Back to GetFilings.com



SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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, 2005

Commission File Number: 0-23697

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

Colorado 84-1084061
(State of 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:   ý YES   o 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:   ý

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

The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant as of September 30, 2004 was approximately $169,557,857. On such date, the closing price of the Registrant’s common stock, as quoted on the NASDAQ National Market, was $7.71.

The Registrant had 22,657,916 shares of its common stock outstanding on June 9, 2005.

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 on August 11, 2005.

Form 10-K
Form 10-K for the Fiscal Year ended March 31, 2005
Table of Contents

        Page
PART I.        
Item 1.   Business        3  
Item 2.   Properties        21  
Item 3.   Legal Proceedings        21  

Item 4.

   Submission of Matters to a Vote of Security Holders        21  
PART II.        

Item 5.

   Market for Registrant’s Common Equity and Related Stockholder Matters        21  

Item 6.

   Selected Financial Data        22  

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations        22  

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk        41  

Item 8.

   Financial Statements and Supplementary Data        42  

Item 9.

   Changes In and Disagreements with Accountants on Accounting and Financial Disclosure        42  

Item 9a.

   Controls and Procedures        42  

Item 9b.

   Other Information        42  
PART III.        

Item 10.

   Directors and Executive Officers of the Registrant        42  

Item 11.

   Executive Compensation        42  

Item 12.

   Security Ownership of Certain Beneficial Owners and Management        42  

Item 13.

   Certain Relationships and Related Transactions        43  

Item 14.

   Principal Accountant Fees and Services        43  
PART IV.        

Item 15.

   Exhibits and Financial Statement Schedules        43  
SIGNATURES        
Table of Contents to Financial Statements        F-1  

2

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 WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. 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. IGallery was liquidated into New Frontier Media, Inc. during the fiscal year ended March 31, 2005, and now operates as a division of this Company.

      New Frontier Media is organized into two reportable segments:

• Pay 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.

• 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. The Internet Group is also the key company asset that will be used to exploit opportunities on new and emerging platforms, including interactive television applications, VOD delivered via the Internet, and wireless. The Internet Group will

3

begin to provide content to the wireless market, both domestically and internationally, during the 2006 fiscal year.

      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 “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.

      Conditional access technology enables cable television operators or satellite providers to sell content as PPV (i.e., individual movie), a timed block of programming, or as an event for a set fee. In addition, it 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 2004 was $761 million. As more cable operators add adult and distributors continue to expand their offerings, Kagan projects revenues from the adult category will grow to $1.4 billion by the year 2014.

      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 38% year-over-year, from 375,683 households as of April 2004 to 232,746 as of April 2005.

      The Pay TV Group also 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 of March 31, 2005, EchoStar Communications Corporation (“DISH”) and DIRECTV Group, Inc. (“DIRECTV”) had 11.23 million and 14.4 million subscribers, respectively, according to public filings made by each company. Kagan estimates that the number of DBS subscribers will grow to 32.6 million by the year 2014.

      In addition, the Pay TV Group 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 April 2005, the Pay TV Group maintained distribution arrangements with nine of the ten largest domestic cable MSOs that control access to 55.7 million, or 76%, of the total basic cable household market. According to the National Cable and Telecommunications Association (“NCTA”), Cable MSOs delivered service to 73.2 million basic households in the United States as of February 2005 (the most recent statistics available). In addition, Kagan indicates that as of December 2004, total analog and digital addressable cable service (i.e.,

4

basic cable households that have the capability of receiving PPV or subscription services) was provided to 36.8 million households.

      Growth in the PPV market is expected to result in part from cable system upgrades utilizing fiber-optic, digital compression technologies or other bandwidth expansion methods that provide cable operators additional channel capacity. Cable operators have shifted from analog to digital technology in order to upgrade their cable systems and to respond to competition from DBS providers who offer programming in a 100% digital environment. When implemented, digital compression technology increases channel capacity, improves audio and video quality, provides fully secure scrambled signals, allows for advanced set-top boxes for increased interactivity, and provides for integrated electronic programming guides (“EPG”). The Pay TV Group expects that all of its future cable launches will be on a digital platform.

