NEW FRONTIER MEDIA INC /CO/ - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10 -Q

/X/ Quarterly report under Section 13 or 15(d) of the Securities and Exchange
Act of 1934.

For the quarterly period ended September 30, 2002

/ / Transition Report under Section 13 or 15(d) of the Exchange Act.

For the transition period from __________________ to __________________

000-23697

(Commission file number)

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

Colorado 84-1084061
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)

7007 Winchester Circle, Suite 200, Boulder, Co 80301

(Address of principal executive offices)

(303) 444-0900

(Issuer's telephone number)

(Former name, former address and former fiscal year, if changed since last
report)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes /X/ No / /

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

As of November 13, 2002, 21,322,816 shares of Common Stock, par value $.0001,
were outstanding.

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FORM 10-Q

NEW FRONTIER MEDIA, INC.
Index
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets as of
September 30, 2002 (Unaudited) and March 31, 2002... 3

Condensed Consolidated Statements of Operations
(Unaudited) for the quarter and six months ended
September 30, 2002 and 2001......................... 5

Condensed Consolidated Statements of Comprehensive
Income (Unaudited) for the quarter and six months
ended September 30, 2002 and 2001................... 6

Condensed Consolidated Statements of Cash Flows
(Unaudited) for the quarter and six months ended
September 30, 2002 and 2001......................... 7

Notes to Consolidated Financial Statements
(Unaudited)......................................... 8

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 17

Item 3. Quantitative and Qualitative Disclosures about
Market Risk......................................... 27

Item 4. Controls and Procedures............................. 27

PART II. OTHER INFORMATION

Item 1. Legal Proceedings................................... 29

Item 4. Submission of Matters to a Vote of Security
Holders............................................. 30

Item 6. Exhibits and Reports on Form 8-K.................... 31

SIGNATURES.................................................. 32

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN 000S)

ASSETS

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

3

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN 000S)

LIABILITIES AND SHAREHOLDERS' EQUITY

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

4

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN 000S)

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

5

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

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

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

6

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000S)

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

7

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

The accompanying financial statements have been prepared without audit pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles in the
United States of America have been condensed or omitted pursuant to such rules
and regulations. These statements include all adjustments considered necessary
for a fair presentation of financial position and results of operations. The
financial statements included herein should be read in conjunction with the
financial statements and notes included in the latest annual report on Form
10-K.

The results of operations for the quarter and six months ended September 30,
2002 are not necessarily indicative of the results to be expected for the full
year. Certain amounts reported for prior periods have been reclassified to
conform to the current year's presentation.

The accompanying consolidated financial statements include the accounts of New
Frontier Media, Inc. ("the Company" or "New Frontier Media") and its wholly
owned subsidiaries Colorado Satellite Broadcasting, Inc. d/b/a The Erotic
Networks ("CSB" or "TEN") and Interactive Gallery, Inc. ("IGI").

BUSINESS

New Frontier Media is a publicly traded holding company for its operating
subsidiaries. TEN is a leading provider of adult programming to multi-channel
television providers and low powered direct-to-home C-Band households. Through
its six networks--Pleasure, TeN, ETC, Extasy, True Blue and XClips--TEN is able
to provide a variety of editing styles and programming mixes that appeal to a
broad range of adult customers. 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. In addition, IGI resells its aggregated content to
third party web masters and resells its Internet traffic that does not convert
into memberships.

USE OF ESTIMATES

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

RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

In April 2002, the Financial Accounting Standards Board ("FASB") adopted
Statement of Financial Accounting Standards 145 Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
("SFAS 145"). This Statement rescinds FASB Statement No. 4, Reporting Gains and
Losses from Extinguishment of Debt, and amends FASB Statement No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This
Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets
of Motor Carriers. This Statement amends FASB Statement No. 13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications

8

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

that have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed conditions. Statement No. 145 is effective for fiscal years
beginning after May 15, 2002. The Company believes that this statement will not
have a significant impact on its results of operations or financial position
upon adoption.

In July 2002, The Financial Accounting Standards Board ("FASB") Issued Statement
146 Accounting for Costs Associated with Exit or Disposal Activities ("SFAS
146"). This Statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". The principal difference between this
Statement and Issue 94-3 relates to its requirements for recognition of a
liability for a cost associated with an exit or disposal activity. This
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Under Issue
94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at
the date of an entity's commitment to an exit plan. The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002. The Company is still assessing this new standard but does not
believe that it will have a material effect on its results of operations or
financial condition upon adoption.

NOTE 2 -- EARNINGS (LOSS) PER SHARE

The components of basic and diluted earnings per share are as follows (in 000s):

Approximately 563,000 and 596,000 options and warrants were excluded from the
calculation of diluted earnings per share for the quarter and six months ended
September 30, 2002, respectively. Inclusion of these options and warrants, due
to the Company reporting a net loss during the period, would be antidilutive.

NOTE 3 -- SHAREHOLDERS' EQUITY

During the quarter and six months ended September 30, 2002, the Company issued 0
and 75,900 shares of common stock, respectively, upon the exercise of
compensatory options.

NOTE 4 -- STOCK OPTIONS AND WARRANTS

As of September 30, 2002, the Company had granted 280,000 options from the 2001
Incentive Stock Option Plan, 2,969,500 options from the 2000 Millenium Stock
Option Plan, 1,607,950 options from the 1999 Incentive Stock Option Plan and
843,000 options from the 1998 Stock Option Plan.

9

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company grants warrants to consultants for services provided allowing them
to purchase common stock of New Frontier Media. During the quarter and six
months ended September 30, 2002, 0 and 50,000 warrants valued at $0 and $72,000,
respectively, were issued.

NOTE 5 -- SEGMENT INFORMATION

For internal reporting purposes, the Company has two reportable segments:
1) Subscription/Pay-Per-View TV and 2) Internet Group.

The following tables represent unaudited financial information by reportable
segment (in 000s):

10

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6 -- 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 the quarters ended September 30 is as follows:

At September 30, 2002 and March 31, 2002, accounts receivable from EchoStar was
approximately $3,320,000 and $2,264,000, respectively. There were no other
customers with receivable balances in excess of 10% of consolidated accounts
receivable. The loss of its significant customer could have a materially adverse
effect on the Company's business, operating results or financial condition.

NOTE 7 -- RESTRUCTURING EXPENSES

During the fourth quarter of fiscal 2002, the Company recorded restructuring
expenses in connection with its decision to consolidate the Internet Group's
engineering, web production, sales and marketing departments to the Company's
Boulder, Colorado location and eliminate its customer service department due to
the outsourcing of its credit card processing functions.

During the quarter ended June 30, 2002, the Company adopted a restructuring plan
with respect to the Internet Group's data center facility. The Company is
closing the Internet Group's in-house data center in Sherman Oaks, California
and moving the management of its servers, bandwidth and content delivery to its
Boulder, Colorado facility. The Company believes that it is more cost effective
to manage these functions as part of its technical infrastructure in Boulder.
The Internet Group expects to have its technical infrastructure fully integrated
into the Boulder facility by the end of the third quarter of its fiscal year
ended March 31, 2003.

