NEW FRONTIER MEDIA INC /CO/ - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10 -K

Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Year Ended March 31, 2003

Commission File Number: 33-27494-FW

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

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

7007 Winchester Circle, Suite 200, Boulder, CO 80301

(Address of principal executive offices and Zip Code)

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

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

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

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: /X/ YES / / NO

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: / /

Aggregate market value of voting stock held by non-affiliates: $26,874,056 based
on 16,092,249 shares at June 23, 2003 held by non-affiliates and the closing
price on the Nasdaq SmallCap Market on that date which was $1.67.

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

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter. $19,958,666

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

19,362,066 common shares were outstanding as of June 23, 2003

DOCUMENTS INCORPORATED BY REFERENCE

The information required in response to Part III of Form 10-K is hereby
incorporated by reference to the specified portions of the registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on August 26, 2003.

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FORM 10-K
FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 2003
TABLE OF CONTENTS

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PART I.

ITEM 1. BUSINESS

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

THIS ANNUAL REPORT ON FORM 10-K AND THE INFORMATION INCORPORATED BY
REFERENCE MAY INCLUDE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. THE COMPANY
INTENDS THE FORWARD-LOOKING STATEMENTS TO BE COVERED BY THE SAFE HARBOR
PROVISIONS FOR FORWARD-LOOKING STATEMENTS. ALL STATEMENTS REGARDING THE
COMPANY'S EXPECTED FINANCIAL POSITION AND OPERATING RESULTS, ITS BUSINESS
STRATEGY, ITS FINANCING PLANS AND THE OUTCOME OF ANY CONTINGENCIES ARE FORWARD-
LOOKING STATEMENTS. THE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
SET FORTH OR IMPLIED BY ANY FORWARD LOOKING STATEMENTS. SOME OF THESE RISKS ARE
DETAILED IN PART I, ITEM 1 "RISK FACTORS" AND ELSEWHERE IN THIS FORM 10-K. THE
COMPANY DISCLAIMS ANY OBLIGATION TO UPDATE THE FORWARD-LOOKING STATEMENTS
CONTAINED HEREIN, EXCEPT AS MAY BE OTHERWISE REQUIRED BY LAW.

GENERAL

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

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

New Frontier Media is organized into two reportable segments:

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

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

Information concerning revenue and profit attributable to each of the
Company's business segments is found in Part II, Item 7, "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," and
in Part IV, Item 16 of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS," of this
Form 10-K, which information is incorporated by reference into this Part I,
Item 1.

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SUBSCRIPTION/PPV TV GROUP
INDUSTRY OVERVIEW

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

PPV technology enables cable television operators or satellite providers to
sell a block of programming, an individual movie, or an event for a set fee. PPV
technology also permits cable television operators or satellite providers to
sell the Subscription/PPV Group's programming on a monthly, quarterly,
semiannual and annual basis. PPV programming competes well with other forms of
entertainment because of its relatively low price point. Kagan World Media
("Kagan") estimates that adult PPV revenue generated by cable systems and DBS
providers in 2002 was $609 million, representing an increase of 15% from
revenues of $529 million generated by the category in 2001. Kagan projects
revenues from the adult category to grow to $917 million by the year 2006.

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

The Subscription/PPV Group provides its programming on both a PPV and
subscription basis to home satellite dish viewers through large backyard
satellite dishes receiving a low-power analog or digital signal (C-Band).
According to General Instrument Corporation's Access Control Center reports, the
U.S. C-Band market has declined from approximately 0.8 million households as of
April 2002 to 0.5 million as of April 2003. The Subscription/PPV TV Group
provides programming to small dish viewers receiving a high-power digital signal
(via DBS providers such as EchoStar Communications Corporation's DISH Network)
as well. Kagan reported in its January 17, 2003 newsletter that there were a
total of 19.7 million DBS households as of December 31, 2002 (DirecTV provides
service to 11.4 million households and EchoStar Communications Corporation's
DISH Network ("DISH") provides service to 8.3 million households). During 2002,
DirecTV and DISH combined to gain 2.5 million net new subscribers. Kagan
estimates that DBS will grow to 26 million subscribers by the year 2006.

The Subscription/PPV Group also provides its programming on a PPV,
subscription and VOD basis through large multiple system operators ("MSOs") and
their affiliated cable systems, as well as independent, privately-held cable
systems. As of May 2003, the Subscription/PPV Group maintained distribution
arrangements with seven of the ten largest domestic cable MSOs which control
access to 45.5 million, or 68%, of the total basic cable household market.
According to the National Cable and Telecommunications Association ("NCTA"),
Cable MSOs delivered service to 66.8 million basic households in the United
States as of April 2003. In addition, Kagan indicates that total analog and
digital addressable cable service (i.e., basic cable households that have the
capability of receiving PPV or subscription services) was provided to 31.2
million households.

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

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programming guides ("EPG"). The Subscription/PPV Group expects that most of its
future cable launches will be on a digital platform.

According to the NCTA, as of December 2002 more than 25% of U.S. Cable
customers, approximately 19.2 million, received digital cable service. This
represents an increase of 26% over the number of digital subscribers receiving
service at the end of 2001. Kagan estimates that the number of digital cable
subscribers will grow to 40.9 million by the year 2006.

Cable operators are also using their upgraded plants to provide their
digital customers with VOD services. VOD differs from traditional PPV in that it
allows the consumer to purchase a specific movie or program for a period of time
with VCR functionality. This provides the opportunity for a consumer to view a
movie at any time, rather than only during the purchase window provided by the
cable operator. The Subscription/PPV TV Group currently provides programming to
over 6.6 million VOD enabled households, representing a 95% penetration rate of
total VOD enabled cable households. Multichannel News, in their December 2002
Broadband Databook, estimates that VOD revenues will grow from $257 million in
2002 to over $1.78 billion in 2006.

DESCRIPTION OF NETWORKS

The Subscription/PPV Group provides eight, 24-hour per day adult
programming networks: Pleasure, TEN, TEN Clips (formerly ETC), TEN Blue, TEN
Blox, TEN Xtsy (formerly Extasy), TEN BluePlus (formerly True Blue), and TEN Max
(formerly X-Cubed). The following table outlines the current distribution
environment for each service:

TABLE 1
SUMMARY OF NETWORKS

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

(1) TEN Xtsy, TEN BluePlus and TEN Max addressable household numbers include 1.1
million, 0.8 million and 0.5 million C-Band addressable households for the years
ended March 31, 2001, 2002 and 2003, respectively.

PLEASURE

On June 1, 1999, the Subscription/PPV Group launched Pleasure, a 24-hour
per day adult network that incorporates the most edited standard available in
the category. Pleasure is distributed via cable television operators. Pleasure's
programming consists of adult feature-length film and video productions and is
programmed to deliver subscription and PPV households up to 21 monthly premiere
adult movies with a total of up to 110 adult movies per month. Pleasure was
specifically designed to provide adult content programming to operators that
have not yet embraced a less

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inhibited adult programming philosophy and for those operators that wish to use
the service to "upsell" subscription or PPV households to a less edited network
such as TEN or TEN Clips. Pleasure is distributed via Cable system operators on
either a pay-per-view or pay-per-block basis at prices ranging from $5.95 to
$11.95.

TEN

On August 15, 1998, the Subscription/PPV Group launched TEN, a 24-hour per
day adult network that incorporates a partial editing standard targeted to cable
television system operators and DBS providers. The PPV Group has programmed TEN
with feature-length film and video productions that incorporate less editing
than traditional cable adult premium networks. TEN is distributed via Cable
system operators and DBS providers on either a pay-per-view or pay-per-block
basis at retail prices ranging from $5.95 to $11.95.

