NEW FRONTIER MEDIA INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10 -K

Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Year Ended March 31, 2004

Commission File Number: 0-23697

NEW FRONTIER MEDIA, INC.
(Exact name of registrant as specified in its charter)

Colorado 84-1084061
(State or Incorporation) (I.R.S. Employer I.D. Number)

7007 Winchester Circle, Suite 200, Boulder, CO 80301

(Address of principal executive offices and Zip Code)

(303) 444-0632
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act: None.

Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock.

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: /X/ YES / / 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/

Aggregate market value of voting stock held by non-affiliates: $181,007,918
based on 21,729,642 shares at June 9, 2004 held by non-affiliates and the
closing price on the NASDAQ National Market on that date which was $8.33.

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). / / YES /X/ NO

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter. $74,127,664

Indicate the number of shares outstanding of each of the registrant's classes of
common stock:

21,954,458 common shares were outstanding as of June 9, 2004

DOCUMENTS INCORPORATED BY REFERENCE

The information required in response to Part III of Form 10-K is hereby
incorporated by reference from the Registrant's Definitive Proxy Statement to be
filed with the Securities and Exchange Commission with respect to the
Registrant's Annual Meeting of Stockholders to be held in August 2004.

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FORM 10-K
FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 2004
TABLE OF CONTENTS

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PART I.

ITEM 1. BUSINESS

CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

THIS ANNUAL REPORT ON FORM 10-K AND THE INFORMATION INCORPORATED BY
REFERENCE INCLUDES "FORWARD-LOOKING STATEMENTS". THE COMPANY INTENDS FOR THE
FORWARD-LOOKING STATEMENTS TO BE COVERED BY THE SAFE HARBOR PROVISIONS FOR
FORWARD-LOOKING STATEMENTS. ALL STATEMENTS REGARDING THE COMPANY'S EXPECTED
FINANCIAL POSITION AND OPERATING RESULTS, ITS BUSINESS STRATEGY, ITS FINANCING
PLANS AND THE OUTCOME OF ANY CONTINGENCIES ARE FORWARD-LOOKING STATEMENTS. THE
WORDS "BELIEVE", "EXPECT", "ANTICIPATE", "OPTIMISTIC", "INTEND", "WILL", AND
SIMILAR EXPRESSIONS ALSO IDENTIFY FORWARD-LOOKING STATEMENTS. THE FORWARD-
LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH OR IMPLIED BY ANY
FORWARD LOOKING STATEMENTS. SOME OF THESE RISKS ARE DETAILED IN PART I, ITEM 1
"RISK FACTORS" AND ELSEWHERE IN THIS FORM 10-K.

READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE ON WHICH THEY ARE MADE. THE COMPANY
UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS, OR OTHERWISE.

GENERAL

On February 18, 1998, New Frontier Media, Inc. and its subsidiaries ("New
Frontier Media" or "the Company") acquired the adult satellite television assets
of Fifth Dimension Communications (Barbados), Inc. and its related entities
("Fifth Dimension"). As a result of the Fifth Dimension acquisition, New
Frontier Media, through its wholly owned subsidiary Colorado Satellite
Broadcasting, Inc., d/b/a The Erotic Networks, ("TEN") became a leading provider
of adult programming to low-powered ("C-Band") direct-to-home ("DTH") households
through its networks TEN*Xtsy ("Xtsy") and TEN*Max ("Max"). Subsequent to this
purchase, the Company launched five networks targeted specifically to cable
television system operators and high-powered DTH satellite service providers
(Direct Broadcast Satellite or "DBS"): TEN, Pleasure, TEN*Clips ("Clips"),
TEN*Blue ("Blue"), and TEN*Blox ("Blox").

On October 27, 1999, New Frontier Media completed an acquisition of three
related Internet companies: Interactive Gallery, Inc. ("IGallery"), Interactive
Telecom Network, Inc. ("ITN") and Card Transactions, Inc. ("CTI"). ITN and CTI
are currently inactive subsidiaries.

New Frontier Media is organized into two reportable segments:

O Pay TV Group (formerly called Subscription/Pay-Per-View TV Group) --
distributes branded adult entertainment programming via Pay-Per-View
("PPV") networks and Video-on-Demand ("VOD") content through electronic
distribution platforms including cable television, DBS, hotels and C-Band

O Internet Group -- aggregates and resells adult content via the Internet.
The Internet Group sells content to monthly subscribers through its
broadband web site, www.TEN.com, partners with third-party gatekeepers
for the distribution of www.TEN.com, and wholesales pre-packaged content
to various web masters.

Information concerning revenue and profit attributable to each of the
Company's business segments is found in Part II, Item 7, "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," and
in Part IV, Item 15 of

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"NOTES TO CONSOLIDATED FINANCIAL STATEMENTS," of this Form 10-K, which
information is incorporated by reference into this Part I, Item 1.

PAY TV GROUP
INDUSTRY OVERVIEW

New Frontier Media, through its wholly owned subsidiary TEN (also referred
to as "Pay TV Group"), is focused on the distribution of adult entertainment
programming through electronic distribution platforms including cable
television, DBS, hotels and C-band. Adult entertainment content distribution has
evolved over the past twenty-five years from home video platforms (video
cassette) to cable television systems and DBS providers, and most recently to
the Internet. Cable television operators began offering subscription and PPV
adult programming from network providers such as Playboy Enterprises, Inc.
("Playboy") in the early 1980's.

PPV technology enables cable television operators or satellite providers to
sell a block of programming, an individual movie, or an event for a set fee. PPV
technology also permits cable television operators or satellite providers to
sell the Pay TV Group's programming on a monthly, quarterly, semiannual and
annual basis. PPV and VOD programming competes well with other forms of
entertainment because of its relatively low price point. Kagan World Media
("Kagan") estimates that adult PPV and VOD revenue generated by cable systems
and DBS providers in 2003 was $530 million, representing an increase of 14% from
revenues of $465 million generated by the category in 2002. Kagan projects
revenues from the adult category to grow to $950 million by the year 2008.

PPV programming is delivered through any number of delivery methods,
including: (a) cable television; (b) DTH to households with large satellite
dishes receiving a low-power analog or digital signal (C-Band) or DBS services
(such as those currently offered by EchoStar Communications Corporation and
DIRECTV Group, Inc.); (c) wireless cable systems; and (d) low speed (dial-up) or
broadband Internet connections (i.e., streaming video).

The Pay TV Group provides programming on both a PPV and subscription basis
to home satellite dish viewers through large backyard satellite dishes receiving
a low-power analog or digital signal (C-Band). According to General Instrument
Corporation's ("GI") Access Control Center reports, the U.S. C-Band market has
declined 29% year-to-year, from 534,058 households as of April 2003 to 375,683
as of April 2004.

The Pay TV Group provides PPV and subscription programming to small dish
viewers receiving a high-power digital signal (via DBS providers such as
EchoStar Communications Corporation's DISH Network) as well. As of December 31,
2003, EchoStar Communications Corporation ("DISH") and DIRECTV Group, Inc.
("DIRECTV") had 9.425 million and 12.21 million subscribers, respectively,
according to public filings made by each company. Kagan estimates that the
number of DBS subscribers will grow to 28 million by the year 2008.

The Pay TV Group also provides its programming on a PPV, subscription and
VOD basis through large multiple system operators ("MSOs") and their affiliated
cable systems, as well as independent, privately-held cable systems. As of May
2004, the Pay TV Group maintained distribution arrangements with nine of the ten
largest domestic cable MSOs which control access to 56.1 million, or 69%, of the
total basic cable household market. According to the National Cable and
Telecommunications Association ("NCTA"), Cable MSOs delivered service to 73.7
million basic households in the United States as of April 2004. In addition,
Kagan indicates that total analog and digital addressable cable service (i.e.,
basic cable households that have the capability of receiving PPV or subscription
services) was provided to 36.0 million households.

Growth in the PPV market is expected to result in part from cable system
upgrades utilizing fiber-optic, digital compression technologies or other
bandwidth expansion methods that provide cable operators additional channel
capacity. Cable operators have shifted from analog to digital technology in
order to upgrade their cable systems and to respond to competition from DBS
providers who offer programming in a 100% digital environment. When implemented,
digital compression technology increases channel capacity, improves audio and
video quality, provides fully secure scrambled signals,

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allows for advanced set-top boxes for increased interactivity, and provides for
integrated electronic programming guides ("EPG"). The Pay TV Group expects that
most of its future cable launches will be on a digital platform.

According to the NCTA, as of December 2003 more than 30% of U.S. Cable
customers, or approximately 22.2 million households, received digital cable
service. This represents an increase of 16% over the number of digital
subscribers receiving service at the end of 2002 (19.2 million). Kagan estimates
that the number of digital cable subscribers will grow to 40.9 million by the
year 2008, which will represent a 60% penetration rate.

Cable operators are also using their upgraded plants to provide their
digital customers with VOD services (due to technology constraints, DBS
providers are not able to provide VOD service to their customers). VOD is a more
advanced form of pay-per-view service which provides a digital video subscriber
with the ability to watch movies, TV shows, infomercials, and other content on
demand with full VCR functionality, in contrast to watching programs at preset
times. The Pay TV Group currently provides programming to over 10.5 million VOD
enabled households. Kagan estimates that there were 16.5 million VOD enabled
households at the end of 2003 compared to only 7.4 million VOD enabled
households at the end of 2002. Kagan projects that there will be 23.3 million
VOD enabled households by the end of 2004 and 38.2 million VOD enabled
households by the end of 2008.

DESCRIPTION OF NETWORKS

The Pay TV Group provides seven, 24-hour per day adult programming
networks: Pleasure, TEN, TEN*Clips, TEN*Blue, TEN*Blox, TEN*Xtsy, and TEN*Max.
The following table outlines the current distribution environment for each
service:

TABLE 1
SUMMARY OF NETWORKS

Note: "N/A" indicates that network was not launched at that time

(1) TEN*Xtsy, TEN*BluePlus and TEN*Max addressable household numbers include 0.8
million, 0.5 million, and 0.4 million C-Band addressable households for the
years ended March 31, 2002, 2003, and 2004 respectively.

(2) The Pay TV Group discontinued providing its TEN*BluePlus network in February
2004.

(3) The above table reflects network household distribution. A household will be
counted more than once if the home has access to more than one of the Pay TV
Group's services, since each service represents an incremental revenue
stream. The Pay TV Group estimates its unique household distribution as of
March 31, 2004 to be 14.3 million cable homes and 9.4 million DBS homes.

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TEN* FAMILY OF NETWORKS -- PROGRAMMING STRATEGY

The TEN* family of networks is designed to be offered together as one
cohesive programming package. The counter-programming strategy employed between
each of the seven PPV networks and VOD service provides the widest variety of
content to the consumer while at the same time supporting an efficient use of
TEN's vast content library. Premiere titles are programmed on VOD first and then
flow through to the PPV networks. Because TEN does not duplicate titles across
its PPV channels or between PPV and VOD in a single month, TEN is able to give
consumers access to more unique titles, a wider variety of talent, and a greater
variety of studio representation than its competitors. TEN focuses on prime time
viewing blocks and programs specific types of content in those blocks to create
an appointment-viewing calendar. All networks are counter-programmed to one
another creating an even greater level of variety for the consumer with multiple
channels. Ultimately, this strategy is responsible for the fact that TEN has
2.65 networks per unique addressable home. Following are individual descriptions
of each network.

PLEASURE

On June 1, 1999, the Pay TV Group launched Pleasure, a 24-hour per day
adult network that incorporates the most edited standard available in the
category. Pleasure is distributed via cable television operators. Pleasure's
programming consists of adult feature-length film and video productions and is
programmed to deliver subscription and PPV households up to 21 monthly premiere
adult movies with a total of up to 110 adult movies per month. Pleasure was
specifically designed to provide adult content programming to operators that
have not yet embraced a less inhibited adult programming philosophy and for
those operators that wish to use the service to "upsell" subscription or PPV
households to a less edited network such as TEN or TEN*Clips. Pleasure is
distributed via Cable system operators on either a pay-per-view or pay-per-block
basis at prices ranging from $5.95 to $11.95.

TEN

On August 15, 1998, the Pay TV Group launched TEN, a 24-hour per day adult
network that incorporates a partial editing standard targeted to cable
television system operators and DBS providers. The Pay TV Group has programmed
TEN with feature-length film and video productions that incorporate less editing
than traditional cable adult premium networks. TEN is distributed via Cable
system operators and DBS providers on either a pay-per-view or pay-per-block
basis at retail prices ranging from $7.95 to $11.95 and on a monthly
subscription basis for $24.95.

TEN offers a diverse programming mix with movies and specials that appeal
to a wide variety of tastes and interests. TEN offers subscription and PPV
households up to 21 monthly premiere adult movies and up to 110 total adult
movies per month. TEN was developed to capitalize on the number of cable
operators/DBS providers now willing to carry partially edited adult network
services and the momentum toward broader market acceptance of partially edited
adult programming by their subscribers. New Frontier Media believes the growing
market acceptance of partially edited programming is due, in large part, to the
higher buy rates (the theoretical percentage of network households ordering one
PPV movie, program or event in a month) achieved for cable system operators/DBS
providers as compared to network programming that incorporates the most edited
adult programming.

TEN*CLIPS

The Pay TV Group launched TEN*Clips on May 17, 2000. The unique formatting of
this network provides for thematically organized clips that are compiled into
90-minute blocks of programming in order to provide more variety in a single
viewing block and encourage appointment viewing by the PPV adult consumer.
Through the Pay TV Group's proprietary database technology, approximately eight
scenes are organized thematically and programmed into one 90-minute block.
TEN*Clips delivers 240 unique thematic blocks with over 500 different adult film
scenes during a typical month. This "clips" format is the most differentiated
service in the adult category and consistently generates

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higher buy rates than feature-driven adult services. TEN*Clips is distributed
via Cable system operators and DBS providers on a pay-per-view and pay-per-block
basis at retail prices ranging from $7.95 to $11.95 and on a monthly
subscription basis for $24.95.

TEN*BLUE

TEN*Blue was launched on January 1, 2003 as the Pay TV Group's newest,
partially edited network. This network is programmed to deliver up to 110 movies
each month. TEN*Blue offers adult consumers feature-length amateur, ethnic, and
urban content. TEN*Blue was developed to capitalize on the number of cable
operators/DBS providers now willing to carry partially edited adult network
services and the momentum toward broader market acceptance of partially edited
adult programming by their subscribers. Additionally, TEN*Blue was designed
specifically to achieve broader market acceptance by appealing to people with
different ethnic backgrounds and interests. TEN*Blue is distributed via Cable
system operators on a PPV or pay-per-block basis at retail prices ranging from
$7.95 to $11.95.

TEN*BLOX

TEN*Blox was launched on January 1, 2003 as the Pay TV Group's newest,
partially edited "clips" network (similar in formatting to TEN*Clips). This
network is programmed to compliment TEN*Blue by utilizing thematically organized
clips from the network's amateur, ethnic, and urban feature-length programs.
TEN*Blox was developed to capitalize on the number of cable operators/ DBS
providers now willing to carry partially edited adult network services and the
momentum toward broader market acceptance of partially edited adult programming
by their subscribers. Additionally, TEN*Blox was designed specifically to
achieve broader market acceptance by appealing to people with different ethnic
backgrounds and interests. TEN*Blox is distributed via Cable system operators on
a pay-per-view or pay-per-block basis at retail prices ranging from $7.95 to
$11.95.

TEN*ON DEMAND (VIDEO-ON-DEMAND)

TEN*On Demand is the brand under which the Pay TV Group delivers its VOD
service. This service is available to Cable operators in each of the Pay TV
Group's three editing standards. TEN*On Demand is provided to Cable operators as
a "kit" of adult content with 5 - 40 titles in each kit. Content is refreshed on
a monthly basis and provides for a 30-day early release window to the PPV
services. Accordingly, there is no duplication of content between the PPV
networks and the VOD content in any one month. TEN*On Demand is distributed via
Cable operators on a per-movie basis at retail prices ranging from $5.95 to
$11.95.

In addition, the Pay TV Group provides its TEN*On Demand service to On
Command Corporation ("On Command"), the leading provider of in-room interactive
entertainment for the hotel industry and its guests. The Pay TV Group provides
up to 14 titles a month to On Command's 895,000 VOD enabled hotel rooms in four
different editing formats.

TEN*XTSY

TEN*Xtsy's programming consists of feature-length adult film and video
productions and is programmed with up to 21 monthly premieres and 130 adult
movies per month. TEN*Xtsy's programming is "least edited", which is similar to
the editing standard employed in the home video market. The network offers a
diverse programming mix with movies and specials that appeal to a wide variety
of tastes and interests. TEN*Xtsy is distributed via C-band DTH, Cable system
operators and DBS providers. Cable operators and DBS providers distribute
TEN*Xtsy on a pay-per-view or pay-per block basis at retail prices ranging from
$8.95 to $11.95 and on a monthly subscription basis for $27.99.

TEN*Xtsy had 43,360, 34,618 and 23,580 active C-Band subscriptions as of
March 31, 2002, 2003 and 2004, respectively. C-Band retail prices range from
$24.99 to $81.99 for monthly, quarterly, and semi-annual subscriptions.

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TEN*BLUEPLUS

TEN*BluePlus was primarily provided to the C-Band DTH market. Given the
continued decline in the number of addressable households in the C-Band market
and the continued decline in the Pay TV Group's revenue from this market, the
Pay TV Group made the decision to discontinue this service in February 2004.

TEN*MAX

TEN*Max incorporates the same editing standard as TEN*Xtsy and is
programmed to compliment this network by utilizing thematically organized clips
(similar to the TEN*Clips format) from TEN*Xtsy's premieres, network specials
and compilations. TEN*Max is distributed via C-band DTH and Cable operators.
C-band retail prices range from $24.99 to $81.99 for monthly, quarterly, and
semiannual subscriptions. TEN*Max had 40,210, 33,606, and 22,923 active C-Band
subscriptions as of March 31, 2002, 2003, and 2004, respectively.