Total restructuring charges of $3.0 million related to this plan were recorded
during the quarter ended June 30, 2002, of which $28,000 related to the
termination of 10 employees. Also included in this charge was $0.3 million
related to the data center space in Sherman Oaks that the Company is attempting
to sublet and $2.7 million of expenses related to excess computer equipment.

During the quarter ended September 30, 2002, the Company recognized an
additional $393,000 in restructuring charges related to the Sherman Oaks office
space that the Company is attempting to sublet. Additionally, the Company
lowered the accrued restructuring charges approximately $251,000 due to a change
in estimate in employment and equipment contracts.

11

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 8 -- CLASS A REDEEMABLE PREFERRED STOCK

As of June 30, 2002, the Company authorized a series of shares of 2 million
Class A Redeemable Preferred Stock, par value $2 per share, of which 1.875
million shares are outstanding. The outstanding preferred stock was issued in
May and June of 2002 the proceeds of which were used to satisfy outstanding
notes payable of approximately $3,000,000 owed by the Company at March 31, 2002
and for working capital purposes.

Holders of the Class A Redeemable Preferred Stock are entitled to receive
cumulative cash dividends at a rate of 15.5% per annum per share payable in
quarterly or monthly installments. Such dividends have preference over all other
dividends of stock issued by the Company. The dividends have been reported as
interest expense. Shares are subject to mandatory redemption on or before
January 2, 2004 at a redemption price of face value plus accrued dividends.
Prior to such date and so long as such mandatory redemption obligations have not
been discharged in full, no dividends may be paid or declared upon the Common
Stock, or on any other capital stock ranking junior to or in parity with such
Class A Redeemable Preferred Stock. Under certain circumstances, the Company may
redeem the stock, in whole or in part, prior to the mandatory redemption date.
The Company is not entitled to issue any class of stock that will in effect
reduce the value or security of the Class A Preferred. Each share of preferred
shall have the right to vote together with the holders of the Company's Common
stock on a one vote per share basis (and not as a separate class) on all matters
presented to the holders of the Common Stock.

The Company recorded the Class A Redeemable Preferred Stock at its redemption
value of $3.75 million. 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 as 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).

NOTE 9 -- RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets." This statement requires that goodwill,
as well as intangible assets with indefinite lives, acquired after June 30,
2001, not be amortized. Effective in the first quarter of the current year,
goodwill and intangible assets with indefinite lives are no longer being
amortized, but are being tested for impairment using the guidance for measuring
impairment set forth in this statement. This statement has been adopted by the
Company and had no impact on the financial statements.

12

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following presents a comparison of net (loss) earnings and (loss) earnings
per share for the three and six months ended September 30, 2002 to the
respective adjusted amounts for the three and six months ended September 30,
2001 that would have been reported had SFAS No. 142 been in effect during the
prior year (in 000s).

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

Amortization expense for intangible assets subject to amortization in each of
the next five fiscal years is estimated to be approximately $796,000 in 2004,
$663,000 in 2005, $161,000 in 2006, $109,000 in 2007 and $107,000 in 2008.

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 supersedes 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 consolidation for a subsidiary for which control is
likely to be temporary. This statement has been adopted by the Company and had
no impact on the financial statements.

NOTE 10 -- ASSET IMPAIRMENT CHARGES

During the six months of fiscal year 2003, the Company recognized impairment
losses on certain URLs of approximately $535,000 in connection with the Internet
Group. Management identified certain conditions including a declining gross
margin due to the availability of free adult content on the Internet and
decreased traffic to certain of the Company's URLs as indicators of asset
impairment. These conditions led to operating results and forecasted future
results that were substantially less than had been anticipated at the time of
the Company's acquisition of IGI, ITN, and CTI. The Company revised its
projections and determined that the projected results would not fully support
the future

13

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

amortization of the URLs associated with IGI, ITN, and CTI. In accordance with
the Company's policy, management assessed the recoverability of the URLs using a
cash flow projection based on the remaining amortization period of four years.
Based on this projection, the undiscounted sum of the estimated cash flow over
the remaining amortization period was insufficient to fully recover the
intangible asset balance.

The Corporation follows the provisions of Statement of Accounting Standards
(SFAS) 144, "Accounting for the Impairment or Disposal of Long-Lived Assets".
SFAS 144 establishes a single accounting model, based on the framework
established in SFAS 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." SFAS 121 establishes accounting
standards for the impairment of long-lived assets and certain identifiable
intangibles. The Corporation reviews long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. If the sum of the undiscounted expected future
cash flows is less than the carrying amount of the assets, the Corporation
recognizes an impairment loss. Impairment losses are measured as the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
When fair values are not available, the Corporation estimates fair value using
the expected future cash flows discounted at a rate commensurate with the risks
associated with the recovery of the assets.

NOTE 11 -- LEGAL PROCEEDINGS

On March 20, 2002, Mr. Edward Bonn and Bradley A. Weber attempted to remove Mark
Kreloff as CEO and appoint a special committee headed by Mr. Bonn to operate the
Company while a search was conducted for a new CEO. The Company's Board rejected
Messrs. Bonn's and Weber's proposal and instead, on March 29, 2002, established
the Special Committee to investigate, among other things, the activities of
Messrs. Bonn and Weber relating to their prior management of Interactive
Gallery, Inc. ("IGallery"), the Company's Internet subsidiary, and whether, by
their actions, Messrs. Bonn and Weber triggered the Company's Rights Plan (also
known as a poison pill). On May 28, 2002, following a two-month investigation by
the Special Committee, the Company filed a 13-Count Complaint in the Superior
Court of the State of California for the County of Los Angeles against: (i) Mr.
Bonn and Mr. Weber; (ii) Jerry D. Howard, the former Chief Financial Officer of
IGallery, Interactive Telecom Network, Inc. ("ITN") and Card Transactions, Inc.
("CTI"); (iii) Response Telemedia, Inc. ("RTI"), a California corporation owned
by Mr. Bonn; and (iv) BEF LLC and Beacon Ocean LLC, Messrs. Bonn's and Weber's
family trusts, respectively.

The Complaint's allegations arise, in part, out of the Company's purchase of 100
percent of the issued and outstanding shares of IGallery and ITN and 90 percent
of the issued and outstanding shares of CTI from defendants Bonn, Weber, and
Howard 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 IGallery's business and business
practices, financial results and prospects, its average customer subscription
rates, the amount of its payments to webmasters, its use of overseas
"aggressive" credit card processors and the significant deficiencies in its
computerized payment-tracking system for the purpose of inducing the Company to
purchase the defendants' stock holdings of IGallery, ITN and CTI.

