NEW FRONTIER MEDIA INC /CO/ - 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, 2002

Commission File Number: 33-27494-FW

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: / /

Aggregate market value of voting stock held by non-affiliates: $28,488,796 based
on 12,386,433 shares at June 7, 2002 held by non-affiliates and the closing
price on the Nasdaq SmallCap Market on that date which was $2.30.

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

21,246,916 common shares were outstanding as of June 7, 2002

DOCUMENTS INCORPORATED BY REFERENCE

The information required in response to Part III of Form 10-K is hereby
incorporated by reference to the specified portions of the registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on August 20, 2002.

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FORM 10-K
FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 2002
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 MAY INCLUDE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. THE COMPANY
INTENDS 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 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. THE
COMPANY DISCLAIMS ANY OBLIGATION TO UPDATE THE FORWARD-LOOKING STATEMENTS
CONTAINED HEREIN, EXCEPT AS MAY BE OTHERWISE REQUIRED BY LAW.

GENERAL

New Frontier Media, Inc. ("New Frontier Media" or "the Company") was
originally incorporated in the State of Colorado on February 23, 1988. On
September 15, 1995, the Company, then known as Old Frontier Media, Inc.,
consummated the acquisition of New Frontier Media, Inc. in a stock-for-stock
exchange. The Company first effected a 2,034.66:1 reverse split of all
569,706,000 shares of its common stock then issued and outstanding, resulting in
280,000 shares of Common Stock being issued and outstanding prior to the New
Frontier Media, Inc. acquisition. The Company also approved a change of the
Company's name to New Frontier Media, Inc.

On February 18, 1998, the Company consummated an underwritten public
offering of 1,500,000 units, each consisting of one share of common stock and
one redeemable common stock purchase warrant, raising $7,087,000 in net proceeds
after underwriting fees (excluding related offering expenses). Simultaneous with
the public offering, New Frontier Media 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
Extasy, True Blue and X-Cubed (formerly GonzoX). Subsequent to this purchase,
the Company launched three networks targeted specifically to cable television
system operators and high-powered DTH satellite service providers (Direct
Broadcast Satellite or "DBS"): The Erotic Network ("TeN"), Pleasure, and Erotic
Television Clips ("ETC").

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"). 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 IGallery and ITN and 90% of CTI.

New Frontier Media is organized into two reportable segments:

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

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O Internet Group -- aggregates and resells adult content via the Internet.
The Internet Group sells content to monthly subscribers as well as 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 14 of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS," of this
Form 10-K, which information is incorporated by reference into this Part I, Item
1.

SUBSCRIPTION/PPV TV GROUP
INDUSTRY OVERVIEW

New Frontier Media, through its wholly owned subsidiary TEN ("PPV Group"),
is focused on the distribution of adult entertainment programming through
electronic distribution platforms including cable television, C-band, DBS and
VOD. 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. In the early
1980's, cable television operators began offering subscription and PPV adult
programming from network providers such as Playboy.

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 PPV Group's programming on a monthly, quarterly, semiannual and annual
basis. PPV programming competes well with other forms of entertainment because
of its relatively low price point.

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); (c) wireless cable systems; and (d) low speed (dial-up) or broadband
Internet connections (i.e., streaming video).

The PPV Group provides its programming on both a PPV and subscription basis
to home satellite dish viewers through either large satellite dishes receiving a
low-power analog or digital signal (C-Band) or small dishes receiving a
high-power digital signal (DBS providers). According to General Instrument
Corporation's Access Control Center reports, the U.S. C-band market has declined
from approximately 1.1 million households as of April 2001 to 0.8 million as of
April 2002. The Satellite Broadcasting & Communications Association (SBCA)
reported that there were a total of 17.53 million DBS households as of December
31, 2001 (DirecTV provides service to 10.7 million households and EchoStar
Communications Corporation's DISH Network ("DISH") provides service to 6.83
million households). During 2001, DirecTV and DISH combined to gain 2.91 million
net new subscribers.

The PPV Group also provides its programming on both a PPV and subscription
basis through large multiple system operators ("MSOs") and their affiliated
cable systems, as well as independent, privately-held cable systems. As of April
2002, the PPV Group maintained distribution arrangements with five of the ten
largest domestic cable MSOs which control access to 30.4 million, or 42%, of the
total basic cable household market. According to the National Cable and
Telecommunications Association ("NCTA"), Cable MSOs delivered service to 73.1
million basic households in the United States as of February 2002, up from 69.4
million households a year ago. In addition, Paul Kagan Associates ("Kagan")
indicates that total analog addressable cable service (i.e., basic cable
households that have the capability of receiving PPV or subscription services)
was provided to 51.6 million households as of December 2001.

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 begun the shift 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

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

According to Spring/Summer 2002 Kagan Cable World "K" Book, the top 25
MSO's had 15.6 million digital subscribers as of December 31, 2001 and 9.0
million digital subscribers as of December 31, 2000, representing an increase of
73%. With the number of basic cable households just above 73 million,
industry-wide digital penetration is currently around 21%. The NCTA estimates
that by 2006 there will be 48.6 million cable digital subscribers.

Cable operators are also using their upgraded plants to provide their
digital customers with VOD services. VOD provides the opportunity for a consumer
to view a movie at any time, rather than only during the purchase window
provided by the cable operator. According to SMART MONEY (May 2002 issue), there
were 2.4 million VOD-enabled subscribers in North America as of December 2001.
SMART MONEY estimates that this number will increase to 6.0 million by the end
of 2002, and to 23.0 million by 2005. The Subscription/PPV TV Group currently
provides programming to over 1.2 million VOD enabled households, representing
50% penetration.

DESCRIPTION OF NETWORKS

The PPV Group provides six, 24-hour per day adult programming networks:
TeN: the erotic network, Pleasure, ETC, Extasy, True Blue and X-Cubed. 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) This network was GonzoX. The network was renamed X-Cubed in May 2001

(2) Extasy, True Blue and X-Cubed addressable household numbers include 1.5
million, 1.1 million, and 0.8 million C-Band addressable households for the
years ended March 31, 2000, 2001 and 2002, respectively.

PLEASURE

On June 1, 1999, the PPV 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 and DBS providers.
Pleasure's programming consists of adult feature-length film and video
productions and is programmed to deliver subscription and PPV households 20
premiere adult movies per month with a total of 110 adult movies per month. As
of March 31, 2002, Pleasure was available to an estimated 8.6 million
addressable multi-channel households. 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

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"upsell" subscription or PPV households to a less edited network such as TeN.
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: THE EROTIC NETWORK (TEN)

On August 15, 1998, the PPV 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 PPV Group has programmed TeN
with feature-length film and video productions that incorporate less editing
than traditional cable adult premium networks. As of March 31, 2002, TeN was
available to an estimated 8.1 million addressable multi-channel households. TeN
is offered on a monthly subscription basis by DISH for a retail price of $22.99.
As of March 31, 2002, TeN had approximately 37,000 monthly DISH subscribers. In
addition, 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 $5.95
to $11.95.

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 20 premiere adult movies and a minimum of 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 subscriber
buy rates (the theoretical percentage of addressable 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.

EROTIC TELEVISION CLIPS (ETC)

The PPV Group launched ETC on May 17, 2000, as its newest, partially edited
24-hour per day adult network. ETC's unique formatting provides for thematically
organized 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. The PPV Group has organized its partially edited content library into
60 thematic categories. Through the PPV Group's proprietary database technology,
approximately eight scenes are organized thematically and programmed into one
90-minute block. ETC delivers 240 unique thematic blocks with over 500 different
adult film scenes during a typical month. As of March 31, 2002, ETC was
available to 3.6 million addressable multi-channel households. ETC 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. In addition,
DISH distributes ETC on a monthly subscription basis for $22.99. As of March 31,
2002, ETC had approximately 7,000 monthly DISH subscribers.

EXTASY

Extasy was acquired from Fifth Dimension on February 18, 1998. Extasy's
programming consists of feature-length adult film and video productions and is
programmed with 20 premieres and a total of 110 adult movies per month. Extasy'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.
Extasy is the Company's least edited programming service available to
multi-channel households and is distributed via C-band DTH, Cable system
operators and DBS providers. Extasy is available on a pay-per-view and
pay-per-block basis as well as on a monthly, quarterly, semiannual and annual
subscription basis.

Extasy had 59,910, 48,099, and 43,360 active C-Band subscriptions as of
March 31, 2000, 2001 and 2002, respectively. In addition, Extasy was available
to 7.0 million Cable/DBS addressable households as of March 31, 2002, and 41,000
monthly DISH subscribers. C-band retail prices range from $19.99 to $110.99 for
monthly, quarterly, semi-annual and annual subscriptions. Cable operators and
DBS

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providers distribute Extasy on a pay-per-view or pay-per-block basis at retail
prices ranging from $8.95 to $10.95.

TRUE BLUE

True Blue was acquired from Fifth Dimension on February 18, 1998. True Blue
incorporates the same editing standard as Extasy and is programmed with adult
movies that feature amateur talent, compilations, and other adult programming
genres. True Blue is programmed to deliver 77 adult movies per month. True Blue
is distributed via C-band DTH. C-band retail prices range from $19.99 to $110.99
for monthly, quarterly, semi-annual and annual subscriptions. True Blue had
56,210, 46,606 and 41,895 active subscriptions as of March 31, 2000, 2001, and
2002, respectively.

X-CUBED

X-Cubed (formerly GonzoX) was acquired from Fifth Dimension on February 18,
1998. X-Cubed incorporates the same editing standard as Extasy and is programmed
to deliver "first person" perspective, amateur and foreign adult feature films.
X-Cubed is programmed to deliver 77 adult features per month. X-Cubed is
distributed via C-band DTH. C-band retail prices range from $19.99 to $110.99
for monthly, quarterly, semiannual and annual subscriptions. X-Cubed had 50,426,
43,743, and 40,210 active C-Band subscriptions as of March 31, 2000, 2001, and
2002, respectively.

SATELLITE TRANSMISSION

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

Video programming is played directly from the Subscription/PPV TV Group's
Boulder, Colorado based digital broadcast center. The program signal is then
scrambled (encrypted) so that the signal is unintelligible unless it is passed
through the proper 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. Each analog
transponder can retransmit one complete analog color television video signal and
two digital television video signals, together with associated audio and data
edgebands.

The Subscription/PPV 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 Subscription/PPV
TV Group. The satellite receivers of C-Band subscribers contain unscrambling
equipment that may be authorized to unscramble the PPV 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 multichannel 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 specific 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
four full-time analog transponders with Loral Skynet on its Telstar 4 satellite
and 9.5 MHz of total bandwidth allocation on a digital transponder on its
Telstar 7 satellite. These transponders provide the satellite transmission
necessary to broadcast each of the Subscription/PPV TV Group's six adult
networks.

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Prior to January 2002, the PPV Group employed General Instrument
Corporation's ("GI") DigiCipher II Edgeband technology to transmit its Pleasure,
TeN and ETC networks over the same satellite transponders as were being used for
Extasy, X-Cubed, True Blue and its 24-hour promotional C-Band channel
("Barker"). GI's Edgeband System permits multiple services to be carried over an
existing satellite transponder by adding a multiplex of MPEG-2 compressed
programs at the band edge of the transponder. These services can be received and
decoded at the Cable system's or DBS provider's headend and carried as an analog
cable service or be re-multiplexed in digital form for carriage as part of a
digital multiplex. Through the use of Edgeband technology, the Company did not
incur any additional cash outlays for transponder space as it added Pleasure,
TeN and ETC to its family of networks. The Company was the first programmer to
utilize this Edgeband technology developed by GI.

In January 2002, the PPV Group renegotiated its transponder leases and
created a digital tier for its Pleasure, TeN, and ETC networks on Telstar 7.
This digital tier takes the place of the Edgeband technology previously used by
the PPV Group for its transponder configuration. This change to a digital tier
makes the PPV Group's services more bandwidth efficient for its Cable
affiliates, providing more opportunity for distribution of its networks.

In April 2000, the PPV 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 over 5.1 million
digital households across the country. IN-DEMAND carries Pleasure on Telstar 7,
transponder 4. iN DEMAND is the nation's leading pay-per-view network, offering
titles from all of the major Hollywood and independent studios, plus sports,
subscription sports packages and entertainment events through its 35-channel
digital Near Video on Demand (NVOD) service. IN-DEMAND serves over 1,900
affiliated systems in over 27 million addressable households nationwide.
IN-Demand's four shareholders include AT&T Broadband, Time Warner Entertainment
- -Advance/Newhouse Communications, Comcast Corporation, and Cox Communications,
Inc.

DIGITAL BROADCAST CENTER

New Frontier Media is the only adult entertainment company to internally
encode, playout, distribute and manage 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 Subscription/PPV TV Group acquired the necessary
broadcast technologies and support services from third party providers, as well
as internally developed its own media asset management systems, for the
distribution of video-based content to Cable and DBS providers.

In April 1999, the PPV Group completed Phase One of its Digital Broadcast
Center in Boulder, Colorado, which allowed for the direct-to-broadcast playout
of TeN, Pleasure and its C-Band Barker channel. Phase Two of this center was
completed in January 2000. The Phase Two additions allowed the PPV Group to
bring the playout of Extasy, True Blue and X-Cubed in-house to its Boulder
facility from Ottawa, Canada where it was being outsourced to Fifth Dimension.
Currently, the Boulder facility broadcasts 7 channels to Cable/DBS systems and
direct-to-home C-band subscribers.

Phase Two also added the capacity to broadcast a total of 12 channels,
allowing for 5 additional services. Broadcast of all media to air is
accomplished utilizing 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 Subscription/PPV TV Group has worked
with its uplinking vendor, Williams Communications VYVX Services ("Vyvx") 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.

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The Subscription/PPV 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, Vyvx.

The technology team that manages the broadcast center also oversees the
Subscription/PPV TV Group's media asset management needs. As a result of
developing its own technological backbone, the Subscription/ PPV TV Group also
developed its own core proprietary asset management systems. These systems are
supplemented with other third party software programs to catalog, monitor, and
exploit its content.

NETWORK PROGRAMMING

The Subscription/PPV TV Group contracts with Pegasus Programming
("Pegasus") in California to screen, edit, and program content for its networks.
The Subscription/PPV 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.
New Frontier Media does not produce any of its own adult feature content for its
networks. The Subscription/PPV Group licenses its content on both an exclusive
and non-exclusive basis from as many as forty independent companies.

The Subscription/PPV TV Group acquires approximately 15 new titles per
month. Once the PPV Group licenses a title, a rigorous quality control process
is completed prior to playing to air to ensure compliance with the strict
broadcasting standards the Group uses for its adult content.

In February 1999, New Frontier Media licensed all of the broadcast and
electronic distribution rights to approximately 4,000 adult films under a
Content License Agreement with Pleasure Productions (see "Legal Proceedings").
In July 1999, the Company licensed the rights 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. The Company
believes that as a result of these acquisitions it is one of the largest
aggregators of adult video content in the world.