TEN offers a diverse programming mix with movies and specials that appeal
to a wide variety of tastes and interests. TEN offers subscription and PPV
households up to 23 monthly premiere adult movies and up to 130 total adult
movies per month. TEN was developed to capitalize on the number of cable
operators/DBS providers now willing to carry partially edited adult network
services and the momentum toward broader market acceptance of partially edited
adult programming by their subscribers. New Frontier Media believes the growing
market acceptance of partially edited programming is due, in large part, to the
higher buy rates (the theoretical percentage of addressable households ordering
one PPV movie, program or event in a month) achieved for cable system
operators/DBS providers as compared to network programming that incorporates the
most edited adult programming.

TEN CLIPS (FORMERLY EROTIC TELEVISION CLIPS)

The Subscription/PPV Group launched TEN Clips on May 17, 2000. TEN Clips'
unique formatting provides for thematically organized 90-minute blocks of
programming in order to provide more variety in a single viewing block and
encourage appointment viewing by the PPV adult consumer. The PPV Group has
organized its partially edited content library into thematic categories. Through
the PPV Group's proprietary database technology, approximately eight scenes are
organized thematically and programmed into one 90-minute block. TEN Clips
delivers 240 unique thematic blocks with over 500 different adult film scenes
during a typical month. This "clips" format is the most differentiated service
in the adult category and consistently generates higher buy rates than feature-
driven adult services. TEN Clips is distributed via Cable system operators and
DBS providers on a pay-per-view and pay-per-block basis at retail prices ranging
from $7.95 to $11.95.

TEN BLUE

TEN Blue was launched on January 1, 2003 as the Subscription/PPV TV Group's
newest, partially edited network. This network is programmed to deliver up to
110 movies each month. TEN Blue offers adult consumers feature-length amateur,
ethnic, and urban content. TEN Blue was developed to capitalize on the number of
cable operators/DBS providers now willing to carry partially edited adult
network services and the momentum toward broader market acceptance of partially
edited adult programming by their subscribers.

TEN BLOX

TEN Blox was launched on January 1, 2003 as the Subscription/PPV TV Group's
newest, partially edited "clips" network (similar in formatting to TEN Clips).
This network is programmed to compliment TEN Blue by utilizing thematically
organized clips from the network's amateur, ethnic, and urban feature-length
programs. TEN Blox was developed to capitalize on the number of cable
operators/DBS providers now willing to carry partially edited adult network
services and the momentum toward broader market acceptance of partially edited
adult programming by their subscribers.

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TEN ON DEMAND (VIDEO-ON-DEMAND)

TEN On Demand is the Subscription/PPV TV Group's VOD service. This service
is available to Cable operators in each of the Group's three editing standards.
TEN On Demand is provided to Cable operators as a "kit" of adult content with
5 - 40 titles in each kit. Content is refreshed on a monthly basis and provides
for a 30-day early release window to the PPV services. Accordingly, there is no
duplication between the PPV networks and the VOD product. The Subscription/PPV
TV Group is the leading provider of adult VOD content with launches on cable
systems representing 95% of VOD enabled households.

In addition, the Subscription/PPV TV Group provides its TEN On Demand
service to On Command Corporation ("On Command"), the leading provider of
in-room interactive entertainment for the hotel industry and its guests. The
Group provides up to 21 titles on a monthly basis to On Command's 895,000 VOD
enabled hotel rooms in four different editing formats.

TEN XTSY (FORMERLY EXTASY)

TEN Xtsy was acquired from Fifth Dimension on February 18, 1998. TEN Xtsy's
programming consists of feature-length adult film and video productions and is
programmed with up to 21 monthly premieres and 130 adult movies per month. TEN
Xtsy's programming is "least edited", which is similar to the editing standard
employed in the home video market. The network offers a diverse programming mix
with movies and specials that appeal to a wide variety of tastes and interests.
TEN Xtsy is the Company's least edited programming service available to
multi-channel households and is distributed via C-band DTH, Cable system
operators and DBS providers. TEN Xtsy is available on a pay-per-view and
pay-per-block basis as well as on a monthly, quarterly, semiannual and annual
subscription basis.

TEN Xtsy had 48,099, 43,360, and 34,618 active C-Band subscriptions as of
March 31, 2001, 2002 and 2003, respectively. C-Band retail prices range from
$19.99 to $110.99 for monthly, quarterly, semi-annual and annual subscriptions.
Cable operators and DBS providers distribute TEN Xtsy on a pay-per-view or
pay-per block basis at retail prices ranging from $8.95 to $10.95.

TEN BLUEPLUS (FORMERLY TRUE BLUE)

TEN BluePlus was acquired from Fifth Dimension on February 18, 1998. TEN
BluePlus incorporates the same editing standard as TEN Xtsy and is programmed
with movies that feature amateur, ethnic, and urban adult content. TEN BluePlus
is programmed to deliver 90 adult movies per month. TEN BluePlus is distributed
via C-band DTH and Cable operators. C-band retail prices range from $19.99 to
$110.99 for monthly, quarterly, semi-annual and annual subscriptions. TEN
BluePlus had 46,606, 41,895, and 33,961 active C-Band subscriptions as of March
31, 2001, 2002, and 2003, respectively.

TEN MAX (FORMERLY X-CUBED AND XCLIPS)

TEN Max (formerly X-Cubed and XClips) was acquired from Fifth Dimension on
February 18, 1998. TEN Max incorporates the same editing standard as TEN Xtsy
and is programmed to compliment this network by utilizing thematically organized
clips (similar to the TEN Clips format) from TEN Xtsy's premieres, network
specials and compilations. TEN Max is distributed via C-band DTH and Cable
operators. C-band retail prices range from $19.99 to $110.99 for monthly,
quarterly, semiannual and annual subscriptions. TEN Max had 43,743, 40,210, and
33,606 active C-Band subscriptions as of March 31, 2001, 2002, and 2003,
respectively.

SATELLITE TRANSMISSION

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

Video programming is played directly from the Subscription/PPV TV Group's
Boulder, Colorado based digital broadcast center. The program signal is then
scrambled (encrypted) so that the signal is unintelligible unless it is passed
through the proper preauthorized decoding devices. The signal is

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transmitted (uplinked) by an earth station to a designated transponder on a
communications satellite. The transponder receives the program signal uplinked
by the earth station, amplifies the program signal and broadcasts (downlinks) it
to satellite dishes located within the satellite's area of signal coverage. The
signal coverage of the domestic satellite used by New Frontier Media is the
continental United States, Hawaii, Alaska, and portions of the Caribbean,
Mexico, and Canada. Each analog transponder can retransmit one complete analog
color television video signal and two digital television video signals, together
with associated audio and data edgebands.

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

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

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

TRANSPONDER AGREEMENTS

New Frontier Media maintains satellite transponder lease agreements for
four full-time analog transponders with Loral Skynet on its Telstar 4 satellite
and 20.5 MHz of total bandwidth allocation on a digital transponder on its
Telstar 7 satellite. These transponders provide the satellite transmission
necessary to broadcast each of the Subscription/PPV TV Group's eight adult
networks.

