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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

Commission File Number: 000-23697

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

Registrant's telephone number, including area code: (303) 444-0900

         Securities registered pursuant to Section 12(b) of the Act:

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

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o YES    ý NO

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. o YES    ý NO

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

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o YES    o NO

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

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

         The aggregate market value of the Registrant's common stock held by non-affiliates of the Registrant as of September 30, 2010 was approximately $32,714,000, based on the closing price of the common stock as reported on the NASDAQ Global Select Market on such date.

         The Registrant had 19,201,018 shares of its common stock outstanding on May 25, 2011.

Documents Incorporated by Reference

         The information required in response to Part III of Form 10-K is hereby incorporated by reference from the Registrant's Definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days of March 31, 2011 with respect to the Registrant's Annual Meeting of Shareholders expected to be held on or about August 25, 2011.

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NEW FRONTIER MEDIA INC. AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 2011

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PART I.

Forward-Looking Statements and Other Information

        This Annual Report on Form 10-K of New Frontier Media, Inc. and its consolidated subsidiaries, hereinafter identified as we, us, the Company or the Registrant, and the information incorporated by reference includes forward-looking statements within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements regarding trend analysis and our expected financial position and operating results, our business strategy, our financing plans and the outcome of contingencies are forward-looking statements. Forward-looking statements are also identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "plan," "may," "should," "could," "will," "would," and similar expressions. 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 1A, Risk Factors and elsewhere in this Form 10-K.

        Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

        Registered trademarks identified herein that are not expressly stated to be our property are the property of the respective owners of such marks.

ITEM 1.    BUSINESS.

DESCRIPTION OF BUSINESS

        Incorporated in Colorado on February 23, 1998, we are a provider of transactional television services and a distributor of general motion picture entertainment. Our key customers include large cable and satellite operators, premium movie channel providers and major Hollywood studios. We distribute content worldwide. Our three principal businesses are reflected in the Transactional TV, Film Production and Direct-to-Consumer operating segments. Our Transactional TV segment distributes adult content to cable and satellite operators who then distribute the content to retail consumers via video-on-demand (VOD) and pay-per-view (PPV) technology. We earn revenue by receiving a contractual percentage of the retail price paid by consumers to purchase our content on our customers' VOD and PPV platforms. The Transactional TV segment has historically been our most profitable segment. The Film Production segment generates revenue through the distribution of mainstream and erotic films to large cable and satellite operators, premium movie channel providers and other content distributors. This segment also periodically provides contract film production services to major Hollywood studios (producer-for-hire arrangements). The Film Production segment incurred operating losses in fiscal years 2011, 2010 and 2009 primarily due to impairment charges. Our Direct-to-Consumer segment primarily generates revenue from membership fees earned through the distribution of adult content to consumer websites. The Direct-to-Consumer segment has historically incurred operating losses and is expected to continue to incur operating losses for the foreseeable future; however, we have been focused on returning the segment to profitability through efforts described below. Our Corporate Administration segment includes all costs associated with the operation of the public holding company, New Frontier Media, Inc.

        Revenue from the Transactional TV segment has declined during each of the three fiscal years ended March 31, 2011, 2010 and 2009. We believe domestic consumers that have historically purchased our content with discretionary income have reduced their spending on our content, eliminated their acquisition of our content, or are viewing content through less expensive alternatives such as low-cost

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and free internet websites, which has resulted in a decline in our domestic VOD and PPV revenue. Although we have made adjustments on domestic VOD platforms in order to stabilize that revenue during fiscal year 2011, we do not have flexibility to make similar adjustments on domestic PPV platforms due to the linear nature of PPV distribution. As a result, the decline in consumer spending has had a larger unfavorable impact on our domestic PPV revenue as compared to our domestic VOD revenue. Also contributing to the decline in our domestic PPV revenue during fiscal years 2011 and 2010 was our loss of a channel on a domestic direct broadcast satellite, or DBS, platform in November 2009. The decline in domestic Transactional TV segment revenue has been partially offset by an increase in the segment's international revenue from our expansion into international markets beginning in fiscal year 2009.

        The Film Production segment has experienced challenging market conditions since fiscal year 2009. As a result of these conditions and in connection with our goodwill impairment testing, we recorded goodwill impairment charges within the segment in fiscal years 2010 and 2009 of approximately $4.9 million and $10.0 million, respectively. We also recorded film cost impairment charges in fiscal years 2011, 2010 and 2009 of approximately $2.2 million, $1.2 million and $1.1 million, respectively, as well as an increase in the allowance for unrecoverable accounts of $0.8 million in each of fiscal years 2011 and 2010 to reserve for certain recoupable costs and producer advances that were not expected to be recovered. See additional information on these charges within the Film Production segment discussions below.

        In the fourth quarter of fiscal year 2010, we discontinued the operations of an Internet Protocol Television (IPTV) set-top box business within the Direct-to-Consumer segment. See Note 18—Discontinued Operations within the Notes to Consolidated Financial Statements for further discussion on our discontinuation of the IPTV set-top box business.

INFORMATION ABOUT OUR SEGMENTS

        We have the following reportable operating segments:

•

Transactional TV—distributes branded adult entertainment PPV networks and VOD content through electronic distribution platforms including cable television and DBS operators.



•

Film Production—produces and distributes mainstream and erotic films. These films are distributed on U.S. and international premium channels, PPV channels and VOD platforms. The Film Production segment also acts as a sales agent for a full range of independently produced motion pictures and distributes the content to markets around the world. Additionally, this segment periodically provides producer-for-hire services to major Hollywood studios.



•

Direct-to-Consumer—aggregates and resells adult content via the internet. The Direct-to-Consumer segment sells content to subscribers through its consumer websites.



•

Corporate Administration—includes all costs associated with the operation of the public holding company, New Frontier Media, Inc., that are not directly allocable to the Transactional TV, Film Production, or Direct-to-Consumer segments.

        Financial information about our segments is included in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 11—Segment and Geographic Information within the Notes to Consolidated Financial Statements.

Transactional TV Segment

        The Transactional TV segment generated the majority of its revenue in fiscal year 2011 through the distribution of adult programming on domestic VOD platforms. VOD distribution primarily occurs through cable multiple system operators, or MSOs, and telephone company operators that also provide

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television services. VOD presents viewers with layered menus, similar to what is traditionally found in hotel room television offerings. These menus allow users to interactively select a movie and then view it immediately or at a later time once the transaction has been executed. VOD tends to have a more accretive impact on our Transactional TV segment's business relative to our PPV offering because of the variety of content available through VOD platforms and because of the flexibility VOD provides in viewing times.

        Our Transactional TV segment also distributes adult programming to cable and satellite television companies through PPV channels. PPV provides consumers access to a timed block of programming—for example, a movie or an event—for a fee payable to the cable or satellite providers. Our PPV programming is offered on channels that are available to viewers through the same electronic program guides that display basic cable channels. Some of our distributors also offer our Transactional TV segment's channels on a monthly subscription basis. However, the large majority of the PPV revenue we generate is based on individual movie purchases, while subscription revenue represents a small portion of the segment's total PPV revenue.

        We earn revenue by receiving a percentage (sometimes referred to as a split) of the total retail purchase price paid by consumers to purchase our content on customers' VOD and PPV platforms. Our Transactional TV segment's products have historically been sold by our customers for a price of between $9.95 and $14.99 for a single movie or event as determined by our customers with input from us.

        We believe that as a result of the economic downturn, domestic consumers that have historically purchased our content are purchasing less of our content or are viewing content through less expensive alternatives such as low-cost and free internet websites. Our content is a relatively expensive choice of entertainment as compared to other options including mainstream categories of content on our customers' platforms and adult content on other off-platform media such as the internet. We believe the high price of our content is contributing to the consumer trend of purchasing less of our content or purchasing other comparable content through alternative media. In order to confirm this assumption and determine whether reducing the price of our content could improve overall gross revenue, we are performing price tests with certain customers to determine whether decreasing the price of our content could generate an increase in the buy volume sufficient to maintain or increase total gross revenue. We continue to investigate the initial results of the tests and although certain test sites have reported positive results, there remains uncertainty regarding the proper price point. We believe additional analysis is required to determine the optimum price point necessary to generate and sustain category growth that is consistent with the successful test site results.

        We continue to believe our VOD and PPV programming provides an attractive form of entertainment because it is offered conveniently in the comfort of consumers' homes and can be viewed on a large, high quality television. During fiscal years 2011, 2010 and 2009, 74%, 74%, and 81%, respectively, of our consolidated net revenue was attributed to the Transactional TV segment. The Transactional TV segment distributes content to nearly every television provider in the U.S. including the two largest providers of DBS services in the U.S., all major cable television systems, and the two telephone company providers of cable television services.

        During fiscal year 2009, we began expanding our services into international markets in North America, Europe and Latin America. We have also recently launched new services in Asia. We believe the business model that we have successfully executed in the U.S. will also be successful in international markets. International expansion has also provided us with an opportunity to leverage our existing content libraries and technology infrastructure. Additionally, the revenue percentages we receive in international markets are typically higher than the percentages we receive in the U.S. because the international cable and satellite markets are less consolidated, which allows us to negotiate higher revenue percentages. Thus far, we have had success in expanding our distribution to international

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markets and generated approximately $5.9 million of Transactional TV segment VOD and PPV international revenue during fiscal year 2011. We plan to continue to expand our footprint to new international locations and customers, and gain additional market share and shelf space in international markets where we currently distribute content. We believe our international expansion will be a key component of our growth over the next five to seven years.

Programming Strategy

        The Transactional TV segment's programming is designed to provide a wide variety of content to consumers while at the same time utilizing available films from our content library. The programming strategy is intended to not duplicate films across our channels or between VOD and PPV during a programming month. Through this strategy, we believe we are able to give consumers access to more unique films, a wider variety of actors and actresses, and a greater variety of studio representation. We focus on prime time viewing blocks and program specific types of content in those blocks to create an appointment-viewing calendar designed to drive viewers to traditionally less popular times for viewing adult content.

        Our programming department spends a significant amount of time and resources researching consumer choices and preferences. We periodically perform primary consumer research to understand buying habits and to obtain information on how we can best provide our consumers with an exceptional viewing experience. We also dedicate resources to analyzing performance data from our products as well as our competitors' products. We believe this research and analysis has enhanced our Transactional TV segment's performance and has assisted us in providing customer satisfaction. Additionally, we use this research to recommend changes to our customers' platforms in order to improve the overall performance of the adult content category.

Content Delivery System

        Our Transactional TV segment delivers its PPV video programming to cable and satellite operators via satellite through in-house digital broadcast technology. The program signal is encrypted so that it is unintelligible unless it is passed through the properly authorized decoding devices. The signal is transmitted (uplinked) by a third party earth station to a designated transponder on a third party commercial communications satellite. The transponder receives the program signal that has been uplinked by the earth station, amplifies the program signal and then broadcasts (downlinks) the signal to commercial satellite dishes located within the satellite's area of signal coverage. The programming is downlinked by MSOs and DBS providers at their head-ends and uplink centers. This programming is received in the form of a scrambled signal. We provide these operators with decoder equipment which allows them to decode the signal and then re-distribute it via their own systems.

        Our Transactional TV segment maintains a satellite transponder lease agreement for one full-time digital transponder with a total bandwidth of approximately 18 MHz on the Galaxy 23 satellite, approximately 9 MHz on the NSS 806 satellite, and approximately 5MHz on Hot Bird 6/8/9. These transponders provide the satellite transmission necessary to broadcast our Transactional TV segment's networks. The signal of the satellites that we use covers the continental U.S., Alaska, Hawaii, Latin America, Europe, North Africa and portions of the Caribbean Islands and Canada.

        Our Transactional TV segment delivers its VOD service to domestic cable MSOs primarily through transport services provided by TVN Entertainment Corporation. International VOD services are delivered through alternative methods such as shipping hard drives that contain content as well as through electronic transfer and related delivery methods.

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Digital Broadcast Technology

        Our digital broadcast infrastructure allows us to ingest, encode, edit, play out, store and digitally deliver our VOD and PPV services. We also maintain one of the largest digital libraries of its kind. Our infrastructure is scalable and includes playlist automation for all channels; encoding and playout to air; a storage area network for near-line content movement and storage; archiving capability in a digital format; and complete integration of our proprietary media asset management database for playlist automation and program scheduling.

Programming

        We obtain our programming for each VOD service and PPV network primarily by licensing content distribution rights from producers. We generally obtain distribution rights for a five-year term. We also produce programming in order to develop unique and new content. We acquire and produce films and scenes each month. In addition, we may license entire content libraries on an as-needed basis or in order to facilitate a larger transaction. Licensed programming undergoes rigorous quality control processes prior to broadcast in order to ensure compliance with strict internal and external broadcasting standards. We obtain age verification documentation for each film we license in accordance with federal statutes. This documentation is maintained on site for the duration of the license term in accordance with 18 U.S.C. § 2257 and 28 C.F.R. 75 et seq.

        We maintain an office in California that (a) ensures all legal documentation is obtained for each film and scene licensed, (b) ensures acquired content is technically compliant, and (c) once the film is deemed acceptable, ships the film, related documentation and promotional content to our Boulder, Colorado location. Our Transactional TV segment's in-house programming and editing departments in Boulder conduct preliminary screening of potentially licensable content, license acceptable content, conform content into appropriate editing standards and program the monthly schedules for all networks and VOD services.

Competition

        We believe the Transactional TV segment's most challenging competition has been low-cost and free internet websites. We believe that the decline in economic conditions has caused consumers to seek lower-cost options for obtaining adult content. As a result of the growth in low-cost and free internet websites over the past several years, we believe a portion of the consumers who would otherwise purchase our content have been electing to obtain their content through these low-cost and free internet websites. Our primary consumer research findings are consistent with the above assumptions. Our research has also indicated that these consumers might transition back from the low-cost and free internet websites to our products if there are improvements to our products' value proposition, such as a reduction in our products' retail price.

        Our primary direct competitor in this segment has historically been Playboy Enterprises, Inc. (Playboy) which, through its Playboy TV service and its Spice Digital Networks, has a long operating history in the adult entertainment space. Over the past several years, we have been successful in competing with Playboy, and we have gained market share through the displacement of Playboy services. Other competitors, such as Hustler TV, have also entered the market and are increasing competition.

