<PAGE>
 
               UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C. 20549

                                   FORM 10-Q



(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934
For the quarterly period ended December 31, 1996

                                      OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934
For the transition period from .................... to ....................


Commission file number 1-6813



                           PLAYBOY ENTERPRISES, INC.
            (Exact name of registrant as specified in its charter)



                DELAWARE                                   36-2258830
     (State or other jurisdiction of                    (I.R.S. Employer
      incorporation or organization)                 Identification Number)

 680 NORTH LAKE SHORE DRIVE, CHICAGO, IL                      60611
 (Address of principal executive offices)                   (Zip Code)


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


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

As of January 31, 1997, there were 4,748,954 shares of Class A Common Stock, par
value $0.01 per share, and 15,580,306 shares of Class B Common Stock, par value
$0.01 per share, outstanding.
<PAGE>
 
                  PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
                              INDEX TO FORM 10-Q

                             --------------------
<TABLE>
<CAPTION>
                                                                  Page Number
                                                                  -----------
Part I.   Financial Information
<C>       <S>                                                     <C>
          Condensed Consolidated Statements of Operations for the
          Quarters Ended December 31, 1996 and 1995 (unaudited)          3
 
          Condensed Consolidated Statements of Operations for the
          Six Months Ended December 31, 1996 and 1995 (unaudited)        4
 
          Condensed Consolidated Balance Sheets at December 31,
          1996 (unaudited) and June 30, 1996                             5
  
          Condensed Consolidated Statements of Cash Flows for the
          Six Months Ended December 31, 1996 and 1995 (unaudited)        6
 
          Notes to Condensed Consolidated Financial Statements         7-8
 
          Management's Discussion and Analysis of Financial
          Condition and Results of Operations                         9-15
 
Part II.  Other Information                                             16
</TABLE>
                                       2
<PAGE>
 
                  PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                for the Quarters Ended December 31 (Unaudited)
                   (In thousands, except per share amounts)
<TABLE>
<CAPTION>


                                                          1996               1995
                                                        --------           --------
<S>                                                     <C>                <C>

Net revenues                                            $ 79,779           $ 71,618
                                                        --------           --------

Costs and expenses:
 Cost of sales                                           (65,801)           (60,498)
 Selling and administrative expenses                      (8,713)            (8,266)
                                                        --------           --------
   Total costs and expenses                              (74,514)           (68,764)
                                                        --------           --------

     Operating income                                      5,265              2,854
                                                        --------           --------

Nonoperating income (expense):
 Investment income                                            15                 13
 Interest expense                                           (165)              (150)
 Other, net                                                  (23)                (8)
                                                        --------           --------
   Total nonoperating expense                               (173)              (145)
                                                        --------           --------

     Income before income taxes                            5,092              2,709

Income tax expense                                        (2,267)            (1,571)
                                                        --------           --------

     Net income                                         $  2,825           $  1,138
                                                        ========           ========

Weighted average number of common shares outstanding      20,321             19,990
                                                        ========           ========

Net income per common share                             $   0.14           $   0.06
                                                        ========           ========

</TABLE> 
The accompanying notes are an integral part of these consolidated financial
statements.

                                       3
<PAGE>
 
                  PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
               for the Six Months Ended December 31 (Unaudited)
                   (In thousands, except per share amounts)
<TABLE>
<CAPTION>


                                                                       1996               1995
                                                                    ---------          ---------
<S>                                                                 <C>                <C>

Net revenues                                                        $ 146,003          $ 133,881
                                                                    ---------          ---------

Costs and expenses:
 Cost of sales                                                       (122,062)          (114,182)
 Selling and administrative expenses                                  (16,247)           (15,405)
                                                                    ---------          ---------
   Total costs and expenses                                          (138,309)          (129,587)
                                                                    ---------          ---------

     Operating income                                                   7,694              4,294
                                                                    ---------          ---------

Nonoperating income (expense):
 Investment income                                                         35                 29
 Interest expense                                                        (299)              (306)
 Other, net                                                               (98)               (34)
                                                                    ---------          ---------
   Total nonoperating expense                                            (362)              (311)
                                                                    ---------          ---------

     Income before income taxes                                         7,332              3,983

Income tax expense                                                     (3,470)            (1,833)
                                                                    ---------          ---------

     Net income                                                     $   3,862          $   2,150
                                                                    =========          =========

Weighted average number of common shares outstanding                   20,291             19,990
                                                                    =========          =========

Net income per common share                                         $    0.19          $    0.11
                                                                    =========          =========
</TABLE> 


The accompanying notes are an integral part of these consolidated financial
statements.

