This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and accompanying notes in Item 1 of this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

RESULTS OF OPERATIONS (1)

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

                                            Quarters Ended          Nine Months Ended
                                               Sept. 30,                Sept. 30,
                                             2009        2008           2009        2008
Net revenues
Entertainment
Domestic TV                               $  12.5     $  14.6     $     38.5     $  45.9
International TV                             10.7        11.8           32.4        39.9
Other                                         1.2         0.9            3.5         3.8
Total Entertainment                          24.4        27.3           74.4        89.6
Print/Digital
Domestic magazine                             9.4        16.9           39.3        49.8
International magazine                        1.5         2.0            4.8         6.0
Special editions and other                    2.4         2.9            5.4         6.7
Digital                                       9.6        10.9           27.8        37.7
Total Print/Digital                          22.9        32.7           77.3       100.2
Licensing
Consumer products                             7.2         9.4           21.9        26.6
Location-based entertainment                  1.2         0.7            3.5         2.9
Marketing events                              0.2         0.2            2.3         2.7
Other                                         0.1         0.1            0.4         0.3
Total Licensing                               8.7        10.4           28.1        32.5
Total net revenues                        $  56.0     $  70.4     $    179.8     $ 222.3

Net loss
Entertainment
Before programming amortization           $   9.5     $   9.7     $     29.7     $  28.2
Programming amortization                     (7.2 )      (8.0 )        (22.4 )     (24.3 )
Total Entertainment                           2.3         1.7            7.3         3.9
Print/Digital                                 0.4        (0.2 )         (0.9 )      (3.0 )
Licensing                                     5.5         6.7           15.9        19.4
Corporate                                    (5.5 )      (4.6 )        (17.3 )     (16.9 )
Segment income                                2.7         3.6            5.0         3.4
Restructuring expense                        (0.5 )      (2.2 )        (12.8 )      (2.8 )
Impairment charges                              -           -           (5.5 )      (0.1 )
Provisions for reserves                         -        (4.1 )            -        (4.1 )
Operating income (loss)                       2.2        (2.7 )        (13.3 )      (3.6 )
Nonoperating income (expense)
Investment income                               -         0.2            0.7         0.9
Interest expense                             (2.2 )      (2.1 )         (6.5 )      (6.4 )
Amortization of deferred financing fees      (0.1 )      (0.1 )         (0.5 )      (0.5 )
Other, net                                    0.2        (0.1 )         (0.3 )      (0.4 )
Total nonoperating expense                   (2.1 )      (2.1 )         (6.6 )      (6.4 )
Income (loss) before income taxes             0.1        (4.8 )        (19.9 )     (10.0 )
Income tax expense                           (1.2 )      (1.4 )         (3.6 )      (3.6 )
Net loss                                  $  (1.1 )   $  (6.2 )   $    (23.5 )   $ (13.6 )
Basic and diluted loss per share          $ (0.03 )   $ (0.19 )   $    (0.70 )   $ (0.41 )

(1) Certain amounts reported for the prior periods have been reclassified to conform to the current year's presentation.

Overview

Total revenues decreased $14.4 million, or 20%, compared to the prior year quarter. The decrease was driven by our Print/Digital Group, which was largely due to publishing one fewer issue of Playboy magazine in the current year quarter. Lower revenues in our Entertainment Group primarily due to lower domestic and international TV revenues and our Licensing Group due to the effects of the global economic slowdown also contributed. For the nine-month period, revenues were down $42.5 million, or 19%, compared to the prior year nine-month period due mainly to lower revenues from our mature television and print businesses. Segment income decreased $0.9 million for the current year quarter as improved results from our Entertainment and Print/Digital Groups were more than offset by lower results from our Licensing Group and higher Corporate expense. Segment income for the current year nine-month period increased $1.6 million due to our cost-savings initiatives despite the lower revenues discussed above.