        Our content has typically outperformed our competitors' content on the majority of MSO and DBS platforms as measured by revenue per server hour. As a result, we have been able to increase our shelf space on these platforms through incremental platform hours and the replacement of our competitors' hours. We believe that some competitors have been willing to execute contracts with distributors that contain lower revenue percentages and/or provide revenue guarantees in order to obtain or retain channels and VOD platform hours. While we believe that our content continues to

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outperform the competition, we cannot predict whether that performance advantage will insulate us from further pressure on revenue percentages. If our competitors continue to accept lower revenue percentages from the MSO and DBS platforms and if we are unable to maintain a performance advantage or cause the MSO and DBS providers to recognize the value from this performance advantage, then our customers could put additional pressure on us to lower our revenue percentages. A reduction in our revenue percentages would have a material adverse impact on our results of operations and financial condition.

        We also face competition in the adult entertainment market from other providers of adult programming including producers of adult content, adult video/DVD rentals and sales, premium movie channels that broadcast adult-themed content, telephone adult chat lines, books and magazines aimed at adult consumers, and adult-oriented wireless services. Our Transactional TV segment also faces general competition from other forms of non-adult entertainment, including sporting and cultural events, other television networks, feature films, and other programming.

Film Production Segment

        Our Film Production segment is a multi-faceted film production and distribution company. The Film Production segment expands our portfolio to the mainstream and erotic markets and provides us with expanded relationships in international markets. Additionally, we have leveraged our existing Transactional TV segment customer relationships and deliver the Film Production segment's library of erotic and mainstream content to many of the same Transactional TV segment MSO and DBS customers.

        Our Film Production segment derives revenue from two principal businesses: (1) the production and distribution of original motion pictures including erotic thrillers and horror movies (collectively, owned content); and (2) the distribution of third party films where we act as a sales agent for the product (repped content). This segment also periodically provides producer-for-hire services to major Hollywood studios.

        The film markets have been significantly impacted by the economic downturn. As a result of the impact of the economic downturn, we believe the Film Production segment's customers have reduced their content acquisition budgets. We believe this occurred because our customers were relying upon their existing libraries to reduce spending and costs. These changes have had a significant negative impact on the Film Production segment's operating results. During fiscal years 2010 and 2009, we incurred goodwill impairment charges of $4.9 million and $10.0 million, respectively. We also recorded film cost impairment charges of approximately $2.2 million, $1.2 million and $1.1 million during fiscal years 2011, 2010 and 2009, respectively, as well as an increase in the allowance for unrecoverable accounts of $0.8 million in each of fiscal years 2011 and 2010. These charges were incurred as a result of the depressed performance of the Film Production segment. It is reasonably possible that the unfavorable conditions within the film markets could persist or further decline, which could cause the operating results of this segment to remain depressed or continue to decline.

Owned Content Revenue

        The Film Production segment produces and distributes its owned content to three primary customer groups. The first customer group consists of cable MSO and DBS service providers. Since our acquisition of the Film Production segment, we have leveraged our existing Transactional TV segment relationships and established new customer opportunities for our Film Production segment's owned content. The owned content that is distributed through PPV appears on unbranded linear channels within the mainstream or adult PPV movie location of the platform's electronic programming guide. Content that is distributed through VOD appears within menu categories such as "uncensored." Our movies are sold to end users at retail prices typically ranging from $3.99 to $9.99. We receive a

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percentage share of the revenue derived from sales on these platforms. Revenue percentages are typically higher than those earned by our Transactional TV segment due to the mainstream nature of the content. Owned content is distributed to cable MSO and DBS service providers using the same technology and transport providers as described above in the Transactional TV segment discussion.

        The second customer group for our owned content distribution consists of premium movie service providers such as Cinemax and Showtime. The premium movie service providers license and distribute the content as part of their late-night programming and within their subscription VOD product. The owned content is typically sold to these customers for a flat license fee.

        The third customer group consists of various international distributors including international premium movie service providers. These international distributors typically re-distribute the content to end-users. We also typically charge these customers a flat license fee for the owned content.

        The Film Production segment does not employ production staff employees. Third-party production staff is used to produce owned content, and our employees provide in-house oversight over the critical areas of production such as scripting, casting, shoot location, and post production.

Sales Agency (Repped Content) Service Revenue

        Our Film Production segment has established relationships with independent mainstream film producers. We act as a sales agent for the film producers and license both domestic and international rights to their movies, which we refer to as repped content, under Lightning Entertainment Group, Inc. We also license films under our Mainline Releasing Group brand. We earn a commission for licensing film rights on behalf of these producers. The commission we earn from domestic distribution is typically more favorable than the commission we earn from international distribution. We also earn a marketing fee for many of the films that we represent. Each contract typically allows for the recovery of any producer advances and costs incurred in preparing the film for market, including advertising costs, screening costs, costs to prepare the trailer, box art, screening material, and similar costs necessary to ensure the movie is market ready.

        We generate revenue from these arrangements, which we refer to as repped content revenue, through arrangements with mainstream distributors world-wide. Distributors deliver the repped content through various channels including theatrical, pay-television, free television and other similar distribution channels. We also distribute repped content on VOD platforms through U.S. cable MSOs. We continue to leverage the relationships we have established through the Transactional TV segment with U.S. cable and DBS providers. Additionally, our repped content is distributed to retail markets including DVD markets, home video markets and other retail markets through arrangements we have executed with leading independent mainstream distribution partners.

Producer-for-Hire and Other Revenue

        Producer-for-hire and other revenue relates to amounts earned through producer-for-hire arrangements, music royalty fees and the delivery of other miscellaneous film materials to customers. Through our producer-for-hire arrangements, we provide services and incur costs associated with a film production, and we earn a fee for our services once the film has been delivered to the customer. Although we maintain no ownership rights for the produced content, we are responsible for the management and oversight of the project and incur significant economic risk until the project is completed. The gross margins we generate from producer-for-hire arrangements are less than the returns we generate from our owned content and have historically been between 5% and 20% of net revenue; however, we cannot reasonably predict whether the gross margins we receive will continue to be similar to those generated historically. We generated approximately $4.0 million and $3.9 million of producer-for-hire services revenue during fiscal years 2011 and 2010, respectively. No material producer-for-hire revenue was generated during fiscal year 2009. We do not currently expect to execute a producer-for-hire arrangement in fiscal year 2012.

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Competition

        For our owned content, we compete primarily with one small, privately-owned company and other branded content such as Girls Gone Wild and Howard Stern. With respect to our sales agency business, we compete with approximately 30 privately-owned companies. We compete with these companies based on licensing fees charged, content quality, ability to deliver our products on-time, relationships with decision makers in the industry, and the professionalism of our sales team. For our producer-for-hire services, we compete against a wide variety of independent movie producers.

Direct-to-Consumer Segment

        Our Direct-to-Consumer segment derives revenue primarily through subscriptions to its adult consumer websites. Content for the websites is primarily obtained through licensing agreements executed by our Transactional TV segment for broadcast rights. Traffic to our consumer websites is derived through either a targeted network of affiliates that earn a referral fee from us when diverted traffic converts into paying members, or type-in traffic whereby users navigate directly to the websites by typing the addresses of our websites into their web browsers.

        In January 2008, the Direct-to-Consumer segment launched a business by acquiring certain intellectual property rights to an IPTV set-top box that allowed consumers to access content through the internet and view the content on their television. During fiscal years 2009 and 2010, the IPTV business model's performance was lower than expected and as a result, we discontinued the operations of the IPTV business model in the fourth quarter of fiscal year 2010. See Note 18—Discontinued Operations within the Notes to Consolidated Financial Statements for further discussion on our discontinuation of the IPTV set-top box business.

Competition

        The adult internet industry is highly competitive and highly fragmented given the relatively low barriers to entry. Free content websites that allow users to access large libraries of content have created an even more challenging environment.

OTHER INFORMATION

Intellectual Property

        Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. Policing unauthorized use of our rights is difficult. Additionally, third parties might independently develop technologies that are substantially equivalent or superior to our technologies.

Seasonality

        We have not experienced any material seasonality within our business during the fiscal years ended March 31, 2011, 2010 or 2009.

Working Capital

        We fund our operations through a combination of available cash, cash equivalents, and cash flows generated from operations. In addition, our line of credit is available for additional working capital needs.

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Customers

        We derived 46% of our total revenue for the fiscal year ended March 31, 2011 from Comcast Corporation (Comcast), DIRECTV, Inc. (DirecTV), DISH Network (DISH), and Time Warner Cable Inc. (Time Warner). We generate revenue from these customers through our Transactional TV and Film Production segments. The loss of any one of these major customers would have a material adverse impact on these segments and the Company as a whole. Specific financial information about the total revenue and outstanding accounts receivable from each of our major customers is incorporated by reference herein to Note 12—Major Customers within the Notes to Consolidated Financial Statements included herein.

Government Regulation

        We are regulated by governmental authorities. We have historically operated only in the U.S. and so we were only regulated by domestic authorities. However, because we have expanded to international markets, we must now comply with diverse and evolving regulations both domestically and internationally. Regulation relates to, among other things, licensing, access to satellite transponders, foreign investment, use of confidential customer information and content, including standards of decency and obscenity. Changes in the regulation of our operations or changes in interpretations of existing regulations by courts or regulators or our inability to comply with current or future regulations could have a material adverse impact on our financial position and results of operations.

Research and Development

        Financial information about research and development costs is incorporated herein by reference to the Research and Development Costs discussion within Note 1—Organization and Summary of Significant Accounting Policies within the Notes to Consolidated Financial Statements included herein.

Employees

        As of March 31, 2011, we had approximately 165 employees primarily located in the U.S. Our employees are not members of a union, and we have never suffered a work stoppage. We consider our employee relations to be good.

Financial Information about Segments and Geographic Areas

        Financial information about segments and geographic areas is incorporated herein by reference to Note 11—Segment and Geographic Information within the Notes to Consolidated Financial Statements included herein.

Available Information

        We file annual, quarterly and current reports, and amendments thereto, with the Securities and Exchange Commission (SEC) under Section 13(a) of the Securities Exchange Act of 1934. We make these reports available free of charge on or through our internet website, www.noof.com, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC. Information on our website should not be considered to be a part of this report or any other SEC filing unless explicitly incorporated by reference herein or therein. You may request a copy of these filings at no cost. Please direct your requests to:

New Frontier Media, Inc.
Attn: CFO
7007 Winchester Circle, Suite 200
Boulder, CO 80301

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        You can also read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington DC 20549. You can obtain information on the operations of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site (www.sec.gov) that contains our reports, proxy and information statements and other information that we file electronically with the SEC. Information on the SEC's website should not be considered part of this report or any other SEC filing unless expressly incorporated by reference herein or therein.

EXECUTIVE OFFICERS OF THE REGISTRANT.

        Our executive officers are as follows:

        Michael Weiner.    Mr. Weiner was appointed President of New Frontier Media, Inc. in February 2003 and was then appointed to the position of Chief Executive Officer in January 2004. Prior to being appointed President, he held the title of Executive Vice President and co-founded New Frontier Media, Inc. As Executive Vice President, Mr. Weiner oversaw content acquisitions, network programming, and all contract negotiations related to the business affairs of New Frontier Media, Inc. In addition, he was instrumental in securing over $20 million to finance the infrastructure build-out and key library acquisitions necessary to launch the television networks. Mr. Weiner's experience in entertainment began with the formation of Inroads Interactive, Inc. in May 1995. Inroads Interactive, based in Boulder, Colorado, was a reference software publishing company dedicated to aggregating still picture, video, and text to create interactive, educational-based software. Among Inroads Interactive's award winning releases were titles such as Multimedia Dogs, Multimedia Photography, and Exotic Pets. These titles sold over 1 million copies throughout the world through its affiliate label status with Broderbund Software and have been translated into ten different languages. Mr. Weiner was instrumental in negotiating the sale of Inroads Interactive to Quarto Holdings PLC, a UK-based book publishing concern. Prior to Inroads Interactive, Mr. Weiner was in the real estate business for 20 years, specializing in shopping center development and redevelopment in the Southeast and Northwest United States. He was involved as an owner, developer, manager, and syndicator of real estate in excess of $250 million.

        Ken Boenish.    Mr. Boenish is a 20-year veteran of the cable television industry. In October 2000, he was named President of the Transactional TV segment and in June 2005 he was named President of New Frontier Media. Mr. Boenish joined New Frontier Media as the Senior Vice President of Affiliate Sales in February 1999. Prior to joining the New Frontier Media, Inc., Mr. Boenish was employed by Jones Intercable ("Jones") from 1994 to 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 then 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 to 1994 he sold cable television advertising on systems owned by Time Warner, TCI, COX, Jones, Comcast and other cable systems. Mr. Boenish holds a bachelors degree from St. Cloud State University.

        Marc Callipari.    Mr. Callipari joined New Frontier Media in August 2006 as the Vice President of Legal Affairs and shortly thereafter was promoted to Chief Legal Officer. He is responsible for New

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Frontier Media's legal and human resources functions. Mr. Callipari started his legal career over 17 years ago in Washington, D.C. where he practiced commercial litigation from 1994 to 1999 with a large, international law firm and a boutique litigation firm. More recently, he served as captive outside and then in-house counsel to Level 3 Communications, an unaffiliated international communications company, from 1999 to 2006, where he was responsible for a wide range of world-wide litigation and transactional matters, including the negotiation of several multi-million dollar telecommunication infrastructure asset purchases and sales. He graduated from the University of San Diego School of Law in 1994, is a member of the Colorado, Virginia and District of Columbia Bars and has been admitted to practice before numerous federal courts throughout the United States.

        Scott Piper.    Mr. Piper joined New Frontier Media in February 2007 as Chief Technology and Information Officer. Mr. Piper has been an information technology professional for approximately 20 years and has held senior leadership roles for the past 12 years. He has extensive experience in infrastructure design and delivery for large scale enterprises, including the implementation of over fifteen customer contact centers, some with as many as 1,500 seats. He was responsible for one of the first successful large voice over internet protocol ("VoIP") contact centers in the U.S. Prior to joining New Frontier Media, Mr. Piper was employed from 1994 to 2006 by EchoStar Satellite L.L.C. ("EchoStar"). While employed in a variety of roles during his tenure at EchoStar, he most recently held the title of Vice President of IPTV. Mr. Piper was also responsible for the launch of DISH Network's web based entertainment portal prior to his departure. Mr. Piper holds a Bachelor of Science in Marketing and Finance from the University of Colorado and a Masters in Science in Telecommunications from the University of Denver.