                                       4
<PAGE>
 
                   PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                       (In thousands, except share data)
<TABLE>
<CAPTION>
 
                                                                 (Unaudited)
                                                                  Dec. 31,    June 30,
                                                                    1996        1996
                                                                 -----------  ---------
<S>                                                              <C>          <C>
Assets
------
  Cash and cash equivalents                                        $  1,061   $  2,438
  Receivables, net of allowance for doubtful accounts of
   $3,490 and $3,009, respectively                                   34,956     29,110
  Inventories                                                        22,476     23,499
  Programming costs                                                  33,524     33,873
  Deferred subscription acquisition costs                            10,987      9,569
  Other current assets                                               12,770     10,420
                                                                   --------   --------
    Total current assets                                            115,774    108,909
                                                                   --------   --------
 
  Property and equipment, at cost                                    37,826     37,404
  Accumulated depreciation                                          (26,639)   (25,510)
                                                                   --------   --------
    Property and equipment, net                                      11,187     11,894
                                                                   --------   --------
 
  Programming costs - noncurrent                                      9,610      3,362
  Trademarks                                                         12,468     11,887
  Net deferred tax assets                                             1,975      4,191
  Other noncurrent assets                                            11,201     10,626
                                                                   --------   --------
 
  Total assets                                                     $162,215   $150,869
                                                                   ========   ========
 
Liabilities
-----------
  Short-term borrowings                                            $ 12,000   $  5,000
  Current financing obligations                                         344        340
  Accounts payable                                                   25,214     22,745
  Accrued salaries, wages and employee benefits                       4,126      6,941
  Reserves for losses on disposals of discontinued operations           689        707
  Income taxes payable                                                1,170        970
  Deferred revenues                                                  44,773     44,378
  Other liabilities and accrued expenses                              8,108      8,940
                                                                   --------   --------
    Total current liabilities                                        96,424     90,021
 
  Long-term financing obligations                                         -        347
  Other noncurrent liabilities                                        8,386      8,218
                                                                   --------   --------
    Total liabilities                                               104,810     98,586
                                                                   --------   --------
 
Shareholders' Equity
--------------------
  Common stock, $0.01 par value
   Class A - 7,500,000 shares authorized; 5,042,381 issued               50         50
   Class B - 30,000,000 shares authorized; 16,987,768 and
    16,477,143 issued, respectively                                     166        165
  Capital in excess of par value                                     37,478     36,323
  Retained earnings                                                  26,660     22,798
  Foreign currency translation adjustment                               (25)       (17)
  Less cost of treasury stock                                        (6,924)    (7,036)
                                                                   --------   --------
    Total shareholders' equity                                       57,405     52,283
                                                                   --------   --------
 
  Total liabilities and shareholders' equity                       $162,215   $150,869
                                                                   ========   ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

                                       5
<PAGE>
 
                  PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
               for the Six Months Ended December 31 (Unaudited)
                                (In thousands)

<TABLE>
<CAPTION>
                                                                             1996       1995*
                                                                           ---------  ---------
<S>                                                                        <C>        <C>
Cash Flows From Operating Activities
------------------------------------
Net income                                                                 $  3,862   $  2,150
Adjustments to reconcile net income to net cash
  provided by (used for) operating activities:
    Depreciation of property and equipment                                    1,135      1,196
    Amortization of intangible assets                                           903        872
    Amortization of investments in entertainment programming                  9,619      9,023
    Investments in entertainment programming                                (15,518)   (10,250)
    Net change in operating assets and liabilities                           (7,115)    (1,489)
    Net cash used for discontinued operations                                   (18)       (16)
    Other, net                                                                    6         15
                                                                           --------   --------
      Net cash provided by (used for) operating activities                   (7,126)     1,501
                                                                           --------   --------
Cash Flows From Investing Activities
-------------------------------------
Additions to property and equipment                                            (431)      (234)
Acquisitions and funding of equity interests in international ventures         (731)    (2,856)
Other, net                                                                      105        100
                                                                           --------   --------
      Net cash used for investing activities                                 (1,057)    (2,990)
                                                                           --------   --------
 
Cash Flows From Financing Activities
------------------------------------
Increase in short-term borrowings                                             7,000      1,500
Repayment of debt                                                              (350)      (350)
Proceeds from exercise of stock options                                          65          -
Proceeds from sales under employee stock purchase plan                           91          -
                                                                           --------   --------
      Net cash provided by financing activities                               6,806      1,150
                                                                           --------   --------
 
Net decrease in cash and cash equivalents                                    (1,377)      (339)
 
Cash and cash equivalents at beginning of period                              2,438      1,471
                                                                           --------   --------
 
Cash and cash equivalents at end of period                                 $  1,061   $  1,132
                                                                           ========   ========
 
</TABLE>

*  Certain reclassifications have been made to conform to the current year
   presentation.


The accompanying notes are an integral part of these consolidated financial
statements.

                                       6
<PAGE>
 
                  PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
       for the Quarters and Six Months Ended December 31, 1996 and 1995

(A)  BASIS OF PREPARATION
     --------------------

     The financial information included herein is unaudited, but in the opinion
     of management, reflects all adjustments (which include only normal
     recurring adjustments) necessary for a fair presentation of the results for
     the interim periods. The interim results of operations and cash flows are
     not necessarily indicative of such results and cash flows for the entire
     year. These financial statements should be read in conjunction with the
     financial statements and notes thereto contained in the Annual Report on
     Form 10-K for the fiscal year ended June 30, 1996 of Playboy Enterprises,
     Inc. and Subsidiaries (the "Company").

(B)  INCOME TAXES
     ------------

     The Company's net deferred tax asset declined to $2.3 million at December
     31, 1996 based on management's projection of fiscal 1997 taxable income. As
     reported in the Company's Annual Report on Form 10-K for the fiscal year
     ended June 30, 1996, the significant components of the gross deferred tax
     asset include net operating loss, capital loss and tax credit
     carryforwards. Of the $2.3 million and $4.5 million net deferred tax assets
     included in the Condensed Consolidated Balance Sheets at December 31, 1996
     and June 30, 1996, respectively, $0.3 million is included in "Other current
     assets" with the remainder segregated as "Net deferred tax assets".