Current year quarter operating results improved $4.9 million compared to the prior year quarter. The improvement was due largely to $4.1 million of provisions for reserves and $1.7 million higher restructuring charges in the prior year quarter. The nine-month period operating loss increased $9.7 million reflecting $10.0 million higher restructuring charges and a $5.5 million impairment charge on goodwill in the current year period, partially offset by $4.1 million of provisions for reserves in the prior year period. Net loss for the current year quarter decreased $5.1 million compared to the prior year quarter while net loss increased $9.9 million compared to the prior year nine-month period primarily due to the operating results previously discussed.

In concert with the integration of our publishing and online businesses in the first quarter of 2009, we moved the reporting of our online/mobile business from the Entertainment Group into the Print/Digital Group, which we formerly called the Publishing Group. These businesses were combined in order to better focus on creating brand-consistent content that extends across print and digital platforms. Amounts reported for prior periods have been reclassified to conform to the revised segment reporting.

Current Economic Conditions

We continue to experience many of the same challenges our partners and competitors in the media industry are facing, namely increased competition for consumers' attention in the face of shrinking overall spending in the television and print businesses, the migration of advertisers to other platforms, higher manufacturing costs and the uncertainty created by the current state of the global economy. Our licensing business is negatively impacted by trends in the retail environment that result from lower consumer spending, in spite of the strength of our brand and products. Additionally, our location-based entertainment business is dependent largely on our partners' ability to attract consumers as well as obtain financing for projects. We have made significant changes to many of our processes and business activities in order to address the current economic climate and industry challenges. To that end, we have implemented plans to reduce overhead costs, including both employees and facilities, as well as integrated our print and digital businesses into one group and focused our business development efforts on Playboy-branded licensing. These cost-savings initiatives also resulted in our exiting or outsourcing revenue-generating but unprofitable businesses, including our Los Angeles production facility, our e-commerce and catalog business and our DVD business. We will continue to make changes to the way we operate our businesses, particularly in our mature print and television operations, in order to enhance our profitability.

Entertainment Group

Domestic TV revenues decreased $2.1 million, or 14%, compared to the prior year quarter reflecting continued consumer migration to the video-on-demand, or VOD, platform as cable and satellite providers eliminate linear channels in order to increase bandwidth. We have less shelf space on VOD than we did when linear networks were the only way consumers could buy our TV products. VOD has lowered barriers to entry for our competitors, resulting in fewer opportunities for consumers to purchase our products. Our results also reflect consumer migration to Internet-based adult options. These factors have led to falling transactional pay-per-view and relatively flat VOD revenues, trends we expect will continue into the future.

International TV revenues decreased $1.1 million, or 10%, compared to the prior year quarter and $7.5 million, or 19%, compared to the prior year nine-month period. While we recorded higher revenues due to expansion into new territories in the current-year quarter, the above decreases resulted from lower sales in Europe due to less favorable contracts replacing several contracts lost in the current year periods and unfavorable foreign

currency exchange rate fluctuations in the current year nine-month period. The economic recession and increased competition, particularly in the U.K., have made our International TV business more challenging primarily because we derive the majority of our revenues from the U.K. television market. We expect these challenges to continue into the future.

Revenues from other businesses increased $0.3 million, or 29%, compared to the prior year quarter primarily reflecting higher license fees from new and recurring television series produced by our production company, Alta Loma Entertainment. For the nine-month period, revenues decreased $0.3 million, or 8%, compared to the prior year period. Both periods reflect lower revenues due to our exiting the DVD business in the third quarter of 2008 to focus on digital video distribution.

The group's segment income improved $0.6 million compared to the prior year quarter and $3.4 million compared to the prior year nine-month period. A combination of exiting unprofitable businesses, cost-savings initiatives, favorable foreign currency exchange rate fluctuations and lower programming amortization expense contributed to the profitability improvement.

Print/Digital Group

Domestic magazine revenues decreased $7.5 million, or 44%, compared to the prior year quarter and $10.5 million, or 21%, compared to the prior year nine-month period. Playboy magazine published its first double issue and recorded revenues reflecting the combined July and August issues in the second quarter of 2009. In the prior year, August was a separate issue with revenues reflected in the third quarter. Our domestic magazine revenue decline in the current year quarter was due in large part to the one fewer issue; however, industry dynamics including decreasing newsstand sales, fewer subscribers and lower overall spending by advertisers, exacerbated by an uncertain economy, also contributed to the negative revenue trends in both the quarter and nine-month period.