SATELLITE TRANSMISSION

The Pay TV Group delivers its video programming via satellite transmission.
Satellite delivery of video programming is accomplished as follows:

Video programming is played directly from the Pay TV Group's Boulder,
Colorado digital broadcast center. The program signal is then scrambled
(encrypted) so that the signal is unintelligible unless it is passed through the
proper preauthorized decoding devices. The signal is transmitted (uplinked) by
an earth station to a designated transponder on a communications satellite. The
transponder receives the program signal uplinked by the earth station, amplifies
the program signal and broadcasts (downlinks) it to satellite dishes located
within the satellite's area of signal coverage. The signal coverage of the
domestic satellite used by New Frontier Media is the continental United States,
Hawaii, Alaska, and portions of the Caribbean, Mexico, and Canada.

The Pay TV Group's programming is received by C-Band subscribers, Cable
system operators and DBS providers. This programming is received in the form of
a scrambled signal. In order for subscribers to receive the programming the
signal must be unscrambled.

C-Band subscribers purchase programming directly from the Pay TV Group. The
satellite receivers of C-Band subscribers contain unscrambling equipment that
may be authorized to decode the Pay TV Group's satellite services. Each set top
box or satellite receiver has a unique electronic "address". This "address" is
activated for the requisite services purchased.

Cable system operators and DBS providers receive their programming in the
same manner as a C-Band subscriber. These multi-channel distributors in turn,
provide the received programming to their captive subscriber audience. The
equipment utilized by Cable system operators and DBS providers is similar to
that utilized by C-Band subscribers but manufactured to an industrial grade
specification. The Cable system operators and DBS providers are able to remotely
control each subscriber's set-top box or satellite receiver on their network,
and cause it to unscramble the television signal for a specified period of time
after the subscriber has made a purchase of a premium service or PPV movie or
event.

TRANSPONDER AGREEMENTS

New Frontier Media maintains satellite transponder lease agreements for two
full-time analog transponders with Intelsat USA Sales Corporation ("Intelsat")
on its Intelsat Americas 6 satellite and 20.5 MHz of total bandwidth allocation
on a digital transponder on its Intelsat Americas 7 satellite. These
transponders provide the satellite transmission necessary to broadcast each of
the Pay TV Group's seven adult networks.

In April 2000, the Pay TV Group signed a multi-year agreement with iN
DEMAND L.L.C. ("iN DEMAND") for carriage of its Pleasure network. As a result of
the contract, Pleasure is available to cable operators representing
approximately 7.4 million digital households across the country. iN DEMAND
carries Pleasure on Intelsat Americas 7, transponder 4. iN DEMAND is the

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world's largest provider of VOD and PPV programming, offering titles from all of
the major Hollywood and independent studios, plus pay-per-view boxing, soccer
and concerts, and professional sports packages from the NBA, NHL, MLB and
NASCAR. iN DEMAND serves over 1,400 affiliated systems. iN DEMAND's three
shareholders include Time Warner Entertainment - Advance/Newhouse Partnership,
Comcast iN DEMAND Holdings, Inc., and Cox Communications, Inc.

In June 2002, the Pay TV Group began offering its VOD service to cable MSOs
via its transport agreement with TVN Entertainment ("TVN"). TVN is one of the
largest privately held digital content aggregation, management, distribution,
and service companies in the country. TVN offers the only single-source
management and distribution solution for VOD and PPV, including content
aggregation, packaging, encoding, asset management and transport via satellite
to all video service providers. TVN has been chosen as a VOD solution for many
Cable MSOs, including Charter, Comcast, Insight and Mediacom. As of March 31,
2004, the Pay TV Group reached approximately 6.3 million VOD households through
its distribution agreement with TVN.

DIGITAL BROADCAST CENTER

The Pay TV Group internally encodes, originates, distributes and manages
its own networks. The Company has differentiated itself by developing broadcast
and broadband distribution capabilities to fully control and exploit its large
content library across various platforms. The Pay TV Group acquired the
necessary broadcast technologies and support services from third party
providers, and internally developed its own media asset management systems, for
the distribution of video-based content to Cable and DBS providers.

The Pay TV Group, through its Boulder, Colorado based Digital Broadcast
Center, currently broadcasts 7 channels, with capacity to add 11 additional
channels, to Cable/DBS systems and direct-to-home C-band subscribers. Broadcast
of all media to air is accomplished using state-of-the-art digital technology
solutions, which includes playlist automation for all channels; SeaChange MPEG 2
encoding and playout to air and MPEG 1 encoding for internet and broadband use;
archiving capability on DLT data cartridges pushing and pulling the data through
a StorageTek jukebox; and complete integration of the media asset management
database to create automated playlists.

The Pay TV Group has worked with its uplinking vendor, WilTel
Communications, LLC ("WilTel") to secure a license to allow an 18Ghz microwave
transmission in order to provide a fully redundant path from the broadcast
center to its uplink facility. The Pay TV Group also runs a fiber transmission
path directly to its largest customer's facility to ensure redundancy of its
services in case of an outage with its primary uplinking vendor, WilTel.

The technology team that manages the broadcast center also oversees the Pay
TV Group's media asset management needs. Using its own core proprietary asset
management systems, supplemented with other third party software programs, the
Digital Broadcast Center catalogs, monitors, and distributes the Group's
licensed content across multiple technology platforms.

NETWORK PROGRAMMING

The Pay TV Group had contracted with an outside third party in California
to screen, license, edit, and program content for most of its services. At the
same time, the Pay TV Group edited and programmed content in-house for TEN*Blue,
TEN*Blox, TEN*Clips, TEN*Max and the On Command VOD content. In May 2004, the
Pay TV Group discontinued its relationship with the outside third party in
California and brought all screening, licensing, editing and programming
functions in-house.

The Pay TV Group now has its own office in California. This office ensures
that all legal documentation is obtained for each title licensed (i.e., cast
lists, talent releases and two photo identifications for each cast member),
screens the content to ensure the commercial and broadcast viability of the
title, and once the title is deemed acceptable, ships the title, related
documentation and promotional content to Boulder. The Pay TV Group's in-house
programming department in Boulder, Colorado conducts preliminary screening of
potentially licensable content, licenses acceptable content,

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conforms content into appropriate editing standards (i.e., partially edited,
least edited and most edited) and programs the monthly schedules for all
networks and services.

The Pay TV Group acquires 100% of its feature-length broadcast programming
for each network by licensing the exclusive and non-exclusive rights from
various third party studios and independent producers within the industry for
generally a five-year term. The Group does not produce any of its own
adult-feature content for its networks. The Pay TV Group licenses its content on
both an exclusive and non-exclusive basis from as many as fifty-four independent
companies.

The Pay TV Group acquires approximately 15 new titles per month. Once the
Pay TV Group licenses a title, it will undergo several rigorous quality control
processes prior to playing to air to ensure compliance with the strict
broadcasting standards the Pay TV Group uses for its adult content. The Pay TV
Group obtains age verification documentation for each title it licenses,
including two forms of photo identification for each cast member in the film.
This documentation is maintained on site for the duration of the license term.

In July 1999, the Company licensed the rights for seven years to Metro
Global Media, Inc.'s ("Metro") 3,000 title adult film and video library and
multi-million still image archive in exchange for 500,000 shares of its common
stock at $7.875 per share and 100,000 warrants to purchase its common stock at
an exercise price equal to the market value of the stock on the date the
warrants were issued. In June 2003, New Frontier Media reached an agreement to
license all of the broadcast and electronic distribution rights to approximately
2,000 adult films under a Content License Agreement with Pleasure Productions,
Inc. As a result of the licensing of these libraries, the Company believes that
it is one of the largest aggregators of adult video content in the world.

CALL CENTER SERVICE

The Pay TV Group's in-house call center receives incoming calls from
customers wishing to order C-Band network programming, or having questions about
their C-Band service or billing. The call center is accessible from anywhere in
the U.S. via toll-free numbers. Its workstations are equipped with a networked
computer, Company-owned proprietary order processing software, and telephone
equipment. These components are tied into a computer telephony integrated switch
which routes incoming calls and enables orders to be processed and subscriber
information to be updated "on-line."

The Pay TV Group's call center is operational 19-hours per day, seven days
a week, and is staffed according to call traffic patterns, which take into
account time of day, day of the week, seasonal variances, holidays, and special
promotions. Customers pay for their order with credit cards and electronic
checks, which are authorized and charged before the order is sent electronically
to GI's Access Control Center in San Diego, California for processing. GI
receives the subscriber order and the subscriber's identification information,
and sends a signal to the appropriate satellite, which "unlocks" the service
ordered for the applicable period of time.

MARKETING

The Pay TV Group's marketing department has developed numerous programs and
promotions to support its pay-per-view and VOD services. These include the
development of detailed monthly program guides, promotional pieces, direct mail
campaigns, and cross channel interstitial programming for use on a Cable or DBS
systems' channel that allows for local insertion. The Pay TV Group also
maintains a sales force of four full-time employees to promote and sell carriage
of its programming on cable television, DBS and alternative platforms. The sales
force consists of cable television industry veterans that each has more than ten
years of experience in the cable television business in both operations and
programming.

The Pay TV Group's sales team attends at least four major industry trade
shows per year, including the National Cable Television Association (NCTA) show,
the Cable Television Advertising and Marketing (CTAM) Summit, PPV and Digital
Television Summit, and DBS Summit.

The Pay TV Group's promotions department creates interstitial programming
for use on its networks between each movie to promote and market additional
movies premiering in the current

10

month, movies premiering in the following month, behind-the-scenes segments of
its movies, and star and director profiles. This interstitial programming
encourages appointment viewing of the Pay TV Group's networks by Cable/DBS
consumers.

The Pay TV Group brands its services to the consumer under the TEN* name
and logo. The Pay TV Group seeks out low cost, high impact ways to reach its
consumer audience and build brand recognition. The Pay TV Group participated in
the Sturgis Motorcycle Rally, sponsored a band's summer tour, and participated
in a Super Bowl promotion during the year ended March 31, 2004 in order to gain
further recognition for its brand. These types of branding promotions will
continue during the fiscal year ended March 31, 2005.

COMPETITION

The Pay TV Group principally competes with Playboy Enterprises, Inc.
("Playboy") in the subscription, PPV and VOD markets. Playboy has a longer
operating history and broader name recognition than the Pay TV Group. Playboy's
size and market position makes it a more formidable competitor than if it did
not have the resources and name recognition that it has. The Pay TV Group
competes directly with Playboy with respect to the editing standards of its
programming, network performance in terms of subscriber buy rates, and the
license fees that the Pay TV Group offers to Cable and DBS providers. However,
the Pay TV Group cannot and does not compete with Playboy in the amount of money
spent on promoting its products. While there can be no assurance that the Pay TV
Group will be able to maintain its current distribution and fee structures in
the face of competition from Playboy or any other content provider, the Pay TV
Group believes that the quality and variety of its programming, as well as the
attractive revenue splits and its ability to generate higher buy rates for its
programming, are the critical factors which have influenced Cable operators and
DBS providers to choose the Pay TV Group's programming over its competition.

The Pay TV Group also faces general competition from other forms of
non-adult entertainment, including sporting and cultural events, other
television networks, feature films, and other programming.

In addition, the Pay TV Group faces competition in the adult entertainment
arena from other providers of adult programming including producers of adult
content, adult video rentals and sales, books and magazines aimed at adult
consumers, telephone adult chat lines, and adult-oriented Internet services.

SEASONALITY

The Pay TV Group's business is generally not seasonal in nature.

CUSTOMER CONCENTRATION

New Frontier Media derived 34% and 16% of its total revenue for the year
ended March 31, 2004 from DISH and Time Warner Cable, respectively, through its
Pay TV Group. The loss of these major customers could have a material adverse
effect on the Pay TV segment and upon the Company as a whole.

INTERNET GROUP
INDUSTRY OVERVIEW

According to Pew Internet & American Life ("Pew"), a non-profit entity
whose initiative is the timely information on the Internet's growth and societal
impact, adoption of high-speed Internet connections in the home grew strongly in
the United States in the first several months of 2004, with home broadband
penetration standing at 39% among American Internet users by the end of February
2004. This is up from 31% in the Pew's November 2003 study. Overall, Pew states
that 48 million American adults had high-speed connections in the home in
February 2004. Of these high-speed connections, Pew's survey shows that 54% of
home broadband users connected with cable modems, 42% used digital subscriber
lines ("DSL"), and 3% used wireless or fixed-satellite technology. According to
NCTA, the cable industry served approximately 15 million high-speed Internet

11

customers as of September 2003, up from 10.3 million in September 2002, an
increase of 46% year-over-year.

In anticipation of the continued increase in broadband users, during the
fiscal year ended March 31, 2004 the Internet Group shifted its focus from the
dial-up web surfer to creating an award-winning website targeted specifically to
the broadband consumer. This site, TEN.com, features over 1,100 hours of video
content, over 16,000 photos, live chat, and voyeur cams.

TEN.com is offered to consumers on a monthly subscription basis for $19.95.
Traffic to TEN.com is derived primarily from advertising on the Pay TV Group's
networks. In addition, a targeted network of affiliated adult webmasters directs
traffic to TEN.com and is compensated only if the traffic converts into a paying
member to TEN.com. Monthly subscription revenue declined during the fiscal year
ended March 31, 2004, as the Internet Group was not attracting enough new
traffic to TEN.com to offset the churn of its recurring membership base. The
Internet Group plans to focus its efforts on attracting a higher volume of
traffic to TEN.com during the upcoming year, as it believes that it can attract
profitable traffic to offset its subscriber churn.

The Internet Group also sells TEN.com through revenue sharing partnerships
with third-party gatekeepers. The Internet Group believes that creating these
third party relationships will be the manner in which it will ultimately sustain
and grow the revenue for this segment. The Internet Group executed its first
such revenue sharing agreement with On Command during the fiscal year ended
March 31, 2003. Under the terms of the agreement, the Internet Group is the
exclusive provider of adult content for On Command's TV Internet Service. The
Internet Group is providing a customized version of its TEN.com broadband
product for delivery through On Command's TV Internet Service in its hotel rooms
nationwide. The Internet Group continues to work on completing additional
revenue sharing partnerships with Cable MSOs such as Wide Open West and RCN
Corporation for the distribution of TEN.com.

New Frontier Media views its Internet Group as an investment in the future.
As broadband distribution grows, and as technology improves the delivery of
content through wireless applications such as cell phones and Personal Digital
Assistants ("PDAs"), the Internet Group will be the segment through which New
Frontier Media will capitalize on these potential revenue-generating
opportunities. Until then, the Internet Group will focus its efforts on deriving
revenue from traffic directed to TEN.com through advertising on the Pay TV
Group's networks and affiliate webmaster programs, as well as to completing new
revenue sharing partnerships through which it can gain access to captive adult
consumers of the Cable MSOs.

DESCRIPTION OF INTERNET REVENUE STREAMS
BUSINESS TO CONSUMER: TEN.COM

Prior to March 31, 2003, the Internet Group owned and operated more than 10
consumer web sites in addition to owning over 1,300 vanity adult domains. These
web sites were developed to convert dial-up web surfers into subscribers through
various subscription models. Recurring monthly subscription rates ranged from
$14.74 to $29.95. The Internet Group used to offer consumers the ability to view
its web sites on a trial basis, generally three days, for a special rate of
$2.97. The Internet Group discontinued offering free trials to its web sites in
December 2001 and discontinued offering paid trials to its web sites during the
quarter ended March 31, 2003.

In connection with a legal settlement, the Internet Group transferred
approximately 150 of its primary domain names to a third party as of March 31,
2003. At the same time, the Internet Group merged all of its dial-up web sites
(and corresponding members) into its premiere broadband site, www.TEN.com. The
Internet Group offers TEN.com to consumers on a recurring monthly subscription
basis for $19.95. The site is targeted to adult broadband consumers and provides
access to over 1,100 hours of video content.

The Internet Group generates traffic to its web sites through three primary
sources. The first, "type-in" traffic, is generated when a consumer types the
name of one of the Internet Group's web sites or one of its domain names into
their browser address bar. There is no cost to the Internet

12

Group when traffic comes to its web sites in this manner other than the initial
cost to acquire the domain name. However, type-in traffic has declined over the
past few years as portals such as Microsoft Corporation's MSN no longer default
words typed into a browser dialogue box to the "dot-com" web site associated
with such word. Currently, the Internet Group actively markets its TEN.com web
site on the Pay TV Group's networks in order to drive type-in traffic to its
site. Over 70% of the Internet Group's traffic is currently generated from
advertising on the Pay TV Group's networks or through type-in traffic.

The second way in which the Internet Group generates traffic is through its
affiliate marketing programs utilizing banner ads, hypertext, or graphic links.
The marketing programs compensate an affiliated webmaster for a referred visitor
if the visitor becomes a member to TEN.com. The affiliated webmaster programs
currently pay out an amount equal to the first month's membership revenue for a
new member ($19.95). The Internet Group then keeps 100% of the revenue from each
recurring monthly membership and any associated revenue from other products sold
within the site. During the past few years, the Internet Group has decreased its
reliance on affiliated webmaster programs as a way to generate traffic to its
sites. However, the Internet Group does expect to create new affiliated
webmaster programs during its fiscal year ended March 31, 2005 in order to
generate more traffic to TEN.com. These programs will only compensate a
webmaster for traffic that converts into a paying member.

The third way in which traffic is generated to TEN.com is through search
engines. Search engine traffic is generated from listings of the Internet
Group's web sites in search engines and directories. The Internet Group uses
discreet and proprietary technology to position (optimize) its web site within a
search engine's results page so that visitors using the search engine to look
for certain types of content have a higher chance of finding what they want.

BUSINESS TO BUSINESS: CONTENT, TRAFFIC SALES AND PAY-PER-CLICK

Content Sales: The Internet Group is one of the leading licensors of adult
content on the Internet. The Internet and Pay TV Groups have licensed thousands
of hours of adult video content and over 500,000 still images from various adult
studios, all of which have been organized thematically and, if necessary,
digitized for Internet distribution. The Internet Group, in addition to using
this content within its own web site, sublicenses this content to webmasters
through its business-to-business programs on a flat-rate monthly basis. During
the upcoming fiscal year, the Internet Group intends to outsource the sales
effort for its content products in an effort to gain more visibility and
generate more revenue from these products.

