================================================================================

                       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, 1997     Commission File Number: 33-76716

                               GENERAL MEDIA, INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

         DELAWARE                                         13-3750988
------------------------                       ---------------------------------
(State of incorporation)                       (IRS Employer Identification No.)

                       277 Park Avenue, New York, NY 10172
                    ----------------------------------------
                    (Address of principal executive offices)

                                 (212) 702-6000
                         -------------------------------
                         (Registrant's telephone number)

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

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

Indicate by check mark whether 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. |X|

The aggregate market value of the Registrant's common stock, par value $.01 per
share, held by non-affiliates of the Registrant (based upon the selling price of
such stock as of March 17, 1998) was $0.

As of March 17, 1998, there were 475,000 shares outstanding of the Registrant's
common stock, par value $.01 per share.

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

                       DOCUMENTS INCORPORATED BY REFERENCE

                                                Location in Form 10-K in Which
               Document                             Document is Incorporated
               --------                             ------------------------

Registration Statement No. 33-76716 on        Part IV, Items 14(a)(3) and 14(c),
Form S-4, filed with the Securities and        to the extent indicated therein.
Exchange Commission on March 22, 1994.
<PAGE>

                               GENERAL MEDIA, INC.
                             FORM 10-K ANNUAL REPORT
                      FOR THE YEAR ENDED DECEMBER 31, 1997

                                TABLE OF CONTENTS

                                                                           Page
                                                                           ----

                                     PART I
                                     ------

Item 1.  BUSINESS.............................................................3
Item 2.  PROPERTIES..........................................................12
Item 3.  LEGAL PROCEEDINGS...................................................13
Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
         HOLDERS.............................................................13

                                     PART II
                                     -------

Item 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK
           AND RELATED STOCKHOLDER MATTERS...................................13
Item 6.  SELECTED FINANCIAL DATA.............................................14
Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS...............................15

                     LIQUIDITY AND CAPITAL RESOURCES

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................27
Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURE.................................27

                                    PART III
                                    --------

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................28
Item 11. EXECUTIVE COMPENSATION..............................................30
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
         AND MANAGEMENT......................................................32
Item 13. CERTAIN RELATIONSHIPS AND RELATED PARTY
         TRANSACTIONS........................................................32

                                     PART IV
                                     -------

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
         REPORTS ON FORM 8-K.................................................34


                                        2
<PAGE>

                                     PART I
                                     ------

Item 1. BUSINESS.

In General

      General Media, Inc. ("General Media"), together with its subsidiaries
(General Media and its subsidiaries are collectively referred to as the
"Company"), is a publishing and entertainment company engaged in the production
and sale of men's magazines, automotive publications and various entertainment
products.

      General Media is a wholly owned subsidiary of General Media International,
Inc. ("GMI"). GMI, together with its subsidiaries other than the Company (such
subsidiaries are collectively referred to as the "Other GMI Subsidiaries"),
engages in operations that are organized into the Real Estate Group (which owns
various properties and real estate holdings), and the Fine Arts Group (which
buys, sells and holds for sale a substantial inventory of works of art). GMI
formed General Media, a Delaware corporation, in November 1993 to implement a
new operating and financing plan, which included (i) the transfer to General
Media of the stock of certain subsidiaries that formed a portion of the
publishing and the entertainment segments of GMI and (ii) the private offering
of senior debt securities and common stock purchase warrants (the "Private
Offering"). See "Market for the Registrant's Common Stock and Related
Stockholder Matters." Such plan enabled GMI to, among other things, direct
resources to certain subsidiaries within its publishing and entertainment
segments and improve operational and financial flexibility by replacing
short-term debt with fixed-rate, long-term debt.

      The Company is currently engaged in activities in two industry segments:
publishing and entertainment. The publishing segment of the Company is engaged
in the publication of Penthouse magazine and six affiliate magazines (the
"Affiliate Publications"), the licensing of the Penthouse brand name to
publishers in foreign countries and the publication of four specialty automotive
magazines. The entertainment segment of the Company provides a number of
adult-oriented entertainment products and services, including pay-per-call
telephone lines, internet subscription services, video cassette products and
pay-per-view programming.

      The net revenues, income (loss) from continuing operations and
identifiable assets attributable to each of the Company's industry segments are
presented in Note 10 to Consolidated Financial Statements included in Part IV,
Item 14.

Products and Services - Publishing Segment

      Penthouse Magazine and the 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,
the magazine of sex, politics and protest, offers its readers a combination of
photography, investigative journalism, fiction, illustration, humor, politics,
art and business. This creative mix of informative and entertaining articles
combined with high quality photography has enabled Penthouse magazine to
maintain a loyal consumer base.


                                       3
<PAGE>

      Penthouse magazine prides itself on the quality of the editorial package
it presents to its readers every month. Its investigative reporting over the
years has been credited with significant "news breaks" that have resulted in
press conferences and national headlines. The monthly Penthouse magazine
interview of public personalities is also a hallmark of the magazine. Over the
years, Penthouse magazine has interviewed major international figures, domestic
politicians, sports heroes and entertainment personalities.

      In addition, leading figures of American political and social life have
written provocative articles for Penthouse magazine. Some of the country's best
selling writers contribute their fiction and non-fiction stories to Penthouse
magazine. The magazine also includes monthly fashion features, as well as
reviews of films, books, computer products, wine and spirits and regular
coverage of health and fitness issues for men.

      To capitalize on the success of Penthouse magazine, the Company
established six Affiliate Publications. Each of the Affiliate Publications is
further described below.

      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, the Company publishes several special
issues of Forum each year. Forum is 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, the Company
publishes several special issues of Variations each year. Variations is sold at
newsstands and through subscriptions.

      Hot Talk: A monthly full-sized publication that features adult
entertainment articles and letters describing erotic telephone conversations.
Hot Talk is sold only through newsstands.

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

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

      Penthouse Comix: A bi-monthly, adult-theme comic book featuring the
creative work of well-known comic artists. The first issue was published in
April 1994. Penthouse Comix is available at newsstands and through
subscriptions. In April 1995, a second adult-theme comic book, Mens' Adventure
Comix, began publication, bi-monthly, in alternating months with Penthouse
Comix. Mens' Adventure Comix discontinued bi-monthly publication in March 1996
and Penthouse Comix was then published 10 times annually and Men's Adventure
Comix was published only twice.

      Circulation.

      In 1997, Penthouse magazine had a domestic average monthly circulation of
approximately 912,000 copies and the Affiliate Publications had a combined
domestic average monthly circulation of approximately 604,000 copies. The table
below presents domestic average monthly circulation figures for Penthouse
magazine and the Affiliate Publications for the years ended December 31, 1993
through 1997.


                                       4
<PAGE>

                Penthouse Magazine and the Affiliate Publications
                      Domestic Average Monthly Circulation
                              (Copies in Thousands)

<TABLE>
<CAPTION>
                      Penthouse Magazine         Affiliate Publications          Total
Year Ended    ------------------------------  ------------------------------   Domestic
December 31,  Newsstand  Subscription  Total  Newsstand  Subscription  Total  Circulation
------------  ---------  ------------  -----  ---------  ------------  -----  -----------
<S>             <C>          <C>       <C>       <C>          <C>        <C>     <C>
1993 ...        826          317       1,143     876          53         929     2,072
1994 ...        856          343       1,199     872          53         925     2,124
1995 ...        720          401       1,121     779          64         843     1,964
1996 ...        645          356       1,001     634          58         692     1,693
1997 ...        533          379         912     554          50         604     1,516
</TABLE>

      Penthouse magazine and the Affiliate Publications are primarily sold
through newsstand distribution by convenience stores, bookstores and newsstands.
Approximately 42% of Penthouse's newsstand sales are derived from convenience
stores, while approximately 13% and 12 % of such sales are derived from
bookstore and newsstand distribution channels, respectively. Newsstand copies
sold as a percentage of total copies sold of Penthouse magazine and the
Affiliate Publications were approximately 72% for the year ended December 31,
1997.

      The number of magazine copies sold on newsstands varies monthly, depending
on, among other things, the cover, pictorials and editorial content.
Approximately 17% of total newsstand copies are sold internationally.

      Newsstand revenues for Penthouse magazine and the Affiliate Publications
were $42.0 million, $49.5 million and $55.5 million for the years ended December
31, 1997, 1996 and 1995, respectively, representing approximately 40%, 43% and
46% of the Company's net revenues for these periods, respectively.

      In recent years, domestic newsstand circulation for men's magazines has
been declining. From 1993 to 1997, Penthouse magazine's and the Affiliate
Publications' domestic average monthly newsstand circulation decreased by 37%.
The Company believes 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, the increased market share of cable television and the internet have
largely contributed to the overall decrease in circulation.

      This decrease in domestic average monthly circulation for Penthouse
magazine and the Affiliate Publications has been partially offset, however, by
the Company's ability to maintain consistent cover price


                                       5
<PAGE>

increases and the recapture of certain convenience store distribution channels.
Penthouse magazine's cover price, for example, has steadily increased from $3.00
per issue in 1983 to $5.99 per issue for eight issues and $6.99 per issue for
four issues in 1997. The Company regularly price tests its magazines. However,
no cover price increases are planned in fiscal 1998.

      While newsstand circulation is the Company's principal means of
distribution for Penthouse magazine and the Affiliate Publications, the Company
has sought to increase their subscription circulation. The price of a twelve
month subscription to Penthouse magazine ranged from $23.00 to $46.00 in 1997,
depending upon the source of the subscription. The Company attracts new
subscribers to its magazines primarily through its own direct mail advertising
campaign, and through subscription agent campaigns. The Company recognizes
revenues from its magazine subscriptions over the term of the subscriptions.

      Subscription revenues for Penthouse magazine and the Affiliate
Publications were $7.2 million, $7.9 million and $8.9 million for the years
ended December 31, 1997, 1996 and 1995, respectively, representing approximately
7% of the Company's net revenues for these periods.

      Advertising.

      Penthouse magazine and the Affiliate Publications are relatively less
dependent on advertising revenues than other magazines as approximately 66% of
their respective revenues are generated from newsstand sales, while
approximately 11% are generated from subscription sales and approximately 20%
are generated from advertising. Advertising revenues (excluding affiliated
advertising revenues) for Penthouse magazine and the Affiliate Publications were
$12.9 million, $15.8 million and $16.0 million for the years ended December 31,
1997, 1996 and 1995, representing approximately 12%, 14% and 13% of the
Company's net revenues for these periods, respectively.

      In 1997, Penthouse magazine's advertising pages (excluding affiliated
advertising pages) decreased by 16% from the prior year, while advertising
revenues (excluding affiliated advertising revenue) decreased by 17%. In 1996,
Penthouse magazine's advertising pages decreased by 24% from 1995.

      Penthouse magazine also includes advertising for the Company's products,
primarily its pay-per-call telephone lines, video cassettes, internet products
and pay-per-view programming.

      The Food and Drug Administration (the "FDA") issued regulations in August
1996 which prohibits the publication of tobacco advertisements containing
drawings, color or pictures. The regulation does not apply to a magazine which
is demonstrated to be an "adult publication". A adult publication is one (i)
whose readers younger than 18 years of age constitute no more than 15% of total
readership, and (ii) is read by fewer than two million persons younger than 18
years of age, in each case as measured by competent and reliable survey
evidence. The Company believes that its magazines qualify as adult publications
and the regulations do not apply to them. In April 1997, the Federal District
Court for the Middle District of North Carolina ruled that the FDA does not have
the authority under existing law to restrict the advertising restrictions
contained in the regulation. The Government has appealed this ruling, which
appeal is pending.

      Foreign Edition Licensing

      The Company has sought to expand its readership through foreign edition
licensing arrangements pursuant to which the Company licenses the Penthouse
brand name to publishers in foreign countries.


                                       6
<PAGE>

Licensees typically use pictorials from the Company's library and provide their
own editorial content to create the foreign editions. The Company, however,
oversees the finished product to insure quality control and to maintain the
spirit of the domestic edition. Under current licensing arrangements, the
Company generally receives a one-time up-front fee and a royalty based upon a
percentage of both circulation and advertising revenues, subject to certain
minimum payments. In 1997, the Company received revenues from licensing
agreements with publishers in Australia, Brazil, Czech Republic, France,
Germany, Greece, Holland, Hong Kong, Italy, Japan, Korea, South Africa, Spain,
Taiwan, Thailand and the United Kingdom.

      Revenues from licensing of foreign editions were $2.3 million, $4.9
million and $2.6 million for the years ended December 31, 1997, 1996 and 1995,
respectively, representing approximately 2%, 4% and 2% of the Company's net
revenues for these periods, respectively. Revenues for the year ended December
31, 1996 includes $2.0 million received as settlement of litigation involving
the Company's licensee in the United Kingdom.

      Automotive Magazines

      The Company publishes four domestic automotive titles (the "Automotive
Magazines"), as described below, that have a combined average monthly
circulation of approximately 651,000 copies. The Company publishes them at its
offices located in Santa Monica, California and Newburyport, Massachusetts.

      Four Wheeler: a monthly publication that features the sports truck field
and is dedicated to the four-wheel drive enthusiast and industry. Four Wheeler's
editorial coverage caters to the technical and lifestyle interests of off-road
drivers and their vehicles. Four Wheeler's comprehensive coverage of the light
truck field includes new product testing, travel and adventure photography,
competitive coverage, project-vehicle features and do-it-yourself articles for
novice and veteran four-wheelers.

      Stock Car Racing: a monthly publication that features stock car racing and
includes articles written by well-known drivers and industry personalities.
Stock Car Racing's editorial coverage includes articles on the technical side of
racing, presented in a form that can help racers learn and fans understand, as
well as profiles on racing personalities and reports on important racetracks,
series and events.

      Open Wheel: a monthly publication that is devoted entirely to sprint cars,
midgets, super modified and "Indy" cars. This special interest publication
contains technical articles that are written with a practical, hands-on
approach. In addition, Open Wheel publishes race reports and racing personality
profiles.

      Drag Racing Monthly: a monthly publication that is devoted to the drag
racing enthusiast. The magazine provides comprehensive coverage of the latest
developments in this sport. It appeals to the experienced as well as the novice
drag racer who is still sharpening his or her race car driving and building
skills.


                                       7
<PAGE>

      Circulation.

      The following table sets forth the circulation for the Automotive
Magazines.

                              Automotive Magazines
                      Domestic Average Monthly Circulation
                              (Copies in Thousands)

 Year Ended
December 31,                                      Newsstand  Subscription  Total
------------                                      ---------  ------------  -----
  1993 ..................................            216          392       608
  1994 ..................................            222          413       635
  1995 ..................................            226          426       652
  1996 ..................................            211          414       625
  1997 ..................................            210          441       651

      All the Automotive Magazines are sold at newsstands and through
subscriptions. Subscription copies sold as a percentage of total copies sold of
the Automotive Magazines were approximately 68% for the year ended December 31,
1997. A twelve-month subscription to one of the Automotive Magazines is
typically $15.97. The Company generally obtains new subscribers to the
Automotive Magazines, as well as its other magazines, through its own direct
mail campaigns and agent-operated direct mail campaigns. The Company recognizes
revenues from its magazine subscriptions over the term of the subscription.

      Subscription revenues of the Automotive Magazines were $3.7 million, $3.7
million and $3.8 million for the years ended December 31, 1997, 1996 and 1995,
respectively, representing approximately 4% of the Company's net revenues in
1997 and 3% of the Company's net revenues in 1996 and 1995. Newsstand revenues
of the Automotive Magazines were $4.7 million, $4.6 million and $4.9 million for
the years ended December 31, 1997, 1996 and 1995, respectively, representing
approximately 5% of the Company's net revenues in 1997 and 4% of the Company's
net revenues in 1996 and 1995.

      Advertising.

      Advertising revenues of the Automotive Magazines were $12.5 million, $11.3
million and $9.8 million for the years ended December 31, 1997, 1996 and 1995,
respectively, representing approximately 12%, 10% and 8% of the Company's net
revenues for these periods, respectively. Advertising revenues are primarily
derived from the automobile industry, including automobile manufacturers and
distributors of automotive parts and accessories. Advertising revenues increased
10.5% and advertising pages increased 2.3% in 1997. Advertising revenues
increased 14.6% and advertising pages decreased 3.3% in 1996, from the 1995
levels.