The Complaint also alleges that, subsequent to the Company's purchase of
IGallery, 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, IGallery, ITN and CTI. Specifically, the Complaint alleges that Messrs.
Bonn, Weber and Howard grossly mismanaged IGallery, ITN and CTI and concealed
marketing, operational and financial information that would have allowed the
Company to detect such mismanagement, including IGallery's difficulty in
attracting new customers at the full membership

14

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

rate, IGallery's substantial payments to its top webmasters, which significantly
exceeded the revenues generated by such payments, and IGallery's failure to
implement basic management controls to trace revenue streams or to document the
profitability of webmaster relationships. 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.
In July 2001, when Messrs. Bonn, Weber and Howard resigned from their positions
at IGallery, ITN and CTI, the Company was able to gain access to the books and
records of IGallery, ITN and CTI and began to uncover the facts underlying the
allegations of the Complaint. The Company had previously been unable to gain
access to the books and records of IGallery, ITN and CTI because, in connection
with their acquisition, the Company had contractually agreed to allow Messrs.
Bonn and Weber to manage these subsidiaries and Messrs. Bonn, Weber and Howard
consistently used their positions as senior management of these subsidiaries to
thwart the Company's efforts to gain access to the subsidiaries' books and
records. The impact of Messrs. Bonn's, Weber's and Howard's alleged behavior was
such that, had the Company been aware of the defendants' alleged
misrepresentations and omissions regarding IGallery, the Company would not have
acquired IGallery, ITN and CTI in October of 1999. In addition, the defendants'
actions are alleged to have resulted in a waste of Company assets because, among
other things, millions of dollars were spent on unprofitable webmaster
relationships and Company funds were diverted to entities controlled by Mr. Bonn
which had no relationship to the Company. Accordingly, the Complaint seeks
rescission of the purchase of IGallery, ITN and CTI as well as monetary damages
in an amount to be proven at trial.

Mr. Bonn, Mr. Weber and Mr. Howard have filed answers denying the allegations
contained in the Complaint and cross-complaints against the Company seeking that
the Company indemnify them against the claims alleged in the Complaint. The
cross-complaints also seek unspecified monetary damages from the Company,
alleging that the Company breached its employment agreements with Messrs. Bonn,
Weber and Howard by terminating their employment on May 28, 2002, and in the
case of Mr. Weber, that the Company wrongfully terminated his stock options.

In August 2002, the Company filed an Amended Reply in New Frontier Media, Inc.,
et al. vs. Edward J. Bonn, et al. (Superior Court of the State of California for
the County of Los Angeles, Case No. BC 274573) disclosing that the Company had
recently discovered additional evidence of alleged fraud committed by Defendants
Edward J. Bonn and Bradley A. Weber based on transfers of IGI's common stock.

NOTE 12 -- COMMITMENTS

EMPLOYMENT CONTRACTS

In August 2002, the company entered into employment contracts with the Company's
Chief Financial Officer and TEN's President. The employment contracts expire in
March 2004 and March 2003, respectively.

Commitments under these obligations are as follows:

YEAR ENDED MARCH 31,
- --------------------
2003 $363,000
2004 $157,800

For the President, if certain financial criteria are met, an additional $250,000
in bonus could be paid in fiscal year 2003. For the Chief Financial Officer, the
bonus is discretionary.

If the Company experiences a change in control (as defined in Note 8), the
executives may terminate their employment, or if the executives are terminated
without cause within six months of the change

15

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

in control, the executives are entitled to: (i) all accrued obligations; (ii)
all base salary for the duration of the employment period or for one year,
whichever is less; and (iii) for the Chief Financial Officer, the amount of
bonus, if any, paid to the Chief Financial Officer for the fiscal year preceding
the change of control; and for the President, the bonus of $250,000.

16

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

FORWARD LOOKING STATEMENTS

This quarterly report on Form 10-Q includes forward-looking statements. These
statements 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 statements include, but are not limited to: 1) 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; 2) our ability to compete effectively with our primary
Cable/ DBS competitor; 3) our ability to compete effectively with our Internet
competitors; 4) our ability to retain our major customer which accounts for 36%
of our total revenue; and 5) our ability to retain our key executives.

The following table reflects the Company's results of operations for the
quarters and six months ended September 30, 2002 and 2001.

RESULTS OF OPERATIONS

NET REVENUE

Net revenue for the Company was $9.3 million and $18.9 million for the quarter
and six months ended September 30, 2002, respectively, as compared to $13.9
million and $28.8 million for the quarter and six months ended September 30,
2001, respectively, representing decreases of 33% and 34%.

17

The decline in net revenue for the quarter ended September 30, 2002 is due to a
65% decrease in net revenue generated by the Internet Group and a 7% decrease in
net revenue generated by the Subscription/PPV TV Group. Net revenue for the
Internet Group declined from $6.3 million for the quarter ended September 30,
2001 to $2.2 million for the quarter ended September 30, 2002. Revenue from the
Subscription/PPV TV Group declined from $7.6 million for the quarter ended
September 30, 2001 to $7.1 million for the quarter ended September 30, 2002 as a
result of a $0.5 million decrease in its C-Band revenue. Revenue generated by
the Internet Group declined from 45% of total net revenue for the quarter to 24%
of total net revenue for the quarter.

The decline in net revenue for the six months ended September 30, 2002 is a
result of a 66% decrease in revenue generated by the Internet Group and a 3%
decrease in revenue generated by the Subscription/PPV TV Group. Net revenue for
the Internet Group declined from $14.2 million for the six months ended
September 30, 2001 to $4.8 million for the six months ended September 30, 2002.
Net revenue for the Subscription/PPV TV Group declined from $14.6 million for
the six months ended September 30, 2001 to $14.1 million for the six months
ended September 30, 2002 due to a decrease of $1.0 million in its C-Band
revenue.

OPERATING INCOME (LOSS)

Operating income (loss) for the Company decreased to a loss of $0.7 million for
the quarter ended September 30, 2002 from operating income of $0.9 million for
the quarter ended September 30, 2001. Operating income (loss) for the Company
decreased to a loss of $5.6 million for the six months ended September 30, 2002
from income of $1.7 million for the six months ended September 30, 2001.

The decrease in operating income for the Company is due to a decrease in
operating income generated by the Internet Group, a $3.1 million restructuring
charge taken during the quarter ended June 30, 2002 related to closing the
Internet Group's Los Angeles based data center facility, a $0.5 asset impairment
charge for the write down of certain Internet Group URLs incurred during the
quarter ended June 30, 2002, and an increase in operating expenses at the
Corporate Administration level related to legal fees incurred with respect to
the Company's proxy fight and the lawsuit with Edward Bonn, Bradley Weber, Jerry
Howard and Response Telemedia Inc. The Internet Group's operating income
declined from income of $0.6 million and $2.0 million for the quarter and six
months ended September 30, 2001, to operating income of $0.1 million and an
operating loss of $0.4 million for the quarter and six months ended September
30, 2002.

SUBSCRIPTION/PAY-PER-VIEW (PPV) TV GROUP

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

(1) % change gives effect to a 33% decline in the C-band market's total
addressable households. Total addressable C-Band households declined from
0.9 million as of September 30, 2001 to 0.6 million as of September 30,
2002.

