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

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
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 December 31, 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 February 13, 2003, 21,322,816 shares of Common Stock, par value $.0001,
were outstanding.

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FORM 10-Q
NEW FRONTIER MEDIA, INC.
Index

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 CONDENSED 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 nine months ended December 31,
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 CONDENSED 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, 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.

In December 2002, FASB issued Statement 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure. This Statement amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The transition guidance and annual disclosure
provisions of Statement 148 are effective for fiscal years ending after December
15, 2002, with earlier application permitted in certain circumstances. The
interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002.
Under the provisions of Statement 123 that remain unaffected by Statement 148,
companies may either recognize expenses on a fair value based method in the
income statement or disclose the pro forma effects of that method in the
footnotes to the financial statements. The Company is still assessing this new
standard but does not believe that it will have a material effect on its results
of operation 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):

9

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

Options and warrants which were excluded from the calculation of diluted
earnings per share because the exercise prices of the options and warrants were
greater than the average market price of the common shares and because the
Company reported a net loss during the period were approximately 7,356,000 for
the period ended December 31, 2002. Options and warrants which were excluded
from the calculation of diluted earnings per share because the exercise prices
of the options and warrants were greater than the average market price of the
common shares for the quarter and nine months ended December 31, 2001 were
approximately 6,034,000 and 5,915,000, respectively. Inclusion of these options
and warrants would be antidilutive.

NOTE 3 -- SHAREHOLDERS' EQUITY

During the quarter and nine months ended December 31, 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

The Company grants warrants to consultants for services provided allowing them
to purchase common stock of New Frontier Media. During the quarter and nine
months ended December 31, 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 CONDENSED 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 is as follows:

At December 31, 2002 and March 31, 2002, accounts receivable from EchoStar was
approximately $3,137,000 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 closed
the Internet Group's in-house data center in Sherman Oaks, California and moved
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.

Total restructuring charges of approximately $3.0 million related to this plan
were recorded during the nine months of fiscal year 2003, of which $28,000
related to the termination of 10 employees. Also included in this charge was
approximately $439,000 related to the data center space in Sherman Oaks that the
Company is attempting to sublet and approximately $2,553,000 of expenses related
to excess computer equipment.

11

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

During the quarter ended December 31, 2002 the Company lowered the accrued
restructuring charges approximately $256,000 due to a change in estimate with
respect to several employment contracts.

NOTE 8 -- CLASS A REDEEMABLE PREFERRED STOCK

As of the quarter ending 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).

12

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

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.

The following presents a comparison of net (loss) earnings and (loss) earnings
per share for the quarter and nine months ended December 31, 2002 to the
respective adjusted amounts for the quarter and nine months ended December 31,
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 $459,000 in 2004,
$317,000 in 2005, $109,000 in 2006, $109,000 in 2007 and $109,000 in 2008.

NOTE 10 -- ASSET IMPAIRMENT CHARGES

During the quarter and nine months ended December 31, 2002, the Company
recognized impairment losses on certain URLs of approximately $805,000 and
$1,341,000, respectively, 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

13

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

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 two to four years. Based on this projection, the undiscounted sum of the
estimated cash flow over the remaining amortization periods was insufficient to
fully recover the intangible asset balance.

The Company 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
Company 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 Company 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 Company 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

The Company is involved in two material legal proceedings. Reference is made to
the Company's Form 10-Q filing for the fiscal period ended September 30, 2002
for a detailed description thereof.

The first legal proceeding relates to a 13-Count Complaint filed by the Company
in the Superior Court of the State of California for the County of Los Angeles
against: (i) Mr. Edward Bonn and Mr. Bradley A. Weber; (ii) Jerry D. Howard, the
former Chief Financial Officer of Interactive Gallery, Inc. ("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, among other things, that,
from early 1999 to the date of the closing, defendants Bonn, Weber, and Howard
knowingly made material misrepresentations or omissions regarding, among other
things, IGallery's business, business practices and prospects 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. 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.
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

14

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

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.

