NEW FRONTIER MEDIA INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10 -K

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

Commission File Number: 0-23697

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

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

7007 Winchester Circle, Suite 200, Boulder, CO 80301

(Address of principal executive offices and Zip Code)

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

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

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

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

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

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

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

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PART I.

ITEM 1. BUSINESS

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

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

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

GENERAL

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

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

New Frontier Media is organized into two reportable segments:

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

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

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

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

PAY TV GROUP
INDUSTRY OVERVIEW

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

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

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

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

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

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

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

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

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

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

DESCRIPTION OF NETWORKS

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

TABLE 1
SUMMARY OF NETWORKS

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

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

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

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

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TEN* FAMILY OF NETWORKS -- PROGRAMMING STRATEGY

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

PLEASURE

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

TEN

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

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

TEN*CLIPS

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

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

TEN*BLUE

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

TEN*BLOX

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

TEN*ON DEMAND (VIDEO-ON-DEMAND)

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

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

TEN*XTSY

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

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

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TEN*BLUEPLUS

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

TEN*MAX

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

SATELLITE TRANSMISSION

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

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

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

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

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

TRANSPONDER AGREEMENTS

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

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

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

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

DIGITAL BROADCAST CENTER

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

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

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

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

NETWORK PROGRAMMING

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

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

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

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

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

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

CALL CENTER SERVICE

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

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

MARKETING

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

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

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

10

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

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

COMPETITION

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

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

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

SEASONALITY

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

CUSTOMER CONCENTRATION

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

INTERNET GROUP
INDUSTRY OVERVIEW

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

11

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

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

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

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

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

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

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

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

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

12

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

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

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

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

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

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

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

13

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

MARKETING

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

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

DATA CENTER

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

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

E-COMMERCE BILLING

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

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

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

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

14

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

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

COMPETITION

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

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

EMPLOYEES

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

GEOGRAPHIC AREAS

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

AVAILABLE INFORMATION

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

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

15

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of New Frontier Media are as follows:

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

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

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

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

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

16

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

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

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

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

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

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

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

RISK FACTORS

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

17

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

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

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

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

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

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

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

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

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

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

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

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

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

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

18

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

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

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

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

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

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

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

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

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

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

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

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

19

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

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

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

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

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

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

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

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

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

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

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

O if we experience excessive chargebacks and/or credits;

O if we experience excessive fraud ratios;

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

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

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

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

20

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

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

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

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

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

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

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

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

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

ITEM 2. PROPERTIES.

The Company uses the following principal facilities in its operations:

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

21

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

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

ITEM 3. LEGAL PROCEEDINGS.

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

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

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

PART II.

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

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

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

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

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

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ITEM 6. SELECTED FINANCIAL DATA

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

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

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

OVERVIEW

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

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

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

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

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

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

FORWARD-LOOKING STATEMENTS

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

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

23

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

OUR BUSINESS

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

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

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

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

24

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

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

PAY TV SEGMENT

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

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

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

O Growing acceptance for its partially-edited services

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

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

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

25

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

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

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

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

O Increased regulation of the adult industry

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

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

O Upcoming PPV and VOD launches with our newest Cable affiliates

O Obtaining distribution for our PPV services with DIRECTV

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

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

O Future international distribution opportunities

INTERNET SEGMENT

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

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

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

26

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

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

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

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

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

CRITICAL ACCOUNTING POLICIES

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

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

27

REVENUE RECOGNITION

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

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

VALUATION ALLOWANCES

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

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

GOODWILL IMPAIRMENT

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

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

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

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PREPAID DISTRIBUTION RIGHTS (CONTENT LICENSING)

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

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

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

RESULTS OF OPERATIONS

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

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