Traffic Sales: The Internet Group had developed a significant source of
revenue by selling traffic from its own web site to other adult web sites. Since
every visitor to the Internet Group's web site does not necessarily purchase a
membership, the Internet Group maximized its return on traffic by "pushing"
these exiting non-member visitors to other adult web sites. In doing so, it was
able to generate revenue from affiliate webmaster programs on a pay-per-member
basis. While the revenue from the sale of traffic did not have the potential to
generate long-term recurring revenue like the Internet Group's membership
revenue, it also did not have the credit and working capital issues associated
with membership revenue. Because the Internet Group has seen a significant
decline in traffic to its site, it also has seen a corresponding decrease in the
amount of traffic available to resell. The Internet Group does not expect any
significant revenue from Traffic Sales in the future.

Pay-Per-Click: During the fiscal year ended March 31, 2003, the Internet
Group developed its own pay-per-click ("PPC") search engine whereby advertisers
registered keywords or keyword combinations, along with a title and description.
Placement in the search results was purchased by the advertiser rather than
determined by a complex formula relating to relevance or popularity. This
resulted in a pure market model for the advertiser. The more they bid for a
keyword, the higher their site was shown in the list of search results returned
to the consumer on that keyword search. The result for the advertiser was
qualified traffic that was more likely to convert into a paying member of its
site, while the consumer received immediate access to relevant results.

13

The success of the PPC search engine was based primarily on how much
traffic was pushed through it. Because the Internet Group experienced a
significant decline in its traffic, the PPC search engine was abandoned as of
March 31, 2003.

MARKETING

The Internet Group currently generates 70% of its traffic to TEN.com from
advertising its site on the Pay TV Group's networks and through type-in traffic.

Prior to the fiscal year ended March 31, 2003, the Internet Group actively
marketed its websites through affiliate webmaster programs which were
incentive-based traffic generation programs that compensated affiliated
webmasters for traffic referrals. A webmaster was compensated when a referred
visitor became a member to one of the Internet Group's web sites, at an average
payout of $30 - $45 per active member. During the fiscal year ended March 31,
2003, the Internet Group ceased actively marketing its traffic acquisition
programs. Currently, the Internet Group has a small group of affiliated
webmasters that send traffic to TEN.com and are compensated if the traffic
converts into a paying member. The affiliate webmaster programs currently pay
out an amount equal to the first month's membership revenue for a new member
($19.95). The Internet Group then keeps 100% of the revenue from each recurring
monthly membership and any associated revenue from other products sold within
the site.

DATA CENTER

The Internet Group had its own data center in Sherman Oaks, California that
provided for all of its web farm, hosting and co-location needs. The data center
occupied approximately 4,400 square feet.

The Internet Group moved its data center to Boulder, Colorado in January
2003 where it currently resides within the Pay TV Group's digital broadcast
facility. This move allowed the Internet Group to significantly reduce its data
center costs. Integrating the data center with the broadcast facility enables
the Company to more efficiently leverage its content across multiple platforms.
The data center uses leading networking hardware, high-end web and database
servers, and computer software to effectively address the Internet Group's
diverse systems and network integration needs.

E-COMMERCE BILLING

Historically, credit card purchases, primarily through VISA and MasterCard,
have been face-to-face paper transactions. This has evolved into face-to-face
swipe transactions with the advent of point-of-sale terminals and a magnetic
stripe on the back of the card storing the cardholder's information. The credit
card system, however, was never designed for non face-to-face transactions such
as those that occur on the Internet.

Because the credit card system was not designed for non face-to-face
transactions, it is understandable that most fraud originates in this area. The
credit card networks were not engineered to verify a valid card in a "card not
present" environment such as the Internet.

The card associations, instead of investing in modifications of its legacy
networks necessary to operate in this changing environment, have combated fraud
in "card not present" environments by charging high chargeback fees and
penalties to merchants and banks. In the past few years the number of banking
relationships available for merchant banking has dropped, the cost of
chargebacks has increased, and the acceptable level allowed for chargeback rates
has also been dramatically reduced.

Prior to 2002, the Internet Group maintained its own in-house billing
personnel and processed its own credit cards for its membership sites. In order
to maintain its in-house credit card processing function the Internet Group
would have had to invest a large amount of capital to upgrade its facilities and
technology to become compliant with VISA's rules and regulations. Rather than
make this investment and detract from its core competency of aggregating and
marketing adult content, the Internet Group determined that it was best to
outsource its credit card processing and customer

14

service functions to third party processors. The Internet Group completed the
outsourcing of its credit card processing functions in the third quarter of
fiscal 2002.

To date, the Internet Group utilizes one credit card company to process its
membership revenue from TEN.com and maintains chargeback and credit ratios that
are well below the 1% requirement.

COMPETITION

The adult Internet industry is highly competitive and highly fragmented
given the relatively low barriers to entry. The leading adult Internet companies
are constantly vying for more members while also seeking to hold down member
acquisition costs paid to webmasters. Increased tightening of chargebacks by
credit card companies has reduced membership sales and further intensified this
already competitive environment.

The Internet Group believes that the primary competitive factors in the
adult Internet industry include the quality of content, technology, pricing, and
sales and marketing efforts. Although the Internet Group no longer actively
competes for traffic with its primary Internet competitors, the Group believes
that it has a distinct competitive advantage in forming third-party gatekeeper
arrangements for the distribution of TEN.com since it already has many of the
same relationships through the Pay TV Group's contracts.

EMPLOYEES

As of the date of this report, New Frontier Media and its subsidiaries had
119 employees. New Frontier Media employees are not members of a union, and New
Frontier Media has never suffered a work stoppage. The Company believes that it
maintains a good relationship with its employees.

GEOGRAPHIC AREAS

Revenue for the Company is primarily derived from within the United States.
Additional information required by this item is incorporated herein by reference
to Note 1 "Organization and Summary of Significant Accounting Policies" of the
Notes to the Consolidated Financial Statements that appears in Item 8 of this
Form 10-K.

AVAILABLE INFORMATION

The Company files annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission ("SEC"). You
may read and copy any document the Company files at the SEC's public reference
room at Room 1024, 450 Fifth Street, NW, Washington, D.C. 20549. Please call the
SEC at 1-800-SEC-0330 for information on the public reference room. The SEC
maintains a web site (www.sec.gov) that contains annual, quarterly and current
reports, proxy statements and other information that issuers (including the
Company) file electronically with the SEC.

The Company makes available, free of charge through its web site
(www.noof.com), its annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, Forms 3, 4 and 5 filed on behalf of directors and
executive officers, and any amendments to those reports filed or furnished
pursuant to the Securities Exchange Act of 1934 as soon as reasonably
practicable after such material is electronically filed with, or furnished to,
the SEC. The information on the Company's web site is not incorporated by
reference into this report.

15

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of New Frontier Media are as follows:

MICHAEL WEINER. Mr. Weiner was appointed President of New Frontier Media,
Inc. in February 2003 and was then appointed to the position of Chief Executive
Officer in January 2004. Prior to being appointed President, he held the title
of Executive Vice President and co-founded the Company in 1995. As Executive
Vice President, Mr. Weiner oversaw content acquisitions, network programming,
and all contract negotiations related to the business affairs of the Company. In
addition, he was instrumental in securing over $20 million to finance the
infrastructure build-out and key library acquisitions necessary to launch the
Company's seven television networks.

Mr. Weiner's experience in entertainment and educational software began
with the formation of Inroads Interactive, Inc. in May 1995. Inroads
Interactive, based in Boulder, Colorado, was a reference software publishing
company dedicated to aggregating still picture, video, and text to create
interactive, educational-based software. Among Inroad Interactive's award
winning releases were titles such as Multimedia Dogs, Multimedia Photography,
and Exotic Pets. These titles sold over 1 million copies throughout the world
through its affiliate label status with Broderbund Software and have been
translated into ten different languages. Mr. Weiner was instrumental in
negotiating the sale of Inroads Interactive to Quarto Holdings PLC, a UK-based
book publishing concern.

Prior to this, Mr. Weiner was in the real estate business for 20 years,
specializing in shopping center development and redevelopment in the Southeast
and Northwest United States. He was involved as an owner, developer, manager,
and syndicator of real estate in excess of $250 million.

KARYN L. MILLER. Ms. Miller joined New Frontier Media in February 1999 as
Chief Financial Officer. She began her career at Ernst & Young in Atlanta,
Georgia and brings fifteen years of accounting and finance experience to the
Company. Prior to joining the Company, Ms. Miller was the Corporate Controller
for Airbase Services, Inc. a leading aircraft repair and maintenance company.
Previous to that she was the Finance Director for Community Medical Services
Organization and Controller for Summit Medical Group, P.L.L.C. Before joining
Summit Medical Group, P.L.L.C., Ms. Miller was a Treasury Analyst at Clayton
Homes, Inc., a former $1 billion NYSE company which was recently purchased by
Warren Buffet. Ms. Miller graduated with Honors with both a Bachelors of Science
degree and a Masters in Accounting from the University of Florida and is a
licensed CPA in the state of Colorado.

KEN BOENISH. Mr. Boenish is a 15-year veteran of the cable television
industry. In October 2000, he was named President of The Erotic Networks, a
subsidiary of New Frontier Media, and in April 2002 he began managing the
day-to-day operations of the Internet Group under The Erotic Networks' umbrella.
Mr. Boenish joined The Erotic Networks as the Senior Vice President of Affiliate
Sales in February 1999. Prior to joining the Company, Mr. Boenish, was employed
by Jones Intercable ("Jones") from 1994 - 1999. While at Jones he held the
positions of National Sales Manager for Superaudio, a cable radio service
serving more than 9 million cable customers. He was promoted to

16

Director of Sales for Great American Country a new country music video service
in 1997. While at Great American Country Mr. Boenish was responsible for adding
more than 5 million new customers to the service while competing directly with
Country Music Television, a CBS cable network. From 1988 - 1994 he sold cable
television advertising on systems owned by Time Warner, TCI, COX, Jones, Comcast
and other cable systems. Mr. Boenish holds a B.S. degree in Marketing from St.
Cloud State University.

BILL MOSSA. Mr. Mossa joined The Erotic Networks as Vice President of
Affiliate Sales and Marketing in 1998 and has been instrumental in growing the
Company's network distribution from zero to over 60 million addressable
subscribers. Prior to joining The Erotic Networks, Mr. Mossa was the Regional
Director of Affiliate Sales and Marketing for Spice Entertainment, directing all
affiliate sales and marketing efforts for its northeast region. Mr. Mossa has
also held positions as Affiliate Marketing Manager of the SportsChannel NY,
Regional Pay-Per-View Director for Century Communications, Corporate
Pay-Per-View Manager for TKR Cable, and Marketing Manager for TKR Cable. Mr.
Mossa holds a Bachelors Degree in Business Administration from Northeastern
University in Boston, Massachusetts.

GEORGE SAWICKI. Mr. Sawicki joined New Frontier Media in September 2003 as
Vice President of Legal Affairs. He began his legal career in December 1995 with
Norris, McLaughlin & Marcus, the largest law firm in Somerset County, New
Jersey, and brings over twenty years of combined technology and legal experience
to the Company. Prior to joining the Company, and beginning in September 2001,
Mr. Sawicki was Senior Corporate Counsel for Storage Technology Corporation
("StorageTek"), a leading information storage and lifecycle management company.
Previous to that, and beginning in November 2000, he was the Director of Legal
for a global supply chain event management software company headquartered in
Atlanta, Georgia and, beginning in October 1996, was Corporate Counsel for
Oracle Corporation in its Atlanta Global Business Office.

Before beginning his legal career, Mr. Sawicki was a Senior Chemist and
Information Systems Analyst with Texaco, Inc, in Houston, Texas. Mr. Sawicki
holds an A.B. degree in Chemistry from Vassar College, a Masters degree in
Management Information Systems from Houston Baptist University and a J.D. from
the University of Houston Law Center. He is a member of the Texas, New Jersey
and Georgia bar associations and is licensed to practice before the United
States Patent and Trademark Office.

No executive officer of the Company is related to any other director or
executive officer. None of the Company's executive officers hold any
directorships in any other public company.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Pursuant to Section 16 of the Exchange Act, the Company's directors and
executive officers and beneficial owners of more than 10% of the Company's
Common Stock are required to file certain reports, within specified time
periods, indicating their holdings of and transactions in the Common Stock and
derivative securities of the Company. Based solely on a review of such reports
provided to the Company and written representations from such persons regarding
the necessity to file such reports, the Company is not aware of any failures to
file reports or report transactions in a timely manner during the Company's
fiscal year ended March 31, 2004.

RISK FACTORS

THIS REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS. YOU CAN
IDENTIFY FORWARD-LOOKING STATEMENTS BY THEIR USE OF THE FORWARD-LOOKING WORDS
"ANTICIPATE," "ESTIMATE," "PROJECT," "LIKELY," "BELIEVE," "INTEND," "EXPECT," OR
SIMILAR WORDS. THESE STATEMENTS DISCUSS FUTURE EXPECTATIONS, CONTAIN PROJECTIONS
REGARDING FUTURE DEVELOPMENTS, OPERATIONS, OR FINANCIAL CONDITIONS, OR STATE
OTHER FORWARD-LOOKING INFORMATION. WHEN CONSIDERING THE FORWARD-LOOKING
STATEMENTS MADE IN THIS REPORT, YOU SHOULD CONSIDER THE RISKS SET FORTH BELOW
AND OTHER CAUTIONARY STATEMENTS THROUGHOUT THIS REPORT. YOU SHOULD

17

ALSO KEEP IN MIND THAT ALL FORWARD-LOOKING STATEMENTS ARE BASED ON MANAGEMENT'S
EXISTING BELIEFS ABOUT PRESENT AND FUTURE EVENTS OUTSIDE OF MANAGEMENT'S CONTROL
AND ON ASSUMPTIONS THAT MAY PROVE TO BE INCORRECT. IF ONE OR MORE RISKS
IDENTIFIED IN THIS REPORT OR OTHER FILING MATERIALIZES, OR ANY OTHER UNDERLYING
ASSUMPTIONS PROVE INCORRECT, OUR ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE
ANTICIPATED, ESTIMATED, PROJECTED, OR INTENDED.

THE LOSS OF OUR MAJOR CUSTOMERS, DISH NETWORK AND TIME WARNER CABLE, WOULD HAVE
A MATERIAL ADVERSE AFFECT ON OUR OPERATING PERFORMANCE AND FINANCIAL CONDITION.

DISH Network, one of the leading providers of direct broadcast satellite
services in the United States, and Time Warner Cable, are major customers of our
Pay TV Group. The loss of DISH Network and Time Warner Cable as customers would
have a material adverse effect on our business operations and financial
condition. For our fiscal year ended March 31, 2004, our revenues from DISH
Network and Time Warner Cable equaled approximately 34% and 16%, respectively,
of our total Company-wide revenues.

DISH Network is not contractually required to carry our programming and can
cancel its broadcast of our programming at any time. Management considers its
long-standing personal contacts with its counterparts at DISH Network to be
critically important to maintaining DISH Network as a major customer, especially
given the nature of our content and the importance of DISH Network's reliance on
our judgment and ability in assuring that all of its programming has been
pre-screened and appropriately edited in accordance with established guidelines.

LIMITS TO OUR ACCESS TO DISTRIBUTION CHANNELS COULD CAUSE US TO LOSE SUBSCRIBER
REVENUES AND ADVERSELY AFFECT OUR OPERATING PERFORMANCE.

Our satellite uplink provider's services are critical to us. If our
satellite uplink provider fails to provide the contracted uplinking services,
our satellite programming operations would in all likelihood be suspended,
resulting in a loss of substantial revenue to the Company. If our satellite
uplink provider improperly manages its uplink facilities, we could experience
signal disruptions and other quality problems that, if not immediately
addressed, could cause us to lose subscribers and subscriber revenues.

Our continued access to satellite transponders is critical to us. Our
satellite programming operations require continued access to satellite
transponders to transmit programming to our subscribers. We also use satellite
transponders to transmit programming to cable operators and DBS providers.
Material limitations to satellite transponder capacity could materially
adversely affect our operating performance. Access to transponders may be
restricted or denied if:

O we or the satellite owner is indicted or otherwise charged as a defendant
in a criminal proceeding;

O the FCC issues an order initiating a proceeding to revoke the satellite
owner's authorization to operate the satellite;

O the satellite owner is ordered by a court or governmental authority to
deny us access to the transponder;

O we are deemed by a governmental authority to have violated any obscenity
law; or

O our satellite transponder provider determines that the content of our
programming is harmful to its name or business.

In addition to the above, the access of our networks to transponders may be
restricted or denied if a governmental authority commences an investigation
concerning the content of the transmissions.

Our ability to convince Cable operators and DBS providers to carry our
programming is critical to us. The primary way for us to expand our Cable
subscriber base is to convince additional Cable

18

operators and DBS providers to carry our programming. We can give no assurance,
however, that our efforts to increase our base of subscribers will be
successful.

IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH OUR PRIMARY CABLE/DBS COMPETITOR,
WHO HAS SIGNIFICANTLY GREATER RESOURCES THAN US, WE WILL NOT BE ABLE TO INCREASE
SUBSCRIBER REVENUES.

Our ability to increase subscriber revenues and operate profitably is
directly related to our ability to compete effectively with Playboy, our
principal competitor. Playboy has significantly greater financial, sales,
marketing and other resources to devote to the development, promotion and sale
of its cable programming products, as well as a longer operating history and
broader name recognition, than we do. We compete with Playboy as to the editing
standards of its programming, network performance in terms of subscriber buy
rates and the license fees that we offer to Cable operators and DBS providers.

IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH OTHER FORMS OF ADULT AND NON-ADULT
ENTERTAINMENT, WE WILL ALSO NOT BE ABLE TO INCREASE SUBSCRIBER REVENUE.

Our ability to increase revenue is also related to our ability to compete
effectively with other forms of adult and non-adult entertainment. We face
competition in the adult entertainment industry from other providers of adult
programming, adult video rentals and sales, books and magazines aimed at adult
consumers, adult oriented telephone chat lines, and adult oriented Internet
services. To a lesser extent, we also face general competition from other forms
of non-adult entertainment, including sporting and cultural events, other
television networks, feature films and other programming.

Our ability to compete depends on many factors, some of which are outside
of our control. These factors include the quality and appeal of our competitors'
content, the technology utilized by our competitors, the effectiveness of their
sales and marketing efforts and the attractiveness of their product offerings.

Our existing competitors, as well as potential new competitors, may have
significantly greater financial, technical and marketing resources than we do.
This may allow them to devote greater resources than we can to the development
and promotion of their product offerings. These competitors may also engage in
more extensive technology research and development and adopt more aggressive
pricing policies for their content.