     Realization of the net deferred tax asset is dependent upon the Company's
     ability to generate taxable income in future years. The recognition of
     benefits in the financial statements is based upon projections by
     management of future operating income and the anticipated reversal of
     temporary differences that will result in taxable income. Projections of
     future earnings were based on adjusted historical earnings.

     In order to fully realize the net deferred tax asset of $4.5 million
     recorded at June 30, 1996, the Company will need to generate future taxable
     income of approximately $13.2 million prior to the expiration, beginning in
     2001, of the Company's net operating loss carryforwards. Management
     believes that it is more likely than not that the required amount of such
     taxable income will be realized. Management will periodically reconsider
     the assumptions utilized in the projection of future earnings and, if
     warranted, increase or decrease the amount of deferred tax benefits
     recognized through an adjustment to the valuation allowance.

(C)  INVENTORIES
     -----------

     Inventories, which are stated at the lower of cost (average cost, specific
     cost and first-in, first-out) or market, consisted of the following (in
     thousands):
<TABLE>
<CAPTION>
                                                           Dec. 31,  June 30,
                                                             1996      1996
                                                           --------  --------
<S>                                                        <C>       <C>
 
               Paper                                        $ 7,552   $10,771
               Editorial and other prepublication costs       5,801     6,566
               Merchandise finished goods                     9,123     6,162
                                                            -------   -------
 
               Total inventories                            $22,476   $23,499
                                                            =======   =======
</TABLE>
(D)  TREASURY STOCK
     --------------

     Treasury stock consisted of 293,427 Class A common shares and 1,018,591
     Class B common shares at December 31, 1996. At June 30, 1996, treasury
     stock consisted of 293,427 Class A common shares and 1,040,045 Class B
     common shares.


                                       7
<PAGE>
 
(E)  ACCOUNTING STANDARDS
     --------------------

     The Company will implement the provisions of Statement of Financial
     Accounting Standards No. 123, Accounting for Stock-Based Compensation
     ("Statement 123") in fiscal 1997. It is the Company's intention to adopt
     only the disclosure requirements of Statement 123.

(F)  CONTINGENCIES
     -------------

     In February 1996, the Company filed suit challenging Section 505 of the
     Telecommunications Act of 1996 (the "Act") which could, among other things,
     regulate the cable transmission of adult programming, such as the Company's
     domestic pay television programs. The Company believes that if Section 505
     of the Act were ultimately to be enforced, the Company's revenues
     attributable to its domestic pay television cable services could be
     materially adversely affected due to reduced cable carriage and/or reduced
     buy rates. See Part II. Item 1. "Legal Proceedings."

     In January 1993, the Company received a General Notice from the United
     States Environmental Protection Agency (the "EPA") as a "potentially
     responsible party" ("PRP") in connection with a site identified as the
     Southern Lakes Trap & Skeet Club, apparently located at the Resort-Hotel in
     Lake Geneva, Wisconsin (the "Resort"), formerly owned by a subsidiary of
     the Company. The Resort was sold by the Company's subsidiary to LG
     Americana-GKP Joint Venture in 1982. Two other entities were also
     identified as PRPs in the notice. The notice relates to actions that may be
     ordered taken by the EPA to sample for and remove contamination in soils
     and sediments, purportedly caused by skeet shooting activities at the
     Resort property. During fiscal 1994, the EPA advised the Company of its
     position that the area of land requiring remediation is approximately twice
     the size of the initial site. The Company believes that it has established
     adequate reserves, which totaled $0.7 million at December 31, 1996, to
     cover the eventual cost of its anticipated share (based on an agreement
     with one of the other PRPs) of any remediation that may be agreed upon. The
     Company is also reviewing available defenses, insurance coverage and claims
     it may have against third parties.

                                       8
<PAGE>
 
                     MANAGEMENT'S DISCUSSION AND ANALYSIS
               OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
              (IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)


RESULTS OF OPERATIONS
---------------------

     The Company's revenues increased 11% to $79.8 for the quarter ended
December 31, 1996 compared to $71.6 for the prior year quarter. Revenues were
$146.0 for the six months ended December 31, 1996, a 9% increase over revenues
of $133.9 for the six months ended December 31, 1995. These increases were
primarily due to higher revenues from the Entertainment Group, principally
driven by increases from Playboy TV, the Catalog Group and the international
publishing and newsstand specials and other businesses. Partially offsetting the
above were declines in Playboy magazine revenues.

     The Company reported operating income of $5.3 for the quarter ended
December 31, 1996 compared to $2.9 in the prior year quarter. For the six months
ended December 31, 1996, the Company had operating income of $7.7 compared to
$4.3 in the prior year. These increases were principally due to increases in
operating income for the Entertainment Group, primarily due to significantly
higher operating income for Playboy TV, partially offset by declines in
operating income for the Publishing Group.

     Net income for the quarter ended December 31, 1996 was $2.8, or $0.14 per
share, compared to $1.1, or $0.06 per share, for the prior year quarter. For the
six months ended December 31, 1996, net income was $3.9, or $0.19 per share,
compared to $2.2, or $0.11 per share, for the six months ended December 31,
1995.