      Production, Printing, Newsstand Distribution and Subscription Fulfillment

      The Company employs a staff of professionals that oversees the production,
printing, distribution and fulfillment of its magazines. Through the use of
state-of-the-art production equipment, economies of


                                       8
<PAGE>

scale in printing contracts and efficiencies in subscription solicitation and
fulfillment, the Company is able to effectively produce and distribute all of
its publications. The Company's production system for both graphics and editing
is state-of-the-art. Approximately twenty employees produce the Company's eleven
magazines with minimal overtime.

      In 1997, the Company's magazines, with the exception of Forum and
Variations, were printed by R. R. Donnelley Corporation ("Donnelley") pursuant
to several agreements which, after giving effect to an an extension and
amendment dated July 1997, expire in December 2003. In 1997, Forum and
Variations were printed by St. Ives Color. Should the Company wish to change
printers, it is confident that other printers of similar quality could be
engaged.

      The domestic newsstand distribution of the Company's magazines is handled
by the Curtis Circulation Company ("Curtis Circulation") pursuant to an
agreement in effect until termination upon prior notice by either the Company or
Curtis Circulation. Curtis Circulation distributes the Company's publications
through a network of approximately 225 marketing representatives to independent
wholesalers, as well as to other channels of distribution. Curtis Circulation
also provides the Company with other services, including management information
and promotional and specialty marketing services. The Company receives a cash
advance from Curtis Circulation at the time each issue is released for sale. The
Company recognizes revenue from newsstand sales based on its estimate of copy
sales at such time as the issue is released for sale and adjusts the estimate
periodically based upon actual sales information. Each issue is settled with
Curtis Circulation based upon the number of magazines actually sold, compared to
the estimated number for which Curtis Circulation was previously paid. The
international newsstand distribution of the Company's magazines is handled by
Worldwide Media Services, Inc.

      The Company's subscriptions are currently serviced by Palm Coast Data
Service, Inc. ("PCD"). PCD performs the following services: receiving,
verifying, balancing and depositing payments from subscribers; maintaining
master files on all subscribers by magazine; issuing bills and renewal notices
to subscribers; issuing labels; packaging and mailing magazines as directed by
the Company; 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. The Company last experienced a general postal rate
increase of 14% in January 1995. The next postal rate increase has not yet been
scheduled.

Products and Services - Entertainment Segment

      The Company's entertainment segment produces and distributes
adult-oriented entertainment products, including pay-per-call telephone lines,
video cassettes and pay-per-view programming, and also includes the licensing of
video cassettes under the Penthouse brand name and provides internet pay
services. Revenues of the entertainment segment were $16.8 million, $15.1
million and $17.4 million for the years ended December 31, 1997, 1996 and 1995,
respectively, representing 16%, 13% and 14% of the Company's net revenues for
these periods, respectively.

      The Company provides 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. The Company's recorded audio programs are
created and broadcast by independent service bureaus. The


                                       9
<PAGE>

operators on the live telephone lines are employed by the service bureaus and
are not employees of the Company.

      The Company's 900 number telephone lines are romantic in nature and
feature programs with which 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 between $3.95 and $4.95 per minute. The
Company's 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. The Company
has pay-per-call telephone lines in the United Kingdom, Canada, Germany, Russia,
Greece and France.

      The Company develops, produces and distributes products for the domestic
and international home video and pay-per-view markets. Since 1990, the Company
has produced 58 videos, which have been released for domestic distribution
through Warner Home Video, a subsidiary of Time Warner, Inc. The videos are also
offered for sale through the Company's magazines and through the Penthouse
internet site. These videos are generally approximately 60 minutes in length,
have a level of explicitness greater than "R" and feature Penthouse centerfold
models. Many of the Company's videos are also sold internationally through
licensing arrangements. In April 1997, the Company entered into an agreement
with Request Television, whereby the Company's videos are first shown on
Request's pay-per-view network prior to retail distribution. Revenues received
from the agreement is based upon the number of pay-per-view purchases and was
$0.3 million in 1997.

      Between 1994 and 1996, the Company released eight CD-ROM interactive
products. These products were unprofitable and the Company discontinued this
product line in 1997.

      In August 1995, the Company launched a pay service, Penthousemag.com, on
the Internet. Customers are sold a subscription ranging from one month to one
year, at a price of $14.95 - $99.95, as well as a lifetime subscription at a
price of $199.95. The subscription gives the customer access to adult-oriented
photographs via a personal identification number. The personal identification
number expires according to the terms of the subscription. The subscriptions are
billed to customers' credit cards in accordance with the Federal Communications
Commission's safe harbor provision. Penthousemag.com also contains access to
Penthouselive.com, which provides paying customers other adult oriented
products, such as videos. Penthouselive.com is a joint venture, whereby the
content and maintenance of the site is the responsibility of the other venturer
and the Company receives 50% of all net revenues from the site. Revenues
received from the internet for the years ended December 31, 1997 and 1996 were $
4.7 million and $ 1.0 million, respectively.

Sources and Availability of Raw Materials

      Paper is the primary raw material used in the production of the Company's
magazines. The Company uses a variety of high quality coated and uncoated paper
that is purchased from a number of suppliers. The Company believes that there
are several alternative suppliers in the event of its inability to purchase from
its present suppliers.


                                       10
<PAGE>

      The Company experienced significant paper price increases in 1995. As a
result, during 1995, the Company implemented certain measures to attempt to
partially offset the effect of the paper price increase, including reducing
print orders, trim size, paper weight and other production efficiencies. The
effect of these measures and the reduction in paper prices throughout 1996, is
reflected in lower paper costs in 1997.

Trademarks

      The Company's trademarks are essential to the Company's current business
operations and future expansion. The trademarks, which are renewable
indefinitely, include Penthouse, Forum, Variations, Penthouse Letters, Hot Talk,
Girls of Penthouse, Penthouse Comix, Penthouse Max, Four Wheeler, Open Wheel,
Stock Car Racing and Drag Racing Monthly.

Seasonality

      The Company's 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 the Company's video cassette products may vary based upon the timing of the
release of new videos.

Dependence on Customers

      No customer of the Company accounted for more than five percent of the
Company's net revenues in 1997, 1996 or 1995, 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. However, one
advertising agency placed $6.0 million, $8.0 million and $8.1 million in
advertising revenues in Penthouse magazine and the Affiliate Publications in
1997, 1996 and 1995, respectively. These revenues represent 6%, 7% and 7% of the
Company's net revenues in 1997, 1996 and 1995, 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. In
addition, there are many automotive magazines currently published that are
similar in content to the Automotive Magazines. Other types of media that carry
advertising also compete for advertising with the Company's magazines.

      Competition in the pay-per-call business is generally limited to a few
major competitors. The Company's advantage in this area is the low cost of
advertisement for such pay-per-call service in its own magazines. No other
magazine publisher has either more adult-oriented magazines or a comparable
combined circulation for such magazines.

Employees

      As of March 17, 1998, the Company employed 228 full-time employees, none
of whom are members of a union, and 14 part-time employees.


                                       11
<PAGE>

Item 2. PROPERTIES.

      The Company's principal corporate offices for both the publishing and
entertainment segments are located in New York City at 277 Park Avenue. The
Company leases office space for its principal corporate offices, the publishing
and sales offices of its publishing segment and the production and sales offices
of its entertainment segment at various locations, as set forth below.

<TABLE>
<CAPTION>
                                                        Approx.   Lease
                                                        Sq. Ft.   Expiration
Location                  Principal Use                 Occupied  Date
--------                  -------------                 --------  ----
<S>                       <C>                             <C>     <C>
277 Park Avenue,          Principal Corporate Offices,
New York, New York        Publishing and Sales Office     80,000  January 31, 2002

Chicago, Illinois         Sales Office                       800  March  31, 2002

Newburyport,
Massachusetts             Publishing and Sales Office      3,200  May 15, 1999

Santa Monica, California  Production and Sales Office     14,019  April 30, 2000
</TABLE>

      The Company has a seven-year lease for its principal corporate offices
which commenced on January 1, 1995 and requires annual lease payments of $2.0
million until July 1, 1998 and thereafter at $2.2 million until the expiration
of lease. The Company believes that its principal corporate offices are suitable
and adequate for its current business operations and that, upon expiration of
the lease, it will be able to obtain similarly suitable and adequate office
space in Manhattan at a competitive price.

      The Company, GMI and the Other GMI Subsidiaries have entered into an
Expense Allocation Agreement (the "Expense Allocation Agreement") which sets
forth the methodology for allocating common expenses among the parties related
to, among other things, the use of and occupancy costs for the Company's former
principal corporate offices in New York City, which were owned by Affiliates of
the Company. Pursuant to the Expense Allocation Agreement, such items of common
expense are allocated primarily on the basis of estimates of time spent and
space occupied by relevant personnel. The rent expense recognized by the Company
in 1995 for the use of the Company's former principal corporate offices located
at 1965 Broadway was approximately $0.3 million. See "Certain Relationships and
Related Party Transactions."

      The Company also uses a 17,000 square foot townhouse located in New York
City (the "Townhouse"), owned by GMI and Robert C. Guccione, for Company related
activities, including business meetings and promotional and marketing events.
Pursuant to a Properties and Salary Allocation Agreement among the Company, GMI
and a GMI subsidiary (the "Properties and Salary Allocation Agreement"), the
Company reimbursed GMI approximately $0.5 million, $0.7 million and $0.9 million
in 1997, 1996 and 1995, respectively, for the use of such property. See "Certain
Relationships and Related Party Transactions."


                                       12
<PAGE>

Item 3. LEGAL PROCEEDINGS.

      The Internal Revenue Service has completed an audit of GMI's Federal
income tax returns through 1985. New York State and New York City have completed
audits of GMI's income tax returns for years 1992 and 1993, respectively.
Subsequent years' income tax and other tax returns filed by GMI are being
audited or are subject to audit by governmental authorities. Under the terms of
a Tax Sharing and Indemnification Agreement among the Company, GMI and the Other
GMI Subsidiaries (the "Tax Sharing Agreement"), GMI and the Other GMI
Subsidiaries will be liable for any payments due as a result of these audits
through fiscal 1993.

      In May 1996, an action was brought by two celebrities against the Company
alleging the possession and intent to publish certain photographs in Penthouse
magazine. This claim was settled in May 1997.

      In August 1996, an action was brought against the Company alleging various
wrongs in connection with the Company's dealings with the former editor of
Penthouse Comix and Mens Adventure Comix. The complaint alleges RICO violations,
breach of contract, trademark and copyright infringement and other charges and
demands damages in excess of $20 million. The Company believes that the claim is
without merit and has tendered defense of this action to its insurance carrier.
In the opinion of management, the outcome of this litigation is not reasonably
likely to have a material adverse effect on the Company's financial position or
results of operations.

      The Company's subsidiaries are parties to various other pending legal
proceedings arising in the ordinary course of business. While the outcome of
these proceedings cannot be predicted with certainty, the Company believes that
these proceedings is not reasonably likely to have a material adverse effect on
the Company's financial condition or results of operations.

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

      None.

                                     PART II

Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
        MATTERS.

      As of March 17, 1998, GMI was the sole holder of the 475,000 shares of
common stock, $.01 par value per share (the "Common Stock"), of the Company
currently issued and outstanding. There is no established public trading market
for the Common Stock.

      Holders of shares of Common Stock are entitled to receive dividends out of
funds legally available for payment thereof in such amounts per share as may be
declared by the Company's Board of Directors, subject to the restrictions
contained in an Indenture (the "Indenture"), dated December 21, 1993, which was
entered into by the Company and IBJ Schroder Bank & Trust Company, as trustee,
in connection with the issuance of Series A 10 5/8% Senior Secured Notes Due
2000 (the "Series A Notes") in the aggregate principal amount of $85 million in
the Private Offering. Pursuant to the Indenture, the Company may not declare a
dividend on the Common Stock, subject to certain exceptions, unless it meets
certain financial


                                       13
<PAGE>

covenants set forth therein. The Company's subsidiaries, however, are permitted
to make inter-company dividends on their shares of common stock.

      The Company has not declared any dividend for the fiscal years ended
December 31, 1997, 1996 and 1995.

      Pursuant to a Registration Rights Agreement, dated December 21, 1993,
among the Company, Jefferies & Company, Inc. and Furman Selz Incorporated (the
"Underwriters"), the Company consummated an exchange offer in July 1994 to
exchange the Series A Notes for Series B 10 5/8% Senior Secured Notes Due 2000
(the "Series B Notes"), which were registered under the Securities Act of 1933.
The Series B Notes are substantially identical to the Series A Notes (including
principal amount, interest rate and maturity), except that the Series B Notes
are freely transferable.

      There is no established public trading market for the Series B Notes.
Jeffries & Company, Inc. is currently making a market in the Series B Notes,
although they are not obligated to do so. Any such market-making may be
discontinued at any time at the sole discretion of Jeffries & Company, Inc.
without notice. The Company currently does not intend to list the Series B Notes
on any securities exchange.

      The Company also issued in the Private Offering 187,506 common stock
purchase warrants (the "Warrants") to purchase an aggregate of 25,000 shares of
Common Stock (approximately 5% of the outstanding Common Stock) (the "Warrant
Shares"). The Warrants are exercisable for Warrant Shares at an exercise price
of $.01 per Warrant Share until December 22, 2000. Under the Warrant Agreement,
dated as of December 21, 1993, between the Company and IBJ Schroder Bank & Trust
Company, as warrant agent, the Company is obligated to use its best efforts to
register the Warrants and Warrant Shares if it proposes to register any shares
of Common Stock under the Securities Act of 1933, upon the request of the
holders of such Warrants and Warrant Shares. At any time after December 21,
1998, the holders of the Warrants and Warrant Shares may request the Company to
purchase for cash all of their Warrants or Warrant Shares.


                                       14
<PAGE>

Item 6. SELECTED FINANCIAL DATA.

                                              Year Ended December 31,
                                  ------------------------------------------
                                   1993     1994     1995     1996     1997
                                   ----     ----     ----     ----     ----

                                                 ($ in Millions)

Operating Data:

  Net revenue                     $111.0   $122.2   $120.4   $114.6   $103.8

  Operating income (loss)           17.3     13.7     (0.3)     8.9      7.4

  Interest expense, net              2.9      9.9      9.8      9.6      9.3

  Income (loss) from continuing
     operations                      8.4      2.0    (10.0)    (1.0)    (1.9)

  Net income (loss)                  7.8      2.0     (9.4)    (1.0)    (1.9)

Other Data:

  Depreciation and amortization     $1.4     $1.2     $1.6     $1.9     $1.9

  Capital expenditures               0.5      1.3      4.7      0.4      0.3

  Ratio of earnings to fixed
    charges                          4.9      1.3      0.0      0.9      0.8

Balance Sheet Data:

  Total assets                    $ 56.7   $ 63.3   $ 51.5   $ 45.6   $ 42.6

  Total long-term debt              83.7     83.9     79.1     79.3     79.5

  Total stockholders' deficiency   (64.9)   (61.5)   (70.9)   (71.9)   (73.8)

Certain amounts have been retroactively restated to reflect an accounting change
from the LIFO to FIFO inventory valuation method in 1997.


                                       15
<PAGE>

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

      YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

      The Company is currently engaged in activities in two industry segments:
publishing and entertainment. The publishing segment of the Company is engaged
in the publication of Penthouse magazine and six affiliate magazines (the
"Affiliate Publications" and, together with Penthouse magazine, the "Mens
Magazines"), the licensing of the Penthouse brand name to publishers in foreign
countries and the publication of four specialty automotive magazines: Four
Wheeler; Stock Car Racing; Open Wheel; and Drag Racing Monthly (the "Automotive
Magazines"). The entertainment segment of the Company produces a number of
adult-oriented entertainment products, including pay-per-call telephone lines,
video cassettes, pay-per-view programming and pay subscription service on the
internet.