During the fiscal quarter ended December 31, 2002, the Company settled its
litigation with Mr. Weber.

The second legal proceeding relates to a complaint filed by the Company on
August 3, 1999 in District Court for the city and county of Denver (Colorado
Satellite Broadcasting, Inc., et al. vs. Pleasure Licensing LLC, et al., case no
99CV4652) against Pleasure Licensing LLC and Pleasure Productions, Inc.
(collectively "Pleasure") alleging breach of contract, breach of express
warranties, breach of implied warranty of fitness for a particular 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 Pleasure Productions litigation had previously been set for trial in March
2003. The trial date has since been vacated by the court at the request of
counsel for Pleasure Productions. A new trial date has not yet been set.

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 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.

NOTE 13 -- DEFERRED TAX ASSETS

The Company has deferred tax assets that have arisen primarily as a result of
operating losses incurred and other temporary differences between book and tax
accounting. Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," requires the establishment of a valuation allowance when, based
on an evaluation of objective evidence, there is a likelihood that some portion
or all of the deferred tax assets will not be realized. The Company continually
reviews the adequacy of the valuation allowance for deferred tax assets. During
the quarter ended December

15

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

31, 2002, the Company determined that it is more likely than not that its
deferred tax assets will not be realized and accordingly has recorded income tax
expense and valuation allowance against the net deferred tax assets of $5.3
million. If the Company generates future taxable income against which these tax
attributes may be applied, some portion or all of the valuation allowance would
be reversed and a corresponding increase in net income would be reported in
future periods.

NOTE 14 -- SUBSEQUENT EVENTS

The Internet Group will be restructuring its operations during the fourth
quarter of the current fiscal year. This final restructuring will result in at
least a 50% reduction in work force and the elimination of the PPC, sale of exit
traffic, and email revenue streams. The Internet Group will focus primarily on
the sale of content packages to adult webmasters and the marketing of its
premiere broadband site, www.ten.com, to third party gatekeepers such as On
Command and to consumers viewing the Subscription/PPV TV Group's networks. All
traffic from its domain names will be directed to ten.com and this will be the
only site that is maintained and marketed by the Group. This restructuring will
be completed by the end of the fourth quarter.

Effective February 14, 2003, Mark Kreloff resigned as the Company's Chairman and
Chief Executive Officer. Mr. Kreloff will continue to serve as a director of the
Company and will remain employed by the Company through March 31, 2003.

Michael Weiner, who has served as Executive Vice President of the Company, has
been appointed by the Company's Board of Directors to the office of President.

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 nine months ended December 31, 2002 and 2001.

RESULTS OF OPERATIONS

NET REVENUE

Net revenue for the Company was $8.6 million and $27.5 million for the quarter
and nine months ended December 31, 2002, respectively, as compared to $12.4
million and $41.2 million for the quarter and nine months ended December 31,
2001, respectively, representing decreases of 31% and 33%.

17

The decline in net revenue for the quarter ended December 31, 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 $5.1 million for the quarter ended December 31,
2001 to $1.8 million for the quarter ended December 31, 2002. Revenue from the
Subscription/PPV TV Group declined from $7.3 million for the quarter ended
December 31, 2001 to $6.8 million for the quarter ended December 31, 2002 as a
result of a $0.5 million decrease in its C-Band revenue. Revenue generated by
the Internet Group declined from 41% of total net revenue for the quarter to 21%
of total net revenue for the quarter.

The decline in net revenue for the nine months ended December 31, 2002 is a
result of a 66% decrease in revenue generated by the Internet Group and a 5%
decrease in revenue generated by the Subscription/PPV TV Group. Net revenue for
the Internet Group declined from $19.3 million for the nine months ended
December 31, 2001 to $6.6 million for the nine months ended December 31, 2002.
Net revenue for the Subscription/PPV TV Group declined from $21.9 million for
the nine months ended December 31, 2001 to $20.9 million for the nine months
ended December 31, 2002 due to a decrease of $1.6 million in its C-Band revenue.

