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

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10 -K

Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Year Ended March 31, 2002

Commission File Number: 33-27494-FW

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

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

7007 Winchester Circle, Suite 200, Boulder, CO 80301

(Address of principal executive offices and Zip Code)

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

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

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

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

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

Aggregate market value of voting stock held by non-affiliates: $28,488,796 based
on 12,386,433 shares at June 7, 2002 held by non-affiliates and the closing
price on the Nasdaq SmallCap Market on that date which was $2.30.

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

21,246,916 common shares were outstanding as of June 7, 2002

DOCUMENTS INCORPORATED BY REFERENCE

The information required in response to Part III of Form 10-K is hereby
incorporated by reference to the specified portions of the registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on August 20, 2002.

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FORM 10-K
FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 2002
TABLE OF CONTENTS

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PART I.

ITEM 1. BUSINESS

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

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

GENERAL

New Frontier Media, Inc. ("New Frontier Media" or "the Company") was
originally incorporated in the State of Colorado on February 23, 1988. On
September 15, 1995, the Company, then known as Old Frontier Media, Inc.,
consummated the acquisition of New Frontier Media, Inc. in a stock-for-stock
exchange. The Company first effected a 2,034.66:1 reverse split of all
569,706,000 shares of its common stock then issued and outstanding, resulting in
280,000 shares of Common Stock being issued and outstanding prior to the New
Frontier Media, Inc. acquisition. The Company also approved a change of the
Company's name to New Frontier Media, Inc.

On February 18, 1998, the Company consummated an underwritten public
offering of 1,500,000 units, each consisting of one share of common stock and
one redeemable common stock purchase warrant, raising $7,087,000 in net proceeds
after underwriting fees (excluding related offering expenses). Simultaneous with
the public offering, New Frontier Media 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
Extasy, True Blue and X-Cubed (formerly GonzoX). Subsequent to this purchase,
the Company launched three networks targeted specifically to cable television
system operators and high-powered DTH satellite service providers (Direct
Broadcast Satellite or "DBS"): The Erotic Network ("TeN"), Pleasure, and Erotic
Television Clips ("ETC").

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"). Under the
terms of the acquisition, which was accounted for as a pooling of interests, the
Company exchanged 6,000,000 shares of restricted common stock in exchange for
all of the outstanding common stock of IGallery and ITN and 90% of CTI.

New Frontier Media is organized into two reportable segments:

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

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O Internet Group -- aggregates and resells adult content via the Internet.
The Internet Group sells content to monthly subscribers as well as 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 14 of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS," of this
Form 10-K, which information is incorporated by reference into this Part I, Item
1.

SUBSCRIPTION/PPV TV GROUP
INDUSTRY OVERVIEW

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

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 PPV Group's programming on a monthly, quarterly, semiannual and annual
basis. PPV programming competes well with other forms of entertainment because
of its relatively low price point.

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

The PPV Group provides its programming on both a PPV and subscription basis
to home satellite dish viewers through either large satellite dishes receiving a
low-power analog or digital signal (C-Band) or small dishes receiving a
high-power digital signal (DBS providers). According to General Instrument
Corporation's Access Control Center reports, the U.S. C-band market has declined
from approximately 1.1 million households as of April 2001 to 0.8 million as of
April 2002. The Satellite Broadcasting & Communications Association (SBCA)
reported that there were a total of 17.53 million DBS households as of December
31, 2001 (DirecTV provides service to 10.7 million households and EchoStar
Communications Corporation's DISH Network ("DISH") provides service to 6.83
million households). During 2001, DirecTV and DISH combined to gain 2.91 million
net new subscribers.

The PPV Group also provides its programming on both a PPV and subscription
basis through large multiple system operators ("MSOs") and their affiliated
cable systems, as well as independent, privately-held cable systems. As of April
2002, the PPV Group maintained distribution arrangements with five of the ten
largest domestic cable MSOs which control access to 30.4 million, or 42%, of the
total basic cable household market. According to the National Cable and
Telecommunications Association ("NCTA"), Cable MSOs delivered service to 73.1
million basic households in the United States as of February 2002, up from 69.4
million households a year ago. In addition, Paul Kagan Associates ("Kagan")
indicates that total analog addressable cable service (i.e., basic cable
households that have the capability of receiving PPV or subscription services)
was provided to 51.6 million households as of December 2001.

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 begun the shift 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

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

According to Spring/Summer 2002 Kagan Cable World "K" Book, the top 25
MSO's had 15.6 million digital subscribers as of December 31, 2001 and 9.0
million digital subscribers as of December 31, 2000, representing an increase of
73%. With the number of basic cable households just above 73 million,
industry-wide digital penetration is currently around 21%. The NCTA estimates
that by 2006 there will be 48.6 million cable digital subscribers.

Cable operators are also using their upgraded plants to provide their
digital customers with VOD services. VOD provides the opportunity for a consumer
to view a movie at any time, rather than only during the purchase window
provided by the cable operator. According to SMART MONEY (May 2002 issue), there
were 2.4 million VOD-enabled subscribers in North America as of December 2001.
SMART MONEY estimates that this number will increase to 6.0 million by the end
of 2002, and to 23.0 million by 2005. The Subscription/PPV TV Group currently
provides programming to over 1.2 million VOD enabled households, representing
50% penetration.

DESCRIPTION OF NETWORKS

The PPV Group provides six, 24-hour per day adult programming networks:
TeN: the erotic network, Pleasure, ETC, Extasy, True Blue and X-Cubed. The
following table outlines the current distribution environment for each service:

TABLE 1
SUMMARY OF NETWORKS

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

(1) This network was GonzoX. The network was renamed X-Cubed in May 2001

(2) Extasy, True Blue and X-Cubed addressable household numbers include 1.5
million, 1.1 million, and 0.8 million C-Band addressable households for the
years ended March 31, 2000, 2001 and 2002, respectively.

PLEASURE

On June 1, 1999, the PPV Group launched Pleasure, a 24-hour per day adult
network that incorporates the most edited standard available in the category.
Pleasure is distributed via cable television operators and DBS providers.
Pleasure's programming consists of adult feature-length film and video
productions and is programmed to deliver subscription and PPV households 20
premiere adult movies per month with a total of 110 adult movies per month. As
of March 31, 2002, Pleasure was available to an estimated 8.6 million
addressable multi-channel households. 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

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"upsell" subscription or PPV households to a less edited network such as TeN.
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: THE EROTIC NETWORK (TEN)

On August 15, 1998, the PPV Group launched TeN, a 24-hour per day adult
network that incorporates a partial editing standard targeted to cable
television system operators and DBS providers. The PPV Group has programmed TeN
with feature-length film and video productions that incorporate less editing
than traditional cable adult premium networks. As of March 31, 2002, TeN was
available to an estimated 8.1 million addressable multi-channel households. TeN
is offered on a monthly subscription basis by DISH for a retail price of $22.99.
As of March 31, 2002, TeN had approximately 37,000 monthly DISH subscribers. In
addition, TeN is distributed via Cable system operators and DBS providers on
either a pay-per-view or pay-per-block basis at retail prices ranging from $5.95
to $11.95.