      The Company's revenues were $103.8 million for the year ended December 31,
1997, compared to revenues of $114.6 million for the year ended December 31,
1996, a decrease of $10.8 million. Newsstand revenues were $46.6 million and
$54.1 million for the years ended December 31, 1997 and 1996, respectively, a
decrease of $7.5 million, primarily due to a decrease in sales of Mens
Magazines. Advertising revenues were $25.4 million and $27.1 million for the
years ended December 31, 1997 and 1996, respectively, a decrease of $1.7
million, due primarily to a decrease of $2.9 million in advertising sales of
Mens Magazines, offset by an increase of $1.2 million in advertising sales of
the Automotive Magazines. Subscription revenues were $10.9 million and $11.6
million for the years ended December 31, 1997 and 1996, respectively, a decrease
of $0.7 million, primarily due to decreased sales of Mens Magazines. Revenues
from the Entertainment segment were $16.8 million and $15.1 million for the
years ended December 31, 1997 and 1996, an increase of $1.7 million. Revenues
from the Company's video business were $3.6 million and $3.2 million for the
years ended December 31, 1997 and 1996, respectively, an increase of $0.4
million. Revenues from the Company's pay-per-call business were $8.5 million and
$10.8 million for the years ended December 31, 1997 and 1996, respectively, a
decrease of $2.3 million . Revenue from the Internet business was $4.7 million
and $1.0 million for the years ended December 31, 1997 and 1996, respectively,
an increase of $3.7 million.

      Income from operations was $7.4 million and $8.9 million for the years
ended December 31, 1997 and 1996, respectively. Income from operations was
negatively impacted by decreased revenues, as previously discussed. Income from
operations was positively impacted in 1997 by lower production, distribution and
editorial costs associated with fewer magazines being printed, and decreased
selling, general and administrative expenses primarily related to lower employee
costs associated with corporate restructuring, lower direct subscription
acquisition spending and reduced legal fees.

      Net non-operating expenses were $9.3 million for the year ended December
31, 1997 compared to $9.6 million for the year ended December 31, 1996, a
decrease of $0.3 million, as a result of an increase in interest income in 1997.
Included in interest expense is the amortization of debt issuance costs and
discounts of $1.2 million for the years ended December 31, 1997 and 1996.

      No provision for income taxes was required in 1997 due to the loss
incurred in such year. Provision for income taxes was $0.3 million for the year
ended December 31, 1996, which represented foreign income taxes incurred.


                                       16
<PAGE>

      Net loss for the year ended December 31, 1997 was ($1.9) million, compared
to ($1.0) million for the year ended December 31, 1996.

      The net revenues and income (loss) from operations of the Company were as
follows ($ in millions):

                                                                  Income (loss)
                                            Net Revenues         from operations
                                            ------------         ---------------
                                             Year Ended            Year Ended
                                            December 31,          December 31,
                                         ------------------      ---------------
                                          1996        1997       1996     1997
                                         ------      ------      ----     ----
Publishing segment                       $ 99.5      $ 86.9      $5.5     $2.3
Entertainment segment                      15.1        16.9       3.4      5.1
                                         ------      ------      ----     ----
                                         $114.6      $103.8      $8.9     $7.4
                                         ======      ======      ====     ====

Publishing Segment

      The net revenues and income (loss) from operations of the Publishing
Segment were as follows ($ in millions):

                                                                  Income (loss)
                                             Net Revenue        from operations
                                             -----------        ---------------
                                             Year Ended            Year Ended
                                             December 31,         December 31,
                                           ---------------       ---------------
                                           1996       1997       1996      1997
                                           ----       ----       ----      ----
Penthouse Magazine and
   the Affiliate Publications              $75.0      $63.7     $(1.3)    $(1.0)
Foreign edition licensing                    4.9        2.3       4.4       1.5
Automotive Magazines                        19.6       20.9       2.4       1.8
                                           -----      -----     -----     -----
                                           $99.5      $86.9      $5.5      $2.3
                                           =====      =====     =====     =====

Penthouse Magazine and the Affiliate Publications

      Revenues for Penthouse Magazine and the Affiliate Publications were $63.7
million and $75.0 million for the years ended December 31, 1997 and 1996,
respectively, a decrease of $11.3 million. Newsstand revenue for the year ended
December 31, 1997 was $42.0 million, compared to $49.5 million for the year
ended December 31, 1996, a decrease of $7.5 million. The decrease is
attributable to a $ 4.8 million decrease in newsstand revenue from Penthouse
magazine, which resulted from a 17% decrease in the number of newsstand copies
sold and a $2.7 million decrease in newsstand revenue from the Affiliate
Publications, which resulted from a decrease of 13% in the number of newsstand
copies sold. Advertising revenue for Penthouse magazine and the Affiliate
Publications was $12.9 million for the year ended December 31, 1997, compared to
$15.8 million for the year ended December 31, 1996, a decrease of $2.9 million.
Advertising revenues in Penthouse magazine decreased $2.2 million as a result of
a 16% decrease in advertising pages sold during 1997. Advertising revenues in
the Affiliate Publications decreased $0.7 million as a result of a 23% decrease
in advertising pages sold, partially offset by an increase in advertising


                                       17
<PAGE>

rates per page. Subscription revenue was $7.2 million for the year ended
December 31, 1997, compared to $7.9 million for the year ended December 31,
1996, a decrease of $0.7 million, due primarily to a decline in the net revenue
per copy. The decreased revenue per copy was due primarily to a change in the
mix between agency sales (which generate a low per copy rate) and direct to
customer sales. Other revenue was $1.6 million for the year ended December 31,
1997, compared to $1.9 million for the year ended December 31, 1996, a decrease
of $0.3 million. The decrease in other revenue is primarily attributable to a
decrease in revenues received from the sale of past issues of the Company's
publications sold as value-packs and a decrease in royalty revenue.

      Publishing-production, distribution and editorial expenses were $35.4
million for the year ended December 31, 1997, compared to $41.7 million for the
year ended December 31, 1996, a decrease of $6.3 million. Paper costs were $12.8
million for the year ended December 31, 1997, compared to $17.0 million for the
year ended December 31, 1996, a decrease of $4.2 million. Paper costs were
reduced primarily because of a decrease in the cost of paper and additionally by
decreasing the number of copies printed and the number of pages printed of
certain publications. Print costs were $13.9 million for the year ended December
31, 1997, compared to $14.6 million for the year ended December 31, 1996, a
decrease of $0.7 million. Print costs were reduced by decreasing the number of
copies printed and number of pages per copy printed in certain publications.
Editorial and art costs were $3.5 million for the year ended December 31,1997,
compared to $3.8 million in 1996, a decrease of $0.3 million. The decrease is
due primarily to decreased spending levels related to Penthouse Comix and Forum
magazine, partially offset by increased write-offs of pictorial inventory during
the year ended December 31, 1997, as compared to the year ended December 31,
1996. Distribution costs were $5.2 million for the year ended December 31, 1997,
compared to $5.8 million for the year ended December 31, 1996, a decrease of
$0.6 million. The decrease in distribution costs was generally due to fewer
copies of magazines being distributed. Other production costs of $0.5 million
were incurred during the year ended December 31, 1996 related to an insert
placed in certain publications to promote the Company's pay-per-call services.

      Selling, general and administrative expenses were $28.0 million for the
year ended December 31, 1997, compared to $32.6 million for the year ended
December 31, 1996, a decrease of $4.6 million. The decrease is primarily
attributable to lower salaries ($0.4 million), lower retail display allowance
costs associated with lower newsstand circulation ($0.9million), lower
advertising expenses ($0.8 million), lower commission expenses related to lower
advertising sales ($0.3 million), and lower legal expenses ($0.7 million).
Additionally, corporate overhead allocations to the Mens Magazine group were
$2.5 million lower in the year ended December 31, 1997, as compared to the year
ended December 31, 1996. These decreases were partially offset by an increase in
professional fees ($0.4 million) and increased promotional spending ($0.3
million).

      Rent expense from affiliated companies represents charges from affiliated
companies for the use of the Company's corporate and executive offices. The
charge is based upon the Company's proportionate share of the operating expenses
of such offices. Rent expense from affiliated companies was $0.5 million for the
year ended December 31, 1997, compared to $0.7 million for the year ended
December 31, 1996, a decrease of $0.2 million.

Foreign Edition Licensing

      Revenues from foreign edition licensing were $2.3 million for the year
ended December 31, 1997, compared to $4.9 million for the year ended December
31, 1996, a decrease of $2.6 million. The decrease


                                       18
<PAGE>

is primarily the result of a $2.0 million litigation settlement in October 1996,
which was in settlement of a dispute with a former licensee of the United
Kingdom edition of Penthouse magazine. Additional revenue decreases were due
primarily to the loss of the South African licensee of Penthouse magazine and
reduced revenues from several other licensees. Selling, general and
administrative expenses were $0.8 million and $0.5 million for the years ended
December 31, 1997 and 1996, respectively, an increase of $0.3 million, due
primarily to an increase in corporate over head allocations during the year
ended December 31, 1997.

Automotive Magazines

      Revenues for the Automotive Magazines were $20.9 million for the year
ended December 31, 1997, compared to $19.6 million for the year ended December
31, 1996, an increase of $1.3 million. Newsstand revenues were $4.7 million for
the year ended December 31, 1997, compared to $4.6 million for the year ended
December 31, 1996, an increase of $0.1 million, due primarily to more copies
sold of Four Wheeler magazine. Advertising revenues were $12.5 million for the
year ended December 31, 1997, compared to $11.3 million for the year ended
December 31, 1996, an increase of $1.2 million, resulting primarily from an 8%
increase in advertising rates per page. Subscription revenues were $3.7 million
for the years ended December 31, 1997 and 1996.

      Publishing-production, distribution and editorial expenses were $10.2
million for the year ended December 31, 1997, compared to $10.4 million for the
year ended December 31, 1996, a decrease of $0.2 million. Paper costs were $3.8
million for the year ended December 31, 1997, compared to $4.4 million for the
year ended December 31, 1996, a decrease of $0.6 million. The decrease in paper
costs in 1997 is primarily attributable to decreased cost of paper, offset by an
increase in the number of magazines printed and page per copy printed in 1997,
as compared to 1996. Print costs were $3.8 million for the years ended December
31, 1997 and 1996. Distribution costs were $2.1 million and $1.9 million for the
years ended December 31, 1997 and 1996, respectively, an increase of $0.2
million, due primarily to more copies being distributed and more per pages per
copy printed. Editorial and art costs were $0.3 million for the years ended
December 31, 1997 and 1996.

      Selling, general and administrative expenses were $8.1 million for the
year ended December 31, 1997, compared to $6.3 million for the year ended
December 31, 1996, an increase of $1.8 million. The increase is primarily
attributable to increased salaries ($0.3 million), increased commission expense
associated with increased advertising revenues ($0.1 million), and increased
subscription spending ($0.4 million). Additionally, corporate overhead
allocations increased $0.9 million during the year ended December 31, 1997,
compared to the year ended December 31, 1996.


                                       19
<PAGE>

Entertainment Segment

      Revenues from the Entertainment Segment were $16.9 million for the year
ended December 31, 1997, compared to $15.1 million for the year ended December
31, 1996, an increase of $1.8 million. The Company's video business revenues
were $3.6 million for the year ended December 31, 1997, compared to $3.2 million
for the year ended December 31, 1996, an increase of $0.4 million. The increase
is due to nine new video titles being released in 1997, compared to six titles
in 1996, increased licensing revenue and revenues from a pay-per-view joint
venture. These increases were offset by decreased revenue of $0.4 million as a
result of the Company's discontinuing the sale of its unprofitable CD-ROM
products. The Company's pay-per-call business revenue was $8.5 million and $10.8
million for the years ended December 31, 1997 and 1996, respectively, a decrease
of $2.3 million. The decrease in pay-per-call revenues is primarily attributable
to a required reduction in the extension of credit to callers that did not meet
certain criteria established by the Company, the purpose of which was to reduce
the amount of customer charge backs to a level acceptable to credit card
companies. The new criteria took effect in mid- June, 1996. Additionally, lower
circulation of the Company's Mens Magazines in all likelihood contributed to
lower revenues. The Company's internet business revenues were $4.7 million and
$1.0 million for the years ended December 31, 1997 and 1996, respectively, an
increase of $3.7 million. Internet revenues increased due to revenues received
from the sale of subscriptions to the Company's "Private Collection", contained
within the Company's internet site that began operations in April 1997. Revenues
were also received from a new arrangement, whereby the company received revenue
from another internet site "linked" to the Company's internet site. Such
arrangement also began in April 1997.

      Direct costs were $6.4 million for the year ended December 31, 1997,
compared to $7.9 million for the year ended December 31, 1996, a decrease of
$1.5 million. The Company's video business experienced a $0.5 million decrease
in direct costs primarily associated with lower video production costs, offset
by higher fulfillment and distribution costs associated with higher sales
volume. The Company's pay-per-call business experienced a $0.9 million reduction
in costs attributed to lower sales volume and lower levels of customer charge
backs due to the reduction in the extension of credit to callers who did not
meet certain criteria established by the Company, as previously discussed.

      Selling, general and administrative expenses were $5.1 million for the
year ended December 31,1997, compared to $3.6 million for the year ended
December 31, 1996, an increase of $1.5 million. The increase is attributable to
increased expenses related to the new video licencing agreements referred to
above and computer processing fees and consulting fees related to the higher
levels of revenues from the internet business. In addition, corporate overhead
allocations to the entertainment group increased $1.0 million in 1997, compared
to 1996.


                                       20
<PAGE>

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

      The Company's revenues were $114.6 million for the year ended December 31,
1996, compared to revenues of $120.4 million for the year ended December 31,
1995, a decrease of $5.8 million. Newsstand revenues were $54.1 million and
$60.4 million for the years ended December 31, 1996 and 1995, respectively, a
decrease of $6.3 million, primarily from a decrease in sales of Mens Magazines.
Advertising revenues were $27.1 million and $25.9 million for the years ended
December 31, 1996 and 1995, respectively, an increase of $1.2 million, due
primarily to an increase in advertising sales of the Automotive Magazines.
Subscription revenues were $11.6 million and $12.7 million for the years ended
December 31, 1996 and 1995, respectively, a decrease of $1.1 million, primarily
due to decreased sales of Men's Magazines. Revenues from the Entertainment
segment were $15.1 million and $17.4 million for the years ended December 31,
1996 and 1995, a decrease of $2.3 million. Revenues from the Company's video and
pay-per-call business decreased $2.2 million and $0.5 million, respectively.
Revenue from the Internet business was $1.0 million and $0.6 million for the
years ended December 31, 1996 and 1995, respectively, an increase of $0.4
million.

      Income from operations was $8.9 million for the year ended December 31,
1996, compared to a loss of $0.3 million for the year ended December 31, 1995.
Income from operations was positively impacted in 1996 by lower production,
distribution and editorial costs associated with fewer magazines being printed,
fewer pages per magazine, as well as decreased selling, general and
administrative expenses primarily related to lower employee costs associated
with corporate restructuring, lower direct subscription acquisition spending and
reduced legal fees and costs. Income(loss) from operations was negatively
impacted by decreased revenues, as previously discussed.

      Net non-operating expenses were $9.6 million for the year ended December
31, 1996 compared to $9.8 million for the year ended December 31, 1995, a
decrease of $0.2 million, as a result of the repurchase of $5.0 million of
senior secured notes by the Company in July 1995. Included in interest expense
is the amortization of debt issuance costs and discounts of $1.2 million for the
years ended December 31, 1996 and 1995.

      Provision for income taxes was $0.3 million for the year ended December
31, 1996. No provision for income taxes was required in 1995 due to the loss
incurred.

      Net loss for the year ended December 31, 1996 was ($1.0) million, compared
to ($9.4) million for the year ended December 31, 1995.