CALL CENTER SERVICE

Following the Fifth Dimension acquisition, New Frontier Media contracted
with TurnerVision, Inc. to provide its call center services. In August 1999, the
Subscription/PPV TV Group moved its call center functions in-house to its
Boulder, Colorado facility. The PPV Group's 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 Subscription/PPV TV Group's call center is operational 24-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.

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MARKETING

The Subscription/PPV TV Group markets its C-band networks primarily through
an open-air, 24-hour Barker channel which promotes the programming featured on
the three C-Band networks. This channel uses edited movie clips, movie previews,
and other interstitial programming to entice viewers who are "channel surfing"
to subscribe to one of the PPV Group's C-Band channels (periodic subscription),
or to purchase the Group's programming on a PPV basis.

The Subscription/PPV TV Group's marketing department has developed numerous
programs and promotions to support its Cable/DBS networks. 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 Subscription/PPV 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 platform
systems.

The 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 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 its networks by
Cable/DBS consumers.

The Subscription/PPV TV Group's sales team attends at least five major
industry trade shows per year, including the National Cable Television
Association (NCTA) shows (Western and National) and the Cable Television
Advertising and Marketing (CTAM) Summit, PPV and Digital Television Summit, and
DBS Summit. The Group no longer exhibits at trade shows, preferring instead, to
focus its sales and marketing efforts on more targeted personal meetings with
Cable and DBS affiliates.

The Subscription/PPV TV Group engaged an outside advertising firm in March
2000 to assist it in branding its networks to the Cable/DBS markets as well as
to the consumer. This agency developed network identities, established branding
methods, positioned the networks in trade and consumer magazines, and increased
the overall consistency of presentation and visibility of the Subscription/PPV
TV Group's networks to the trades and the public. The Subscription/PPV TV Group
has rebranded its family of networks as The Erotic Networks through this effort.

COMPETITION

New Frontier Media principally competes with Playboy Enterprises, Inc.
("Playboy") in the subscription and PPV markets. 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 New Frontier Media.
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. New Frontier
Media competes directly with Playboy in editing standards of its programming,
network performance in terms of subscriber buy rates and the license fees that
New Frontier Media offers to Cable and DBS providers. However, New Frontier
Media cannot and does not compete with Playboy in the amount of money spent on
promoting its products. New Frontier Media believes that the quality and variety
of its programming, as well as the attractive revenue splits and subscriber buy
rates for the Company's programming, are the critical factors which have
influenced Cable operators and DBS providers to choose its programming over
Playboy's.

The Company 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 Company will
face competition in the adult entertainment arena from other providers of adult
programming, adult video rentals and sales, books and magazines aimed at adult
consumers, telephone adult chat lines, and adult-oriented Internet services.

CUSTOMER CONCENTRATION

New Frontier Media derived 27% of its total revenue for the year ended
March 31, 2002 from DISH for its TeN, Pleasure, ETC, and Extasy PPV and
subscription services. The loss of this customer

10

could have a material adverse effect on the Subscription/PPV TV segment and upon
the Company as a whole.

GOVERNMENT REGULATION

In 1996, the United States Congress passed the Telecommunications Act of
1996 ("the Act"), a comprehensive overhaul of the Federal Communication Act of
1934. Section 641 of the Act requires full audio and video scrambling of
channels that are primarily dedicated to "sexually explicit" programming. If a
multi-channel video programming distributor, including a cable television
operator, cannot comply with the full scrambling requirement, then the channel
must be blocked during the hours when children are likely to be watching
television, i.e., from 6:00 a.m. to 10:00 p.m. Programming providers offering
the most edited adult services (such as Pleasure) and programming providers
offering partially-edited adult services (such as TeN), feature "sexually
explicit" programming as contemplated by Section 641 of the Act. Although all
adult programming companies fully scramble their signals for security purposes,
several cable television MSOs lack the technical capability to fully scramble
the audio portion of the signal. These cable systems are required to block adult
broadcasts between 6:00 a.m. and 10:00 p.m. Section 641 of the Act affects New
Frontier Media to the extent its programming is offered by cable television MSOs
without such technical scrambling ability.

In February 1996, the leading adult network providers challenged Section
505 of the Act that, among other things, regulates the cable transmission of
adult programming such as New Frontier Media's domestic pay television networks.
Enforcement of Section 505 of the Act commenced May 18, 1997. The case was heard
by the United States District Court in Wilmington, Delaware (the "Delaware
District Court") in March 1998. In December 1998, the Delaware District Court
unanimously declared Section 505 of the Act unconstitutional. The defendants
appealed this judgement and the Supreme Court heard the appeal on November 30,
1999.

On May 23, 2000 the Supreme Court ruled that Section 505 of the Act was
unconstitutional. By a vote of 5-4 the Supreme Court ruled that the 1996 federal
law was too broad and violated constitutional First Amendment free speech
rights. The Court ruled that the federal government failed to prove the law was
the least restrictive means of addressing the problem. The Court referred to an
alternative in the law that requires cable operators to block any channel, free
of charge, only if a customer requests it.

New Frontier Media began offering adult programming to cable system
operators in February 1998, which is after the May 18, 1997 date that
enforcement of Section 505 of the Act commenced. Our business has not been
adversely affected by these regulations because we have never had the
opportunity, or prior history, of selling our programming under any other
regulatory structure.

INTERNET GROUP

INDUSTRY OVERVIEW

Ipsos-Reid, part of the Ipsos Group, which ranks among the top ten market
research companies in the world, estimates the global Internet population at
approximately 450 million adults, with the United States ranking number one at
110 million active Internet users. Ipsos-Reid indicates that the American online
population is still growing, albeit more slowly. As of February 2002, 69% of
adult Americans (age 18 and older) reported that they had access to the Internet
or the World Wide Web. This number is up from 67% in September 2001. According
to Ipsos-Reid, since middle aged and older adults made up the bulk of last
year's new Internet users, this explains why the prevalence of online gaming
(and one could argue as well, adult content) dropped among the online population
over the past year, while the prevalence of online banking almost doubled.

Jupiter Media Metrix ("JMM"), a global leader in Internet and new
technology analysis and measurement, estimates that the number of U.S. online
users will grow to 210.8 million by the year 2006. In a March 2002 press
release, JMM reported that revenues from paid online content are expected to
grow to $5.8 billion by 2006, up from $1.4 billion in 2002. JMM forecasts that
general

11

content revenue will reach $2.3 billion in 2006 and that of this amount $400
million will be for adult entertainment.

In the early stages of the Internet, it was clear there was a great deal of
unmet consumer demand for adult entertainment and it was relatively easy for
operators to open up an adult storefront. With few hurdles to overcome online,
including city licensing, leasing, taxes, and objecting neighbors, many new
independent adult web sites were born, creating a highly fragmented environment.
As more and more competition emerged, operators were determined to create ways
in which to distinguish themselves. They developed more distinctive products and
methods of organizing content, and they developed technologies to improve
ease-of-use and increased speeds of content delivery. With more independent
operators opening up shop, reselling content and providing outsourced services
became the means by which some of the more innovative and sophisticated
operators could grow their businesses. This allowed for the evolution of a
business-to-business market in addition to the large business-to-consumer
market.

The January 2002 issue of AVN Online states that the adult online industry
is beginning to show signs of economic stress. A featured article in the issue
says that due to low barriers of entry, the growth in the number of new adult
web sites has begun to outstrip the growth in the number of new adult Web
consumers. In addition, there is now so much high-quality free content available
on the Web that many consumers feel it is no longer necessary to pay for
content. Frederick Lane, author of Obscene Profits, states in this article that
"Just as the adult industry led the curve of the upside of the dot-com
revolution, it's now behind the curve on the downside". The article further
states that the adult Internet industry is undergoing a profound market
transformation from a "growth" phase to a "consolidation" phase, with more
emphasis on customer loyalty than customer acquisition.

The Company's Internet Group has responded to these changes in the industry
during the 2002 fiscal year by decreasing the amount of money spent on the
acquisition of traffic to its web sites (down from a high of $1 million per
month to $40,000 per month), increasing the focus on the depth, breadth, and
relevance of content included in each of its web sites, decreasing the amount of
web sites maintained to a more manageable number, ensuring continual updating of
its sites with new content on a daily/weekly basis, working with new pricing
strategies to increase membership retention, and focusing on new, more stable
revenue streams such as its pay-per-click search engine (www.sexfiles.com),
which allows it to monetize its exit traffic by auctioning off keywords to the
highest bidder, and its double opt-in marketing email program.

In addition, because the Internet Group has access to the large library of
high-quality video content licensed by the Subscription/PPV TV Group, it has
begun to increasingly focus its efforts on the broadband Internet user rather
than the dial-up user. JMM reports in an April 23, 2002 press release that,
"while only 16% of U.S. online households subscribe to broadband, more than 24%
of dial-up consumers are considering signing up for a broadband service within
the next 12 months". JMM reports that there were 10.0 million U.S. broadband
households in 2001, up from 5.2 million in 2000. JMM predicts that this number
will rise to 35.1 million households (or 41% of online households) by the year
2006.

BUSINESS TO CONSUMER: MEMBERSHIP SITES

The Internet Group designs, creates and implements membership-based web
sites for the adult Internet consumer market. The Internet Group currently owns
and operates more than 10 consumer web sites in addition to owning over 1,300
vanity adult domains. These web sites have been developed to convert web surfers
into subscribers through various subscription models. Recurring monthly
subscription rates range from $14.74 to $29.95. The Internet Group also offers
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.

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 1,300 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.

The second way in which traffic is generated is through the Internet
Group's 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 one of the Internet Group's web
sites. These referral payments currently range from $30 - $45 per active member
obtained.

The third, 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 sites
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 PPV Groups have licensed thousands of
hours of adult 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. In addition, the Internet Group has exclusive rights to
four live streaming video feeds and produces several monthly online adult
publications. The Internet Group, in addition to using this content within its
own web sites, sublicenses this content to webmasters through its
business-to-business programs on a flat-rate monthly basis.

Traffic Sales: The Internet Group has developed a significant source of
revenue by selling traffic from its own web sites to other adult web sites.
Since every visitor to the Internet Group's web sites does not necessarily
purchase a membership, the Internet Group maximizes its return on traffic by
"pushing" these exiting non-member visitors to other adult web sites. In doing
so, it is able to generate revenue from affiliate webmaster programs on a
pay-per-member basis. While the revenue from the sale of traffic does not have
the potential to generate long-term recurring revenue like the Group's
membership revenue, it also does not have the credit and working capital issues
associated with membership revenue.

Pay-Per-Click: The Internet Group has recently developed its own
pay-per-click ("PPC") search engine whereby advertisers register keywords or
keyword combinations, along with a title and description. Placement in the
search results is purchased by the advertiser rather than determined by a
complex formula relating to relevance or popularity. This results in a pure
market model for the advertiser. The more they bid for a keyword, the higher
their site is shown in the list of search results returned to the consumer on
that keyword search. The result for the advertiser is qualified traffic that is
more likely to convert into a paying member of its site, while the consumer gets
immediate access to relevant results. In addition, the Internet Group sells
prepaid banner advertising on the search engine results page.

PPC advertisers pre-pay for their search terms within the search engine
resulting in no capital risk for the Internet Group. The Internet Group began to
beta test its PPC search engine, www.sexfiles.com, in April 2002.

MARKETING

The Internet Group's affiliate marketing programs are incentive-based
traffic generation programs that compensate affiliated webmasters for traffic
referrals. A webmaster is compensated when a referred visitor becomes a member
to one of the Internet Group's web sites, at an average payout of $30 - $45 per
active member. The Internet Group markets these programs to its database of over
20,000 webmasters using its own internal sales team.

The Internet Group provides incentives to webmasters to collect user's
e-mail addresses for a pay-per-address fee of up to 60 cents. The Internet Group
has amassed over 4.0 million opt-in email addresses to which the Group targets
daily newsletters promoting its web sites and/or web sites and products of its
webmaster affiliates.

13

The Internet Group markets to webmasters via advertisements in trade
magazines and on-line banner advertisements. In addition, representatives of the
Internet Group exhibit at industry trade shows specific to the Internet and the
adult industry.

INTERNET SERVICE PROVIDER FACILITY

The Internet Group has its own Internet service provider ("ISP") facility
in Sherman Oaks, California that provides for all of its data center, hosting
and co-location needs. The ISP occupies approximately 4,400 square feet.

The ISP has two OC3 and three DS3 connections to the Internet. Bandwidth
providers, allowing for full redundancy, include Worldcom, PacBell, and Global
Crossing. The ISP currently has capacity through-rate of 445 Megabits per
second.

The ISP utilizes its expertise across multiple platforms using leading
networking hardware, high-end web and database servers, and computer software to
more effectively address the Internet Group's diverse systems and network
integration needs. The ISP principally services the Internet Group, but also
provides some vendor services to a small group of third party companies.

Given the current excess capacity within third party co-location
facilities, the Internet Group believes it can service its data center needs
more efficiently and effectively by out-sourcing these functions. The Internet
Group is currently taking steps to relocate its network operations to an
outsource facility in Colorado and anticipates completing the transition of
these functions by the third quarter of its fiscal year ended March 31, 2003.

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 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.

COMPETITION

The adult Internet industry is highly competitive 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.

All of the major adult Internet competitors of the Company are privately
held, though many have created alliances with various publicly traded companies.
Companies such as Cyber Entertainment

14

Network and VS Media have joint-venture websites with Private Media Group
(NASDAQ: PRVT). Rick's Cabaret International (NASDAQ: RICK) acquired several
membership websites from Voice Media, a leading adult Internet company. In
addition, companies such as Python Communications, a privately-held adult
Internet content provider and membership website company, have acquired smaller
adult properties in their attempt to expand their base of business. Other larger
competitors of the Internet Group include RJB Telecom, Python Video, Web Power,
and Vivid Video.

OTHER INFORMATION

EMPLOYEES

As of the date of this report, New Frontier Media and its subsidiaries had
137 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 2 "Summary of Significant Accounting Policies" of the Notes to the
Consolidated Financial Statements that appears in Item 8 of this Form 10-K.

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of New Frontier Media are as follows:

MARK H. KRELOFF. Mr. Kreloff has held the title Chairman and Chief
Executive Officer of New Frontier Media, Inc. since the Company's inception in
September, 1995. Mr. Kreloff has been actively involved in the cable television
industry since 1977. Prior to founding the Company, Mr. Kreloff held the title
Vice President, Mergers and Acquisitions, with Kidder Peabody & Co. and Drexel
Burnham Lambert. From 1983 through 1986, Mr. Kreloff was employed by Butcher &
Singer, Inc., a Philadelphia-based investment bank, in a variety of departments,
including the Cable Television and Broadcast Media Group. From 1977 through
1983, Mr. Kreloff held a variety of positions, including Marketing Director, in
his family's cable television system based in New Jersey. Mr. Kreloff is an
honors graduate of Syracuse University and holds B.S. degrees in Finance and
Public Communications.