TeN offers a diverse programming mix with movies and specials that appeal
to a wide variety of tastes and interests. TeN offers subscription and PPV
households 20 premiere adult movies and a minimum of 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 subscriber
buy rates (the theoretical percentage of addressable households ordering one PPV
movie, program or event in a month) achieved for cable system operators/DBS
providers as compared to network programming that incorporates the most edited
adult programming.

EROTIC TELEVISION CLIPS (ETC)

The PPV Group launched ETC on May 17, 2000, as its newest, partially edited
24-hour per day adult network. ETC's unique formatting provides for thematically
organized 90-minute blocks of programming in order to provide more variety in a
single viewing block and encourage appointment viewing by the PPV adult
consumer. The PPV Group has organized its partially edited content library into
60 thematic categories. Through the PPV Group's proprietary database technology,
approximately eight scenes are organized thematically and programmed into one
90-minute block. ETC delivers 240 unique thematic blocks with over 500 different
adult film scenes during a typical month. As of March 31, 2002, ETC was
available to 3.6 million addressable multi-channel households. ETC 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. In addition,
DISH distributes ETC on a monthly subscription basis for $22.99. As of March 31,
2002, ETC had approximately 7,000 monthly DISH subscribers.

EXTASY

Extasy was acquired from Fifth Dimension on February 18, 1998. Extasy's
programming consists of feature-length adult film and video productions and is
programmed with 20 premieres and a total of 110 adult movies per month. Extasy'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.
Extasy is the Company's least edited programming service available to
multi-channel households and is distributed via C-band DTH, Cable system
operators and DBS providers. Extasy is available on a pay-per-view and
pay-per-block basis as well as on a monthly, quarterly, semiannual and annual
subscription basis.

Extasy had 59,910, 48,099, and 43,360 active C-Band subscriptions as of
March 31, 2000, 2001 and 2002, respectively. In addition, Extasy was available
to 7.0 million Cable/DBS addressable households as of March 31, 2002, and 41,000
monthly DISH subscribers. C-band retail prices range from $19.99 to $110.99 for
monthly, quarterly, semi-annual and annual subscriptions. Cable operators and
DBS

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providers distribute Extasy on a pay-per-view or pay-per-block basis at retail
prices ranging from $8.95 to $10.95.

TRUE BLUE

True Blue was acquired from Fifth Dimension on February 18, 1998. True Blue
incorporates the same editing standard as Extasy and is programmed with adult
movies that feature amateur talent, compilations, and other adult programming
genres. True Blue is programmed to deliver 77 adult movies per month. True Blue
is distributed via C-band DTH. C-band retail prices range from $19.99 to $110.99
for monthly, quarterly, semi-annual and annual subscriptions. True Blue had
56,210, 46,606 and 41,895 active subscriptions as of March 31, 2000, 2001, and
2002, respectively.

X-CUBED

X-Cubed (formerly GonzoX) was acquired from Fifth Dimension on February 18,
1998. X-Cubed incorporates the same editing standard as Extasy and is programmed
to deliver "first person" perspective, amateur and foreign adult feature films.
X-Cubed is programmed to deliver 77 adult features per month. X-Cubed is
distributed via C-band DTH. C-band retail prices range from $19.99 to $110.99
for monthly, quarterly, semiannual and annual subscriptions. X-Cubed had 50,426,
43,743, and 40,210 active C-Band subscriptions as of March 31, 2000, 2001, and
2002, respectively.

SATELLITE TRANSMISSION

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

Video programming is played directly from the Subscription/PPV TV Group's
Boulder, Colorado based digital broadcast center. The program signal is then
scrambled (encrypted) so that the signal is unintelligible unless it is passed
through the proper 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. Each analog
transponder can retransmit one complete analog color television video signal and
two digital television video signals, together with associated audio and data
edgebands.

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

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

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

TRANSPONDER AGREEMENTS

New Frontier Media maintains satellite transponder lease agreements for
four full-time analog transponders with Loral Skynet on its Telstar 4 satellite
and 9.5 MHz of total bandwidth allocation on a digital transponder on its
Telstar 7 satellite. These transponders provide the satellite transmission
necessary to broadcast each of the Subscription/PPV TV Group's six adult
networks.

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

In January 2002, the PPV Group renegotiated its transponder leases and
created a digital tier for its Pleasure, TeN, and ETC networks on Telstar 7.
This digital tier takes the place of the Edgeband technology previously used by
the PPV Group for its transponder configuration. This change to a digital tier
makes the PPV Group's services more bandwidth efficient for its Cable
affiliates, providing more opportunity for distribution of its networks.

In April 2000, the PPV 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 over 5.1 million
digital households across the country. IN-DEMAND carries Pleasure on Telstar 7,
transponder 4. iN DEMAND is the nation's leading pay-per-view network, offering
titles from all of the major Hollywood and independent studios, plus sports,
subscription sports packages and entertainment events through its 35-channel
digital Near Video on Demand (NVOD) service. IN-DEMAND serves over 1,900
affiliated systems in over 27 million addressable households nationwide.
IN-Demand's four shareholders include AT&T Broadband, Time Warner Entertainment
- -Advance/Newhouse Communications, Comcast Corporation, and Cox Communications,
Inc.

DIGITAL BROADCAST CENTER

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

In April 1999, the PPV Group completed Phase One of its Digital Broadcast
Center in Boulder, Colorado, which allowed for the direct-to-broadcast playout
of TeN, Pleasure and its C-Band Barker channel. Phase Two of this center was
completed in January 2000. The Phase Two additions allowed the PPV Group to
bring the playout of Extasy, True Blue and X-Cubed in-house to its Boulder
facility from Ottawa, Canada where it was being outsourced to Fifth Dimension.
Currently, the Boulder facility broadcasts 7 channels to Cable/DBS systems and
direct-to-home C-band subscribers.

Phase Two also added the capacity to broadcast a total of 12 channels,
allowing for 5 additional services. Broadcast of all media to air is
accomplished utilizing state-of-the-art digital technology solutions, which
includes playlist automation for all channels; SeaChange MPEG 2 encoding and
playout to air and MPEG 1 encoding for internet and broadband use; archiving
capability on DLT data cartridges pushing and pulling the data through a
StorageTek jukebox; and complete integration of the media asset management
database to create automated playlists. The Subscription/PPV TV Group has worked
with its uplinking vendor, Williams Communications VYVX Services ("Vyvx") to
secure a license to allow an 18Ghz microwave transmission in order to provide a
fully redundant path from the broadcast center to its uplink facility.

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The Subscription/PPV TV Group also runs a fiber transmission path directly
to its largest customer's facility to ensure redundancy of its services in case
of an outage with its primary uplinking vendor, Vyvx.

The technology team that manages the broadcast center also oversees the
Subscription/PPV TV Group's media asset management needs. As a result of
developing its own technological backbone, the Subscription/ PPV TV Group also
developed its own core proprietary asset management systems. These systems are
supplemented with other third party software programs to catalog, monitor, and
exploit its content.