     Net income for the quarter ended December 31, 1996, adjusted to eliminate
federal income tax expense that will not be paid due to the Company's net
operating loss carryforwards ("tax-adjusted net income"), was $4.4, or $0.22 per
share, compared to $2.2, or $0.11 per share, for the prior year quarter. For the
six months ended December 31, 1996, tax-adjusted net income was $6.1, or $0.30
per share, compared to $3.2, or $0.16 per share, for the six months ended
December 31, 1995.

     Several of the Company's businesses can experience variations in quarterly
performance. As a result, the Company's performance in any quarterly period is
not necessarily reflective of full-year or longer-term trends. For example,
Playboy magazine newsstand revenues vary from issue to issue, with revenues
generally higher for holiday issues and any issues including editorial or
pictorial features that generate unusual public interest. Advertising revenues
also vary from quarter to quarter, depending on product introductions by
advertising customers, changes in advertising buying patterns and economic
conditions. In addition, Entertainment Group revenues vary with the timing of
sales to international customers, particularly the timing of new multiyear
agreements to both program and supply programming for exclusive Playboy-branded
time slots on overseas pay television services. To allow greater flexibility the
Company modified how it programs its international networks effective with the
fourth quarter of fiscal 1996. This modification results in the revenues from
these networks now being recorded on a quarterly basis, which has the effect of
smoothing out the fluctuations caused by recording a year's worth of programming
sales in one quarter. Previously, the Company scheduled programming for a full
year in the quarter during which the network was launched or an agreement was
renewed, and recognized the full year of revenues in that quarter.

                                       9
<PAGE>
 
PUBLISHING GROUP

     The revenues and operating income of the Publishing Group were as follows
for the periods indicated below:
<TABLE>
<CAPTION>
 
 
                                      QUARTERS            SIX MONTHS
                                        ENDED                ENDED
                                     DECEMBER 31,         DECEMBER 31,
                                     ------------         ------------
                                     1996   1995          1996    1995
                                     ----   ----          ----    ----
<S>                                  <C>    <C>           <C>     <C>
 
     REVENUES
     Playboy Magazine..............  $27.7  $29.3         $51.8   $54.1
     Newsstand Specials and Other..    5.8    4.2          11.4    10.9
     International Publishing......    2.8    1.3           5.2     2.6
                                     -----  -----         -----   -----
       Total Revenues..............  $36.3  $34.8         $68.4   $67.6
                                     =====  =====         =====   =====
 

     OPERATING INCOME                $ 2.6  $ 3.5         $ 3.7   $ 6.2
                                     =====  =====         =====   =====

</TABLE> 
     Publishing Group revenues increased 4%, or $1.5, and 1%, or $0.8,
respectively, for the quarter and six months ended December 31, 1996 compared to
the prior year. This was primarily due to strong revenue growth in international
publishing and newsstand specials and other, including Playboy on-line, which
more than offset Playboy magazine revenue declines principally due to both
newsstand and advertising weakness. Playboy magazine circulation revenues for
the quarter and six months ended December 31, 1996 decreased 5%, or $1.1, and
1%, or $0.4, respectively, compared to the prior year. These decreases were
primarily due to 18% and 11% lower newsstand revenues, primarily due to 28% and
15% more U.S. and Canadian newsstand copies sold, respectively, in the prior
year, when two exceptionally strong-selling issues were published. Partially
offsetting the above were 7% and 6% higher subscription revenues, respectively,
for the quarter and six-month periods. Playboy magazine advertising revenues for
the quarter and six months ended December 31, 1996 decreased 6% and 12%,
respectively, compared to the prior year primarily due to 12% and 15% fewer ad
pages, respectively. Advertising sales for the fiscal 1997 third quarter issues
of the magazine are closed, and the Company expects to report 8% more
advertising pages for the quarter compared to the prior year quarter. Revenues
from newsstand specials and other increased 37%, or $1.6, for the quarter ended
December 31, 1996 primarily due to the mix of newsstand specials titles sold,
combined with higher advertising revenues generated from Playboy on-line. For
the six-month period, revenues from newsstand specials and other increased 5%,
or $0.5, primarily due to higher advertising revenues generated from Playboy on-
line, partially offset by lower revenues from newsstand specials primarily due
to 8% fewer U.S. and Canadian newsstand copies sold in the current year.

     For the quarter and six months ended December 31, 1996, Publishing Group
operating income decreased $0.9, or 24%, and $2.5, or 40%, compared to the prior
year due to the net decreases in revenues for Playboy magazine discussed above
combined with higher magazine manufacturing costs and operating expenses. For
the quarter, the higher costs were largely due to an increase in the average
book size. Partially offsetting the above were lower photo costs primarily as a
result of a celebrity pictorial in the prior year quarter and 14% lower average
paper prices in the current year quarter. For the six-month period, the higher
costs were largely due to an increase in the average book size. Partially
offsetting the above were lower advertising sales expense and 5% lower average
paper prices in the current year. For the quarter and six-month periods, higher
subscription expenses mostly offset the increases in subscription revenues
referred to above.

     The higher revenues for newsstand specials and other for the second 
quarter, as discussed above, resulted in an increase in operating income and 
these favorable results partially reduced the first quarter comparative decline 
in operating income.

     International publishing operating income increased for both the quarter
and six months ended December 31, 1996, respectively, compared to the prior year
due to higher revenues.