      The net revenues and income (loss) from operations of the Company were as
follows ($ in millions):

                                                                 Income (loss)
                                                Net Revenues    from operations
                                                ------------    ---------------
                                                 Year Ended       Year Ended
                                                December 31,     December 31,
                                             ---------------     -------------
                                              1995     1996      1995    1996
                                             ------   ------     -----   ----
Publishing segment                           $103.0   $99.5      $(2.7)  $5.5
Entertainment segment                          17.4    15.1        2.4    3.4
                                             ------   ------     -----   ----
                                             $120.4   $114.6     $(0.3)  $8.9
                                             ======   ======     =====   ====


                                       21
<PAGE>

Publishing Segment

      The net revenues and income (loss) from operations of the Publishing
Segment were as follows ($ in millions) :

                                                                 Income (loss)
                                                Net Revenues    from operations
                                                ------------    ---------------
                                                 Year Ended       Year Ended
                                                December 31,     December 31,
                                             ---------------     --------------
                                              1995     1996      1995     1996
                                             ------   ------     -----    ----
Penthouse Magazine and
   the Affiliate Publications                $ 81.9    $75.0     $(4.7)  $(1.3)
Foreign edition licensing                       2.5      4.9       1.8     4.4
Automotive Magazines                           18.6     19.6       0.2     2.4
                                             ------   ------     -----    ----
                                             $103.0    $99.5     $(2.7)  $ 5.5
                                             ======   ======     =====    ====

Penthouse Magazine and the Affiliate Publications

      Revenues for Penthouse Magazine and the Affiliate Publications were $75.0
million and $81.9 million for the years ended December 31, 1996 and 1995,
respectively, a decrease of $6.9 million. Newsstand revenue for the year ended
December 31, 1996 was $49.5 million, compared to $55.5 million for the year
ended December 31, 1995, a decrease of $6.0 million. The decrease is partially
attributable to a decrease of $ 1.5 million in newsstand revenue from Penthouse
magazine, which resulted from a 11% decrease in the number of newsstand copies
sold of Penthouse during the year ended December 31, 1996, as compared to the
year ended December 31, 1995. The Company publishes annually four issues of
Penthouse magazine at $6.99 per issue and eight issues at $5.99. The effect of
the decrease in newsstand copies sold of Penthouse magazine was partially offset
in 1996 by the full year benefit of a cover price increase, which was
implemented beginning with the June 1995 issue of Penthouse magazine. Newsstand
revenues from the Affiliated Publications decreased $4.5 million, resulting from
a decrease of 19% in the number of copies sold. Advertising revenue for
Penthouse magazine and the Affiliate Publications was $15.8 million for the year
ended December 31, 1996, compared to $16.1 million for the year ended December
31, 1995, a decrease of $0.3 million. Advertising revenues in Penthouse magazine
decreased $0.2 million as a result of a 24% decrease in advertising pages sold
during 1996, which was partially offset by a 30% increase in advertising rates
per page. Advertising revenues in the Affiliated Publications decreased $0.1
million as a result of a decrease in advertising pages sold, which was partially
offset by an increase in advertising rates per page. Subscription revenue was
$7.9 million for the year ended December 31, 1996, compared to $8.9 million for
the year ended December 31, 1995, a decrease of $1.0 million, as a result of a
12% decrease in subscription copies sold of Penthouse magazine and the
Affiliated Publications, due in part to a decrease in subscription acquisition
spending in 1996. Other revenue was $1.9 million for the year ended December 31,
1996, compared to $1.4 million for the year ended December 31, 1995, an increase
of $0.5 million. The increase is attributable to revenues received from the
catalogue sale of Company merchandise, increased product royalties and a full
year of amortization in 1996 of advances received from the Company's newsstand
distributors being recognized over the life of the agreements.


                                       22
<PAGE>

      Publishing-production, distribution and editorial expenses were $41.7
million for the year ended December 31, 1996, compared to $48.8 million for the
year ended December 31, 1995, a decrease of $7.7 million. Paper costs were $17.0
million for the year ended December 31, 1996, compared to $20.1 million for the
year ended December 31, 1995, a decrease of $3.1 million. Paper costs were
reduced primarily by decreasing the number of copies printed and the number of
pages printed of certain publications. Print costs were $14.6 million for the
year ended December 31, 1996, compared to $17.2 million for the year ended
December 31, 1995, a decrease of $2.6 million. Print costs were reduced by
decreasing the number of copies printed and the number of pages printed of
certain publications. Editorial and art costs were $3.8 million for the year
ended December 31,1996, compared to $5.0 million in 1995, a decrease of $1.2
million. The decrease is due primarily to lower write-offs of pictorial
inventory during the year ended December 31, 1996, as compared to the year ended
December 31, 1995, and lower per issue art and editorial costs of Penthouse
Comix. These savings were partially offset by increased spending in Forum due to
a change in the editorial content during the first half of 1996. Distribution
costs were $5.8 million for the year ended December 31, 1996, compared to $6.5
million for the year ended December 31, 1995, a decrease of $0.7 million. The
decrease in distribution costs was due to generally fewer copies of magazines
being distributed. Other production costs of $0.5 million were incurred during
the year ended December 31, 1996, related to an insert placed in certain
publications to promote the Company's pay-per-call services.

      Selling, general and administrative expenses were $32.6 million for the
year ended December 31, 1996, compared to $35.8 million for the year ended
December 31, 1995, a decrease of $3.2 million. The decrease is primarily
attributable to: lower salaries, employee benefits, travel and entertainment,
and temporary personnel expenses in 1996 due to corporate restructuring
($2.7million); lower retail display allowance costs associated with lower
newsstand circulation ($0.6 million); lower subscription fulfillment costs
related to fewer subscription copies fulfilled during 1996 and to the Company's
change to a new subscription fulfillment company during 1995 ($0.2million).
Furthermore, the Company incurred moving expenses in 1995 ($0.4 million) as a
result of the relocation of its principal corporate offices. The decreases were
partially offset by an increase in consulting fees ($0.5million).

      Rent expense from affiliated companies represents charges from affiliated
companies for the use of the Company's corporate and executive offices. The
charge is based upon the Company's proportionate share of the operating expenses
of such offices. Rent expense from affiliated companies was $0.7 million for the
year ended December 31, 1996, compared to $1.1 million for the year ended
December 31, 1995, a decrease of $0.4 million. The decrease is primarily due to
lower operating costs of the Company's executive offices and because, effective
March 1, 1995, in connection with the relocation of the Company's principal
corporate offices, rent expense for the corporate offices is included in
selling, general and administrative expense rather than in rent expense from
affiliated companies.

Foreign Edition Licensing

      Revenues from foreign edition licensing were $4.9 million for the year
ended December 31, 1996, compared to $2.5 million for the year ended December
31, 1995, an increase of $2.4 million. The increase is primarily the result of a
$2.0 million litigation settlement in October 1996, which was in settlement of a
dispute with a former licensee of the United Kingdom edition of Penthouse
magazine. Additional revenue increases were obtained through the addition of
licensees in Brazil and Taiwan. Selling, general and administrative expenses
were $0.5 million and $0.7 million for the years ended December 31, 1996 and
1995, respectively, a decrease of $0.2 million, resulting from lower consulting
fees during the year ended December 31, 1996.


                                       23
<PAGE>

Automotive Magazines

      Revenues for the Automotive Magazines were $19.6 million for the year
ended December 31, 1996, compared to $18.6 million for the year ended December
31, 1995, an increase of $1.0 million. Newsstand revenues were $4.6 million for
the year ended December 31, 1996, compared to $4.9 million for the year ended
December 31, 1995, a decrease of $0.3 million, due primarily to less copies sold
in 1996, partially offset by an increase in the cover price of Drag Racing
Monthly. Advertising revenues were $11.3 million for the year ended December 31,
1996, compared to $9.8 million for the year ended December 31, 1995, an increase
of $1.5 million, resulting primarily from a 19% increase in advertising rates
per page. Subscription revenues were $3.7 million for the year ended December
31, 1996, compared to $3.8 million for the year ended December 31, 1995, a
decrease of $0.1 million, due to a decrease in the number of subscription copies
sold.

      Publishing-production, distribution and editorial expenses were $10.4
million for the year ended December 31, 1996, compared to $10.8 million for the
year ended December 31, 1995, a decrease of $0.4 million. Paper costs were $4.4
million for the year ended December 31, 1996, compared to $4.3 million for the
year ended December 31, 1995, an increase of $0.1 million. The increase in paper
costs in 1996 is primarily attributable to the increased cost of paper, offset
by a decrease in the number of magazines printed in 1996 as compared to 1995.
Print costs were $3.8 million for the year ended December 31, 1996, compared to
$4.3 million for the year ended December 31, 1995, a decrease of $0.5 million.
The decrease is attributable to a decreased number of magazines printed in 1996.
Distribution costs were $1.9 million for the year ended December 31, 1996 and
1995. Editorial and art costs were $0.3 million for the year ended December 31,
1996 and 1995.

      Selling, general and administrative expenses were $6.3 million for the
year ended December 31, 1996, compared to $6.9 million for the year ended
December 31, 1995, a decrease of $0.6 million. The decrease is primarily
attributable to lower subscription acquisition spending.


                                       24
<PAGE>

Entertainment Segment

      Revenues from the Entertainment Segment were $15.1 million for the year
ended December 31, 1996, compared to $17.4 million for the year ended December
31, 1995, a decrease of $2.3 million. The Company's pay-per-call and video
divisions accounted for decreases of $0.5 million and $2.2 million,
respectively. These decreases were partially offset by a $0.4 million increase
in revenues from the Company's internet business. The decrease in pay-per-call
revenues is attributed primarily to a required reduction in the extension of
credit to callers that did not meet certain criteria established by the Company,
the purpose of which was to reduce the amount of customer charge backs to a
level acceptable to credit card companies. The decrease in revenues from the
Company's video division is primarily due to fewer video cassettes sold through
the Company's national wholesale distributor during the year ended December 31,
1996, as compared to the year ended December 31, 1995. Additionally, the revenue
decline resulted from the termination in December 1995, of a direct response
program with the Company's national video wholesale distributor. Internet
revenues have been achieved through the implementation, in August 1995, of a pay
subscription service on the internet.

      Direct costs were $7.9 million for the year ended December 31, 1996,
compared to $10.1 million for the year ended December 31, 1995, a decrease of
$2.2 million. The Company's video business experienced a $1.8 million decrease
in direct costs, primarily associated with declines in fulfillment and
distribution costs associated with a lower sales volume. The Company's
pay-per-call business experienced a $0.4 million reduction in costs attributed
to lower levels of customer charge backs due to the reduction in the extension
of credit to callers who did not meet certain criteria established by the
Company, as previously discussed.

      Selling, general and administrative expenses were $3.6 million for the
year ended December 31,1996, compared to $4.9 million for the year ended
December 31, 1995, a decrease of $1.3 million. The decrease in expenses is
primarily attributable to lower costs of the Company's video business associated
with lower sales volume, which was partially offset by higher expenses related
to higher revenues from the internet business.

                               IMPACT OF YEAR 2000

      The Company is conducting a comprehensive review of its computer systems
to identify the systems that could be affected by the Year 2000 issue and is
developing an implementation plan to resolve the issue. The Year 2000 problem is
the result of computer programs being written using two digits rather than four
to define the applicable year.

      The Company presently believes that the Year 2000 problem will not pose
significant operational problems for the Company's computer systems and
accordingly, will not have a material adverse effect on the Company's results of
operations or financial position.


                                       25
<PAGE>

                         LIQUIDITY AND CAPITAL RESOURCES

      At December 31, 1997, the Company had $ 7.3 million in cash and cash
equivalents, compared to $7.2 million at December 31, 1996. The increase in cash
and cash equivalents during the year ended December 31, 1997 resulted from net
cash flows provided by operating activities of $1.7 million, net cash flows used
in financing activities of $1.1 million and net cash flows used in investing
activities of $0.5 million.

Cash flows from operating activities

      Net cash provided by operating activities was $1.7 million for the year
ended December 31, 1997, compared to net cash provided by operating activities
of $2.8 million for the year ended December 31, 1996. Net cash provided by
operating activities for the year ended December 31, 1997 was primarily a result
of the reduction of paper and film and programming cost inventory, decreased
accounts receivable and increased deferred subscription revenue due in part to
increased subscription acquisition spending during the year ended December 31,
1997. The decrease in accounts receivable was the result of the sale of an
accounts receivable balance due from a customer totaling $2.2 million. Net cash
provided by operating activities for the year ended December 31, 1996 was
primarily a result of the reduction of paper and film and programming cost
inventory, and accounts receivable, partially offset by the reduction of
deferred subscription revenue due in part to lower subscription acquisition
spending during the year ended December 31, 1996.

Cash flows from investing activities

      Cash used in investing activities for the year ended December 31, 1997 was
$1.0 million, compared to cash used in investing activities of $0.4 million for
the year ended December 31, 1996. The cash used in investing activities in 1997,
includes a $0.7 million loan to GMI's principle shareholder and $0.3 million in
capital expenditures. Cash used in investing activities in 1996 was for capital
expenditures.

Cash flows from financing activities

      Cash flows (used in) provided by financing activities were ($0.5) million
and $0.3 million for the years ended December 31, 1997 and 1996, respectively.
Cash flows used in financing activities in 1997 were related to advances to
affiliated companies of $0.5 million. Cash flows from financing activities in
1996 were related to the repayment of advances from affiliated companies. During
the year ended December 31, 1995, cash flows from financing activities were a
result of the receipt of $8.0 million in advances from its distributor of video
cassettes and films and national newsstand distributor. These advances, included
as unearned revenues in the Company's balance sheets at December 31 and 1997 and
1996, respectively, are recognized as revenue, as video cassettes are sold and
in the case of the advance from the national newsstand distributor, over the
term of the distribution agreement. The Company will not receive cash from the
sale of video cassettes until this amount is recouped by the Company's
distributor. Should the Company's revenues from the sales of video cassettes and
films be insufficient to earn the entire advance during the term of the
agreement, the unearned amount would have to repaid, although at the current
sales levels this would not be the case. In July 1995, the Company used cash to
repurchase $5.0 million face amount of its outstanding senior secured notes,
including 5,000 warrants, for $4.1 million.

      Affiliated company investments and advances at December 31, 1997 increased
$0.5 million from the December 31, 1996 balance, such that the Company is owed
$1.1 million from GMI as of December 31, 1997. These balances regularly result
from the impact 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 the Company and a portion charged to GMI and
its subsidiaries as incurred. These


                                       26
<PAGE>

charges generally result in amounts due to the Company, and are generally repaid
sixty days after the end of each quarter in accordance with the terms of an
expense sharing agreement. No reimbursement was made by GMI during 1997 and the
amount is still outstanding as of March 17, 1998. Demand for such payment has
been made by management of the Company. Management of the Company believes that
GMI and its subsidiaries have sufficient assets to enable the Company to recover
its advance through liquidation of certain of its assets and Management expects
that the amount will be repaid in 1998. The principal shareholder of GMI has
agreed to guarantee repayment of this amount.

      The ability of the Company to incur additional debt is severely limited by
the terms of its senior secured notes and the Indenture. Pursuant to the
Indenture, the Company may not declare a dividend on its Common Stock, subject
to certain exceptions, unless it meets certain financial covenants set forth
therein. The Company's subsidiaries which are guarantors of the senior secured
notes under the Indenture, however, are permitted to make intercompany di
vidends on their common stock.

Future outlook

      The Company's results from operations continues to be negatively impacted
by decreased newsstand circulation and advertising revenues from Mens Magazines.
Newsstand circulation has continued to decline during 1997, resulting in
continued net losses to the Company. While it is difficult to predict future
newsstand sales of the Company's magazines, it is unlikely that the Company can
achieve profitable results from operations in 1998 if such sales continue to
decline. However, the Company does expect the entertainment segment will
contribute increased profitability in 1998, due to the Company's internet pay
subscription service being operational for the entire year. Furthermore, under
the Indenture, should the Company incur additional losses in the future such
that the Company's tangible net worth (deficiency) declines from the amount at
December 31, 1997 of ($77.9) million to below ($81.6) million for two
consecutive quarters, the Company would be required to purchase, on the last day
of the next following fiscal quarter, ten percent of the principal amount of the
Notes then outstanding at a price of 101% of the principal amount thereof.