NETWORK PROGRAMMING

The Subscription/PPV TV Group contracts with Pegasus Programming
("Pegasus") in California to screen, edit, and program content for its networks.
The Subscription/PPV TV Group acquires 100% of its feature-length broadcast
programming for each network by licensing the exclusive and non-exclusive rights
from various third party studios and independent producers within the industry.
New Frontier Media does not produce any of its own adult feature content for its
networks. The Subscription/PPV Group licenses its content on both an exclusive
and non-exclusive basis from as many as forty independent companies.

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

In February 1999, New Frontier Media licensed all of the broadcast and
electronic distribution rights to approximately 4,000 adult films under a
Content License Agreement with Pleasure Productions (see "Legal Proceedings").
In July 1999, the Company licensed the rights 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. The Company
believes that as a result of these acquisitions it is one of the largest
aggregators of adult video content in the world.

CALL CENTER SERVICE

Following the Fifth Dimension acquisition, New Frontier Media contracted
with TurnerVision, Inc. to provide its call center services. In August 1999, the
Subscription/PPV TV Group moved its call center functions in-house to its
Boulder, Colorado facility. The PPV Group's call center receives incoming calls
from customers wishing to order C-Band network programming, or having questions
about their C-Band service or billing. The call center is accessible from
anywhere in the U.S. via toll-free numbers. Its workstations are equipped with a
networked computer, Company-owned proprietary order processing software, and
telephone equipment. These components are tied into a computer telephony
integrated switch which routes incoming calls and enables orders to be processed
and subscriber information to be updated "on-line."

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

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MARKETING

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

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

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

The Subscription/PPV TV Group's sales team attends at least five major
industry trade shows per year, including the National Cable Television
Association (NCTA) shows (Western and National) and the Cable Television
Advertising and Marketing (CTAM) Summit, PPV and Digital Television Summit, and
DBS Summit. The Group no longer exhibits at trade shows, preferring instead, to
focus its sales and marketing efforts on more targeted personal meetings with
Cable and DBS affiliates.

The Subscription/PPV TV Group engaged an outside advertising firm in March
2000 to assist it in branding its networks to the Cable/DBS markets as well as
to the consumer. This agency developed network identities, established branding
methods, positioned the networks in trade and consumer magazines, and increased
the overall consistency of presentation and visibility of the Subscription/PPV
TV Group's networks to the trades and the public. The Subscription/PPV TV Group
has rebranded its family of networks as The Erotic Networks through this effort.

COMPETITION

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

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

CUSTOMER CONCENTRATION

New Frontier Media derived 27% of its total revenue for the year ended
March 31, 2002 from DISH for its TeN, Pleasure, ETC, and Extasy PPV and
subscription services. The loss of this customer

10

could have a material adverse effect on the Subscription/PPV TV segment and upon
the Company as a whole.

GOVERNMENT REGULATION

In 1996, the United States Congress passed the Telecommunications Act of
1996 ("the Act"), a comprehensive overhaul of the Federal Communication Act of
1934. Section 641 of the Act requires full audio and video scrambling of
channels that are primarily dedicated to "sexually explicit" programming. If a
multi-channel video programming distributor, including a cable television
operator, cannot comply with the full scrambling requirement, then the channel
must be blocked during the hours when children are likely to be watching
television, i.e., from 6:00 a.m. to 10:00 p.m. Programming providers offering
the most edited adult services (such as Pleasure) and programming providers
offering partially-edited adult services (such as TeN), feature "sexually
explicit" programming as contemplated by Section 641 of the Act. Although all
adult programming companies fully scramble their signals for security purposes,
several cable television MSOs lack the technical capability to fully scramble
the audio portion of the signal. These cable systems are required to block adult
broadcasts between 6:00 a.m. and 10:00 p.m. Section 641 of the Act affects New
Frontier Media to the extent its programming is offered by cable television MSOs
without such technical scrambling ability.

In February 1996, the leading adult network providers challenged Section
505 of the Act that, among other things, regulates the cable transmission of
adult programming such as New Frontier Media's domestic pay television networks.
Enforcement of Section 505 of the Act commenced May 18, 1997. The case was heard
by the United States District Court in Wilmington, Delaware (the "Delaware
District Court") in March 1998. In December 1998, the Delaware District Court
unanimously declared Section 505 of the Act unconstitutional. The defendants
appealed this judgement and the Supreme Court heard the appeal on November 30,
1999.

On May 23, 2000 the Supreme Court ruled that Section 505 of the Act was
unconstitutional. By a vote of 5-4 the Supreme Court ruled that the 1996 federal
law was too broad and violated constitutional First Amendment free speech
rights. The Court ruled that the federal government failed to prove the law was
the least restrictive means of addressing the problem. The Court referred to an
alternative in the law that requires cable operators to block any channel, free
of charge, only if a customer requests it.

New Frontier Media began offering adult programming to cable system
operators in February 1998, which is after the May 18, 1997 date that
enforcement of Section 505 of the Act commenced. Our business has not been
adversely affected by these regulations because we have never had the
opportunity, or prior history, of selling our programming under any other
regulatory structure.

INTERNET GROUP

INDUSTRY OVERVIEW

Ipsos-Reid, part of the Ipsos Group, which ranks among the top ten market
research companies in the world, estimates the global Internet population at
approximately 450 million adults, with the United States ranking number one at
110 million active Internet users. Ipsos-Reid indicates that the American online
population is still growing, albeit more slowly. As of February 2002, 69% of
adult Americans (age 18 and older) reported that they had access to the Internet
or the World Wide Web. This number is up from 67% in September 2001. According
to Ipsos-Reid, since middle aged and older adults made up the bulk of last
year's new Internet users, this explains why the prevalence of online gaming
(and one could argue as well, adult content) dropped among the online population
over the past year, while the prevalence of online banking almost doubled.

Jupiter Media Metrix ("JMM"), a global leader in Internet and new
technology analysis and measurement, estimates that the number of U.S. online
users will grow to 210.8 million by the year 2006. In a March 2002 press
release, JMM reported that revenues from paid online content are expected to
grow to $5.8 billion by 2006, up from $1.4 billion in 2002. JMM forecasts that
general

11

content revenue will reach $2.3 billion in 2006 and that of this amount $400
million will be for adult entertainment.

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

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

The Company's Internet Group has responded to these changes in the industry
during the 2002 fiscal year by decreasing the amount of money spent on the
acquisition of traffic to its web sites (down from a high of $1 million per
month to $40,000 per month), increasing the focus on the depth, breadth, and
relevance of content included in each of its web sites, decreasing the amount of
web sites maintained to a more manageable number, ensuring continual updating of
its sites with new content on a daily/weekly basis, working with new pricing
strategies to increase membership retention, and focusing on new, more stable
revenue streams such as its pay-per-click search engine (www.sexfiles.com),
which allows it to monetize its exit traffic by auctioning off keywords to the
highest bidder, and its double opt-in marketing email program.

In addition, because the Internet Group has access to the large library of
high-quality video content licensed by the Subscription/PPV TV Group, it has
begun to increasingly focus its efforts on the broadband Internet user rather
than the dial-up user. JMM reports in an April 23, 2002 press release that,
"while only 16% of U.S. online households subscribe to broadband, more than 24%
of dial-up consumers are considering signing up for a broadband service within
the next 12 months". JMM reports that there were 10.0 million U.S. broadband
households in 2001, up from 5.2 million in 2000. JMM predicts that this number
will rise to 35.1 million households (or 41% of online households) by the year
2006.