                                      10
<PAGE>
 
ENTERTAINMENT GROUP

  The revenues and operating income of the Entertainment Group were as follows
for the periods indicated below:

<TABLE>
<CAPTION>
                                                     QUARTERS               SIX MONTHS
                                                      ENDED                   ENDED
                                                   DECEMBER 31,            DECEMBER 31,
                                                 ----------------        ----------------
                                                  1996      1995          1996      1995
                                                 ------    ------        ------    ------
<S>                                              <C>       <C>           <C>       <C>
     REVENUES
     Playboy TV:
      Cable....................................   $ 5.4     $ 5.2         $10.4     $10.8
      Satellite Direct-to-Home.................     4.9       4.0           9.9       7.2
      Other....................................     1.5       0.1           2.0       0.3
                                                  -----     -----         -----     -----
     Total Playboy TV..........................    11.8       9.3          22.3      18.3
     Domestic Home Video.......................     2.3       2.2           3.9       4.4
     International TV and Home Video...........     2.0       1.3           4.3       3.2
                                                  -----     -----         -----     -----
       Total Playboy Businesses................    16.1      12.8          30.5      25.9
     AdulTVision...............................     1.2       0.5           2.4       0.9
     Movies and Other..........................     0.8       0.4           1.0       0.7
                                                  -----     -----         -----     -----
       Total Revenues..........................   $18.1     $13.7         $33.9     $27.5
                                                  =====     =====         =====     =====

     OPERATING INCOME
     Profit Contribution Before
       Playboy Businesses Programming Expense..   $ 8.8     $ 4.8         $16.7     $10.7
     Playboy Businesses Programming Expense....    (4.6)     (4.1)         (9.0)     (8.8)
                                                  -----     -----         -----     -----
        Total Operating Income.................   $ 4.2     $ 0.7         $ 7.7     $ 1.9
                                                  =====     =====         =====     =====
</TABLE>

  The following discussion focuses on the profit contribution of each Playboy
business before Playboy businesses programming expense ("profit contribution").

Playboy TV

  For the quarter ended December 31, 1996, cable pay-per-view revenues of the
Company's branded domestic pay television service, Playboy TV, were 12% higher
primarily due to higher average buy rates combined with larger favorable
adjustments, as reported by cable systems, in the current year quarter.  Cable
pay-per-view revenues were 1% higher for the six months ended December 31, 1996
primarily due to higher average buy rates, mostly offset by lower favorable
adjustments, as reported by cable systems, in the current year.  At December 31,
1996, Playboy TV was available to 11.2 million cable addressable homes, of which
4.5 million could receive Playboy TV on a 24-hour basis.  The number of homes
with 24-hour availability increased 1.2 million, or 36%, from December 31, 1995.
However, new launches in cable systems were not sufficient to offset some system
drops leading to a 1% lower total number of cable addressable homes to which
Playboy TV was available at December 31, 1996 compared to the prior year.
Historically, buy rates in homes receiving Playboy TV on a 24-hour basis are
higher than those receiving Playboy TV on only a ten-hour basis.  The number of
total cable addressable homes to which Playboy TV was available at December 31,
1996 increased 2% from September 30, 1996, while homes with 24-hour availability
increased 0.4 million, or 10%, over the same period.  The average annual
increase in the number of total cable addressable homes to which Playboy TV was
available over the last five complete fiscal years was 20%.  For the quarter and
six months ended December 31, 1996, cable monthly subscription revenues
decreased 17% and 16%, respectively, compared to the prior year largely due to a
decline in the average number of subscribing households.

  Management believes that the growth in cable access for the Company's domestic
pay television businesses has slowed in recent years due to the effects of cable
reregulation by the Federal Communications Commission ("FCC"), including the
"going-forward rules" announced in fiscal 1995 which provide cable operators
with incentives to add basic services.  As cable operators have utilized
available channel space to comply with "must-carry" provisions, mandated
retransmission consent agreements and "leased access" provisions, competition
for channel space has increased.  Additionally, the delay of new technology,
primarily digital set-top converters which would dramatically increase channel
capacity, has contributed to the slowdown.  Management believes that

                                      11
<PAGE>
 
growth will continue to be affected in the near term as the cable television
industry responds to the FCC's rules and subsequent modifications, and develops
new technology. Management believes that the Telecommunications Act of 1996 (the
"Act") as discussed in Part II. Item 1. "Legal Proceedings" has also slowed
growth in cable access. In addition, the Company believes that if Section 505 of
the Act were ultimately to be enforced, the Company's revenues attributable to
its domestic pay television cable services could be materially adversely
affected due to reduced cable carriage and/or reduced buy rates. However, as
addressable and digital technology becomes more widely available, the Company
believes that ultimately its pay television networks will be available to the
vast majority of cable homes.

     Playboy TV satellite direct-to-home revenues were 22% and 37% higher for
the quarter and six months ended December 31, 1996, respectively, compared to
the prior year. These increases were primarily due to higher DirecTV and
PrimeStar revenues, as a result of significant increases in their addressable
universes, partially offset by lower revenues, as expected, from TVRO, or the
big-dish market. Playboy TV was available to approximately 16.9 million cable
addressable and satellite direct-to-home households, including approximately
380,000 monthly subscribers, at December 31, 1996, an increase of 10% compared
to December 31, 1995.