OPERATING INCOME (LOSS)

Operating income (loss) for the Company decreased to a loss of $0.3 million for
the quarter ended December 31, 2002 from operating income of $0.5 million for
the quarter ended December 31, 2001. Operating income (loss) for the Company
decreased to a loss of $5.9 million for the nine months ended December 31, 2002
from income of $2.2 million for the nine months ended December 31, 2001.

The decrease in operating income for the quarter ended December 31, 2002 is
related to an asset impairment charge in the amount of $0.8 million. The Company
recognized an impairment loss on certain URLs used by 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.

The decrease in operating income for the nine months ended December 31, 2002 is
related to a decrease in operating income generated by the Internet Group, a
$2.9 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 $1.3 asset impairment charge for the write down of certain Internet Group
URLs, and a $1.9 million increase in operating expenses at the Corporate
Administration level related to the Company's proxy fight and the lawsuit filed
against Edward Bonn, Bradley Weber, Jerry Howard and Response Telemedia, Inc.
The Internet Group's operating income declined from income of $2.3 million to an
operating loss of $0.2 million for the nine months ended December 31, 2002.

18

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 30% decline in the C-band market's total
addressable households. Total addressable C-Band households declined from
840,000 as of December 31, 2001 to 590,000 as of December 31, 2002.

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

NET REVENUE

Total net revenue for the Subscription/PPV TV Group was $6.8 million for the
quarter ended December 31, 2002, representing a 7% decrease from $7.3 million
for the quarter ended December 31, 2001. Of total net revenue, C-Band net
revenue was $1.8 million for the quarter ended December 31, 2002 as compared to
$2.3 million for the quarter ended December 31, 2001, representing a decrease of
22%. Revenue from the Group's Cable/DBS services for both quarters ended
December 31, 2002 and 2001 was $5.0 million. Revenue from the Group's Cable/DBS
services is responsible for 74% of the Group's total net revenue for the quarter
ended December 31, 2002, as compared to 68% for the quarter ended December 31,
2001.

Total net revenue for the Subscription/PPV TV Group was $20.9 million for the
nine months ended December 31, 2002, representing a 5% decrease from $21.9
million for the nine months ended December 31, 2001. Of total net revenue,
C-Band net revenue was $5.6 million for the nine months ended December 31, 2002
as compared to $7.2 million for the nine months ended December 31, 2001,
representing a decrease of 22%. Revenue from the Group's Cable/DBS services for
the nine months ended December 31, 2002 was $15.3 million as compared to $14.7
million for the nine months ended December 31, 2001, representing an increase of
4%. Revenue from the Group's Cable/DBS services is responsible for 73% of the
Group's total net revenue for the nine months ended December 31, 2002, as
compared to 67% for the nine months ended December 31, 2001.

The decrease in C-Band revenue for the quarter and nine months ended December
31, 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 30% since
December 31, 2001, from 840,000 addressable subscribers to 590,000 addressable
subscribers as of December 31, 2002. The Subscription/PPV TV Group experienced a
decline in subscriptions to its three C-Band networks of 23% 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
deemed by management to be no longer favorable to the Group. The
Subscription/PPV TV Group experienced a 7% decrease in the number of
subscriptions to its networks due to the termination of these contracts.

19

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.

The increase in Cable/DBS revenue for the nine months ended December 31, 2002 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, 3) an increase in revenue from the Group's
Video-on-Demand ("VOD") services, 4) a decrease in revenue from the TeN network,
and 5) the addition of a new revenue stream from product advertising on the
Group's networks.

As of December 31, 2002, Extasy was available to 8.1 million Cable/DBS
addressable subscribers up from 6.8 million Cable/DBS addressable subscribers as
of December 31, 2001, an increase of 19%. 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
its satellite at 119 degrees. Significantly more addressable subscribers view
DISH's satellite at 119 degrees 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 16% year over year for the nine
months ended December 31, 2002.