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

In January 2002, the Subscription/PPV TV Group renegotiated its transponder
leases and created a digital tier for its Pleasure, TEN, and TEN Clips networks
on Telstar 7. This digital tier takes the place of the Edgeband technology
previously used by the Group for its transponder configuration. This change to a
digital tier makes the Subscription/PPV TV Group's services more bandwidth
efficient for its Cable affiliates, providing more opportunity for distribution
of its networks. In January 2003, the Group added TEN Blue, TEN Blox, and TEN
Xtsy to its digital tier on Telstar 7.

In April 2000, the Subscription/PPV TV Group signed a multi-year agreement
with iN-DEMAND L.L.C. ("iN-DEMAND") for carriage of its Pleasure network. As a
result of the contract, Pleasure is available to cable operators representing
approximately 7.2 million digital households across the country. iN-DEMAND
carries Pleasure on Telstar 7, transponder 4. iN DEMAND is the nation's leading
provider of VOD and PPV programming, offering titles from all of the major
Hollywood and independent studios, plus sports, subscription sports packages and
entertainment. iN-DEMAND serves

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over 1,900 affiliated systems. iN-DEMAND's three shareholders include Time
Warner Entertainment - Advance/Newhouse Communications, Comcast Corporation, and
Cox Communications, Inc.

In June 2002, the Subscription/PPV TV Group began offering its VOD service
to cable MSOs via transport provided by TVN Entertainment ("TVN"). TVN is a
digital distribution services company serving over 50 million subscribers. TVN
offers the only single-source management and distribution solution for VOD and
PPV, including content aggregation, packaging, encoding, asset management and
transport via satellite to all video service providers. TVN has been chosen as
the VOD solution for many Cable MSOs, including Charter, Comcast, Insight and
Mediacom. As of March 31, 2003, the Subscription/PPV TV Group reached
approximately 1 million VOD households through its distribution agreement
with TVN.

DIGITAL BROADCAST CENTER

New Frontier Media, through its subsidiary TEN, is the only adult
entertainment company to internally encode, playout, distribute and manage its
own networks. The Company has differentiated itself by developing broadcast and
broadband distribution capabilities to fully control and exploit its large
content library across various platforms. The Subscription/PPV TV Group acquired
the necessary broadcast technologies and support services from third party
providers, and internally developed its own media asset management systems, for
the distribution of video-based content to Cable and DBS providers.

The Subscription/PPV TV Group, through its Boulder, Colorado based Digital
Broadcast Center, currently broadcasts 9 channels, with capacity to add 1
additional channel, to Cable/DBS systems and direct-to-home C-band subscribers.
Broadcast of all media to air is accomplished utilizing state-of-the-art digital
technology solutions, which includes playlist automation for all channels;
SeaChange MPEG 2 encoding and playout to air and MPEG 1 encoding for internet
and broadband use; archiving capability on DLT data cartridges pushing and
pulling the data through a StorageTek jukebox; and complete integration of the
media asset management database to create automated playlists.

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

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

NETWORK PROGRAMMING

The Subscription/PPV TV Group contracts with Pegasus Programming
("Pegasus") in California to screen, edit, and program content for its networks.
In addition, the Subscription/PPV TV Group edits and/or programs content
in-house for its new networks, TEN Blue and TEN Blox, as well as TEN Clips, TEN
Max and the On Command VOD content.

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

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

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

CALL CENTER SERVICE

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

The Subscription/PPV TV Group's call center is operational 24-hours per
day, seven days a week, and is staffed according to call traffic patterns, which
take into account time of day, day of the week, seasonal variances, holidays,
and special promotions. Customers pay for their order with credit cards and
electronic checks, which are authorized and charged before the order is sent
electronically to GI's Access Control Center in San Diego, California for
processing. GI receives the subscriber order and the subscriber's identification
information, and sends a signal to the appropriate satellite, which "unlocks"
the service ordered for the applicable period of time.

MARKETING

The Subscription/PPV TV Group markets its C-band networks primarily through
an open-air, 24-hour per day Barker channel that promotes the programming
featured on the three C-Band networks. This channel uses edited movie clips,
movie previews, and other interstitial programming to entice viewers who are
"channel surfing" to subscribe to one of the Subscription/PPV TV Group's C-Band
channels (periodic subscription), or to purchase the Group's programming on a
PPV basis. The Subscription/PPV TV Group will be discontinuing its barker
channel as of June 30, 2003.

The Subscription/PPV TV Group's marketing department has developed numerous
programs and promotions to support its Cable/DBS networks. These include the
development of detailed monthly program guides, promotional pieces, direct mail
campaigns, and cross channel interstitial programming for use on a Cable or DBS
systems' channel that allows for local insertion. The Subscription/PPV TV Group
also maintains a sales force of four full-time employees to promote and sell
carriage of its programming on cable television, DBS and alternative platform
systems.

The Group's promotions department creates interstitial programming for use
on its networks between each movie to promote and market additional movies
premiering in the current month, movies premiering in the following month,
behind-the-scenes segments of its movies, and star and director profiles. This
interstitial programming encourages appointment viewing of its networks by
Cable/DBS consumers.

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

The Subscription/PPV TV Group rebranded its networks under the TEN* name
and logo during the fourth quarter of the fiscal year ended March 31, 2003. Each
network (except Pleasure) has the TEN name associated with it (TEN, TEN Clips,
TEN Blue, TEN Blox, TEN Xtsy, TEN Max, TEN BluePlus, and TEN On Demand). This
change was done in an effort to create brand recognition for

10

the TEN name and associate this name with the best adult programming on Cable
and DBS platforms.

COMPETITION

TEN principally competes with Playboy Enterprises, Inc. ("Playboy") in the
subscription and PPV markets. Playboy has significantly greater financial,
sales, marketing and other resources to devote to the development, promotion and
sale of its cable programming products, as well as a longer operating history
and broader name recognition than TEN. Playboy's size and market position makes
it a more formidable competitor than if it did not have the resources and name
recognition that it has. TEN competes directly with Playboy in editing standards
of its programming, network performance in terms of subscriber buy rates and the
license fees that TEN offers to Cable and DBS providers. However, TEN cannot and
does not compete with Playboy in the amount of money spent on promoting its
products. TEN believes that the quality and variety of its programming, as well
as the attractive revenue splits and its ability to generate higher buy rates
for its programming, are the critical factors which have influenced Cable
operators and DBS providers to choose its programming over Playboy's.

The Company also faces general competition from other forms of non-adult
entertainment, including sporting and cultural events, other television
networks, feature films, and other programming. In addition, the Company faces
competition in the adult entertainment arena from other providers of adult
programming, adult video rentals and sales, books and magazines aimed at adult
consumers, telephone adult chat lines, and adult-oriented Internet services.

CUSTOMER CONCENTRATION

New Frontier Media derived 36% of its total revenue for the year ended
March 31, 2003 from DISH for its TEN, TEN Clips and TEN Xtsy PPV and
subscription services. The loss of this customer could have a material adverse
effect on the Subscription/PPV TV segment and upon the Company as a whole.

INTERNET GROUP
INDUSTRY OVERVIEW

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

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

The Company's Internet Group responded to these industry changes during the
past two fiscal years by decreasing the amount of money spent on the acquisition
of traffic to its web sites (decreased

11

from $1 million per month during the 2001 fiscal year to $0 as of the end of the
2003 fiscal year); increasing its focus on the depth, breadth, and relevance of
content included in its web site(s); decreasing the amount of web sites
maintained to a more manageable number (decreased from thirty to ten during the
2002 fiscal year; decreased to one web site as of the end of the 2003 fiscal
year); ensuring the daily/weekly updating of its sites with new content; working
with new pricing strategies to increase membership retention; and focusing on
forming revenue sharing partnerships with third-party gatekeepers such as cable
companies, hospitality providers and portals, whereby it can gain direct access
to consumers in search of adult entertainment. Also in response to these
industry changes, the Internet Group shifted its focus from dial-up consumers to
broadband consumers.