BUSINESS TO CONSUMER: MEMBERSHIP SITES

The Internet Group designs, creates and implements membership-based web
sites for the adult Internet consumer market. The Internet Group currently owns
and operates more than 10 consumer web sites in addition to owning over 1,300
vanity adult domains. These web sites have been developed to convert web surfers
into subscribers through various subscription models. Recurring monthly
subscription rates range from $14.74 to $29.95. The Internet Group also offers
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.

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 1,300 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.

The second way in which traffic is generated is through the Internet
Group's 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 one of the Internet Group's web
sites. These referral payments currently range from $30 - $45 per active member
obtained.

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

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 PPV Groups have licensed thousands of
hours of adult content and over 500,000 still images from various adult studios,
all of which have been organized thematically and, if necessary, digitized for
Internet distribution. In addition, the Internet Group has exclusive rights to
four live streaming video feeds and produces several monthly online adult
publications. The Internet Group, in addition to using this content within its
own web sites, sublicenses this content to webmasters through its
business-to-business programs on a flat-rate monthly basis.

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

Pay-Per-Click: The Internet Group has recently developed its own
pay-per-click ("PPC") search engine whereby advertisers register keywords or
keyword combinations, along with a title and description. Placement in the
search results is purchased by the advertiser rather than determined by a
complex formula relating to relevance or popularity. This results in a pure
market model for the advertiser. The more they bid for a keyword, the higher
their site is shown in the list of search results returned to the consumer on
that keyword search. The result for the advertiser is qualified traffic that is
more likely to convert into a paying member of its site, while the consumer gets
immediate access to relevant results. In addition, the Internet Group sells
prepaid banner advertising on the search engine results page.

PPC advertisers pre-pay for their search terms within the search engine
resulting in no capital risk for the Internet Group. The Internet Group began to
beta test its PPC search engine, www.sexfiles.com, in April 2002.

MARKETING

The Internet Group's affiliate marketing programs are incentive-based
traffic generation programs that compensate affiliated webmasters for traffic
referrals. A webmaster is compensated when a referred visitor becomes a member
to one of the Internet Group's web sites, at an average payout of $30 - $45 per
active member. The Internet Group markets these programs to its database of over
20,000 webmasters using its own internal sales team.

The Internet Group provides incentives to webmasters to collect user's
e-mail addresses for a pay-per-address fee of up to 60 cents. The Internet Group
has amassed over 4.0 million opt-in email addresses to which the Group targets
daily newsletters promoting its web sites and/or web sites and products of its
webmaster affiliates.

13

The Internet Group markets to webmasters via advertisements in trade
magazines and on-line banner advertisements. In addition, representatives of the
Internet Group exhibit at industry trade shows specific to the Internet and the
adult industry.

INTERNET SERVICE PROVIDER FACILITY

The Internet Group has its own Internet service provider ("ISP") facility
in Sherman Oaks, California that provides for all of its data center, hosting
and co-location needs. The ISP occupies approximately 4,400 square feet.

The ISP has two OC3 and three DS3 connections to the Internet. Bandwidth
providers, allowing for full redundancy, include Worldcom, PacBell, and Global
Crossing. The ISP currently has capacity through-rate of 445 Megabits per
second.

The ISP utilizes its expertise across multiple platforms using leading
networking hardware, high-end web and database servers, and computer software to
more effectively address the Internet Group's diverse systems and network
integration needs. The ISP principally services the Internet Group, but also
provides some vendor services to a small group of third party companies.

Given the current excess capacity within third party co-location
facilities, the Internet Group believes it can service its data center needs
more efficiently and effectively by out-sourcing these functions. The Internet
Group is currently taking steps to relocate its network operations to an
outsource facility in Colorado and anticipates completing the transition of
these functions by the third quarter of its fiscal year ended March 31, 2003.

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

COMPETITION

The adult Internet industry is highly competitive 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.

All of the major adult Internet competitors of the Company are privately
held, though many have created alliances with various publicly traded companies.
Companies such as Cyber Entertainment

14

Network and VS Media have joint-venture websites with Private Media Group
(NASDAQ: PRVT). Rick's Cabaret International (NASDAQ: RICK) acquired several
membership websites from Voice Media, a leading adult Internet company. In
addition, companies such as Python Communications, a privately-held adult
Internet content provider and membership website company, have acquired smaller
adult properties in their attempt to expand their base of business. Other larger
competitors of the Internet Group include RJB Telecom, Python Video, Web Power,
and Vivid Video.

OTHER INFORMATION

EMPLOYEES

As of the date of this report, New Frontier Media and its subsidiaries had
137 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 2 "Summary of Significant Accounting Policies" of the Notes to the
Consolidated Financial Statements that appears in Item 8 of this Form 10-K.

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of New Frontier Media are as follows:

MARK H. KRELOFF. Mr. Kreloff has held the title Chairman and Chief
Executive Officer of New Frontier Media, Inc. since the Company's inception in
September, 1995. Mr. Kreloff has been actively involved in the cable television
industry since 1977. Prior to founding the Company, Mr. Kreloff held the title
Vice President, Mergers and Acquisitions, with Kidder Peabody & Co. and Drexel
Burnham Lambert. From 1983 through 1986, Mr. Kreloff was employed by Butcher &
Singer, Inc., a Philadelphia-based investment bank, in a variety of departments,
including the Cable Television and Broadcast Media Group. From 1977 through
1983, Mr. Kreloff held a variety of positions, including Marketing Director, in
his family's cable television system based in New Jersey. Mr. Kreloff is an
honors graduate of Syracuse University and holds B.S. degrees in Finance and
Public Communications.

MICHAEL WEINER. Mr. Weiner has been Executive Vice President and a director
of New Frontier Media, Inc. since the Company's inception. His background
includes 20 years in real estate development and syndication. Prior to founding
the Company, Mr. Weiner was actively involved as a principal and director in a
variety of publishing businesses, including a fine art poster company.

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 thirteen 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

15

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 $1
billion NYSE company. 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 13-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.

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. 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, 2002, except that Edward J. Bonn was late in filing a Form 4 reporting
a disposition of shares by Response Telemedia, Inc. on January 1, 2002 pursuant
to the Response Telemedia, Inc. Phantom Stock Plan. Mr. Bonn is the President
and a principal stockholder of Response Telemedia, Inc.

RISK FACTORS

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

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

16

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

DISH Network, one of the leading providers of direct broadcast satellite
services in the United States, is a major customer of our Subcription/PPV TV
Group. The loss of DISH Network as a customer would have a material adverse
effect on our business operations and financial condition. For our fiscal year
ended March 31, 2002, our revenues from DISH Network equaled approximately 27%
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. A significant management change could
adversely affect the Company's relationship with DISH.

WE MAY HAVE TO RAISE APPROXIMATELY $4 MILLION IN NEW FUNDS TO PAY THE HOLDERS OF
OUR CLASS A PREFERRED STOCK IN THE EVENT OF A CHANGE OF CONTROL IN THE COMPANY.