Additionally, increased competition could result in price reductions, lower
margins and negatively impact our financial results.

THE ADDITION OF NEW COMPETITORS ON THE VIDEO-ON-DEMAND DISTRIBUTION PLATFORM
WOULD LIKELY HAVE A MATERIAL ADVERSE AFFECT ON OUR OPERATING PERFORMANCE.

Revenue from our Pay TV Group's Video-on-Demand ("VOD") service became a
significant part of our overall revenue mix during our fiscal year ended March
31, 2004. We believe that we currently are the exclusive provider of adult VOD
content to the two largest cable MSOs in the U.S. The addition of new
competitors to the VOD platform, either on platforms where we enjoy exclusivity
or where we currently share the platform, would likely have a material adverse
affect on our operating performance.

We face competition on the VOD platform from established adult video
producers with post-production capabilities, as well as independent companies
that distribute adult entertainment. These competitors include producers such as
Video Company of America, Hustler, Vivid Video, Wicked Pictures, and Metro
Global Media Inc. In the event that cable companies seek to purchase adult video
content for their VOD service directly from adult video producers or other
independent distributors of such content, including Playgirl, our VOD business
is likely to suffer.

For the fiscal year ended March 31, 2004, revenue from our VOD service was
32% of our total Pay TV revenue.

19

WE MAY BE LIABLE FOR THE CONTENT WE MAKE AVAILABLE ON THE INTERNET.

Because of the adult-oriented content of our web site, we may be subject to
obscenity or other legal claims by third parties. We may also be subject to
claims based upon the content that is available on our web site through links to
other sites. Our business, financial condition and operating results could be
harmed if we were found liable for this content. Implementing measures to reduce
our exposure to this liability may require us to take steps that would
substantially limit the attractiveness of our web site and/or its availability
in various geographic areas, which would negatively impact our ability to
generate revenue. Furthermore, our insurance may not adequately protect us
against all of these types of claims.

INCREASED GOVERNMENT REGULATION IN THE UNITED STATES AND ABROAD COULD IMPEDE OUR
ABILITY TO DELIVER OUR CONTENT AND EXPAND OUR BUSINESS.

New laws or regulations, or the new application of existing laws could
prevent us from making our content available in various jurisdictions or
otherwise have a material adverse effect on our business, financial condition
and operating results. These new laws or regulations may relate to liability for
information retrieved from or transmitted over the Internet, taxation, user
privacy and other matters relating to our products and services. Moreover, the
application to the Internet of existing laws governing issues such as
intellectual property ownership and infringement, pornography, obscenity, libel,
employment and personal privacy is uncertain and developing.

Cable system and DBS operators could become subject to new governmental
regulations that could further restrict their ability to broadcast our
programming. If new regulations make it more difficult for Cable and DBS
operators to broadcast our programming, our operating performance would be
adversely affected.

The current Republican administration in Washington D.C. could result in
increased government regulation of our business. It is not possible for us to
predict what new governmental regulations we may be subject to in the future.

CONTINUED IMPOSITION OF TIGHTER PROCESSING RESTRICTIONS BY THE VARIOUS CREDIT
CARD ASSOCIATIONS AND ACQUIRING BANKS WOULD MAKE IT MORE DIFFICULT TO GENERATE
REVENUES FROM OUR WEBSITE.

Our ability to accept credit cards as a form of payment for our products
and services is critical to us. Unlike a merchant handling a sales transaction
in a card present environment, the e-commerce merchant is 100% responsible for
all fraud perpetrated against them.

Our ability to accept credit cards as a form of payment for our products
and services has been or could further be restricted or denied for a number of
reasons, including but not limited to:

O Visa Tier 1 capital ratio requirements for financial institutions have
significantly restricted the level of adult-related Internet activity a
particular bank may be allowed to process in any given month;

O MasterCard changing its chargeback ratio policies to include credits and
fining merchants whose chargeback and credit ratios together exceed 1%;

O if we experience excessive chargebacks and/or credits;

O if we experience excessive fraud ratios;

O there is a change in policy of the acquiring banks and/or card
associations with respect to the processing of credit card charges for
adult-related content;

O continued tightening of credit card association chargeback regulations in
international areas of commerce;

O association requirements for new technologies that consumers are less
likely to use;

O an increasing number of European and U.S. banks will not take accounts
with adult-related content

20

In this regard we note that American Express has a policy of not processing
credit card charges for online adult-related content. To the extent other credit
card processing companies were to implement a similar policy it could have a
material adverse effect on our business operations and financial condition.

IF WE ARE NOT ABLE TO RETAIN OUR KEY EXECUTIVES IT WILL BE MORE DIFFICULT FOR US
TO MANAGE OUR OPERATIONS AND OUR OPERATING PERFORMANCE COULD BE ADVERSELY
AFFECTED.

As a small company with approximately 119 employees, our success depends
upon the contributions of our executive officers and our other key personnel.
The loss of the services of any of our executive officers or other key personnel
could have a significant adverse effect on our business and operating results.
We cannot assure that New Frontier Media will be successful in attracting and
retaining these personnel. It may also be more difficult for us to attract and
recruit new personnel due to the nature of our business.

OUR INABILITY TO IDENTIFY, FUND THE INVESTMENT IN, AND COMMERCIALLY EXPLOIT NEW
TECHNOLOGY COULD HAVE AN ADVERSE IMPACT ON OUR FINANCIAL CONDITION.

We are engaged in a business that has experienced tremendous technological
change over the past several years. As a result, we face all the risks inherent
in businesses that are subject to rapid technological advancement, such as the
possibility that a technology that we have invested in may become obsolete. In
that event, we may be required to invest in new technology. Our inability to
identify, fund the investment in, and commercially exploit such new technology
could have an adverse impact on our financial condition. Our ability to
implement our business plan and to achieve the results projected by management
will be dependent upon management's ability to predict technological advances
and implement strategies to take advantage of such changes.

NEGATIVE PUBLICITY, LAWSUITS OR BOYCOTTS BY OPPONENTS OF ADULT CONTENT COULD
ADVERSELY AFFECT OUR OPERATING PERFORMANCE AND DISCOURAGE INVESTORS FROM
INVESTING IN OUR PUBLICLY TRADED SECURITIES.

We could become a target of negative publicity, lawsuits or boycotts by one
or more advocacy groups who oppose the distribution of "adult entertainment."
These groups have mounted negative publicity campaigns, filed lawsuits and
encouraged boycotts against companies whose businesses involve adult
entertainment. The costs of defending against any such negative publicity,
lawsuits or boycotts could be significant, could hurt our finances and could
discourage investors from investing in our publicly traded securities. To date,
we have not been a target of any of these advocacy groups. As a leading provider
of adult entertainment, we cannot assure you that we may not become a target in
the future.

BECAUSE WE ARE INVOLVED IN THE ADULT PROGRAMMING BUSINESS, IT MAY BE MORE
DIFFICULT FOR US TO RAISE MONEY OR ATTRACT MARKET SUPPORT FOR OUR STOCK.

Some investors, investment banking entities, market makers, lenders and
others in the investment community may decide not to provide financing to us, or
to participate in our public market or other activities due to the nature of our
business, which, in turn, may hurt the value of our stock, and our ability to
attract market support.

ITEM 2. PROPERTIES.

The Company uses the following principal facilities in its operations:

COLORADO: New Frontier Media occupies two buildings in Boulder, Colorado.
The Airport Boulevard facility is 11,744 leased square feet and houses the Pay
TV Group's digital broadcast facility, technical operations group, content
conforming and quality control functions, as well as the Internet Group's data
center. This facility is 80% utilized. The Winchester Circle facility is 18,000
leased square feet and is used by New Frontier Media as its corporate
headquarters, as well as by the Internet Group's web production, sales and
marketing departments, and by the Pay TV Group's marketing, sales, call center,
promotions, and programming departments. This facility is 80% utilized.

21

CALIFORNIA: As of May 1, 2004, New Frontier Media leased 1,200 square feet
in Woodland Hills, California. The facility houses three employees of the Pay TV
Group's content acquisitions department. This facility is 100% utilized.

The Company believes that its facilities are adequate to maintain its
existing business activities.

ITEM 3. LEGAL PROCEEDINGS.

The Company is involved in a number of pending or threatened legal
proceedings in the ordinary course of business. In the opinion of management,
there are no legal proceedings that will have a material adverse effect on the
Company's results of operations or financial condition.

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

No matters were submitted for a vote of the shareholders during the fourth
quarter of the fiscal year covered by this Report.

PART II.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Beginning on April 27, 2004, the Company's Common Stock has been quoted on
the NASDAQ National Market under the symbol "NOOF". Prior to April 27, 2004, the
Company's common stock was quoted on the NASDAQ SmallCap Market.

The following table sets forth the range of high and low closing prices for
the Company's Common Stock for each quarterly period indicated, as reported by
brokers and dealers making a market in the capital stock. Such quotations
reflect inter-dealer prices without retail markup, markdown or commission, and
may not necessarily represent actual transactions:

As of June 1, 2004, there were approximately 2,600 beneficial owners of New
Frontier Media's Common Stock.

New Frontier Media has not paid any cash or other dividends on its Common
Stock since its inception and does not anticipate paying any such dividends in
the foreseeable future. New Frontier Media intends to retain any earnings for
use in New Frontier Media operations and to finance the expansion of its
business.

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ITEM 6. SELECTED FINANCIAL DATA

FIVE YEAR SELECTED CONSOLIDATED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(1) The selected consolidated financial data for 2000 includes the effect of the
acquisition of IGallery, ITN, and 90% of CTI on October 27, 1999, which was
accounted for as a pooling-of-interests.

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

OVERVIEW

The following Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") is intended to help the reader understand New
Frontier Media, Inc. MD&A is provided as a supplement to -- and should be read
in conjunction with -- our financial statements and the accompanying notes. This
overview provides our perspective on the individual sections of MD&A. Our MD&A
includes the following sections:

O Forward-Looking Statements -- cautionary information about
forward-looking statements and a description of certain risks and
uncertainties that could cause actual results to differ materially from
the Company's historical results or our current expectations or
projections.

O Our Business -- a general description of our business, our strategy for
each business segment, and goals of our business.

O Application of Critical Accounting Policies -- a discussion of accounting
policies that require critical judgments and estimates.

O Results of Operations -- an analysis of our Company's consolidated
results of operations for the three years presented in our financial
statements. Our Company operates in two segments -- Pay TV and Internet.
We present the discussion in this MD&A on a segment basis and,
additionally, we discuss our corporate overhead expenses.

O Liquidity, Capital Resources and Financial Position -- an analysis of
cash flows, sources and uses of cash, contractual obligations, and
financial position.

FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K includes forward-looking statements. These
are subject to certain risks and uncertainties, including those identified
below, which could cause actual results to differ materially from such
statements. The words "believe", "expect", "anticipate", "optimistic", "intend",
"will", and similar expressions identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date on which they are made. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events, or otherwise.

Factors that could cause actual results to differ materially from the
forward-looking statements include, but are not limited to: 1) our ability to
retain our major customers that account for 34% and 16% of our total revenue; 2)
our ability to compete effectively for quality content with our Pay TV

23

Group's primary competitor who has significantly greater resources than us; 3)
our ability to compete effectively with our Pay TV Group's major competitor or
any other competitors that may distribute adult content to Cable MSOs, DBS
providers, or to the Hotel industry; 4) our ability to retain our key
executives; 5) our ability to successfully manage our credit card chargeback and
credit percentages in order to maintain our ability to accept credit cards as a
form of payment for our products and services; and 6) our ability to attract
market support for our stock. The foregoing list of important factors is not
exclusive.

OUR BUSINESS

Our goal is to be the leading provider in the electronic distribution of
high-quality adult entertainment via Cable, Satellite and Broadband platforms.
As part of our overall strategy to compete in each relevant market segment, we
use the following core competencies:

O Leveraging our technical infrastructure: We own and operate a broadcast
origination facility where our licensed content is a) ingested at one
central point and converted into multiple digital formats that allow for
broadcast, VOD and Internet delivery, b) tagged with meta-data that
allows for efficient cataloging of the elements included in the movie,
c) edited into the proper formats required by our customers (i.e.,
most-edited, partially-edited, and least-edited), and d) subjected to
several rigorous quality control reviews prior to airing on our PPV or
VOD services or the Internet. By owning and operating our own technical
infrastructure, including our proprietary media asset management software
tool, we are able to quickly respond to new revenue opportunities with
zero to very little capital outlay. For example: Over the years, we have
worked closely with many cable MSOs in understanding and perfecting the
delivery of VOD content, allowing us to become the leader in the delivery
of VOD content in the adult category. We have been able to easily
capitalize on new opportunities for delivering our content to the hotel
industry due to our technical infrastructure. We responded to the demand
for new partially edited PPV services by launching two new networks in
only 90 days at very little additional cost. We believe that our
technical infrastructure will allow us to respond quickly and effectively
to new opportunities in the Cable, Satellite, and Broadband areas as well
as any new platforms that may be discovered.

O Content library: We license content from a network of over 54 different
adult studios, allowing us access to a wider variety of directors, actors
and actresses, and content niches than our primary competitor. We are
committed to providing our consumers with variety, breadth and depth of
content in order to appeal to the widest audience base possible. We
understand that our content is purchased in an impulse environment and in
order to capture those purchases we must provide a large amount of
content to the consumer. Therefore, we have licensed what we believe to
be the largest digital library of adult content in the world that we use
to program our PPV networks, VOD service and Internet website. Content is
used continuously through the life of the license term and will be
repurposed in many ways, including using "clips" of the content and
creating compilations or blocks of programming from several movies. We
spend approximately $2.4 million annually licensing content for our PPV
networks, VOD service and Internet website. The amount spent annually on
licensing content has been the same for three years.

O Expertise in aggregation of adult content: We consider ourselves to be
experts in the aggregation of high-quality adult content. We ensure that
we have all proper documentation required to verify that the cast members
of the movies that we license are eighteen years or older. We monitor the
trends in the video sales and rental market to understand what content
niches are popular and program our networks to correspond to these
trends. We monitor the trends of the VOD buys of our own content to
understand what type of content is selling the best and adjust our
programming models for these trends. We strive to provide the best
performing PPV networks and VOD service to the Cable/DBS/Hotel markets.
We program seven PPV networks in order to accommodate different editing
standards and different programming niches to best

24

serve our customers' needs. We also ensure that the interstitial
programming that we create is entertaining, edgy, and appeals to our
consumer audience.

We operate our Company in two different segments -- Pay TV and Internet.
Our core business resides within the Pay TV segment and this is where the
majority of our financial and human resources are concentrated.

PAY TV SEGMENT

Our Pay TV segment is focused on the distribution of its seven PPV networks
and its Video-on-Demand ("VOD") service to cable MSOs and DBS providers. In
addition, the Pay TV Group has had success in delivering its VOD service to
hotel rooms through its current distribution arrangement with On Command. The
Pay TV Group earns a percentage of revenue on each pay-per-view, subscription,
or VOD transaction related to its services. Revenue growth occurs as the Pay TV
Group launches its services to new cable MSOs or DBS providers, experiences
growth in the number of digital subscribers for systems where its services are
currently distributed ("on-line growth"), launches additional services to its
existing cable/DBS partners, experiences new and on-line growth for its VOD
service, is able to effect increases in the retail price of its products, and is
able to increase the buy rates for its products. The Pay TV Group seeks to
achieve distribution for at least four of its services on every digital platform
in the U.S. Based on the current market of 21.6 million DBS households and 22.2
million digital cable households, the Pay TV Group currently has 36% of its
defined market share.

Revenue growth for the Pay TV Group for the year ended March 31, 2004 was
driven primarily by:

O Growth in revenue from its VOD service provided to the Cable and Hotel
industries

O Growing acceptance for its partially-edited services

Revenue from the Pay TV Group's VOD service became a significant part of
its overall revenue mix (representing 32% of total Pay TV revenue) during the
fiscal year ended March 31, 2004, as cable operators upgraded their systems to
deliver content in this manner. The Pay TV Group currently delivers its VOD
content to 10.5 million cable network households as compared to 5.3 million a
year ago, as well as to 900,000 hotel rooms through its distribution arrangement
with On Command. The Company expects cable operators will continue to upgrade
their systems to allow for the delivery of VOD content to the home. VOD can only
be delivered in a digital, cable environment. Currently, per the NCTA, there are
22.2 million digital cable households in the U.S. We estimate that 12.5 million
digital cable households are VOD enabled and, of this amount, 11.5 million
provide adult content to their VOD customers. We anticipate that by the end of
calendar year 2004 over 85% of digital cable households will be VOD enabled. We
expect that our VOD cable revenue will increase as MSOs continue the deployment
of this technology to their digital cable subscribers and as they increase the
amount of space allocated on their VOD servers to the adult category (currently
we provide 75 hours of programming each month). Today, we are the sole provider
of adult VOD content to the two largest U.S. cable MSOs. However, we can give no
assurances that we will continue to remain the exclusive provider of adult VOD
content to these two cable MSOs.

The Pay TV Group's relationship with On Command generated incremental VOD
revenue for the year ended March 31, 2004. However, we do not expect significant
revenue growth in fiscal year 2005 from the hospitality industry. Future revenue
growth from VOD revenue generated through the hospitality industry is dependent
upon the addition of new hotel properties by On Command, an increase in business
traveler occupancy rates, and our ability to distribute our VOD content through
other providers of in-room entertainment to the hospitality industry.

In addition to the growth in VOD, the Pay TV Group experienced a growing
acceptance for its partially edited services during the 2004 fiscal year. The
Pay TV Group launched two new partially edited services in January 2003 to
respond to this change. Accordingly, we are seeing a shift in our distribution
away from our most-edited service - Pleasure - as more cable operators choose to
launch our partially edited services - TEN, TEN*Clips, TEN*Blue and TEN*Blox.

25

To date, the focus of the Pay TV Group has been on the distribution of its
PPV and VOD services to Cable, DBS and Hotel platforms in the U.S. market only.