        Grant Williams.    Mr. Williams has served as Chief Financial Officer since April 2008. Mr. Williams served as the Corporate Controller of New Frontier Media from October 2006 until April 2008. From February 2004 until October 2006, Mr. Williams was employed by eFunds Corporation and served in various senior manager roles, including management of Securities and Exchange Commission filings and correspondence; financial contract management for significant transactions including business acquisitions, business dispositions, and debt financing; and financial management and analysis of the company's corporate costs. Prior to February 2004, Mr. Williams was employed by Ernst and Young, LLP as a manager within the assurance and advisory services group. Mr. Williams holds a Bachelor of Accountancy from the University of Oklahoma and is a Certified Public Accountant in Colorado and Arizona.

ITEM 1A.    RISK FACTORS.

The loss of any of our current major customers, or our inability to maintain or negotiate at renewal or otherwise favorable contractual terms with these customers, could have a material adverse effect on our financial position and results of operations.

        We have agreements with the ten largest U.S. cable MSOs and two largest U.S. DBS providers. For our fiscal year ended March 31, 2011, the aggregate revenue we received from our major customers (customers that account for 10% or more of our consolidated net revenue during any one of the fiscal years ended March 31, 2011, 2010 or 2009, namely Comcast, DISH, DirecTV and Time Warner) was approximately 46% of our total company-wide revenue. Our agreements with these operators may be terminated without penalty and with little advance notice, and as a result are sometimes subject to renegotiation during their stated term. If one or more of these cable MSO or DBS operators terminates or does not renew our agreements, or negotiates mid-term or agrees only to renew the agreements on terms less favorable than those of our current agreements (including removing or replacing with a competitive offering or otherwise one or more of our PPV channels or VOD offerings from their platforms), our financial position and results of operations could be materially adversely effected.

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If the general economic environment, consumer discretionary spending or other conditions continue to be unfavorable or further deteriorate, our financial position and results of operations could be materially adversely impacted.

        We believe consumers view our content as a discretionary item rather than a necessity. Accordingly, our results of operations tend to be more sensitive to changes in macroeconomic conditions that impact consumer spending, including discretionary spending. Other factors, including consumer confidence, employment levels, interest rates, tax rates, consumer debt levels, and fuel and energy costs, could reduce consumer spending or change consumer purchasing habits. We believe many of these factors have adversely affected consumer spending during each of our three fiscal years ended March 31, 2011, 2010 and 2009, and, consequently, our business and results of operations.

        For example, our Transactional TV segment revenue decreased in fiscal year 2011 by approximately 4% despite generating international revenue of $5.9 million. We also experienced challenging conditions within our Film Production segment that caused operating losses during fiscal years 2011, 2010 and 2009. If the general economic environment, consumer discretionary spending or other conditions continue to be unfavorable or further deteriorate, our financial position and results of operations could be materially adversely impacted.

We rely on third party service providers to deliver our content to our customers via satellite uplink, transponder and VOD transport services. If these services were disrupted, it could cause us to lose revenue and adversely affect our financial position and results of operations.

        Our satellite uplink, transponder and VOD transport provider services are critical to us. If our service providers fail to provide the contracted services, our programming operations would in all likelihood be suspended, resulting in a loss of substantial revenue. If our satellite uplink and transponder providers improperly manage their facilities, we could experience signal disruptions and other quality problems that, if not immediately addressed, could cause us to lose revenue. All our domestic Transactional TV segment VOD transport services are provided by TVN Entertainment Corporation (TVN). If TVN fails to provide the contracted services, our domestic Transactional TV segment VOD programming operations would in all likelihood be suspended resulting in a materially adverse impact to our financial position and results of operations.

        Our continued access to satellite transponders is critical to us. Our satellite transponder agreements expire through October 2013. Our satellite programming operations require continued access to satellite transponders to transmit programming to our cable and DBS customers. Limitations to satellite transponder capacity could materially adversely affect our financial position and results of operations. Access to transponders may be restricted or denied if:

•

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



•

the Federal Communications Commission issues an order initiating a proceeding to revoke the satellite owner's authorization to operate the satellite;



•

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



•

a governmental authority commences an investigation concerning the content of the transmissions;



•

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



•

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

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        Our ability to convince cable operators and DBS providers to carry our programming is critical to us. We can give no assurance that we will be able to continue to obtain carriage with cable operators and DBS providers in the future.

If we are unable to compete effectively with other forms of adult and non-adult entertainment, we will not be able to sustain or increase revenue.

        Our ability to increase or sustain revenue is impacted by 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/DVD rentals and sales, books and magazines aimed at adult consumers, adult-oriented telephone chat lines, adult-oriented internet services, including free website content services, premium movie channels that broadcast adult-themed content and adult-oriented wireless services. To a lesser extent, we also face general competition from other forms of non-adult entertainment, including sporting and cultural events, other television networks, feature films, and other programming and entertainment options.

        Our ability to compete depends on a variety of factors, many of which are outside of our control. These factors include: the quality and appeal of our competitors' content relative to our offerings; the strength of our competitors' brands; the technology utilized by our competitors; the effectiveness of our competitors' sales, marketing efforts and the attractiveness of their product offerings; general consumer behaviors; and preferences on how consumers choose to spend their discretionary income.

        Our existing competitors, as well as potential new competitors, may have significantly greater financial, technical and marketing resources, as well as better name recognition than we do. This may allow them to devote greater resources than we can to the development and promotion of their product offerings. These competitors may also engage in more extensive technology research and development, and adopt more aggressive pricing policies for their content. Additionally, increased competition could result in license fee reductions, lower margins and a negative impact on our financial position and results of operations.

        The popularity and notoriety of adult entertainment through low-cost and free websites has resulted in additional pressure on our business. The quality and quantity of content available on these free and low-cost websites continues to improve. The content we sell through the Transactional TV segment typically has a retail price between $9.95 and $14.99 and is typically less explicit than the content offered on internet websites. As a result of the recent deterioration in economic conditions, customers may view internet delivered content as a replacement to our content based on the difference in cost, edit standard and availability of certain niche content that we do not distribute. A migration of customers to free and low-cost internet delivered content could result in a further decline in our buy rates and have a negative impact on our financial position and results of operations.

The continued addition of new competitors to our business could have a material adverse affect on our operating performance.

        We face competition from established adult video producers, as well as independent companies that distribute adult entertainment, some of which is provided for free through internet websites. These competitors may include producers such as Hustler, Wicked Pictures and Vivid Entertainment. In the event that cable and/or satellite companies seek to purchase adult video content for their PPV or VOD service directly from adult video producers or other independent distributors of such content, our VOD and PPV business is likely to suffer. For example, an independent producer of adult content, which has historically distributed content only through the internet, replaced one of our PPV channels on the largest DBS platform in the U.S. during the third quarter of fiscal year 2010. Increased competition in the adult category could also lead to downward pressure on the license fees that our customers are willing to pay for our content.

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We may incur costs to defend ourselves against legal claims initiated in connection with our distribution of adult-themed content.

        Because of the adult-oriented content that we distribute, we may be subject to obscenity or other legal claims by third parties. Our financial position and results of operations could be harmed if we were found liable for this content or if costs to defend such claims proved significant. Implementing measures to reduce our exposure to this liability may require us to take steps that would substantially limit the attractiveness of our content and/or its availability in various geographic areas, which would negatively impact our ability to generate revenue. Furthermore, our insurance may not cover or may not adequately protect us against all of these types of claims.

Increased government regulation in the United States and abroad could impede our ability to deliver our content and expand our business.

        New laws or regulations, or the new application of existing laws could prevent us from making our content available in various jurisdictions or otherwise have a material adverse affect on our business, financial position 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 of internet related laws governing issues such as intellectual property ownership and infringement, pornography, obscenity, libel, employment, and personal privacy is still developing.

        Cable 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 financial position and results of operations could be adversely affected.

        Because we have expanded our service offerings to international markets, we must now comply with diverse and evolving international regulations. New application of regulations related to our operations internationally and our ability to comply with these regulations could have a material adverse impact on our financial position and results of operation.

Changes in our effective tax rate or assessments arising from tax audits may have an adverse impact on our results.

        We are subject to taxation in various jurisdictions, both domestically and internationally. Significant judgment is required in the determination of our income tax benefit (expense), and this determination requires the interpretation and application of complex and sometimes uncertain tax laws and regulations. Our effective tax rate may be adversely impacted by changes in the mix of earnings between jurisdictions with different statutory tax rates, in the valuation of our deferred tax assets, and by changes in tax rules and regulations. For instance, the availability and timing of lapses in the U.S. research and development tax credit, the accounting for uncertain tax positions and the amount of our estimated tax deduction for domestic production activities may add more variability to our future effective tax rates. Additionally, we are subject to examination of our fiscal year 2008 amended tax returns, current tax returns and our determination of certain tax positions. If the Internal Revenue Service audits these returns and determines certain of our tax positions are invalid, our financial position and results of operations could be materially adversely affected.

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If the Film Production segment produces, acquires or represents film content that is not well-received by our customers, we may not be able to recover the investments made in the film content.

        We have a history of impairing films in our content library and recording allowances for unrecoverable accounts for recoupable costs and producer advances. The Film Production segment's ability to continue to create or acquire film content and obtain rights to represent content that is well-received by our customers is critical to the segment's future success. If a film produced, acquired or represented by the Film Production segment does not sell as well as anticipated, we may not be able to recover our investment in the film, including, but not limited to, the cost of producing or acquiring the film, the costs associated with promoting the film, costs associated with post-production work on the film, or advances and other recoupable costs associated with representing the film. No assurance can be given that the Film Production segment's past success in generating profits from its investment in its films will continue.

Antitakeover provisions in our Amended and Restated Articles of Incorporation, as amended, and our Rights Agreement may discourage or prevent a change of control.

        Our charter documents may inhibit a takeover or change in control that our shareholders may consider beneficial. Provisions in our Amended and Restated Articles of Incorporation may have the effect of delaying or preventing a merger or acquisition of us, or making a merger or acquisition less desirable to a potential acquirer, even when the shareholders may consider the acquisition or merger favorable. For example, our Board of Directors, without further shareholder approval, may issue preferred stock that could delay or prevent a change of control as well as reduce the voting power of the holders of common stock, even with the effect of losing control to others. In addition, our Board of Directors has adopted a Rights Agreement, commonly known as a poison pill, that may delay or prevent a change of control and may also make a merger or acquisition of us less desirable. If a change in control transaction perceived by the shareholders to be in their best interest were delayed or blocked by our protective measures, the value of an investment in our securities may be negatively impacted.

If we are not able to retain our key executives, it may be more difficult for us to manage our operations and our financial position and result of operations could be adversely affected.

        With only approximately 165 employees, our success depends greatly 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 material adverse effect on our financial position and results of operations. No assurance can be given that we will be successful in attracting and retaining these personnel.

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

        We are engaged in a business that has experienced significant technological change over the past several years and will likely continue to experience further changes. 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 becomes obsolete, our inability to identify in a timely manner emerging technologies that may impact our business, or technology advancement that may make our offerings obsolete. In any such event, we may be required to invest significant amounts of capital 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 position and results of operations. 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. We may also experience impairments related to existing investments that we have made in new technology.

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Negative publicity, lawsuits or boycotts by opponents of adult content could adversely affect our financial position and results of operations 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. As a leading provider of adult entertainment, we cannot assure you that we may not become a target of such negative publicity 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 banking entities, investors, investment banking entities, market makers, lenders and other service providers 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 adversely impact the value of our stock, and our ability to attract market support or obtain financing.

We may be unable to protect our intellectual property rights or others may claim that we are infringing on their intellectual property.

        Third parties could assert infringement claims against our business in the future. Claims for infringement of all types of intellectual property rights are a common source of litigation. Infringement claims can require us to modify our products, services and technologies or require us to obtain a license to permit our continued use of those rights. We may not be able to perform either of these actions in a timely manner or upon reasonable terms and conditions. Failure to do so could harm our financial position and results of operations. In addition, future litigation relating to infringement claims could result in substantial costs to us and a diversion of management resources. Adverse determinations in any litigation or proceeding could also subject us to significant liabilities and could prevent us from selling some of our products, services or technologies.

        Despite our efforts to protect our intellectual property rights, third parties may infringe or misappropriate our intellectual property or otherwise independently develop substantially equivalent products and services. The loss of intellectual property protection or the inability to secure or enforce intellectual property protection could harm our business.

If we experience system failures, the services we provide to our customers could be delayed or interrupted, which could harm our business reputation and result in a loss of customers.

        Our ability to provide reliable service largely depends on the efficient and uninterrupted operations of our digital broadcast technology and related systems. Any significant interruptions could severely harm our business and reputation and result in a loss of revenue and customers. Our systems and operations could be exposed to damage or interruption from fire, natural disaster, unlawful acts, power loss, telecommunications failure, unauthorized entry, computer viruses, or similar events. Although we have taken steps to prevent system failures, we cannot be certain that our measures will be successful and that we will not experience service interruptions. Further, our property and business interruption insurance may not be adequate to compensate us for all losses or failures that may occur.

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Our goodwill, other identifiable intangible assets and other long-lived assets may incur further charges and expenses.

        We conducted our annual goodwill and other identifiable intangible assets impairment tests as of March 31, 2011, 2010 and 2009. We also performed goodwill and other identifiable intangible assets impairment tests as of December 31, 2008 due to events and circumstances within our Film Production segment that caused us to believe that it was more likely than not that the segment's goodwill was impaired. We also perform quarterly analyses on the valuation of long-lived assets including our content and distribution rights, film library, and other long-lived assets as well as the recoverability of recoupable costs and producer advances. We recognized the following continuing operations charges for asset impairments and in the case of the allowance for unrecoverable accounts, operating expenses, in our statements of operations (in thousands):

        If our goodwill, other identifiable intangible assets or other long-lived assets' future benefit does not exceed its carrying value, or if we experience a change in estimates regarding the recoverability of our recoupable costs and producer advances, we may be required to record further charges and expenses related to the assets, which could materially affect our financial position and results of operations. The ongoing uncertainty in general economic and market conditions could increase the likelihood of additional asset charges and expenses being recorded in future periods. In addition, the determination of the fair value of goodwill, other identifiable intangible assets and long-lived assets as well as the estimated recoverability of recoupable costs and producer advances is subject to a high degree of judgment and complexity and changes in estimates could materially affect our financial position and results of operations.

We may pursue acquisitions, joint ventures, new services and other strategic transactions and activities to complement or expand our business and add shareholder value that may not be successful.