Pleasure was available to 7.8 million addressable subscribers as of December 31,
2002, representing a 55% decline from 17.3 million subscribers as of December
31, 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. These disaffiliations resulted in a 46%
decline in revenue year-over-year for the nine months ended December 31, 2002
from the Pleasure network. This decline in revenue generated by the Pleasure
network from DISH and DirecTV was offset by a 20% increase in revenue from the
addition of addressable subscribers from other Cable affiliates.

The decrease in revenue from the Pleasure network was further 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 services and added new VOD distribution with Charter
Communications, Inc. ("Charter") and Comcast Corporation during the current
fiscal year. As of December 31, 2002, the Group's VOD services were available to
4.9 million addressable households, up from 0.5 million as of December 31, 2001.
Revenue from VOD accounted for 6% of the Subscription/PPV TV Group's total
Cable/DBS revenue for the nine months ended December 31, 2002.

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.

Revenue from the Group's TeN network declined year-over-year for the nine months
ended December 31, 2002, due to a 20% 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 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.

20

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 accounted for
6% of the Subscription/PPV TV Group's total quarterly Cable/DBS revenue and 7%
of the total Cable/DBS revenue for the nine months ended December 31, 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 is re-branding its family of networks around the
TeN "umbrella" brand and launched two new 24-hour partially edited services in
January 2003. The new channel launches will address the increasing demand from
consumers for the Group's partially edited services. The Group currently has
launch commitments from three MSO's, representing 500,000 addressable
subscribers, for the new partially edited networks.

The two new networks are 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). Content costs to program these networks
will be minimal since the Subscription/PPV TV Group can use content from its
licensed library of titles.

The Subscription/PPV TV Group will be renaming its networks as follows in
January 2003: 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 Plus.

COST OF SALES

Cost of sales for the Subscription/PPV TV Group was $3.6 million, or 53% of
revenue, for the quarter ended December 31, 2002, as compared to $3.5 million,
or 48% of revenue, for the quarter ended December 31, 2001, an increase of 3%.
Cost of sales for the Subscription/PPV TV Group was $10.5 million or 50% of
revenue for the nine months ended December 31, 2002, as compared to $10.0
million or 46% of revenue for the nine months ended December 31, 2001, an
increase of 5%.

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 for its C-Band business.

The increase in cost of sales for the quarter and nine 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 C-band call center costs.

The Subscription/PPV TV Group renegotiated the contract for two of its analog
satellite transponders that it uses for its C-Band networks. Beginning in
January 2003, this renegotiation will result in savings of $1.0 million over the
next twelve months.

The Subscription/PPV TV Group's transponder costs will increase 11% and its
uplinking costs will increase 5% for the addition of its two new networks in
January 2003. In addition, the Group will be conforming the content and
scheduling its two new networks in-house instead of outsourcing these functions
to a third party as it has done with its other networks. The Subscription/PPV TV
Group

21

anticipates transitioning these functions for all of its networks in-house over
the next twelve to twenty-four months.

OPERATING INCOME

Operating income for the Subscription/PPV TV Group was $1.4 million for the
quarters ended December 31, 2002 and 2001. Operating income for the
Subscription/PPV TV Group for the nine months ended December 31, 2002 was $4.4
million as compared to operating income of $4.5 million for the nine months
ended December 31, 2001, representing a decrease of 2%.

The Subscription/PPV TV Group's gross margins declined from 52% and 54% for the
quarter and nine months ended December 31, 2001, respectively, to 47% and 50%
for the quarter and nine months ended December 31, 2002, respectively. This
decline in gross margin was offset by a decrease in operating expenses as a
percentage of revenue. Operating expenses as a percentage of revenue declined
from 33% for the quarter and nine months ended December 31, 2001, to 26% and 29%
for the quarter and nine months ended December 31, 2002.