In the event of a "change in control transaction" involving the
Company, the holders of our Class A Preferred Stock have the right to require
that their shares be redeemed for approximately $4 million in cash within 15
days of the change of control transaction. A change in control transaction for
this purpose would include the replacement of the Company's board of directors
in a proxy contest with Mr. Bonn. If a change of control occurs, and the Company
is required to redeem the Class A Preferred Stock, it may have to raise a
substantial portion of the necessary funds from external sources such as the
sale of stock or incurrence of debt. There can be no assurance given that
following any such change in control transaction $4 million in new funds would
be available to repay the Class A Preferred Stock holders on terms acceptable to
the Company, if at all. A failure to secure these funds in a timely manner or on
acceptable terms could have a material adverse effect on the Company, its
operations, financial condition and prospects.

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

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

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

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

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

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

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

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

17

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.

IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH OUR PRIMARY INTERNET COMPETITORS,
SOME OF WHOM HAVE SIGNIFICANTLY GREATER RESOURCES THAN US, WE WILL NOT BE ABLE
TO INCREASE OUR WEB SITE MEMBERSHIP REVENUES.

Our ability to increase our Internet web site membership revenues is
directly related to our ability to compete effectively with our Internet
competitors. Some of these competitors have significantly greater financial,
sales, marketing and other resources to devote to the development, promotion and
sale of their web site subscriptions, as well as a longer operating history and
broader name recognition, than we do. We compete with other adult-content web
sites as to the editing standards of their programming and the subscription fees
that are offered to web site members.

To the extent that the availability of free adult content on the Internet
increases, it is likely to negatively impact our ability to attract fee-paying
members.

In addition, our Internet operations benefit from, and compete with our
competitors for, traffic arrangements with third party webmasters who direct
traffic to our Internet sites. These traffic arrangements are short-term in
nature and, as such, are subject to rapid change. No assurances can be given
that we will be able to continue our arrangements with our affiliated webmasters
or that these arrangements will continue to be profitable for us.

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

18

aggressive pricing policies for their subscription-based content. Additionally,
increased competition could result in price reductions, lower margins and
negatively impact our financial results.

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

Because of the adult-oriented content of our web sites, 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 sites 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 sites and/or their
availability in various geographic areas, which would negatively impact their
ability to generate revenue. Furthermore, our insurance may not adequately
protect us against all of these types of claims.

DISRUPTION OF OUR INTERNET SERVICES DUE TO SECURITY BREACHES OR OTHER SYSTEM
FAILURES COULD RESULT IN LESS TRAFFIC AT OUR WEB SITES AND SUBSCRIBER
CANCELLATIONS.

The uninterrupted performance of our computer systems is critical to the
operation of our web sites. Our computer systems for our Internet services are
located in Southern California and, as such, are vulnerable to earthquakes,
fire, floods, power loss, telecommunications failures and other similar
catastrophes. In addition, we may have to restrict access to our web sites to
solve problems caused by computer viruses, security breaches or other system
failures. Our customers may become dissatisfied by any systems disruption or
failure that interrupts our ability to provide our content. Repeated system
failures could substantially reduce the attractiveness of our web sites and/or
interfere with commercial transactions, negatively impacting their ability to
generate revenues.

Our web sites must accommodate a high volume of traffic and deliver
regularly updated content. Our sites have, on occasion, experienced slower
response times and network failures. These types of occurrences in the future
could cause users to perceive our web sites as not functioning properly and
therefore cause them to frequent other Internet web sites. In addition, our
customers depend on their own Internet service providers for access to our web
sites. To the extent that they experience outages or other difficulties
accessing our web sites due to system disruptions or failures unrelated to our
systems our revenues could be negatively impacted.

Our insurance policies may not adequately compensate us for any losses that
may occur due to any failures in our service providers' systems or interruptions
in our Internet services.

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 relating to the Internet, or the new application of
existing laws, could decrease the growth in the use of our web sites, 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 change to a 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.

19

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

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 if we experience excessive chargebacks and/or credits;

O if we experience excessive fraud ratios;

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

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

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

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

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

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 137 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.

FUTURE SALES OF COMMON STOCK MAY CAUSE THE MARKET PRICE OF THE COMMON STOCK TO
DROP.

Future sales of shares of common stock by New Frontier Media and/or its
stockholders could cause the market price of the common stock to drop. As of
June 15, 2002, there are 8,299,171 restricted shares that are currently eligible
for resale under Rule 144 of the Securities Act and 12,947,745 shares of common
stock that are freely tradable. Sales of substantial amounts of common stock in
the public market, or the perception that such sales may occur, could have a
significant adverse effect on the market price of the common stock.

ITEM 2. PROPERTIES.

COLORADO: New Frontier Media occupies two buildings in Boulder, Colorado.
The Airport Boulevard facility is 12,000 leased square feet and houses the
Subscription/PPV TV Group's digital broadcast facility, technical operations
group and call center. This facility is 75% utilized. The Winchester Circle
facility is 18,000 leased square feet and is used by New Frontier Media as its
corporate headquarters, as well as by the Internet Group's web production, sales
and marketing departments, and by the Subscription/PPV TV Group's marketing,
sales, and promotions departments. This facility is 100% utilized.

CALIFORNIA: New Frontier Media leases three suites in one building in
Sherman Oaks, California. Suite 675 is 4,400 square feet and is used by the
Internet Group for its data center operations. Suite 605 is 1,600 square feet
and is used by the Internet Group's marketing and payment processing
departments. Suite 675 is 60% utilized and Suite 605 is 100% utilized as of June
15, 2002.

Suite 800 in this same building is 18,000 square feet and is currently
unoccupied. The Company previously utilized this space in connection with its
Internet Group's operations. These operations have subsequently been relocated
to Boulder, Colorado as part of the Company's 2002 fourth quarter restructuring.
The Company is actively seeking to sublet this space. The Company recognized a
loss with respect to the leasehold improvements and furniture associated with
this Suite as part of its restructuring charge.

ITEM 3. LEGAL PROCEEDINGS.

The Company is involved in two material legal proceedings.

On August 3, 1999, the Company filed a lawsuit in District Court for the
city and county of Denver (Colorado Satellite Broadcasting, Inc., et al. vs.
Pleasure Licensing LLC, et al., case no 99CV4652) against Pleasure Licensing LLC
and Pleasure Productions, Inc. (collectively "Pleasure") alleging breach of
contract, breach of express warranties, breach of implied warranty of fitness
for a particular purpose, and rescission, seeking the return of 700,000 shares
of New Frontier Media stock

21

and warrants for an additional 700,000 New Frontier Media shares which were
issued to Pleasure in connection with a motion picture licensing agreement.
Pleasure removed the District Court action to Federal District Court in Colorado
and filed counterclaims related to the Company's refusal to permit Pleasure to
sell the securities issued to Pleasure. Pleasure's counterclaims allege breach
of contract, copyright and trademark infringement, and fraud. The counterclaims
seek a declaratory judgment and monetary damages.