        Our future success may depend on opportunities to acquire or form strategic partnerships with other businesses or technologies or establish new services that could complement, enhance or expand our current business or products or that might otherwise offer us growth opportunities. We may not be able to complete such transactions or activities and such transactions or activities, if executed, could pose significant risks and could have a negative effect on our financial position and results of operations. Any transactions or activities that we are able to identify and complete may involve a number of risks, including:

•

the diversion of our management's attention and resources from our existing business to integrate the operations and personnel of the acquired, combined or created business or joint venture;



•

the diversion of our management's attention and resources from existing business to create new services;

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•

possible adverse effects on our financial position and results of operations during the integration process or implementation process; and



•

the inability to achieve the intended objectives of the transactions or activities.

        In addition, we may not be able to successfully or profitably integrate, operate, maintain and manage our newly acquired operations, employees or activities. We may not be able to maintain uniform standards, controls, procedures and policies, and this may lead to operational inefficiencies.

        New acquisitions, joint ventures, new services and other transactions may require the commitment of significant capital that would otherwise be directed to investments in our existing businesses or be distributed to shareholders. Commitment of this capital may cause us to defer or suspend any common stock dividends or share repurchases that we otherwise may have made.

We may be unsuccessful with our initiative to expand our Transactional TV segment distribution into international markets due to our inexperience with international adult content delivery and foreign government regulations.

        We are expanding our Transactional TV segment services into new international markets. We have not historically operated internationally or transacted with international government regulators, competitors, cultures or consumers. As a result of our inexperience, we may be unsuccessful in executing our international growth initiatives.

If we are required to make payments under our guarantee of the state of Georgia producer-for-hire production tax credits that we sold during fiscal year 2011, our financial position and results of operations could be materially adversely impacted.

        Our Film Production segment completed producer-for-hire services related to a movie production in the state of Georgia during fiscal year 2011. We realized certain transferable production tax credits in the state of Georgia associated with the production, and we sold the tax credits to a third-party resulting in a reduction in the net cost of the production of approximately $0.8 million. In connection with the sale of the tax credits, we agreed to reimburse the buyer if the tax credits are recaptured, forfeited, recovered or otherwise become invalid in the next four years. If we are required to make payments under our guarantee of the tax credits, our financial position and results of operations could be materially adversely impacted.

We currently represent horror films that are distributed through a large video rental retailer and are owed money from the related distribution. The retailer recently filed for bankruptcy and if we do not receive payments related to the distribution, our financial position and results of operations could be materially adversely impacted.

        Our Film Production segment has distributed eight repped content horror films through a large video rental retailer (the Retailer). We incurred recoupable costs and producer advances associated with the films. The Retailer filed for bankruptcy in late September 2010 and was subsequently acquired in April 2011. If we are unable to collect amounts owed to us related to our distribution of films through the Retailer, we expect that we will be unable to recover the recoupable costs and producer advances incurred for the related films. We estimate that we would incur a maximum increase in the allowance for unrecoverable accounts of approximately $0.2 million if we were unable to collect amounts due from the distribution agreement with the retailer resulting in an adverse impact to our financial position and results of operations.

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We are relocating our corporate and digital broadcast facilities into a new, combined leased facility. If we are unable to execute the relocation, we experience delays in the relocation, we incur costs in excess of expectations from the relocation, or we experience other issues associated with the relocation, our financial position and results of operations could be materially adversely impacted.

        We are in the process of relocating our corporate and digital broadcast facilities to a new, combined leased facility. Our corporate facility is used as our corporate headquarters and is also used by our Direct-to-Consumer segment's web production department and our Transactional TV segment's marketing, sales, branding, promotions and conforming departments. Our digital broadcast facility is used by our Transactional TV segment for key operations activities including broadcasting, encoding and technical operations, content screening, and quality control functions. We are responsible for completing the building improvements in the new facility and furnishing the new facility, and we are also responsible for the relocation of our property, equipment, and related assets from our corporate and digital broadcast facilities to the new combined facility. We anticipate that this relocation will be completed in July 2011. If we are unable to execute the relocation, we experience delays in the relocation, we incur costs in excess of expectations from the relocation, or we experience other issues associated with the relocation, our financial position and results of operations could be materially adversely impacted.

ITEM 1B.    UNRESOLVED STAFF COMMENTS.

        None.

ITEM 2.    PROPERTIES.

        We use the following principal facilities in our operations.

        Colorado:    We lease space in two office buildings in Boulder, Colorado. The north Boulder facility is approximately 12,000 square feet and houses our Transactional TV segment's digital broadcast center, encoding and technical operations groups, content screening, and quality control functions. Our Winchester Circle facility is approximately 18,000 square feet and is used as our corporate headquarters, as well as by our Direct-to-Consumer segment's web production department and by our Transactional TV segment's marketing, sales, branding, promotions and conforming departments. The facilities are 100% utilized.

        We entered into a lease agreement in October 2010 to rent a north Boulder facility that is approximately 48,500 square feet. We expect to vacate our current Colorado facilities discussed above in July 2011 and combine the occupants of those facilities into the new leased facility. The new facility is expected to be used by our Transactional TV, Direct-to-Consumer and Corporate Administration segments. Our digital broadcast technology and other groups and functions currently located at our digital broadcast center will also be relocated to the new facility. We do not currently occupy the facility and expect to utilize 85% of the facility upon completion of occupancy.

        California:    We lease approximately 4,600 square feet in Santa Monica, California. This facility houses our Film Production segment's production and licensing business. The facility is 100% utilized.

        We believe that our facilities are adequate to maintain our existing business activities.

ITEM 3.    LEGAL PROCEEDINGS.

        For a discussion of legal proceedings, see Note 13—Commitments and Contingencies in the Notes to Consolidated Financial Statements included herein and incorporated herein by reference.

ITEM 4.    (REMOVED AND RESERVED).

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PART II.

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

MARKET INFORMATION

        Our common stock is traded on the NASDAQ Global Select Market under the symbol "NOOF".

        The following table sets forth the range of high and low sales prices for our common stock for each quarterly period indicated, as reported on the NASDAQ Global Select Market:

        The high and low sales prices per share as reported on the NASDAQ Global Select Market on May 25, 2011, were $1.53 and $1.45, respectively. As of May 25, 2011, there were approximately 3,000 beneficial owners and approximately 170 holders of record of New Frontier Media's common stock.

ISSUER PURCHASES OF EQUITY SECURITIES

        From time to time, we have executed stock repurchase programs and stock purchase agreements based on current market conditions and our capital and financial position. This activity is conducted in a manner intended to comply with the safe harbor provisions of Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended, and to minimize the impact of any purchases upon the market for our securities. Repurchased shares are returned to authorized but unissued shares of common stock in accordance with Colorado law.

        In June 2008, our Board of Directors extended a share repurchase plan allowing for the repurchase of approximately 1.1 million shares of common stock through June 2010. During the six month period ended September 30, 2008, we substantially completed the share repurchase plan and repurchased approximately 1.1 million shares for a total purchase price of approximately $4.3 million. On November 14, 2008, we entered into a Stock Purchase Agreement pursuant to which a shareholder agreed to sell and we agreed to purchase approximately 2.6 million shares of our common stock for a cash purchase price of $1.55 per share or an aggregate purchase price for all of the shares of approximately $4.1 million. We funded the acquisition of the shares with available cash. On March 11, 2009, we purchased through one broker in an unsolicited single block trade approximately 0.5 million shares of our common stock for a cash purchase price of $1.30 per share, or an aggregate purchase price for all of the shares of approximately $0.7 million. The acquisition was funded with available cash.

        On August 28, 2009, we announced that our Board of Directors adopted a new stock repurchase program. Under the program, we may purchase with available cash and cash from operations up to 1.0 million shares of our outstanding common stock, from time to time through open market or privately negotiated transactions, as market and business conditions permit. The program will expire in March 2012. As of March 31, 2011, we had purchased approximately 0.3 million shares of our common stock under the plan for a total purchase price of approximately $0.5 million. No common stock purchases were made during the fourth quarter of fiscal year 2011. As of March 31, 2011, approximately 0.7 million shares of common stock remain authorized for repurchase under the stock repurchase plan.

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STOCK PERFORMANCE GRAPH

        The following graph compares the 5 year cumulative total return provided to shareholders of New Frontier Media, Inc.'s common stock relative to the cumulative total returns of the S&P SmallCap 600 index and two peer group indexes. Peer Group 1 reflects the peer group used in the immediately preceding fiscal year ended March 31, 2010. The Peer Group 1 index has historically included Playboy Enterprises Inc. (Playboy) and Private Media Group, Inc. (Private); however, the Peer Group 1 index as presented in the below table only includes Private because Playboy became a privately held company in March 2011. Comparable data for the full 5 year cumulative total return period ended March 31, 2011 is therefore unavailable for Playboy. The Peer Group 2 index represents a newly selected peer group index for the 5 year cumulative total return period ended March 31, 2011 and includes: Outdoor Channel Holdings, Inc., Private, Rick's Cabaret International, Inc., and VCG Holding Corp. We changed from the Peer Group 1 index to the Peer Group 2 index because we do not believe that one company, Private, reflects a reasonable index of issuer peers. We believe the index based on the companies included in the Peer Group 2 index reflects a reasonable peer group based on the peer issuers' industry and line of business. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock, in the peer group indexes, and the index on March 31, 2006 and its relative performance is tracked through March 31, 2011.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among New Frontier Media, Inc., The S&P SmallCap 600 Index
And Two Peer Groups

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*

$100 invested on 3/31/06 in stock or index, including reinvestment of dividends.

        Copyright© 2011 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

        The stock price performance included in this graph is not necessarily indicative of future stock price performance.

        In accordance with the rules and regulations of the SEC, the above performance graph shall not be deemed to be "soliciting material" or deemed to be "filed" with the SEC or subject to Regulations 14A or 14C of the Securities Exchange Act of 1934, as amended, or to the liabilities of Section 18 of the Securities and Exchange Act of 1934, as amended, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities and Exchange Act of 1934, as amended, notwithstanding any general incorporation by reference of this report into any other filed document.

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ITEM 6.    SELECTED FINANCIAL DATA.

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

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

INTRODUCTION

        Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide the readers of our accompanying consolidated financial statements with a narrative discussion about our business. The MD&A is provided as a supplement to the consolidated financial statements and accompanying notes and should be read in conjunction with those financial statements and accompanying notes. Our MD&A is organized as follows:

•

Overview.  General description of our business and operating segments as well as trends, challenges, strategies and objectives.



•

Critical Accounting Policies and Estimates.  Discussion of accounting policies that require critical judgments and estimates.



•

Results of Operations.  Analysis of our consolidated results of operations for the three years presented in our financial statements for each of our operating segments: Transactional TV, Film Production, Direct-to-Consumer, and Corporate Administration.



•

Liquidity and Capital Resources.  Analysis of changes in our cash flows, discussion of our financial condition and discussion of our potential sources and uses of liquidity.



•

Contractual Obligations and Off-Balance Sheet Arrangements.  Overview of contractual obligations, commitments, off-balance sheet arrangements and contingent liabilities outstanding as of March 31, 2011, including expected payment schedule.



•

Recent Accounting Pronouncements.  Accounting pronouncements that have been recently issued.

        This annual report on Form 10-K includes forward-looking statements within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended. All statements regarding trend analysis and our expected financial position and operating results, business strategy, financing plans and the outcome of contingencies are forward-looking statements. Forward-looking statements are also identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "plan," "may," "should," "could," "will," "would," "will be," "will continue," "will likely result," and similar expressions. 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. 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. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

        Factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to, our ability to: 1) retain our four major customers and related revenue that accounted for approximately 46% of our total revenue during the fiscal year ended March 31, 2011; 2) maintain the license fee structures currently in place with our customers; 3) maintain our pay-per-view (PPV) channel and video-on-demand (VOD) shelf space with existing customers; 4) compete effectively with our current competitors and potential future competitors that distribute adult content to U.S. and international cable multiple system operators (MSOs) and direct broadcast satellite (DBS) providers; 5) retain our key executives; 6) produce film content that is well received by our Film Production segment's customers; 7) comply with current and future regulatory developments both domestically and internationally; and 8) successfully compete against other forms of adult and non-adult entertainment such as pay and free adult-oriented internet websites and adult-oriented premium channel content. Our actual results could also differ materially from our forward-looking

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

statements if the general economic environment, consumer discretionary spending or other conditions continue to be unfavorable or further deteriorate. The foregoing list of factors is not exhaustive. For a more complete list of factors that may cause results to differ materially from projections, please refer to the Risk Factors section of this Form 10-K.

OVERVIEW

        We are a provider of transactional television services and a distributor of general motion picture entertainment. Our key customers include large cable and satellite operators, premium movie channel providers and major Hollywood studios. We distribute content worldwide. Our three principal businesses are reflected in the Transactional TV, Film Production and Direct-to-Consumer operating segments. Our Transactional TV segment distributes adult content to cable and satellite operators who then distribute the content to retail consumers via VOD and PPV technology. We earn revenue by receiving a contractual percentage of the retail price paid by consumers to purchase our content on customers' VOD and PPV platforms. The Transactional TV segment has historically been our most profitable segment. The Film Production segment generates revenue through the distribution of mainstream content to large cable and satellite operators, premium movie channel providers and other content distributors. This segment also periodically provides contract film production services to major Hollywood studios (producer-for-hire arrangements). The Film Production segment incurred operating losses in fiscal years 2011, 2010 and 2009 primarily due to impairment charges. Our Direct-to-Consumer segment primarily generates revenue from membership fees earned through the distribution of adult content to consumer websites. The Direct-to-Consumer segment has historically incurred operating losses and is expected to continue to incur operating losses for the foreseeable future; however, we have been focused on returning the segment to profitability through efforts described below. Our Corporate Administration segment includes all costs associated with the operation of the public holding company, New Frontier Media, Inc.

        The business models of each of our segments are summarized below.

Transactional TV Segment

        The Transactional TV segment is focused on the distribution of content to consumers via MSO and DBS customers' VOD and PPV services. We earn revenue by receiving a percentage (sometimes referred to as a split) of the total retail purchase price paid by consumers to purchase our content on customers' VOD and PPV platforms. Revenue growth can occur when we launch our services to new cable MSOs or DBS providers primarily in international markets, when the number of digital subscribers for systems where our services are currently distributed increases, when we launch additional services or replace our competitors' services on existing customer cable and DBS platforms, and when our proportional buy rates improve relative to our competitors. Alternatively, our revenue could decline if we were to experience lower consumer buy rates, as has been the case with the recent general economic downturn, if consumers migrate to other forms of entertainment such as pay and free adult-oriented internet websites which we believe may also be occurring as a result of the economic downturn, if our customers pay us a smaller percentage of the consumer retail purchase price, if additional competitive channels are added to our customers' platforms or if our existing customers remove or replace our services on their platform.