      The Company's cash balance at December 31, 1997 is $7.3 million. The
Company has $4.2 million semiannual interest payment due on June 30, 1998.
Management of the Company believes that it will have sufficient cash resources
through positive cash flows from operations and use of its existing cash
balances to enable it to meet its obligations over the next twelve months.

                         CHANGE IN ACCOUNTING PRINCIPLE

      In 1997, the Company changed its method of determining the cost of
inventories from the LIFO method to the FIFO method. Under the current
environment of low inflation, the Company believes that the FIFO method will
result in a better measurement of operating results. This change has been
applied by retroactively restating the Company's consolidated financial
statements for all periods presented. The effect of the restatement was to
decrease 1997 net loss by $178,000, increase 1996 net loss by $499,000 and
decrease 1995 net loss by $115.000.

      The January 1, 1995 balance of retained earnings has been adjusted for the
effect of applying retroactively, the new method of valuing inventories.


                                       27
<PAGE>

                   NEW AUTHORITATIVE ACCOUNTING PRONOUNCEMENT

      The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 changes how operating
segments are reported in annual financial statements and requires the reporting
of selected information about operating segments in interim financial reports
issued to shareholders. SFAS No. 131 is effective for periods beginning after
December 15, 1997, and comparative information for earlier years is to be
restated. SFAS No. 131 need not be applied to interim financial statements in
the initial year of its application. The Company is in the process of evaluating
the disclosure requirements. The adoption of SFAS No. 131 will have no impact on
the Company's consolidated results of operations, financial positions or cash
flows.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

      See Consolidated Financial Statements and Financial Statement Schedules
included in Part IV, Item 14.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

      None.


                                       28
<PAGE>

                                    PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

      The directors of the Company 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 director and executive officer of the Company.

                                                              Date       Date
                                                            Elected   Elected to
                             Positions Presently Held          as      Present
Name                Age        with the  Registrant         Director    Office
------------------  ---  ---------------------------------  --------  ----------

Robert C. Guccione  67   Director, Chairman of the Board,     1993       1993
                         Publisher

Robert H. Altman    53   Director, President, Chief           1998       1998
                         Executive Officer

Patrick J. Gavin    46   Director, Executive Vice             1993       1998
                         President, Chief Operating
                         Officer

Nina Guccione       38   Director, Executive Vice             1997       1998
                         President,
                         President-New Media, Secretary

James M. Follo      38   Vice President, Chief Financial       --        1998
                         Officer, Treasurer

Laurence B. Sutter  54   Senior Vice President, General        --        1997
                         Counsel, Assistant Secretary

William F. Marlieb  69   Director                             1993        --

John L. Decker      61   Director                             1993        --

Phyllis Schwebel    70   Director                             1993        --


                                       29
<PAGE>

The business experience of the directors and executive officers of the Company
during the past five years is presented below.

Robert C. Guccione is a Director, Chairman of the Board and Publisher of the
Company, since February 1998. Since 1967, through February 1998, Mr. Guccione
was Director, Chairman of the Board and Chief Executive Officer of the Company.
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.

Robert H. Altman has been a Director, President and Chief Executive Officer of
the Company since January 1998. Prior to joining the Company, Mr. Altman was a
partner in the law firm of Bryan Cave LLP from June 1995 to December 1997. From
1990 to 1995, Mr. Altman was a partner in the law firm of Holtzman, Wise &
Sheperd.

Eugene Boffa, Jr. was President and Chief Operating Officer of the Company until
January 1998. Mr. Boffa joined the Company in June 1996 as a consultant and
served as President and Chief Operating Officer of the Company from December
1996 until January 1998. Mr. Boffa is an attorney-at-law, licensed to practice
in New York and New Jersey. Mr. Boffa has practiced law since 1970 and most
recently was a partner in the law firm of Boffa & Lytle for in excess of five
years.

Patrick J. Gavin has been a Director, Executive Vice President and Chief
Operating Officer of the Company since February 1998. Prior to the appointment
to his current position, Mr. Gavin was Executive Vice President- Chief Financial
Officer and Treasurer of the Company since 1990. Mr. Gavin received his B.S. in
Management and an M.B.A. from St. John's University.

Nina Guccione has been a Director, Executive Vice President, President- New
Media and Secretary of the Company since February 1998. Prior to the appointment
to her current position, Ms. Guccione was Executive Vice President- New Media
and Secretary of the Company since 1996. Ms. Guccione has served in various
capacities within the Company for in excess of five years. Ms. Guccione is the
daughter of Robert C. Guccione.

James M. Follo has been Vice President- Chief Financial Officer and Treasurer of
the Company since February 1998. Prior to appointment to his current position,
Mr. Follo was Vice President-Financial Operations of the Company since January
1994. Prior to joining the Company, Mr. Follo was Senior Audit Manager with the
accounting firm of Grant Thornton, where he was employed from 1984 to 1994. Mr
Follo is a certified public accountant.

Laurence B. Sutter has been a Senior Vice President, General Counsel and
Assistant Secretary of the Company, since January 1997. Prior to his appointment
to his current position, Mr. Sutter was Associate Counsel/Publications and
Assistant Secretary. Mr. Sutter has been employed by the Company since 1982. Mr.
Sutter has been a practicing attorney since 1977.

William F. Marlieb is a Director of the Company. Mr. Marlieb was
President/Marketing, Sales and Circulation of the Company until his retirement
in April 1997. He has been associated with the Company for 24 years. Prior to
joining the Company in 1973, he was President of Tilley Marlieb Advertising,
Inc. Mr. Marlieb is a past President and Chairman of the Advertising Club of New
York.


                                       30
<PAGE>

John L. Decker is a Director of the Company. Since 1983, he has been President
of Decker & Associates, the publisher of The Advertiser and Agency magazines.
From 1978 to 1983, Mr. Decker was Senior Vice President and Group Publisher of
Knapp Communications, which is responsible for the advertising and circulation
of Architectural Digest, Bon Appetit, Go, and Home magazines. Mr. Decker
received his B.S. in Economics from Villanova University.

Phyllis F. Schwebel is a Director of the Company. Since 1992, she has been
President of The Garth Company, a strategic marketing organization. From 1983
through 1991, Ms. Schwebel was Manager of Market Research for Time magazine and
Manager of Corporate Management Research for Time Inc. Ms. Schwebel is a member
of the Board of Directors of the American Advertising Federation and immediate
past Chairman of its Counsel of Governors. She holds a B.A. from The City
University of New York.

Item 11. EXECUTIVE COMPENSATION.

      The following table summarizes the compensation for services rendered to
the Company during fiscal years 1995, 1996 and 1997 by (i) the Company's Chief
Executive Officer, Robert C. Guccione, and (ii) each of the Company's three
other most highly compensated executive officers whose total annual salary and
bonus exceed $100,000. The compensation for all such officers represents the
amounts paid by the Company in respect thereof pursuant to the Properties and
Salary Allocation Agreement (for Mr. Guccione and Ms. Keeton) and the Expense
Allocation Agreement and employment agreements (for all other such officers).
See "Certain Relationships and Related Party Transactions."


                                       31
<PAGE>

Name and Principal Position                         Annual Compensation
-----------------------------------------  ------------------------------------

                                           Year   Salary(1)  Bonus(5)  Other (3)
                                           ----  ----------  --------  --------

Robert C. Guccione                         1997  $1,530,000            $233,855
  Chairman, Publisher,                     1996  $1,615,000            $120,886
  Chief Executive Officer                  1995  $1,538,500

Kathryn Keeton Guccione (2)                1997  $  347,114            $233,855
  Vice Chairman                            1996  $  475,000            $120,886
                                           1995  $  452,500

Eugene Boffa, Jr.(4)                       1997  $  398,739
  President and Chief Operating Officer    1996  $  286,000

Patrick J. Gavin                           1997  $  347,959
  Executive Vice President,                1996  $  345,838
  Chief Financial Officer and Treasurer    1995  $  329,456

Lawrence B. Sutter
   Senior Vice President, General Counsel  1997  $  148,575
   and Assistant Secretary                 1996  $  137,247
                                           1995  $  141,115

William F. Marlieb(5)                      1997  $  268,651
  President/Marketing, Sales and           1996  $  393,262  $81,555
  Circulation                              1995  $  374,634  $87,520

(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 and, for 1995, as to
      Messrs. Gavin and Marlieb, their employment agreements with the Company,
      GMI and its affiliates. The allocations were approved by the nonemployee
      members of the Board of Directors of the Company. See "Compensation
      Committee Interlock and Insider Participation in Compensation Decisions"
      and "Certain Relationships and Related Party Transactions."

(2)   Deceased as of September 1997.

(3)   Other compensation represents life insurance premiums paid on behalf of
      Mr. and Mrs. Guccione, under split dollar policy arrangements. One-half of
      the total premium paid is allocated above to each of Mr. and Mrs.
      Guccione.

(4)   In 1996, salary represents payments under a consultant arrangement. In
      1997, salary represents $115,200 under a consulting arrangement and
      $283,539 in salary.


                                       32
<PAGE>

(5)   Mr. Marlieb was granted a bonus in 1995 and 1996 equal to the value of
      certain advertising he received in the Company's Mens Magazines. Mr.
      Marlieb, upon retirement from the Company on April 4, 1997, entered into
      an agreement with the Company which provides for retirement payments
      totalling $207,000 for two years. In addition, Mr. Marlieb is to be paid
      $25,000 annually through 2002, for consulting services, and the Company
      will furnish health insurance benefits through March 26, 1999.

Compensation of Directors

      Directors who are also employees of the Company 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 $1,000 for each Board
meeting and committee meeting attended.

Compensation Committee Interlock and Insider Participation in Compensation
Decisions

      During 1997, three non-employee directors, Messrs. Decker and Avrett and
Ms. Schwebel (the "Non-employee Members"), who have never served as officers of
the Company or been employees of the Company, acted as the Company's
Compensation Committee. Mr. Avrett (who died in August 1997), however, was the
Chairman of the Board and a principal of the firm Avrett, Free and Ginsberg
which provides advertising services to the Company. The Company paid Avrett,
Free and Ginsberg approximately $ 0.5 million, $1.2 million and $1.3 million for
such services in 1997, 1996 and 1995, respectively. See "Certain Relationships
and Related Party Transactions."

      The salaries of Mr. Guccione and Ms. Keeton are determined and paid by
GMI. The Non-employee Members reviewed and approved the reimbursement of GMI by
the Company in an amount equal to the portion of the salaries of Mr. Guccione
and Ms. Keeton allocated to the Company pursuant to the Properties and Salaries
Allocations Agreement. In addition, the Non-employee Members reviewed and
approved the expenses allocated to the Company for its use of the Townhouse
pursuant to the Properties and Salary Allocation Agreement. See "Certain
Relationships and Related Party Transactions."

Retirement Savings Plan

      The General Media Communications, Inc. Employees' Retirement Savings Plan
and Trust (the "Plan") is a tax-exempt defined contribution plan covering all
employees of GMI and its affiliates (including the Company) who have completed
1,000 hours of service in one plan year and are twenty-one years of age or
older. GMI may make 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 $9,500 in
1997. 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, 1997, Messrs. Guccione, Gavin, and Marlieb were 100% vested in
profit sharing contributions. 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


                                       33
<PAGE>

the Expense Allocation Agreement. See "Certain Relationships and Related Party
Transactions." The Company did not make any contributions to the Plan in fiscal
years 1995, 1996 and 1997.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

      All of the issued and outstanding Common Stock of the Company is owned by
GMI. The following table sets forth certain information regarding the beneficial
ownership of GMI's common stock as of March 17, 1998.

                                       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

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

Item 13. CERTAIN RELATIONSHIPS AND RELATED PARTY 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 Company related activities,
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 the Company, GMI and a GMI subsidiary, the Company reimbursed
GMI in the amounts of approximately $0.5 million, $0.7 million and $0.9 million,
during 1997, 1996 and 1995, respectively, for the use of the Townhouse for
Company purposes. See "Compensation Committee Interlock and Insider
Participation in Compensation Decisions."

      The Properties and Salary Allocation Agreement also provides that the
salaries of Mr. Guccione and Ms. Keeton are determined and paid by GMI. Pursuant
to this agreement, the Company reimburses GMI for a portion of such salaries
based upon an allocation of the relative business time spent by Mr. Guccione and
Ms. Keeton on GMI related business and on Company related business. In 1997,
1996 and 1995, the Company reimbursed GMI in the amounts of approximately $1.9
million , $2.1 million and $2.0 million, respectively, for the allocable amount
of Mr. Guccione's and Ms. Keeton's salaries.

      GMI, the Company and the Other GMI Subsidiaries are parties to the Tax
Sharing Agreement pursuant to which such parties file consolidated federal
income tax returns and, so long as permitted by the relevant tax authorities,
combined New York State and New York City tax reports. New York State and New
York City have preliminarily agreed to allow the Company to file combined
returns for certain years, and it is anticipated that continued permission will
be granted, although no assurance of such permission can be given. The Tax
Sharing Agreement sets forth the methodology for allocating income taxes and the
use of net operating losses ("NOLs") between the Company, GMI and the Other GMI
Subsidiaries. The Company, however, is not required to pay income or franchise
taxes (except certain alternative taxes) to the extent that it can utilize a
portion of the NOLs of GMI and the Other GMI Subsidiaries pursuant to the terms
of the Tax Sharing Agreement. The Company is not required to reimburse GMI and
the Other GMI Subsidiaries for the use of the NOLs generated by these entities
until after all of the Series B Notes are redeemed or paid, and then only for
the NOLs used in that or any subsequent year. In addition, the Tax Sharing
Agreement provides


                                       34
<PAGE>

that GMI and the Other GMI Subsidiaries indemnify the Company 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.

      The Company, GMI and the Other GMI Subsidiaries also have entered into the
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 the Company's
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 and Ms. Keeton), data processing,
accounting, production and sales support and administrative personnel. The
Company pays such combined expenses and allocates to GMI and the Other GMI
Subsidiaries the portions due by such companies. Costs incurred directly by
subsidiaries of the Company solely for their benefit are paid directly by such
companies, as are direct costs incurred by the Other GMI Subsidiaries solely for
their benefit.

In October 1997, Mr. Guccione was granted a loan in the amount of $1.2 million
from a company that had simultaneously entered into an agreement with the
Company to provide services for the Company's pay-per-call business. The loan
was in consideration of Mr. Guccione personally guaranteeing all material
obligations of the Company under the agreement. Payment on the loan may be
demanded with interest at 9% per annum, no earlier than December 31, 2001. If
the note is repaid in full prior to June 30, 2001, the unpaid principal amount
of the loan is reduced by $500,000.

      At December 31, 1997, the Company had a $0.7 million loan receivable from
Mr. Guccione, pursuant to a promissory note. Such loan bears interest at 13.25%
per annum and is due on December 31, 1998.

      At December 31, 1997, the Company had a $1.1 million loan receivable from
a foreign company which is principally owned by Mr. Guccione. Such loan bears no
interest, is due on demand and is personally guaranteed by Mr. Guccione.

      In 1996 and 1995, the Company sold advertising pages in several of its
publications to a Company which is owned by Mr. Marlieb, a director and officer
of the Company. The amounts charged by the Company for the advertising pages was
$81,555 and $87,250 in 1996 and 1995, respectively, which was the average rate
paid by all non-affiliated advertisers in each issue in which the advertising
appeared.

      The Company utilizes the services of Avrett, Free & Ginsberg, an
advertising agency. Such agency provides for the design and placement of media
advertising. Mr. Jack Avrett, a director of the Company until his death in
August 1997, was a principal of such firm. The Company paid Avrett, Free &
Ginsberg approximately $0.5, $ 1.2 and $1.3 million for advertising services in
1997, 1996 and 1995, respectively.

                                     PART IV

Item 14. 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 a listing of consolidated financial statements.

      (2)   See page F-1 for a listing of financial statement schedules.

      (3)   Exhibits:


                                       35
<PAGE>

Exhibit
   No.           Description
----------       -----------

  *3.1  --       Certificate of Incorporation of the Company, filed with the
                 Secretary of State of Delaware on November 9, 1993.