MICHAEL WEINER. Mr. Weiner has been Executive Vice President and a director
of New Frontier Media, Inc. since the Company's inception. His background
includes 20 years in real estate development and syndication. Prior to founding
the Company, Mr. Weiner was actively involved as a principal and director in a
variety of publishing businesses, including a fine art poster company.

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 thirteen 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

15

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 $1
billion NYSE company. 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 13-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 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.

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. 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, 2002, except that Edward J. Bonn was late in filing a Form 4 reporting
a disposition of shares by Response Telemedia, Inc. on January 1, 2002 pursuant
to the Response Telemedia, Inc. Phantom Stock Plan. Mr. Bonn is the President
and a principal stockholder of Response Telemedia, Inc.

RISK FACTORS

THIS REPORT AND THE DOCUMENTS INCORPORATED IN THIS REPORT BY REFERENCE MAY
CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. THESE FORWARD-LOOKING
STATEMENTS ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES AND PROJECTIONS ABOUT
OUR INDUSTRY, MANAGEMENT'S BELIEFS AND ASSUMPTIONS MADE BY MANAGEMENT. WORDS
SUCH AS "ANTICIPATES," "EXPECTS," "INTENDS," "PLANS," "BELIEVES," "SEEKS,"
"ESTIMATES," VARIATIONS OF SUCH WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF
FUTURE PERFORMANCE AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND
ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT.

ACCORDINGLY, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR
FORECASTED IN ANY SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES
INCLUDE THOSE RISK FACTORS AND SUCH OTHER UNCERTAINTIES NOTED IN THE PROSPECTUS
AND IN THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE. NEW FRONTIER MEDIA
ASSUMES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS, WHETHER
AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.

16

THE LOSS OF OUR MAJOR CUSTOMER, DISH NETWORK, 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, is a major customer of our Subcription/PPV TV
Group. The loss of DISH Network as a customer would have a material adverse
effect on our business operations and financial condition. For our fiscal year
ended March 31, 2002, our revenues from DISH Network equaled approximately 27%
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. A significant management change could
adversely affect the Company's relationship with DISH.

WE MAY HAVE TO RAISE APPROXIMATELY $4 MILLION IN NEW FUNDS TO PAY THE HOLDERS OF
OUR CLASS A PREFERRED STOCK IN THE EVENT OF A CHANGE OF CONTROL IN THE COMPANY.

In the event of a "change in control transaction" involving the
Company, the holders of our Class A Preferred Stock have the right to require
that their shares be redeemed for approximately $4 million in cash within 15
days of the change of control transaction. A change in control transaction for
this purpose would include the replacement of the Company's board of directors
in a proxy contest with Mr. Bonn. If a change of control occurs, and the Company
is required to redeem the Class A Preferred Stock, it may have to raise a
substantial portion of the necessary funds from external sources such as the
sale of stock or incurrence of debt. There can be no assurance given that
following any such change in control transaction $4 million in new funds would
be available to repay the Class A Preferred Stock holders on terms acceptable to
the Company, if at all. A failure to secure these funds in a timely manner or on
acceptable terms could have a material adverse effect on the Company, its
operations, financial condition and prospects.

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.

17

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 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 OUR PRIMARY INTERNET COMPETITORS,
SOME OF WHOM HAVE SIGNIFICANTLY GREATER RESOURCES THAN US, WE WILL NOT BE ABLE
TO INCREASE OUR WEB SITE MEMBERSHIP REVENUES.

Our ability to increase our Internet web site membership revenues is
directly related to our ability to compete effectively with our Internet
competitors. Some of these competitors have significantly greater financial,
sales, marketing and other resources to devote to the development, promotion and
sale of their web site subscriptions, as well as a longer operating history and
broader name recognition, than we do. We compete with other adult-content web
sites as to the editing standards of their programming and the subscription fees
that are offered to web site members.

To the extent that the availability of free adult content on the Internet
increases, it is likely to negatively impact our ability to attract fee-paying
members.

In addition, our Internet operations benefit from, and compete with our
competitors for, traffic arrangements with third party webmasters who direct
traffic to our Internet sites. These traffic arrangements are short-term in
nature and, as such, are subject to rapid change. No assurances can be given
that we will be able to continue our arrangements with our affiliated webmasters
or that these arrangements will continue to be profitable for us.

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

18

aggressive pricing policies for their subscription-based content. Additionally,
increased competition could result in price reductions, lower margins and
negatively impact our financial results.

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

Because of the adult-oriented content of our web sites, 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 sites 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 sites and/or their
availability in various geographic areas, which would negatively impact their
ability to generate revenue. Furthermore, our insurance may not adequately
protect us against all of these types of claims.

DISRUPTION OF OUR INTERNET SERVICES DUE TO SECURITY BREACHES OR OTHER SYSTEM
FAILURES COULD RESULT IN LESS TRAFFIC AT OUR WEB SITES AND SUBSCRIBER
CANCELLATIONS.

The uninterrupted performance of our computer systems is critical to the
operation of our web sites. Our computer systems for our Internet services are
located in Southern California and, as such, are vulnerable to earthquakes,
fire, floods, power loss, telecommunications failures and other similar
catastrophes. In addition, we may have to restrict access to our web sites to
solve problems caused by computer viruses, security breaches or other system
failures. Our customers may become dissatisfied by any systems disruption or
failure that interrupts our ability to provide our content. Repeated system
failures could substantially reduce the attractiveness of our web sites and/or
interfere with commercial transactions, negatively impacting their ability to
generate revenues.

Our web sites must accommodate a high volume of traffic and deliver
regularly updated content. Our sites have, on occasion, experienced slower
response times and network failures. These types of occurrences in the future
could cause users to perceive our web sites as not functioning properly and
therefore cause them to frequent other Internet web sites. In addition, our
customers depend on their own Internet service providers for access to our web
sites. To the extent that they experience outages or other difficulties
accessing our web sites due to system disruptions or failures unrelated to our
systems our revenues could be negatively impacted.

Our insurance policies may not adequately compensate us for any losses that
may occur due to any failures in our service providers' systems or interruptions
in our Internet services.

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 relating to the Internet, or the new application of
existing laws, could decrease the growth in the use of our web sites, 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 change to a 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.

19

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

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 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

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 137 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.

20

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.

FUTURE SALES OF COMMON STOCK MAY CAUSE THE MARKET PRICE OF THE COMMON STOCK TO
DROP.

Future sales of shares of common stock by New Frontier Media and/or its
stockholders could cause the market price of the common stock to drop. As of
June 15, 2002, there are 8,299,171 restricted shares that are currently eligible
for resale under Rule 144 of the Securities Act and 12,947,745 shares of common
stock that are freely tradable. Sales of substantial amounts of common stock in
the public market, or the perception that such sales may occur, could have a
significant adverse effect on the market price of the common stock.

ITEM 2. PROPERTIES.

COLORADO: New Frontier Media occupies two buildings in Boulder, Colorado.
The Airport Boulevard facility is 12,000 leased square feet and houses the
Subscription/PPV TV Group's digital broadcast facility, technical operations
group and call center. This facility is 75% 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 Subscription/PPV TV Group's marketing,
sales, and promotions departments. This facility is 100% utilized.

CALIFORNIA: New Frontier Media leases three suites in one building in
Sherman Oaks, California. Suite 675 is 4,400 square feet and is used by the
Internet Group for its data center operations. Suite 605 is 1,600 square feet
and is used by the Internet Group's marketing and payment processing
departments. Suite 675 is 60% utilized and Suite 605 is 100% utilized as of June
15, 2002.

Suite 800 in this same building is 18,000 square feet and is currently
unoccupied. The Company previously utilized this space in connection with its
Internet Group's operations. These operations have subsequently been relocated
to Boulder, Colorado as part of the Company's 2002 fourth quarter restructuring.
The Company is actively seeking to sublet this space. The Company recognized a
loss with respect to the leasehold improvements and furniture associated with
this Suite as part of its restructuring charge.

ITEM 3. LEGAL PROCEEDINGS.

The Company is involved in two material legal proceedings.

On August 3, 1999, the Company filed a lawsuit 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 purpose, and rescission, seeking the return of 700,000 shares
of New Frontier Media stock

21

and warrants for an additional 700,000 New Frontier Media shares which were
issued to Pleasure in connection with a motion picture licensing agreement.
Pleasure removed the District Court action to Federal District Court in Colorado
and filed counterclaims related to the Company's refusal to permit Pleasure to
sell the securities issued to Pleasure. Pleasure's counterclaims allege breach
of contract, copyright and trademark infringement, and fraud. The counterclaims
seek a declaratory judgment and monetary damages.

Although the ultimate outcome of Pleasure's counterclaims, and the
liability, if any, arising from such counterclaims cannot be determined,
management, after consultation and review with counsel, believes that the facts
do not support Pleasure's counterclaims and that the Company has meritorious
defenses. In the opinion of management, resolution of Pleasure's counterclaims
is not expected to have a material adverse effect on the financial position of
the Company. In the event of an unfavorable resolution of this matter, however,
the Company's earnings and financial condition in one or more periods could be
materially and adversely affected.

On May 28, 2002, the Company filed a lawsuit in the Superior Court of the
State of California for the County of Los Angeles (New Frontier Media, Inc., et
al. vs. Edward J. Bonn, et al., case no. BC274573) against: (i) directors and
former officers Edward J. Bonn and Bradley A. Weber; (ii) Jerry D. Howard, the
former Chief Financial Officer of its subsidiaries Interactive Gallery, Inc.
("IGI"), Interactive Telecom Network, Inc. ("ITN") and Card Transactions, Inc.
("CTI"); and (iii) Response Telemedia, Inc., a California corporation owned by
Mr. Bonn.

The Complaint's allegations arise, in part, out of the Company's purchase
of 100 percent of the issued and outstanding shares of IGI and ITN and 90
percent of the issued and outstanding shares of CTI from the individual
defendants on October 27, 1999. The Complaint alleges that, from early 1999 to
the date of the closing, defendants Bonn, Weber, and Howard knowingly made
material misrepresentations or omissions regarding IGI's business and financial
results and prospects for the purpose of inducing the Company to purchase the
defendants' stock holdings of IGI, ITN and CTI.

The Complaint further alleges that, subsequent to the Company's purchase of
IGI, ITN and CTI on October 27, 1999, Messrs. Bonn, Weber and Howard (as
directors and/or officers) each breached their fiduciary duties owed to the
Company, IGI, ITN and CTI. Specifically, the Complaint alleges that Messrs.
Bonn, Weber and Howard grossly mismanaged IGI, ITN and CTI and concealed
marketing, operational and financial information that would have allowed the
Company to detect such mismanagement. The Complaint also alleges that Messrs.
Bonn, Weber and Howard engaged in self-dealing transactions that benefited
themselves and Mr. Bonn's company, RTI, at the expense of the Company.

The Complaint seeks rescission of the purchase of IGI, ITN, and CTI, as
well as monetary damages in an amount to be proven at trial.

Mr. Bonn has filed an answer denying the allegations contained in the
Complaint and a cross-complaint against the Company seeking that the Company
indemnify him against the claims alleged in the Complaint. The cross-complaint
also seeks unspecified monetary damages from the Company alleging that the
Company breached Mr. Bonn's employment agreement with the Company by terminating
his employment on May 28, 2002.

Although the ultimate outcome of Mr. Bonn's cross-complaints, and the
liability, if any, arising from such cross-complaints cannot be determined,
management, after consultation and review with counsel, believes that the facts
do not support Mr. Bonn's cross-complaints and that the Company has meritorious
defenses. In the opinion of management, resolution of Mr. Bonn's
cross-complaints is not expected to have a material adverse effect on the
financial position of the Company.

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

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

22

PART II.

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

The Company's Common Stock is quoted on the Nasdaq Stock Market under the
symbol "NOOF".

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 15, 2002, there were approximately 150 holders of record 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.

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 1998-2000 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.

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 update or revise any forward-looking statements. Factors that
could cause actual results to differ materially from the forward-looking

23

statements include, but are not limited to: 1) our ability to compete
effectively for quality content with our Subscription/PPV TV Group's primary
competitor who has significantly greater resources than us; 2) our ability to
retain our major customer that accounts for 27% of our total revenue; 3) our
ability to compete effectively with our primary Internet competitors and to
increase our membership revenues; 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; 6) our ability to generate compelling
website content for resale; and 7) our ability to attract market support for our
stock.

The following table presents certain consolidated statement of operations
information.

RESULTS OF OPERATIONS

The above table for the year ended March 31, 2000 is based on the assumption
that the companies were combined for the full year (the acquisition of the
Internet Group occurred in October 1999 and was accounted for as a pooling of
interests).

OVERVIEW
NET REVENUE

Net revenue for the Company was $52.4 million, $58.6 million, and $45.3 for
the years ended March 31, 2002, 2001, and 2000, respectively, representing a
decrease of 11% from 2001 to 2002 and an increase of 29% from 2000 to 2001.

24

The decrease in revenue from 2001 to 2002 is entirely related to a decrease
in revenue for the Internet Group. Revenue for the Internet Group was $23.2
million and $34.0 million for the years ended March 31, 2002 and 2001,
respectively, representing a decrease of 32%. This decrease was offset by an
increase in Subscription/PPV TV Group revenue. Revenue for the Subscription/PPV
TV Group was $29.1 million and $24.5 million for the years ended March 31, 2002
and 2001, respectively, representing an increase of 19%.

The increase in net revenue from 2000 to 2001 is a result of increases in
net revenue for both the Subscription/PPV TV and Internet Groups. Revenue for
the Subscription/PPV TV Group was $24.5 million and $16.8 million for the years
ended March 31, 2001 and 2000, respectively, representing an increase of 46%.
Revenue for the Internet Group was $34.0 million and $28.4 million for the years
ended March 31, 2001 and 2000, respectively, representing an increase of 20%.

OPERATING INCOME (LOSS)

Operating income (loss) for the Company was an operating loss of $0.6
million for the year ended March 31, 2002, and operating income of $2.5 million
and $0.9 million for the years ended March 31, 2001 and 2000, respectively. The
decline in operating income from 2001 to 2002 is a result of a $3.2 million
restructuring charge taken during the fourth quarter of 2002 in connection with
the consolidation of the Internet Group's engineering, web production, sales and
marketing departments to the Company's 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 experienced a decline in its operating income from $4.5 million for the
year ended March 31, 2001 to $2.1 million for the year ended March 31, 2002,
representing a 53% decrease. This decline in operating income for the Internet
Group was offset by an increase in operating income for the Subscription/PPV TV
Group from $3.5 million for the year ended March 31, 2001 to $6.3 million for
the year ended March 31, 2002, representing an increase of 80%.