(2) This network was formerly known as X-Cubed. The network was renamed XClips
in August 2002.

18

NET REVENUE

Total net revenue for the Subscription/PPV TV Group was $7.1 million for the
quarter ended September 30, 2002, representing a 7% decrease from $7.6 million
for the quarter ended September 30, 2001. Of total net revenue, C-Band net
revenue was $1.9 million for the quarter ended September 30, 2002 as compared to
$2.4 million for the quarter ended September 30, 2001, representing a decrease
of 21%. Revenue from the Group's Cable/DBS services for both quarters ended
September 30, 2002 and 2001 was $5.2 million. Revenue from the Group's Cable/DBS
services is responsible for 73% of the Group's total net revenue for the quarter
ended September 30, 2002, as compared to 68% for the quarter ended September 30,
2001.

Total net revenue for the Subscription/PPV TV Group was $14.1 million for the
six months ended September 30, 2002, representing a 3% decrease from $14.6
million for the six months ended September 30, 2001. Of total net revenue,
C-Band net revenue was $3.9 million for the six months ended September 30, 2002
as compared to $4.9 million for the six months ended September 30, 2001,
representing a decrease of 20%. Revenue from the Group's Cable/DBS services for
the six months ended September 30, 2002 was $10.2 million as compared to $9.7
million for the six months ended September 30, 2001, representing an increase of
5%. Revenue from the Group's Cable/DBS services is responsible for 72% of the
Group's total net revenue for the six months ended September 30, 2002, as
compared to 66% for the six months ended September 30, 2001.

The decrease in C-Band revenue for the quarter and six months ended September
30, 2002 is due to the continued decline of the C-Band market as consumers
convert from C-Band "big dish" analog satellite systems to smaller, 18-inch
digital DBS satellite systems. The C-Band market has decreased 33% since
September 30, 2001, from 0.9 million addressable subscribers to 0.6 million
addressable subscribers as of September 30, 2002. The Subscription/PPV TV Group
experienced a corresponding decrease in subscriptions to its three C-Band
networks of 22% during this same period. In addition, the Subscription/PPV TV
Group terminated its third party C-Band distributor contracts during the past
year because the contracts were no longer favorable to the Group.

During the quarter ended September 30, 2002, the Subscription/PPV TV Group
reformatted and renamed its X-Cubed C-Band network. The new network, named
XClips, is a least-edited "clip" formatted network, similar to the Group's ETC
network. This change in format allows the Group to use its library content to
program the network instead of licensing new content and provides the C-Band
consumer with a uniquely formatted programming option on the platform.

Cable/DBS revenue for the quarter and six months ended September 30, 2001
included revenue from the Company's website, www.ten.com. Revenue from this site
was included in the Subscription/PPV TV Group's segment at that time because the
website was originally created by this Group and was an extension of the
broadcast networks. In January 2002, the Company reformatted this website and
launched it as the flagship site for the Internet Group. The revenue from this
site is now included in the Internet Group's membership revenue.

Revenue from the Group's Cable/DBS services would have increased 6% and 11% for
the quarter and six months ended September 30, 2002, respectively, had the
revenue from www.ten.com been excluded for the comparative time periods.

The increase in Cable/DBS revenue for the quarter and six months ended September
30, 2002 (excluding revenue from www.ten.com) is a result of the following
changes in product mix as described in more detail below: 1) an increase in
revenue from the Extasy network, 2) a decrease in revenue from the Pleasure
network which was offset by an increase in revenue from the Group's
Video-on-Demand ("VOD") services, 3) a decrease in revenue from the TeN network,
and 4) the addition of a new revenue stream from product advertising on the
Group's networks.

As of September 30, 2002, Extasy was available to 7.7 million Cable/DBS
addressable subscribers up from 6.4 million addressable subscribers as of
September 30, 2001, an increase of 20%. The majority of this increase is due to
EchoStar Communication Corporation's DISH network ("DISH") moving the Extasy
network from its satellite at 110 degrees, where it has resided since its launch
on DISH, to

19

its satellite at 119 degrees. DISH's satellite at 119 degrees is viewed by
significantly more addressable subscribers than its satellite at 110 degrees.
This change in satellite location, coupled with an increase in the retail price
for PPV and subscription transactions that was implemented by DISH in September
2001, increased revenue from the Extasy network by 13% quarter over quarter and
28% year over year.

Pleasure was available to 7.6 million addressable subscribers as of September
30, 2002, representing a 52% decline from 15.7 million subscribers as of
September 30, 2001. This decrease in addressable subscribers is a result of
disaffiliations by DISH and Hughes Electronic Corporation's DirecTV ("DirecTV")
that occurred during the prior fiscal year when both companies decided to
increase the number of partially edited services on their platforms and decrease
the number of "most edited" services.

The decrease in revenue from the Pleasure network was offset by an increase in
revenue from the Subscription/PPV TV Group's VOD services which are provided to
cable operators in both its Pleasure and TeN editing formats. The Group is
currently the exclusive provider of adult content for Time Warner Cable's ("Time
Warner") VOD service and added new VOD distribution with Charter Communication,
Inc. ("Charter") during the quarter ended June 30, 2002. As of September 30,
2002, the Group's VOD service was available to 3.0 million Time Warner and
Charter addressable households, up from 0.4 million as of September 30, 2001.

In June 2002, the Subscription/PPV TV Group signed a VOD agreement with TVN
Entertainment ("TVN") to utilize TVN's wide-range delivery platform to
distribute and manage its VOD titles for cable MSOs. TVN is a leading digital
content transport company that currently serves cable systems reaching over 60
million subscribers. This agreement is expected to increase the Group's reach to
new VOD enabled households with many of the top cable MSOs.

The Subscription/PPV TV Group signed a multi-year VOD agreement with Comcast
Corporation ("Comcast") in October 2002. The Group expects to add an additional
1.0 million VOD enabled households during the current fiscal year as a result of
this agreement.

Revenue from the Group's TeN network has declined due to a 30% year over year
decrease in the number of monthly and annual DISH subscribers. This decline in
subscribers has been ongoing since DISH converted TeN to a PPV service in 1999.
In addition, PPV buys for TeN on the DISH platform have declined 19% year over
year due to the addition of a competing network of the same editing standard
that was added to the DISH platform in September 2001.

The Subscription/PPV TV Group added a new revenue stream during the fourth
quarter of its fiscal year ended March 31, 2002, related to the advertising of
adult lifestyle products on its networks and the selling of traditional "spot"
advertising. The Group partners with third parties for the sale and fulfillment
of these adult lifestyle products and shares in any revenue generated by the
advertisement of the product on its networks. This revenue stream accounts for
8% of the Subscription/PPV TV Group's total quarterly Cable/DBS revenue and 7%
of the total Cable/DBS revenue for the six months ended September 30, 2002.