  *3.2  --       By-Laws of the Company.

  *4.1  --       Indenture, dated as of December 21, 1993, between the Company
                 and IBJ Schroder Bank & Trust Company, as trustee ("Trustee"),
                 containing, as exhibits, specimens of Series A Notes and Series
                 B Notes.

  *4.2  --       Registration Rights Agreement, dated as of December 21, 1993,
                 between the Company and the Underwriters.

  *4.3  --       Security Agreement, dated December 21, 1993, between the
                 Company and Trustee.

  *4.4  --       Pledge Agreement, dated December 21, 1993, between the Company
                 and Trustee.

  *4.5  --       Copyright Security Agreement, dated December 21, 1993, between
                 the Company and Trustee.

  *4.6  --       Trademark Security Agreement, dated December 21, 1993, between
                 the Company and Trustee.

+*10.1  --       Distribution Agreement, dated September 19, 1977, among Curtis
                 Circulation, 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.

+*10.2  --       Printing Agreement, dated April 30, 1980, between Penthouse
                 International, Ltd. and Meredith Corporation (to print
                 Penthouse); Amendment, dated October 23, 1986; Addendum #8,
                 dated November 7, 1986; Amendment, dated December 8, 1986;
                 Addendum, dated March 20, 1987; Amendment, dated November 3,
                 1987; Addendum, dated March 15, 1990; Addendum, dated June 15,
                 1990; and Amendment and Extension, dated September 1, 1992.

+*10.3  --       Printing Agreement, dated May 1, 1987, between Penthouse
                 International, Ltd. and Meredith/Burda (to print Four Wheeler);
                 Amendment, dated November 3, 1987; Addendum, dated March 15,
                 1990; Addendum, dated June 15, 1990; Amendment, undated,
                 effective July 1991; and Amendment and Extension, dated
                 September 1, 1992.

+*10.4  --       Printing Agreement, dated May 13, 1987, between Penthouse
                 International, Ltd. and Meredith/Burda (to print Girls of
                 Penthouse); Addendum, dated March 15, 1990; Addendum, dated
                 June 15, 1990; and Amendment and Extension, dated September 1,
                 1992.

+*10.5  --       Printing Agreement, dated July 15, 1991, among Four Wheeler
                 Publishing, Ltd., General Media International, Inc. and R.R.
                 Donnelley & Sons Co. (to print Open Wheel, Stock Car Racing and
                 Super Stock & Drag Illustrated); Amendment and Extension, dated
                 September 1, 1992.

+*10.6  --       Printing Agreement, dated July 20, 1993, among Hot Talk
                 Publications, Ltd., Penthouse Letters, Ltd., General Media
                 International, Inc. and R.R. Donnelley & Sons Co. (to print Hot
                 Talk and Penthouse Letters).


                                       36
<PAGE>

Exhibit
   No.           Description
----------       -----------

 *10.7  --       Warrant Agreement, dated December 21, 1993, between the Company
                 and Trustee.

 *10.8  --       Properties and Salary Allocation Agreement, dated December 21,
                 1993, among the Company, GMI and Locusts on the Hudson River
                 Corp.

 *10.9  --       Expense Allocation Agreement, dated December 21, 1993, among
                 the Company, GMI and the Other GMI Subsidiaries.

*10.10  --       Tax Sharing and Indemnification Agreement, dated December 21,
                 1993, among the Company, GMI and the Other GMI Subsidiaries.

*10.11  --       Employment Agreement, dated as of January 1, 1994, between the
                 Company and William F. Marlieb.**

*10.12  --       Employment Agreement, dated as of January 1, 1994, between the
                 Company and Patrick J. Gavin.**

 10.13  --       Lease, dated as of January 1, 1995, between the Company and
                 Stahl Park Avenue Co., for premises at 277 Park Avenue, New
                 York, New York (incorporated by reference to Exhibit 10.14 to
                 the Company's Annual Report on Form 10-K for the year ended
                 December 31, 1994).

+10.14  --       Circulation Subscription Fulfillment Services Agreement, dated
                 September 15, 1994, between Palm Coast Data, Ltd., Penthouse
                 International, Ltd., Omni Publications International, Ltd.,
                 Longevity International, Ltd., Four Wheeler Publishing, Ltd.,
                 Stock Car Racing Publications, Inc., Open Wheel Publications,
                 Inc., Super Stock Publications, Inc., Forum International, Ltd.
                 and Variations Publishing International, Ltd.; Amendment, dated
                 September 16, 1994.

 10.15  --       Employment Agreement, dated December 17, 1997, between the
                 Company and Robert H. Altman.**

 10.16  --       Retirement Agreement, effective April 4, 1997, between the
                 Company and William F. Marlieb.**

+10.17  --       Amendment and Extension by and among R.R. Donnelly & Sons and
                 General Media International, Inc., General Media, Inc., General
                 Media Communications, Inc. And General Media Automotive Group,
                 Inc. (incorporated by reference to Exhibit 10.1 to the
                 Company's Quarterly Report on Form 10-Q for the quarter ended
                 September 30, 1997).

  12.1  --       Computation of ratio of earnings to fixed charges.

  18.1  --       Letter on change in accounting principle.

  21.1  --       Subsidiaries of the Company.

  27    --       Financial Data Schedule.

---------------------
*     Previously filed with Registration Statement No. 33-76716 on Form S-4, and
      incorporated herein by reference to such Registration Statement.
**    Compensatory arrangement.
+     Confidential treatment has been requested with respect to certain
      information contained in this exhibit.


                                       37
<PAGE>

(b) Reports on Form 8-K:

            No reports on Form 8-K have been previously filed by the Company.

(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.

(d) Financial Statement Schedules:

            See page S-2 for a listing of financial statement schedules filed as
            part of this Form 10-K.


                                       38
<PAGE>

                                   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.

GENERAL MEDIA, INC.


By: /s/ Robert C. Guccione                            March 30, 1998
   --------------------------------------------
        Robert C. Guccione,
        Chairman of the Board;
        Publisher
        (Principal Executive Officer)


By: /s/ James M. Follo                                March 30, 1998
   --------------------------------------------
        James M. Follo,
        Vice President-
        Chief Financial Officer and Treasurer
        (Principal Financial Officer and
        Principal Accounting Officer)

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

       Signature                            Title                   Date
       ---------                            -----                   ----


/s/ Robert C. Guccione              Chairman of the Board,      March 30, 1998
---------------------------         Publisher and Director
Robert C. Guccione


/s/ Robert H. Altman                President, Chief Executive  March 30, 1998
---------------------------         Officer and Director
Robert H. Altman


/s/ Patrick J. Gavin                Executive Vice President-   March 30, 1998
---------------------------         Chief Operting Officer
Patrick J. Gavin                    and Director


/s/ Nina Guccione                   President-New Media,        March 30, 1998
---------------------------         Secretary and Director
Nina Guccione


/s/ James M. Follo                  Vice President- Chief       March 30, 1998
---------------------------         Financial Officer and
James M. Follo                      Treasurer


/s/ William F. Marlieb              Director                    March 30, 1998
---------------------------
William F. Marlieb


/s/ John L. Decker                  Director                    March 30, 1998
---------------------------
John L. Decker


/s/ Phyllis Schwebel                Director                    March 30, 1998
---------------------------
Phyllis Schwebel
<PAGE>

                                  EXHIBIT INDEX

Exhibit                                                           Sequential
  No.       Description                                           Numbering
-------     -----------                                           ----------

   *3.1 --  Certificate of Incorporation of the Company,
            filed with the Secretary of State of Delaware on
            November 9, 1993.

   *3.2 --  By-Laws of the Company.

   *4.1 --  Indenture, dated as of December 21, 1993,
            between the Company and IBJ Schroder Bank &
            Trust Company, as trustee ("Trustee"),
            containing, as exhibits, specimens of Series A
            Notes and Series B Notes.

   *4.2 --  Registration Rights Agreement, dated as of
            December 21, 1993, between the Company and the
            Underwriters.

   *4.3 --  Security Agreement, dated December 21, 1993,
            between the Company and Trustee.

   *4.4 --  Pledge Agreement, dated December 21, 1993,
            between the Company and Trustee.

   *4.5 --  Copyright Security Agreement, dated December 21,
            1993, between the Company and Trustee.

   *4.6 --  Trademark Security Agreement, dated December 21,
            1993, between the Company and Trustee.

 +*10.1 --  Distribution Agreement, dated September 19,
            1977, among Curtis Circulation, 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.

 +*10.2 --  Printing Agreement, dated April 30, 1980,
            between Penthouse International, Ltd. and
            Meredith Corporation (to print Penthouse);
            Amendment, dated October 23, 1986; Addendum #8,
            dated November 7, 1986; Amendment, dated
            December 8, 1986; Addendum, dated March 20,
            1987; Amendment, dated November 3, 1987;
            Addendum, dated March 15, 1990; Addendum, dated
            June 15, 1990; and Amendment and Extension,
            dated September 1, 1992.

 +*10.3 --  Printing Agreement, dated May 1, 1987, between
            Penthouse International, Ltd. and Meredith/Burda
            (to print Four Wheeler); Amendment, dated
            November 3, 1987; Addendum, dated March 15,
            1990; Addendum, dated June 15, 1990; Amendment,
            undated, effective July 1991; and Amendment and
            Extension, dated September 1, 1992.

 +*10.4 --  Printing Agreement, dated May 13, 1987, between
            Penthouse International, Ltd. and Meredith/Burda
            (to print Girls of Penthouse); Addendum, dated
            March 15, 1990; Addendum, dated June 15, 1990;
            and Amendment and Extension, dated September 1,
            1992.


                              i
<PAGE>

Exhibit                                                           Sequential
  No.       Description                                           Numbering
-------     -----------                                           ----------

+*10.5  --  Printing Agreement, dated July 15, 1991, among
            Four Wheeler Publishing, Ltd., General Media
            International, Inc. and R.R. Donnelley & Sons
            Co. (to print Open Wheel, Stock Car Racing and
            Super Stock & Drag Illustrated); Amendment and
            Extension, dated September 1, 1992.

+*10.6  --  Printing Agreement, dated July 20, 1993, among
            Hot Talk Publications, Ltd., Penthouse Letters,
            Ltd., General Media International, Inc. and R.R.
            Donnelley & Sons Co. (to print Hot Talk and
            Penthouse Letters).

 *10.7  --  Warrant Agreement, dated December 21, 1993,
            between the Company and Trustee.

 *10.8  --  Properties and Salary Allocation Agreement,
            dated December 21, 1993, among the Company, GMI
            and Locusts on the Hudson River Corp.

 *10.9  --  Expense Allocation Agreement, dated December 21,
            1993, between the Company, GMI and the Other GMI
            Subsidiaries.

*10.10  --  Tax Sharing and Indemnification Agreement, dated
            December 21, 1993, among the Company, GMI and
            the Other GMI Subsidiaries.

*10.11  --  Employment Agreement, dated as of January 1,
            1994, between the Company and William F.
            Marlieb.**

*10.12  --  Employment Agreement, dated as of January 1,
            1994, between the Company and Patrick J.
            Gavin.**

 10.13  --  Lease, dated as of January 1, 1995, between the
            Company and Stahl Park Avenue Co., for premises
            at 277 Park Avenue, New York, New York
            (incorporated by reference to Exhibit 10.14 to
            the Company's Annual Report on Form 10-K for the
            year ended December 31, 1994).

+10.14  --  Circulation Subscription Fulfillment Services
            Agreement, dated September 15, 1994, between
            Palm Coast Data, Ltd., Penthouse International,
            Ltd., Omni Publications International, Ltd.,
            Longevity International, Ltd., Four Wheeler
            Publishing, Ltd., Stock Car Racing Publications,
            Inc., Open Wheel Publications, Inc., Super Stock
            Publications, Inc., Forum International, Ltd.
            and Variations Publishing International, Ltd.;
            Amendment, dated September 16, 1994.

 10.15  --  Employment Agreement, dated December 17, 1997,
            between the Company and Robert H. Altman.**

 10.16  --  Retirement Agreement, effective April 4, 1997,
            between the Company and William F. Marlieb.**


                             ii
<PAGE>

Exhibit                                                           Sequential
  No.       Description                                           Numbering
-------     -----------                                           ----------

+10.17  --  Amendment and Extension by and among R.R.
            Donnelly & Sons and General Media International,
            Inc., General Media, Inc., General Media
            Communications, Inc. And General Media
            Automotive Group, Inc. (incorporated by
            reference to Exhibit 10.1 to the Company's
            Quarterly Report on Form 10-Q for the quarter
            ended September 30, 1997).

  12.1  --  Computation of ratio of earnings to fixed
            charges.

  18.1  --  Letter on change in accounting principle.

  21.1  --  Subsidiaries of the Company.

    27  --  Financial Data Schedule.

---------------------
*     Previously filed with Registration Statement No. 33-76176 on Form S-4, and
      incorporated herein by reference to such Registration Statement.
**    Compensatory arrangement.
+     Confidential treatment has been requested with respect to certain
      information contained in this exhibit.


                                       iii
<PAGE>

                      General Media, Inc. and Subsidiaries

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                                  AND SCHEDULES

                                                                           Page
                                                                           ----

Report of Independent Certified Public Accountants                           F-2

Financial Statements

      Consolidated Balance Sheets, December 31, 1996 and 1997                F-3

      Consolidated Statements of Operations For the Years
         Ended December 31, 1995, 1996 and 1997                              F-5

      Consolidated Statement of Stockholder Deficiency
         For the Years Ended December 31, 1995, 1996
         and 1997                                                            F-6

      Consolidated Statements of Cash Flows For the Years
         Ended December 31, 1995, 1996 and 1997                              F-7

      Notes to Consolidated Financial Statements                      F-9 - F-22

Report of Independent Certified Public Accountants
    on Schedule                                                              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
<PAGE>

                         REPORT OF INDEPENDENT CERTIFIED
                               PUBLIC ACCOUNTANTS

Board of Directors
General Media, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of General Media,
Inc. (a Delaware corporation and wholly-owned subsidiary of General Media
International, Inc.) and Subsidiaries as of December 31, 1996 and 1997 and the
related consolidated statements of operations, stockholder deficiency and cash
flows for each of the three years in the period ended December 31, 1997. 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 generally accepted auditing
standards. 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, 1996 and 1997 and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.

As discussed in Note 3 to the financial statements, the Company changed its
method of determining the cost of inventories from the LIFO method to the FIFO
method.

GRANT THORNTON LLP

New York, New York
February 19, 1998


                                      F-2
<PAGE>

                      General Media, Inc. and Subsidiaries

                           CONSOLIDATED BALANCE SHEETS

                                  December 31,

<TABLE>
<CAPTION>
                                    ASSETS                     1996              1997
                                                           -----------       -----------
                                                        (Restated - Note 3)
<S>                                                        <C>               <C>
CURRENT ASSETS
    Cash and cash equivalents (Notes 1-g and 1-i)          $ 7,164,000       $ 7,308,000
    Accounts receivable, net of allowance for
       doubtful accounts of $1,661,000 in 1996 and
       $951,000 in 1997 (Notes 1-b and 1-i)                 11,751,000         9,177,000
    Inventories (Notes 1-c and 3)                            5,963,000         5,097,000
    Prepaid expenses and other current
      assets                                                 2,692,000         3,580,000
    Due from affiliated companies (Note 9)                     624,000         1,148,000
    Loan to shareholder (Note 9)                                                 732,000
                                                           -----------       -----------

             Total current assets                           28,194,000        27,042,000

PROPERTY AND EQUIPMENT - AT COST;
    net of accumulated depreciation and amortization
    (Notes 1-e and 4)                                        4,716,000         3,793,000

OTHER ASSETS
    Intangible assets (Note 1-f)                             3,810,000         3,194,000
    Deferred subscription acquisition costs (Note 1-d)       2,162,000         3,075,000
    Deferred debt issuance costs (Note 5)                    3,977,000         2,988,000
    Loan to affiliated company (Note 9)                      1,086,000         1,086,000
    Rent security deposits                                     766,000           766,000
    Other                                                      888,000           683,000
                                                           -----------       -----------
                                                            12,689,000        11,792,000
                                                           -----------       -----------
                                                           $45,599,000       $42,627,000
                                                           ===========       ===========
</TABLE>


The accompanying notes are an integral part of these statements.