The improvement in operating income for the Company from 2000 to 2001 is
due to an increase in operating income for the Subscription/PPV TV Group.
Operating income for the Subscription/ PPV TV Group was $3.5 million for the
year ended March 31, 2001, representing a 369% increase from an operating loss
of $1.3 million for the year ended March 31, 2000. The Internet Group's
operating income declined 13% from $5.2 million as of the year ended March 31,
2000 to $4.5 million for the year ended March 31, 2001.

25

SUBSCRIPTION/PAY-PER-VIEW TV GROUP

The following table outlines the current distribution environment and
addressable households for each network:

Note: "n/a" indicates that network was not launched at that time

(1) This network was formerly known as GonzoX. The network was renamed X-Cubed
in May 2001

(2) Extasy, True Blue and X-Cubed addressable household numbers
include 1.5 million, 1.1 million and 0.8 million C-Band addressable households
for the years ended March 31, 2000, 2001 and 2002, respectively.

NET REVENUE

Total net revenue for the Subscription/PPV TV Group was $29.1 million,
$24.5 million, and $16.8 million, for the years ended March 31, 2002, 2001, and
2000, respectively, representing increases of 19% from 2001 to 2002 and 46% from
2000 to 2001. Of total net revenue, C-Band net revenue was $9.4 million, $10
million, and $10.5 million for the years ended March 31, 2002, 2001, and 2000,
respectively, representing a 6% decrease from 2001 to 2002 and a 5% decrease
from 2000 to 2001. Revenue from the Group's Cable/DBS services was $19.7
million, $14.5 million, and $6.3 million for the years ended March 31, 2002,
2001, and 2000, respectively, representing an increase of 36% from 2001 to 2002
and 130% from 2000 to 2001. Revenue from the Group's Cable/DBS services is
responsible for approximately 68%, 59%, and 38% of the Group's total net revenue
for the years ended March 31, 2002, 2001, and 2000, respectively.

The year over year decreases in C-Band revenue are due to the declining
C-Band market as consumers convert C-Band "big dish" analog satellite systems to
smaller, 18-inch digital DBS satellite systems. The total C-Band market declined
27% from 2001 to 2002 and 27% from 2000 to 2001.

Total C-Band subscriptions to the Group's networks (Extasy, True Blue and
X-Cubed) were 166,546, 138,448 and 125,465 as of March 31, 2000, 2001, and 2002,
respectively, representing a decrease of 9% from 2001 to 2002 and 17% from 2000
to 2001.

The Subscription/PPV TV Group acquired the C-Band subscriber base of
Emerald Media, Inc. ("EMI") in April 2001 for a total of $750,000 in stock and
cash. EMI was formerly the Group's largest competitor in the adult C-Band
market, operating two competing networks, which were discontinued after this
acquisition. The effect of this acquisition has been to support the Group's
C-Band revenue stream in a quickly eroding market place. Although the C-Band
market continues to decline, the number of subscribers to the Subscription/PPV
TV Group's networks remains relatively stable, as does its average revenue
earned per sale.

Increases in the Subscription/PPV TV Group's Cable/DBS revenues year to
year are a result of launching new services and the addition of addressable
subscribers to its networks through affiliations with new Cable/DBS providers
and the online growth of current affiliates.

26

During the fiscal year ended March 31, 2000, the Subscription/PPV TV Group
launched its Pleasure network, a 24-hour per day adult network that incorporates
the most edited standard available in the category. Pleasure's programming
consists of adult feature-length film and video productions and is programmed to
deliver subscription and PPV households 20 premiere adult movies per month with
a total of 110 adult movies per month. Pleasure obtained immediate distribution
with DISH network upon its launch.

In January 2000, the Subscription/PPV TV Group signed a corporate carriage
agreement with AOL Time Warner, Inc. ("Time Warner") for the distribution of
Pleasure on its digital systems. In addition, many of Time Warner's analog
systems have chosen to carry Pleasure. In fact, Time Warner replaced Playboy TV
with Pleasure on its largest analog system in New York City's borough of
Manhattan in September 2001. As of March 31, 2002, Pleasure is distributed on
nearly all of Time Warner's digital cable systems.

In August 2000, the Subscription/PPV TV Group signed a contract with Hughes
Electronic Corporation's DirecTV ("DirecTV") for carriage of a daily six-hour
feed of Pleasure branded as "Pleasure Island". Carriage of Pleasure Island was
terminated by DirecTV in January 2002. The Subscription/PPV TV Group has not
experienced a material change in its total net revenue as a result of this
disaffiliation.

In January 2001, the Subscription/PPV TV Group signed a corporate carriage
agreement with Comcast Corporation ("Comcast") for the distribution of Pleasure
on all of its digital systems. As of March 31, 2002, Pleasure was distributed on
all of Comcast's digital cable systems.

In September 2001, DISH terminated its distribution of Pleasure on its
platform. The Group has not experienced a material change in its total net
revenue due to this disaffiliation.

The Subscription/PPV TV Group launched TeN in August 1998. TeN is a 24-hour
per day adult network that incorporates a partial editing standard. TeN is
programmed with feature-length film and video productions that incorporate less
editing than traditional adult premium networks. TeN offers subscription and PPV
households 20 premieres and a total of 110 adult movies per month. TeN obtained
immediate distribution with DISH network upon its launch as a monthly and annual
subscription service.

In September 1999, TeN was made available to DISH households on a PPV
basis, which increased monthly revenues for TeN by 50% at that time. Adding TeN
as a PPV service on the DISH platform had the expected effect of decreasing the
number of monthly subscribers to the network. Monthly subscriptions have
declined 24% from 2000 to 2001 and 36% from 2001 to 2002. DISH increased its
retail prices for TeN in September 2001 to $9.99 for a PPV purchase and $22.99
for a monthly subscription from $8.99 and $19.99, respectively.

The Subscription/PPV TV Group acquired Extasy from Fifth Dimension in
February 1998. At that time, Extasy was distributed via C-Band only. Extasy's
programming consists of feature-length adult film and video productions and is
programmed with 20 premieres and a total of 110 adult movies per month. Extasy's
editing standard is least edited, which is similar to the editing standard
employed in the home video market.

In January 2000, DISH launched Extasy on its satellite at 110 degrees. In
August 2001, DISH moved Extasy to its satellite at 119 degrees. DISH's satellite
at 119 degrees is viewed by nearly double the number of addressable subscribers
than its satellite at 110 degrees. Extasy is available on DISH as both a
subscription and PPV service, as well as part of a monthly combination
subscription with TeN. In September 2001, DISH increased its retail price for
Extasy to $10.99 for a PPV purchase and $27.99 for a monthly subscription from
$9.99 and $24.99, respectively.

The Subscription/PPV TV Group launched ETC in May 2000. ETC is a partially
edited 24-hour per day adult network. ETC's unique formatting provides for
thematically organized 90-minute blocks of programming in order to encourage
appointment viewing by the adult PPV consumer. Through the Subscription/PPV TV
Group's proprietary database technology, approximately eight scenes are
organized thematically and programmed into one 90-minute block. ETC delivers 240
unique thematic blocks with over 500 different adult film scenes during a
typical month.

27

ETC obtained carriage with DISH network in July 2000 and is carried as both
a PPV and subscription service. DISH increased its retail prices for ETC in
September 2001 to $9.99 for a PPV purchase and $22.99 for a monthly subscription
from $8.99 and $19.99, respectively.

During the third quarter of its fiscal year ended March 31, 2002, the
Subscription/PPV TV Group began distribution of its Pleasure, TeN, and ETC
networks with Charter Communication, Inc.

The Subscription/PPV TV Group has seen modest revenue gains from its VOD
service on Time Warner's systems. Time Warner VOD addressable households totaled
1.1 million as of March 31, 2002.

In June 2002, the Subscription/PPV TV Group signed a distribution agreement
with TVN Entertainment ("TVN"). Under the terms of the agreement, the Group will
utilize TVN's delivery platform powered by the ADONISS asset management system
to distribute and manage VOD titles within the cable television universe. This
is expected to greatly expand the Subscription/PPV TV Group's current VOD
distribution base of 1.1 million U.S. households and significantly increase its
reach to new VOD households through the nation's top cable MSOs.

COST OF SALES

Cost of sales for the Subscription/PPV TV Group was $13.4 million, $11.4
million, and $10.9 million for the years ended March 31, 2002, 2001, and 2000,
respectively, representing increases of 18% from 2001 to 2002 and 5% from 2000
to 2001. Cost of sales as a percentage of revenue was 46%, 47%, and 65% for the
years ended March 31, 2002, 2001, and 2000, respectively. Cost of sales consists
of expenses associated with broadcast playout, satellite uplinking, satellite
transponder leases, programming acquisition costs, amortization of content
licenses, and call center operations.

The 18% increase in cost of sales from fiscal year 2001 to 2002 is a result
of increases in a) programming acquisition costs for screening, quality control,
and scheduling of the Subscription/PPV TV Group's networks; b) amortization
expense of the Group's content licenses; and c) costs associated with the
operation of the Group's digital broadcast center as the Group has added
additional functionalities.

During the fourth quarter of the year ended March 31, 2002, the
Subscription/PPV TV Group renegotiated its transponder leases with Loral for its
four analog transponders. This renegotiation resulted in a 30% decrease in its
monthly analog transponder lease payments.

In addition, the Subscription/PPV TV Group created a digital tier for its
Pleasure, TeN and ETC networks on Loral's satellite known as T-7. This digital
tier will take the place of the edgeband technology that the Group was currently
using. Edgeband technology permits multiple services to be carried over an
existing satellite transponder by adding a multiplex of MPEG-2 compressed
programs at the band edge of the transponder. This change to a digital tier
makes the distribution of the Group's services more bandwidth efficient for its
cable affiliates.

OPERATING INCOME (LOSS)

Operating income (loss) for the Subscription/PPV TV Group was operating
income of $6.3 million, $3.5 million, and an operating loss of $1.3 million for
the years ended March 31, 2002, 2001, and 2000, respectively, representing
increases of 80% from 2001 to 2002 and 369% from 2000 to 2001. The increase in
operating income is attributable to a 19% increase in revenue from 2001 to 2002
and a 46% increase in revenue from 2000 to 2001. In addition, the Group's gross
margin percentage increased from 35% for the year ended March 31, 2000 to 54%
for the year ended March 31, 2002.

Total operating expenses decreased 2% from 2001 to 2002 and increased 33%
from 2000 to 2001. Operating expenses as a percentage of revenue were 32%, 39%,
and 43% as of March 31, 2002, 2001, and 2000, respectively. The decrease in
operating expenses from 2001 to 2002 is a result of operating expenses such as
advertising, travel, entertainment, and trade show costs remaining flat
year-to-year.

28

INTERNET GROUP

NET REVENUE

Total net revenue for the Internet Group was $23.2 million, $34 million,
and $28.4 million for the years ended March 31, 2002, 2001 and 2000,
respectively, representing a decrease of 32% from 2001 to 2002 and an increase
of 20% from 2000 to 2001. The Internet Group's revenue is comprised of
membership revenue from its consumer-based web sites, revenue from the sale of
its content feeds to webmasters, revenue from the sale of exit traffic, and
revenue from its data center services ("ISP").

Gross membership revenue was $17.0 million, $22.6 million, and $23.0
million for the years ended March 31, 2002, 2001, and 2000, respectively,
representing decreases of 2% from 2000 to 2001 and 25% from 2001 to 2002.
Chargebacks and credits were $1.7 million or 10% of gross membership revenue for
the year ended March 31, 2002, $2.7 million or 12% of gross membership revenue
for the year ended March 31, 2001, and $3.6 million or 16% of gross membership
revenue for the year ended March 31, 2000. Net membership revenue was $15.3
million, $19.9 million, and $19.4 million for the years ended March 31, 2002,
2001, and 2000.

Growth in gross membership revenue for the year ended March 31, 2001 was
slowed due to the implementation of more stringent fraud controls, including the
reduction of sign-ups from international credit card users due to a lack of
effective verification procedures.

The 25% decline in gross membership revenue from 2001 to 2002 is a direct
result of a decrease in traffic to the Internet Group's web sites. The decrease
in traffic to the Internet Group's sites is primarily due to changes made to the
Group's traffic acquisition model. The Internet Group changed its traffic
acquisition model during fiscal 2002 to compensate an affiliated webmaster for
traffic directed to the Internet Group's web sites only upon the conversion of a
referral into a paying member. Prior to this change, the Group was paying for
traffic based upon the amount of traffic directed to the Group's web sites,
regardless of whether this traffic resulted in a paying member to one of the
Group's sites. This change has resulted in a 57% decline in webmaster payouts
from 2001 to 2002. The Group also believes that its membership revenue and
traffic volume have declined from 2001 due to the proliferation of free adult
content available on the Internet. In addition, portals such as Microsoft
Corporation's MSN ("MSN"), no longer default words typed into a browser dialogue
box to the "dot-com" web site associated with such word, and have begun to sell
off their adult word searches to outside companies, impacting the amount of
type-in traffic to the Internet Group's web sites.

The standard one-month membership prices to the Group's web sites ranged
from $20 to $30 for all three periods. Marketing programs offering three-day
trial memberships at prices varying from $2.00 to $3.00 were introduced during
the year ended March 31, 2000, which resulted in an average membership price of
$15.00 during the last two quarters of the year ended March 31, 2000. An
additional marketing program offering a free 5-day trial membership was
implemented during the fourth quarter of the year ended March 31, 2001, which
resulted in an average membership price of $10 to $12 during the last quarter of
the year ended March 31, 2001. Marketing programs offering free trial
memberships were discontinued during fiscal year 2002. The Internet Group
decreased the monthly membership fee to its flagship site from $29.95 to $14.74
during fiscal year 2002.

Revenue is earned from traffic sales by forwarding exit traffic and traffic
from selected vanity domains to other affiliated webmaster marketing programs
domestically, monetizing foreign traffic via international dialer companies, and
marketing affiliated webmaster sites through the Internet Group's double opt-in
email list. Revenue from the sale of traffic was $5.6 million, $9.4 million, and
$3.7 million for the years ended March 31, 2002, 2001, and 2000, respectively,
representing a decrease of 40% from 2001 to 2002 and an increase of 154% from
2000 to 2001. The increase in revenue from exit traffic from 2000 to 2001 was
due to the increase in traffic to the Internet Group's web sites which allowed
the Group to increase exit traffic sales to other affiliated marketing programs
at similar rates paid by the Internet Group for its purchased traffic (i.e., $30
- -$45 per active member). The Internet Group has seen a corresponding decrease in
revenue from the sale of traffic from 2001 to 2002 because of a decline in
overall traffic purchased by the Internet Group under its new traffic
acquisition

29

model discussed above. The decline in traffic to the Internet Group's web sites
results in less traffic available to sell both domestically and internationally.
Revenue from the international sale of traffic was 36%, 40% and 11% of total
sale of traffic revenue for the years ended March 31, 2002, 2001, and 2000,
respectively.