      According to the NCTA, as of December 31, 2004 over 34% of U.S. Cable customers, or approximately 25.0 million households, received digital cable service. This represents an increase of 13% over the number of digital subscribers receiving service at the end of 2003 (22.2 million). Kagan estimates that the number of digital cable subscribers will grow to 64.9 million by the year 2014, which will represent an 89.8% digital 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 at this time). 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 18.0 million VOD enabled households. Kagan estimates that there were 19.8 million VOD enabled households at the end of 2004, compared to only 12.6 million VOD enabled households at the end of 2003. Kagan projects that there will be 62.9 million VOD enabled households by the end of 2014.

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

        ESTIMATED NETWORK HOUSEHOLDS(3)
(in thousands)
NETWORK
             DISTRIBUTION METHOD
   As of
March 31,
2005
   As of
March 31,
2004
   As of
March 31,
2003
Pleasure             Cable               8,400                 7,800                 8,000  
TEN             Cable/DBS               16,600                 15,200                 11,100  
TEN*Clips             Cable/DBS               16,900                 13,700                 5,800  
Video-on-Demand             Cable               18,300                 10,500                 5,300  
TEN*Xtsy(1)             C-band/Cable/DBS               11,600                 10,000                 9,000  
TEN*BluePlus(1)(2)             C-band/Cable               N/A                 N/A                 570  
TEN*Max(1)             C-band/Cable               233                 470                 570  
TEN*Blue             Cable               2,900                 2,500                 300  
TEN*Blox             Cable               5,200                 2,800                 300  
Total Network Households               80,133                 62,970                 40,940  

(1) TEN*Xtsy, TEN*BluePlus and TEN*Max addressable household numbers include 0.5 million, 0.4 million, and 0.2 million C-Band addressable households for the years ended March 31, 2003, 2004, and 2005, respectively.

5

(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, 2005 and 2004 to be 23.1 million and 14.3 million cable homes, respectively, and 11.0 million and 9.4 million DBS homes, respectively.

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 its consumers access to more unique titles, a wider variety of talent, and a greater variety of studio representation than any of its competitors. TEN focuses on prime time viewing blocks and programs specific types of content in those blocks to create an appointment-viewing calendar with the intent of driving viewers to traditionally less popular nights of the week for viewing adult content. 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 2.35 services 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.

6

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 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 provides a standard content package of 40 titles in addition to several 5-title add-on packages of specialized content. 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. Most Cable MSO’s are currently accepting 75 to 100 hours of TEN*On Demand content. TEN*On Demand is distributed via Cable operators on a per-movie basis at retail prices ranging from $7.95 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 23 titles a month to On Command’s 840,000 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

7

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 34,618, 23,580 and 11,727 active C-Band subscriptions as of March 31, 2003, 2004 and 2005, respectively. C-Band retail prices range from $24.99 to $49.99 for monthly and quarterly subscriptions.

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 $49.99 for monthly and quarterly subscriptions. TEN*Max had 33,606, 22,923, and 11,442 active C-Band subscriptions as of March 31, 2003, 2004, and 2005, 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/VOD movie or event.

8

Transponder and VOD Transport 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 13 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 4.3 million digital households across the country. iN DEMAND carries Pleasure on Intelsat Americas 7, transponder 4. iN DEMAND also provides transport for our VOD content to certain Cable MSOs.

      iN DEMAND is the 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, including content aggregation, packaging, encoding, asset management and transport via satellite to all video service providers. As of March 31, 2005, the Pay TV Group reached approximately 7.0 million VOD households through its distribution agreement with TVN.

      In March 2005, the Pay TV Group began offering its VOD service to cable MSOs via Comcast Media Center (“CMC”). CMC is a business unit of Comcast Cable, which is a division of Comcast Corporation (“Comcast”). CMC encodes and delivers content to headends currently serving Comcast’s VOD-enabled cable systems. The CMC VOD platform helps to optimize resources at the local level by providing operators the ability to centrally manage the delivery and quality control of on-demand content. CMC’s unique VOD platform provides superior delivery speed to customers’ homes, is able to encrypt content at the national level, saving cable operators time and money at the local level, and provides encoding, metadata creation and storage. As of March 31, 2005, the Pay TV Group reached approximately 2.7 million VOD households through its distribution agreement with CMC.