Operating expenses for the Subscription/PPV TV Group declined 25% and 18% for
the quarter and nine months ended December 31, 2002. The decrease in operating
expenses for the quarter and nine months ended December 31, 2002 is due to a
decline in: a) the costs associated with the Group's C-Band barker channel, b)
advertising costs, c) payroll costs due to the elimination of two senior manager
positions, and d) commissions paid to the Group's sales people as a result of a
change in the commission plan and a decline in the number of people being
commissioned. The decline in these costs were offset by increases in: a)
equipment lease costs related to the addition of several new operating leases,
b) legal costs incurred for new affiliate contracts, c) depreciation expense
related to equipment purchases, and d) facility costs related to moving the
sales, marketing, and promotions departments to a new location in Boulder,
Colorado.

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 $477,000 for the quarter and
nine months ended December 31, 2001, respectively.

INTERNET GROUP

NET REVENUE

Total net revenue for the Internet Group was $1.8 million for the quarter ended
December 31, 2002, as compared to $5.1 million for the quarter ended December
31, 2001, representing a decrease of 65%. Total net revenue for the Internet
Group was $6.6 million for the nine months ended December 31, 2002 as compared
to $19.3 million for the nine months ended December 31, 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 $1.2 million for the quarter
ended December 31, 2002, as compared to net membership revenue of $3.2 million
for the quarter ended December 31, 2001, representing a decrease of 63%. Net
membership revenue for the Internet Group was $4.4 million for the nine months
ended December 31, 2002, as compared to net membership revenue of $12.7 million
for the nine months ended December 31, 2001, representing a decrease of 65%.

The Internet Group has seen a decline in its net membership revenue for the
quarter and nine 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 nine
months ended December 31, 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
more than 1,500 adult domain names to

22

generate traffic for its sites. Marketing efforts to generate traffic to its
websites are focused on cross selling the Internet Groups flagship website,
www.ten.com, on the Subscription/PPV TV Groups 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"). Under the terms of this agreement, the
Internet Group will be the exclusive provider of adult content for On Command's
TV Internet Service. The Internet Group is 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 the On Command hotels offering high-speed
Internet access during the current quarter. The Internet Group expects to be
fully distributed within the On Command hotels that offer high-speed Internet
access, estimated at over 600 hotel properties representing more than 225,000
rooms, 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
also eliminated all low-cost trial memberships to its sites during the current
quarter because it believes that these trials do not improve conversion rates.
The Internet Group has not seen a decline in its conversion rates or revenue due
to the elimination of trials.

Additionally, during the past year the Internet Group decreased the number of
consumer web sites that it markets from 30 to 10, which also contributed to the
decline in net membership revenue year-over-year. The decrease in the number of
web sites marketed allows the Internet Group to ensure that its 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 December 31, 2002, as compared to $0.4 million for the quarter
ended December 31, 2001, representing a decrease of 25%. Revenue from the
Internet Group's sale of content was $1.0 million for the nine months ended
December 31, 2002, as compared to $1.5 million for the nine months ended
December 31, 2001, representing a decrease of 33%. 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 new content product offerings. The Internet
Group has refocused its efforts on this revenue stream during the current fiscal
year by 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 requires pre-payment for products.

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 $0.3 million and $1.2 million for the quarter
and nine months ended December 31, 2002, respectively, as compared to $1.4
million and $4.7 million for the quarter and nine months ended December 31,
2001, respectively, representing decreases of 79% and 74%. 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

23

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.

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. 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 are sold
on a cost-per-click or cost-per-acquisition basis.

COST OF SALES

Cost of sales for the Internet Group was $0.8 million, or 44% of revenue, for
the quarter ended December 31, 2002, as compared to $2.6 million, or 51% of
revenue, for the quarter ended December 31, 2001, representing a decrease of
69%. Cost of sales for the Internet Group was $3.6 million, or 55% of revenue,
for the nine months ended December 31, 2002, as compared to $10.1 million, or
52% of revenue, for the nine months ended December 31, 2001, representing a
decrease of 64%. 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.