Revenue from the sale of content was $1.9 million, $3.8 million, and $3.3
million for the years ended March 31, 2002, 2001, and 2000, respectively,
representing a decrease of 50% from 2001 to 2002 and an increase of 15% from
2000 to 2001. The decrease in revenue from 2001 to 2002 is a result of a
softening in demand for content by third-party webmasters as well as a decrease
in emphasis on this revenue stream by the Internet Group. The Internet Group
will begin to focus more effort on this revenue stream during the next fiscal
year, as it believes it could be a viable source of stable, recurring revenue.

The Internet Group's other revenue was earned from the sale of services
such as hosting, co-location and bandwidth management ("ISP services") to
non-affiliated companies. The Group's other revenue was $0.4 million, $0.9
million and $2.0 million for the years ended March 31, 2002, 2001, and 2000,
representing decreases of 56% from 2001 to 2002 and 55% from 2000 to 2001. The
decrease in other revenue from 2000 to 2001 was due to the Internet Group's
major non-affiliated customer changing service providers during the year. The
decrease in revenue from 2001 to 2002 is a result of other non-affiliated
customers changing service providers. The Internet Group does not anticipate
revenue growth in this area as it continues to focus its data center operations
on its internal needs.

The Internet Group has experienced many changes in the adult Internet
industry to which it has responded during the current fiscal year. These changes
include the proliferation of free adult content available on the Internet, the
increase in traffic acquisition costs, the lack of barriers to entry to the
adult Internet marketplace, the fact that portals such as MSN no longer default
to the "dot-com" extension of a search word typed into the dialogue box and the
increase in more explicit content prior to a credit card transaction by many of
the Internet Group's larger, privately-held, competitors.

The Internet Group has responded to these changes in the industry during
the 2002 fiscal year by decreasing the amount of money spent on the acquisition
of traffic to its web sites (down from a high of $1 million per month to $40,000
per month), increasing the focus on the depth, breadth, and relevance of content
included in each of its web sites in an effort to increase member retention,
decreasing the amount of web sites maintained to a more manageable number,
ensuring continual updating of its sites with new content on a daily/weekly
basis, working with new pricing strategies to increase site retention, and
focusing on new, more stable revenue streams such as its pay-per-click search
engine (www.sexfiles.com), which allows it to monetize its exit traffic by
auctioning off keywords, and its double opt-in marketing email programs. In
addition, the Internet Group is focusing its efforts on the broadband Internet
user rather than the dial-up user. The Internet Group will continue to focus its
efforts in these areas during the next fiscal year.

COST OF SALES

Cost of sales for the Internet Group was $12.2 million, $18.2 million, and
$15.6 million for the years ended March 31, 2002, 2001, and 2000, respectively,
representing a decrease of 33% from 2001 to 2002 and an increase of 17% from
2000 to 2001. Cost of sales consists of variable expenses associated with credit
card fees, merchant banking fees, bandwidth, traffic acquisition costs (purchase
of traffic), web site content costs and depreciation of assets related to the
Internet Group's data center operations. Cost of sales as a percentage of
revenue was 53%, 54%, and 55%, for the years ended March 31, 2002, 2001, and
2000, respectively.

Approximately 70% of the traffic to the Internet Group's web sites is
acquired through affiliate programs that it markets to webmasters. These
programs compensate webmasters for traffic referrals to the Internet Group's web
sites. A webmaster is paid a fee of $30 - 45 per referral that results in a
paying membership to one of the Internet Group's web sites. Any traffic referred
that does not result in a paying membership to the Internet Group's web sites is
sold by the Internet Group to other webmasters via affiliate programs to which
it belongs, resulting in revenue from traffic sales. The Internet Group's
traffic acquisition costs also include payments made to affiliated webmasters
for the

30

acquisition of email addresses as part of its opt-in email program. This list is
then used to market the Internet Group's websites and products, as well as
affiliated webmasters' sites (for which it earns revenue from the sale of
traffic).

The Internet Group's traffic acquisition costs were $4.3 million, $10.1
million, and $7.4 million for the years ended March 31, 2002, 2001, and 2000,
respectively, representing a decrease of 57% from 2001 to 2002 and an increase
of 36% from 2000 to 2001. The Internet Group's traffic acquisition costs as a
percentage of net revenue were 19%, 30%, and 26% for the years ended March 31,
2002, 2001, and 2000, respectively. The decline in traffic acquisition costs
from 2001 to 2002 is primarily due to changes made to the Group's traffic
acquisition model. The Internet Group changed is traffic acquisition model
during fiscal 2002 to compensate an affiliated webmaster for traffic directed to
the Internet Group's web sites only upon the conversion of a referral into a
paying member. Prior to this change, the Group was paying for traffic based upon
the amount of traffic directed to the Group's web sites, regardless of whether
this traffic resulted in a paying member to one of the Group's sites.

Merchant banking fees, including fees for credits and chargebacks, were
$1.9 million, $2.2 million, and $3.5 million for the years ended March 31, 2002,
2001, and 2000, respectively, representing a decrease of 14% from 2001 to 2002
and 37% from 2000 to 2001. Merchant banking fees were 12%, 11%, and 18% of net
membership revenue for the years ended March 31, 2002, 2001, and 2000,
respectively. The decrease in merchant banking fees from 2000 to 2001 was due to
lower check debit fees and the transfer of the Internet Group's credit card
processing to companies with lower merchant fees. The increase in merchant
banking fees as a percentage of net membership revenue from 2001 to 2002 is due
to the Internet Group's decision to fully outsource its credit card processing
function, including customer service. This increase in merchant banking fees as
a percentage of net membership revenue is offset by the decrease in payroll
associated with the termination of its in-house customer service function.

Operational expenses, which include depreciation and amortization of
Internet equipment and domain names, were 16%, 9% and 7% of total net revenue
for the years ended March 31, 2002, 2001, and 2000, respectively. The increase
in operational expenses is primarily related to increases in operating lease
costs, maintenance costs, and depreciation expense related to data center
equipment purchases and the build out of the Internet Group's data center
facility.

OPERATING INCOME

Operating income for the Internet Group was $2.1 million, $4.5 million, and
$5.2 million for the years ended March 31, 2002, 2001 and 2000, respectively,
representing decreases of 53% from 2001 to 2002 and 13% from 2000 to 2001.

Operating expenses were $8.8 million, $11.3 million, and $7.7 million for
the years ended March 31, 2002, 2001, and 2000, respectively, representing a
decrease of 22% from 2001 to 2002 and an increase of 47% from 2000 to 2001.
Operating expenses were 38%, 33%, and 27% of net revenue for the fiscal years
ended March 31, 2002, 2001, and 2000, respectively.

The increase in operating expenses from 2000 to 2001 was attributable to
increases in personnel costs, advertising and promotion costs, and the
establishment of a reserve for bad debts. The increases in personnel costs were
the result of adding new positions to support the Internet Group's
infrastructure, as well as to the increase in wages of certain positions
necessary to remain competitive in the environment in which the Internet Group
was operating. The Internet Group reorganized its data center and billing
departments during the fiscal year ended March 31, 2001, refocusing these
departments on internal needs only, which resulted in the elimination of certain
positions supporting these functions. Advertising costs increased from 2000 to
2001 as a result of an increase in commission expense paid on sales of content
and traffic and an increase in trade show costs. A bad debt reserve of $1.0
million was established during the year ended March 31, 2001, related to an
uncollectible merchant processor receivable and content and traffic sales bad
debt.

The decrease in operating expenses from 2001 to 2002 was attributable a
decrease in bad debt expense from $1.0 million in 2001 to $0.1 million in 2002
and a decline in personnel costs during the

31

2002 fiscal year related to the elimination of certain positions and the
elimination of bonuses paid to employees.

RESTRUCTURING EXPENSES

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 that were being utilized by these functions.

As a result of these measures the Company expects to save approximately
$3.0 million on an annualized basis. 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. The Internet Group has trimmed its workforce from 81
employees as of the beginning of the fiscal year to 40 through this
restructuring plan. Also included in the restructuring charge were $1.2 million
of expenses related to the excess office space in Sherman Oaks, California that
the Company plans to sublet and $1.0 million of expenses related to excess
furniture and equipment.

CORPORATE ADMINISTRATION

The Corporate Administration segment includes all costs associated with the
operation of the public holding company, New Frontier Media, Inc. 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 operating loss for this segment was $5.8 million, $5.5 million, and
$3.0 million for the years ended March 31, 2002, 2001, and 2000, respectively,
representing increases of 5% from 2001 to 2002 and 83% from 2000 to 2001.

The 83% increase in the operating loss for this segment from 2000 to 2001
relates to 1) an increase in legal costs associated with the Company's defense
in the J.P. Lipson lawsuit; 2) an increase in consulting costs related to the
hiring of an investment banking advisor, the use of outside investor/ public
relations consultants, and the development of a new public imaging campaign,
logo and corporate website; 3) an increase in payroll costs and related employee
benefits; and 4) an increase in accounting/auditing fees.

The 5% increase in operating loss for this segment from 2001 to 2002 is
primarily due to 1) an increase in consulting and professional fees; 2) an
increase in travel costs, 3) an increase in payroll costs and related employee
benefits; and 4) an increase in the Company's insurance premiums. The increase
in these costs was offset by a 33% decline in the Company's legal fees.

OTHER INCOME (EXPENSE)

Other income (expense) was income of $0.4 million, and expense of $3.5
million and $0.6 million for the years ended March 31, 2002, 2001, and 2000,
respectively.

Other income (expense) for the fiscal years ended March 31, 2002 and 2001
include two nonrecurring items related to the legal reserve established for the
J.P. Lipson lawsuit and a licensing agreement entered into with Metro Global
Media, Inc. ("Metro") in July 1999.

The Company was a defendant in a lawsuit filed on January 25, 1999 in which
J.P. Lipson sought to enforce an alleged agreement with the Company ("Lipson
Lawsuit"). On September 1, 2000, a jury entered a verdict awarding to the
plaintiff $10 million in liquidated damages and, in the alternative, $1 million
in actual damages and $1 million in punitive damages. Subsequent to this
verdict, the Boulder District Court entered an order granting the Company's
motion to reduce the actual damages against the Company from $10 million to $1
million, thereby reducing Mr. Lipson's total award, exclusive of interest, to
$2.5 million. For the year ended March 31, 2001, the Company established a
reserve on its

32

books for these damages in the amount of $2.5 million. Since the Company already
had a portion of this reserve booked subsequent to the 2001 fiscal year, the
total amount expensed in connection with this reserve during the year ended
March 31, 2001 was $2.0 million.

During the third quarter of its fiscal year ended March 31, 2002, the
Company announced that it had settled the Lipson Lawsuit in its entirety for a
lump sum payment of $820,000 made to his attorneys. For the year ended March 31,
2002, the Company reversed the remaining $1.7 million of its legal reserve.

In July 1999, the Company entered into an agreement with Metro in which it
received 250,000 shares of Metro common stock for services it was to provide.
The market value of this stock on the date of the transaction was $2.47 per
share. Subsequent to this agreement the stock was delisted from the NASDAQ, is
now thinly traded on the over-the-counter market, and its value had declined to
$0.47 per share. Due to the permanent impairment in the value of this stock, the
Company wrote the stock down to a value of $117,500 on its books during its
second quarter of its fiscal year ended March 31, 2001, and took a write off of
$507,500.

The Company recognized $0.3 million in other revenue during the fiscal year
ended March 31, 2002, in connection with Metro releasing the Company from its
obligations to perform services under the contract signed in July 1999, for
which the Company was given the 250,000 shares of Metro stock. At the time the
contract was signed, the Company recognized deferred revenue in the amount of
$0.6 million, the fair market value of the Metro stock on that date. Since that
time, the Company has amortized this deferred revenue over 60 months for
services it was providing to Metro. The Company ceased providing services to
Metro and Metro released the Company from its obligation of providing any future
services. Accordingly, the remaining deferred revenue is considered earned and
was recognized during the fiscal year ended March 31, 2002 in the amount of $0.3
million.

DEFERRED TAXES

FAS 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.

As of March 31, 2001 and 2000, the Company estimated that it had $7.5
million and $9.2 million, respectively, in net operating loss carryforwards.
Based on the recent history of operating profits and the expected profitability
of the Company in future periods, the Company provided a valuation allowance of
$0 and $3.4 million for the years ended March 31, 2001 and 2000, respectively,
of its net deferred assets, while recognizing the benefit of $4.1 million and
$.8 million for each respective year.

The Company concluded that it is "more likely than not" that the full
benefit of its deferred tax assets will be realized in future years.

The Company expects to realize its deferred tax assets through the
generation of future taxable income. The amount of future income required based
on currently enacted tax rates applied to the deferred tax asset amount as of
March 31, 2001, is approximately $19.2 million. Due to the fact that the Company
has recorded several years of operating profitability the Company has concluded
that a valuation allowance is not necessary for its net deferred tax assets.

CRITICAL ACCOUNTING POLICIES

New Frontier Media's consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires management to
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, management evaluates its
estimates and judgments, including those related to revenue

33

recognition, valuation allowances, goodwill impairment, and prepaid distribution
rights (content licensing). 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 may differ from these
estimates under different assumptions or conditions.

Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.

REVENUE RECOGNITION

Our revenues for the Subscription/PPV TV Group are primarily related to the
sale of our network services to Cable/DBS affiliates. The Cable affiliates do
not report actual monthly sales for each of their systems to the
Subscription/PPV TV Group until 45 - 60 days after the month of service ends.
This practice requires management to make monthly revenue estimates based on the
Subscription/PPV TV Group's historical experience for each affiliated system.
Revenue is subsequently adjusted to reflect the actual amount earned upon
receipt by the Subscription/PPV TV Group. Adjustments made to adjust revenue
from estimated to actual have historically been immaterial.

The recognition of revenues for both the Subscription/PPV 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 maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments for both the
Subscription/PPV TV and Internet Groups. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.

We record a valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized. While we have considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event New Frontier
Media were to determine that it would not be able to realize all or part of its
net deferred tax assets in the future, an adjustment to the deferred tax assets
would be charged to income in the period such determination was made. Likewise,
should New Frontier Media determine that it would be able to realize its
deferred tax assets in the future in excess of its net recorded amount, an
adjustment to the 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 Subscription/PPV 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

Our long-lived assets include goodwill in the amount of $3.7 million as of
March 31, 2002 related to the Subscription/PPV TV Group. During 2002, we
evaluated the recoverability of our goodwill and other intangible assets in
accordance with Statement of Financial Accounting Standards No. 121 ("SFAS
121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," which generally required us to assess these assets
for recoverability when events or circumstances indicate a potential impairment
by estimating the undiscounted cash flows to be generated from the use of these
assets. No impairment losses were recorded related to goodwill during 2002.

34

We are adopting SFAS 142 effective April 1, 2002. We have not yet
determined the amount of the impairment loss but expect to complete that
measurement by June 30, 2002. Any further impairment losses recorded in the
future could have a material adverse impact on our financial conditions and
results of operations.