The Subscription/PPV TV Group signed a deal with the National Cable Television
Cooperative ("NCTC") in October 2002. The NCTC is a cooperative that negotiates
programming contracts for its more than 1,000 member multiple system operators
("MSOs") representing 14 million subscribers. Under the terms of the agreement,
NCTC member systems will have the opportunity to launch the Group's networks
without being burdened by the process of completing a license agreement of their
own with the Group. The Subscription/PPV TV Group is the only adult
entertainment provider to be a part of the NCTC.

The Subscription/PPV TV Group will be re-branding its family of networks around
the TeN "umbrella" brand and launching two new 24-hour partially edited services
in January 2002. The new channel launches are expected to address the increasing
demand for the Group's partially edited services. The Group currently has launch
commitments from three MSO's, representing 750,000

20

addressable subscribers, for the new partially edited networks. The networks are
expected to launch on January 1st.

The two new networks will be named TeN Blue and TeN Blox. TeN Blue will be a
partially edited service offering amateur, ethnic and urban oriented feature
programming. TeN Blox will be the "clip" sister service to TeN Blue (i.e., the
same "clip" format as ETC and XClips).

The Subscription/PPV TV Group will be renaming its services as follows: Pleasure
to remain Pleasure, TeN to remain TeN, ETC to be renamed TeN Clips, Extasy to be
renamed TeN Xtsy, XClips to be renamed TeN Max, and True Blue to be renamed TeN
Blue+.

COST OF SALES

Cost of sales for the Subscription/PPV TV Group was $3.5 million, or 49% of
revenue, for the quarter ended September 30, 2002, as compared to $3.3 million,
or 43% of revenue, for the quarter ended September 30, 2001, an increase of 6%.
Cost of sales for the Subscription/PPV TV Group was $6.9 million or 49% of
revenue for the six months ended September 30, 2002, as compared to $6.5 million
or 45% of revenue for the six months ended September 30, 2001, an increase of
6%.

Cost of sales consists of expenses associated with broadcast playout, satellite
uplinking, satellite transponder leases, programming acquisition costs,
amortization of content licenses, and the Subscription/PPV TV Group's in-house
call center operations for its C-Band business.

The increase in cost of sales for the quarter and six months is due to: a) an
increase in the amortization of the Group's content licenses and b) an increase
in costs associated with the digital broadcast center as the Group has added
additional functionalities and redundancies. These increases were offset by
declines in the Group's transponder and call center operation costs as well as
by the decrease in costs associated with the Company's www.ten.com website being
moved to the Internet Group's operations.

OPERATING INCOME

Operating income for the Subscription/PPV TV Group for the quarter ended
September 30, 2002 was $1.4 million as compared to operating income of $1.8
million for the quarter ended September 30, 2001, representing a decrease of
22%. Operating income for the Subscription/PPV TV Group for the six months ended
September 30, 2002 was $3.0 million as compared to operating income of $3.1
million for the six months ended September 30, 2001, representing a decrease of
3%.

The 22% decrease in operating income for the quarter ended September 30, 2002 is
due to a decline in gross margin from 57% to 51% quarter over quarter. This
decline in gross margin was slightly offset by a decrease in operating expenses
as a percentage of revenue. Operating expenses as a percentage of revenue
declined from 33% as of the quarter ended September 30, 2001 to 30% for the
quarter ended September 30, 2002.

The 3% decrease in operating income for the six months ended September 30, 2002
is due to a decline in gross margin from 55% to 51% year over year. This decline
in gross margin was slightly offset by a decrease in operating expenses as a
percentage of revenue. Operating expenses as a percentage of revenue declined
from 34% as of the six months ended September 30, 2001 to 29% for the six months
ended September 30, 2002.

The decrease in operating expenses for the quarter and six months ended
September 30, 2002 is due to a decline in advertising and trade show costs as
compared to a year ago, as well as to a decrease in bad debt expense related to
the C-Band distributor contracts. In addition, due to an accounting
pronouncement change, goodwill and intangible assets with indefinite lives are
no longer required to be amortized and are, instead, tested for impairment on an
annual basis using the guidance for measuring impairment as set forth in SFAS
142, "Goodwill and Other Intangible Assets". Goodwill amortization was $159,000
and $318,000 for the quarter and six months ended September 30, 2001,
respectively.

21

INTERNET GROUP
NET REVENUE

Total net revenue for the Internet Group was $2.2 million for the quarter ended
September 30, 2002, as compared to $6.3 million for the quarter ended September
30, 2001, representing a decrease of 65%. Total net revenue for the Internet
Group was $4.8 million for the six months ended September 30, 2002 as compared
to $14.2 million for the six months ended September 30, 2001, representing a
decrease of 66%. The Internet Group's revenue is comprised of membership revenue
from its consumer-based web sites, revenue from the sale of its content feeds,
and revenue from the sale of exit traffic.

Net membership revenue for the Internet Group was $1.5 million for the quarter
ended September 30, 2002, as compared to net membership revenue of $4.2 million
for the quarter ended September 30, 2001, representing a decrease of 64%. Net
membership revenue for the Internet Group was $3.2 million for the six months
ended September 30, 2002, as compared to net membership revenue of $9.5 million
for the six months ended September 30, 2001, representing a decrease of 66%.

The Internet Group has seen a decline in its net membership revenue for the
quarter and six months as a result of a decrease in traffic to its sites. This
decrease in traffic to the Internet Group's sites during the quarter and six
months ended September 30, 2002 is due to the elimination of almost all traffic
acquisition costs. The Internet Group ceased purchasing traffic for its web
sites during the current fiscal year and has, instead, depended solely upon its
1,500 adult domain names to generate traffic for its sites. Marketing efforts to
generate traffic to its websites are focused on cross selling the Internet
Group's flagship website, www.ten.com, on the Subscription/PPV TV Group's
networks, search engine optimization techniques, and revenue sharing agreements
with portals and third party gatekeepers in order to gain direct access to
consumers in search of adult entertainment. This effort to create partnerships
with portals and third party gatekeepers is essentially a duplication of the
Subscription/PPV TV Group's model for the Internet.

The Internet Group executed its first such revenue sharing agreement with On
Command Corporation ("On Command") whereby it will become the exclusive provider
of adult content for On Command's TV Internet Service. The Internet Group will
be providing a customized version of its www.ten.com broadband product for
delivery through On Command's TV Internet Service in hotel rooms nationwide. The
Internet Group began the initial distribution of this product through On Command
systems during October 2002 and expects to be fully distributed on the On
Command systems by the end of the fiscal year.

The decline in membership revenue is also attributable to the Internet Group
decreasing the monthly retail price of its flagship web site, www.ten.com, from
$29.95 to $14.74 during the quarter ended December 31, 2001. The Internet Group
plans to increase the monthly retail price of this site during its third fiscal
quarter because the price decrease did not have the expected effect of
increasing conversion rates or retention for this site. In addition, the
Internet Group will be eliminating all low cost trials memberships to its sites
because it believes that these trials do not improve conversion rates.