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 nine months ended December 31,
2002, as compared to $0.7 million and $3.9 million for the quarter and nine
months ended December 31, 2001.

Bandwidth costs have declined from $0.4 million and $1.3 million as of the
quarter and nine months ended December 31, 2001, respectively, to $0.3 million
and $0.9 million as of the quarter and nine months ended December 31, 2002,
representing decreases of 25% and 31%. 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. The Internet Group expects to see a continued
decline in its bandwidth costs due to new contracts negotiated for its bandwidth
needs in conjunction with the move of its in-house data center to Boulder,
Colorado that was completed in January 2003.

Merchant banking fees, including fees for credits and chargebacks, were 11% and
10% of net membership revenue for the quarters ended December 31, 2002 and 2001,
respectively, and 13% and 12% of net membership revenue for the nine months
ended December 31, 2002 and 2001, respectively. The Internet Group outsourced
all of its credit card processing and customer service functions to a third
party in December 2001. The increase in merchant banking fees as a percentage of
revenue for both periods was offset by a decline in payroll costs related to the
elimination of the Internet Group's in-house customer service department that
was performing these functions previously.

Operational expenses, the majority of which relates to depreciation and
amortization of Internet equipment, were $0.4 million and $1.7 million for the
quarter and nine months ended December 31, 2002, respectively, as compared to
$1.0 million and $2.7 million for the quarter and nine months ended December 31,
2001, respectively, representing decreases of 60% and 37%. The decrease in
operational expenses for the quarter and nine months ended December 31, 2002 is
attributable to the write-off of

24

excess equipment taken 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 $0.2 million for the quarter ended
December 31, 2002, as compared to $0.3 million for the quarter ended December
31, 2001, representing a decrease of 33%. Operating income (loss) for the
Internet Group was an operating loss of $0.2 million for the nine months ended
December 31, 2002, as compared to operating income of $2.3 million for the nine
months ended December 31, 2001, representing a decrease of 109%.

The decrease in operating income for the quarter and nine months ended December
31, 2002 is a result of a decrease in revenue of 65% and 66% for each period
respectively. Gross margin for the Internet Group increased from 49% to 56% for
the quarter ended December 31, 2002 as a direct result of the restructuring
completed during the first quarter of the current fiscal year.

Operating expenses were 44% and 43% of net revenue for the quarters ended
December 31, 2002 and 2001, respectively, and 48% and 36% of net revenue for the
nine months ended December 31, 2002 and 2001, respectively. Total operating
expenses decreased 64% and 54% for the quarter and nine months ended December
31, 2002.

The decrease in operating expenses for the quarter and nine months ended
December 31, 2002 is due to a decrease in payroll, benefits, and facility
related 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 travel,
meals/entertainment and trade show costs, and legal costs.

As part of its lawsuit filed against Edward Bonn, 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 4.7 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 Internet Group will be restructuring its operations during the fourth
quarter of the current fiscal year. This final restructuring will result in at
least a 50% reduction in work force and the elimination of the PPC, sale of exit
traffic, and email revenue streams. The Internet Group will focus primarily on
the sale of content packages to adult webmasters and the marketing of its
premiere broadband site, www.ten.com, to third party gatekeepers such as On
Command and to consumers viewing the Subscription/PPV TV Group's networks. All
traffic from its domain names will be directed to ten.com and this will be the
only site that is maintained and marketed by the Group. This restructuring will
be completed by the end of the fourth quarter.

RESTRUCTURING EXPENSES

During the quarter ended June 30, 2002, the Company adopted a restructuring plan
to shut down the Internet Group's in-house data center in Sherman Oaks,
California and move 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.