PREPAID DISTRIBUTION RIGHTS

The Company's Subscription/PPV 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
amortizes the costs on a straight-line basis over the life of the licensing
agreement (usually 3 to 7 years). Pursuant to FAS 63 the costs associated with
the license agreements should be amortized based on the relative revenues earned
for each showing of the film. Management has determined that it is appropriate
to amortize these costs on a straight-line basis under the assertion that each
showing 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 showing 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 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.

LIQUIDITY AND CAPITAL RESOURCES

Cash provided by (used in) operating activities was $5.8 million, $0.6
million, and ($0.8 million) for the years ended March 31, 2002, 2001, and 2000,
respectively. The increase in cash provided by operating activities from 2001 to
2002 was primarily associated with an increase in depreciation and amortization
expense from $6.2 million to $8.9 million, a decrease in accounts receivable
from $5.7 million in 2001 to $4.3 million in 2002, and an increase in
restructuring and impairment charges of $2.9 million. Cash provided by operating
activities was offset by a decrease in the legal reserve related to the Lipson
Lawsuit of $2.5 million, an increase in prepaid distribution rights related to
the licensing of content of $4.8 million, and a decrease in accrued liabilities
of $1.7 million.

The increase in cash provided by operating activities from 2000 to 2001 was
primarily associated with an increase in net income from $1.1 million to $3.3
million, a $2.5 million increase in the litigation reserve for the Lipson
Lawsuit, and an increase in depreciation and amortization expense from $4.2
million to $6.2 million. Cash provided by operating activities was offset by a
$4.8 million increase in prepaid distribution rights related to the licensing of
content for the Company's distribution channels, a $2.8 million increase in the
Company's accounts receivables primarily related to the Subscription/PPV TV
Group and a $4.6 million increase in the Company's deferred tax asset.

Cash used in investing activities for the year ended March 31, 2002 was
$3.3 million. This use of cash was primarily related to tenant improvements
incurred during the build out of the Company's new space in Boulder, Colorado,
Sherman Oaks, California and its data center facility, as well as $0.5 million
related to the purchase of the EMI C-Band subscriber data base by the
Subscription/PPV TV Group.

Cash used in investing activities for the year ended March 31, 2001 was
$4.5 million. This use of cash was primarily related to the purchase of domain
names for the Internet Group in the amount of $1.6 million, equipment purchased
for the broadcast and Internet service provider facilities and leasehold
improvements and furniture for the Internet Group's new facility.

Cash used in investing activities was $4.6 million for the year ended March
31, 2000. This use of cash was primarily for capital expenditures comprised of
broadcast equipment, editing equipment,

35

receiver/decoder equipment, computer equipment, and domain name purchases in the
amount of $2.9 million.

Cash used in financing activities was $4.9 million for the year ended March
31, 2002, and was primarily attributable to the payment of $2.1 million on the
Company's capital lease obligations and the repayment of $3.0 million of the
Company's outstanding debt obligations.

Cash provided by financing activities was $4.8 million for the year ended
March 31, 2001, and was primarily attributable to a contribution of capital in
the amount of $1.3 million made by the senior management group as part of the
agreement reached by NASDAQ to maintain the Company's listing and an increase in
notes payable of $6 million. This cash provided from financing activities was
offset by $0.7 million used to repay monies owed to the previous shareholders of
the Internet Group, $1.3 million in capital lease payments and $0.9 million paid
to related-parties.

Cash provided by financing activities was $8.7 million for the year ended
March 31, 2000. Cash provided by financing activities for the year ended March
31, 2000 was attributable to the issuance of $6.0 million of convertible
redeemable preferred stock and $3.9 million raised from the exercise of 600,000
of the Company's 1.5 million publicly traded warrants.

The Company's balance sheet as of March 31, 2002 reflects $3.0 million in
notes payable outstanding. In May 2002, the Company 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 outstanding notes
payable. An additional $1.0 million in debt was converted into 0.5 million
shares of Class A Redeemable Preferred Stock. The preferred stock pays dividends
at 15.5% on a monthly and quarterly basis and is redeemable in 2004. The
preferred stock is subject to full or partial early redemption at the option of
the holder if the Company experiences a change in control defined as (i) a
replacement of more than one-half of the members of the Company's board of
directors which is not approved by a majority of those individuals who are
members of the board of directors on the date of the issuance of the preferred
(or by those individuals who are serving as members of the board of directors on
any date whose nomination to the board of directors was approved by a majority
of the members of the board of directors who are members on the date of the
issuance of the preferred), (ii) the merger of the Company with or into another
entity that is not wholly owned by the Company, consolidation or sale of all or
substantially all of the assets of the Company in one or a series of related
transactions, or (iii) the execution by the Company of an agreement to which the
Company is a party or by which it is bound, providing for any of the events set
forth in (i) or (ii). The Company expects to fund the dividends due on the
preferred stock from its cash flows from operations. The Company is also
confident that it can fund the redemption of the preferred stock in 2004 through
cash flows from operations or a refinancing of the obligation prior to the time
of redemption. In the event the preferred stock should become due by reason of a
change in control occurring at the Company's upcoming Annual Meeting of its
Shareholders, the Company's liquidity and capital resources is likely to be
materially and adversely impaired.

New Frontier Media believes that existing cash and cash generated from
operations will be sufficient to satisfy its operating requirements. The Company
does not anticipate any major capital expenditures during the next 12 months and
believes that any capital expenditures that may be incurred can be financed
through its cash flows from operations or lease financing.

If New Frontier Media were to lose its major customer that accounts for 27%
of its revenue, its ability to finance its operating requirements would be
severely impaired.

NEW ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 141, "Business Combinations." This
statement requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, and establishes criteria to
separately recognize intangible assets apart from goodwill. The Company does not
believe that the adoption of this pronouncement will have a material impact on
its consolidated financial statements.

36

In July 2001, the Financial Accounting Standards Board issued SFAS 142,
"Goodwill and Other Intangible Assets." This statement requires that goodwill,
as well as intangible assets with indefinite lives, acquired after June 30,
2001, will not be amortized. Effective in the first quarter of the year ending
March 31, 2003, goodwill and intangible assets with indefinite lives will no
longer be amortized and will be tested for impairment using the guidance for
measuring impairment set forth in this statement. The amortization expense of
goodwill and intangible assets with indefinite lives for the years ended March
31, 2002, 2001 and 2000 totaled $0.6 million for each year, respectively. As
prescribed under SFAS 142, the Company is in the process of having its goodwill
and intangible assets with indefinite lives tested for impairment. The Company
does not anticipate any material impairment losses resulting from the adoption
of SFAS 142.

In October 2001, the Financial Accounting Standards Board issued SFAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." This statement
addresses financial accounting and reporting for the impairment of long-lived
assets and assets to be disposed of. This statement supersedes FASB 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," however, it retains the fundamental provisions of FASB 121 for
(a) recognition and measurement of the impairment of long-lived assets to be
held and used and (b) measurement of long-lived assets to be disposed of by
sale. SFAS 144 is effective for the Company's first quarter of the year ending
March 31, 2003. The Company is still in the process of evaluating the impact of
adopting this pronouncement on its consolidated financial statements, however,
it does not believe that the adoption of this pronouncement will have a material
impact on the consolidated financial statements.

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 15, 2002, the Company had cash in checking
and money market accounts. 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-1 of this Report.

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

(a) By letter dated November 26, 2001, New Frontier Media terminated
Singer, Lewak, Greenbaum, & Goldstein LLP ("Singer Lewak") as independent
accountants for the Company. The decision to change accountants was recommended
by the Company's Audit Committee.

Singer Lewak had been the Company's independent accountants since
approximately December 22, 2000, and had been the independent accountants for
the Company's subsidiaries, Interactive Gallery, Inc., Interactive Telecom
Network, Inc. and Card Transactions, Inc., since approximately April 1999.
Singer Lewak's report on the financial statements of these subsidiaries was
included in the Company's financial statements for the year ended March 31,
2000.

Singer Lewak's annual report covering the fiscal year ended March 31, 2001
did not include an adverse opinion or disclaimer of opinion, and was not
qualified as to uncertainty, audit scope or accounting principles.

37

In connection with the audits of the two most recent fiscal years and
during any subsequent interim periods preceding the termination of Singer Lewak,
there did not develop any disagreement on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure
between such former independent accountants and management of the Company or
other reportable events which have not been resolved to the Company's former
independent accountants' satisfaction.

(b) As of November 26, 2001, the Company engaged Grant Thornton LLP as the
Company's independent auditors to replace Singer Lewak.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

New Frontier Media will furnish to the Securities and Exchange Commission a
definitive Proxy Statement (the "Proxy Statement") not later than 120 days after
the close of the fiscal year ended March 31, 2002. The information required by
this item is incorporated herein by reference to the Proxy Statement. Also see
"Executive Officers of the Registrant" in Part I of this form.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference
to the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated herein by reference
to the Proxy Statement except for the following equity compensation plan
information:

EQUITY COMPENSATION PLAN INFORMATION

MATERIAL FEATURES OF EACH NON-SECURITY HOLDER-APPROVED PLAN

The 4,937,808 shares issuable upon plans that were not approved by security
holders are all issuable upon the exercise of individual warrant grants without
any warrant plan. Each grant of warrants was made in connection with consulting
services. All the warrants currently expire by no later than 2009 unless earlier
exercised.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated herein by reference
to the Proxy Statement.

38

ITEM 14. 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

EXHIBITS

REPORTS ON FORM 8-K

The Company did not file any reports on Form 8-K during the quarter ended
March 31, 2002.

40

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/ Mark H. Kreloff
Mark H. Kreloff
Chairman of the Board of Directors,
Chief Executive Officer

In accordance with the requirements of the Exchange Act, this report is
signed below by the following persons on behalf of New Frontier Media in the
capacities and on the dates indicated.

NAME AND CAPACITY DATE
----------------- ----

/s/ MARK H. KRELOFF July 1, 2002
.......................................................
Name: Mark H. Kreloff
Title: Chairman of the Board of Directors,
Chief Executive Officer
(Principal Executive Officer)

/s/ MICHAEL WEINER July 1, 2002
.......................................................
Name: Michael Weiner
Title: Director, Executive Vice President,
Secretary, Treasurer

/s/ KARYN MILLER July 1, 2002
.......................................................
Name: Karyn Miller
Title: Chief Financial Officer
(Principal Financial and Accounting Officer)

/s/ KOUNG Y. WONG July 1, 2002
.......................................................
Name: Koung Y. Wong
Title: Director

/s/ ALAN ISAACMAN July 1, 2002
.......................................................
Name: Alan Isaacman
Title: Director

/s/ HIRAM WOO July 1, 2002
.......................................................
Name: Hiram Woo
Title: Director

.......................................................
Name: Edward Bonn
Title: Director

41

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

TABLE OF CONTENTS

F-1

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT

To the Board of Directors and Shareholders
NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES

We have audited the accompanying consolidated balance sheet of New Frontier
Media, Inc. and Subsidiaries as of March 31, 2002, and the related statements of
operations, comprehensive income, shareholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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 New
Frontier Media Inc. and Subsidiaries as of March 31, 2002 and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.

GRANT THORNTON LLP

New York, New York
May 17, 2002 (except for Note 22, as to which
the date is May 28, 2002)

F-2

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors
New Frontier Media, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of New Frontier
Media, Inc. and Subsidiaries as of March 31, 2001, and the related consolidated
statements of operations, comprehensive income (loss), stockholders' equity and
cash flows for the year ended March 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

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

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

SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California
May 18, 2001

F-3

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors
New Frontier Media, Inc. and Subsidiaries

We have audited the consolidated statements of operations, changes in
shareholders' equity, and cash flows of New Frontier Media, Inc, and
subsidiaries (the "Company") for the year ended March 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. We did not audit the financial statements of Interactive Gallery,
Inc., Interactive Telecom Network, Inc. (100% owned subsidiaries) or Card
Transactions, Inc. (90% owned subsidiary), which statements reflect revenues of
65 percent for the year ended March 31, 2000 of the related consolidated totals.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to the amounts included for
Interactive Gallery, Inc., Interactive Telecom Network, Inc., and Card
Transactions, Inc., is based solely on the report of the other auditors.

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

In our opinion, based on our audit and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the results of the Company's operations and cash flows for
the year ended March 31, 2000 in conformity with accounting principles generally
accepted in the United States of America.

We previously audited the combination of the accompanying consolidated
statements of operations and cash flows for the year ended March 31, 2000, after
restatement for the 1999 pooling of interests; in our opinion, such consolidated
statements have been properly combined on the basis described in Note 1 of notes
to consolidated financial statements.

/s/ SPICER, JEFFRIES & CO.

Denver, Colorado
May 23, 2000

F-4

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-5

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-6

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-7

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-8

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-9

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-10

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-11

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

NOTE 1 -- NATURE OF OPERATIONS

New Frontier Media, Inc. ("New Frontier Media"), through its wholly owned
subsidiary 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 six
networks Pleasure, TeN, ETC, Extasy, True Blue and X-Cubed, TEN is able to
provide a variety of editing styles and programming mixes that appeal to a broad
range of adult consumers.

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 is a leading aggregator and reseller of adult content via the Internet.
IGI aggregates adult-recorded video, live-feed video and still photography from
adult content studios and distributes it via its membership websites and
Pay-Per-View feeds. In addition, IGI resells its aggregated content to
third-party web masters and resells its Internet traffic that does not convert
into memberships.

NOTE 2 -- SUMMARY OF 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, the
valuation of chargebacks and reserves, and the valuation allowance associated
with deferred income tax assets. Actual results could differ materially from
these estimates.

RECLASSIFICATIONS

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

FURNITURE AND EQUIPMENT

Furniture and equipment 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 their estimated useful life.

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
Capitalized URLs...................................... 3 to 5 years

F-12

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

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

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.

CASH EQUIVALENTS

Cash equivalents are short-term, highly liquid investments that are both
readily convertible to cash and have original maturities of three months or less
at the time of acquisition, and are stated at cost, which approximates fair
market value.

PREPAID DISTRIBUTION RIGHTS

Prepaid distribution rights represent content license agreements. These
rights typically range from one to ten years. The Company amortizes these rights
on a straight line basis over the respective terms of the agreements, as each
showing of a film is expected to generate similar revenues and the estimated
number of future showings is not determinable.

REVENUE RECOGNITION

Subscription/Pay-Per-View TV revenues are recognized based on pay-per-view
buys and monthly subscriber counts reported each month by the system operator.
Revenue from sales of movie subscriptions, ranging from one to twelve months, is
recognized on a monthly basis over the term of the subscription. Revenue from
internet membership fees is recognized over the life of the membership, which
range from one month to one year. 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. A
significant portion of the Company's Internet sales are from the United States.
International sales were $3,101,090, $5,411,223 and $5,141,352 for the years
ended March 31, 2002, 2001 and 2000, respectively.