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 broadband use; a storage area network for near-line content movement and storage; archiving capability on DLT data cartridges; and complete integration of its media asset management database for playlist automation and program scheduling.

      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.

9

      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

      Prior to May 2004, 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/editing department in Boulder, Colorado conducts preliminary screening of potentially licensable content, licenses acceptable content, conforms content into appropriate editing standards (i.e., partially edited, least edited and most edited) and programs the monthly schedules for all networks and VOD 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 over forty-five 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 acquires approximately 25 premiere titles per month. In addition, the Pay TV Group may license library content on an as needed basis. Library content are titles that have generally been produced within the last three years but have never been broadcast on a cable television or DBS platform. 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.

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 17-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

10

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 five 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 three major industry trade shows per year, including the National Cable Television Association (NCTA) show, DISH Summit, and the Cable Television Advertising and Marketing (CTAM) Summit, along with various local trade shows.

      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 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.

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 operators and DBS providers. However, the Pay TV Group cannot and does not compete with Playboy in the amount of money spent on programming and 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/DVD rentals and sales, books and magazines aimed at adult consumers, telephone adult chat lines, adult-oriented Internet services and adult-oriented wireless services.

Seasonality

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

11

Customer Concentration

      New Frontier Media derived 35%, 18%, and 11% of its total revenue for the year ended March 31, 2005 from DISH, Time Warner Cable and Comcast Corporation, respectively, through its Pay TV Group. The loss of any 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, nearly 60 million American adults have high-speed connections in the home and 63% of the online population in the U.S. is made up of adults age 18 or older. Pew also cites data that shows that Americans are behind in comparison to other parts of the world with respect to broadband penetration. According to the most recent data from the Federal Communications Commission, in 2002 South Korea ranked first in the world in broadband penetration with 21.3% of its citizens having a broadband connection at home; Hong Kong was second with 14.9%; Canada was third with 11.2%; and the United States was eleventh with 6.9%.

      According to NCTA, the U.S. cable industry served approximately 21 million high-speed Internet customers as of December 2004, up from 16.1 million in December 2003, an increase of 30% year-over-year. According to Jupiter Research, a leading research advisory organization, 31.9 million U.S. households have broadband access. This is predicted to grow to 69 million households, or 80% of online households, by 2010.

      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 2,000 hours of video content, over 25,000 photos, live chat, and voyeur cams.

      TEN.com is offered to consumers on a monthly subscription basis for $29.95 or a three-month subscription for $74.95. Traffic to TEN.com is derived 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, 2005, 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 also sells TEN.com through revenue sharing partnerships with third-party gatekeepers. 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.

      During the 2006 fiscal year, the Internet Group will be focused on the development of a wireless product for distribution both domestically and internationally. Based on a February 8, 2005 press release, Juniper Research, an entity that provides analytical research reports and consultancy services to the telecommunications industry, is predicting the following with respect to the mobile adult content market: a) The value of mobile adult content will increase by more than 50% to $1.01 billion in 2005; b) this growth will come from video-clips and streaming video; c) the majority of revenues will be derived from Europe and the Asia-Pacific region; and d) North American mobile adult revenues will pass the $400 million mark by the end of the decade. In addition, this same press release stated that a) the value of the global mobile adult market will reach $2.1 billion by 2009; b) the scale of content available directly from operators in the UK and mainland Europe will likely rise dramatically in the short and medium term; c) more than half the net additions to the user base of adult text-based services will come from Asia; and d) European customers are currently the biggest spenders on adult content, with an average annual revenue per user of more than $34.

12

      Juniper Research also suggests that the U.S. market size will initially be limited because the wireless operators are reluctant to offer this type of content for fear of regulatory or consumer backlash. However, wireless customers in the U.S. will still be able to access this content by browsing wireless Internet sites, such as the one that our Internet Group has developed over the past several months. According to CTIA, the wireless trade association, the number of wireless subscribers in the U.S. has increased 15% since 2003 to approximately 182 million.