The Internet Group has also decreased the number of consumer web sites that it
markets from 30 to 10. The decrease in the number of web sites marketed allows
the Internet Group to ensure that the web sites are always updated with new
content on a daily/weekly basis while increasing the depth, breadth and
relevance of the content included in each site.

Revenue from the Internet Group's sale of content was $0.3 million for the
quarter ended September 30, 2002, as compared to $0.5 million for the quarter
ended September 30, 2001, representing a decrease of 40%. Revenue from the
Internet Group's sale of content was $0.7 million for the six months ended
September 30, 2002, as compared to $1.1 million for the six months ended
September 30, 2001, representing a decrease of 36%. The decrease in revenue from
the sale of content is due to a softening in the demand for content by
third-party webmasters and a lack of focus on creating new content products to
sell. The Internet Group has begun to focus more effort on this revenue stream
by

22

hiring a new sales team, establishing a fixed matrix of retail pricing for its
products, creating new content products to market, and by establishing a billing
and collections process that ensures pre-payment for products. The Internet
Group recently launched two new content products and has plans to launch a new
product every fourteen days.

Revenue is earned from traffic sales by forwarding exit traffic and traffic from
selected vanity domains to affiliate webmaster marketing programs, monetizing
foreign traffic via international dialer companies, marketing affiliated
webmaster sites through the Internet Group's double opt-in email list, and by
directing traffic to its pay-per-click ("PPC") search engine, www.sexfiles.com.
Revenue from sale of traffic was $0.4 million and $0.9 million for the quarter
and six months ended September 30, 2002, respectively, as compared to $1.4
million and $3.3 million for the quarter and six months ended September 30,
2001, respectively, representing decreases of 71% and 73%. The Internet Group's
revenue from sale of traffic has decreased because of a decline in traffic to
its web sites as a result of the elimination of its traffic acquisition
programs. The decline in traffic to the Internet Group's web sites results in
less traffic available to sell both domestically and internationally and less
traffic to direct through its PPC search engine.

The Internet Group has changed its methodology for monetizing the exit traffic
from its sites (i.e., traffic that comes through its web sites and does not
convert into a paying member) during the current fiscal year. Instead of selling
its traffic to affiliated webmasters it now directs most of these exiting
consumers to its own PPC search engine. The PPC search engine allows the
Internet Group to monetize its exit traffic by auctioning off keyword searches
to advertisers that prepay for placement within the search engine. This results
in a pure market model for the advertiser. The more the advertiser bids for the
keyword, the higher their site is shown in the list of search results returned
to the consumer. The result for the advertiser is qualified traffic that is more
likely to convert into a paying member, while the consumer gets immediate access
to relevant results.

The Internet Group entered into an agreement with Fast Search & Transfer
("FAST"), a leading developer of search and real-time alert technologies, in
October 2002. Under the terms of the agreement, FAST will include Sexfiles.com
search listings on a 24-hour basis within its FAST PartnerSite product. FAST
PartnerSite is an integrated marketing tool that drives highly qualified and
targeted search traffic to web sites desiring to be more visible to their target
audience with guaranteed 24-hour web site index inclusion through FAST's network
of global portal partners. Through the FAST PartnerSite product, Sexfiles.com
search listings will be included in FAST Web Search, one of the world's largest
search indexes, serving over 100 million monthly unique users worldwide and
utilized by some of the world's most trafficked search engines, portals, and
destination sites, including AlltheWeb.com. The Internet Group will begin
testing with FAST during November 2002.

In addition to revenue from its PPC search engine, the Internet Group's sale of
traffic revenue includes revenues from the marketing of its double opt-in email
program. The Internet Group has hired a sales and marketing team that is
dedicated to this revenue stream. Revenue is earned by selling email campaigns
to customers that are marketed to the Group's 1.4 million opt-in email users.
Email campaigns can be sold on a cost-per-click or cost-per-acquisition basis
with customers purchasing a dedicated emailer where only their sites are
included or a composite emailer where their sites are included with others.

COST OF SALES

Cost of sales for the Internet Group was $1.0 million, or 45% of revenue, for
the quarter ended September 30, 2002, as compared to $3.4 million, or 54% of
revenue, for the quarter ended September 30, 2001, representing a decrease of
71%. Cost of sales for the Internet Group was $2.8 million, or 58% of revenue,
for the six months ended September 30, 2002, as compared to $7.5 million, or 53%
of revenue, for the six months ended September 30, 2001, representing a decrease
of 63%. Cost of sales consists of expenses associated with credit card fees,
merchant banking fees, bandwidth, membership acquisition costs (purchase of
traffic), web site content costs, and depreciation of assets.

23

More than 70% of the traffic to the Internet Group's web sites used to be
acquired through affiliate programs marketed to webmasters. These programs
compensated webmasters for traffic referrals to the Internet Group's web sites.
A webmaster would be paid a fee of $25 - $45 per referral that resulted in a
monthly membership to one of the Internet Group's web sites. The Internet Group
no longer actively markets any traffic acquisition programs. The Internet
Group's traffic acquisition costs also included payments made to affiliated
webmasters for the acquisition of email addresses as part of its opt-in email
program. The Internet Group discontinued paying for the acquisition of email
addresses during the quarter ended June 30, 2002.

As a result of these changes, the Internet Group's traffic acquisition costs
were $0 and $0.2 million for the quarter and six months ended September 30,
2002, as compared to $1.3 million and $3.2 million for the quarter and six
months ended September 30, 2001.

Bandwidth costs have declined from $0.4 million and $0.9 million as of the
quarter and six months ended September 30, 2001, respectively, to $0.3 million
and $0.6 million as of the quarter and six months ended September 30, 2002,
representing decreases of 25% and 33%. These decreases are a result of the
renegotiation of bandwidth contracts with each of the Internet Group's providers
and a decrease in the amount of bandwidth used as a result of the decline in
traffic to the Group's sites.

Merchant banking fees, including fees for credits and chargebacks, were 13% of
net membership revenue for both the quarter and six months ended September 30,
2002 as compared to 14% and 13% of net revenue for the quarter and six months
ended September 30, 2001. The Internet Group outsourced all of its credit card
processing and customer service functions to a third party in December 2001.
Although its merchant banking fees increased due to the outsourcing of these
functions (which was offset by a decline in payroll costs associated with the
termination of its in-house customer service function) merchant banking fees as
a percentage of revenue remained the same year to year because the Internet
Group did not incur fines or penalties during the current fiscal year. The
Internet Group incurred a Visa fine during the quarter ended September 30, 2001,
which was ultimately overturned in a subsequent quarter.