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. See Note 19 for
long-lived asset write-down recorded in connection with the restructuring
program for the Internet group.

F-13

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

ADVERTISING COSTS

The Company expenses advertising costs as incurred. Advertising costs for
the years ended March 31, 2002, 2001 and 2000 were approximately $2,529,000,
$3,448,000 and $4,262,000, respectively.

OTHER IDENTIFIABLE INTANGIBLE ASSETS

Other identifiable intangible assets primarily include amounts paid to
acquire domain names. These costs are capitalized and amortized on a
straight-line basis over their estimated useful lives that range from 3 to 5
years. At March 31, 2002 and 2001, accumulated amortization was $2,153,000 and
$1,203,000, respectively.

EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED

The excess of the purchase price over the estimated fair value of the
assets acquired has been recorded as excess cost over fair value of net assets
acquired, and is being amortized on a straight-line basis over 10 years. For
each of the years ended March 31, 2002, 2001 and 2000, amortization expense was
approximately $636,000. When events and circumstances so indicate, all long-term
assets, including the excess cost over fair value of net assets acquired, are
assessed for recoverability based upon cash flow forecasts. As of March 31,
2002, the Company has not recognized any impairment losses.

DEFERRED OFFERING COSTS

Amounts paid for costs associated with an anticipated equity offering are
capitalized and will be recorded as a reduction to additional paid-in capital
upon the completion of the funding. In the event that the equity funding is not
successful, the deferred offering costs will be charged to expense. As of March
31, 2002, and 2001, the Company capitalized deferred offering costs of
approximately $196,000 and $236,000 respectively. These amounts are included in
other assets on the balance sheet.

DEBT ISSUE COSTS

Fees and warrants issued in connection with the issuance of notes payable
and letters of credit were capitalized and are being amortized using the
straight-line method over the term of the notes. As of March 31, 2002 and 2001,
the Company capitalized debt issue costs of approximately $368,000 and $884,000
net of accumulated amortization of approximately $661,000 and $146,000
respectively. These amounts are included in other assets on the balance sheet.

STOCK-BASED COMPENSATION

As permitted by the FASB's Statement of Financial Accounting Standards No.
123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation," the Company has
elected to follow Accounting Principles Board Opinion No. 25 ("APB No. 25"),
"Accounting for Stock-Issued to Employees," and related interpretations in
accounting for its employee stock option plans. Under APB No. 25, no
compensation expense is recognized at the time of option grant because the
exercise price of the Company's employee stock option equals the fair market
value of the underlying common stock on the date of grant.

COMPREHENSIVE INCOME

The Company utilizes Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income." This statement establishes standards
for reporting comprehensive income and its components in a financial statement.
Comprehensive income as defined

F-14

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

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.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of cash and cash equivalents, accounts receivable, accounts
payable, accrued expenses and other liabilities approximate their carrying value
due to their short maturities.

RESTRUCTURING

Restructuring activities are accounted for in accordance with the guidance
provided by the Emerging Issues Task Force (EITF) in EITF Issue No. 94-3, (EITF
94-3), "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)" and by the SEC in SAB No. 100, "Restructuring and Impairment
Charges." These two pronouncements generally require the recognition of
restructuring expenses in the period that management formally approves of the
restructuring plan, determines the employees to be terminated, and communicates
the benefit arrangements to employees. See Note 19 for information regarding the
Company's restructuring activities.

INCOME (LOSS) PER COMMON SHARE

Basic earnings per share is computed on the basis of the weighted average
number of common shares outstanding. Diluted earnings per share is computed on
the basis of the weighted average number of common shares outstanding plus the
potential dilutive effect of outstanding warrants and stock options using the
"treasury stock" method.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued Statements 141 and 142, Business Combinations
and Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001. Under the new rules, the purchase method of accounting
is required for all business combinations initiated after June 30, 2002 and
goodwill and intangible assets with indefinite lives will no longer be amortized
but will be subject to annual impairment tests in accordance with Statements 141
and 142. Other intangible assets will continue to be amortized over their useful
lives.

The Company is evaluating the impact the application of the nonamortization
provisions of Statements 141 and 142 will have on the Company's financial
statements. Annual amortization expense for goodwill and intangible assets with
indefinite lives was approximately $636,000, for the years ended March 31, 2002,
2001 and 2000. The Company will perform the first of the required impairment
tests of goodwill and indefinite-lived intangible assets as of April 1, 2002 and
has not yet determined what the effect of these tests will be on the financial
statements of the Company.

In August 2001, the FASB issued Statement 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which is effective for fiscal years
beginning after December 15, 2001. Statement 144 establishes a single accounting
model for the impairment or disposal of long-lived assets, including
discontinued operations. Statement 144 supercedes Statement 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
and the accounting and reporting provisions of APB 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business (as previously defined in that Opinion).
Statement 144 also amends ARB 51, Consolidated Financial Statements, to
eliminate the exception to

F-15

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

consolidation for a subsidiary for which control is likely to be temporary. The
Company has not yet determined what effects this pronouncement will have on the
financial statements of the Company.

NOTE 3 -- FURNITURE AND FIXTURES

Furniture and equipment at March 31, consisted of the following (in
thousands):

Depreciation and amortization expense was approximately $3,997,000,
$2,465,000 and $2,250,000 for the years ended March 31, 2002, 2001 and 2000
respectively.

NOTE 4 -- EARNINGS PER SHARE

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

Options and warrants which were excluded from the calculation of diluted
earnings per share because the Company reported a net loss during the period,
and therefore, would be antidilutive, were approximately 1,163,000 for the year
ended March 31, 2002.

NOTE 5 -- SHAREHOLDERS' EQUITY

On June 3, 1998, the Company sold $1,750,000 of 8% convertible debentures,
interest due quarterly and due on June 3, 2000. The debentures were convertible
into shares of common stock of the Company at a conversion price for each share
of common stock equal to the lesser of: (a) 125% of the closing price or (b) 90%
of the market price on the conversion date. During the year ended March 31,
1999, these debentures plus accrued interest of $76,219 were converted into
2,474,184 shares of the Company's common stock. In addition, the debenture
holders received 175,000 common stock purchase warrants exercisable at $3.47875
per share expiring in July, 2001. In March 1999, 135,000 of these warrants were
exercised and in May 1999 the remaining 40,000 warrants were exercised.

In July 1999, New Frontier Media issued 500,000 shares of its common stock
to Metro Global Media, Inc. ("Metro") at $7.875 per share as consideration in
obtaining a license agreement for the

F-16

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

rights to distribute the entity's 3,000 title adult film and video library and
multi-million still image archive. In addition, the Company issued 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 August 1999, the Company raised $3,901,177 less redemption costs of
$43,749 through the exercise of 600,181 of its 1,500,000 publicly traded
warrants to purchase common stock. These warrants had been called by the Company
in June 1999 with a redemption date of August 13, 1999. The remaining
outstanding warrants were redeemed at $.05 per share.

On October 27, 1999, the Company completed its acquisition of ITN and IGI
and 90% of CTI. Under the terms of the Stock Purchase Agreement, New Frontier
Media issued 6,000,000 shares of the Company's restricted common stock to the
Sellers of the companies. This acquisition has been accounted for as a pooling
of interests.

In October 1999, the Company issued 5,000 shares of its common stock as
part of a settlement of a lawsuit to which it was a party.

In June 2000, the Company retired 589,136 shares of common stock as part of
the agreement reached by NASDAQ to maintain the Company's listing.

During the years ended March 31, 2001 and 2000, the Company issued 690,420
and 187,813 shares, respectively, of its common stock for the conversion of 470
and 130 shares, respectively, of Series C Convertible Redeemable Preferred Stock
and related interest.

During the years ended March 31, 2002, 2001, 2000, the Company issued an
aggregate of 114,332, 207,000, and 1,166,681, shares, respectively, of common
stock in connection with the exercise of warrants for each of $172,000,
$268,000, and $5,374,490, respectively.

During the years ended March 31, 2002, 2001, and 2000, the Company issued
an aggregate of 46,361, 78,658, and 125,625 shares, respectively, of common
stock in connection with the exercise of stock options for cash of $78,340,
$90,000 and $125,625, respectively.

During the years ended March 31, 2002, 2001, and 2000, the Company issued
an aggregate of 0, 10,000, and 0 shares, respectively, of common stock in
exchange for services rendered valued at $0, $17,000, and $0, respectively,
which is the fair market value of the services rendered.

During the year ended March 31, 2001, the Company obtained a 2% interest in
a company in exchange for issuing 20,000 shares of common stock valued at
$90,000.

During the year ended March 31, 2002, the Company issued 94,137 shares of
common stock, valued at $250,000, for the purchase of a subscriber base.

During the year ended March 31, 2002 the Company issued an aggregate of
54,466 shares of common stock in exchange for interest expense valued at
$151,141.

NOTE 6 -- 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 three principle reportable segments:

F-17

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

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

O Internet Group -- aggregates and resells adult content via the Internet.
The Internet Group sells content to monthly subscribers as well as to
various web masters.

O Corporate Administration

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-18

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

NOTE 7 -- MAJOR CUSTOMER

The Company's major customer (revenues in excess of 10% of total sales) is
EchoStar Communications Corporation ("EchoStar"). EchoStar is included in the
Subscription/Pay-Per-View TV Segment. Revenue from Echostar's DISH Network as a
percentage of total revenue for each of the three years ended March 31 is as
follows:

At March 31, 2002 and 2001, accounts receivable from EchoStar was
approximately $2,264,000 and $2,888,000, respectively. There were no other
customers with receivable balances in excess of 10% of consolidated accounts
receivable.

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

NOTE 8 -- INCOME TAXES

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-19

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:

The benefit for income taxes includes federal income taxes at statutory
rates and state income taxes.

The valuation allowance for deferred tax assets was decreased by $550,000
during 2000.

The Company has an unused net operating loss carryforward of approximately
$7,500,000 for income tax purposes, which expires through 2020. 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 components of the income tax provision (benefit) for the years ended
March 31 were as follows:

F-20

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

NOTE 9 -- 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. The shares issued
pursuant to the plans are restricted shares until or unless registered by the
Company.

1998 Incentive Stock Option Plan

Under the 1998 Incentive Stock Option Plan (the "1998 Plan"), options may
be granted by the Compensation Committee to officers, employees, and directors.
Options granted under the 1998 Plan may either be incentive stock options or
non-qualified stock options. The aggregate number of shares that may be issued
pursuant to the 1998 Plan is 750,000 over the life of the 1998 Plan. 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 the 1998 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 1998 Plan is effective as of July 21, 1998 and will terminate at the
close of business on July 21, 2008.

1999 Incentive Stock Option Plan

Under the 1999 Incentive Stock Option Plan (the "1999 Plan"), options may
be granted by the Compensation Committee to officers, employees, and directors.
Options granted under the 1999 Plan may either be incentive stock options or
non-qualified stock options. The aggregate number of shares that may be issued
pursuant to the 1999 Plan is 1,500,000 over the life of the 1999 Plan. 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 is a 10%
Shareholder 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 the 1999

F-21

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

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 1999 Plan is effective as of June 18, 1999 and will terminate at the
close of business on June 18, 2009.

Millennium Incentive Stock Option Plan

Under the Millennium Incentive Stock Option Plan (the "2000 Plan"), options
may be granted by the Compensation Committee to officers, employees, and
directors. Options granted under the 2000 Plan may either be incentive stock
options or non-qualified stock options. The aggregate number of shares that may
be issued pursuant to the 2000 Plan is 2,500,000 over the life of the 2000 Plan.
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 is a 10%
Shareholder 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 the 2000 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 2000 Plan is effective as of July 13, 2000 and will terminate at the
close of business on July 13, 2010.

2001 Incentive Stock Option Plan

Under the 2001 Incentive Stock Option Plan (the "2001 Plan"), options may
be granted by the Compensation Committee to officers, employees, and directors.
Options granted under the 2001 Plan may either be incentive stock options or
non-qualified stock options. The aggregate number of shares that may be issued
pursuant to the 2001 Plan is 500,000 over the life of the 2001 Plan. 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 is a 10%
Shareholder 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 the 2001 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 2001 Plan is effective as of June 25, 2001 and will terminate at the
close of business on June 25, 2011.

F-22

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

General

The 2001, 2000, 1999, and 1998 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.

CONSULTANT STOCK PLANS

The Company has adopted two Consultant Stock Plans: the 1999 Consultant
Stock Plan and the Millennium Consultant Stock Plan.

1999 Consultant Stock Plan

Under the 1999 Consultant Stock Plan (the "1999 Consultant Plan"), 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 the 1999
Consultant Plan is 500,000 shares. The 1999 Consultant Plan is effective as of
March 18, 1999, 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 1999 Consultant Plan prior to that
date.

Millennium Consultant Stock Plan

Under the Millennium Consultant Stock Plan (the "2000 Consultant Plan"),
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
the 2000 Consultant Plan is 500,000 shares. The 2000 Consultant Plan is
effective as of December 15, 2000, 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 2000
Consultant Plan prior to that date.

General

The 2000 and 1999 Consultant 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.

COMMON STOCK WARRANTS

Common stock warrants have been issued in connection with the acquisition
of assets, the acquisition of license agreements, and legal settlements. The
following table describes certain information relating to these warrants.

F-23

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

WARRANTS

1) During the year ended March 31, 2002, the Company issued 20,000 warrants
to purchase common stock. The warrants were issued in exchange for consulting
services. The warrants were valued at $27,400, which was expensed during the
year ended March 31, 2002. The warrants expire in April 2004.

2) During the year ended March 31, 2002, the Company issued 25,000 warrants
to purchase common stock. The warrants were issued in exchange for consulting
services. The warrants were valued at $41,000, which was expensed during the
year ended March 31, 2002. The warrants expire in April 2007.

3) During the year ended March 31, 2002, the Company issued 20,000 warrants
to purchase common stock. The warrants were issued in exchange for consulting
services. The warrants were valued at $34,600, which was expensed during the
year ended March 31, 2002. The warrants expire in May 2007.

4) During the year ended March 31, 2002, the Company issued 40,000 warrants
to purchase common stock. The warrants were issued in exchange for consulting
services. The warrants were valued at $42,000, which $31,500 was expensed during
the year ended March 31, 2002. The warrants expire in June 2004.

F-24

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

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,
2002, 2001, and 2000:

F-25

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.

Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS No. 123 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, 2002 and 2001: risk free interest
rates of 4.75% - 5.25% and 5.6%, respectively; dividend yields of 0% and 0%,
respectively; expected lives of 3 years and 2.25 to 10 years, respectively; and
expected volatility of 105% and 100%, 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.

F-26

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

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 earnings (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, 2002, 2001 and 2000 is as follows (in thousands except
share data):

NOTE 10 -- RELATED PARTY TRANSACTIONS

The Company carries out administrative and processing services for a
company in which a director has an interest. The Company recognized revenue of
$32,330, $48,363 and $79,467 during the years ended March 31, 2002, 2001 and
2000, respectively, by charging a processing fee of 3% of the related party's
revenue.