      The wireless product currently being developed will include a wireless enabled web site, photo and video content, and ring “moans”. The product will be sold on a subscription and a la carte basis. Product pricing and revenue sharing agreements with the carriers are still being developed. Launches for the wireless product are anticipated to occur in the U.S., South America and Europe within the next three to six months.

      The Internet Group will also be working to develop interactive adult games for distribution on Cable, DBS and Hotel platforms during the 2006 fiscal year.

Description of Internet Revenue Streams
Business to Consumer: TEN.com

      The Internet Group offers TEN.com to consumers on a recurring monthly subscription basis for $29.95 or for three months at $74.95. The site is targeted to adult broadband consumers and provides access to over 2,000 hours of video content.

      The Internet Group generates traffic to its web sites through two primary sources. The first, “type-in” traffic, is generated when a consumer types the name of the Internet Group’s web site into their browser address bar. There is no cost to the Internet Group when traffic comes to its web site in this manner. 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. Approximately 45% 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 40 - 67% of the first month’s membership revenue for a new member. The Internet Group then keeps 100% of the revenue from each recurring monthly membership. 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.

Business to Business: Content and Traffic Sales

      Content Sales: 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.

      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.

13

Marketing

      The Internet Group currently generates approximately 45% 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. 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 40 - 67% of the first month’s membership revenue for a new member ($29.95). The Internet Group then keeps 100% of the revenue from each recurring monthly membership.

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 has been integrated with 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.

      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

14

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 121 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.

Executive Officers of the Registrant

      The executive officers of New Frontier Media are as follows:

Name
      Age
      Position

Michael Weiner

      62      Chairman of the Board, Chief Executive Officer, Secretary, and Director, New Frontier Media, Inc.

Karyn L. Miller

      39      Chief Financial Officer and Treasurer, New Frontier Media, Inc.

Ken Boenish

      38      President, The Erotic Networks, Inc.

Bill Mossa

      42      Vice President of Affiliate Sales and Marketing, The Erotic Networks, Inc.

George Sawicki

      45      Vice President, Legal Affairs and Assistant Secretary, New Frontier Media, Inc.

      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.

15

      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 sixteen 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 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 16-year veteran of the cable television industry. In October 2000, he was named President of The Erotic Networks, a subsidiary of New Frontier Media, and in April 2002 he began managing the day-to-day operations of the Internet Group under The Erotic Networks’ umbrella. Mr. Boenish joined The Erotic Networks as the Senior Vice President of Affiliate Sales in February 1999. Prior to joining the Company, Mr. Boenish, was employed by Jones Intercable (“Jones”) from 1994 - 1999. While at Jones he held the positions of National Sales Manager for Superaudio, a cable radio service serving more than 9 million cable customers. He was promoted to Director of Sales for Great American Country a new country music video service in 1997. While at Great American Country Mr. Boenish was responsible for adding more than 5 million new customers to the service while competing directly with Country Music Television, a CBS cable network. From 1988 - 1994 he sold cable television advertising on systems owned by Time Warner, TCI, COX, Jones, Comcast and other cable systems. Mr. Boenish holds a B.S. degree in Marketing from St. Cloud State University.

      Bill Mossa. Mr. Mossa joined The Erotic Networks, a subsidiary of New Frontier Media, Inc., as Vice President of Affiliate Sales and Marketing in 1998 and has been instrumental in growing the Company’s network distribution from zero to almost 80 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, LLC, 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.

16

      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, 2005.

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 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 any of our major customers, Dish Network, Time Warner Cable, and Comcast Corporation, 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, Time Warner Cable and Comcast Corporation, are major customers of our Pay TV Group. The loss of any of DISH Network, Time Warner Cable, and Comcast Corporation as customers would have a material adverse effect on our business operations and financial condition. For our fiscal year ended March 31, 2005, our revenues from DISH Network, Time Warner Cable, and Comcast Corporation were approximately 35%, 18%, and 11%, 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.

17

      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:

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

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

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

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

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

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

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

      If we are unable to compete effectively with our primary Cable/DBS competitor, who has significantly greater resources than us, we will not be able to increase subscriber revenues.