     Other revenues increased $1.4 and $1.7 for the quarter and six months ended
December 31, 1996, primarily due to licensing episodes of one of the Company's
series to Showtime Networks Inc. ("Showtime") in the current year.

     Profit contribution for Playboy TV increased $2.7 and $5.1, respectively,
for the quarter and six months ended December 31, 1996 primarily due to the net
increases in revenues combined with no royalty expense related to the Company's
former distributor in the current year. Royalty payments were discontinued April
30, 1996, when the agreement ended.

Domestic Home Video

     Domestic home video revenues increased $0.1 and decreased $0.5,
respectively, for the quarter and six months ended December 31, 1996, compared
to the prior year primarily due to higher net sales of new releases, more than
offset for the six-month period by anticipated lower revenues from a direct-
response continuity series deal with Time Life Inc. A new continuity series with
Sony Music Direct, a different distributor, featuring new products has recently
been introduced.

     Profit contribution increased $0.1 and decreased $0.8, respectively, on the
increase and decrease, respectively, in revenues for the quarter and six months
ended December 31, 1996. Also unfavorably impacting the six-month comparison was
the timing of promotion costs.

International TV and Home Video

     For the quarter and six months ended December 31, 1996, profit contribution
from the international TV and home video business increased $0.5 and $0.9,
respectively, on $0.7 and $1.1 increases in revenues, respectively. These
increases are primarily due to higher international TV revenues in the current
year, largely from Playboy TV networks. Variations in quarterly performance are
caused by revenues and profit contribution from multiyear agreements being
recognized depending upon the timing of program delivery, license periods and
other factors. To allow greater flexibility the Company modified how it programs
its international networks effective with the fourth quarter of fiscal 1996. See
"Results of Operations."

Playboy Businesses Programming Expense

     Programming amortization expense associated with the Entertainment Group's
Playboy businesses discussed above increased $0.5 and $0.2, respectively, for
the quarter and six months ended December 31, 1996, compared to the prior year
primarily due to amortization in the current year related to the previously
discussed licensing of episodes of one of the Company's series to Showtime.

AdulTVision

     AdulTVision revenues increased $0.7 and $1.5, respectively, for the quarter
and six months ended December 31, 1996, compared to the prior year primarily due
to revenues in the current year related to the September 1996 launch of a new
channel in Latin America. Also contributing to the increases were higher
revenues from the domestic channel, which launched in July 1995, as a result of
an increase in the addressable universe.

                                      12
<PAGE>
 
     For the quarter and six months ended December 31, 1996, operating
performance increased $0.3 and $0.8, respectively, primarily due to the
increases in revenues, partially offset by higher distribution costs due to the
launch in Latin America and an increase in domestic fees in the current year
related to transferring to a new transponder.

Movies and Other

     For the quarter and six months ended December 31, 1996, operating income
from movies and other businesses increased $0.2 for both periods on $0.4 and
$0.3 increases in revenues, respectively. The Entertainment Group's
administrative expenses for the quarter and six months ended December 31, 1996
decreased and increased $0.1 and $0.2, respectively, compared to the prior year.

PRODUCT MARKETING GROUP

     The revenues and operating income of the Product Marketing Group were as
follows for the periods indicated below:
<TABLE>
<CAPTION>
 
                          QUARTERS     SIX MONTHS
                            ENDED         ENDED
                         DECEMBER 31,  DECEMBER 31,
                         ------------  ------------
                         1996   1995   1996   1995
                         -----  -----  -----  -----
<S>                      <C>    <C>    <C>    <C>
 
     REVENUES..........  $ 2.0  $ 2.3  $ 4.3  $ 3.8
                         =====  =====  =====  =====
 
     OPERATING INCOME..  $ 0.9  $ 1.2  $ 2.3  $ 1.9
                         =====  =====  =====  =====
</TABLE>

     Revenues and operating income for the quarter ended December 31, 1996 both
decreased $0.3 compared to the prior year quarter primarily due to lower
international product licensing royalties, principally from Asia. For the six
months ended December 31, 1996, revenues and operating income increased $0.5 and
$0.4, respectively, primarily due to higher international product licensing
royalties, principally from Asia. The timing of reporting of royalties from Asia
contributed to the decreases for the quarter. Further, favorably impacting both
the quarter and six-month period results were royalties in the current year
related to the Company's new domestic line of cigars and lower international
marketing costs.

CATALOG GROUP

     The revenues and operating income of the Catalog Group were as follows for
the periods indicated below:
<TABLE>
<CAPTION>
 
                          QUARTERS     SIX MONTHS
                            ENDED         ENDED
                         DECEMBER 31,  DECEMBER 31,
                         ------------  ------------
                         1996   1995   1996   1995
                         -----  -----  -----  -----
<S>                      <C>    <C>    <C>    <C>
 
     REVENUES..........  $23.3  $20.8  $39.4  $35.0
                         =====  =====  =====  =====
 
     OPERATING INCOME..  $ 2.4  $ 1.9  $ 2.9  $ 2.6
                         =====  =====  =====  =====
 
</TABLE>

     For the quarter and six months ended December 31, 1996, revenues of the
Catalog Group increased 12% and 13%, respectively, compared to the prior year
due to higher sales volume from all of the Company's catalogs, principally
attributable to increased circulation.  Additional promotions also contributed
to the higher revenues from the Collectors' Choice Music catalog.  Revenues from
the Playboy catalog were also favorably impacted by current year sales from the
Playboy Store, a version of the catalog on Playboy on-line.