The Pay TV Group also provides its two least-edited services to the C-Band
market on a direct-to-the-consumer basis. C-Band customers contact the Pay TV
Group's in-house call center directly to purchase the networks on a one-month,
three-month or six-month subscription basis or PPV basis. The Pay TV Group
retains 100% of the revenue from these customers and over 95% of the sales are
made via credit cards. This market has been declining for several years as these
consumers convert from C-Band "big dish" analog satellite systems to smaller,
18-inch digital DBS satellite systems. The Pay TV Group has been able to
decrease its transponder, uplinking and call center costs related to this
business over the years in order to maintain its margins. However, based on the
rate of revenue decline and the expected erosion of its C-Band margins, the Pay
TV Group expects that it will no longer be operating this business by the end of
its 2005 fiscal year. The Pay TV Group expects continued declines in revenue
from this segment of its business during 2005.

Looking forward, management has identified certain challenges and risks
that could impact the Pay TV Group's future financial results including the
following:

O Increased competition from other adult companies attempting to provide
VOD content and PPV services to Cable providers or DBS platforms

O Increased regulation of the adult industry

O Loss of exclusivity on the VOD platform of certain cable operators

We believe that many opportunities accompany these challenges and risks.
Among these opportunities, we believe the following exist for the Pay TV Group:

O Upcoming PPV and VOD launches with our newest Cable affiliates

O Obtaining distribution for our PPV services with DIRECTV

O Continued growth in the VOD segment from further deployment of this
technology by the largest Cable operator in the U.S.

O Implementation of technologies that will allow for distribution of our
content on new platforms

O Future international distribution opportunities

INTERNET SEGMENT

The Internet Group generates revenue by selling monthly memberships to its
website, TEN.com, by earning a percentage of revenue from third-party
gatekeepers like On Command for the distribution of TEN.com to their customer
base, and by selling pre-packaged video and photo content to webmasters for a
monthly fee. In fiscal years 2002 and 2003, the Internet Group also generated
revenue by selling traffic from its sites that did not convert into a member to
other webmasters. Due to the decline in the volume of traffic to TEN.com, we no
longer generate revenue from selling non-converting traffic to other webmasters.

During the 2002 and 2003 fiscal years, we significantly restructured our
Internet business. The decision to restructure our Internet business was based
on a number of factors including: the large number of adult websites competing
for web surfers, the lack of barriers to entry into the adult Internet business,
the increased regulation from VISA and MasterCard, and the amount of free adult
content available on the Internet.

Through this restructuring we moved the Internet Group from Los Angeles,
California to Boulder, Colorado, decreased staffing levels from approximately 80
employees to seven, decreased the number of websites we were creating and
managing from thirty to one, discontinued the practice of purchasing large
amounts of traffic, and focused the business on creating a premiere broadband
website branded as TEN.com. In addition, in connection with a legal settlement,
the Internet Group transferred approximately 150 of its primary domain names to
a third party as of April 1, 2003. The

26

transfer of these domain names resulted in a significant, although expected,
decline in traffic volume to TEN.com.

Once the restructuring was completed, we shifted our focus to forming
long-term revenue sharing partnerships with third-party gatekeepers, such as
cable companies, hospitality providers and portals for the distribution of
TEN.com, whereby we could gain direct access to consumers in search of adult
entertainment. We completed one such agreement with On Command for the
distribution of TEN.com through their digitally wired hotel rooms, and we expect
to create additional revenue sharing arrangements in the near-term with select
cable operators. The success we achieve with these cable operators will dictate
the revenue potential for this segment in the longer term and will serve as
justification for larger MSO's to adopt this business model. Currently we do not
generate any meaningful revenue from these third-party arrangements (less than
4% of total Internet revenue).

Over 75% of revenue from the Internet Group continues to be generated from
monthly memberships to TEN.com. However, we have seen this revenue erode over
the past several years since the current traffic volume to TEN.com does not
generate enough new monthly sign-ups to offset the churn of our renewing
membership base. The decline in membership revenue has slowed over the past
several quarters as new marketing efforts have increased traffic to TEN.com,
generating monthly sign-ups that are close to or slightly exceeding our monthly
cancellation rate. We will be focusing on other ways to generate profitable
traffic during the 2005 fiscal year in order to reverse the decline in
membership revenue from TEN.com.

We have also seen a decrease in revenue generated from selling pre-packaged
content to webmasters. This decrease in revenue from the sale of content is due
to a softening in demand for content by third-party webmasters. Webmasters are
decreasing their reliance on outside sources for content and demanding lower
prices for the content that they do purchase. In addition, we have not allocated
any significant resources towards a sales effort for these content products
during the 2004 fiscal year. We expect to contract with a third-party during the
2005 fiscal year to sell our products to the webmaster community.

We view our Internet Group as an investment in the future, and we do not
anticipate any significant revenue growth from this segment during the 2005
fiscal year. As broadband distribution grows, and as technology improves the
delivery of content through wireless applications such as cell phones and
Personal Digital Assistants ("PDAs"), the Internet Group will be the segment
through which we will capitalize on these potential revenue-generating
opportunities. Until then, the Internet Group will focus its efforts on deriving
monthly subscription revenue from traffic directed to TEN.com through
advertising on the Pay TV Group's networks and affiliate webmaster programs, as
well as to completing new revenue sharing partnerships through which we can gain
access to captive adult consumers of the Cable MSOs.

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires that we make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. On an
on-going basis, we evaluate our estimates and judgments, including those related
to revenue recognition, valuation allowances, goodwill impairment, and prepaid
distribution rights (content licensing). We base our estimates and judgments on
historical experience and on various other factors that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

We believe that the following critical accounting policies, among others,
affect our more significant judgments and estimates used in the preparation of
our consolidated financial statements. We have discussed with our Audit
Committee the development, selection, and disclosure of our critical accounting
policies and estimates and the application of these policies and estimates.

27

REVENUE RECOGNITION

Our revenues for the Pay TV Group are primarily related to the sale of our
PPV and VOD services to Cable/DBS and Hotel affiliates. The Cable affiliates do
not report actual monthly PPV or VOD sales for each of their systems to the Pay
TV Group until 60-90 days after the month of service ends. This practice
requires management to make monthly revenue estimates based on the Pay TV
Group's historical experience for each affiliated system. The Pay TV Group
subsequently adjusts its revenue to reflect the actual amount earned upon
receipt of the cash. Historically, any differences between the amounts estimated
and the actual amounts received have been immaterial due to the overall
predictability of pay-per-view revenues. Since VOD is such a new service, the
revenue expected from new VOD cable affiliates can be more difficult to predict.
The Pay TV Group believes that it is conservative in estimating the impact of
the rollout of VOD households, and it continually adjusts estimates to reflect
actual revenue remitted.

The recognition of revenues for both the Pay TV and Internet Groups is
partly based on our assessment of the probability of collection of the resulting
accounts receivable balance. As a result, the timing or amount of revenue
recognition may have been different if different assessments of the probability
of collection of accounts receivable had been made at the time the transactions
were recorded in revenue.

VALUATION ALLOWANCES

We must make certain estimates and judgments in determining income tax
expense for financial statement purposes. These estimates and judgments occur in
the calculation of certain tax assets and liabilities, which arise from
differences in the timing of recognition of revenue and expense for tax and
financial statement purposes. Judgments regarding realization of deferred tax
assets and the ultimate outcome of tax-related contingencies represent key items
involved in the determination of tax expense and related balance sheet accounts.
We have currently recorded a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be realized. Should we
determine that a reduction in the valuation allowance is appropriate, an
adjustment to our deferred tax assets would increase income in the period such
determination was made.

We maintain a reserve for chargebacks and credits for estimated refunds
related to customers whose transactions were processed via credit cards for both
the Pay TV and Internet Groups. Should our actual chargebacks and credits be
higher than estimated we would have an additional expense for the period in
which this was experienced.

GOODWILL IMPAIRMENT

Goodwill represents the excess of cost over the fair value of the net
identifiable assets acquired in a business combination accounted for under the
purchase method. Through the end of fiscal year 2002, the Company amortized its
goodwill over 10 years using the straight-line method. As a result of the
adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangibles" ("FAS 142"), that was effective for the Company as of the
beginning of fiscal year 2003, goodwill and intangible assets with an indefinite
useful life are no longer amortized, but are tested for impairment at least
annually. The Company completed the initial impairment test during the first
quarter of fiscal year 2003 and concluded that the fair value of the Company's
reporting unit (the Pay TV Group) exceeded its respective carrying value as of
June 30, 2002 and, therefore, no impairment existed at that date.

In addition to the initial impairment test completed during the first
quarter of fiscal year 2003, we perform an annual review in the fourth quarter
of each year, or more frequently if indicators of potential impairment exist, to
determine if the recorded goodwill is impaired. Our impairment process compares
the fair value of the Pay TV Group to its carrying value, including the goodwill
related to the Pay TV Group. We concluded for the 2003 and 2004 fiscal years
that the fair value of the Company's reporting unit exceeded its carrying value
and no impairment charge was required.

If actual operating results or cash flows are different than our estimates
and assumptions, we could be required to record impairment charges in future
periods.

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PREPAID DISTRIBUTION RIGHTS (CONTENT LICENSING)

Our Pay TV Group's film and content library consists of newly produced and
historical film licensing agreements. We account for the licenses in accordance
with FAS 63 Financial Accounting by Broadcasters. Accordingly, we capitalize the
costs associated with the licenses and certain editing costs and amortize the
costs on a straight-line basis over the life of the licensing agreement (usually
3 to 5 years). Pursuant to FAS 63 the costs associated with the license
agreements should be amortized based on the relative revenues earned for each
usage of the film.

We have determined that it is appropriate to amortize these costs on a
straight-line basis under the assertion that each usage of the film is expected
to generate similar revenues. We regularly review and evaluate the
appropriateness of amortizing film costs on a straight-line basis and assess if
an accelerated method would more appropriately reflect the revenue generation of
the content. Through our analysis, we have concluded that the current policy of
recognizing the costs incurred to license the film library on a straight-line
basis most accurately reflects the revenue generated by each showing of the
film.

We periodically review our film library and assess if the unamortized cost
approximates the fair market value of the films. In the event that the
unamortized costs exceed the fair market value of the film library, we will
expense the excess of the unamortized costs to reduce the carrying value of the
film library to the fair market value.

RESULTS OF OPERATIONS

PAY TV GROUP (FORMERLY, CALLED SUBSCRIPTION/PAY-PER-VIEW TV GROUP)

The following table outlines the current distribution environment and
networks households for each network and our VOD service:

NET REVENUE
CABLE/DBS/HOTEL REVENUE 2003 TO 2004

The increase in the Pay TV Group's Cable/DBS/Hotel revenues from 2003 to
2004 was attributable to the following items:

O A 399% increase in VOD revenue

O The addition of VOD revenue from the hospitality industry

O A 10% increase in revenues generated by our three services on the DISH
platform

O An 86% increase in Cable revenue from our partially edited services

The above items are described in more detail below.

Revenue from our VOD service became a significant contributor to the Pay TV
Group's revenue mix during the 2004 fiscal year as cable operators have
aggressively upgraded their plants to deliver content in this manner to their
customers. Our VOD content is available through our distribution arrangements
with cable MSOs to 10.5 million cable network households, up from 5.3 million
households a year ago, representing an increase of 98%. Additionally, we are
currently the sole provider of adult VOD content to the two largest cable MSOs
in the U.S.

During the 2004 fiscal year, we also began delivering our VOD content to
900,000 hotel rooms through our distribution arrangement with On Command.
Through this agreement we deliver up to fourteen titles on a monthly basis to On
Command for use on their in-room entertainment platform which they provide to
the hospitality industry.

Our VOD revenue from both Cable households and the hospitality industry via
our arrangement with On Command accounted for 37% and 10% of total
Cable/DBS/Hotel revenue for the fiscal years ended March 31, 2004 and 2003,
respectively.

Revenue from our TEN, TEN*Clips and TEN*Xtsy networks on the DISH platform
increased 10% year-over-year. This increase was due to an overall increase in
PPV buys for each service while the number of monthly subscribers to each
service increased 3%. We believe that these increases in buys and subscribers
can be attributed to the increase in overall subscribers to the DISH platform.

As discussed above, the Pay TV Group has seen a growing acceptance by its
consumer base for its partially edited services, TEN, TEN*Blue, TEN*Blox, and
TEN*Clips. We view this as a positive development given the higher buy rates and
higher retail rates associated with this editing standard. In anticipation of
the increased acceptance for partially edited programming, we launched two new

30

networks in January 2003. These two new services, TEN*Blue and TEN*Blox, plus
our legacy partially edited services, TEN and TEN*Clips, are now distributed to
34.2 million network households as compared to 17.5 million network households a
year ago, representing a 95% increase. Revenue from these four networks
increased 86% from 2003 to 2004.

CABLE/DBS/HOTEL REVENUE 2002 TO 2003

The increase in the Pay TV Group's Cable/DBS/Hotel revenues from 2002 to
2003 was attributable to the following items:

O An increase in revenue generated by TEN*Xtsy on the DISH platform

O An increase in revenue generated by TEN*Clips as a result of an
increase in distribution for this network from 2002 to 2003

O An increase in our VOD revenue from 2002 to 2003

The following items offset the increase in revenue from the above items:

O A decrease in revenue from our Pleasure network due to disaffiliations
by DIRECTV and DISH

O A decrease in TEN revenue generated on the DISH platform

The above items are described in more detail below.

In January 2000, DISH launched TEN*Xtsy on its satellite at 110 degrees. In
August 2001, DISH moved TEN*Xtsy to its satellite at 119 degrees. Significantly
more addressable subscribers view DISH's satellite at 119 degrees than its
satellite at 110 degrees. In addition to the satellite change, in September 2001
DISH increased its retail price for TEN*Xtsy to $10.99 for a PPV purchase and
$27.99 for a monthly subscription from $9.99 and $24.99, respectively. Together,
these changes resulted in an 11% increase in revenue generated by the TEN*Xtsy
network on the DISH platform from 2002 to 2003.

TEN*Clips was available to 3.6 million and 5.8 million network households
as of March 31, 2002 and 2003, respectively, representing a 61% increase in
distribution year-over-year. DISH also increased its retail prices for TEN*Clips
in September 2001 to $9.99 for a PPV purchase and $22.99 for a monthly
subscription from $8.99 and $19.99, respectively. Revenue from TEN*Clips
increased 29% from 2002 to 2003 as a result of an increase in distribution and
the increase in retail prices on the DISH platform.

We experienced significant growth in revenue from our VOD service, TEN*On
Demand, between 2002 and 2003 as this technology was rolled out for the first
time by several cable MSOs. Revenue from our VOD service accounted for 10% of
total Cable/DBS/Hotel revenue for the year ended March 31, 2003, as compared to
1% for the year ended March 31, 2002.

During the 2002 fiscal year, both DISH and DIRECTV terminated distribution
of our Pleasure network. Both DBS providers terminated distribution of Pleasure
to create available bandwidth for the addition of partially edited services to
their platforms. The loss of this distribution resulted in a 40% decrease in
revenue from the Pleasure network from 2002 to 2003. However, this decrease was
offset by an increase in revenue from new launches and online growth for our
Pleasure network with several cable MSOs.

Revenue from our TEN network declined from 2002 to 2003 because of a
decrease in the number of monthly DISH subscribers. This decline in the number
of monthly subscribers has been ongoing since DISH converted TEN to a PPV
service in 1999. In addition, PPV buys from TEN on the DISH platform declined
from 2002 to 2003 due to the addition of a competing network of the same editing
standard to the DISH platform in September 2001.

C-BAND REVENUE

The year-over-year decreases in C-Band revenue are due to the continued
decline of the C-Band market as consumers convert C-Band "big dish" analog
satellite systems to smaller, 18-inch digital

31

DBS satellite systems. The total C-Band market declined 29% from 2003 to 2004
and 38% from 2002 to 2003.

Although the C-Band market has continued to decline, our C-Band revenue
declined at a slower rate due to the fact that our only competitor on this
platform went out of business during the 2004 fiscal year. Providing service to
the C-Band market continues to be profitable for us, generating operating
margins of approximately 37% during the 2004 fiscal year. We will continue to
closely monitor this business and when margins erode to an unacceptable level we
will discontinue providing our content on this platform. We anticipate that we
will no longer be providing our networks on the C-Band platform by the end of
the 2005 fiscal year. In an effort to minimize costs associated with this
revenue stream, we discontinued selling TEN*BluePlus on the C-Band platform
during the fourth quarter of our 2004 fiscal year.

COST OF SALES

Cost of sales consists of expenses associated with our digital broadcast
facility, satellite uplinking, satellite transponder leases, programming
acquisition and conforming costs, VOD transport costs, amortization of content
licenses, and C-Band call center costs.

The 10% increase in cost of sales from fiscal year 2003 to 2004 is due to
a) a 20% increase in costs associated with our digital broadcast center and b)
the addition of VOD transport costs during the 2004 fiscal year. The increase in
costs related to our digital broadcast facility is due to the hiring of
additional personnel to manage our growing VOD business. We began paying
transport costs to TVN for the services they provide in delivering our VOD
content to cable MSOs during the 2004 fiscal year. These fees are expected to
increase during the 2005 fiscal year as our VOD business continues to grow. The
increase in our cost of sales from 2003 to 2004 was offset by a 22% decrease in
C-Band call center costs and a 24% decrease in transponder costs for this same
period. The Pay TV Group successfully renegotiated its lease costs for its
analog transponders during the fourth quarter of its 2003 fiscal year. In
addition, during the fourth quarter of our 2004 fiscal year we discontinued one
of our C-Band services allowing us to terminate the lease for one of our analog
transponders.

The 4% increase in cost of sales from fiscal year 2002 to 2003 is due to:
a) a 27% increase in the amortization of the Pay TV Group's content licenses and
b) a 16% increase in costs associated with the digital broadcast center related
to new functionalities and redundancies added during the fiscal year. These
increases were offset by a 12% decrease in transponder lease costs and a 12%
decrease in C-Band call center costs. The Pay TV Group successfully renegotiated
its lease cost for its four analog transponders at the end of its 2002 fiscal
year.

OPERATING INCOME

Operating income increased 132% from 2003 to 2004 largely as a result of a
37% increase in revenue year-over-year. Gross margins increased from 52% to 61%
year-over-year and operating expenses declined 1% during the same period.
Operating expenses as a percentage of revenue decreased to 19% for the 2004
fiscal year from 27% for the 2003 fiscal year.