Operational expenses, the majority of which relates to depreciation and
amortization of Internet equipment, were $0.4 million and $1.3 million for the
quarter and six months ended September 30, 2002, respectively, as compared to
$0.9 million and $1.7 million for the quarter and six months ended September 30,
2001, respectively, representing decreases of 56% and 24%. The decrease in
operational expenses for the quarter and six months ended September 30, 2002 is
attributable to the write-off of excess equipment during the first quarter
related to the relocation of the Internet Group's data center from Los Angeles
to Boulder, and impaired assets written off during the first quarter (see
"Restructuring Expenses" and "Asset Impairment Charges" below).

OPERATING INCOME (LOSS)

Operating income for the Internet Group was $0.1 million for the quarter ended
September 30, 2002, as compared to $0.6 million for the quarter ended September
30, 2001, representing a decrease of 83%. Operating income (loss) for the
Internet Group was an operating loss of $0.4 million for the six months ended
September 30, 2002, as compared to operating income of $2.0 million for the six
months ended September 30, 2001, representing a decrease of 120%.

The decrease in operating income for the quarter and six months ended September
30, 2002 is a result of a decrease in revenue of 65% and 66% for each period
respectively. Gross margin increased from 46% to 55% for the quarter ended
September 30, 2002 as a direct result of the restructuring completed during the
first quarter of the current fiscal year.

Operating expenses were 50% and 37% of net revenue for the quarters ended
September 30, 2002 and 2001, respectively, and 50% and 33% of net revenue for
the six months ended September 30, 2002 and 2001, respectively. Total operating
expenses decreased 52% and 49% from the quarter and six months ended September
30, 2001.

24

The decrease in operating expenses for the quarter and six months ended
September 30, 2002 is due to a decrease in payroll, benefit, and facility costs
as a result of the restructuring of the customer service, marketing, sales and
engineering operations concluded during the fourth quarter of the fiscal year
ended March 31, 2002, a decrease in trade show and advertising costs, and a
decrease in legal costs.

As part of its lawsuit filed against Edward Bonn, Bradley Weber, Jerry Howard,
and Response Telemedia, Inc. (see "Legal Proceedings") the Company is seeking
rescission of the acquisition of the Internet Group and the return of the 6
million shares of the Company's common stock issued as consideration in the
acquisition. Should the Company be successful in the rescission of this deal, it
does not expect that the rescission would have a material effect on its results
from operations since the Internet Group's revenue is currently generated from
products created since the acquisition, including its flagship web site
www.ten.com, the PPC engine, new content packages, and the opt-in email
marketing program.

RESTRUCTURING EXPENSES

During the quarter ended June 30, 2002, the Company adopted a restructuring plan
with respect to the Internet Group's data center facility. The Company is
closing the Internet Group's in-house data center in Sherman Oaks, California
and moving its servers, bandwidth and content delivery to the same location as
the Subscription/PPV TV Group's digital broadcast facility in Boulder, Colorado.
The Internet Group had been expecting to outsource these functions to a third
party provider. However, after several months of in-depth analysis, it was
determined that these functions could be done more efficiently and effectively
if they were integrated into the digital broadcast facility's plant. The
integration will be completed by the end of the Company's third fiscal quarter.

As a result of this restructuring, the Company expects to save approximately
$1.8 million on an annualized basis, which will be reflected in its cost of
sales. Costs of sales decreased 47% from the first fiscal quarter to the second
fiscal quarter of this year due to this restructuring. Total restructuring
charges of $3.1 million related to this plan were recorded during the six months
ended September 30, 2002, of which $28,000 related to the termination of 10
employees. Also included in this charge was $0.4 million related to the data
center space in Sherman Oaks that the Company is attempting to sublet and $2.6
million of expenses related to excess equipment.

During the current quarter, the Internet Group increased the amount of its
restructuring expense accrued during the fourth quarter of the prior fiscal year
by $0.3 million due to an adjustment to the estimate used in computing the
expense related to its excess space. The change in the estimate was related to
an extension of the time necessary to sublet the space. Future adjustments to
this accrual may be required if the space is not sublet when expected. In
addition, the restructuring expense for this same period was decreased by $0.1
million during the current fiscal quarter for a change in the amount estimated
for certain payroll related expenses.

ASSET IMPAIRMENT CHARGES

During the first quarter of fiscal year 2003, the Company recognized impairment
losses on certain URLs of approximately $535,000 in connection with the Internet
Division. Management identified certain conditions including a declining gross
margin due to the availability of free adult content on the Internet and
decreased traffic to the Company's URLs as indicators of asset impairment. These
conditions led to operating results and forecasted future results that were
substantially less than had been anticipated at the time of the Company's
acquisition of IGI, ITN, and CTI. The Company revised its projections and
determined that the projected results would not fully support the future
amortization of the URLs associated with IGI, ITN, and CTI. In accordance with
the Company's policy, management assessed the recoverability of the URLs using a
cash flow projection based on the remaining amortization period of four years.
Based on this projection, the cumulative cash flow over the remaining
amortization period was insufficient to fully recover the intangible asset
balance.

25

CORPORATE ADMINISTRATION

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

Corporate administration expenses were $2.1 million and $1.5 million for the
quarters ended September 30, 2002 and 2001, respectively, representing an
increase of 40%. Corporate administration expenses were $4.6 million and $3.4
million for the six months ended September 30, 2002 and 2001, respectively,
representing an increase of 35%.

The increase in corporate administration expenses for the quarter and six months
ended September 30, 2002 is due to the following items: a) an increase in legal
fees related to the Company's proxy fight and its lawsuit filed against Edward
Bonn, Bradley Weber, Jerry Howard, and Response Telemedia, Inc.; b) a $0.2
million non-cash consulting expense incurred for warrants to purchase Company
stock which were granted to outside consultants; c) an increase in accounting,
printing, postage and investor relation fees related to the proxy fight and the
Company's lawsuit referenced in item (a); and d) an increase in insurance and
facility expenses.

OTHER EXPENSE

Other expense increased from $0.9 million for the six months ended September 30,
2001 to $1.0 million for the six months September 30, 2002, representing an
increase of 11%. This increase is due to an $117,500 write down in value of the
Company's investment in Metro Global Media, Inc. ("Metro") stock and the
write-off of $187,000 in non-cash debt offering costs related to the early
repayment of the Company's debt obligations during the quarter ended June 30,
2002.

In July 1999, the Company entered into an agreement with Metro in which it
received 250,000 shares of Metro common stock. The market value of this stock on
the date of the transaction was $2.47 per share. Subsequent to this agreement
Metro was delisted from the NASDAQ. During the quarter ended September 30, 2000,
the Company wrote the Metro stock down to a value of $117,500. At that time,
Metro was still thinly traded on NASDAQ's over-the-counter market at $0.47 per
share. During the quarter ended June 30, 2002, the Metro stock ceased trading
and the Company wrote off the remaining value of $117,500.