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

      Failure to maintain our agreements with Cable MSOs on favorable terms could adversely affect our business, financial condition, or results of operations.

      We currently have agreements with the nation’s five largest Cable MSOs. Our agreements with these operators may be terminated on short notice without penalty. If one or more Cable MSOs terminates or does not renew our agreements, or does not renew the agreement on terms as favorable as those of our current agreements, our business, financial condition, or results of operations could be materially adversely affected.

      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

18

at adult consumers, adult oriented telephone chat lines, adult oriented Internet services, and adult oriented wireless services. To a lesser extent, we also face general competition from other forms of non-adult entertainment, including sporting and cultural events, other premium pay services, 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 continued addition of new competitors to the Video-On-Demand distribution platform will 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. The continued addition of new competitors to the VOD platform, either on platforms where we have previously enjoyed exclusivity or where we currently share the platform, may continue to have an 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, 2005, revenue from our VOD service was 36% of our total Pay TV revenue.

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 still 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

19

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:

• 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;

• if we experience excessive chargebacks and/or credits;

• if we experience excessive fraud ratios;

• if 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;

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

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

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

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

      If we are not able to retain our key executives it will be more difficult for us to manage our operations and our operating performance could be adversely affected.

      As a small company with approximately 121 employees, our success depends upon the contributions of our executive officers and our other key personnel. The loss of the services of any of our executive officers or other key personnel could have a significant adverse effect on our business and operating results. We cannot assure that New Frontier Media will be successful in attracting and retaining these personnel. It may also be more difficult for us to attract and recruit new personnel due to the nature of our business.

      Our inability to identify, fund the investment in, and commercially exploit new technology could have an adverse impact on our financial condition.

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

20

      Negative publicity, lawsuits or boycotts by opponents of adult content could adversely affect our operating performance and discourage investors from investing in our publicly traded securities.

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

      Because we are involved in the adult programming business, it may be more difficult for us to raise money or attract market support for our stock.

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

ITEM 2. PROPERTIES.

      The Company uses the following principal facilities in its operations:

      Colorado: New Frontier Media leases space in two office buildings in Boulder, Colorado. The Airport Boulevard facility is 11,744 square feet and houses the Pay TV Group’s digital broadcast facility, encoding and technical operations groups, screening and programming functions, 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 square feet and is used by New Frontier Media as its corporate headquarters, as well as by the Internet Group’s web production department, and by the Pay TV Group’s marketing, sales, call center, branding, and promotions departments. This facility is 80% utilized.

      California: New Frontier Media leases 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

21

market in the capital stock. Such quotations reflect inter-dealer prices without retail markup, markdown or commission, and may not necessarily represent actual transactions:

Quarter Ended
          High
          Low
          Quarter Ended
          High
          Low
June 30, 2004          8.87          5.77          June 30, 2003          1.85          0.75
September 30, 2004          9.02          6.82          September 30, 2003          4.90          1.65
December 31, 2004          8.64          7.68          December 31, 2003          9.30          3.73
March 31, 2005          10.00          6.79          March 31, 2004          11.38          6.61

      As of June 1, 2005, 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.

ITEM 6. SELECTED FINANCIAL DATA

FIVE YEAR SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share amounts)

    Fiscal Year Ended March 31,
    2005
   2004
   2003
   2002
   2001
   Net Sales        $ 46,277          $ 42,878          $ 36,747          $ 52,435          $ 58,638  
   Net income (loss)        $ 11,122          $ 10,913          $ (11,895 )        $ (582 )        $ 3,324  
   Net income (loss) per basic common share        $ 0.50          $ 0.53          $ (0.56 )        $ (0.03 )        $ 0.16  
   Net income (loss) per fully diluted share        $ 0.48          $ 0.50          ($ 0.56 )        $ (0.03 )        $ 0.14  
   Weighted average diluted shares outstanding          23,067            21,892            21,319            21,128            23,063  
   Total assets        $ 59,528          $ 44,762          $ 35,025          $ 48,132          $ 52,606  
   Long term obligations        $ 5          $ 429          $ 465          $ 1,013          $ 7,076