The 1% decrease in operating expenses from 2003 to 2004 is primarily
related to a decrease in C-Band marketing costs during the 2004 fiscal year. At
the end of the first quarter of its 2004 fiscal year, the Pay TV Group
discontinued using its barker channel to market its C-Band services. The
decrease in operating costs associated with the barker channel was offset by an
increase in sales commissions and costs associated with the Pay TV Group's
in-house promotions department. Sales commissions increased during the 2004
fiscal year due to an increase in distribution for our PPV and VOD services.
Costs associated with operating our in-house promotions department increased 17%
during the 2004 fiscal year as we hired more personnel to produce and edit the
promotional and branding elements of our PPV and VOD programming.

The 13% increase in operating income from 2002 to 2003 is primarily related
to a 17% decrease in operating expenses during this period. Operating expenses
as a percentage of revenue declined from 32% to 27% during this same period. The
decline in operating expenses from 2002 to 2003 was related to a decline in:
a) the costs associated with the Group's C-Band barker channel, b) advertising

32

costs, c) payroll costs associated with the elimination of two senior manager
positions, and d) commissions paid to the Group's sales force as a result of a
change in the commission plan and a decline in the number of people being
commissioned.

In addition, due to an accounting pronouncement change, goodwill and
intangible assets with indefinite lives are no longer required to be amortized
and are, instead, tested for impairment on an annual basis using the guidance
for measuring impairment as set forth in SFAS 142, "Goodwill and Other
Intangible Assets". Goodwill amortization was $0, $0 and $636,000 for the fiscal
years ended March 31, 2004, 2003, and 2002, respectively.

INTERNET GROUP

The following table sets forth certain financial information for the
Internet Group for the three years ended March 31:

NET REVENUE

The 49% decline in net membership revenue from 2003 to 2004 and the 65%
decline in net membership revenue from 2002 to 2003 was a result of a
significant decline in traffic to our web sites as we eliminated most of our
traffic generating programs during the 2003 and 2004 fiscal years. We ceased
actively purchasing traffic for our web sites during the fiscal year ended March
31, 2003. Instead, we depended upon our adult domain names and the advertising
of TEN.com on the Pay TV Group's networks to generate type-in traffic for
TEN.com. In addition, we transferred 150 domain names to a third-party in
settlement of a lawsuit at the end of the 2003 fiscal year. The loss of these
URLs resulted in an expected decline in the volume of traffic to TEN.com during
the 2004 fiscal year such that the number of new monthly sign-ups was not enough
to offset the monthly cancellation rate.

The decrease in revenue from the sale of content during the past three
fiscal years is a result of a softening in demand for content by third-party
webmasters. Webmasters are decreasing their reliance on outside sources for
content and demanding lower prices for the content that they do purchase. In
addition, we did not allocate any significant resources towards a sales effort
for our content products during the 2004 fiscal year.

Revenue from the sale of traffic was earned by forwarding exit traffic and
traffic from selected vanity domains to affiliated webmaster marketing programs
domestically, monetizing foreign traffic via international dialer companies,
marketing affiliated webmaster sites through our double opt-in email list, and
by directing traffic to our pay-per-click ("PPC") search engine,
www.sexfiles.com. Due to the

33

decline in traffic volume to TEN.com during the 2003 and 2004 fiscal years, our
sale of traffic revenue decreased 77% from 2002 to 2003 and was completely
eliminated during the 2004 fiscal year. In addition, we ceased the use of our
opt-in email list and PPC search engines at the end of the 2003 fiscal year as a
means to generate revenue from the sale of traffic.

Our other revenue was earned from the sale of services such as hosting,
co-location and bandwidth management ("ISP services") to non-affiliated
companies. During the fiscal year ended March 31, 2003, we ceased selling our
ISP services to outside customers and focused our data center operations solely
on our internal needs.

COST OF SALES

Cost of sales consists of variable expenses associated with credit card
fees, bandwidth costs, traffic acquisition costs (purchase of traffic), web site
content costs and depreciation of assets. Cost of sales, as a percentage of
revenue, was 39%, 54%, and 53% for the years ended March 31, 2004, 2003, and
2002, respectively.

The 69% decrease in cost of sales from 2003 to 2004 is related to a 67%
decline in depreciation expense and bandwidth costs. These costs declined due to
the data center restructuring completed during the 2003 fiscal year (See "Data
Center Restructuring 2003" below) through which we wrote-off excess equipment,
moved the data center to Boulder, Colorado, and negotiated more favorable
bandwidth rates. In addition, we eliminated the costs associated with our PPC
search engine and email program at the end of 2003 fiscal year. Variable costs
related to the processing of credit cards for membership revenue also declined
from 2003 to 2004 in tandem with the decrease in this revenue stream.

The 66% decrease in costs of sales from 2002 to 2003 is related to a 95%
decline in traffic acquisition costs. Traffic acquisition costs declined from
2002 to 2003 because we ceased actively purchasing traffic for our sites during
the 2003 fiscal year. In addition, depreciation expense declined 47% due to the
restructuring completed during the 2003 fiscal year through which we wrote off
excess equipment. Variable costs related to the processing of credit cards for
membership revenue also declined from 2002 to 2003 as this revenue stream
declined year-over-year.

OPERATING INCOME (LOSS)

Operating income increased from 2003 to 2004 primarily due to the fact that
cost of sales and operating expenses declined by $5.0 million year-over-year
while revenue for the same period declined by only $4.5 million. The 54% decline
in operating expenses from 2003 to 2004 is related to decreases in payroll,
benefits and other office expenses for all of our departments as a result of the
final restructuring completed during the fourth quarter of the 2003 fiscal year
(see "Internet Restructuring 2003" below). This restructuring resulted in a
decrease in sales, marketing, data center, and web development personnel.

Operating income decreased 114% from 2002 to 2003 primarily due to the fact
that the 66% decrease in revenue year-over-year was only partially offset by a
62% decrease in cost of sales and operating expenses for the same period.

The 56% decrease in operating expenses from 2002 to 2003 was related to
a) the elimination of our in-house customer service and credit card processing
functions; b) a decrease in payroll, benefits, and facility costs related to the
restructuring and relocation of the sales, marketing, engineering and web
development departments to Boulder, Colorado; c) a decrease in trade show
related costs; and d) a decrease in travel related costs.

34

RESTRUCTURING EXPENSES

INTERNET RESTRUCTURING 2002

During the fiscal year ended March 31, 2002, we adopted a restructuring
plan with respect to our Internet Group's operations. The plan provided for the
consolidation of the Internet Group's engineering, web production, sales and
marketing departments to our Boulder, Colorado location and the elimination of
the Internet Group's customer service department due to the outsourcing of its
credit card processing functions. In addition, the Internet Group vacated its
office facilities in Sherman Oaks, California that were being utilized by these
functions.

Total restructuring charges of $3.2 million related to this plan were
recorded during the 2002 fiscal year, of which $0.8 million related to the
termination of 31 employees. In addition, 10 other positions were eliminated
through attrition. Also included in the restructuring charge was $1.2 million of
expenses related to the excess office space in Sherman Oaks, California and $1.0
million related to the write off of excess furniture and equipment.

DATA CENTER RESTRUCTURING 2003

During the fiscal year ended March 31, 2003, we adopted a restructuring
plan to close the Internet Group's in-house data center in Sherman Oaks,
California and move its servers, bandwidth and content delivery functions to the
same location as the Pay TV Group's digital broadcast facility in Boulder,
Colorado. Total restructuring charges of $3.1 million related to this plan were
recorded during the year, of which $28,000 related to the termination of 10
employees. Also included in this charge was $0.4 million of rent expense related
to the data center space in Sherman Oaks and $2.6 million related to the write
off of excess equipment.

INTERNET RESTRUCTURING 2003

During the fiscal year ended March 31, 2003, we adopted a final
restructuring plan to eliminate 13 positions within our Internet Group. Total
restructuring charges of $0.3 million were recorded, of which $10,000 related to
the termination of thirteen positions and $0.2 million related to the write off
of excess equipment and operating leases.

ASSET IMPAIRMENT

We recognized impairment losses on certain domain names owned by our
Internet Group of $1.4 million during the fiscal year ended March 31, 2003.
Management identified certain conditions, including a declining gross margin due
to the availability of free adult content on the Internet and decreased traffic
to the Internet Group's domain names, as indicators of asset impairment. These
conditions led to operating results and forecasted future results that were
substantially less than had been anticipated at the time of our acquisition of
the Internet Group. We revised our projections and determined that the projected
results would not fully support the future amortization of the domain names
associated with the Internet Group.

In accordance with the Company's policy, management assessed the
recoverability of the domain names using a cash flow projection based on the
remaining amortization period of two to four years. Based on this projection,
the cumulative cash flow over the remaining amortization periods was
insufficient to fully recover the intangible asset balance.

35

CORPORATE ADMINISTRATION

The following table sets forth certain financial information for Corporate
Administration expenses for the three years ended March 31:

Expenses related to corporate administration include all costs associated
with the operation of the public holding company, New Frontier Media, Inc., that
are not directly allocable to the Pay TV and Internet operating segments. These
costs include, but are not limited to, legal and accounting expenses, insurance,
registration and filing fees with NASDAQ and the SEC, investor relation cost,
and printing costs associated with the Company's public filings.

The 31% decrease in corporate administration expenses from 2003 to 2004 is
primarily due to an 81% decrease in legal fees. Legal fees decreased from 2003
due to the settlement of a lawsuit with three former officers of our Company
during the last quarter of our 2003 fiscal year. In addition, we also saw a
decrease in our postage, printing and public relation expenses. These expenses
were 62% higher in the 2003 fiscal year due to the proxy fight that the Company
was involved in that year. Consulting costs also declined from 2003, as we were
no longer using an outside corporate advisory firm. The decline in these costs
was offset by an increase in our accounting and auditing costs and an increase
in fees paid to our outside Board members for the 2004 fiscal year.

The 22% increase in corporate administration expenses from 2002 to 2003 is
primarily due to 1) an 82% increase in legal fees related to a lawsuit that we
filed against three former officers of our Company (these lawsuits were settled
by the end of the 2003 fiscal year and no additional costs were incurred going
forward), 2) a 59% increase in general insurance and directors and officers
insurance premiums, 3) the addition of fees paid to our outside Board members,
and 4) a 99% increase in expenses related to the proxy fight that the Company
defended itself against (public relations, printing and postage costs). The
increase in these expenses was offset by a 27% decrease in payroll and benefit
costs due to the elimination of several senior management positions and a 29%
decrease in travel costs. We estimate that approximately $1.9 million of our
2003 corporate administration expenses related to the proxy fight and our
lawsuit with our former officers.

DEFERRED TAXES

SFAS 109, "Accounting for Income Taxes" requires, among other things, the
separate recognition, measured at currently enacted tax rates, of deferred tax
assets and deferred tax liabilities for the tax effect of temporary differences
between the financial reporting and tax reporting bases of assets and
liabilities, and net operating loss and tax credit carryforwards for tax
purposes. A valuation allowance must be established for deferred tax assets if
it is "more likely than not" that all or a portion will not be realized. The
Company routinely evaluates its recorded deferred tax assets to determine
whether it is still more likely than not that such deferred tax assets will be
realized.

During the years ended March 31, 2004 and 2003, we determined that it is
more likely than not that our deferred tax assets will not be realized and we,
accordingly, recorded a valuation allowance against the net deferred tax assets
of $6.7 million and $7.2 million, respectively. If we generate future taxable
income against which these attributes may be applied, some portion of the
valuation allowance would be reversed and a corresponding increase in net income
would be reported in future periods. However, during the 2004 fiscal year,
options and warrants were exercised and certain disqualified dispositions
occurred resulting in deductions for tax purposes of approximately $10.5
million. As the $3.9 million valuation allowance for these tax assets is
reversed it will be credited to Additional Paid-in-Capital instead of net
income.

36

LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATING ACTIVITIES AND INVESTING ACTIVITIES:

Our statements of cash flows are summarized as follows (in millions):

The increase in cash provided by operating activities from 2003 to 2004 was
primarily related to increased profits in 2004 versus 2003. The following items
also significantly impacted cash flows from operations for 2004 versus 2003:

O Depreciation and amortization charges decreased to $6.0 million for the
2004 fiscal year from $7.5 million for the 2003 fiscal year

O Prepaid distribution rights related to the licensing of content declined
to $2.9 million in 2004 from $4.2 million in 2003

O Other accrued liabilities increased by $1.1 million from 2003 to 2004

O Accounts receivable increased from $5.7 million in 2003 to $6.9 million
in 2004

The decrease in cash provided by operating activities from 2002 to 2003 was
primarily related to an increase in our net loss from $0.6 million in 2002 to
$11.9 million in 2003. The following items also significantly impacted cash
flows from operations for 2003 versus 2002:

O Accounts receivable increased from $4.3 million in 2002 to $5.7 million
in 2003

O Prepaid distribution rights related to the licensing of content was $4.2
million in 2003 compared to $4.8 million in 2002

O We established a valuation allowance for our deferred tax assets in the
amount of $5.3 million during our 2003 fiscal year

O We had $4.0 million in non-cash charges related to our Internet
restructurings and the impairment of certain domain names during the 2003
fiscal year

Purchases of equipment and furniture accounted for the most significant
cash outlays for investing activities in each of the three years ended March 31,
2004, 2003 and 2002. Purchases of equipment and furniture during the 2004 fiscal
year related primarily to purchases of broadcast equipment, including a new
broadcast cluster to allow for increased redundancy of our digital broadcast
center, purchases of encrypting equipment necessary for new cable launches, and
leasehold improvements necessary to upgrade our digital broadcast facility.
Purchases of equipment and furniture for the 2003 fiscal year related primarily
to purchases of software licenses, minor equipment upgrades to the Pay TV
Group's digital broadcast facility and the purchase of encrypting equipment for
new cable launches, while the purchases completed during the 2002 fiscal year
were primarily related to the Internet Group's data center facility in Los
Angeles. We currently estimate that purchases of equipment and furniture during
the 2005 fiscal year will be less than $1.5 million, which will include
approximately $0.3 million to complete the improvements we are making to our
digital broadcast facility.

Purchases of investments represented the next most significant investing
activity during the 2004 fiscal year. These purchases related to certificates of
deposits in which we invested during the year.

37

FINANCING ACTIVITIES:

Our cash flows provided by (used in) financing activities are as follows
(in millions):

During the 2003 fiscal year we issued 1.4 million shares of Class A
Redeemable Preferred Stock at $2.00 per share. The proceeds from this offering
were used to repay $2.0 million of the Company's notes payable. An additional
$1.0 million in debt was converted to 0.5 million shares of Class A Redeemable
Preferred Stock. During the 2004 fiscal year, we issued 2.5 million shares of
Class B Redeemable Preferred Stock at $0.81 per share. The proceeds from this
offering were used to redeem $1.0 million of the Company's Class A Redeemable
Preferred Stock and to fund the purchase and subsequent retirement of 2,520,750
shares of New Frontier Media, Inc. common stock from Edward Bonn, a former
officer of the Company.

During the 2004 fiscal year, we redeemed $5.3 million of the Class A and
Class B Redeemable Preferred Stock. In addition, during the 2004 fiscal year
$0.5 million of the Class B Redeemable Preferred Stock was converted into a note
payable which was then subsequently repaid.

Much of our cash used in financing activities during the 2004 fiscal year
was offset by the exercise of stock options and warrants which generated cash
from financing activities of $6.3 million.

In May 2004, we repaid our secured note payable in the amount of $0.4
million. Ongoing interest expense for our remaining capital lease obligations
and debt is anticipated to be immaterial.

If we were to lose our major customers that account for 34% and 16% of our
revenue, our ability to finance our future operating requirements would be
severely impaired.

The Company did not incur any Federal income taxes for the year ended March
31, 2004, due to certain prior year restructuring charges and impairments being
deductible in the current year, deductions resulting from the exercise of
warrants and options, and the availability of prior year net operating loss
carryforwards. Certain state taxes were unable to be offset by these deductions.

We expect that we will be able to utilize our net operating loss carryovers
from this and prior years to offset most of our taxable income for the 2005
fiscal year. However, we do expect to pay some federal and state taxes during
the 2005 fiscal year. We currently estimate the cash required for these taxes to
be less than $1.0 million.

We believe that existing cash and cash generated from operations will be
sufficient to satisfy our operating requirements, and we believe that any
capital expenditures that may be incurred can be financed through our cash flows
from operations.

38

The following is a summary of the Company's contractual obligations for the
periods indicated that existed as of March 31, 2004, and is based on information
appearing in the Notes to the Consolidated Statements:

The Company is currently renegotiating its broadcast uplinking contract
with a third party provider. The current contract expires May 31, 2004. The new
contract is expected to be for a three-year term with an annual cost of $900,000
per year.

NEW ACCOUNTING PRONOUNCEMENTS

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS No. 150"). This statement establishes standards for how an issuer
classifies and measures in its statement of financial position certain financial
instruments with characteristics of both liabilities and equity. In accordance
with the standard, financial instruments that embody obligations for the issuer
are required to be classified as liabilities. The Company adopted this
pronouncement on April 1, 2003. Upon adoption of SFAS No. 150 the Company
reclassified its Redeemable Preferred Stock as a liability.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK. The Company's exposure to market risk is principally confined
to cash in the bank, money market accounts, and notes payable, which have short
maturities and, therefore, minimal and immaterial market risk.

INTEREST RATE RISK. As of June 1, 2004, the Company had cash in checking
and money market accounts and certificates of deposit. Because of the short
maturities of these instruments, a sudden change in market interest rates would
not have a material impact on the fair value of these assets. Furthermore, the
Company's borrowings are at fixed interest rates, limiting the Company's
exposure to interest rate risk.

FOREIGN CURRENCY EXCHANGE RISK. The Company does not have any foreign
currency exposure because it currently does not transact business in foreign
currencies.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of New Frontier Media, Inc. and its
subsidiaries, including the notes thereto and the report of independent
accountants therein, commence at page F-2 of this Report.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in its Securities and
Exchange ("SEC") reports is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and

39

procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, as the Company's are designed to do,
and management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.