Although the ultimate outcome of Pleasure's counterclaims, and the
liability, if any, arising from such counterclaims cannot be determined,
management, after consultation and review with counsel, believes that the facts
do not support Pleasure's counterclaims and that the Company has meritorious
defenses. In the opinion of management, resolution of Pleasure's counterclaims
is not expected to have a material adverse effect on the financial position of
the Company. In the event of an unfavorable resolution of this matter, however,
the Company's earnings and financial condition in one or more periods could be
materially and adversely affected.

On May 28, 2002, the Company filed a lawsuit in the Superior Court of the
State of California for the County of Los Angeles (New Frontier Media, Inc., et
al. vs. Edward J. Bonn, et al., case no. BC274573) against: (i) directors and
former officers Edward J. Bonn and Bradley A. Weber; (ii) Jerry D. Howard, the
former Chief Financial Officer of its subsidiaries Interactive Gallery, Inc.
("IGI"), Interactive Telecom Network, Inc. ("ITN") and Card Transactions, Inc.
("CTI"); and (iii) Response Telemedia, Inc., a California corporation owned by
Mr. Bonn.

The Complaint's allegations arise, in part, out of the Company's purchase
of 100 percent of the issued and outstanding shares of IGI and ITN and 90
percent of the issued and outstanding shares of CTI from the individual
defendants on October 27, 1999. The Complaint alleges that, from early 1999 to
the date of the closing, defendants Bonn, Weber, and Howard knowingly made
material misrepresentations or omissions regarding IGI's business and financial
results and prospects for the purpose of inducing the Company to purchase the
defendants' stock holdings of IGI, ITN and CTI.

The Complaint further alleges that, subsequent to the Company's purchase of
IGI, ITN and CTI on October 27, 1999, Messrs. Bonn, Weber and Howard (as
directors and/or officers) each breached their fiduciary duties owed to the
Company, IGI, ITN and CTI. Specifically, the Complaint alleges that Messrs.
Bonn, Weber and Howard grossly mismanaged IGI, ITN and CTI and concealed
marketing, operational and financial information that would have allowed the
Company to detect such mismanagement. The Complaint also alleges that Messrs.
Bonn, Weber and Howard engaged in self-dealing transactions that benefited
themselves and Mr. Bonn's company, RTI, at the expense of the Company.

The Complaint seeks rescission of the purchase of IGI, ITN, and CTI, as
well as monetary damages in an amount to be proven at trial.

Mr. Bonn has filed an answer denying the allegations contained in the
Complaint and a cross-complaint against the Company seeking that the Company
indemnify him against the claims alleged in the Complaint. The cross-complaint
also seeks unspecified monetary damages from the Company alleging that the
Company breached Mr. Bonn's employment agreement with the Company by terminating
his employment on May 28, 2002.

Although the ultimate outcome of Mr. Bonn's cross-complaints, and the
liability, if any, arising from such cross-complaints cannot be determined,
management, after consultation and review with counsel, believes that the facts
do not support Mr. Bonn's cross-complaints and that the Company has meritorious
defenses. In the opinion of management, resolution of Mr. Bonn's
cross-complaints is not expected to have a material adverse effect on the
financial position of the Company.

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

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

22

PART II.

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

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

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

As of June 15, 2002, there were approximately 150 holders of record 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(1)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(1) The selected consolidated financial data for 1998-2000 includes the effect
of the acquisition of IGallery, ITN, and 90% of CTI on October 27,1999,
which was accounted for as a pooling-of-interests.

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

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

23

statements include, but are not limited to: 1) our ability to compete
effectively for quality content with our Subscription/PPV TV Group's primary
competitor who has significantly greater resources than us; 2) our ability to
retain our major customer that accounts for 27% of our total revenue; 3) our
ability to compete effectively with our primary Internet competitors and to
increase our membership revenues; 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; 6) our ability to generate compelling
website content for resale; and 7) our ability to attract market support for our
stock.

The following table presents certain consolidated statement of operations
information.

RESULTS OF OPERATIONS

The above table for the year ended March 31, 2000 is based on the assumption
that the companies were combined for the full year (the acquisition of the
Internet Group occurred in October 1999 and was accounted for as a pooling of
interests).

OVERVIEW
NET REVENUE

Net revenue for the Company was $52.4 million, $58.6 million, and $45.3 for
the years ended March 31, 2002, 2001, and 2000, respectively, representing a
decrease of 11% from 2001 to 2002 and an increase of 29% from 2000 to 2001.

24

The decrease in revenue from 2001 to 2002 is entirely related to a decrease
in revenue for the Internet Group. Revenue for the Internet Group was $23.2
million and $34.0 million for the years ended March 31, 2002 and 2001,
respectively, representing a decrease of 32%. This decrease was offset by an
increase in Subscription/PPV TV Group revenue. Revenue for the Subscription/PPV
TV Group was $29.1 million and $24.5 million for the years ended March 31, 2002
and 2001, respectively, representing an increase of 19%.

The increase in net revenue from 2000 to 2001 is a result of increases in
net revenue for both the Subscription/PPV TV and Internet Groups. Revenue for
the Subscription/PPV TV Group was $24.5 million and $16.8 million for the years
ended March 31, 2001 and 2000, respectively, representing an increase of 46%.
Revenue for the Internet Group was $34.0 million and $28.4 million for the years
ended March 31, 2001 and 2000, respectively, representing an increase of 20%.

OPERATING INCOME (LOSS)

Operating income (loss) for the Company was an operating loss of $0.6
million for the year ended March 31, 2002, and operating income of $2.5 million
and $0.9 million for the years ended March 31, 2001 and 2000, respectively. The
decline in operating income from 2001 to 2002 is a result of a $3.2 million
restructuring charge taken during the fourth quarter of 2002 in connection with
the consolidation of the Internet Group's engineering, web production, sales and
marketing departments to the Company's Boulder, Colorado location and the
elimination of the Internet Group's customer service department due to the
outsourcing of its credit card processing functions. In addition, the Internet
Group experienced a decline in its operating income from $4.5 million for the
year ended March 31, 2001 to $2.1 million for the year ended March 31, 2002,
representing a 53% decrease. This decline in operating income for the Internet
Group was offset by an increase in operating income for the Subscription/PPV TV
Group from $3.5 million for the year ended March 31, 2001 to $6.3 million for
the year ended March 31, 2002, representing an increase of 80%.

The improvement in operating income for the Company from 2000 to 2001 is
due to an increase in operating income for the Subscription/PPV TV Group.
Operating income for the Subscription/ PPV TV Group was $3.5 million for the
year ended March 31, 2001, representing a 369% increase from an operating loss
of $1.3 million for the year ended March 31, 2000. The Internet Group's
operating income declined 13% from $5.2 million as of the year ended March 31,
2000 to $4.5 million for the year ended March 31, 2001.

25

SUBSCRIPTION/PAY-PER-VIEW TV GROUP

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

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

(1) This network was formerly known as GonzoX. The network was renamed X-Cubed
in May 2001

(2) Extasy, True Blue and X-Cubed addressable household numbers
include 1.5 million, 1.1 million and 0.8 million C-Band addressable households
for the years ended March 31, 2000, 2001 and 2002, respectively.