     For the quarter and six months ended December 31, 1996, operating income
increased 25% and 11%, respectively, compared to the prior year primarily due to
higher operating income from the Critics' Choice Video and Playboy catalogs, as
the increased revenues were sufficient to absorb higher related costs.  The
Critics' Choice Video catalog was also favorably impacted by lower paper prices.
Operating income for the Collectors' Choice

                                      13
<PAGE>
 
Music catalog remained relatively stable for the quarter and six months ended
December 31, 1996, as the increased revenues combined with lower paper prices
were offset by higher related costs, principally due to significantly expanded
circulation.  Administrative expenses were higher for the group largely due to
higher salary and related expenses.  The Company recently purchased from the
trustee in bankruptcy the customer list of the Time Warner Viewer's Edge catalog
and expects to begin using the list in the third quarter of fiscal 1997.

CORPORATE ADMINISTRATION AND PROMOTION

     Corporate administration and promotion expenses of $4.9 and $8.9 for the
quarter and six months ended December 31, 1996, respectively, both increased
$0.5 compared to the prior year periods. These increases were primarily due to
investment spending on corporate marketing, information resources and human
resources.

CASINO GAMING

     In fiscal 1996 the Company announced plans to re-enter the casino gaming
business.  The Company, with a consortium of Greek investors, bid for and won an
exclusive casino gaming license on the island of Rhodes, Greece.  The Company's
consortium executed the contract with the government in October 1996 and is
presently renovating the approximately 85,000-square-foot property that will be
the Playboy hotel casino, which is expected to open in calendar 1997.  The
Company is continuing to explore other casino gaming opportunities with a
strategy to form joint ventures with strong local partners, in which the Company
would receive license fees for the use of the Playboy name and trademarks and
would consider taking equity positions.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

     At December 31, 1996, the Company had $1.1 in cash and cash equivalents and
$12.0 in short-term borrowings, compared to $2.4 in cash and cash equivalents
and $5.0 in short-term borrowings at June 30, 1996. At January 31, 1997, the
Company's short-term borrowings were $5.0 million. The Company expects to meet
its short-term and long-term cash requirements through its revolving credit
agreement and cash generated from operations.

  Cash Flows From Operating Activities

     Net cash used for operating activities was $7.1 for the six months ended
December 31, 1996 compared to net cash provided of $1.5 for the prior year
period. Cash used for operating assets and liabilities was $7.1 in the current
year period compared to $1.5 in the prior year. This increased use of cash was
primarily due to an increase in cash used for accounts receivable, primarily in
the Entertainment Group, principally due to the higher revenues in the current
year period as discussed throughout "Results of Operations." In addition, the
current year period had a use of cash for other current assets primarily related
to the timing of prepaid production and postage costs for the Critics' Choice
Video and Collectors' Choice Music catalogs. Further, cash used for other
accrued liabilities in the current year compared to cash provided in the prior
year was largely due to the timing of tax payments. There was also lower cash
provided by accounts payable in the current year period primarily due to
additional purchases of paper related to Playboy magazine in the prior year
period in part to take advantage of favorable pricing. Partially offsetting the
unfavorable variances discussed above was cash provided by inventories in the
current year compared to a use of cash in the prior year primarily as a result
of the additional paper purchases in the prior year combined with usage of paper
in the current year. The Company invested $15.5 in Company-produced and licensed
entertainment programming during the first six months of fiscal 1997 compared to
$10.3 in the prior year period, and expects to invest approximately $16.6 in
such programming during the remainder of fiscal 1997.

  Cash Flows From Investing Activities

     Net cash used for investing activities was $1.1 for the six months ended
December 31, 1996 compared to $3.0 for the prior year period. The prior year
included investments in equity interests of $2.9 in the first overseas Playboy
TV channels in the United Kingdom and Japan, and in the casino gaming venture
that was awarded an exclusive license on the island of Rhodes, Greece. This
compares to $0.7 of investments in the current year period related to additional
funding of the channel in the United Kingdom and an equity interest in the new
Playboy TV and AdulTVision channels in Latin America.

                                      14
<PAGE>
 
  Cash Flows From Financing Activities

     Net cash provided by financing activities was $6.8 for the six months ended
December 31, 1996 compared to $1.2 for the prior year period. This increase was
principally due to a $5.5 higher increase in the level of short-term borrowings
under the Company's revolving line of credit in the current year.

  Income Taxes
 
     Based on current tax law, the Company must generate approximately $13.2 of
future taxable income prior to the expiration of the Company's net operating
loss carryforwards ("NOLs") for full realization of the $4.5 net deferred tax
asset recorded at June 30, 1996. At June 30, 1996, the Company had NOLs of $37.5
for tax purposes, with $0.8 expiring in 2001, $8.9 expiring in 2003, $8.2
expiring in 2004, $2.1 expiring in 2007, $1.1 expiring in 2008 and $16.4
expiring in 2009.