A study released in May 2003 by Pew Internet & American Life Project
("Pew"), a non-profit, non-partisan research organization that examines how
Internet use affects families, communities, health care, education,
civic/political life, and the work place, reported that high-speed Internet
adoption at home increased 50%, to 30 million people, from March 2002 to March
2003. As of the end of March 2003, this same study reported that 31% of home
Internet users had a high-speed connection at home and that 13% of dial-up
Internet users are ready to migrate to broadband service.

Broadband service is primarily delivered in two ways: via digital
subscriber lines ("DSL") provided by local phone companies or via a cable modem.
Multichannel News, in its December 2002 Broadband Databook, estimated the number
of cable modem subscribers at the end of 2002 to be 10.2 million and the number
of DSL subscribers at the end of 2002 to be 5.8 million. Kagan estimates that
cable high-speed subscribers will reach over 26 million by the end of the
decade.

As of March 31, 2003 the Internet Group merged all of its dial-up web sites
into its premiere broadband site, www.ten.com. Although the Internet Group will
continue to have recurring monthly revenue from memberships to this web site
(which is expected to erode over time), its main focus for the future will be
creating revenue sharing partnerships with third-party gatekeepers for the
distribution of www.ten.com rather than trying to attract random Internet
consumers to this site.

The Internet Group executed its first such revenue sharing agreement with
On Command during the fiscal year ended March 31, 2003. Under the terms of the
agreement, the Internet Group 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 its hotel rooms nationwide. The Internet Group
was fully deployed within most of the On Command hotels that offer high-speed
Internet access, estimated at over 120,000 rooms, as of May 2003.

DESCRIPTION OF INTERNET REVENUE STREAMS
BUSINESS TO CONSUMER: MEMBERSHIP SITES

The Internet Group designs, creates and implements membership-based web
sites for the adult Internet consumer market. Prior to March 31, 2003, the
Internet Group owned and operated more than 10 consumer web sites in addition to
owning over 1,300 vanity adult domains. As of March 31, 2003, the Internet Group
merged all of its membership-based web sites into its premiere broadband site,
www.ten.com.

These web sites were developed to convert web surfers into subscribers
through various subscription models. Recurring monthly subscription rates range
from $14.74 to $29.95. The Internet Group used to offer consumers the ability to
view its web sites on a trial basis, generally three days, for a special rate of
$2.97. The Internet Group discontinued offering free trials to its web sites in
December 2001 and discontinued offering paid trials to its web sites during the
quarter ended March 31, 2003.

The Internet Group generated traffic to its web sites through three primary
sources. The first, "type-in" traffic, is generated when a consumer types the
name of one of the Internet Group's web sites or one of its domain names into
their browser address bar. There is no cost to the Internet Group when traffic
comes to its web sites in this manner other than the initial cost to acquire the
domain name. However, type-in traffic has declined over the past few years as
portals such as

12

Microsoft Corporation's MSN no longer default words typed into a browser
dialogue box to the "dot-com" web site associated with such word. Currently, the
Internet Group actively markets its www.ten.com web site on the Subscription/PPV
TV Group's networks which drives type-in traffic to this site.

The second way in which the Internet Group used to generate traffic was
through its affiliate marketing programs utilizing banner ads, hypertext, or
graphic links. The marketing programs compensated an affiliated webmaster for a
referred visitor if the visitor became a member to one of the Internet Group's
web sites. These referral payments ranged from $30 - $45 per active member
obtained. The Internet Group ceased actively marketing its traffic acquisition
programs during the fiscal year ended March 31, 2003.

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

In connection with the settlement with Edward Bonn (see "Legal
Proceedings"), the Internet Group transferred to Mr. Bonn approximately 150 of
its domain names. As a result of this transfer, as of March 31, 2003, the
Internet Group merged all of its dial-up web sites (and corresponding members)
into its premiere broadband site, www.ten.com. The transfer of these URLs,
coupled with the already declining traffic to its sites as a result of the
Internet Group's decision to cease purchasing traffic, has resulted in a
substantial decrease in new monthly members to its web site.

The Internet Group expects to see continued declines in its monthly
recurring membership revenue as it is primarily marketing this site only on the
Subscription/PPV TV Group's networks. The traffic generated from this effort is
not enough to sustain its membership revenue base. Consequently, the Internet
Group continues to experience a 2 - 8% decline in its renewing membership base
each month. However, it is important to note that the Internet Group does not
consider the monthly membership model to be the focus of its future growth
plans. The recurring monthly membership model on the Internet is too
competitive, there are no barriers to entry, it is too dependent upon credit
card processing, and it is very difficult to attract profitable traffic to a web
site.

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

Content Sales: The Internet Group is one of the leading licensors of adult
content on the Internet. The Internet and Subscription/PPV Groups have licensed
thousands of hours of adult content and over 500,000 still images from various
adult studios, all of which have been organized thematically and, if necessary,
digitized for Internet distribution. The Internet Group, in addition to using
this content within its own web site, sublicenses this content to webmasters
through its business-to-business programs on a flat-rate monthly basis.

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

Pay-Per-Click: During the fiscal year ended March 31, 2003, the Internet
Group developed its own pay-per-click ("PPC") search engine whereby advertisers
registered keywords or keyword combinations, along with a title and description.
Placement in the search results was purchased by the advertiser rather than
determined by a complex formula relating to relevance or popularity. This
resulted in a pure market model for the advertiser. The more they bid for a
keyword, the higher their

13

site was shown in the list of search results returned to the consumer on that
keyword search. The result for the advertiser was qualified traffic that was
more likely to convert into a paying member of its site, while the consumer
received immediate access to relevant results.

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

MARKETING

Prior to the fiscal year ended March 31, 2003, the Internet Group's
affiliate marketing programs were incentive-based traffic generation programs
that compensated affiliated webmasters for traffic referrals. A webmaster was
compensated when a referred visitor became a member to one of the Internet
Group's web sites, at an average payout of $30 - $45 per active member. During
the fiscal year ended March 31, 2003, the Internet Group ceased actively
marketing its traffic acquisition programs.

Prior to the fiscal year ended March 31, 2003, the Internet Group provided
incentives to webmasters to collect users' e-mail addresses for a
pay-per-address fee of up to 60 cents. The Internet Group amassed over 4.0
million double opt-in email addresses to which the Group targeted daily
newsletters promoting its web sites and/or web sites and products of its
webmaster affiliates. The Internet Group ceased collecting email addresses
during the fiscal year ended March 31, 2003 and is no longer using its double
opt-in email address list to market its sites or the sites of its affiliates.

The Internet Group markets to webmasters via advertisements in trade
magazines and on-line banner advertisements for the sale of its content
products. The Internet Group markets to consumers via commercials on the
Subscription/PPV TV Group's networks and depends on its adult domain names to
attract type-in traffic to its sites. In addition, representatives of the
Internet Group attend industry trade shows specific to the Internet and the
adult industry.

DATA CENTER

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

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

E-COMMERCE BILLING

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

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

The card associations, instead of investing in modifications of its legacy
networks necessary to operate in this changing environment, have combated fraud
in "card not present"environments by charging high chargeback fees and penalties
to merchants and banks. In the past few years the number

14

of banking relationships available for merchant banking has dropped, the cost of
chargebacks has increased, and the acceptable level allowed for chargeback rates
has also been dramatically reduced.