                                      F-3
<PAGE>

                      General Media, Inc. and Subsidiaries

                           CONSOLIDATED BALANCE SHEETS

                                  December 31,

<TABLE>
<CAPTION>
  LIABILITIES AND STOCKHOLDER DEFICIENCY                         1996              1997
                                                            ------------      ------------
                                                         (Restated - Note 3)
<S>                                                         <C>               <C>
CURRENT LIABILITIES
    Accounts payable                                        $ 13,918,000      $ 13,909,000
    Accrued retail display allowances                          3,391,000         2,849,000
    Deferred subscription revenues (Note 1-b)                 10,914,000        11,748,000
    Other liabilities and accrued expenses                     1,334,000         1,583,000
    Income taxes payable (Note 6)                                677,000           372,000
                                                            ------------      ------------
             Total current liabilities                        30,234,000        30,461,000

SENIOR SECURED NOTES (Note 5)                                 79,290,000        79,467,000

UNEARNED REVENUE (Note 8)                                      6,160,000         4,699,000

COMMITMENTS AND CONTINGENCIES (Notes 5, 6, 7 and 8)

REDEEMABLE WARRANTS (Note 5)                                   1,791,000         1,791,000

STOCKHOLDER DEFICIENCY
    Common stock, $.01 par value; authorized, 1,000,000
       shares; issued and outstanding, 475,000 shares              5,000             5,000
    Capital in excess of par value                             1,418,000         1,418,000
    Accumulated deficit (Note 5)                             (73,299,000)      (75,214,000)
                                                            ------------      ------------
                                                             (71,876,000)      (73,791,000)
                                                            ------------      ------------
                                                            $ 45,599,000      $ 42,627,000
                                                            ============      ============
</TABLE>


The accompanying notes are an integral part of these statements.

                                      F-4
<PAGE>

                      General Media, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                             Year ended December 31,

<TABLE>
<CAPTION>
                                                             1995           1996           1997
                                                         ------------   ------------   ------------
                                                         ----(Restated - Note 3)----
<S>                                                      <C>            <C>            <C>
Net revenues (Note 1-b)
    Publishing
      Newsstand                                          $ 60,350,000   $ 54,114,000   $ 46,635,000
      Advertising                                          25,951,000     27,068,000     25,372,000
      Subscription                                         12,674,000     11,558,000     10,895,000
      Other                                                 4,051,000      6,826,000      4,016,000
    Entertainment                                          17,391,000     15,056,000     16,842,000
                                                         ------------   ------------   ------------
                                                          120,417,000    114,622,000    103,760,000
                                                         ------------   ------------   ------------
Operating costs and expenses
    Publishing - production, distribution and editorial    59,565,000     52,189,000     45,586,000
    Entertainment - direct costs                           10,092,000      7,947,000      6,363,000
    Selling, general and administrative (Note 1-h)         48,293,000     42,999,000     41,998,000
    Rent expense from affiliated companies (Note 9)         1,125,000        723,000        548,000
    Depreciation and amortization (Notes 1-e and 1-f)       1,593,000      1,877,000      1,873,000
                                                         ------------   ------------   ------------
         Total operating costs and expenses               120,668,000    105,735,000     96,368,000
                                                         ------------   ------------   ------------
         Income (loss) from operations                       (251,000)     8,887,000      7,392,000

Other income (expense)
    Interest expense                                      (10,302,000)    (9,907,000)    (9,918,000)
    Interest income                                           541,000        319,000        611,000
                                                         ------------   ------------   ------------
         Loss from operations before income
           taxes and extraordinary gain                   (10,012,000)      (701,000)    (1,915,000)

Provision for income taxes (Note 6)                                          327,000
                                                         ------------   ------------   ------------
         Loss from operations before
           extraordinary gain                             (10,012,000)    (1,028,000)    (1,915,000)

Extraordinary gain from early extinguishment
    of debt (Note 5)                                          656,000
                                                         ------------   ------------   ------------
         NET LOSS                                        $ (9,356,000)  $ (1,028,000)  $ (1,915,000)
                                                         ============   ============   ============
</TABLE>


The accompanying notes are an integral part of these statements.

                                      F-5
<PAGE>

                      General Media, Inc. and Subsidiaries

                CONSOLIDATED STATEMENT OF STOCKHOLDER DEFICIENCY

                  Years ended December 31, 1995, 1996 and 1997

<TABLE>
<CAPTION>
                                                      Capital in
                                              Common   excess of   Accumulated
                                              stock    par value     deficit         Total
                                              ------  ----------  ------------   ------------
<S>                                           <C>     <C>         <C>            <C>
Balance - January 1, 1995, as
    previously reported                       $5,000  $1,418,000  $(64,012,000)  $(62,589,000)

Adjustment for the cumulative effect
    on prior years of applying retroactively
    the new method of valuing inventories
    (Note 3)                                                         1,097,000      1,097,000
                                              ------  ----------  ------------   ------------
Balance - January 1, 1995                      5,000   1,418,000   (62,915,000)   (61,492,000)
Net loss for the year                                               (9,356,000)    (9,356,000)
                                              ------  ----------  ------------   ------------
Balance - December 31, 1995                    5,000   1,418,000   (72,271,000)   (70,848,000)
Net loss for the year                                               (1,028,000)    (1,028,000)
                                              ------  ----------  ------------   ------------
Balance - December 31, 1996                    5,000   1,418,000   (73,299,000)   (71,876,000)
Net loss for the year                                               (1,915,000)    (1,915,000)
                                              ------  ----------  ------------   ------------
Balance - December 31, 1997                   $5,000  $1,418,000  $(75,214,000)  $(73,791,000)
                                              ======  ==========  ============   ============
</TABLE>


The accompanying notes are an integral part of this statement.

                                      F-6
<PAGE>

                      General Media, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                            Years ended December 31,

<TABLE>
<CAPTION>
                                                          1995           1996          1997
                                                      ------------   -----------   -----------
                                                      ---(Restated - Note 3)----
<S>                                                   <C>            <C>           <C>
Cash flows from operating activities
    Net loss                                          $ (9,356,000)  $(1,028,000)  $(1,915,000)
                                                      ------------   -----------   -----------
    Adjustments to reconcile net loss to net cash
      provided by (used in) operating activities
        Depreciation and amortization                    2,799,000     3,045,000     3,039,000
        Amortization of unearned revenue                (1,472,000)   (1,230,000)   (1,461,000)
        Extraordinary gain from early extinguishment
          of debt                                         (656,000)
        Changes in operating assets and liabilities
          Accounts receivable                             (287,000)    1,610,000     2,574,000
          Inventories                                   (1,081,000)    3,096,000       866,000
          Other current assets                            (402,000)      751,000      (888,000)
          Other assets                                     372,000      (112,000)     (709,000)
          Accounts payable and accrued expenses         (5,151,000)     (376,000)     (300,000)
          Income taxes payable                                           327,000      (305,000)
          Deferred subscription revenue                    931,000    (3,265,000)      834,000
                                                      ------------   -----------   -----------
                                                        (4,947,000)    3,846,000     3,650,000
                                                      ------------   -----------   -----------
         Net cash provided by (used in) operating
             activities                                (14,303,000)    2,818,000     1,735,000
                                                      ------------   -----------   -----------
Cash flows from investing activities
    Capital expenditures                                (4,662,000)     (383,000)     (335,000)
    Payments from unconsolidated foreign affiliate         268,000
    Loan to shareholder                                                               (732,000)
                                                      ------------   -----------   -----------
         Net cash used in investing activities          (4,394,000)     (383,000)   (1,067,000)
                                                      ------------   -----------   -----------
</TABLE>


                                      F-7
<PAGE>

                      General Media, Inc. and Subsidiaries

                CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

                             Year ended December 31,

<TABLE>
<CAPTION>
                                                                  1995          1996       1997
                                                              ------------   ----------  ----------
                                                              ---(Restated - Note 3)---
<S>                                                           <C>            <C>         <C>
Cash flows from financing activities
    Repurchase of Senior Secured Notes                        $ (4,050,000)
    Advances and other amounts received from
       suppliers                                                 8,000,000
    Repayment from (advances to) affiliated companies              (76,000)  $  349,000  $ (524,000)
                                                              ------------   ----------  ----------
         Net cash provided by (used in) financing activities     3,874,000      349,000    (524,000)
                                                              ------------   ----------  ----------
         NET INCREASE (DECREASE) IN CASH AND
             CASH EQUIVALENTS                                  (14,823,000)   2,784,000     144,000
Cash and cash equivalents at beginning of year                  19,203,000    4,380,000   7,164,000
                                                              ------------   ----------  ----------
Cash and cash equivalents at end of year                      $  4,380,000   $7,164,000  $7,308,000
                                                              ============   ==========  ==========
</TABLE>


The accompanying notes are an integral part of these statements.

                                      F-8
<PAGE>

                      General Media, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1996 and 1997

NOTE 1 - ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES

      General Media, Inc. (the "Company"), a wholly-owned subsidiary of General
      Media International, Inc. ("GMI"), is a multimedia company focused
      primarily on the adult and automotive enthusiast marketplace. The
      Company's principal businesses are magazine publishing and adult
      entertainment. Operating profits of the Publishing and Entertainment
      segments were 29% and 71%, respectively, of total operating profits in
      1997. Men's magazines accounted for approximately 73% of revenues of the
      publishing segment in 1997, which also includes foreign edition licensing.
      Penthouse is the most significant trademark of the Publishing segment and
      is used extensively in magazine publishing and foreign edition licensing.
      The Company's operations are located primarily in New York City, and the
      Company has a broad customer base. Approximately 90% of the Company's
      revenues are derived from customers within the United States.

      Newsstand and advertising revenues accounted for approximately 45% and
      24%, respectively, of the Company's revenues in 1997. Revenues and
      operating results can be affected by changes in the demand for advertising
      and/or consumer demand for the Company's products. National and economic
      conditions largely affect the overall industry levels of advertising
      revenues. Magazine circulation revenues are generally affected by national
      and/or regional conditions and competition from other magazines and forms
      of media.

      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 all its subsidiaries. All significant intercompany
            transactions and balances have been eliminated.

      b. Revenue Recognition

            Revenue from the sale of magazine subscriptions is recognized over
            the term of the subscriptions.

            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
            revenues are adjusted to actual revenues as actual sales information
            becomes available. The Company receives an advance payment from its
            distributor at the on-sale date of each issue.


                                      F-9
<PAGE>

                      General Media, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

                           December 31, 1996 and 1997

NOTE 1 (continued)

            Revenues from advertising are recognized on the on-sale date of each
            issue in which the advertising was included. Revenues from
            pay-per-call programs are recorded in the period in which the calls
            are made, net of estimated chargebacks.

            Revenues from the sales of films and video cassettes are recognized
            in the period in which the product is shipped. Returns are generally
            not material. Revenues from product and trademark licensing are
            recorded in the period in which earned.

      c. 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
            actual cost, which is not greater than market. Film and programming
            costs are the direct cost of production, less amounts amortized over
            the expected period of revenue, generally twelve months from the
            film release date.

      d. Deferred Subscription Acquisition Costs

            The costs of acquiring subscriptions related to direct response
            marketing are deferred and amortized over the life of the
            subscriptions, generally twelve to eighteen months, in accordance
            with the provisions of the AICPA's Statement of Position 93-7 ("SOP
            93-7"), "Reporting on Advertising Costs." Amortization of these
            costs is done on a cost-pool-by-cost-pool basis over the period
            during which the future benefits are expected to be received. The
            impact of adopting SOP 93-7 in 1995 was immaterial to the Company as
            the Company was already in compliance with all the statement's
            accounting provisions.

      e. 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 5 years and leasehold improvements are
            depreciated over 7 years or the life of the lease, whichever is
            shorter.


                                      F-10
<PAGE>

                      General Media, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

                           December 31, 1996 and 1997

NOTE 1 (continued)

      f. Intangible Assets

            Intangible assets are specific advertising accounts, subscriber and
            circulation lists obtained with acquisition of certain magazine
            assets and are being amortized over original periods ranging from 7
            to 14 years. Goodwill represents the excess of the purchase price
            over the fair value of assets of the business acquired and is
            amortized other 15 years. On an ongoing basis, management reviews
            the valuation and amortization of goodwill and other intangible
            assets to determine possible impairment by comparing the carrying
            value to the undiscounted future cash flows of the related assets.

            Amortization expense is approximately $730,000, $617,000 and
            $616,000 for the years ended December 31, 1995, 1996 and 1997,
            respectively.

            Accumulated amortization is approximately $6,061,000, $6,678,000 and
            $7,294,000 at December 31, 1995, 1996 and 1997, respectively.

      g. Statement of Cash Flows

            The Company considers all highly liquid debt instruments purchased
            with an original maturity of three months or less to be cash
            equivalents.

            Interest paid was $9,097,000, $8,740,000 and $8,720,000 for the
            years ended December 31, 1995, 1996 and 1997, respectively.

      h. 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,
            including interest charges and depreciation. These allocations are
            based on factors determined by management of the Company to be
            appropriate for the particular item, including estimated relative
            time commitments of managerial personnel, relative number of
            employees and relative square footage of all space occupied.


                                      F-11
<PAGE>

                      General Media, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

                           December 31, 1996 and 1997

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.

      i. Concentration 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 investments exceed the FDIC insurance
            limit. 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
            distributor and, as a consequence, believes that its trade accounts
            receivable exposure is limited. The carrying value of financial
            instruments potentially subject to valuation risk (principally
            consisting of cash and cash equivalents) approximates fair market
            value. Based upon the quoted market prices, the fair value of the
            Company's Senior Secured Notes is $70,400,000 as of December 31,
            1997.

      j. Use of Estimates

            In preparing financial statements in conformity with generally
            accepted accounting principles, 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. Actual
            results could differ from those estimates.

      k. Reclassification of Prior Periods

            Certain amounts in the 1995 and 1996 financial statements have been
            reclassified to conform to the 1997 presentation.


                                      F-12
<PAGE>

                      General Media, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

                           December 31, 1996 and 1997

NOTE 2 - LIQUIDITY

      The Company's results from operations continue to be negatively impacted
      by decreased newsstand circulation and advertising revenues from men's
      magazines. Newsstand circulation has continued to decline during 1997,
      resulting in continued net losses to the Company. While it is difficult to
      predict future newsstand sales of the Company's magazines, it is unlikely
      that the Company can achieve profitable results from operations in 1998 if
      such sales continue to decline. However, the Company does expect the
      entertainment segment will contribute increased profitability in 1998, due
      to the Company's internet pay subscription service being operational for
      the entire year.

      However, the Company's cash balance at December 31, 1997 is $7.3 million.
      The Company has a $4.2 million semiannual interest payment due on June 30,
      1998. Management of the Company believes that it will have sufficient cash
      resources through positive cash flows from operations and use of its
      existing cash balances to enable it to meet its obligations over the next
      twelve months.

NOTE 3 - INVENTORIES

      Inventories include the following at December 31, 1996 and 1997:

                                                            1996        1997
                                                         ----------  ----------
        Paper and printing                               $2,581,000  $2,063,000
        Editorials and pictorials                         2,288,000   2,210,000
        Film and programming costs                        1,094,000     824,000
                                                         ----------  ----------
                                                         $5,963,000  $5,097,000
                                                         ==========  ==========

      The Company changed its method of determining the cost of paper and
      printing inventories from the LIFO method to the FIFO method. Under the
      current economic environment of low inflation, the Company believes that
      the FIFO method will result in a better measurement of operating results.
      This change has been applied by retroactively restating the accompanying
      consolidated financial statements. The effect of the restatement was to
      decrease 1997 net loss by $178,000, increase 1996 net loss by $499,000 and
      decrease 1995 net loss by $115,000.

      The January 1, 1995 balance of retained earnings has been adjusted for the
      effect of applying retroactively the new method of valuing inventories.