During the year ended March 31, 2001, the Company entered into an office
lease agreement, which is personally guaranteed by a director and his wife. As
an inducement to the guarantors, they were granted a security interest in
certain domain names, which had an original purchase price of approximately
$1,600,000.

Amounts due from related parties for the years ended March 31, 2002 and
2001 aggregated to $46,500 and $64,061, respectively. During the year ended
March 31, 2002, the Company gave a related party an advance of $46,500, which is
non-interest-bearing.

NOTE 11 -- SERIES C CONVERTIBLE REDEEMABLE PREFERRED STOCK

On October 14, 1999, the Company issued 600 shares of 7% Series C
Convertible Preferred Stock at $10,000 per share to a single institutional
investor.

The Preferred Stock was initially convertible into the Company's common
stock at a price of $7.87 per share which was equal to 140% of the market price
of the Company's stock at the closing date of the transaction. The Company had
the right to redeem the Preferred Stock at any time, in whole or in part, at a
price equal to the amount the investor would have received if the investor had
then converted its shares of Preferred Stock into common stock, or, if greater,
115% of the amount paid by the investor for the Preferred Stock. The preferred
stock was redeemable by the holder upon certain triggering events outside the
control of the Company. The shares automatically convert after three years, or
September 30, 2002, if not redeemed earlier. As of March 31, 2001, all
convertible preferred stock had been converted to common stock.

F-27

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

In connection with this transaction, the Company also issued to its
investor 60,000 warrants dated September 30, 1999, exercisable at $7.87 per
share, to purchase common stock of the Company for each $1 million invested with
the Company. These warrants were valued at $752,000.

NOTE 12 -- COMMITMENTS

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, 2002, 2001 and 2000 is approximately $6,646,000, $5,225,000, and
$3,977,000, respectively, of equipment under capital leases. Included in
restructuring expenses at March 31, 2002 is approximately $189,000 of equipment
under capital leases. Accumulated depreciation relating to these leases was
approximately $2,855,000, $2,666,000, and $1,591,000, respectively. Accumulated
depreciation related to equipment under capital lease in restructuring expenses
at March 31, 2002 was approximately $52,000. 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 January 2006.

Future minimum lease payments under these leases as of March 31, 2002 were
as follows (in thousands):

Rent expense for the years ended March 31, 2002, 2001, and 2000 was
approximately $6,741,000, $6,412,000, and $6,782,000 which includes transponder
payments, respectively.

EMPLOYMENT CONTRACTS

The Company employs certain key staff and directors under non-cancelable
employment contracts in Colorado. These employment contracts expire through
March 31, 2003.

Commitments under these obligations at March 31, 2002 were as follows:

F-28

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

NOTE 13 -- NOTES PAYABLE

Notes payable at March 31 consisted of the following:

Future minimum principal payments under notes payable as of March 31, 2002
were as follows:

NOTE 14 -- LICENSE AGREEMENTS

In February of 1999, the Company entered into a licensing agreement with an
unrelated entity. Pursuant to the agreement, the Company obtained the rights to
distribute the entity's current library of approximately 4,000 adult pictures
and the rights to three new adult pictures ("New Releases") that are produced by
the entity or its affiliated companies per month (for a period of five years).
The Company currently is in litigation with this unrelated party regarding the
breach of the license agreement. The Company believes that the unrelated party
has breached its license agreement with the Company by, among other things,
failing to deliver to the Company the 4,000 adult pictures and the New Releases.
See Note 16.

In July 1999 New Frontier Media executed a definitive license agreement to
acquire exclusive rights to Metro's 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.

F-29

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

NOTE 15 -- 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, 2002, 2001,
and 2000, were approximately $208,000, $151,000, and $200,000, respectively.

NOTE 16 -- LITIGATION

Lipson

The Company was a defendant in a lawsuit filed on January 25, 1999 in which J.P.
Lipson sought to enforce an alleged agreement with the Company. On September 1,
2000, a jury entered a verdict awarding to the plaintiff $10 million in
liquidated damages and, in the alternative, $1 million in actual damages and $1
million in punitive damages. The Company established a $10 million reserve on
its books during the quarter ended September 30, 2000 as a result of the jury
verdict.

Subsequent to September 30, 2000, the Boulder District Court entered an
order granting the Company's motion to reduce the actual damages against the
Company from $10 million to $1 million, thereby reducing Mr. Lipson's total
award, exclusive of interest, to $2.5 million. Therefore, the Company thereafter
reduced the $10 million reserve on its books to $2.5 million.

On December 26, 2001, the Company announced that it had settled the Lipson
lawsuit in its entirety for a lump sum payment of $820,000 made to his
attorneys. The Company reversed the remaining $1.7 million in legal reserve
during the quarter ended December 31, 2001.

Pleasure Licensing LLC

In February 1999, the Company issued 700,000 shares of its common stock to
Pleasure Licensing LLC and Pleasure Productions, Inc. (collectively "Pleasure")
at $2.12 per share for consideration in obtaining a license agreement for the
rights to distribute approximately 4,000 adult motion pictures. In addition, the
Company issued a five year common stock purchase warrant valued at $1.00 per
share to purchase 700,000 shares of the Company's common stock at an exercise
price of $1.12 per share.

On August 3, 1999, the Company filed a lawsuit against Pleasure alleging
breach of contract, breach of express warranties, breach of implied warranty of
fitness for a particular purpose, and rescission, seeking the return of 700,000
shares of New Frontier Media stock and warrants. Pleasure removed the District
Court action to Federal District Court in Colorado and filed counterclaims
related to the Company's refusal to permit Pleasure to sell the securities
issued to Pleasure. Pleasure's counterclaims allege breach of contract,
copyright and trademark infringement, and fraud.

The Company contends that Pleasure, among other things, breached its
license agreement with the Company by failing to deliver to the Company
approximately 4,000 broadcast-quality pictures, as required by the agreement,
and by failing to deliver to the Company three "new releases" a month. The
Company intends to pursue vigorously its claims against Pleasure and to defend
the counterclaims asserted against it.

At March 31, 2002, the carrying value of the Pleasure licenses' was
approximately $2.3 million and has been recorded in Other Assets--Other. The
Company is not amortizing these assets as they have not been utilized by the
Company. Although a loss on these licenses is possible, no provision for such
loss has been recorded in the accompanying financial statements due to the
uncertainty of the outcome of the litigation proceedings. See Note 14.

F-30

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

OTHER 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.

NOTE 17 -- OTHER INCOME

The Company recognized $0.3 million in deferred revenue during the year
ended March 31, 2002, in connection with Metro releasing the Company from its
obligations to perform services under a contract signed in July 1999 for which
the Company was given 250,000 shares of Metro stock. At the time the contract
was signed, the Company recognized deferred revenue in the amount of $0.6
million, the fair market value of the Metro stock on that date. Since that time,
the Company has amortized this deferred revenue over 60 months for services it
was providing to Metro. The Company has ceased providing these services to Metro
and Metro released the Company from its obligation of providing any future
services during this current quarter. Accordingly, the remaining deferred
revenue has now been recognized and is included in Other Income as of March 31,
2002.

NOTE 18 -- CONTINGENCIES

CSB, 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.

To remain competitive, the Company must continue to enhance and improve the
responsiveness, functionality, and features of the Company's websites. The
Internet and the on-line commerce industry are characterized by rapid
technological changes, changes in user and customer requirements and
preferences, frequent new service and membership introductions embodying new
technologies, and the emergence of new industry standards and practices that
could render the Company's existing websites and proprietary technology and
systems obsolete. The Company's success will depend, in part, on their ability
to license leading technologies useful in their business, enhance their existing
services, develop new services and technology that address the increasingly
sophisticated and varied needs of their prospective customers, and respond to
technological advances and emerging industry standards and practices on a
cost-effective and timely basis.

The on-line commerce market, particularly over the Internet, is new,
rapidly evolving, and intensely competitive. The Company currently or
potentially competes with a variety of other companies.

The Company has deposits in a bank in excess of the FDIC insured amount of
$100,000. The amount in excess of the $100,000 is subject to loss should the
bank cease business.

NOTE 19 -- RESTRUCTURING EXPENSES

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

F-31

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

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 that
were being utilized by these functions.

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.
The Internet Group has trimmed its workforce from 81 employees as of the
beginning of the fiscal year to 40 through this restructuring plan. Also
included in the restructuring charge were $1.2 million of expenses related to
the excess office space in Sherman Oaks, California that the Company plans to
sublet and $1.0 million of expenses related to excess furniture and equipment.

NOTE 20 -- QUARTERLY INFORMATION (UNAUDITED)

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

NOTE 21 -- 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.

On March 20, 2002, Messrs. Edward Bonn and Bradley Weber attempted to
remove the Company's CEO, Mark Kreloff, and appoint a special committee headed
by Mr. Bonn to operate the Company while a search was conducted for a new CEO.
After the Company's Board rejected Messrs. Bonn's and Weber's proposal and
instead established a Special Committee, comprised of a majority of independent
directors, to investigate, among other things, the activities of Messrs. Bonn
and Weber

F-32

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

relating to their prior management of IGI, the Company's Internet subsidiary,
and whether, by their actions, they had triggered the Company's Rights Plan, Mr.
Bonn notified the Company that he would seek to replace the Board of
Directors.

The Company's Rights Plan may have been triggered by the actions of Messrs.
Bonn and Weber. To preserve the Company's options under the Plan in the event it
is determined that the Plan has been triggered by the actions of Messrs. Bonn
and Weber, the Rights Plan was amended in March, April, May and June of 2002 to
delay each time for 30 days the effectiveness of its Distribution Date.

NOTE 22 -- SUBSEQUENT EVENTS

In May 2002, the Company filed a lawsuit in the Superior Court of the State
of California for the County of Los Angeles (New Frontier Media, Inc., et al.
vs. Edward J. Bonn, et al., case no. BC274573) against: (i) directors and former
officers Edward J. Bonn and Bradley A. Weber; (ii) Jerry D. Howard, the former
Chief Financial Officer of its subsidiaries Interactive Gallery, Inc. ("IGI"),
Interactive Telecom Network, Inc. ("ITN") and Card Transactions, Inc. ("CTI");
and (iii) Response Telemedia, Inc., a California corporation owned by Mr. Bonn.

The Complaint's allegations arise, in part, out of the Company's purchase
of 100 percent of the issued and outstanding shares of IGI and ITN and 90
percent of the issued and outstanding shares of CTI from the individual
defendants on October 27, 1999. The Complaint alleges that, from early 1999 to
the date of the closing, the defendants knowingly made material
misrepresentations or omissions regarding IGI's business and financial results
and prospects for the purpose of inducing the Company to purchase the
defendants' stock holdings of IGI, ITN and CTI.

The Complaint also alleges that, subsequent to the Company's purchase of
IGI, ITN and CTI, Messrs. Bonn, Weber and Howard (as directors and/or officers)
each breached their fiduciary duties owed to the Company and its subsidiaries.
Such allegations arise out of the individual defendants' gross mismanagement of
IGI, ITN and CTI and their concealment of marketing, operational and financial
information that would have allowed the Company to discover their actions. Such
allegations also arise out of self-dealing transactions that benefited, among
others, Mr. Bonn's company RTI. The Complaint seeks rescission of the purchase
of the IGI, ITN, and ITC as well as monetary damages in an amount to be proven
at trial.

Mr. Bonn has filed an answer denying the allegations contained in the
Complaint and a cross-complaint against the Company seeking that the Company
indemnify him against the claims alleged in the Complaint. The cross-complaint
also seeks unspecified monetary damages from the Company alleging that the
Company breached Mr. Bonn's employment agreement with the Company by terminating
his employment on May 28, 2002.

Although the ultimate outcome of Mr. Bonn's cross-complaints, and the
liability, if any, arising from such cross-complaints cannot be determined,
management, after consultation and review with counsel, believes that the facts
do not support Mr. Bonn's cross-complaints and that the Company has meritorious
defenses. In the opinion of management, resolution of Mr. Bonn's
cross-complaints is not expected to have a material adverse effect on the
financial position of the Company.

In May 2002, the Company 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 outstanding notes payable. An additional
$1.0 million in debt was converted into 0.5 million shares of Class A Redeemable
Preferred Stock. The preferred stock pays dividends at 15.5% on a monthly and
quarterly basis and is redeemable in 2004. The preferred stock is subject to
full or partial early redemption at the option of the holder if the Company
experiences a change in control defined as

F-33

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

(i) a replacement of more than one-half of the members of the Company's
board of directors which is not approved by a majority of those individuals who
are members of the board of directors on the date of the issuance of the
preferred (or by those individuals who are serving as members of the board of
directors on any date whose nomination to the board of directors was approved by
a majority of the members of the board of directors who are members on the date
of the issuance of the preferred), (ii) the merger of the Company with or into
another entity that is not wholly owned by the Company, consolidation or sale of
all or substantially all of the assets of the Company in one or a series of
related transactions, or (iii) the execution by the Company of an agreement to
which the Company is a party or by which it is bound, providing for any of the
events set forth in (i) or (ii). The Class A Redeemable Preferred has the right
to vote together with the holders of the Company's Common Stock on a one vote
per share basis.

In June 2002, the Company announced the relocation of its data center in
Sherman Oaks, California to a co-location facility in Colorado. The Company
anticipates incurring a restructuring charge of $4.0 to $4.5 million in the
first quarter of fiscal year 2003.

F-34

SUPPLEMENTAL INFORMATION

F-35

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
ON SUPPLEMENTAL INFORMATION

To the Board of Directors and Shareholders
NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES

Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole of New Frontier Media, Inc. and
Subsidiaries as of and for the year ended March 31, 2002, which are presented in
the preceding section of this report. The supplemental Valuation and Qualifying
Accounts -- Schedule II is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic
consolidated financial statements. Such information has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.

GRANT THORNTON LLP

New York, New York
May 17, 2002

F-36

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON SUPPLEMENTAL INFORMATION

To the Board of Directors
New Frontier Media, Inc. and Subsidiaries

Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole of New Frontier Media, Inc. and
Subsidiaries as of and for the year ended March 31, 2001, which are presented in
the preceding section of this report. The supplemental Valuation and Qualifying
Accounts -- Schedule II is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic
consolidated financial statements. Such information has been subjected to the
auditing procedures applied in our audit of the basic financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.

SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California
May 18, 2001

F-37

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON SUPPLEMENTAL INFORMATION

To the Board of Directors
New Frontier Media, Inc. and Subsidiaries
Boulder, Colorado

Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The consolidated
supplemental schedule II for the year ended March 31, 2000 is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not a part of the basic consolidated financial statements. This schedule has
been subjected to the auditing procedures applied in our audit of the basic
consolidated financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic consolidated financial statements
taken as a whole.

SPICER, JEFFRIES & CO.

Denver, Colorado
May 23, 2000

F-38

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

F-39