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

COMPETITION

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

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

OTHER INFORMATION
EMPLOYEES

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

GEOGRAPHIC AREAS

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

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of New Frontier Media are as follows:

15

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

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

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

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

KEN BOENISH. Mr. Boenish is a 14-year veteran of the cable television
industry. In October 2000, he was named President of The Erotic Networks, a
subsidiary of New Frontier Media, and in April 2002 he began managing the
day-to-day operations of the Internet Group under The Erotic Networks' umbrella.
Mr. Boenish joined The Erotic Networks as the Senior Vice President of Affiliate
Sales in February 1999. Prior to joining the Company, Mr. Boenish, was employed
by Jones Intercable ("Jones") from 1994 - 1999. While at Jones he held the
positions of National Sales Manager for Superaudio, a cable radio service
serving more than 9 million cable customers. He was promoted to Director of
Sales for Great American Country a new country music video service in 1997.
While at Great American Country Mr. Boenish was responsible for adding more than
5 million new customers to the service while competing directly with Country
Music Television, a CBS cable network. From 1988 -1994 he sold cable television
advertising on systems owned by Time Warner, TCI, COX, Jones, Comcast and other
cable systems. Mr. Boenish holds a B.S. degree in Marketing from St. Cloud State
University.

BILL MOSSA. Mr. Mossa joined The Erotic Networks as Vice President of
Affiliate Sales and Marketing in 1998 and has been instrumental in growing the
Company's network distribution from zero to over 40 million addressable
subscribers. Prior to joining The Erotic Networks, Mr. Mossa was the Regional
Director of Affiliate Sales and Marketing for Spice Entertainment, directing all
affiliate sales and marketing efforts for its northeast region. Mr. Mossa has
also held positions as Affiliate Marketing Manager of the SportsChannel NY,
Regional Pay-Per-View Director for Century Communications, Corporate
Pay-Per-View Manager for TKR Cable, and Marketing Manager for TKR Cable. Mr.
Mossa holds a Bachelors Degree in Business Administration from Northeastern
University in Boston, Massachusetts.

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

16

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Pursuant to Section 16 of the Exchange Act, the Company's directors and
executive officers and beneficial owners of more than 10% of the Company's
Common Stock are required to file certain reports, within specified time
periods, indicating their holdings of and transactions in the Common Stock and
derivative securities of the Company. Based solely on a review of such reports
provided to the Company and written representations from such persons regarding
the necessity to file such reports, the Company is not aware of any failures to
file reports or report transactions in a timely manner during the Company's
fiscal year ended March 31, 2003, except that Mark Kreloff was late in filing a
Form 4 reporting a disposition of shares by Ethyx Trust and the receipt of
shares by Ethyx Trust on March 31, 2003, and failed to file any Form 4 reports
in respect of the sale of an aggregate of 46,800 shares on June 12, 13, 16 and
17, 2003 in violation of the Company's corporate trading policy.

RISK FACTORS

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

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

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

DISH Network, one of the leading providers of direct broadcast satellite
services in the United States, is a major customer of our Subscription/PPV TV
Group. The loss of DISH Network as a customer would have a material adverse
effect on our business operations and financial condition. For our fiscal year
ended March 31, 2003, our revenues from DISH Network equaled approximately 36%
of our total Company-wide revenues. DISH Network is not contractually required
to carry our programming and can cancel its broadcast of our programming at any
time. Management considers its long-standing personal contacts with its
counterparts at DISH Network to be critically important to maintaining DISH
Network as a major customer, especially given the nature of our content and the
importance of DISH Network's reliance on our judgment and ability in assuring
that all of its programming has been pre-screened and appropriately edited in
accordance with established guidelines.

WE MAY HAVE TO RAISE APPROXIMATELY $5 MILLION IN NEW FUNDS TO PAY THE HOLDERS OF
OUR CLASS A AND CLASS B PREFERRED STOCK IN THE EVENT OF A CHANGE OF CONTROL IN
THE COMPANY.

In the event of a "change in control transaction"involving the Company, the
holders of our Class A and Class B Preferred Stock have the right to require
that their shares be redeemed for approximately $5 million in cash within 15
days of the change of control transaction. A change in

17

control transaction for this purpose would include the replacement of the
Company's board of directors in a proxy contest. If a change of control occurs,
and the Company is required to redeem the Class A and Class B Preferred Stock,
it may have to raise a substantial portion of the necessary funds from external
sources such as the sale of stock or incurrence of debt. There can be no
assurance given that following any such change in control transaction $5 million
in new funds would be available to repay the Class A and Class B Preferred Stock
holders on terms acceptable to the Company, if at all. A failure to secure these
funds in a timely manner or on acceptable terms could have a material adverse
effect on the Company, its operations, financial condition and prospects.

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

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

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

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

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

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

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

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

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

Our ability to convince Cable operators and DBS providers to carry our
programming is critical to us. The primary way for us to expand our Cable
subscriber base is to convince additional Cable operators and DBS providers to
carry our programming. We can give no assurance, however, that our efforts to
increase our base of subscribers will be successful.

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

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

18

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

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

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

Our existing competitors, as well as potential new competitors, may have
significantly greater financial, technical and marketing resources than we do.
This may allow them to devote greater resources than we can to the development
and promotion of their product offerings. These competitors may also engage in
more extensive technology research and development and adopt more aggressive
pricing policies for their subscription-based content. Additionally, increased
competition could result in price reductions, lower margins and negatively
impact our financial results.

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

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

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

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

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

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

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

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

19

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

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

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

O if we experience excessive chargebacks and/or credits;

O if we experience excessive fraud ratios;

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

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

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

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

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

We also note that MasterCard has recently changed its chargeback ratio
policy to include credits when the number of credits exceeds chargebacks (which
is generally always the case). When the number of chargebacks and credits
together exceed 1% of total monthly transactions for two consecutive months,
MasterCard can impose fines of up to $100 per chargeback and credit plus
$100,000 per month. Our merchant processor is contesting this policy. If we are
unsuccessful in contesting this policy we may have to stop accepting MasterCard
as a form of payment for monthly memberships to our web site. Currently,
MasterCard transactions account for more than 30% of our monthly web site
membership transactions.

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

As a small company with approximately 112 employees, our success depends
upon the contributions of our executive officers and our other key personnel.
The loss of the services of any of our executive officers or other key personnel
could have a significant adverse effect on our business and operating results.
We cannot assure that New Frontier Media will be successful in attracting and
retaining these personnel. It may also be more difficult for us to attract and
recruit new personnel due to the nature of our business.

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

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

20

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

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

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

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

SECURITIES EXCHANGE ACT REPORTS

The Company maintains an Internet website at the following address:
www.noof.com. New Frontier Media makes available on or through this web site
certain reports and amendments to those reports that are filed with the
Securities and Exchange Commission (the "SEC") in accordance with the Securities
Exchange Act of 1934 (the "Securities Exchange Act"). These include the
Company's annual report on Form 10-K, its quarterly reports on Form 10-Q, and
current reports on Form 8-K. The Company makes this information available on its
website free of charge as soon as reasonably practicable after we electronically
file the information with, or furnish it to, the SEC.

ITEM 2. PROPERTIES.