Subscription revenues decreased $4.3 million, or 43%, compared to the prior year quarter and $3.2 million, or 10%, compared to the prior year nine-month period. Current year quarter subscription revenues compared to the prior year quarter were negatively impacted by one fewer issue of Playboy magazine. The decreases in both the current year quarter and nine-month period were also affected by 17% and 10% fewer average paid copies served, respectively. Industry sources believe most magazine subscriptions are down due to competition for readers, including from the Internet, as well as lower consumer spending due to the weak economy.

Newsstand revenues decreased $0.7 million, or 47%, compared to the prior year quarter and $1.6 million, or 32%, compared to the prior year nine-month period based on 43% and 32% fewer copies sold compared to the respective prior year periods. The current year quarter and nine-month period reflect continued overall weakness in the newsstand business due to the clutter created by a large number of titles, fewer newsstand outlets and competition from free content on the Internet. In addition, newsstand revenues were negatively impacted by publishing one fewer issue compared to the prior year quarter and nine-month period.

Advertising revenues decreased $2.5 million, or 46%, compared to the prior year quarter and $5.7 million, or 38%, compared to the prior year nine-month period primarily due to 34% fewer advertising pages compared to both prior year periods. Advertising sales for the 2009 fourth quarter magazine issues are closed, and we expect to report approximately 43% lower advertising revenues and 38% fewer advertising pages compared to the 2008 fourth quarter. The negative advertising sales comparison for the current year quarter and nine-month period is due in part to the impact of the double issue. On a combined basis, Playboy print and digital advertising revenues decreased $2.4 million, or 36%, compared to the prior year quarter and $6.1 million, or 34%, compared to the prior year nine-month period.

We will combine our January and February 2010 issues and record revenues reflecting both the January and February issues in the fourth quarter of 2009, and therefore we will publish only two issues in the first quarter of 2010. This will result in lower circulation and advertising revenues in the first quarter of 2010 but also lower manufacturing and shipping costs. We are also adjusting Playboy magazine's rate base (the total newsstand and subscription circulation guaranteed to advertisers) to 1.5 million from 2.6 million, effective with the January/February 2010 issue.

International magazine revenues decreased $0.5 million, or 21%, compared to the prior year quarter and $1.2 million, or 19%, compared to the prior year nine-month period due largely to lower royalties from our European

editions. Special editions and other revenues decreased $0.5 million, or 18%, compared to the prior year quarter and $1.3 million, or 20%, compared to the prior year nine-month period due mainly to 21% and 20% fewer newsstand copies sold compared to the respective prior year periods. The same industry dynamics that are impacting Playboy magazine in the domestic market are also impacting our other print businesses.

Digital revenues were $1.3 million, or 13%, lower than the prior year quarter and $9.9 million, or 26%, lower than the prior year nine-month period. The decrease in revenues for the nine-month period is in part a result of outsourcing our Playboy e-commerce and catalog business during the prior year nine-month period. Also, paysites revenues in both the current year quarter and nine-month period were lower due to increasing amounts of free content available on the Internet. We improved the customer and advertiser experience and our competitive position by completing a major infrastructure overhaul, redesign and relaunch of the free portions of our website. With the redesign completed, we are now turning our focus to our paysites and increasing profitability by building traffic and conversions.

Segment results improved $0.6 million compared to the prior year quarter and $2.1 million compared to the prior year nine-month period. Significant reductions in manufacturing and subscription costs, attributable to the one fewer issue and other cost-savings initiatives implemented in previous quarters, more than offset the lower revenues in the current year quarter and nine-month period. In addition, outsourcing our e-commerce business contributed to the improved segment results in the current year nine-month period.

Licensing Group

Licensing Group revenues decreased $1.7 million, or 16%, compared to the prior year quarter and $4.4 million, or 14%, compared to the prior year nine-month period. Despite the strength of our brand and our products and our expansion into new product lines and territories, the continued overall weakness of the global economy translated into lower retail sales for our licensees and in turn lower royalties to us. This is largely reflected in lower international consumer products royalties, primarily from Western Europe. We expect our international consumer products royalties to increase as overall economic conditions improve.