NET REVENUE

Total net revenue for the Subscription/PPV TV Group was $29.1 million,
$24.5 million, and $16.8 million, for the years ended March 31, 2002, 2001, and
2000, respectively, representing increases of 19% from 2001 to 2002 and 46% from
2000 to 2001. Of total net revenue, C-Band net revenue was $9.4 million, $10
million, and $10.5 million for the years ended March 31, 2002, 2001, and 2000,
respectively, representing a 6% decrease from 2001 to 2002 and a 5% decrease
from 2000 to 2001. Revenue from the Group's Cable/DBS services was $19.7
million, $14.5 million, and $6.3 million for the years ended March 31, 2002,
2001, and 2000, respectively, representing an increase of 36% from 2001 to 2002
and 130% from 2000 to 2001. Revenue from the Group's Cable/DBS services is
responsible for approximately 68%, 59%, and 38% of the Group's total net revenue
for the years ended March 31, 2002, 2001, and 2000, respectively.

The year over year decreases in C-Band revenue are due to the declining
C-Band market as consumers convert C-Band "big dish" analog satellite systems to
smaller, 18-inch digital DBS satellite systems. The total C-Band market declined
27% from 2001 to 2002 and 27% from 2000 to 2001.

Total C-Band subscriptions to the Group's networks (Extasy, True Blue and
X-Cubed) were 166,546, 138,448 and 125,465 as of March 31, 2000, 2001, and 2002,
respectively, representing a decrease of 9% from 2001 to 2002 and 17% from 2000
to 2001.

The Subscription/PPV TV Group acquired the C-Band subscriber base of
Emerald Media, Inc. ("EMI") in April 2001 for a total of $750,000 in stock and
cash. EMI was formerly the Group's largest competitor in the adult C-Band
market, operating two competing networks, which were discontinued after this
acquisition. The effect of this acquisition has been to support the Group's
C-Band revenue stream in a quickly eroding market place. Although the C-Band
market continues to decline, the number of subscribers to the Subscription/PPV
TV Group's networks remains relatively stable, as does its average revenue
earned per sale.

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

26

During the fiscal year ended March 31, 2000, the Subscription/PPV TV Group
launched its Pleasure network, a 24-hour per day adult network that incorporates
the most edited standard available in the category. Pleasure's programming
consists of adult feature-length film and video productions and is programmed to
deliver subscription and PPV households 20 premiere adult movies per month with
a total of 110 adult movies per month. Pleasure obtained immediate distribution
with DISH network upon its launch.

In January 2000, the Subscription/PPV TV Group signed a corporate carriage
agreement with AOL Time Warner, Inc. ("Time Warner") for the distribution of
Pleasure on its digital systems. In addition, many of Time Warner's analog
systems have chosen to carry Pleasure. In fact, Time Warner replaced Playboy TV
with Pleasure on its largest analog system in New York City's borough of
Manhattan in September 2001. As of March 31, 2002, Pleasure is distributed on
nearly all of Time Warner's digital cable systems.

In August 2000, the Subscription/PPV TV Group signed a contract with Hughes
Electronic Corporation's DirecTV ("DirecTV") for carriage of a daily six-hour
feed of Pleasure branded as "Pleasure Island". Carriage of Pleasure Island was
terminated by DirecTV in January 2002. The Subscription/PPV TV Group has not
experienced a material change in its total net revenue as a result of this
disaffiliation.

In January 2001, the Subscription/PPV TV Group signed a corporate carriage
agreement with Comcast Corporation ("Comcast") for the distribution of Pleasure
on all of its digital systems. As of March 31, 2002, Pleasure was distributed on
all of Comcast's digital cable systems.

In September 2001, DISH terminated its distribution of Pleasure on its
platform. The Group has not experienced a material change in its total net
revenue due to this disaffiliation.

The Subscription/PPV TV Group launched TeN in August 1998. TeN is a 24-hour
per day adult network that incorporates a partial editing standard. TeN is
programmed with feature-length film and video productions that incorporate less
editing than traditional adult premium networks. TeN offers subscription and PPV
households 20 premieres and a total of 110 adult movies per month. TeN obtained
immediate distribution with DISH network upon its launch as a monthly and annual
subscription service.

In September 1999, TeN was made available to DISH households on a PPV
basis, which increased monthly revenues for TeN by 50% at that time. Adding TeN
as a PPV service on the DISH platform had the expected effect of decreasing the
number of monthly subscribers to the network. Monthly subscriptions have
declined 24% from 2000 to 2001 and 36% from 2001 to 2002. DISH increased its
retail prices for TeN in September 2001 to $9.99 for a PPV purchase and $22.99
for a monthly subscription from $8.99 and $19.99, respectively.

The Subscription/PPV TV Group acquired Extasy from Fifth Dimension in
February 1998. At that time, Extasy was distributed via C-Band only. Extasy's
programming consists of feature-length adult film and video productions and is
programmed with 20 premieres and a total of 110 adult movies per month. Extasy's
editing standard is least edited, which is similar to the editing standard
employed in the home video market.

In January 2000, DISH launched Extasy on its satellite at 110 degrees. In
August 2001, DISH moved Extasy to its satellite at 119 degrees. DISH's satellite
at 119 degrees is viewed by nearly double the number of addressable subscribers
than its satellite at 110 degrees. Extasy is available on DISH as both a
subscription and PPV service, as well as part of a monthly combination
subscription with TeN. In September 2001, DISH increased its retail price for
Extasy to $10.99 for a PPV purchase and $27.99 for a monthly subscription from
$9.99 and $24.99, respectively.

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

27

ETC obtained carriage with DISH network in July 2000 and is carried as both
a PPV and subscription service. DISH increased its retail prices for ETC in
September 2001 to $9.99 for a PPV purchase and $22.99 for a monthly subscription
from $8.99 and $19.99, respectively.

During the third quarter of its fiscal year ended March 31, 2002, the
Subscription/PPV TV Group began distribution of its Pleasure, TeN, and ETC
networks with Charter Communication, Inc.

The Subscription/PPV TV Group has seen modest revenue gains from its VOD
service on Time Warner's systems. Time Warner VOD addressable households totaled
1.1 million as of March 31, 2002.

In June 2002, the Subscription/PPV TV Group signed a distribution agreement
with TVN Entertainment ("TVN"). Under the terms of the agreement, the Group will
utilize TVN's delivery platform powered by the ADONISS asset management system
to distribute and manage VOD titles within the cable television universe. This
is expected to greatly expand the Subscription/PPV TV Group's current VOD
distribution base of 1.1 million U.S. households and significantly increase its
reach to new VOD households through the nation's top cable MSOs.

COST OF SALES

Cost of sales for the Subscription/PPV TV Group was $13.4 million, $11.4
million, and $10.9 million for the years ended March 31, 2002, 2001, and 2000,
respectively, representing increases of 18% from 2001 to 2002 and 5% from 2000
to 2001. Cost of sales as a percentage of revenue was 46%, 47%, and 65% for the
years ended March 31, 2002, 2001, and 2000, respectively. Cost of sales consists
of expenses associated with broadcast playout, satellite uplinking, satellite
transponder leases, programming acquisition costs, amortization of content
licenses, and call center operations.