COLORADO: New Frontier Media occupies two buildings in Boulder, Colorado.
The Airport Boulevard facility is 11,744 leased square feet and houses the
Subscription/PPV TV Group's digital broadcast facility, technical operations
group, and call center as well as the data center for the Internet Group's
operations. This facility is 100% utilized. The Winchester Circle facility is
18,000 leased square feet and is used by New Frontier Media as its corporate
headquarters, as well as by the Internet Group's web production, sales and
marketing departments, and by the Subscription/PPV TV Group's marketing, sales,
and promotions departments. This facility is 80% utilized.

CALIFORNIA: New Frontier Media leases three suites in one building in
Sherman Oaks, California. Suite 675 is 4,400 square feet, Suite 605 is 1,600
square feet and Suite 800 is 18,000 square feet. All three suites are unoccupied
and have been returned to the landlord in order to be sublet. The Company
previously utilized this space in connection with its Internet Group's
operations. These operations have subsequently been relocated to Boulder,
Colorado as part of the Company's 2002 and 2003 restructurings. The Company
recognized a loss with respect to the leasehold improvements and furniture
associated with these suites as part of its restructuring charges.

ITEM 3. LEGAL PROCEEDINGS.

The Company has settled its two material legal proceedings.

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. Edward Bonn and Mr.
Bradley A. 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.

21

The Complaint's allegations arose, 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 sought rescission of the purchase
of IGallery, ITN and CTI as well as monetary damages in an amount to be proven
at trial.

The Company settled its litigation with Mr. Weber during the quarter ended
December 31, 2002, and settled its litigation with Mr. Bonn, Mr. Howard and the
other defendants in April 2003. In connection therewith, Mr. Bonn returned 3.5
million shares of the Company's common stock and received $1.5 million, 150
Internet domain names, and warrants to purchase 350,000 shares at $1.00 a share.
The effect of this transaction will be reflected in the Company's financial
statements for the quarter ended June 30, 2003.

The second legal proceeding related to a complaint filed by the Company on
August 3, 1999 in District Court for the city and county of Denver (Colorado
Satellite Broadcasting, Inc. et al. vs. Pleasure Licensing LLC, et al., case no
99CV4652) against Pleasure Licensing LLC and Pleasure Productions, Inc.
(collectively, "Pleasure"), alleging breach of contract, breach of express
warranties, breach of implied warranty of fitness for a particular purposes, and
rescission, seeking the return of 700,000 shares of New Frontier Media stock and
warrants for an additional 700,000 New Frontier Media shares which were issued
to Pleasure in connection with a motion picture licensing agreement.

On June 12, 2003, the Company settled its litigation with Pleasure. In
connection therewith, the Company secured the exclusive broadcast rights to
2,000 titles from Pleasure's catalog and up to 83 new releases. In addition,
Pleasure agreed to the cancellation of 700,000 warrants issued to it in 1999 to
purchase New Frontier common stock at $1.12 a share.

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

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

PART II.

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

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

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

As of June 15, 2003, there were approximately 2,600 beneficial owners of
New Frontier Media's Common Stock.

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

22

In conjunction with the issuance of 2.5 million shares of Class B
Redeemable Preferred Stock, with a face value of $0.81 per share, the Company
issued 500,000 shares of its Common Stock in May and June 2003 to three
accredited investors pursuant to the exemption afforded by Section 4(2) of the
Securities Act of 1933, as amended.

ITEM 6. SELECTED FINANCIAL DATA

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

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

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

This annual report on Form 10-K includes forward-looking statements. These
are subject to certain risks and uncertainties, including those identified
below, which could cause actual results to differ materially from such
statements. The words "believe", "expect", "anticipate", "optimistic", "intend",
"will", and similar expressions identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date on which they are made. The Company undertakes no
obligation to update or revise any forward-looking statements. Factors that
could cause actual results to differ materially from the forward-looking
statements include, but are not limited to: 1) our ability to compete
effectively for quality content with our Subscription/PPV TV Group's primary
competitor who has significantly greater resources than us; 2) our ability to
retain our major customer that accounts for 36% of our total revenue; 3) our
ability to retain our key executives; 4) 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

23

products and services; 5) our ability to generate compelling website content for
resale; and 6) our ability to attract market support for our stock.

The following table presents certain consolidated statement of operations
information.

RESULTS OF OPERATIONS

OVERVIEW

NET REVENUE

Net revenue for the Company was $36.7 million, $52.4 million, and $58.6
million for the years ended March 31, 2003, 2002, and 2001, respectively,
representing a decrease of 30% from 2002 to 2003 and 11% from 2001 to 2002.

The decrease in revenue from 2002 to 2003 is primarily related to a
decrease in revenue generated by the Internet Group. Revenue generated by the
Internet Group was $7.8 million and $23.2 million for the years ended March 31,
2003 and 2002, respectively, representing a decrease of 66% year-over-year. This
decrease in revenue is a direct result of the Internet Group changing its
business model from one that relied entirely upon generating traffic to its web
sites by paying to acquire it to one that relies upon internally generated
traffic and partnerships with third party gatekeepers. The Internet Group ceased
purchasing traffic for its web sites because it was no longer a profitable model
due to changes in the adult Internet industry; such as, an increase in the
availability

24

of free content and low barriers of entry. The Internet Group will continue to
focus its efforts on creating revenue-sharing partnerships with third party
gatekeepers similar to the business model used by the Subscription/PPV TV Group.
Management expects to experience further declines in its membership and content
revenue bases as the old business model erodes. However, management believes
that the creation of partnerships with third party gatekeepers will ultimately
lead to a sustainable and profitable revenue base in the future.

Revenue generated by the Subscription/PPV TV Group was $28.9 million and
$29.1 million for the years ended March 31, 2003 and 2002, respectively,
representing a slight decrease of less than 1%. This decrease in revenue is
related to a decrease in revenue generated by the Subscription/PPV TV Group's
C-Band services. C-Band revenue declined from $9.4 million in 2002 to $7.5
million in 2003, representing a decrease of 20% year-over-year. The decline in
C-Band revenue follows the decline in the number of consumers in this market as
it continues to erode each year.

The decrease in C-Band revenue was offset by an increase in the
Subscription/PPV TV Group's core business segment related to its Cable/DBS
services. Cable/DBS revenue increased 9% from $19.7 million for the year ended
March 31, 2002 to $21.4 million for the year ended March 31, 2003.

The decrease in revenue from 2001 to 2002 is related to a decrease in
revenue generated by the Internet Group due to the change in its business model,
as described above, which began during the 2002 fiscal year. Revenue for the
Internet Group was $23.2 million and $34.0 million for the years ended March 31,
2002 and 2001, respectively, representing a decrease of 32%. This decrease was
offset by an increase in Subscription/PPV TV Group revenue. Revenue for the
Subscription/PPV TV Group was $29.1 million and $24.5 million for the years
ended March 31, 2002 and 2001, respectively, representing an increase of 19%.

OPERATING INCOME (LOSS)

Operating income (loss) for the Company was an operating loss of $5.0
million and $0.6 million for the years ended March 31, 2003 and 2002,
respectively, and operating income of $2.5 million for the year ended March 31,
2001.

The increase in the Company's operating loss from 2002 to 2003 is related
to the following: a) a $1.4 million asset impairment charge related to the write
down of the book value of several of the Internet Group's URLs; b) a $3.2
million restructuring charge primarily related to the relocation of the Internet
Group's data center from Los Angeles to Boulder; c) an increase in Corporate
Administration expenses related to legal fees associated with the Company's
lawsuit with Edward Bonn, Bradley Weber, Jerry Howard, and Response Telemedia,
Inc. and the proxy fight that the Company defended itself against during the
year; and d) a decrease in operating income generated by the Internet Group. The
Company does not anticipate any further restructuring or impairment charges
related to the Internet Group in future periods. In addition, the Company has
settled its lawsuits with the above entities and does not anticipate any further
costs related to this in future periods.