        Beginning in fiscal year 2009, we focused the Transactional TV segment's growth efforts on expanding distribution into international markets. The expansion of the Transactional TV segment's distribution into international markets continues to be one of our primary focuses for growth within the

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segment. We currently distribute content in international markets including North America, Europe, Latin America and Asia. The Transactional TV segment's international revenue during the fiscal years ended March 31, 2011, 2010 and 2009 was approximately $5.9 million, $3.6 million and $1.0 million, respectively. The large majority of the international growth within the Transactional TV segment has occurred though the distribution of content to VOD platforms.

        In fiscal year 2011, we executed transponder agreements that allow us to distribute PPV channels in Latin America and Europe. The annual cost of the leased transponders is approximately $0.6 million and is expected to increase as we expand the quantity of PPV channels that we distribute internationally. We plan to focus on executing new PPV distribution agreements with customers in the future to further expand the Transactional TV segment's international growth. Although the initial transponder costs associated with the international PPV expansion are higher relative to the costs to distribute content to international VOD platforms, the international PPV transponder costs are fixed rather than variable relative to the related revenue. Comparatively, the transport costs associated with the international VOD distribution are variable relative to revenue.

        Throughout fiscal year 2011, the Transactional TV segment's costs increased as a result of our efforts to expand our international distribution. The increase in expenses occurred within various areas of the Transactional TV segment's cost structure including transponder and uplink costs; content and distribution rights amortization; employee costs for sales, programming, and content production; depreciation of equipment; and business development consulting. We expect the higher cost structure of the segment will continue in future periods in order to support the international expansion efforts. If our international distribution and related revenue increase, we expect to experience improvements in our gross and operating margins as a result of the generally fixed cost structure. If our efforts to increase revenue through international expansion are not successful or occur at a slower pace than expected, the segment could experience a further decline in gross and operating margins.

        Transactional TV segment revenue during fiscal year 2011 as compared to the prior fiscal year experienced the following trends:

•

Domestic VOD revenue, which represented approximately 48%, or $17.2 million, of the Transactional TV segment's total revenue during fiscal year 2011, declined slightly by 2% as compared to the prior year results. The stabilization in the domestic VOD revenue in fiscal year 2011 contrasts an 18% decline in revenue in fiscal year 2010 as compared to fiscal year 2009. Throughout fiscal year 2011, we have made adjustments to our programming mix and have launched new content packages with our existing customers. We believe these efforts have contributed to the stabilization of the domestic VOD revenue in fiscal year 2011.



•

Domestic PPV revenue, which represented approximately 34%, or $12.3 million, of the Transactional TV segment's total revenue during fiscal year 2011, declined primarily due to lower revenue from the largest DBS provider in the U.S. In November 2009, the customer decreased its distribution of our channels from three channels to two channels. Also contributing to the decline in revenue was lower buy rates among DBS and top 10 cable MSO consumers. As discussed in more detail below, we believe consumers that have historically purchased our content with discretionary income have reduced their spending on our content, eliminated their acquisition of our content, and/or are viewing content through less expensive alternatives such as low-cost and free internet websites, which has resulted in a decline in our domestic PPV revenue.

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Although we have made adjustments on domestic VOD platforms in order to stabilize that revenue, we do not have flexibility to make similar adjustments on domestic PPV platforms due to the linear nature of PPV distribution. PPV services consist of linear channel products, so consumers that receive an individual PPV service have only one available movie option through that service at a specific viewing time. As a result, our ability to make significant changes in product mix and packages is limited as compared to the VOD service, which provides consumers with a large variety of movie options at any specific viewing time.

•

International revenue was $5.9 million in fiscal year 2011 and increased approximately 64% as compared to the prior year. Approximately 78% of the international revenue generated in fiscal year 2011 was from the distribution of content to VOD platforms. International revenue was higher primarily as a result of new customer launches, an increase in the quantity of content distributed to existing customers, an improvement in our content performance with existing customers, and adjustments to customer menu structures.

        We believe that as a result of the economic downturn, domestic consumers that have historically purchased our content are purchasing less of our content or are viewing content through less expensive alternatives such as low-cost and free internet websites. These conditions have put pressure on the Transactional TV segment's domestic revenue and caused unfavorable performance over the past three years. It is reasonably possible that difficult economic conditions will persist or worsen, which could cause our Transactional TV segment results to be materially adversely impacted. Although we believe that the deterioration in the economy has negatively impacted the Transactional TV segment's results, it is not possible for us to quantify or reasonably estimate the financial impact. We have remained focused on maintaining our competitive market position by offering a wide range of high-quality content as well as adjusting our content mix and distributing new content packages, and we believe our product is superior to other product offerings in the industry.

        Our Transactional TV segment is reliant on discretionary consumer purchases of our content. When consumers spend less of their discretionary income on non-essential expenses such as our content, it adversely impacts our business. Additionally, our content is a relatively expensive choice of entertainment as compared to other options including mainstream content that is available on our customers' platforms and adult content that is available on off-platform media such as the internet. We believe the high price of our content is causing consumers to purchase less of our content or purchase other comparable content through alternative media. In order to confirm this assumption and determine whether reducing the price of our content could improve overall gross revenue, we are performing price tests with certain customers to determine whether decreasing the price of our content could generate an increase in the buy volume sufficient to maintain or increase total gross revenue. Although the initial results of the price tests are positive, there remains uncertainty regarding the optimum price for our products. As a result, we plan to continue testing various pricing and packaging models with several of our larger customers in order to compile sufficient data to recommend changes to our customers.

        When considering the future operating results of the Transactional TV segment, we believe the following challenges and risks could adversely impact the segment's future operating results:

•

declines in new and existing consumer buys of adult TV services due to a migration to other lower-cost or free adult media services such as the internet;



•

adverse impacts to our business from a continued decline in discretionary consumer spending as a result of less favorable economic conditions or otherwise;

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•

slowing growth of the overall adult entertainment category and limited incremental distribution opportunities within the U.S.;



•

reductions in opportunities to gain domestic market share due to our customers' efforts to maintain competition among platform programmers;



•

challenges associated with our continued expansion into international markets and our inexperience with international customers, buy rates, and consumer habits;



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increased pressure from customers that threaten to remove one or more of our channels or content from their platform if we do not reduce the revenue percentages we receive or provide minimum guarantees;



•

increased VOD competition from established adult entertainment companies or new entrants such as production studios and internet-based distributors because the barriers of entry for this product line are low; and



•

continued product commoditization.

        In addition to the above noted risks, our agreements typically allow our customers to make significant changes to our distribution (such as reduce the quantity of our VOD content or remove one or more PPV channels from the platform) and may be terminated on relatively short notice without penalty. If one or more of our cable MSO or DBS operators changes our distribution terms, terminates or does not renew our agreements, or does not renew the agreements on terms as favorable as those of our current agreements, our financial position and results of operations could be materially adversely affected.

        All the above mentioned challenges and risks, and others that we may not have identified, could have a material adverse impact on our business. Nevertheless, we believe that we are well-positioned to mitigate the impact of these risks and challenges. However, not all the risks and challenges can be managed by us because the ultimate outcome will be decided by other parties such as our customers.

        During fiscal year 2012 and future periods, we believe that the Transactional TV segment could experience revenue growth if we can successfully manage and are not materially adversely impacted by the challenges and risks previously mentioned. We currently expect future growth in the segment to occur if we are successful with the following objectives:

•

continuing our international distribution expansion into new and existing geographic locations;



•

improving the value proposition for consumers, such as reducing the retail price of our content to increase buy volume;



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replacing our competitors' PPV channels with our channels on both existing and new customer platforms;



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increasing the proportional VOD hours we receive on existing customer platforms;



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gaining new carriage on emerging consumer electronic platforms such as connected televisions, Blu-ray players, and gaming consoles;



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transitioning cable MSO and DBS providers to less edited content standards; and



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improving the mix of programming.

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Film Production Segment

        The Film Production segment has historically derived the majority of its revenue from two principal businesses: (1) the production and distribution of original motion pictures including erotic thrillers and horror movies (collectively, owned content); and (2) the distribution of third party films where we act as a sales agent for the product (repped content). This segment also periodically provides contract film production services to certain major Hollywood studios (producer-for-hire arrangements).

        We generate revenue by licensing our owned content for a one-time fee to free TV, premium TV and other domestic and international distributors. We also leverage our existing relationships with Transactional TV segment customers and license the Film Production segment's owned content to domestic and international cable MSO and DBS providers through revenue percentage arrangements that are structured in a similar manner to our Transactional TV segment agreements. The revenue percentages we receive from cable MSO and DBS providers for the Film Production segment content are higher than the revenue percentages we receive for our Transactional TV segment content primarily due to the mainstream nature of the content. However, the retail price for our mainstream content is lower than our Transactional TV segment content, so the per-buy revenue per transaction is often the same as the Transactional TV segment.

        We generate repped revenue through sales agency arrangements whereby we earn a sales commission and marketing fees by selling mainstream films on behalf of film producers. The Film Production segment has established relationships with independent mainstream filmmakers and represents these filmmakers' movies primarily through Lightning Entertainment Group, Inc. Beginning in late fiscal year 2009, we leveraged our existing Transactional TV segment customer relationships and began distributing repped content on VOD platforms through several domestic cable MSOs. We are also distributing repped content films to retail markets through distribution partners.

        The Film Production segment periodically acts as a contract film producer for major Hollywood studios. Through these producer-for-hire arrangements, we provide services and incur costs associated with the film production. Once the film has been delivered to the customer, we earn a fee for our services. Although we maintain no ownership rights for the produced content, we are responsible for the management and oversight of the production. We do not produce these movies unless we have an executed agreement with a customer. These services have historically generated a gross margin of between 5% and 20%. However, our historical performance may not be representative of producer-for-hire performance in the future.

        Film Production segment revenue during fiscal year 2011 as compared to the prior fiscal year experienced the following trends:

•

Owned content revenue declined primarily due to a $0.8 million decline in VOD revenue due to lower consumer spending as described above in the Transactional TV segment discussion. Revenue also declined because the prior year results included approximately $0.4 million in revenue from the delivery of a horror film to a pay television customer, and no similar revenue recurred during fiscal year 2011. The declines in revenue were partially offset by a $0.7 million increase in revenue from the delivery of the fourth installment of an episodic series, whereas only a partial delivery of films from the third installment of an episodic series occurred in the prior fiscal year. We plan to pursue episodic productions in the future.

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•

Repped content revenue improved due to our distribution of mainstream content to domestic VOD platforms. Revenue also increased due to the distribution of content to home video, retail DVD and other markets through our arrangements with mainstream film distributors. Partially offsetting the increases in revenue was a reduction in one-time repped distribution revenue, and we believe the decline is due to a reduction in spending by our customers in response to the continuation of the challenging film market conditions.



•

Producer-for-hire and other revenue in fiscal year 2011 included approximately $3.3 million of revenue from film production services completed in the third quarter of the fiscal year. The fiscal year 2011 results also included approximately $0.7 million of revenue related to completing the production of films from another producer-for-hire arrangement that generated a portion of its revenue in the fourth quarter of fiscal year 2010 and the remaining revenue in the first quarter of fiscal year 2011. This same producer-for-hire arrangement generated approximately $1.3 million of revenue in the fourth quarter of fiscal year 2010. The fiscal year 2010 results also included $2.6 million of revenue from a separate producer-for-hire arrangement that was completed in the fourth quarter of that fiscal year. We intend to continue to pursue producer-for-hire arrangements in the future.

        When considering the future operating results of the Film Production segment, we believe the following challenges and risks could adversely impact this segment's operating results:

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declines in new and existing consumer VOD buys of our erotic owned content due to a migration to other lower-cost or free adult services such as the internet;



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adverse impacts to our business from a continued depression or additional decline in discretionary consumer spending as a result of less favorable economic conditions;



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the identification and execution of owned content deals with premium movie channels could become less frequent;



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increased competition to our owned content from more explicit adult film offerings;



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adverse impacts to our business resulting from the departures of the segment's Co-Presidents during fiscal year 2011; and



•

we are making larger producer advances and incurring more significant costs for repped content films with larger production budgets and we may be unable to recover these advances and costs through the future sale of the films.

        The impact of these challenges and risks, and others that we may not have identified, could have a material adverse impact on our business. Nevertheless, we believe that we are well-positioned to mitigate the impact of these risks and challenges. However, not all the risks and challenges can be managed by us because the ultimate outcome will be decided by other parties such as our customers.

        During fiscal year 2012 and in future periods, we will focus on improving the revenue we generate from this segment through the following strategic initiatives:

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generating incremental mainstream VOD repped content revenue by distributing higher quality films with recognized actors and actresses through domestic cable MSOs;



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generating incremental mainstream repped content revenue by distributing higher quality films to retail markets through our arrangements with mainstream film distributors;

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•

improving the buy rates of VOD owned content on cable MSO and DBS platforms through the same methods utilized by our Transactional TV segment;



•

expanding the quantity of owned episodic series content deals we execute with premium movie channels; and



•

identifying new opportunities to provide producer-for-hire services to major Hollywood studios.

        Beginning in fiscal year 2009, the film markets were significantly impacted by the economic downturn. As a result, the Film Production segment's customers reduced their content acquisition budgets. We believe this occurred because customers were relying on their existing libraries to reduce spending and costs. These changes significantly impacted the Film Production segment operating results during the third quarter of fiscal year 2009 and as a result, we made material revisions to the segment's internal forecasts resulting in a $10.0 million goodwill impairment charge. We also recorded film cost impairment charges of approximately $1.1 million during the third quarter of fiscal year 2009 as a result of the economic downturn. During fiscal year 2010, the Film Production segment results were consistent with our internal budgets excluding the impact of the goodwill and other impairment and related charges. However, conditions continued to be unfavorable in the film markets where we distribute content, and we believed these challenging conditions would continue for the foreseeable future. As a result, the five year internal forecast for the Film Production segment was revised downward in connection with the year end goodwill impairment testing which resulted in a goodwill impairment charge of $4.9 million. We also recorded film cost impairment charges of approximately $1.2 million and an increase in the allowance for unrecoverable accounts of approximately $0.8 million during fiscal year 2010 associated with the unfavorable film market conditions.