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. Total restructuring charges of $3.1 million related to this plan were
recorded during the quarter ended June 30, 2002, of which $28,000 related to

25

the termination of 10 employees. Also included in this charge was $0.4 million
of rent expense related to the data center space in Sherman Oaks that the
Company is attempting to sublet and $2.6 million for excess equipment written
off as a result of this restructuring.

During the quarter ended September 30, 2002, 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 and $0.3 million during the quarters ended September 30 and
December 31, 2002, respectively, for a change in the amount estimated for
certain payroll related expenses.

ASSET IMPAIRMENT CHARGES

The Company recognized impairment losses on certain URLs of approximately
$535,000 and $805,000 for the quarters ended June 30 and December 31, 2002,
respectively, 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 two to four years. Based on this projection, the cumulative cash flow
over the remaining amortization periods was insufficient to fully recover the
intangible asset balance.

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 $1.3 million and $1.2 million for the
quarters ended December 31, 2002 and 2001, respectively, representing an
increase of 8%. Corporate administration expenses were $5.9 million and $4.6
million for the nine months ended December 31, 2002 and 2001, respectively,
representing an increase of 28%.

The increase in corporate administration expenses for the quarter ended December
31, 2002 is due to the following items: a) a 63% increase in legal fees over
prior year related to the Company's lawsuit filed against Edward Bonn, Bradley
Weber, Jerry Howard, and Response Telemedia, Inc.; b) an increase in general
insurance and directors and officers insurance premiums; c) an increase in fees
paid to the Company's outside Board members, and d) an increase in fees paid to
the Company's outside auditor. These increases were offset by a 32% decrease in
payroll costs due to the elimination of several senior manager positions and a
decrease in consulting expenses.

The increase in corporate administration expenses for the nine months ended
December 31, 2002 is due to the following items: a) a 65% increase in legal fees
over prior year related to the Company's proxy fight and its lawsuit filed
against Edward Bonn, Bradley Weber, Jerry Howard, and Response Telemedia, Inc.;
b) an increase in accounting, printing, postage and investor relation fees
related to the proxy fight and the Company's lawsuit referenced in item (a); c)
an increase in facility costs related to moving the accounting, human resource
and executive departments to a new location in Boulder, Colorado; d) an increase
in insurance premiums for general insurance and directors and officers

26

insurance; and e) an increase in fees paid to the Company's outside Board
members. These increases were offset by a 28% decline in payroll costs due to
the elimination of several senior manager positions.

OTHER INCOME (EXPENSE)

Other income (expense) decreased from income of $1.6 million and $0.7 million
for the quarter and nine months ended December 31, 2001, respectively, to
expense of $0.4 million and $1.4 million for the quarter and nine months ended
December 31, 2002, respectively.

This decline for the quarter and nine months is a result of the reversal of $1.7
million of the Company's legal reserve for the settlement of its lawsuit with
J.P. Lipson. The Company settled its lawsuit with J.P. Lipson for a lump sum
payment of $820,000 made to his attorneys in December 2001. The Company had
previously accrued $2.5 million with respect to this lawsuit and was able to
reverse the difference during the quarter ended December 31, 2001.

In addition, the Company recognized $0.3 million in other revenue during the
quarter ended December 31, 2001, in connection with Metro Global Media, Inc.
("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. The Company was amortizing the deferred revenue over
60 months for the services it was providing to Metro. During the quarter ended
December 31, 2001, the Company ceased providing these services to Metro and
Metro released the Company from its obligation of providing any future services.
Accordingly, the remaining deferred revenue balance was recognized.

Interest expense was $0.4 million and $1.4 million for both the quarter and nine
months ended December 31, 2002 and 2001, respectively.

INCOME TAXES

In accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, deferred income taxes are provided for temporary
differences between the basis of assets and liabilities for financial reporting
purposes and for income tax return purposes. The Company routinely evaluates its
recorded deferred tax assets to determine whether it is more likely than not
that such deferred tax assets will be realized. During the quarter ended
December 31, 2002, the Company determined that it was more likely than not that
sufficient taxable income would not be generated in future years to fully
realize its deferred tax assets. Accordingly, a full valuation allowance for
these deferred tax assets in the amount of $5.3 million has been reflected in
the financial statements.