In connection with its audit of the Company's consolidated financial
statements for the year ended March 31, 2004, Grant Thornton, LLP ("Grant
Thornton") the Company's independent registered accountants, advised the Audit
Committee and management of an internal control matter with respect to deferred
revenue that they considered to be a reportable condition as that term is
defined under standards established by the American Institute of Certified
Public Accountants. The Company considered these matters in connection with the
year end closing process and the preparation of the March 31, 2004 consolidated
financial statements included in this Form 10-K and also determined that no
prior period financial statements were materially affected by such matters. In
response to the observations made by Grant Thornton, in fiscal 2005 the Company
will (i) expand the scope of the review of the deferred revenue calculation on a
monthly and quarterly basis, and (ii) will implement certain enhancements to its
internal controls and procedures, which it believes will address the matter
raised by Grant Thornton.

As required by the SEC rules, we have evaluated the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
the end of the period covered by this Annual Report. This evaluation was
performed under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Financial Officer.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's controls and procedures were effective,
except as noted above.

Subsequent to the date of this evaluation, there have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls, and no corrective actions taken with regard
to significant deficiencies or material weaknesses in such controls.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 will be included in our proxy statement
to be filed relating to the annual meeting of stockholders to be held in August
2004, which will be filed within 120 days after the close of our fiscal year
ended March 31, 2004, and is incorporated herein by reference, pursuant to
General Instruction G(3). Please see "Executive Officers of the Registrant" in
Part I of this form.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 will be included in our proxy statement
to be filed relating to the annual meeting of stockholders to be held in August
2004, which will be filed within 120 days after the close of our fiscal year
ended March 31, 2004, and is incorporated herein by reference, pursuant to
General Instruction G(3).

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12 will be included in our proxy statement
to be filed relating to the annual meeting of stockholders to be held in August
2004, which will be filed within 120 days after the close of our fiscal year
ended March 31, 2004, and is incorporated herein by reference, pursuant to
General Instruction G(3).

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 will be included in our proxy statement
to be filed relating to the annual meeting of stockholders to be held in August
2004, which will be filed within 120 days

40

after the close of our fiscal year ended March 31, 2004, and is incorporated
herein by reference, pursuant to General Instruction G(3).

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 will be included in our proxy statement
to be filed relating to the annual meeting of stockholders to be held in August
2004, which will be filed within 120 days after the close of our fiscal year
ended March 31, 2004, and is incorporated herein by reference, pursuant to
General Instruction G(3).

PART IV.

ITEM 15. EXHIBITS AND REPORTS ON FORM 8-K.

The following documents are filed as part of this report:

1) FINANCIAL STATEMENTS

The financial statements listed in the Table of Contents to Consolidated
Financial Statements are filed as part of this report.

2) FINANCIAL STATEMENT SCHEDULES -- All schedules have been included in the
Consolidated Financial Statements or Notes thereto.

3) EXHIBITS

1 Incorporated by reference to the Company's Registration Statement on Form SB-2
(File No. 333-35337).

2 Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended March 31, 1999.

3 Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended March 31, 2000.

4 Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2002.

5 Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2002.

6 Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 31, 2002.

7 Incorporated by reference to the Company's Annual Report filed on Form 10-K
for the year ended March 31, 2003.

8 Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 31, 2003.

9 Filed herewith.

REPORTS ON FORM 8-K

The Company did not file any Form 8-Ks during the quarter ended March 31,
2004.

42

SIGNATURES

In accordance with the requirements of Section 13 or 15(d) of the Exchange
Act, New Frontier Media has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

NEW FRONTIER MEDIA, INC.

/s/ Michael Weiner

Michael Weiner
Chief Executive Officer

43

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NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

TABLE OF CONTENTS

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Board of Directors of
NEW FRONTIER MEDIA INC. AND SUBSIDIARIES

We have audited the accompanying consolidated balance sheets of New Frontier
Media, Inc. and Subsidiaries as of March 31, 2004 and March 31, 2003, and the
related consolidated statements of operations, comprehensive income,
stockholders' equity and cash flows for the years then ended. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the New
Frontier Media Inc. and Subsidiaries as of March 31, 2004 and March 31, 2003,
and the consolidated results of their operations and their cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America.

As discussed in Note 1 to the consolidated financial statements, New Frontier
Media, Inc. and Subsidiaries adopted Statement of Financial Accounting Standards
No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets," on January 1,
2002.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule included in the accompanying
supplementary information section is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. For the years ended March 31, 2004 and 2003, this schedule
has been subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.

GRANT THORNTON LLP

New York, New York
May 20, 2004

F-2

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN 000S)
ASSETS

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

F-3

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN 000S EXCEPT PER SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY

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

F-4

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN 000S EXCEPT PER SHARE DATA)

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

F-5

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN 000'S)

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

F-6

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN 000S EXCEPT SHARE DATA)

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

F-7

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000S)

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

F-8

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN 000S)

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

F-9

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

New Frontier Media, Inc. ("New Frontier Media"), is a publicly traded
holding company for its operating subsidiaries. Colorado Satellite Broadcasting,
Inc. ("CSB"), d/b/a The Erotic Networks, ("TEN") is a leading provider of adult
programming to multi-channel television providers and low-powered direct-to-home
households. Through its VOD service and its networks--Pleasure, TEN, TEN*Clips,
TEN*Xtsy, TEN*Blue, TEN*Blox, and TEN*Max--TEN is able to provide a variety of
editing styles and programming mixes that appeal to a broad range of adult
consumers. Ten Sales, Inc. formed in April 2003, is responsible for marketing
the products for TEN.

On October 27, 1999, New Frontier Media completed an acquisition of three
related Internet companies: Interactive Gallery, Inc. ("IGI"), Interactive
Telecom Network, Inc. ("ITN") and Card Transactions, Inc. ("CTI"). Under the
terms of the acquisition, which was accounted for as a pooling of interests, the
Company exchanged 6,000,000 shares of restricted common stock in exchange for
all of the outstanding common stock of IGI and ITN and 90% of CTI.

IGI aggregates and resells adult content via the Internet. IGI sells
content to monthly subscribers through its broadband site, www.TEN.com, partners
with third-party gate-keepers for the distribution of www.TEN.com and wholesales
pre-packaged content to various web masters. ITN and CTI have been inactive
since March 31, 2002.

The majority of the Company's sales are derived from the United States.
International sales were approximately $524,000, $1,022,000 and $3,101,000 for
the years ended March 31, 2004, 2003 and 2002, respectively.

SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
New Frontier Media, Inc. and its majority owned subsidiaries (collectively
hereinafter referred to as New Frontier Media or the Company). All intercompany
accounts and transactions have been eliminated in consolidation.

USE OF ESTIMATES

The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Estimates have been made by management in several areas,
including, but not limited to, the realizability of accounts receivable, accrued
restructuring expenses, the valuation of chargebacks and reserves, the valuation
allowance associated with deferred income tax assets and the expected useful
life and valuation of our prepaid distribution rights. Management bases its
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
could differ materially from these estimates.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current
year presentation.

F-10

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash on hand, cash in banks and cash
equivalents, which are highly liquid instruments with original maturities of
less than 90 days. The Company maintains cash deposits with major banks which
exceed federally insured limits. At March 31, 2004, the Company exceeded the
federally insured limits by approximately $15,252,000. The Company periodically
assesses the financial condition of the institutions and believes that the risk
of any loss is minimal.

INVESTMENTS

Short and long-term investments are classified as `held to maturity'
securities and are stated at cost. Investments consist of certificates of
deposits with varying maturity lengths and approximates fair market value. These
are recorded at fair value on the Consolidated Balance Sheet.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of cash and cash equivalents, accounts receivable,
investments, accounts payable, accrued expenses and other liabilities
approximate their carrying value due to their short maturities. The fair value
of obligations under capital leases and preferred stock approximate the carrying
value and is estimated based on the current interest rates offered to the
Company for debt of similar maturity.

ACCOUNTS RECEIVABLE

The majority of the Company's accounts receivable are due from customers in
the cable and satellite industries. Credit is extended based on evaluation of a
customer's financial condition and collateral is not required. Accounts
receivable are stated at amounts due from customers net of an allowance for
doubtful accounts. Accounts outstanding longer than the contractual payment
terms are considered past due. The Company determines its allowance by
considering a number of factors, including the length of time accounts
receivable are past due, the Company's previous loss history, the customer's
current ability to pay its obligation to the Company, and the condition of the
general economy and the cable and satellite industries as a whole.

PREPAID DISTRIBUTION RIGHTS

The Company's Pay TV Group's film and content library consists of newly
produced and historical film licensing agreements. The Company accounts for the
licenses in accordance with FAS 63 Financial Accounting by Broadcasters.
Accordingly, the Company capitalizes the costs associated with the licenses and
certain editing costs and amortizes these costs on a straight-line basis over
the life of the licensing agreement (generally 5 years). Pursuant to FAS 63 the
costs associated with the license agreements should be amortized based on the
relative revenues earned for each usage of the film. Management has determined
that it is appropriate to amortize these costs on a straight-line basis under
the assertion that each usage of the film is expected to generate similar
revenues. The Company regularly reviews and evaluates the appropriateness of
amortizing film costs on a straight-line basis and assesses if an accelerated
method would more appropriately reflect the revenue generation of the content.
Through its analysis, management has concluded that the current policy of
recognizing the costs incurred to license the film library on a straight-line
basis most accurately reflects the revenue generated by each usage of the film.

Management periodically reviews the film library and assesses if the
unamortized cost approximates the fair market value of the films. In the event
that the unamortized costs exceed the

F-11

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

fair market value of the film library, the Company will expense the excess of
the unamortized costs to reduce the carrying value of the film library to the
fair market value.

EQUIPMENT AND FURNITURE

Equipment and furniture are stated at cost less accumulated depreciation.
The cost of maintenance and repairs is charged to operations as incurred;
significant additions and betterments are capitalized. Depreciation is computed
using the straight-line method over the estimated useful life of the assets.

The estimated useful lives of the assets are as follows:

Furniture and fixtures................................ 3 to 5 years
Computers, equipment and servers...................... 2 to 5 years

Leasehold improvements are amortized over the lives of the respective
leases or the service lives of the improvements, whichever is shorter.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill represents the excess of cost over the fair market value of net
assets acquired. Goodwill recorded in connection with an acquisition had been
amortized using the straight-line method over the estimated useful life of 10
years through March 31, 2002. The Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets," at the beginning of 2002. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives not be amortized but instead be
tested for impairment annually.

Other identifiable intangible assets primarily include amounts paid to
acquire domain names, trademarks and customer lists. These costs are capitalized
and amortized on a straight-line basis over their estimated useful lives that
range from 3 to 15 years.

LONG-LIVED ASSETS

The Company continually reviews long-lived assets and certain identifiable
intangibles held and used for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In evaluating the fair value and future benefits of such assets,
the Company performs an analysis of the anticipated undiscounted future net cash
flows of the individual assets over the remaining amortization period and
recognizes an impairment loss if the carrying value exceeds the expected future
cash flows. The impairment loss is measured based upon the difference between
the fair value of the asset and its recorded carrying value.

DEBT ISSUE COSTS

Fees and warrants issued in connection with the issuance of notes payable
and preferred stock were capitalized and are being amortized using the
straight-line method over the term of the notes. As of March 31, 2004 and 2003,
the Company capitalized debt issue costs of approximately $0 and $101,000 net of
accumulated amortization of approximately $0 and $482,000, respectively. These
amounts are included in other assets on the balance sheet.

INCOME (LOSS) PER COMMON SHARE

Basic income (loss) per share is computed on the basis of the weighted
average number of common shares outstanding. Diluted income (loss) per share is
computed on the basis of the weighted

F-12

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

average number of common shares outstanding plus the potential dilutive effect
of outstanding warrants and stock options using the "treasury stock" method.

REVENUE RECOGNITION

The Pay TV Group's Cable/DBS revenues are recognized based on pay-per-view
buys and monthly subscriber counts reported each month by its cable and DBS
affiliates. The cable/DBS affiliates do not report actual monthly sales for each
of their systems to the Pay TV Group until approximately 60 - 90 days after the
month of service ends. This practice requires management to make monthly revenue
estimates based on the Pay TV Group's historical experience for each affiliated
system. Revenue is subsequently adjusted to reflect the actual amount earned
upon receipt by the Pay TV Group. Adjustments made to adjust revenue from
estimated to actual have historically been immaterial.

Revenue from sales of C-Band network subscriptions, ranging from one to
twelve months, is recognized monthly on a straight line basis over the term of
the subscription.

Revenue from hotel VOD is recognized on a monthly basis based on buy counts
reported each month by a third party provider. The third party provider does not
report actual monthly sales for its hotels until approximately 30 days after the
month of service. This practice requires management to make monthly revenue
estimates based on the third party provider's historical experience. Revenue is
subsequently adjusted to reflect the actual amount earned upon receipt.
Adjustments made to adjust revenue from estimated to actual have historically
been immaterial.

Revenue from internet membership fees is recognized over the life of the
membership, which is typically one month. The Company provides an allowance for
refunds based on expected membership cancellations, credits and chargebacks.
Revenue from processing fees is recorded in the period services are rendered.

Revenue from advertising of products on the Company's PPV networks is
recognized in the month the product is sold as reported by the Company's third
party partners. Revenue from spot advertising is recognized in the month the
spot is run on the Pay TV Group's networks.

ADVERTISING COSTS

The Company expenses advertising costs as incurred. Advertising costs for
the years ended March 31, 2004, 2003 and 2002 were approximately $875,000,
$1,573,000, and $2,529,000, respectively.

INSURANCE PROGRAMS

In general, the Company is fully insured for costs of casualty claims and
medical claims.

INCOME TAXES

The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between the
tax bases of assets and liabilities and their financial reporting amounts at
each period end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized. The provision for income taxes
represents the tax payable for the period and the change during the period in
deferred tax assets and liabilities.

F-13

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

STOCK-BASED COMPENSATION

The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," ("APB Opinion No. 25") and related
interpretations in accounting for its plans and complies with the disclosure
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"). Under APB Opinion No. 25,
compensation expense is measured as the excess, if any, of the fair value of the
Company's common stock at the date of the grant over the amount a grantee must
pay to acquire the stock. The Company's stock option plans enable the Company to
grant options with an exercise price not less than the fair value of the
Company's common stock at the date of the grant. Accordingly, no compensation
expense has been recognized in the accompanying consolidated statements of
operations for its stock-based compensation plans.

Pro forma information regarding net income (loss) and income (loss) per
share is required by SFAS No. 123, "Accounting for Stock-Based Compensation" and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of SFAS No. 123. The fair value for these
options was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions for the years
ended March 31, 2004, 2003 and 2002, respectively: risk free interest rates of
2.78% - 4.62%, 4.62% - 5.93% and 4.75% - 5.25%, respectively; dividend yields
of 0%; expected lives of 2 to 5 years, 10 years and 3 years, respectively; and
expected volatility of 95%, 95% and 105%, respectively.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. Adjustments are
made for options forfeited prior to vesting. The effect on compensation expense,
net income (loss), and net income (loss) per common share had compensation costs
for the Company's stock option plans been determined based on a fair value at
the date of grant consistent with the provisions of SFAS No. 123 for the years
ended March 31, 2004, 2003 and 2002 is as follows (in thousands, except share
data):

F-14

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

COMPREHENSIVE INCOME

The Company utilizes SFAS No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting comprehensive income and its
components in the financial statements. Comprehensive income as defined includes
all changes in equity (net assets) during a period from non-owner sources.
Examples of items to be included in comprehensive income, which are excluded
from net income, include foreign currency translation adjustments and unrealized
gains and losses on available-for-sale securities.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS No. 150"). This statement establishes standards for how an issuer
classifies and measures in its statement of financial position certain financial
instruments with characteristics of both liabilities and equity. In accordance
with the standard, financial instruments that embody obligations for the issuer
are required to be classified as liabilities. The Company adopted this
pronouncement on April 1, 2003. Upon adoption of SFAS No. 150 the Company
reclassified its Redeemable Preferred Stock as a liability.

F-15

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2 -- INCOME (LOSS) PER SHARE

The components of basic and diluted income (loss) per share are as follows
(in thousands):

Options and warrants which were excluded from the calculation of diluted
earnings per share because the exercise prices of the options and warrants were
greater than the average market price of the common shares and/or because the
Company reported a net loss during the period were approximately 485,750,
7,054,000 and 7,489,000 for the years ended March 31, 2004, 2003 and 2002,
respectively. Inclusion of these options and warrants would be antidilutive.

NOTE 3 -- EQUIPMENT AND FURNITURE

Equipment and furniture at March 31, consisted of the following (in
thousands):

Depreciation expense was approximately $1,731,000, $2,706,000 and
$3,997,000 for the years ended March 31, 2004, 2003 and 2002, respectively.

NOTE 4 -- SEGMENT INFORMATION

The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which establishes reporting and disclosure standards for an enterprise's
operating segments. Operating segments are defined as components of an
enterprise for which separate financial information is available and regularly
reviewed by the Company's senior management.

The Company has the following two reportable segments:

O Pay TV Group -- distributes branded adult entertainment programming
networks and VOD content through electronic distribution platforms
including cable television, C-Band, and Direct Broadcast Satellite
("DBS")

F-16

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

O Internet Group -- aggregates and resells adult content via the Internet.
The Internet Group sells content to monthly subscribers through its
broadband site, www.TEN.com, partners with third-party gatekeepers for
the distribution of www.TEN.com and wholesales pre-packaged content to
various web masters.

The accounting policies of the reportable segments are the same as those
described in the summary of accounting policies. Segment profit (loss) is based
on income (loss) before minority interest and income taxes. The reportable
segments are distinct business units, separately managed with different
distribution channels.

The following tables represent financial information by reportable segment
(in thousands):

F-17

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A reconciliation of the expected income tax (benefit) computed using the
federal statutory income tax rate to the Company's effective income tax rate is
as follows for the years ended March 31:

F-18

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Significant components of the Company's deferred tax liabilities and assets
as of March 31 are as follows:

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 amount used for income tax purposes.

The Company has deferred tax assets that have arisen primarily as a result
of operating losses incurred and other temporary differences between book and
tax accounting. Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes," requires the establishment of a valuation allowance when,
based on an evaluation of objective evidence, there is a likelihood that some
portion or all of the deferred tax assets will not be realized. The Company
continually reviews the adequacy of the valuation allowance for deferred tax
assets. During the years ended March 31, 2004 and 2003, the Company determined
that it is more likely than not that its deferred tax assets will not be
realized and accordingly has recorded a valuation allowance against the net
deferred tax assets of $6.7 million and $7.2 million, respectively. If the
Company generates future taxable income against which these tax attributes may
be applied, some portion or all of the valuation allowance would be reversed and
a corresponding increase in net income would be reported in future periods
except as explained below.