The decline in operating income from 2001 to 2002 is a result of a $3.2
million restructuring charge taken during the fourth quarter of 2002 in
connection with the consolidation of the Internet Group's engineering, web
production, sales and marketing departments to the Company's Boulder, Colorado
location and the elimination of the Internet Group's customer service department
due to the outsourcing of its credit card processing functions. In addition, the
Internet Group experienced a decline in its operating income from $4.5 million
for the year ended March 31, 2001 to $2.1 million for the year ended March 31,
2002, representing a 53% decrease. This decline in operating income for the
Internet Group was offset by an increase in operating income for the
Subscription/PPV TV Group from $3.5 million for the year ended March 31, 2001 to
$6.3 million for the year ended March 31, 2002, representing an increase of 80%.

SUBSCRIPTION/PAY-PER-VIEW TV GROUP

The Subscription/PPV TV Group rebranded its networks under the TEN* name
and logo during the fourth quarter of the fiscal year ended March 31, 2003. Each
network (except Pleasure) has the TEN name associated with it. This change was
done in an effort to create brand recognition for the

25

TEN name and associate this name with the best adult programming on Cable and
DBS platforms. The networks are now named as follows: Pleasure, TEN, TEN Clips
(formerly ETC), TEN Xtsy (formerly Extasy), TEN BluePlus (formerly True Blue),
TEN Max (formerly X-Cubed and XClips), TEN Blue (launched in January 2003), and
TEN Blox (launched in January 2003). The Subscription/ PPV TV Group's VOD
service is branded as TEN On Demand.

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

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

(1) TEN Xtsy, TEN BluePlus and TEN Max addressable households include 1.1
million, 0.8 million, and 0.5 million C-Band addressable households for the
years ended March 31, 2001, 2002 and 2003, respectively.

NET REVENUE

Total net revenue for the Subscription/PPV TV Group was $28.9 million,
$29.1 million, and $24.5 million for the years ended March 31, 2003, 2002, and
2001, respectively, representing a decrease of 1% from 2002 to 2003 and an
increase of 19% from 2001 to 2002. Of total net revenue, C-Band net revenue was
$7.5 million, $9.4 million, and $10 million for the years ended March 31, 2003,
2002, and 2001, respectively, representing a 20% decrease from 2002 to 2003 and
a 6% decrease from 2001 to 2002. Revenue from the Group's Cable/DBS services was
$21.4 million, $19.7 million, and $14.5 million for the years ended March 31,
2003, 2002, and 2001, respectively, representing an increase of 9% from 2002 to
2003 and 36% from 2001 to 2002. Revenue from the Group's Cable/DBS services is
responsible for approximately 74%, 68%, and 59% of the Group's total net revenue
for the years ended March 31, 2003, 2002, and 2001, respectively.

The year-over-year decreases in C-Band revenue are due to the continued
decline of the C-Band market as consumers convert C-Band "big dish" analog
satellite systems to smaller, 18-inch digital DBS satellite systems. The total
C-Band market declined 38% from 2002 to 2003 and 27% from 2001 to 2002.

Total C-Band subscriptions to the Group's networks (TEN Xtsy, TEN Max, and
TEN BluePlus) were 138,448, 125,465, and 102,185 as of March 31, 2001, 2002, and
2003, respectively, representing a decrease of 19% from 2002 to 2003 and 9% from
2001 to 2002.

The Subscription/PPV TV Group acquired the C-Band subscriber base of
Emerald Media, Inc. ("EMI") in April 2001 for a total of $750,000 in stock and
cash. EMI was formerly the Group's largest competitor in the adult C-Band
market, operating two competing networks, which were discontinued after this
acquisition. The effect of this acquisition has been to support the Group's
C-Band revenue

26

stream in a quickly eroding market place. Although the C-Band market continues
to decline, the number of subscribers to the Subscription/PPV TV Group's
networks is not declining as quickly, and its average revenue earned per sale
has remained relatively stable.

The Subscription/PPV TV Group terminated its third party C-Band distributor
contracts during the year ended March 31, 2003 because management felt the
contracts were no longer favorable to the Group. The termination of these
contracts was responsible for a 7% decrease in subscriptions to its networks
from 2002 to 2003.

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

The Subscription/PPV TV Group's Pleasure network was available to 17.3
million, 7.5 million and 8.0 million addressable subscribers as of March 31,
2001, 2002, and 2003, respectively. The decrease in addressable subscribers from
2001 to 2002 is a result of both DISH Network and Hughes Electronic
Corporation's DirecTV ("DirecTV") terminating its distribution of Pleasure
during the fiscal year ended March 31, 2002. Both DBS providers terminated its
distribution of Pleasure in order to increase the number of partially edited
services distributed on their platforms. Revenue from Pleasure on these two
platforms contributed 10% and 7% of total Cable/DBS revenue in 2001 and 2002,
respectively.

The increase in addressable subscribers for the Pleasure network from 2002
to 2003 is related to new launches and online growth from Cable affiliates such
as AOL Time Warner, Inc. ("Time Warner"), Comcast Corporation ("Comcast"), and
Charter Communications, Inc. ("Charter").

Revenue from the Subscription/PPV TV Group's TEN network has declined
year-over-year because of a continued decrease in the number of monthly DISH
subscribers. This decline in subscribers has been ongoing since DISH converted
TEN to a PPV service in 1999. In addition, until recently, PPV buys from TEN on
the DISH platform have been declining due to the addition of a competing network
of the same editing standard which was added to the DISH platform in September
2001. However, during the last quarter of the 2003 fiscal year, the number of
TEN's PPV buys on the DISH platform has begun to increase. The Subscription/PPV
TV Group has also started to work with several Cable affiliates to replace the
Pleasure network with TEN and its sister service, TEN Clips.

In January 2000, DISH launched TEN Xtsy (formerly Extasy) on its satellite
at 110 degrees. In August 2001, DISH moved TEN Xtsy to its satellite at 119
degrees. Significantly more addressable subscribers view DISH's satellite at 119
degrees than its satellite at 110 degrees. TEN Xtsy is available on DISH as both
a subscription and PPV service, as well as part of a monthly combination
subscription with TEN. In September 2001, DISH increased its retail price for
TEN Xtsy to $10.99 for a PPV purchase and $27.99 for a monthly subscription from
$9.99 and $24.99, respectively. These changes have resulted in a 78% increase in
revenue for the TEN Xtsy network from 2001 to 2002 and an 11% increase in
revenue for the TEN Xtsy network from 2002 to 2003.

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

TEN Clips was available to 2.4 million, 3.6 million and 5.8 million
addressable subscribers as of March 31, 2001, 2002, and 2003, respectively.
Revenue from TEN Clips increased 250% from 2001 to 2002 and 29% from 2002 to
2003. TEN Clips obtained carriage with DISH network in July 2000 and is carried
as both a PPV and subscription service. DISH increased its retail prices for TEN
Clips in September 2001 to $9.99 for a PPV purchase and $22.99 for a monthly
subscription from $8.99 and $19.99, respectively.