        During fiscal year 2011, owned content films continued to underperform as compared to our expectations. Additionally, the former Co-Presidents of the segment departed. As a result, we adjusted downward the expected future performance of certain owned content films which resulted in film cost impairment charges of $2.2 million. We also recorded an increase in the allowance for unrecoverable accounts of $0.8 million because certain recoupable costs and producer advances associated with repped content films were not expected to be recovered. If challenging conditions within the film markets persist or worsen, the operating results of the Film Production segment could be materially adversely impacted.

Direct-to-Consumer Segment

        Our Direct-to-Consumer segment generates revenue primarily by selling memberships to our adult consumer websites. We have experienced declines in the Direct-to-Consumer segment revenue, which we believe is due to a decline in consumer spending as a result of the unfavorable economic conditions as well as the availability of free and low-cost internet content. We expect this segment will continue to incur operating losses for the foreseeable future; however, we have launched additional consumer websites and executed other actions in an effort to improve the segment's performance in the future.

        The Direct-to-Consumer segment also operated an internet protocol television (IPTV) set-top box business beginning in late fiscal year 2008. Customers of the IPTV set-top box product could obtain content directly through the internet and view the content on television. In the fourth quarter of fiscal year 2010, we discontinued the operations of the IPTV business model as a result of underperformance in fiscal year 2010. See Note 18—Discontinued Operations within the Notes to Consolidated Financial Statements for further discussion on our discontinuation of the IPTV set-top box business.

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Corporate Administration Segment

        The Corporate Administration segment reflects all costs associated with the operation of the public holding company, New Frontier Media, Inc., that are not directly allocable to the Transactional TV, Film Production, or Direct-to-Consumer operating segments. These costs include, but are not limited to, legal expenses, accounting expenses, human resource department costs, insurance expenses, registration and filing fees with NASDAQ, executive employee costs, and costs associated with our public company filings and shareholder communications. Our focus for this operating segment is balancing cost containment with the need for administrative support.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The methods, estimates, and judgments that we use in applying the accounting policies have a significant impact on the results that we report in the financial statements. Some of the accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We continuously evaluate the methods, estimates and judgments. We believe the following critical accounting policies reflect the more significant judgments, estimates and considerations used in the preparation of the consolidated financial statements:

•

the recognition of revenue;



•

the recognition and measurement of income tax expenses, assets and liabilities (including the measurement of uncertain tax positions and valuation of deferred tax assets);



•

the assessment of film costs and the forecast of anticipated revenue (ultimate revenue), which is used to amortize the Film Production segment's film costs;



•

the determination of the allowance for unrecoverable accounts, which reserves for certain recoupable costs and producer advances that are not expected to be recovered;



•

the amortization methodology and valuation of content and distribution rights; and



•

the valuation of goodwill, other identifiable intangible and other long-lived assets.

        Each of these critical accounting policies is described in detail below.

Revenue Recognition

        Our revenue consists primarily of fees earned through the distribution of programming content through various media outlets including dedicated PPV channels and VOD categories that are distributed on cable and DBS platforms, premium movie channels, pay and free television channels and other available media outlets. Revenue is recognized when persuasive evidence of an arrangement exists as is typically evidenced through an executed contract, the services have been rendered or delivery conditions as described in the related contract have been satisfied, the license period related to the content has begun and the customer can begin exploitation of the content, the fee is fixed or determinable and collection of fees is reasonably assured. The process involved in evaluating the

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appropriateness of revenue recognition involves judgment including estimating monthly revenue based on historical data and determining collectability of fees.

Transactional TV Segment VOD and PPV Services

        The Transactional TV segment's VOD and PPV revenue are recognized based on buys and monthly subscriber counts reported each month by cable MSOs and DBS providers. We earn revenue by receiving a contractual percentage of the retail price paid by consumers of the content. Monthly sales information is not typically reported to the Transactional TV segment until approximately 30 - 90 days after the month of service, which requires management to make monthly revenue estimates based on the Transactional TV segment's historical experience with each customer. The revenue estimates may be subsequently adjusted to reflect the actual amount earned upon receipt of the monthly sales reports. A 10% change in our estimated revenue as of March 31, 2011 would have affected our net loss by approximately $0.3 million in fiscal year 2011.

Film Production Segment Owned Content Licensing

        Revenue from the licensing of owned content is recognized when persuasive evidence of an arrangement exists as is typically evidenced through an executed contract, the delivery conditions of the completed film have been satisfied as required in the contract, the license period of the arrangement has begun, the fee is fixed or determinable and collection of the fees is reasonably assured. For agreements that involve the distribution of content through VOD and PPV services and retail markets, we are unable to determine or reasonably estimate the revenue earned from customers in advance of receiving the reported earnings because the performance materially varies by film and from period to period. As a result, licensing revenue from these arrangements is not recognized until the amounts are reported by the customers.

Film Production Segment Repped Content Licensing

        We recognize revenue from represented film licensing activities on a net basis as an agent. The revenue recognized for these transactions represents only the sales agency fee earned on the total content licensing fee. The producers' share of the licensing fee is recorded as a liability until the balance is remitted to the producer. For agreements that involve the distribution of content through VOD and PPV services and retail markets, we are unable to determine or reasonably estimate the revenue earned from customers in advance of receiving the reported earnings because the performance materially varies by film and from period to period. As a result, licensing revenue from these arrangements is not recognized until the amounts are reported by the customers.

        The agreements entered into with the producers may also provide for a marketing fee that can be earned by us. The marketing fee is stated as a fixed amount and is contractually earned upon collection of sufficient film licensing fees as defined by the contract, the terms of which vary depending on film quality, distribution markets and other factors. We recognize marketing fees as revenue when the amounts become determinable and the collection of the fee has occurred as defined by the respective contract.

Direct-to-Consumer Segment Membership Fees

        Revenue from membership fees is recognized over the life of the membership. We record an allowance for refunds based on expected membership cancellations, credits and chargebacks.

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Income Taxes

        We make certain estimates and judgments in determining the income tax benefit (expense). These estimates and judgments are used in the determination of tax credits, benefits and deductions, uncertain tax positions, and the calculation of certain tax assets and liabilities which are a result of differences in the timing of the recognition of revenue and expense for tax and financial statement purposes. We also use estimates and judgments in determining interest and penalties on uncertain tax positions. Significant changes to these estimates could result in a material change to the income tax benefit (expense) in subsequent periods.

        We are required to evaluate the likelihood that we will be able to recover deferred tax assets. We have no material deferred tax asset valuation allowances and estimate that our deferred tax assets will be recoverable. If these estimates were to change and the assessment indicated we would be unable to recover the deferred tax assets, we would increase the income tax expense in the period of the change in estimate.

        The calculation of long-term taxes payable involves dealing with uncertainties in the application of tax regulations. We account for uncertain tax positions using a two-step approach to recognizing and measuring uncertain tax position liabilities. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. This process is based on various factors including, but not limited to, changes in facts and circumstances, changes in tax law, settlement of issues under audit, and new audit activity. Changes to these factors and estimates regarding these factors could result in the recognition of an income tax benefit or an additional charge to the income tax expense.

Film Costs

        We capitalize the Film Production segment's costs incurred for film production including costs to develop, acquire and produce films, which primarily consist of salaries, equipment and overhead costs, as well as the cost to acquire rights to films. Film costs include amounts for completed films and films still in development. Production overhead, a component of film costs, includes allocable costs of individuals or departments with exclusive or significant responsibility for the production of the films. Interest expense associated with film costs is not capitalized because the duration of productions is short-term in nature. Films are typically direct-to-television in nature. Film costs are stated at the lower of cost, less accumulated amortization, or fair value.

        Capitalized film costs are amortized as an expense within cost of sales using the film forecast method. Under this method, capitalized film costs are expensed based on the proportion of the film's revenue recognized for such period relative to the film's estimated remaining ultimate revenue, not to exceed ten years. Ultimate revenue is the estimated total revenue expected to be recognized over a film's useful life. Ultimate revenue for new films and events is typically estimated using actual historical performance of comparable films that are similar in nature (such as production cost and genre). Film revenue associated with this method includes amounts from all sources on an individual-film-forecast-computation method. Estimates of ultimate revenue are reviewed quarterly and adjusted if appropriate, and amortization is also adjusted on a prospective basis for such a change in estimate. Changes in estimated ultimate revenue could be due to a variety of factors, including the proportional buy rates of the content as compared to competitive content as well as the level of market acceptance of the television product.

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        Film costs are reviewed for impairment on a film-by-film basis each quarterly reporting period. We record an impairment charge when the fair value of the film is less than the unamortized cost. Examples of events or circumstances that could result in an impairment charge for film costs include the underperformance of a film as compared to expectations or a downward adjustment in the estimated future performance of a film due to an adverse change in the general business climate. Impairment charges associated with film costs could have a material impact on our financial position and results of operations in future periods.

Fiscal Year 2011 Film Cost Impairments

        During the second and fourth quarters of fiscal year 2011, we recorded impairment expenses of approximately $0.6 million and $1.6 million, respectively, associated with certain owned content films. During our second quarter film performance analysis, we adjusted downward the expected performance for certain films based on a continuation of underperformance as compared to expectations. During our fourth quarter film performance analysis, we adjusted downward the expected results for certain films based on a continued trend of lower than expected film performance and based on the recent departure of the segment's Co-Presidents. As a result, we performed further assessments on the films and determined the fair value of the films was less than the unamortized cost of the films, and the differences were recorded as impairment charges. The impairment charges were recorded in the charge for asset impairments other than goodwill within the Film Production segment. The fair value of the films was estimated by discounting the films' expected future cash flow by the weighted average cost of capital. The weighted average cost of capital was determined by considering comparable companies and their cost of equity, cost of debt, capital structure, and other risk factors specific to the segment. A 10% change in the estimated future cash flows of the impaired films would have immaterially affected our net loss by less than approximately $0.1 million in fiscal year 2011. A 10% change in the weighted average cost of capital would also have immaterially affected our net loss by less than approximately $0.1 million in fiscal year 2011.

Recoupable Costs and Producer Advances

        Recoupable costs and producer advances represent amounts paid by us that are expected to be subsequently recovered through the collection of fees associated with the licensing of repped content. In connection with the Film Production segment's repped content operations, we enter into sales agency agreements whereby we act as a sales agent for a producer's film (Sales Agency Agreements). These Sales Agency Agreements typically include provisions whereby certain costs that are incurred for promotion related activities will be paid by us on behalf of the producer (such as movie trailer and advertising material costs). We may also pay the producer an advance for the related film prior to the distribution of such film. As we subsequently license the producer's film and license fees are collected, the recoupable costs and producer advances are recovered by us through these license fee collections. License fees typically are not paid to the producer of the related film until such recoupable costs and producer advances have been fully recovered.

        Recoupable costs and producer advances are stated at the amounts contractually recoverable through collection of future license fees net of an allowance for unrecoverable accounts. The allowance for unrecoverable accounts reflects any loss anticipated from unrecovered recoupable costs and producer advances. Charges to adjust the allowance for unrecoverable accounts are reflected as a component of operating expenses in the consolidated statements of operations. We evaluate recoupable costs and producer advances on an individual film-by-film basis each quarter based on a number of factors including our historical experience with charges to the allowance, estimates of future license fee

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collections, estimates of future recoupable costs to be incurred, and the condition of the general economy and film industry as a whole. A 10% change in the allowance for unrecoverable accounts as of March 31, 2011 would have affected our net loss by approximately $0.1 million in fiscal year 2011.

Content and Distribution Rights

        The Transactional TV segment's content and distribution rights library primarily consists of licensed films. We capitalize the costs associated with the content and distribution rights as well as certain editing and production costs and amortize these capitalized costs on a straight-line basis over the lesser of the license term or estimated useful life (generally 5 years). These costs are amortized using a basis that is consistent with the manner in which the related revenue is expected to be recognized. We amortize the cost of content and distribution rights on a straight-line basis because each usage of the films is expected to generate similar revenue, and the revenue for the films is expected to be recognized ratably over the related license term. We regularly review and evaluate the appropriateness of amortizing film costs on a straight-line basis as opposed to an alternative method of amortization such as an accelerated basis. Based on these analyses, we determined that the amortization of the film library costs using a straight-line basis most accurately reflects the manner in which the revenue for the related films will be recognized.

        We periodically review the content library and assess whether the unamortized cost approximates the estimated net realizable value of the library based on expected forecast results. In the event that the unamortized costs exceed the estimated net realizable value of the film library, we will expense the excess of the unamortized costs to reduce the carrying value to the estimated net realizable value.

Goodwill, Other Identifiable Intangible and Long-lived Assets

        We record goodwill when the purchase price of an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. Goodwill is tested for impairment at the operating segment level, which is equivalent to our reporting units, on an annual basis (March 31) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include, but are not limited to, a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. Application of the goodwill impairment test requires judgment in the determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated using considerations of various valuation methodologies which could include income and market valuation approaches. The income approach involves discounting the reporting unit's projected free cash flow at its weighted average cost of capital, and the market approach considers comparable publicly traded company valuations and recent merger and acquisition valuations. The analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts; estimation of the long-term rate of growth; determination of the weighted average cost of capital; and other similar estimates. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit. We allocate goodwill to each reporting unit based on the reporting unit expected to benefit from the related acquisition and/or combination.

        As an overall test of the reasonableness of the estimated fair value of the reporting units and the consolidated Company, we also perform a reconciliation of the fair value estimates for the reporting units to our market capitalization. The reconciliation considers a control premium based on merger and acquisition transactions within the media and entertainment industry and other available information. A

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control premium is the amount that a buyer is willing to pay over the current market price of a company as indicated by the traded price per share (i.e., market capitalization), in order to acquire a controlling interest. The premium is justified by the expected synergies, such as the expected increase in cash flow resulting from cost savings and revenue enhancements.

        Other identifiable intangible assets subject to amortization have primarily included amounts paid to acquire non-compete agreements with certain key executives, contractual and non-contractual customer relationships, intellectual property rights, patents and websites. These costs are capitalized and amortized on a straight-line basis over their estimated useful lives which is typically five years. Other identifiable intangible asset balances are removed from the gross asset and accumulated amortization amounts in the period in which they become fully amortized or impaired and are no longer in use. For intellectual property and patents, the assets are not removed until our legal claim to the assets has expired.