The group's segment income decreased $1.2 million compared to the prior year quarter and $3.5 million compared to the prior year nine-month period primarily due to the decreases in revenues discussed above.

Corporate

Corporate expense increased $0.9 million for the current year quarter and $0.4 million for the current year nine-month period. The effects of our cost-savings initiatives on the current year periods were more than offset by favorable adjustments related to our now-terminated deferred compensation plan in the prior year periods.

Restructuring Expense

In the second quarter of 2009, we recorded a charge of $9.3 million related to our plan to vacate our leased New York office space. The charge primarily reflects the discounted value of our remaining lease obligation net of estimated sublease income. We expect to record additional annual restructuring charges of $1.0 million on average, of which $0.4 million was recorded during the current year quarter, with $9.1 million in total over the remaining approximate 10-year term of the lease. These charges represent depreciation of leasehold improvements and furniture and equipment as well as accretion of the difference between the nominal and discounted remaining lease obligation net of estimated sublease income.

In the first quarter of 2009, we implemented a restructuring plan to integrate our print and digital businesses in our Chicago office as well as to streamline operations across the Company, including the elimination of positions. As a result of this plan, we recorded a charge of $2.6 million related to the workforce reduction of 107 employees, whose positions were eliminated by the end of the second quarter of 2009. Severance payments under this plan began in the first quarter of 2009 and will be substantially completed by the end of the year with some payments continuing into 2010. We recorded an unfavorable adjustment of $0.1 million during the current year quarter and nine-month period as a result of changes in assumptions for this plan.

In the fourth quarter of 2008, we implemented a restructuring plan to lower overhead costs, primarily related to senior Corporate and Entertainment Group positions. As a result of this plan, we recorded a charge of $4.0 million

related to 21 employees, most of whose positions were eliminated in the first quarter of 2009. Payments under this plan began in the fourth quarter of 2008 and will be largely completed by the end of 2009 with some payments continuing into 2011. We recorded an unfavorable adjustment of $0.8 million during the current year nine-month period as a result of changes in assumptions for this plan.

In the third quarter of 2008, we implemented a restructuring plan to reduce overhead costs. As a result of this plan, we recorded a charge of $2.2 million related to costs associated with a workforce reduction of 55 employees, most of whose positions were eliminated in the fourth quarter of 2008. Payments under this plan began in the fourth quarter of 2008 and will be substantially completed by the end of 2009 with some payments continuing into 2010. We recorded a favorable adjustment of $0.4 million during the current year nine-month period as a result of changes in assumptions for this plan.

Impairment Charge

In accordance with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 350, Intangibles-Goodwill and Other, or ASC Topic 350, we conduct annual impairment testing of goodwill and other indefinite-lived intangible assets as of October 1st of each year, or in between annual tests if events occur or circumstances change that would indicate impairment of our goodwill and/or other indefinite-lived intangible assets. In concert with the integration of our publishing and online businesses in the first quarter of 2009, we moved the reporting of our online/mobile business from the Entertainment Group into the Print/Digital Group, which we formerly called the Publishing Group. These businesses were combined in order to better focus on creating brand-consistent content that extends across print and digital platforms. Due to this realignment of our operating segments, which are also our reporting units as defined in ASC Topic 350, we conducted interim impairment testing of goodwill in accordance with ASC Topic 350. Interim testing of goodwill was also necessitated by lower expected financial results in the new Print/Digital Group than that of the former Entertainment Group, which contained the digital business' assets prior to the realignment of our operating segments. We estimated the implied fair value of the goodwill using a combined weighted forecasted-discounted cash flow method and a market multiple approach based in part on our financial results during the current year and our expectation of future performance, which are Level 3 inputs within the fair value hierarchy under ASC Topic 820, Fair Value Measurements and Disclosure, as described in Note (H), Fair Value Measurement, to the Notes to Condensed Consolidated Financial Statements. As a result of this testing, the implied fair value of goodwill of the new Print/Digital operating segment was lower than its carrying value, and we recorded an impairment charge on the entire balance of the Print/Digital Group's goodwill of $5.5 million in the first quarter of 2009.