                                      F-13
<PAGE>

                      General Media, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

                           December 31, 1996 and 1997

NOTE 4 - PROPERTY AND EQUIPMENT

      Property and equipment as of December 31, 1996 and 1997 consist of:

                                                          1996          1997
                                                      -----------   -----------
        Furniture and equipment                       $ 7,032,000   $ 7,039,000
        Leasehold improvements                          2,477,000     2,477,000
        Computer hardware and software                  1,985,000     2,268,000
        Other                                              66,000        66,000
                                                      -----------   -----------
                                                       11,560,000    11,850,000
        Accumulated depreciation and amortization      (6,844,000)   (8,057,000)
                                                      -----------   -----------
                                                      $ 4,716,000   $ 3,793,000
                                                      ===========   ===========

NOTE 5 - SENIOR SECURED NOTES

      On December 21, 1993, the Company 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. The Notes mature on December 31, 2000 and bear
      interest at 10-5/8% per annum, which is payable semiannually. The Notes
      are not redeemable prior to December 31, 1998. The Notes can be redeemed
      at the option of the Company during the period beginning on December 31,
      1998 at 104% of the principal amount of the Notes and beginning December
      31, 1999 and thereafter at 100% of the principal amount of the Notes.

      The Company also 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 entitle the holders to purchase in
      the aggregate 25,000 shares of the Company's common stock at the exercise
      price of $0.01 per share. The Warrants are exercisable for a period of
      seven years and, beginning in 1999, the holders have the right to require
      the Company to purchase for cash all of the Warrants at their fair value.
      The Company recorded the Warrants at fair value determined to be
      $1,841,000. Debt issuance costs, consisting of placement agent
      commissions, and professional and underwriters' fees totalling
      approximately $7,141,000, are being amortized over seven years.


                                      F-14
<PAGE>

                      General Media, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

                           December 31, 1996 and 1997

NOTE 5 (continued)

      In July 1995, the Company repurchased $5,000,000 face amount of its
      outstanding Senior Secured Notes, including 5,000 warrants, for cash of
      $4,050,000. The resulting gain of $656,000 from this transaction is
      reported in the accompanying statement of operations as an extraordinary
      gain during the year ended December 31, 1995.

      The Notes are secured 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 Company,
      other than accounts receivable, inventory and cash and cash equivalents.

      The Notes are fully and unconditionally guaranteed, jointly and severally,
      by each of the Company's direct and indirect subsidiaries (the "Subsidiary
      Guarantors"). Each of the Subsidiary Guarantors is a wholly-owned
      subsidiary of the Company. The Company is a holding company with no
      separate assets, liabilities or operations other than its investment in
      its subsidiaries and the Notes. Financial statements of the Subsidiary
      Guarantors have not been presented because the aggregate assets,
      liabilities, operations and equity of the Subsidiary Guarantors are
      substantially equivalent to the assets, liabilities, operations and equity
      of the Company on a consolidated basis.

      The indenture contains covenants which, among other things, (i) restrict
      the ability of the Company to dispose of assets, incur indebtedness,
      create liens and make certain investments, (ii) require the Company to
      maintain a minimum consolidated tangible net worth (deficiency) of $(81.6)
      million, and (iii) restrict the Company's ability to pay dividends unless
      certain financial performance tests are met. The Company's subsidiaries,
      who are guarantors of the Senior Secured Notes under the indenture,
      however, are permitted to pay intercompany dividends on their shares of
      common stock. The ability of the Company and its subsidiaries to incur
      additional debt is severely limited by such covenants. As of December 31,
      1997, the Company was in compliance with all such covenants.

NOTE 6 - INCOME TAXES

      Deferred income taxes reflect the net tax effects of temporary differences
      between the carrying 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, 1996 and 1997 were as follows:


                                      F-15
<PAGE>

                      General Media, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

                           December 31, 1996 and 1997

NOTE 6 (continued)

                                                        1996           1997
                                                    ------------   ------------

        Deferred tax assets
            Reserve for doubtful accounts           $    697,000   $    577,000
            Reserve for newsstand returns                497,000        497,000
            Capitalized inventory costs                  188,000        188,000
            Depreciation and amortization                209,000         99,000
            Loss carryforwards                        39,668,000     44,199,000
                                                    ------------   ------------

                                                      41,259,000     45,560,000
            Less valuation allowance                 (40,374,000)   (44,343,000)
                                                    ------------   ------------

                                                         885,000      1,217,000
                                                    ------------   ------------
        Deferred tax liabilities
            Deferred subscription acquisition
             costs                                       885,000      1,217,000
                                                    ------------   ------------

        Net deferred tax asset                      $     --       $     --
                                                    ============   ============

      A valuation allowance is recorded against tax assets which are not likely
      to be realized. Specifically, the carryforwards are available to expire at
      specific dates. Due to the uncertain nature of their ultimate realization
      based upon past performance and expiration dates, the Company has
      established a full valuation allowance against these carryforwards.

      The Company and its subsidiaries are included in the consolidated Federal
      income tax return of GMI. 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 Company will not be required to remit income taxes to GMI
      to the extent that taxes are not payable, due to the utilization of
      available net operating loss carryovers. GMI has available for Federal
      income tax purposes net operating losses aggregating approximately $105
      million 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, which will
      expire in tax years ending in 2004 to 2012. The Company's ability to
      utilize net operating losses may be limited in the future due to
      additional issuances of the Company's common stock or other changes in
      control, as defined in the Internal Revenue Code and related regulations.
      In addition, utilization of NOL carryforwards may be limited by the
      application of the at-risk rules.


                                      F-16
<PAGE>

                      General Media, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

                           December 31, 1996 and 1997

NOTE 6 (continued)

      The Internal Revenue Service has completed an audit of GMI's Federal
      income tax returns for the years ended 1979 through 1985. New York State
      and New York City have completed audits through tax years 1992 and 1993,
      respectively. The Company is currently subject to an audit by foreign tax
      authorities and has provided a reserve of $372,000 against such audits in
      the accompanying balance sheet as of December 31, 1997. Subsequent years'
      income tax and other tax returns filed by GMI are being audited or are
      subject to audit by governmental authorities.

      In 1993, the Company agreed to pay up to $26,000,000 to satisfy a portion
      of the actual and potential tax liabilities of GMI and its subsidiaries
      through 1993. This liability has been fully paid since 1994. GMI has
      agreed to indemnify the Company for any income tax liabilities with
      respect to taxable periods ended prior to 1994 in excess of the
      $26,000,000. If GMI does not have the resources to pay the tax
      assessments, the Company will be liable for any deficiency. Management
      believes that GMI has sufficient assets to pay any likely assessments in
      excess of $26,000,000.

NOTE 7 - COMMITMENTS AND CONTINGENCIES

      Litigation

      In May 1996, an action was brought against the Company alleging wrongful
      possession and seeking to prevent publication of certain photographs in
      Penthouse magazine. This claim was settled in May 1997.

      In August 1996, an action was brought against the Company alleging various
      wrongs in connection with the Company's dealings with the former editor of
      Penthouse Comix and Mens Adventure Comix. The complaint alleges RICO
      violations, breach of contract, trademark and copyright infringement and
      other charges and demands damages in excess of $20 million. The Company
      believes that the claim is without merit and has tendered defense of this
      action to its insurance carrier. In the opinion of management, the outcome
      of this litigation is not reasonably likely to have a material adverse
      effect on the Company's financial position or results of operations.


                                      F-17
<PAGE>

                      General Media, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

                           December 31, 1996 and 1997

NOTE 7 (continued)

      There are various other lawsuits claiming amounts against the Company. It
      is the opinion of the Company's management that the ultimate liabilities,
      if any, in these cases is not reasonably likely to have a material effect
      on the Company's financial statements.

      Leases

      The Company leases office space in several cities under operating leases
      at various dates through December 2002. The leases require annual payments
      of approximately $2,300,000 in 1997 through 2002. Rent expense under
      operating leases was $2,000,000, $2,480,000 and $2,440,000 during the
      years ended December 31, 1995, 1996 and 1997, respectively.

      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. 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, 1995, 1996 and 1997.

NOTE 8 - UNEARNED REVENUE

      During 1995, the Company received amounts aggregating $8,000,000 from two
      distributors of Company products. One advance, totalling $5,000,000,
      represents an advance payment which will be recognized as revenue as
      Company products are sold through the distributor. The other advance,
      totalling $3,000,000, represents an incentive to sign a new ten-year
      agreement with the distributor and will be recognized as revenue on a
      straight-line basis over the term of the contract.


                                      F-18
<PAGE>

                      General Media, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

                           December 31, 1996 and 1997

NOTE 9 - RELATED PARTIES

      Included in the accompanying statement of operations are allocated
      expenses for the use of the Company's corporate and executive offices
      owned by affiliated companies. The following represents allocated expenses
      incurred by the Company for the business use of these facilities for the
      years ended December 31, 1995, 1996 and 1997:

                                                   1995       1996      1997
                                                ----------  --------  --------
       Corporate office                         $  266,000
       Executive office                            859,000  $723,000  $548,000
                                                ----------  --------  --------
       Rent expense from affiliated
           companies                            $1,125,000  $723,000  $548,000
                                                ==========  ========  ========

      On November 26, 1993, the Company entered into a Property and Salary
      Allocation Agreement (the "Agreement") with GMI and a subsidiary of GMI
      which allows the Company to be charged for the cost of utilizing executive
      offices owned by GMI and a subsidiary of GMI. The charges are based upon
      an estimate of the portion of the executive offices used by the Company
      and the cost of utilizing comparable facilities as determined by the
      nonemployee members of the Board of Directors of the Company.

      The Agreement also allows for the Company to be charged for salaries of
      the Chairman of the Board and the previous Vice Chairman of the Board of
      the Company, which are paid by GMI. The amount of salary charged to the
      Company is based upon an estimate of the time devoted to Company matters.

      On November 26, 1993, the Company entered into an Expense Allocation
      Agreement with GMI and its subsidiaries which allows the Company to pay
      certain shared common indirect expenses. GMI and its subsidiaries are
      required to reimburse the Company, within 60 days after each quarter-end,
      for any payments made by the Company on its behalf. 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 at December 31, 1996 and 1997 was $624,000 and
      $1,148,000, respectively. The principal shareholder of GMI has guaranteed
      the repayment of these amounts.


                                      F-19
<PAGE>

                      General Media, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

                           December 31, 1996 and 1997

NOTE 9 (continued)

      The Company has an unsecured loan receivable from an entity which is owned
      by the GMI's principal shareholder. The loan amounted to $1,086,000 at
      December 31, 1996 and 1997. The loan is due on demand, bears no interest
      and is guaranteed by GMI's principal shareholder.

      In October, 1997, GMI's principal shareholder was granted a loan in the
      amount of $1,200,000 from a company that had simultaneously entered into
      an agreement with the Company to provide services for the Company's
      pay-per-call business. The loan was in consideration of GMI's principal
      shareholder personally guaranteeing all material obligations of the
      Company under the agreement. The loan is payable in full, with interest at
      9% per annum, no earlier than December 31, 2001. If the note is repaid in
      full prior to June 30, 2001, the unpaid principal amount of the loan is
      reduced by $500,000.

      At December 31, 1997, the Company had a $732,000 loan receivable from
      GMI's principal shareholder, pursuant to a promissory note. Such loan
      bears interest at 13.25% per annum and is due on December 31, 1998.

NOTE 10 - SEGMENT INFORMATION

      Operating results and other financial data are presented for the principal
      business segments of the Company for the years ended December 31, 1995,
      1996 and 1997.

      Total revenue and operating profit (loss) by business segment include only
      sales to unaffiliated customers, as reported in the Company's consolidated
      statements of operations.

      Income (loss) from operations by business segment is total revenue, less
      operating expenses. In computing operating profit (loss) by business
      segment, none of the following items have been included: affiliated
      advertising income and expense, interest income and expense, income taxes
      and other miscellaneous and unusual items.

      Identifiable assets by business segment are those assets used in Company
      operations in each segment. Corporate items are principally cash and cash
      equivalents, deferred charges and nonoperating receivables from related
      parties.

      No geographic area outside the United States was material relative to
      consolidated revenues, operating profits or identifiable assets.


                                      F-20
<PAGE>

                      General Media, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

                           December 31, 1996 and 1997

NOTE 10 (continued)

<TABLE>
<CAPTION>
                                                   Entertain-   Corporate
                                    Publishing        ment        items     Consolidated
                                   ------------   -----------  -----------  ------------
<S>                                <C>            <C>          <C>          <C>
1997
    Sales to customers             $ 86,918,000   $16,842,000               $103,760,000
    Income from operations            2,290,000     5,102,000                  7,392,000
    Identifiable assets              27,336,000     2,029,000  $13,262,000    42,627,000
    Depreciation and amortization     1,604,000       269,000                  1,873,000
    Capital expenditures                260,000        75,000                    335,000

1996
    Sales to customers             $ 99,566,000   $15,056,000               $114,622,000
    Income from operations            5,459,000     3,428,000                  8,887,000
    Identifiable assets              29,839,000     2,909,000  $12,851,000    45,599,000
    Depreciation and amortization     1,822,000        55,000                  1,877,000
    Capital expenditures                171,000       212,000                    383,000

1995
    Sales to customers             $103,026,000   $17,391,000               $120,417,000
    Income (loss) from operations    (2,635,000)    2,384,000                   (251,000)
    Identifiable assets              35,956,000     4,130,000  $11,406,000    51,492,000
    Depreciation and amortization     1,565,000        28,000                  1,593,000
    Capital expenditures              4,606,000        56,000                  4,662,000
</TABLE>


                                      F-21
<PAGE>

                      General Media, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

                           December 31, 1996 and 1997

NOTE 11 - NEW AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS

      The Financial Accounting Standards Board ("FASB") issued Statement of
      Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
      Income." SFAS No. 130 is effective for fiscal years beginning after
      December 15, 1997. Earlier application is permitted. Reclassification of
      financial statements for earlier periods provided for comparative purposes
      is required. The adoption of SFAS No. 130 will have no impact on the
      Company's consolidated results of operations, financial position or cash
      flows.

      The FASB has issued SFAS No. 131, "Disclosures About Segments of an
      Enterprise and Related Information." SFAS No. 131 changes how operating
      segments are reported in annual financial statements and requires the
      reporting of selected information about operating segments in interim
      financial reports issued to shareholders. SFAS No. 131 is effective for
      periods beginning after December 15, 1997, and comparative information for
      earlier years is to be restated. SFAS No. 131 need not be applied to
      interim financial statements in the initial year of its application. The
      Company is in the process of evaluating the disclosure requirements. The
      adoption of SFAS No. 131 will have no impact on the Company's consolidated
      results of operations, financial position or cash flows.


                                      F-22
<PAGE>

                         REPORT OF INDEPENDENT CERTIFIED
                         PUBLIC ACCOUNTANTS ON SCHEDULE

Board of Directors
General Media, Inc. and Subsidiaries

In connection with our audits of the consolidated financial statements of
General Media, Inc. and Subsidiaries, referred to in our report dated February
19, 1998, we have also audited Schedule II as of December 31, 1997, 1996 and
1995, and for each of the three years in the period ended December 31, 1997.

In our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.

GRANT THORNTON LLP

New York, New York
February 19, 1998


                                       S-2
<PAGE>

                      General Media, Inc. and Subsidiaries

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                  Years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
               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 period   expenses     describe     describe         period
              -----------             ----------   --------   ----------   ----------      -----------
<S>                                   <C>          <C>                     <C>             <C>
Year ended December 31, 1997
    Allowance for doubtful accounts   $1,661,000   $555,000                $1,265,000(a)   $   951,000
                                      ==========   ========                ==========      ===========

Year ended December 31, 1996
    Allowance for doubtful accounts   $1,192,000   $677,000                $ (208,000)(a)  $1,661,000
                                      ==========   ========                ==========      ===========

Year ended December 31, 1995
    Allowance for doubtful accounts   $  503,000   $757,000                $  (68,000)(a)  $1,192,000
                                      ==========   ========                ==========      ===========
</TABLE>

(a) Accounts written off, net of recoveries.


                                       S-3