        We continually review long-lived assets that are held and used and other identifiable intangible assets that are subject to amortization for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In evaluating the fair value and future benefits of such assets, we consider whether the estimated undiscounted future net cash flows of the individual assets are less than the related assets' carrying value and if so, we record an impairment loss for the excess recorded carrying value of the asset as compared to its fair value.

Fiscal Year 2011 Goodwill Impairment Testing

        We performed annual goodwill impairment testing for the Transactional TV segment as of March 31, 2011 using the income and market valuation approaches. The projected results used in the income valuation approach included estimates of revenue, cost of sales, operating expenses, content acquisitions, capital expenditures and other related cash flows and activities over a five year future period, and the cash flows were discounted by a risk adjusted discount rate. The market valuation approach required us to estimate and consider market multiples for companies considered to be comparable to ours and although there was a lack of comparable public companies to consider for the market valuation approach, we believe the comparable companies considered are reasonably similar to our operations. The income valuation approach was more heavily weighted than the market valuation approach because (a) there was a lack of comparable public companies to consider for the market valuation approach, and (b) the income valuation approach was more representative of our unique operating performance characteristics relative to the comparable companies considered in the market valuation approach.

        We assumed an average annual growth rate of 10% based on both company-specific and general economic risk, and we used a weighted average cost of capital of 26% for the risk adjusted discount rate. The weighted average cost of capital was determined by considering comparable companies and their cost of equity, cost of debt, capital structure, and other risk factors specific to the segment. Based on the testing, the fair value of the Transactional TV segment exceeded the carrying value by approximately 39%. A 1% change in the growth rate would cause the percentage by which the segment's fair value exceeded the carrying value to change by approximately 200 basis points. A 1% change in the weighted average cost of capital would cause the percentage by which the segment's fair value exceeded the carrying value to change by approximately 500 basis points. If the five year projected future performance of the Transactional TV segment as estimated in the income valuation approach is adjusted downward or is lower than expected in the future, we could be required to record a goodwill impairment charge.

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        Due to the continued pressure on our stock price, our market capitalization was less than the total New Frontier Media, Inc. shareholders' equity balance as of March 31, 2011. As an overall test of the reasonableness of the estimated fair value of the reporting units and consolidated Company, a reconciliation of the fair value estimates for the reporting units to our market capitalization based on the 30-day average closing price of our stock was also performed as of March 31, 2011. The reconciliation reflected an implied control premium of 67%, which is reflective of historical merger and acquisition transactions involving comparable companies as well as other relevant information. Based on the reconciliation, our fair value was in excess of the total New Frontier Media, Inc. shareholders' equity balance by approximately 29%, and there was no indicator of goodwill impairment. A 1% change in the control premium would cause the percentage by which the fair value exceeded the shareholders' equity balance to change by approximately 100 basis points.

RESULTS OF OPERATIONS

Transactional TV Segment

        The following table sets forth certain financial information for the Transactional TV segment for each of the three fiscal years presented (amounts may not sum due to rounding):

Net Revenue

VOD

        International VOD revenue increased during fiscal year 2011 by approximately $1.6 million as compared to fiscal year 2010. International revenue was higher primarily as a result of new customer launches, an increase in the quantity of content distributed to existing customers, an improvement in our content performance with existing customers, and adjustments to customer menu structures. Domestic VOD revenue experienced a minimal decline during fiscal year 2011 of $0.3 million, or 2%, as compared to the prior fiscal year. Based on our results in the second through fourth quarters of fiscal year 2011, it appears that the domestic VOD performance has generally stabilized in contrast to a declining trend in the prior fiscal year as described in more detail below. We believe the stabilization in the domestic VOD revenue was due to adjustments we made to our programming mix and our distribution of new content packages. If the current economic conditions including high unemployment

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and lower consumer discretionary spending persist or worsen, our domestic VOD performance could be materially adversely impacted.

        The decline in VOD revenue during fiscal year 2010 as compared to fiscal year 2009 was due to a reduction in revenue from several of the largest cable MSOs in the U.S. We believe the decline was due to a reduction in discretionary consumer spending in response to the economic downturn. We believe consumers that historically purchased our content with discretionary income reduced or eliminated their acquisition of our content or viewed adult content through less expensive or free alternatives such as pay and free internet websites in response to the economic downturn. The decline in revenue was also due to a settlement of paid and unpaid historical amounts with a domestic MSO customer in fiscal year 2009 that resulted in $0.9 million of additional revenue, and no similar settlement occurred in fiscal year 2010. Partially offsetting the decline in revenue was (a) a $2.1 million increase in revenue primarily associated with new international VOD distribution, (b) a $0.6 million increase in domestic VOD revenue associated with distribution to a new cable MSO customer in the eastern U.S., and (c) a $0.4 million increase in revenue from domestic telecommunication companies associated with their growth in subscribers.

PPV

        PPV revenue was lower during fiscal year 2011 as compared to fiscal year 2010 due to a decline in revenue of $1.8 million from the largest DBS platform in the U.S. primarily from the loss of a channel on that platform in November 2009. Revenue was also lower due to a decline in revenue from domestic DBS and top 10 cable MSO customers. We believe consumers that have historically purchased our content with discretionary income have reduced their spending on our content, eliminated their acquisition of our content, or are viewing content through less expensive alternatives such as low-cost and free internet websites, which has resulted in a decline in our domestic PPV revenue. Although we have made adjustments on domestic VOD platforms in order to stabilize that revenue, we do not have flexibility to make similar adjustments on domestic PPV platforms due to the linear nature of PPV distribution. As a result, the decline in consumer spending has had a larger unfavorable impact on our domestic PPV revenue as compared to our domestic VOD revenue. Partially offsetting the decline in revenue was a $0.7 million increase in international PPV revenue from our expansion into international markets primarily in Latin America.

        Revenue from our PPV distribution declined during fiscal year 2010 as compared to fiscal year 2009 primarily due to a decrease in revenue from the two largest DBS providers and other top ten cable MSOs in the U.S., which we believe was due to the general economic downturn and related reduction in discretionary consumer spending. Revenue also declined by approximately $0.6 million due to our loss of a third channel on the largest DBS provider in the U.S. in November 2009. The decline in revenue was partially offset by a $0.6 million increase in revenue associated with new international launches in Latin America.

Other Revenue

        Other revenue primarily includes revenue from advertising on our PPV channels and from content distribution fees. Other revenue declined during fiscal year 2011 as compared to fiscal year 2010 due to a general decline in advertising and distribution activity. We believe customers reduced or eliminated their spending on these services as a method to decrease expenses in response to the challenging economic conditions. Other revenue in fiscal year 2010 was consistent with fiscal year 2009.

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Cost of Sales

        Our cost of sales primarily consists of expenses associated with our digital broadcast infrastructure; satellite uplinking; satellite transponder leases; programming acquisition and monitoring activities; VOD transport; amortization of content and distribution rights; depreciation of property and equipment; and related employee costs.

        Cost of sales increased during fiscal year 2011 as compared to fiscal year 2010 primarily due to (a) a $0.4 million increase in content and distribution rights amortization from a general increase in acquisitions and the development of new and unique content incurred in an effort to improve domestic buy rates and support international expansion, (b) a $0.3 million increase in transponder and uplink costs associated with the PPV channel launches in Latin America and Europe, (c) a $0.2 million increase in employee costs to support content programming analysis, and (d) a $0.2 million increase in costs from accelerating depreciation expense for certain tenant improvement assets. We shortened the estimated lives of the related tenant improvement assets in anticipation of vacating our current corporate and digital broadcast facilities prior to the end of the lease terms and moving to a new building during the first half of fiscal year 2012. The increases in costs were partially offset by a decline in transport expenses from executing a new domestic transport agreement that contained more favorable financial terms.

        Cost of sales increased during fiscal year 2010 as compared to fiscal year 2009 primarily due to (a) a $0.1 million increase in transport costs to support the increase in international and domestic VOD distribution, (b) a $0.2 million increase in transponder and uplink costs to support additional domestic PPV channel offerings, and (c) a $0.2 million increase in content and distribution amortization expense associated with licensing higher quality content to attract additional consumer purchases.

Operating Expenses and Operating Income

        The increase in operating expenses during fiscal year 2011 as compared to fiscal year 2010 was primarily due to (a) a $0.5 million increase in employee costs to support the development of new content packages and to strengthen the international sales expansion efforts, (b) a $0.3 million increase in depreciation and maintenance expenses from purchasing storage equipment to support our international growth and the increase in domestic content distribution, (c) a $0.3 million increase in expenses primarily from fully impairing certain content and distribution rights assets that no longer met our quality standards for distribution, (d) a $0.2 million increase in business development consulting costs incurred in an effort to grow our international revenue, (e) a $0.1 million increase in costs from accelerating depreciation expense for certain tenant improvement assets, (f) a $0.1 million increase in costs because the same prior year period included a gain from a vendor settlement that did not recur during fiscal year 2011, and (g) a $0.1 million increase in legal costs from a vendor settlement. Operating income for fiscal year 2011 was $10.9 million as compared to $15.1 million in fiscal year 2010.

        Operating expenses increased during fiscal year 2010 as compared to fiscal year 2009 primarily due to (a) a $0.4 million increase in consulting fees from new business development efforts in international markets, and (b) a $0.4 million increase in advertising and promotion costs incurred in an effort to improve domestic revenue. Operating income for fiscal year 2010 was $15.1 million as compared to $21.6 million in fiscal year 2009.

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Operating Lease for New Facility

        In October 2010, we entered into an operating lease agreement to rent an approximately 48,500 square foot facility and expect to complete occupancy of the facility in July 2011. We expect that the leased facility will be primarily used by the Transactional TV, Direct-to-Consumer and Corporate Administration segments, and the new facility will replace our digital broadcast and corporate facilities. The landlord of the new facility will assume our current digital broadcast facility lease in connection with the new operating lease agreement. The initial term of the agreement expires in January 2022 and provides for options to extend the term of the lease if agreed upon by the landlord and us. In connection with our leasing of the new facility, we reduced the remaining estimated useful lives of certain tenant improvements related to the corporate and digital broadcast facilities we currently occupy because we expect to vacate the buildings prior to the conclusion of the original lease agreements. As a result, we incurred an increase in depreciation expense in each of the Transactional TV segment's cost of sales and operating expenses of approximately $0.1 million during each of the third and fourth quarters of fiscal year 2011. We expect to incur a similar increase in depreciation expense in the first quarter of fiscal year 2012. We also expect to incur a charge in the first quarter of fiscal year 2012 within the Transaction TV segment's operating expenses of approximately $0.8 million associated with vacating our digital broadcast facility and assigning the remaining lease and related obligations to the landlord of the new facility. The total remaining lease and related obligations assumed by the new facility landlord will be reflected as a reduction in our rental expense on a straight-line basis over the term of the new facility lease. Additionally, we expect to incur a $0.3 million charge in the second quarter of fiscal year 2012 from vacating our current corporate facility prior to the end of the lease term, and the charge is expected to be included in the operating expenses of our segments with the majority of the charge being reflected within the Transactional TV segment. See the Cash Flows from Investing Activities of Continuing Operations discussion within the Liquidity and Capital Resources section of the MD&A for additional information on the cash flow impact from the new facility.

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Film Production Segment

        The following table sets forth certain financial information for the Film Production segment for each of the three fiscal years presented (amounts in table may not sum due to rounding):

Net Revenue

Owned Content

        The decrease in owned content revenue during fiscal year 2011 was due to a $0.8 million decline in VOD revenue due to lower consumer spending as described above within the Transactional TV segment discussion. Revenue also declined because the prior fiscal year 2010 results included approximately $0.4 million in revenue from the delivery of a horror film to a pay television customer, and no similar revenue recurred during fiscal year 2011. The declines in revenue were partially offset by a $0.7 million increase in revenue from the delivery of the fourth installment of an episodic series, whereas only a partial delivery of films from the third installment of an episodic series occurred in the prior fiscal year.

        Owned content revenue declined during fiscal year 2010 as compared to fiscal year 2009 primarily due to a $0.9 million decline in revenue from premium cable channel customers related to the delivery

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of episodic series. We recognized revenue in fiscal year 2010 from a premium cable channel customer for the remaining partial delivery of the third installment of an episodic series, whereas in fiscal year 2009, we recognized the full revenue from the delivery of the second installment of an episodic series as well as revenue from the initial partial delivery of the third installment of an episodic series. Also contributing to the decline in revenue in fiscal year 2010 was lower revenue from the second largest DBS provider in the U.S. because fewer films were distributed on that platform in fiscal year 2010 as compared to the prior fiscal year.

Repped Content

        Repped content revenue includes revenue from the licensing of films that we represent (but do not own) under domestic and international sales agency relationships with various film producers.

        Repped content revenue increased during fiscal year 2011 due to $0.4 million in incremental revenue from the distribution of repped content on domestic VOD platforms. Revenue also increased by approximately $0.2 million due to additional revenue from the distribution of content to home video, retail DVD and other retail markets through our arrangements with mainstream film distributors.

        The increase in repped content revenue in fiscal year 2010 as compared to fiscal year 2009 was primarily due to (a) a $0.4 million increase in revenue from the new distribution of repped content on domestic VOD platforms and through retail DVD markets, and (b) a $0.2 million increase in revenue from the distribution of content to home video and other retail markets through our arrangements with mainstream film distributors. We also believe that our ability to represent and distribute mainstream films with widely recognized actors and actresses has contributed to the improvement in repped content revenue as compared to the prior fiscal year.

Producer-for-hire and Other Revenue

        Producer-for-hire and other revenue relates to amounts earned through producer-for-hire arrangements, music royalty fees and the delivery of other miscellaneous film materials to distributors.

        Fiscal year 2011 producer-for-hire and other revenue included approximately $3.3 million of revenue from the completion of a producer-for-hire arrangement for a major Hollywood studio. We also recognized approximately $0.7 million of revenue from the final delivery of films from another producer-for-hire arrangement that began production and delivery in fiscal year 2010 as discussed below.

        Fiscal year 2010 producer-for-hire and other revenue included approximately $2.6 million of revenue from our completion of a producer-for-hire arrangement for a major Hollywood studio. We also recognized approximately $1.3 million of revenue associated with the initial delivery of films from a second producer-for-hire arrangement. We did not generate any producer-for-hire revenue in fiscal year 2009.

Cost of Sales

        Cost of sales is primarily comprised of the amortization of owned content film costs as well as delivery and distribution costs related to that content. These expenses also include costs incurred to provide producer-for-hire services.