LIQUIDITY AND CAPITAL RESOURCES

For the nine months ended December 31, 2002, cash used in operating activities
was $0.3 million and was primarily associated with a net loss of $12.6 million,
an increase in accounts receivable of $0.5 million and a $3.3 million increase
in prepaid distribution rights which are 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,
a $1.3 million charge for the impairment of URLs owned by the Internet Group,
$5.7 million in depreciation and amortization, $0.6 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 $5.3 million of
deferred tax assets for which the Company fully reserved.

For the nine months ended December 31, 2001, cash provided by operating
activities of $5.4 million was primarily associated with net income of $1.8
million, depreciation and amortization expense of $6.5 million, a $1.2 million
decrease in accounts receivable, and a decrease of $1.5 million in other
receivables and prepaid expenses. This cash provided by operations was offset by
a $3.8 million increase in prepaid distribution rights which are related to the
Company's licensing of content and a

27

$2.5 million decrease in the Company's legal reserve related to the settlement
of its lawsuit with J.P. Lipson.

Cash used in investing activities was $0.5 million for the nine months ended
December 31, 2002 compared to cash used in investing activities of $3.0 million
for the nine months ended December 31, 2001. Cash used in investing activities
for the nine months ended December 31, 2002 was primarily related to the
purchase of software licenses, minor equipment upgrades to the Subscription/PPV
TV Group's digital broadcast facility and the purchase of encrypting equipment
for new cable launches.

Cash used in investing activities for the nine months ended December 31, 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 $2.1 million
related to the build-out of office space and the data center facility for the
Internet Group and the build-out of office space for the Company's Boulder,
Colorado headquarters.

Cash used in financing activities was $0.5 million for the nine months ended
December 31, 2002, compared to cash used in financing activities of $3.5 million
for the nine months ended December 31, 2001. Cash used in financing activities
for the nine months ended December 31, 2002 was related to $1.3 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
nine months ended December 31, 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 $3.5 million for the nine months ended
December 31, 2001 was related to the repayment of $2.0 million in principal on
the Company's outstanding debt obligations and $1.6 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.

NEW ACCOUNTING PRONOUNCEMENTS

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 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, FASB issued Statement 146, Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS 146"). This Statement addresses financial
accounting and reporting for costs

28

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.

In December 2002, FASB issued Statement 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure. This Statement amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The transition guidance and annual disclosure
provisions of Statement 148 are effective for fiscal years ending after December
15, 2002, with earlier application permitted in certain circumstances. The
interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002.
Under the provisions of Statement 123 that remain unaffected by Statement 148,
companies may either recognize expenses on a fair value based method in the
income statement or disclose the pro forma effects of that method in the
footnotes to the financial statements. The Company is still assessing this new
standard but does not believe that it will have a material effect on its results
of operation or financial condition upon adoption.

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 December 31, 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 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

29

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. Reference is made to
the Company's Form 10-Q filing for the fiscal period ended September 30, 2002
for a detailed description thereof.

During the fiscal quarter ended December 31, 2002, the Company settled its
litigation with Bradley A. Weber, a former director of the Company.

The Pleasure Productions litigation had previously been set for trial in March
2003. The trial date has since been vacated by the court at the request of
counsel for Pleasure Productions. A new trial date has not yet been set.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a) Exhibits

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

99.1 Certification by President Michael Weiner pursuant to U.S.C. Section
1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley 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 of 2002

b) Reports on Form 8-K

The Company did not file any reports on Form 8-K during the quarter ended
December 31, 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: February 13, 2003

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 December 31, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Michael Weiner, President 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/ Michael Weiner
- ------------------------------------
Michael Weiner
President
February 14, 2003

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 December 31, 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
February 14, 2003

34