The Company has net operating loss carryforwards of approximately
$17,200,000 for Federal Income Tax purposes, which expire through 2024. For tax
purposes there is an annual limitation of approximately $208,000 for the
remaining 15 years on $4,600,000 of the Company's net operating losses generated
prior to the year ended March 31, 1999 under Internal Revenue Code Section 382.
The remaining net operating loss carryforwards are not currently limited under
IRC 382.

F-19

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Internal Revenue Code Section 382 places a limitation on the utilization of
net operating losses carryforwards when an ownership change, as defined in the
tax law, occurs. Generally, an ownership change occurs when there is a greater
than 50 percent change in ownership. When a change occurs the actual utilization
of net operating loss carryforwards, for tax purposes, is limited annually to a
percentage of the fair market value of the Company at the time of such change.

During the year ended March 31, 2004, options and warrants were exercised
and certain disqualified dispositions occurred resulting in deductions for tax
purposes of approximately $10,500,000. The net operating losses reflected in the
table above include a benefit of $3,900,000 that will be credited to Additional
Paid in capital as the valuation allowance is reversed.

NOTE 6 -- STOCK OPTIONS AND WARRANTS

STOCK OPTION PLANS

The Company has adopted four stock option plans: the 1998 Incentive Stock
Option Plan, the 1999 Incentive Stock Option Plan, the Millennium Incentive
Stock Option Plan and the 2001 Incentive Stock Option Plan (collectively
referred to as the "ISO Plans").

Under the ISO Plans options may be granted by the Compensation Committee to
officers, employees, and directors. Options granted under the ISO Plans may
either be incentive stock options or non-qualified stock options. The maximum
number of shares of common stock subject to options of any combination that may
be granted during any 12-consecutive-month period to any one individual is
limited to 250,000 shares. Incentive stock options may only be issued to
employees of the Company or subsidiaries of the Company. The exercise price of
the options is determined by the Compensation Committee, but in the case of
incentive stock options, the exercise price may not be less than 100% of the
fair market value on the date of grant.

No incentive stock option may be granted to any person who owns more than
10% ("10% Shareholders") of the total combined voting power of all classes of
the Company's stock unless the exercise price is at least equal to 110% of the
fair market value on the date of grant. No incentive stock options may be
granted to an optionee if the aggregate fair market value of the stock with
respect to which incentive stock options are exercisable by the optionee in any
calendar year under all such plans of the Company and its affiliates exceeds
$100,000. Options may be granted under each ISO Plan for terms of up to 10
years, except for incentive stock options granted to 10% Shareholders, which are
limited to five-year terms.

The aggregate number of shares that may be issued under each plan is as
follows:

1998 Incentive Stock Plan............................. 750,000
1999 Incentive Stock Plan............................. 1,500,000
Millennium Incentive Stock Plan....................... 2,500,000
2001 Incentive Stock Plan............................. 500,000

The ISO Plans were adopted to provide the Company with a means to promote
the long-term growth and profitability of the Company by:

i) Providing key people with incentives to improve stockholder value and
to contribute to the growth and financial success of the Company.

ii) Enabling the Company to attract, retain, and reward the best available
people for positions of substantial responsibility.

F-20

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONSULTANT STOCK PLANS

The Company adopted two Consultant Stock Plans: the 1999 Consultant Stock
Plan and the Millennium Consultant Stock Plan (the "Consultant Stock Plans").

Under the Consultant Stock Plans awards may be granted by the Board of
Directors, who have sole discretion. The maximum number of shares of common
stock to which awards may be granted under each of the Consultant Stock Plans is
500,000 shares. The Consultant Plans are for a term of up to 10 years and the
Board of Directors may suspend or terminate it at any time or from time to time.
However, no such action shall adversely affect the rights of a person awarded a
grant under the Consultant Stock Plans prior to that date.

The Consultant Stock Plans were adopted to further the growth of the
Company and its subsidiaries by allowing the Company to compensate consultants
and certain other people providing bona fide services to the Company.

SUMMARY INFORMATION

The following table describes certain information related to the Company's
compensatory stock option and warrant activity for the years ending March 31,
2004, 2003, and 2002:

F-21

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes additional information regarding all stock
options and warrants outstanding.

NOTE 7 -- MAJOR CUSTOMER

The Company's major customers (revenues in excess of 10% of total sales)
are EchoStar Communications Corporation ("EchoStar") and Time Warner Cable
("Time Warner"). EchoStar and Time Warner are included in the Pay TV Segment.
Revenue from EchoStar's DISH Network and Time Warner as a percentage of total
revenue for each of the three years ended March 31 are as follows:

At March 31, 2004 and 2003, accounts receivable from EchoStar was
approximately $3,333,000 and $3,462,000, respectively. At March 31, 2004 and
2003, accounts receivable from Time Warner was approximately $880,000 and
$606,000, respectively.

The loss of its major customers could have a materially adverse effect on
the Company's business, operating results or financial condition.

NOTE 8 -- DEFERRED REVENUE

The Company recognizes deferred revenue from the Pay TV and Internet Group.
Revenue can be deferred up to six and twelve months for the years ended March
31, 2004 and 2003, respectively.

NOTE 9 -- COMMITMENTS & CONTINGENCIES

LEASES
The Company maintains non-cancelable leases for office space and equipment
under various operating and capital leases. Included in property and equipment
at March 31, 2004 and 2003 is approximately $1,567,000 and $2,077,000,
respectively, of equipment under capital leases. Accumulated depreciation
relating to these leases under property and equipment was approximately $534,000
and $790,000, respectively. Included in restructuring expenses at March 31, 2004
and 2003 is approximately $0 and $2,485,000, respectively, of equipment under
capital leases. Accumulated depreciation related

F-22

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to equipment under capital leases in restructuring expenses at March 31, 2004
and 2003 was approximately $0 and $1,516,000, respectively.

In addition, TEN has entered into direct lease agreements with an unrelated
party for the use of transponders to broadcast TEN's channels on satellites. The
leases expire through December 2005.

TEN, as lessee of transponders under the transponder agreements, is subject
to arbitrary refusal of service by the service provider if that service provider
determines that the content being transmitted by the Company is harmful to the
service provider's name or business. Any such service disruption would
substantially and adversely affect the financial condition of the Company.

In addition, the Company bears the risk that the access of their networks
to transponders may be restricted or denied if a governmental authority
commences an investigation concerning the content of the transmissions. Also,
certain cable operators may be reluctant to carry less edited or partially
edited adult programming on their systems. This could adversely affect the
Company's business if either of the above occurs.

Rent expense for the years ended March 31, 2004, 2003 and 2002 was
approximately $3,427,000, $6,232,000, and $6,597,000 respectively, which
includes transponder payments. The Company is currently renegotiating its
uplinking contract, which expires in May 2004, with a third party provider. The
contract is expected to have a yearly cost of approximately $900,000 and a term
of three years.

Future minimum lease payments under these leases as of March 31, 2004 were
as follows (in thousands):

EMPLOYMENT CONTRACTS

The Company employs certain key executives under non-cancelable employment
contracts in Colorado. These employment contracts expire through March 31, 2006.

Commitments under these obligations at March 31, 2004 were as follows (in
thousands):

F-23

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10 -- NOTES PAYABLE

Notes payable at March 31 consisted of the following (in thousands):

During the quarter ended December 31, 2003, the Company converted $500,000
of its Class B Redeemable Preferred Stock into a note payable with an unrelated
third party. The loan matures in October 2004 and bears interest at 5% per annum
payable on a quarterly basis. This loan was paid in full during the quarter
ended March 31, 2004.

NOTE 11 -- LICENSE AGREEMENTS

In July 1999 New Frontier Media executed a definitive license agreement to
acquire exclusive rights to Metro Global Media, Inc's ("Metro") 3,000 title
adult film and video library and multi-million still image archive for a period
of seven years with renewal provisions. In addition, the Company entered into a
multi-year production agreement with Metro which calls for the delivery of at
least three new adult feature titles per month over the next five years.

In June 2003, the Company entered into a licensing agreement with Pleasure
Productions. Pursuant to the agreement, the Company secured the exclusive
broadcast rights for 5.5 years to 2,000 titles from the Pleasure Productions'
catalog and up to 83 new titles. See the Litigation Note for further discussion.

NOTE 12 -- DEFERRED COMPENSATION PLAN

The Company sponsors a 401(k) retirement plan. The plan covers
substantially all eligible employees of the Company. Employee contributions to
the plan are elective, and the Company has discretion to match employee
contributions. All contributions by the Company are vested over a three-year
period. Contributions by the Company for the years ended March 31, 2004, 2003,
and 2002 were approximately $138,000, $101,000 and $208,000, respectively.

NOTE 13 -- RESTRUCTURING EXPENSES

INTERNET RESTRUCTURING 2002

During the fiscal year ended March 31, 2002, the Company implemented a
restructuring plan with respect to its Internet Group's operations. The plan
included a consolidation of the Internet Group's engineering, web production,
sales and marketing departments to the Company's Boulder, Colorado location and
the elimination of its customer service department due to the outsourcing of its
credit card processing functions. In addition, the Internet Group vacated its
office facilities in Sherman Oaks, California that were being utilized by these
functions.

F-24

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Total restructuring charges of $3.2 million related to this plan were
recorded in 2002, of which $0.8 million related to the termination of 31
employees. In addition, 10 other positions were eliminated through attrition.
Also included in the restructuring charge were $1.2 million of expenses related
to the excess office space in Sherman Oaks, California and $1.0 million of
expenses related to excess furniture and equipment.

During the year ended March 31, 2003 the Company lowered the accrued
restructuring charges related to this restructuring approximately $256,000 due
to a change in estimate with respect to several employment contracts.

SELECTED INTERNET RESTRUCTURING 2002 DATA:
(In 000s)

DATA CENTER RESTRUCTURING 2003

During the fiscal year ended March 31, 2003 the Company adopted a
restructuring plan to close the Internet Group's in-house data center in Sherman
Oaks, California and move its servers, bandwidth and content delivery functions
to the same location as the Pay TV Group's digital broadcast facility in
Boulder, Colorado. Total restructuring charges of $3.1 million related to this
plan were recorded during the year, of which $28,000 related to the termination
of 10 employees. Also included in this charge was $0.4 million of rent expense
related to the data center space in Sherman Oaks and $2.6 million for excess
equipment written off as a result of this restructuring.

INTERNET RESTRUCTURING 2003

During the fourth quarter of the fiscal year ended March 31, 2003, the
Internet Group adopted a final restructuring plan to eliminate 13 positions.
Total restructuring charges of $0.3 million were recorded, of which $10,000
related to the termination of the thirteen positions and $0.2 million related to
the write off of excess equipment and operating leases.

F-25

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SELECTED DATA CENTER RESTRUCTURING 2003 AND INTERNET RESTRUCTURING 2003 DATA:
(In 000s)

NOTE 14 -- REDEEMABLE PREFERRED STOCK

During the year ending March 31, 2003, the Company authorized a series of
shares of 2 million Class A Redeemable Preferred Stock, par value $2 per share,
of which 1.875 million shares were issued. The Company recorded the Class A
Redeemable Preferred Stock at its redemption value of $3.75 million. The
proceeds of the Class A Redeemable Preferred Stock were used to satisfy
outstanding notes payable of approximately $3,000,000 and for working capital
purposes. Holders of the Class A Redeemable Preferred Stock were entitled to
receive cumulative cash dividends at a rate of 15.5% per annum per share payable
in quarterly or monthly installments. Such dividends had preference over all
other dividends of stock issued by the Company. The dividends were reported as
interest expense. Shares were subject to mandatory redemption on or before
January 2, 2004 at a redemption price of face value plus accrued dividends.

During the quarter ended June 30, 2003, the Company issued 2.5 million
shares of Class B Redeemable Preferred Stock ("Class B") at $0.81 per share. The
proceeds from this offering of $2,000,000 were used to redeem $1.0 million of
the Company's Class A Redeemable Preferred Stock and to fund the purchase and
subsequent retirement of 2,520,750 shares of New Frontier Media, Inc. common
stock as part of a legal settlement (see Note 18). The Class B paid dividends at
10% per year on a quarterly basis.

As of March 31, 2004, all Class A Redeemable Preferred Stock and all Class
B Redeemable Preferred Stock were fully redeemed.

NOTE 15 -- GOODWILL AND INTANGIBLE ASSETS

On April 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." Under the new rules, goodwill and intangible assets with
indefinite lives are no longer being amortized, but are tested for impairment
using the guidance for measuring impairment set forth in this statement.

Through the end of fiscal year 2002, the Company amortized its goodwill
over 10 years using the straight-line method. As a result of the adoption of
SFAS No. 142, that was effective for the Company as of the beginning of fiscal
year 2003, goodwill and intangible assets with an indefinite useful life are no
longer amortized, but are tested for impairment at least annually. The Company
completed the initial impairment test during the first quarter of fiscal year
2003 and concluded that the fair value of

F-26

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company's reporting unit (Pay TV Group) exceeded its respective carrying
value as of June 30, 2002 and, therefore, no impairment existed at that date.

In addition to the initial impairment test completed during the first
quarter of fiscal year 2003, the Company performed annual impairment tests
during the fourth quarter of fiscal year 2004 and 2003, and concluded for both
fiscal years that the fair value of the Company's reporting unit exceeded its
carrying value and no impairment charge was required.

The following presents a comparison of net (loss) income and (loss) income
per share for the year ended March 31, 2004 to the respective adjusted amounts
for the years ended March 31, 2003 and 2002, respectively, that would have been
reported had SFAS No. 142 been in effect during the prior years (in 000s).

OTHER INTANGIBLE ASSETS

The components of prepaid distribution rights are as follows (in 000s):

Amortization expense for prepaid distribution rights in each of the next
five years is estimated to be approximately $3,679,000, $2,942,000, $1,867,000,
$1,014,000 and $419,000, based on balances as of March 31, 2004.

F-27

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The components of other identifiable intangible assets are as follows (in 000s):

Amortization expense for intangible assets subject to amortization in each
of the next five fiscal years is estimated to be approximately $255,000,
$85,000, $2,000, $2,000 and $2,000, respectively. The average weighted life of
domain names and other intangible assets is approximately 4 years at inception.

See Note 18 for explanation regarding decline of carrying amount of Domain
Names.

ASSET IMPAIRMENT CHARGES

During the year ended March 31, 2003, the Company recognized impairment
losses on certain domain names of approximately $1,341,000 in connection with
the Internet Group. Management identified certain conditions including a
declining gross margin due to the availability of free adult content on the
Internet and decreased traffic to certain of the Company's domain names as
indicators of asset impairment. These conditions led to operating results and
forecasted future results that were substantially less than had been anticipated
at the time of the Company's acquisition of IGI, ITN, and CTI. The Company
revised its projections and determined that the projected results would not
fully support the future amortization of the domain names associated with IGI,
ITN, and CTI. In accordance with the Company's policy, management assessed the
recoverability of the domain names using a cash flow projection based on the
remaining amortization period of two to four years. Based on this projection,
the undiscounted sum of the estimated cash flow over the remaining amortization
periods was insufficient to fully recover the intangible asset balance.

NOTE 16 -- STOCKHOLDER RIGHTS PLAN

On December 4, 2001, the Company's Board of Directors adopted a Stockholder
Rights Plan in which Rights will be distributed at the rate of one Right for
each share of the Company's common stock held by stockholders of record as of
the close of business on December 21, 2001. The Rights generally will be
exercisable only if a person or group acquires beneficial ownership of 15% or
more of the Company's outstanding common stock after November 29, 2001, or
commences a tender offer upon consummation of which the person or group would
beneficially own 15% or more of the Company's outstanding common stock. Each
Right will initially be exercisable at $10.00 and will expire on December 21,
2011.

F-28

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 17 -- QUARTERLY INFORMATION (UNAUDITED)

The consolidated results of operations on a quarterly basis were as follows
(in thousands of dollars, except per share amounts).

NOTE 18 -- LITIGATION

In the normal course of business, the Company is subject to various other
lawsuits and claims. Management of the Company believes that the final outcome
of these matters, either individually or in the aggregate, will not have a
material effect on its financial statements.

During the fiscal quarter ended March 31, 2003, the Company settled its
litigation with Edward J. Bonn, a former director of the Company, and Jerry
Howard. In connection therewith, Mr. Bonn returned 2.5 million shares of the
Company's common stock and received $1.5 million, 150 internet domain names and
warrants to purchase 350,000 shares at $1.00 a share. The effect of this
transaction was recorded during the quarter ended June 30, 2003, and reduced
equity by approximately $2,100,000.

On June 12, 2003, the Company settled its litigation with Pleasure
Productions. This litigation related to a complaint filed by the Company on
August 3, 1999 in District Court for the city and county of Denver (Colorado
Satellite Broadcasting, Inc. et al. vs. Pleasure Licensing LLC, et al., case no
99CV4652) against Pleasure Licensing LLC and Pleasure Productions, Inc.
(collectively, "Pleasure"), alleging breach of contract, breach of express
warranties, breach of implied warranty of fitness for a particular purposes, and
rescission, seeking the return of 700,000 shares of New Frontier Media stock and
warrants for an additional 700,000 New Frontier Media shares which were issued
to Pleasure in connection with a motion picture licensing agreement. In the
settlement, the Company secured the exclusive broadcast rights to 2,000 titles
from Pleasure Productions' catalog and up to 83 new releases. In addition,
Pleasure Productions agreed to the cancellation of 700,000 warrants issued

F-29

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to it in 1999 to purchase New Frontier common stock at $1.12 a share. As a
result of the transaction, the Company reduced the carrying value of the
underlying assets and equity for an amount that approximates the value of the
warrants.

NOTE 19 -- SUBSEQUENT EVENTS

In June 2004, the Company secured a $3 million Line of Credit with a bank.

In June 2004, the company paid in full the $400,000 note payable. In
connection with this transaction, the Company received the return of the
collateral of 929,250 shares of New Frontier Media stock. The Company has
retired these shares.

F-30

SUPPLEMENTAL INFORMATION

F-31

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS -- SCHEDULE II
(in 000s)

F-32