LIQUIDITY AND CAPITAL RESOURCES

For the six months ended September 30, 2002, cash used in operating activities
was $1.0 million and was primarily associated with a net loss of $6.7 million,
an increase in accounts receivable of $1.0 million related to the
Subscription/PPV TV Group and a $2.3 million increase in prepaid distribution
rights related to the Company's licensing of content. This use of cash was
offset by a $2.6 million restructuring charge related to closing the Internet
Group's Los Angeles based data center facility, $3.8 million in depreciation and
amortization, $0.5 million related to non-cash expenses from warrants issued to
consultants for services and issued as offering costs related to debt
obligations repaid during the period, and a $0.9 million increase in accounts
payable and accrued liabilities.

For the six months ended September 30, 2001, cash provided by operating
activities of $4.1 million was primarily associated with net income of $0.5
million, depreciation and amortization expense of $4.2 million, a $0.7 million
decrease in accounts receivable, and a decrease of $1.6 million in other
receivables and prepaid expenses. This cash provided by operations was offset by
a $2.5 million increase in content licensing costs and a $0.7 million decrease
in accrued liabilities.

Cash used in investing activities was $0.3 million for the six months ended
September 30, 2002 compared to cash used in investing activities of $2.0 million
for the six months ended September 30, 2001. Cash used in investing activities
for the six months ended September 30, 2002 was primarily related to the
purchase of software licenses, minor equipment upgrades to the Subscription/PPV
TV

26

Group's digital broadcast facility and the purchase of encrypting equipment for
new cable launches. Cash used in investing activities for the six months ended
September 30, 2001 was primarily related to $0.5 million paid for the
acquisition of the subscriber base of Emerald Media, Inc. by the Subscription/
PPV TV Group and $1.3 million related to the build out of office space for the
Internet Group, the data center facility and the Boulder, Colorado headquarters.

Cash used in financing activities was $0.3 million for the six months ended
September 30, 2002, compared to cash used in financing activities of $3.0
million for the six months ended September 30, 2001. Cash used in financing
activities for the six months ended September 30, 2002 was related to $1.0
million paid on the Company's capital lease obligations. This use of cash was
offset by the issuance of 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 to 0.5 million shares of Class A Redeemable
Preferred Stock during the six months ended September 30, 2002. The preferred
stock pays dividends at 15.5% on a monthly and quarterly basis and is redeemable
anytime at the Company's option until January 2004, by which time it must be
redeemed.

Cash used in financing activities of $3.0 million for the six months ended
September 20, 2001 was related to the repayment of $2.0 million in principal on
the Company's outstanding debt obligations and $1.0 million in payments made on
the Company's capital lease obligations.

The Company expects to fund the dividends due on the preferred stock from its
cash flows from operations. The Company anticipates funding the redemption of
the preferred stock in 2004 from its cash flows from operations or a refinancing
of the obligation prior to the redemption.

If New Frontier Media were to lose its major customer that accounts for 36% of
its revenue, its ability to finance its operating requirements would be severely
impaired.

The Company believes that its existing cash balances and cash generated from
operations will be sufficient to satisfy its operating requirements.

ITEM 3. 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 Sensitivity. As of September 30, 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 4. CONTROLS AND PROCEDURES

As required by SEC rules, we have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures within 90 days of the filing
of this quarterly report. This evaluation was carried out under the supervision
and with the participation of our management, including our principal executive
officer and principal financial officer. Based on this evaluation, these
officers have concluded that the design and operation of our disclosure controls
and procedures are effective. There were no significant changes to our internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of their evaluation.

Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in

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the SEC's rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including the principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

The Company is involved in two material legal proceedings.

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, Mr. Weber and Mr. Howard have filed answers denying the allegations
contained in the Complaint and cross-complaints against the Company seeking that
the Company indemnify them against the claims alleged in the Complaint. The
cross-complaints also seek unspecified monetary damages from the Company,
alleging that the Company breached its employment agreements with Messrs. Bonn,
Weber and Howard by terminating their employment on May 28, 2002, and in the
case of Mr. Weber, that the Company wrongfully terminated his stock options.

In August 2002, the Company filed an Amended Reply in New Frontier Media, Inc.,
et al. vs. Edward J. Bonn, et al. (Superior Court of the State of California for
the County of Los Angeles, Case No. BC 274573) disclosing that the Company had
recently discovered additional evidence of alleged fraud committed by Defendants
Edward J. Bonn and Bradley A. Weber based on transfers of IGI's common stock.

The Company entered into a settlement agreement with Mr. Weber on November 8,
2002 contemplating the dismissal with prejudice of the Company's causes of
action against Mr. Weber and Mr. Weber's cross-complaints against the Company.

Although the ultimate outcome of Mr. Bonn's and Mr. Howard'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 their cross-complaints and that the Company has
meritorious defenses. In the opinion of management, resolution of Mr. Bonn's and
Mr. Howard's cross-complaints is not expected to have a material adverse effect
on the financial position of the Company.

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

29

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 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. The case has been set for trial in March 2003.

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.

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

(a) The Company held an annual meeting of its shareholders on August 20, 2002
(the "Annual Meeting").

(b) The Annual Meeting involved the election of directors. The directors elected
at the meeting were Mark H. Kreloff, Michael Weiner, Alan L. Isaacman, Hiram
J. Woo, Koung Y. Wong, Melissa Hubbard and Dr. Skender Fani.

(c) Two matters were voted on at the Annual Meeting, as follows:

(i) The election of seven directors to the Board of Directors for the
following year and until their successors are elected.

The votes were cast for this matter as follows:

(ii) The ratification of the appointment of Grant Thornton LLP as the
Company's independent auditors for the fiscal year ending March 31,
2003.

The votes were cast for this matter as follows:

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a) Exhibits

10.1 Employment agreement between Ken Boenish and New Frontier Media, Inc.

10.2 Amendment IV to Teleport Services Agreement between Colorado Satellite
Broadcasting, Inc. and Williams Vyvx Services

10.3 Amendment Number Two to the Agreement Between Colorado Satellite
Broadcasting, Inc. and Loral Skynet Concerning Skynet Space Segment
Service

99.1 Certification by CEO Mark Kreloff pursuant to U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act Act of 2002

99.2 Certification by CFO Karyn Miller pursuant to U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act Act of 2002

b) Reports on Form 8-K

The Company did not file any reports on Form 8-K during the quarter ended
September 30, 2002

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SIGNATURES

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

NEW FRONTIER MEDIA, INC.

/s/ Karyn L. Miller

Karyn L. Miller
Chief Financial Officer
(Principal Accounting Officer)
Dated: November 13, 2002

32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350
ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of New Frontier Media, Inc. (the
"Company") on Form 10-Q for the period ending September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Mark Kreloff, Chief Executive Officer of the Company, certify, pursuant to
Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) and
15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.

/s/ Mark Kreloff

- ------------------------------------
Mark Kreloff
Chief Executive Officer
November 13, 2002

33

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350
ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of New Frontier Media, Inc. (the
"Company") on Form 10-Q for the period ending September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Karyn L. Miller, Chief Financial Officer of the Company, certify, pursuant to
Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) and
15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.

/s/ Karyn L. Miller

- ------------------------------------
Karyn L. Miller
Chief Financial Officer
November 13, 2002

34