     Management continues to believe that it is more likely than not that a
sufficient level of taxable income will be generated prior to the expiration of
the Company's NOLs to realize the $4.5 net deferred tax asset recorded at June
30, 1996. The Company's net deferred tax asset declined to $2.3 at December 31,
1996 based on management's projection of fiscal 1997 taxable income. Following
is a summary of the bases for management's belief that a valuation allowance of
$28.0 at June 30, 1996 is adequate, and that it is more likely than not that the
net deferred tax asset of $4.5 at June 30, 1996 will be realized:

 . In initially establishing the net deferred tax asset, management reviewed the
  components of the Company's NOLs and determined that they primarily resulted
  from several nonrecurring events, which were not indicative of the Company's
  ability to generate future earnings.

 . The Publishing, Product Marketing and Catalog Groups continue to generate
  meaningful earnings, while the Company's substantial investments in the
  Entertainment Group resulted in significant earnings growth in fiscal 1996 and
  are anticipated to lead to increased earnings potential in fiscal 1997 and
  future years.

 . The Company has several opportunities to accelerate taxable income into the
  NOL carryforward period.  Tax planning strategies would include the
  capitalization and amortization versus immediate deduction of circulation
  expenditures, the immediate inclusion versus deferred recognition of prepaid
  subscription income, the revision of depreciation and amortization methods for
  tax purposes and the sale-leaseback of certain property that would generate
  taxable income in future years.

  Other

     In January 1993, the Company received a General Notice from the United
States Environmental Protection Agency (the "EPA") as a "potentially responsible
party" ("PRP") in connection with a site identified as the Southern Lakes Trap &
Skeet Club, apparently located at the Resort-Hotel in Lake Geneva, Wisconsin
(the "Resort"), formerly owned by a subsidiary of the Company. The Resort was
sold by the Company's subsidiary to LG Americana-GKP Joint Venture in 1982. Two
other entities were also identified as PRPs in the notice. The notice relates to
actions that may be ordered taken by the EPA to sample for and remove
contamination in soils and sediments, purportedly caused by skeet shooting
activities at the Resort property. During fiscal 1994, the EPA advised the
Company of its position that the area of land requiring remediation is
approximately twice the size of the initial site. The Company believes that it
has established adequate reserves, which totaled $0.7 at December 31, 1996, to
cover the eventual cost of its anticipated share (based on an agreement with one
of the other PRPs) of any remediation that may be agreed upon. The Company is
also reviewing available defenses, insurance coverage and claims it may have
against third parties.

     The Company will implement the provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation
("Statement 123") in fiscal 1997. It is the Company's intention to adopt only
the disclosure requirements of Statement 123.

                                      15
<PAGE>
 
                           PART II. OTHER INFORMATION

Item 1. Legal Proceedings
-------------------------

     On February 26, 1996, Playboy Entertainment Group, Inc., a subsidiary of
the Company, filed a civil suit challenging Section 505 of The
Telecommunications Act of 1996 (the "Act") which was passed by Congress and
signed into law in February 1996. The Company believes that Section 505 is
unconstitutional and unnecessary but fully supports Section 504 of the Act,
which mandates that cable operators place full audio and video blocks on any
channel, at no charge, at a customer's request. Certain provisions of the Act
are directed exclusively at cable programming in general and adult cable
programming in particular. In some cable systems, audio or momentary bits of
video of premium or pay-per-view channels may accidentally become available to
non-subscribing cable customers. This is called "bleeding." The practical effect
of Section 505 of the Act would be to require cable systems to employ additional
blocking technology in every household in every cable system that offers adult
programming, whether or not customers request it or need it, to prevent any
possibility of bleeding. In the alternative, Section 505 provides that a cable
operator that does not employ additional blocking technology must restrict the
period during which the programming is transmitted from 10:00 p.m. to 6:00 a.m.
Penalties for violation of the Act are significant and include fines and
imprisonment. Fifteen organizations representing a wide range of influential
media, civil liberties and entertainment organizations filed friend of the court
briefs supporting the Company's litigation. The suit names as defendants The
United States of America, The United States Department of Justice, Attorney
General Janet Reno and The Federal Communications Commission. On March 7, 1996,
the Company was granted a Temporary Restraining Order ("TRO") staying the
implementation and enforcement of Section 505. In granting the TRO, the court
found that the Company had demonstrated it is likely to succeed on the merits of
its claim that Section 505 is unconstitutional. On November 8, 1996, eight
months after the TRO was granted, a three-judge panel in United States District
Court in Wilmington, Delaware (the "Court"), denied the Company's request for a
preliminary injunction against enforcement of Section 505 of the Act. The
Company has appealed the panel's decision to the United States Supreme Court.
The Court has granted the Company's motion for a stay that prohibits enforcement
of the provision pending appeal. The Company believes that if Section 505 were
ultimately to be enforced, the Company's revenues attributable to its domestic
pay television cable services could be materially adversely affected due to
reduced cable carriage and/or reduced buy rates.

Item 6. Exhibits and Reports on Form 8-K
----------------------------------------

(a)  Exhibits

     11  Computation of Earnings Per Common Share

     27  Financial Data Schedule

(b)  Reports on Form 8-K

     No reports on Form 8-K were filed during the quarter ended December 31,
1996.


                                      16
<PAGE>
 
                                  SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                            PLAYBOY ENTERPRISES, INC.
                                            -------------------------
                                                    (Registrant)



Date   February 13, 1997                By   /s/ Rebecca S. Maskey
      --------------------                   ------------------------------
                                                 Rebecca S. Maskey
                                                 Senior Vice President,
                                                 Finance

                                      17