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

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

In addition, the Subscription/PPV TV Group created a digital tier for its
Pleasure, TeN and ETC networks on Loral's satellite known as T-7. This digital
tier will take the place of the edgeband technology that the Group was currently
using. Edgeband technology permits multiple services to be carried over an
existing satellite transponder by adding a multiplex of MPEG-2 compressed
programs at the band edge of the transponder. This change to a digital tier
makes the distribution of the Group's services more bandwidth efficient for its
cable affiliates.

OPERATING INCOME (LOSS)

Operating income (loss) for the Subscription/PPV TV Group was operating
income of $6.3 million, $3.5 million, and an operating loss of $1.3 million for
the years ended March 31, 2002, 2001, and 2000, respectively, representing
increases of 80% from 2001 to 2002 and 369% from 2000 to 2001. The increase in
operating income is attributable to a 19% increase in revenue from 2001 to 2002
and a 46% increase in revenue from 2000 to 2001. In addition, the Group's gross
margin percentage increased from 35% for the year ended March 31, 2000 to 54%
for the year ended March 31, 2002.

Total operating expenses decreased 2% from 2001 to 2002 and increased 33%
from 2000 to 2001. Operating expenses as a percentage of revenue were 32%, 39%,
and 43% as of March 31, 2002, 2001, and 2000, respectively. The decrease in
operating expenses from 2001 to 2002 is a result of operating expenses such as
advertising, travel, entertainment, and trade show costs remaining flat
year-to-year.

28

INTERNET GROUP

NET REVENUE

Total net revenue for the Internet Group was $23.2 million, $34 million,
and $28.4 million for the years ended March 31, 2002, 2001 and 2000,
respectively, representing a decrease of 32% from 2001 to 2002 and an increase
of 20% from 2000 to 2001. The Internet Group's revenue is comprised of
membership revenue from its consumer-based web sites, revenue from the sale of
its content feeds to webmasters, revenue from the sale of exit traffic, and
revenue from its data center services ("ISP").

Gross membership revenue was $17.0 million, $22.6 million, and $23.0
million for the years ended March 31, 2002, 2001, and 2000, respectively,
representing decreases of 2% from 2000 to 2001 and 25% from 2001 to 2002.
Chargebacks and credits were $1.7 million or 10% of gross membership revenue for
the year ended March 31, 2002, $2.7 million or 12% of gross membership revenue
for the year ended March 31, 2001, and $3.6 million or 16% of gross membership
revenue for the year ended March 31, 2000. Net membership revenue was $15.3
million, $19.9 million, and $19.4 million for the years ended March 31, 2002,
2001, and 2000.

Growth in gross membership revenue for the year ended March 31, 2001 was
slowed due to the implementation of more stringent fraud controls, including the
reduction of sign-ups from international credit card users due to a lack of
effective verification procedures.

The 25% decline in gross membership revenue from 2001 to 2002 is a direct
result of a decrease in traffic to the Internet Group's web sites. The decrease
in traffic to the Internet Group's sites is primarily due to changes made to the
Group's traffic acquisition model. The Internet Group changed its traffic
acquisition model during fiscal 2002 to compensate an affiliated webmaster for
traffic directed to the Internet Group's web sites only upon the conversion of a
referral into a paying member. Prior to this change, the Group was paying for
traffic based upon the amount of traffic directed to the Group's web sites,
regardless of whether this traffic resulted in a paying member to one of the
Group's sites. This change has resulted in a 57% decline in webmaster payouts
from 2001 to 2002. The Group also believes that its membership revenue and
traffic volume have declined from 2001 due to the proliferation of free adult
content available on the Internet. In addition, portals such as Microsoft
Corporation's MSN ("MSN"), no longer default words typed into a browser dialogue
box to the "dot-com" web site associated with such word, and have begun to sell
off their adult word searches to outside companies, impacting the amount of
type-in traffic to the Internet Group's web sites.

The standard one-month membership prices to the Group's web sites ranged
from $20 to $30 for all three periods. Marketing programs offering three-day
trial memberships at prices varying from $2.00 to $3.00 were introduced during
the year ended March 31, 2000, which resulted in an average membership price of
$15.00 during the last two quarters of the year ended March 31, 2000. An
additional marketing program offering a free 5-day trial membership was
implemented during the fourth quarter of the year ended March 31, 2001, which
resulted in an average membership price of $10 to $12 during the last quarter of
the year ended March 31, 2001. Marketing programs offering free trial
memberships were discontinued during fiscal year 2002. The Internet Group
decreased the monthly membership fee to its flagship site from $29.95 to $14.74
during fiscal year 2002.

Revenue is earned from traffic sales by forwarding exit traffic and traffic
from selected vanity domains to other affiliated webmaster marketing programs
domestically, monetizing foreign traffic via international dialer companies, and
marketing affiliated webmaster sites through the Internet Group's double opt-in
email list. Revenue from the sale of traffic was $5.6 million, $9.4 million, and
$3.7 million for the years ended March 31, 2002, 2001, and 2000, respectively,
representing a decrease of 40% from 2001 to 2002 and an increase of 154% from
2000 to 2001. The increase in revenue from exit traffic from 2000 to 2001 was
due to the increase in traffic to the Internet Group's web sites which allowed
the Group to increase exit traffic sales to other affiliated marketing programs
at similar rates paid by the Internet Group for its purchased traffic (i.e., $30
- -$45 per active member). The Internet Group has seen a corresponding decrease in
revenue from the sale of traffic from 2001 to 2002 because of a decline in
overall traffic purchased by the Internet Group under its new traffic
acquisition

29

model discussed above. The decline in traffic to the Internet Group's web sites
results in less traffic available to sell both domestically and internationally.
Revenue from the international sale of traffic was 36%, 40% and 11% of total
sale of traffic revenue for the years ended March 31, 2002, 2001, and 2000,
respectively.

Revenue from the sale of content was $1.9 million, $3.8 million, and $3.3
million for the years ended March 31, 2002, 2001, and 2000, respectively,
representing a decrease of 50% from 2001 to 2002 and an increase of 15% from
2000 to 2001. The decrease in revenue from 2001 to 2002 is a result of a
softening in demand for content by third-party webmasters as well as a decrease
in emphasis on this revenue stream by the Internet Group. The Internet Group
will begin to focus more effort on this revenue stream during the next fiscal
year, as it believes it could be a viable source of stable, recurring revenue.

The Internet Group's other revenue was earned from the sale of services
such as hosting, co-location and bandwidth management ("ISP services") to
non-affiliated companies. The Group's other revenue was $0.4 million, $0.9
million and $2.0 million for the years ended March 31, 2002, 2001, and 2000,
representing decreases of 56% from 2001 to 2002 and 55% from 2000 to 2001. The
decrease in other revenue from 2000 to 2001 was due to the Internet Group's
major non-affiliated customer changing service providers during the year. The
decrease in revenue from 2001 to 2002 is a result of other non-affiliated
customers changing service providers. The Internet Group does not anticipate
revenue growth in this area as it continues to focus its data center operations
on its internal needs.