Further downward pressure on our operating results and/or further deterioration of economic conditions could result in additional future impairments of our long-lived assets including remaining goodwill, which is reflected entirely in the Entertainment Group.

Income Tax Expense

Income tax expense of $1.2 million for the current year quarter and $3.6 million for the current year nine-month period was flat compared to the respective prior year periods.

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

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2009, our cash and cash equivalents totaled $26.8 million compared to $25.2 million at December 31, 2008. At September 30, 2009 and December 31, 2008, our outstanding debt consisted solely of our $115.0 million principal amount 3.00% convertible senior subordinated notes due 2025, or convertible notes. At the beginning of 2009, we adopted FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), or FSP APB 14-1, which is incorporated in ASC Topic 470, Debt. Our financing obligations had a carrying value of $103.0 million at September 30, 2009 and

$99.8 million at December 31, 2008. The difference between the principal amount of $115.0 million and the financing obligation carrying value reflects the discount associated with applying the estimated 7.75% nonconvertible borrowing rate at the time of issuance of our convertible notes. The total discount will be amortized to interest expense under the effective interest rate method over a seven-year term, representing the period beginning on the issuance date of the convertible notes of March 15, 2005 and ending on the first put date of March 15, 2012. See "Recently Issued Accounting Standards" below.

At September 30, 2009, cash generated from our operating activities and existing cash and cash equivalents were fulfilling our liquidity requirements. We also have a $30.0 million credit facility, which can be used for revolving borrowings, issuing letters of credit or a combination of both. As of September 30, 2009, there were no borrowings and $0.8 million in letters of credit outstanding under this facility, resulting in $29.2 million of available borrowings. Our credit facility expires in January 2011.

Our future net cash flows from operating activities are dependent on many factors, including industry specific trends and overall economic conditions. As described above, market driven trends are negatively impacting our revenues, primarily within our more mature television and print businesses. We expect that these trends will continue for the foreseeable future. In response to these market driven trends, we have taken a number of significant actions designed to reduce our overall cost structure and preserve cash flow, some of which are described in "Restructuring Expense" above. As a result, we generated positive cash flows from operating activities in the current year nine-month period. Despite the market trends described above, we believe cash generated from operations, our existing cash and cash equivalents and funds available under our credit facility will provide sufficient liquidity to fund our operations and meet our expected capital expenditure requirements and other contractual obligations as they become due through 2010. A prolonged continuation of the economic and industry trends described above could adversely affect our future net cash flows from operating activities, which could require us to seek other sources of funds.

Holders of our convertible notes may require us to purchase all or a portion of the convertible notes at a purchase price in cash equal to 100% of the principal amount of the convertible notes beginning on the first put date of March 15, 2012. We believe that this put option will likely be exercised by holders of our convertible notes because the trading price of the convertible notes is significantly below the put option purchase price. As a result, we expect to be required to refinance this obligation prior to the put date. We cannot be certain whether such refinancing will take the form of debt, equity or a combination thereof. Issuance of debt would likely increase our interest expense, and the issuance of equity could be dilutive to our existing stockholders.

Derivative Instruments

We hedge the variability of forecasted cash receipts related to royalty payments denominated in yen and euro with derivative instruments. These royalties are hedged with forward contracts for periods not exceeding 12 months. The fair value and carrying value of our forward contracts are not material. For the nine-month period ended September 30, 2009, hedges deemed to be ineffective due to our inability to exactly match the settlement date of the forward contracts to the receipt of these royalty payments resulted in immaterial losses.

Cash Flows from Operating Activities

Net cash provided by operating activities for the current year nine-month period was flat at $0.9 million compared to the prior year period. The operating results discussed earlier combined with the distribution of deferred compensation plan account balances were offset by changes in other liabilities and accrued expenses.

Cash Flows from Investing Activities

Net cash provided by investing activities for the current year nine-month period was $3.6 million compared to $7.1 million in the prior year period. The current year period reflected net proceeds from sales of investments of $6.7 million . . .