The Subscription/PPV TV Group has experienced significant growth in revenue
from its VOD service, TEN On Demand. TEN On Demand is provided to Cable
affiliates in each of the Group's

27

three editing standards. TEN On Demand is provided to Cable operators as a "kit"
of adult content with 5 -40 titles in each kit. Content is refreshed on a
monthly basis and provides for a 30-day early release window to the PPV
services. Accordingly, there is no duplication between the PPV networks and the
VOD product. The Subscription/PPV TV Group is the leading provider of adult VOD
content with launches on cable systems representing 95% of VOD enabled cable
households as of May 1, 2003, and is the exclusive provider of adult VOD content
for Time Warner. Revenue from its VOD service accounted for 9% of the
Subscription/PPV TV Group's total Cable/DBS revenue for the year ended March 31,
2003, as compared to 1% for the year ended March 31, 2002.

The Subscription/PPV TV Group signed an agreement in February 2003 to
provide its TEN On Demand service to On Command, the leading provider of in-room
interactive entertainment for the hotel industry and its guests. Beginning in
March 2003, the Group began providing titles on a monthly basis to On Command's
VOD enabled hotel rooms in four different editing formats. The Subscription/ PPV
TV Group was fully deployed in all 895,000 On Command hotel rooms as of May 1,
2003.

In January 2003, the Subscription/PPV TV Group launched TEN Blue and TEN
Blox, two partially edited services created to address the increasing demand
from consumers for this editing standard. TEN Blue will offer amateur, ethnic,
and urban oriented feature programming. TEN Blox will be the "clip" sister
service to TEN Blue. Content costs to program these networks will be minimal
since the Subscription/PPV TV Group can use content from its already licensed
library of titles.

The Subscription/PPV TV Group added a new revenue stream during the fiscal
year ended March 31, 2002, related to the advertisement of adult lifestyle
products which enhance the viewing experience of the adult consumer. These
products are advertised during the interstitial breaks between each movie. The
Subscription/PPV TV Group partners with third parties for the sale and
fulfillment of these products and shares in any revenue generated by the
advertisement of the products on its networks. Revenue from product sales
accounted for 6% of total Cable/DBS revenue for the fiscal year ended March 31,
2003, up from 2% for the fiscal year ended March 31, 2002.

COST OF SALES

Cost of sales for the Subscription/PPV TV Group was $14.0 million, $13.4
million, and $11.4 million for the years ended March 31, 2003, 2002, and 2001,
respectively, representing increases of 4% from 2002 to 2003 and 18% from 2001
to 2002. Cost of sales as a percentage of revenue was 48%, 46%, and 47% for the
years ended March 31, 2003, 2002, and 2001, respectively. Cost of sales consists
of expenses associated with broadcast playout, satellite uplinking, satellite
transponder leases, programming acquisition costs, amortization of content
licenses, and call center operations.

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

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

During the fourth quarter of the year ended March 31, 2002, the
Subscription/PPV TV Group renegotiated its transponder leases with Loral for its
four analog transponders. This renegotiation resulted in a 30% decrease in its
monthly analog transponder lease payments. During the fourth quarter ended March
31, 2003, the Subscription/PPV TV Group renegotiated two of its analog
transponder leases with Loral, resulting in a 55% decrease in the annual costs
for those two transponders.

In addition, during the fiscal year ended March 31, 2002 the
Subscription/PPV TV Group created a digital tier for its Pleasure, TEN and TEN
Clips networks on Loral's satellite known as T-7. This

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digital tier replaces the edgeband technology that the Group was using. Edgeband
technology permits multiple services to be carried over an existing satellite
transponder by adding a multiplex of MPEG-2 compressed programs at the band edge
of the transponder. This change to a digital tier makes the distribution of the
Group's services more bandwidth efficient for its Cable affiliates. In January
2003, the Subscription/PPV TV Group added TEN Blue, TEN Blox and TEN Xtsy to its
digital tier.

OPERATING INCOME

Operating income for the Subscription/PPV TV Group was $7.1 million, $6.3
million, and $3.5 million for the years ended March 31, 2003, 2002, and 2001,
respectively, representing increases of 13% from 2002 to 2003 and 80% from 2001
to 2002.

The 13% increase in operating income from 2002 to 2003 is primarily related
to a 17% decrease in operating expenses during this period. Operating expenses
as a percentage of revenue declined from 32% to 27% during this same period. The
decline in operating expenses from 2002 to 2003 was related to a decline in: a)
the costs associated with the Group's C-Band barker channel, b) advertising
costs, c) payroll costs associated with the elimination of two senior manager
positions, and d) commissions paid to the Group's sales force as a result of a
change in the commission plan and a decline in the number of people being
commissioned.

In addition, due to an accounting pronouncement change, goodwill and
intangible assets with indefinite lives are no longer required to be amortized
and are, instead, tested for impairment on an annual basis using the guidance
for measuring impairment as set forth in SFAS 142, "Goodwill and Other
Intangible Assets". Goodwill amortization was $0, $636,000 and $636,000 for the
fiscal years ended March 31, 2003, 2002 and 2001, respectively.

The 80% increase in operating income from 2001 to 2002 is attributable to a
19% increase in revenue and an increase in the Group's gross margin percentage
from 53% to 54%. Total operating expenses decreased slightly by 2% from 2001 to
2002 and operating expenses as a percentage of revenue declined from 39% to 32%.
The slight decrease in operating expenses from 2001 to 2002 is a result of
operating expenses; such as, advertising, travel, entertainment, and trade show
costs, remaining flat year-over-year.

INTERNET GROUP
NET REVENUE

Total net revenue for the Internet Group was $7.8 million, $23.2 million,
and $34 million for the years ended March 31, 2003, 2002 and 2001, respectively,
representing a decrease of 66% from 2002 to 2003 and 32% from 2001 to 2002. The
Internet Group's revenue is comprised of membership revenue from its
consumer-based web sites, revenue from the sale of its content feeds to
webmasters, revenue from the sale of exit traffic, and revenue from its data
center services.

Net membership revenue was $5.3 million, $15.3 million, and $19.9 million
for the years ended March 31, 2003, 2002, and 2001, respectively, representing
decreases of 65% from 2002 to 2003 and 23% from 2001 to 2002.

The 23% decline in gross membership revenue from 2001 to 2002 is a direct
result of a decrease in traffic to the Internet Group's web sites. The decrease
in traffic to the Internet Group's sites was primarily due to changes made to
the Group's traffic acquisition model. The Internet Group changed its traffic
acquisition model during the fiscal year ended March 31, 2002 to compensate an
affiliated webmaster for traffic directed to the Internet Group's web sites only
upon the conversion of a referral into a paying member. Prior to this change,
the Group was paying for traffic based upon the amount of traffic directed to
the Group's web sites, regardless of whether this traffic resulted in a paying
member to one of the Group's sites. This change to the Internet Group's traffic
acquisition programs resulted in a 57% decline in webmaster payouts from 2001 to
2002.

The Internet Group also believes that its membership revenue and traffic
volume declined from 2001 due to the proliferation of free adult content
available on the Internet. In addition, portals such as Microsoft Corporation's
MSN ("MSN"), no longer default words typed into a browser dialogue box

29

to the "dot-com" web site associated with such word, and have begun to sell off
their adult word searches to outside companies, impacting the amount of type-in
traffic to the Internet Group's web sites.

The 65% decline in net membership revenue from 2002 to 2003 was a result of
a continued decline in traffic to the Internet Group's web sites due to the
elimination of all traffic generating programs. The Internet Group ceased
actively purchasing traffic for its web sites during the fisca