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        Cost of sales was lower in fiscal year 2011 as compared to fiscal year 2010 due to a $0.5 million decline in film cost amortization from lower owned content revenue and from generating a larger proportion of revenue from higher margin films. The decrease in cost of sales was partially offset by a $0.4 million increase in production costs associated with producer-for-hire services. The producer-for-hire services in fiscal year 2011 generated comparable revenue as the services rendered in fiscal year 2010; however, the production costs associated with the fiscal year 2011 services were higher due to the production of a higher quality film. Film cost amortization as a percentage of the related owned content revenue during fiscal year 2011 was 42% as compared to 47% during fiscal year 2010. The decline in the film cost amortization as a percentage of the owned content revenue was due to the above mentioned generation of a larger proportion of revenue from higher margin films during fiscal year 2011.

        Cost of sales increased during fiscal year 2010 as compared to fiscal year 2009 due to $3.2 million of producer-for-hire costs associated with the completion of a producer-for-hire arrangement and the partial delivery of films related to a second producer-for-hire arrangement. The increase in costs was partially offset by a decline in film cost amortization consistent with the decline in owned content revenue. Film cost amortization as a percentage of the related owned content revenue during fiscal year 2010 was 47% as compared to 39% during fiscal year 2009. Film cost amortization as a percentage of owned content revenue increased because the prior fiscal year included a larger proportion of revenue from older films whose costs had been fully amortized.

Operating Expenses and Operating Loss

        Operating expenses during fiscal year 2011 included $2.2 million in film cost impairment charges, which are discussed in more detail below. Operating expenses also included $0.8 million in expenses to increase the allowance for unrecoverable accounts to reserve for certain recoupable costs and producer advances that are not expected to be recovered. Employee costs were higher in fiscal year 2011 as compared to fiscal year 2010 by approximately $0.1 million primarily from severance expenses associated with the departure of certain employees, and consulting costs increased by approximately $0.1 million from the provision of services related to strategic planning. Comparatively, the fiscal year 2010 results included a $4.9 million goodwill impairment charge, $1.2 million in film cost impairment charges, and $0.8 million in charges to increase the allowance for unrecoverable accounts. We may incur film cost impairment charges and charges to increase our allowance for unrecoverable accounts in the future if our content underperforms relative to our expectations. The Film Production segment incurred an operating loss of $1.5 million in fiscal year 2011 as compared to an operating loss of $5.4 million in fiscal year 2010.

        Operating expenses declined during fiscal year 2010 as compared to fiscal year 2009 primarily because the fiscal year 2009 results included a $10.0 million goodwill impairment charge and $1.1 million in film cost impairment charges whereas the fiscal year 2010 results included a $4.9 million goodwill impairment charge and $1.2 million in film cost impairment charges. These impairment charges are discussed in additional detail below. Operating expenses in fiscal year 2010 also included approximately $0.8 million of expenses to increase the allowance for unrecoverable accounts because we estimated the amounts would not be recovered through future sales of the related repped content. Operating expenses declined in fiscal year 2010 by approximately $0.4 million due to a reduction in tradeshow and travel costs associated with efforts to further reduce expenses in response to the economic downturn. The Film Production segment incurred an operating loss of $5.4 million in fiscal year 2010 as compared to an operating loss of $10.9 million in fiscal year 2009.

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Goodwill Impairment Charges

        We did not perform a goodwill impairment analysis for the Film Production segment as of March 31, 2011 because the segment's goodwill was fully impaired in fiscal year 2010.

        As part of our prior fiscal year end procedures, we performed a goodwill impairment analysis as of March 31, 2010. We engaged an independent firm to assist us in performing the impairment test and considered the income and market valuation approaches in determining the estimated fair value of the Film Production segment. Using these methods, we determined that the estimated fair value of the Film Production segment was less than its carrying value as of March 31, 2010. We then performed additional analysis to estimate the implied fair value of goodwill by first allocating the estimated fair value of the Film Production segment to the tangible and identifiable intangible assets and liabilities of the operating segment. The excess of the estimated fair value over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. Based on this analysis, we recorded a goodwill impairment charge in the fourth quarter of fiscal year 2010 of $4.9 million to reduce the Film Production segment's goodwill from $4.9 million to the implied fair value of goodwill of zero. Although the fiscal year 2010 performance of the Film Production segment was consistent with our internal forecasts (excluding the impact of impairment and related charges), conditions within the film markets continued to be challenging. Based on our historical and current experience within the film production markets and in connection with our year end annual goodwill impairment test, we modified our five year forecast for the Film Production segment downward to reflect our estimate that film market conditions would remain depressed and decline further. As a result of our downward adjustment to the five year forecast, we incurred a goodwill impairment charge in fiscal year 2010.

        During the third quarter of fiscal year 2009, we determined that continued adverse changes in the business climate and material revisions to the Film Production segment's internal three year forecasts based on lower than expected revenue for the third quarter of fiscal year 2009 were events that could indicate that the fair value of the reporting unit was less than its carrying amount. We therefore engaged an independent firm to assist us in performing an impairment test. The income and market valuation approaches were considered in determining the estimated fair value of the Film Production segment. Using these methods, we determined that the estimated fair value of the Film Production segment was less than its carrying value at December 31, 2008. We then performed additional analysis to estimate the implied fair value of goodwill. Based on this analysis, we recorded a goodwill impairment charge during the third quarter of fiscal year 2009 of $10.0 million to reduce the Film Production segment's goodwill from $14.9 million to the implied fair value of goodwill of $4.9 million.

Film Cost Impairment Charges

        During the second and fourth quarters of fiscal year 2011, we recorded impairment expenses of approximately $0.6 million and $1.6 million, respectively, associated with certain owned content films. During our second quarter film performance analysis, we adjusted downward the expected performance for certain films based on a continuation of underperformance as compared to expectations. During our fourth quarter film performance analysis, we adjusted downward the expected results for certain films based on a continued trend of lower than expected film performance and based on the recent departure of the segment's Co-Presidents. As a result, we performed further assessments on the films and determined the fair value of the films was less than the unamortized cost of the films, and the differences were recorded as impairment charges. The impairment charges were recorded in the charge for asset impairments other than goodwill within the Film Production segment. The fair value of the

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films was estimated by discounting the films' expected future cash flow by the weighted average cost of capital.

        During the fourth quarter of fiscal year 2010, we recorded impairment expenses of approximately $1.2 million associated with several owned content films. As part of our quarterly film performance analysis and in connection with our annual goodwill impairment analysis, we estimated that conditions within the film markets would continue to be challenging and adjusted downward the Film Production segment's forecasts as well as certain estimated future film performance. As a result, we recorded impairment charges of approximately $1.2 million representing the difference in the unamortized film costs and the estimated fair value of the related films. This difference was recorded as a charge for asset impairments other than goodwill within the Film Production segment's operating expenses. The fair value of the films was estimated by discounting the film's projected cash flow by the weighted average cost of capital.

        During the third quarter of fiscal year 2009, we recorded impairment expenses of approximately $1.1 million associated with several owned content films. During that quarter and as part of our quarterly film performance analysis, we determined that downward adjustments to the estimated performance of the films should be recorded as a result of adverse changes to the business climate. As a result, we recorded impairment charges of approximately $1.1 million representing the difference in the unamortized film costs and the estimated fair value of the films. This difference was recorded as a charge for asset impairments other than goodwill within the Film Production segment's operating expenses. The fair value of the films was estimated by discounting the film's projected cash flow by the weighted average cost of capital.

Direct-to-Consumer Segment

        The following table sets forth certain financial information for the Direct-to-Consumer segment for each of the three fiscal years presented (amounts in table may not sum due to rounding):

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Net Revenue

        We believe the decline in net membership revenue during fiscal year 2011 and 2010 as compared to the prior fiscal years was primarily due to the economic downturn and a related reduction in consumer spending.

        Other revenue primarily relates to the sale of content to other webmasters. We also believe other revenue declined during fiscal years 2011 and 2010 as compared to the prior fiscal years as a result of the general economic downturn and a related reduction in consumer spending.

Cost of Sales

        Cost of sales consists of expenses associated with credit card processing, bandwidth, traffic acquisition, content amortization, depreciation of property and equipment and related employee costs.

        Costs of sales in fiscal year 2011 declined as compared to fiscal year 2010 primarily due to the impact of cost reduction efforts. The increase in cost of sales during fiscal year 2010 as compared to fiscal year 2009 was primarily due to additional employee costs incurred in an effort to improve our website membership revenue.

Operating Expenses and Operating Loss

        Operating expenses in fiscal year 2011 included general increases in administrative costs of approximately $0.2 million including higher legal, advertising and facility expenses. Operating expenses were also higher by approximately $0.2 million due to settlement expenses associated with a payment processing vendor and software licensing vendor. Operating expenses in the prior fiscal year 2010 included $0.3 million in other identifiable intangible asset impairment charges as discussed in further detail below, and no materially similar impairment charges were incurred in fiscal year 2011. The Direct-to-Consumer segment incurred operating losses of $1.1 million and $0.9 million during the fiscal years ended March 31, 2011 and 2010, respectively.

        Operating expenses declined during fiscal year 2010 as compared to fiscal year 2009 primarily as a result of a $0.3 million reduction in website maintenance fees. Operating expenses were also lower because the fiscal year 2009 results included a $0.2 million settlement expense associated with a vendor and no similar expenses were incurred in fiscal year 2010. The decline in operating expenses was partially offset by $0.3 million in other identifiable intangible asset impairment charges discussed in further detail below. The Direct-to-Consumer segment incurred an operating loss of $0.9 million in fiscal year 2010 as compared to $0.3 million in fiscal year 2009.

Other Identifiable Intangible Assets Impairment Charges

        During the fourth quarter of fiscal year 2010, we determined that certain internally developed websites and related software used to manage our consumer websites no longer met our quality standards. Additionally, the software did not provide sufficient support or functionality for content management, database interface, consumer facing websites, or accumulation or reporting of website traffic. As a result, we ceased using the websites and software, and we determined the websites and software would not provide us with service potential in the future. As a result, we recorded impairment charges of $0.3 million to reduce the fair value of the websites and related software to zero.

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Corporate Administration

        The following table sets forth certain financial information for the Corporate Administration segment for each of the three fiscal years presented:

        The increase in Corporate Administration segment expenses during fiscal year 2011 as compared to fiscal year 2010 was primarily due to (a) a $0.3 million increase in bonus accruals primarily for certain executive officers, (b) a $0.2 million increase in employee costs from certain annual salary increases, (c) a $0.1 million increase in stock option expenses related to awards issued in the third and fourth quarters of fiscal year 2010, and (d) a $0.1 million increase in legal expenses associated with ordinary course litigation matters.

        Corporate Administration segment expenses declined in fiscal year 2010 as compared to fiscal year 2009 primarily due to (a) a $0.7 million decline in audit, accounting and related third-party advisor fees from ongoing cost reduction efforts, (b) a $0.1 million decline in external legal fees, and (c) a $0.1 million decline in tradeshow and travel costs. Operating expenses also declined as a result of our efforts to renegotiate our contracts with vendors in order to obtain more favorable fee structures.

Other Income (Expense) and Income Tax Benefit (Expense)

Other Income (Expense)

        The following table sets forth certain financial information for other income (expense) for each of the three fiscal years presented:

        Amounts included in other income (expense) primarily relate to interest expense on our line of credit borrowings; interest expense on our uncertain tax positions; and interest income from our cash and cash equivalents.

        The change in other income (expense) during fiscal year 2011 as compared to fiscal year 2010 was primarily due to a decline in interest expense on our line of credit borrowings. Interest expense declined as a result of the full year impact of reducing the related line of credit principal balance during the second half of fiscal year 2010 and from further reductions in the principal balance during fiscal year 2011. Also contributing to the change was the reversal of interest expense in fiscal year 2011 associated with the reversal of uncertain tax position liabilities due to the expiration of the statute of limitations. There was no similar reversal of interest expense during fiscal year 2010.

        The change in other income (expense) in fiscal year 2010 as compared to fiscal year 2009 primarily occurred because the fiscal year 2009 results included the reversal of approximately $0.4 million of

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interest expense associated with the reversal of uncertain tax position liabilities due to the expiration of the statute of limitations. There was no similar reversal of interest expense during fiscal year 2010. Also contributing to the change was an increase in interest expense in fiscal year 2010 associated with a higher outstanding line of credit principal balance throughout the fiscal year. There was no outstanding line of credit principal balance in fiscal year 2009 until the third quarter of that fiscal year.

Income Tax Benefit (Expense)

        During the third quarter of fiscal year 2011, the statute of limitations expired on approximately $0.2 million of uncertain tax position liabilities. As a result, we recorded a reduction in our income tax expense of $0.2 million. Additionally, we increased our income tax expense during fiscal year 2011 by approximately $0.1 million in connection with changes in certain estimates related to permanent tax differences between our tax expense for financial reporting purposes and the amount used for income tax purposes. No other discreet items had a material impact on our tax rate during fiscal year 2011.

        During fiscal year 2010, we performed a research and development tax credit study. The study considered fiscal years for which amended or current tax returns could be filed. We concluded that we were eligible for research and development tax credits that would result in a reduction in the income tax expense for the noted fiscal years as follows (in thousands):

        We filed amended and current tax returns during the third quarter of fiscal year 2010 for each of the fiscal years noted above and included the research and development tax credits identified in the study. As a result of the filings, we recorded a reduction in the income tax expense of $0.6 million during the third quarter of fiscal year 2010. We also estimated in fiscal year 2010 that we would utilize research and development tax credits during fiscal year 2010 of between $0.1 million and $0.2 million. Additionally, we recorded a goodwill impairment charge of $4.9 million within our Film Production segment in the fourth quarter of fiscal year 2010, and the impairment charge was a non-deductible expense for purposes of the fiscal year 2010 tax return. No other discreet items had a material impact on our tax rate during fiscal year 2010.

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        During fiscal year 2009, we recorded a goodwill impairment charge of $10.0 million within our Film Production segment. The impairment charge was a non-deductible expense for purposes of our fiscal year 2009 tax return. Additionally, the statute of limitations expired on approximately $1.6 million of uncertain tax positions in fiscal year 2009. This reversal of uncertain tax positions resulted in a $0.4 million reduction in income tax expense and a $0.4 million reversal of related interest expense during the third quarter of fiscal year 2009. No other discreet items had a material impact on our tax rate during fiscal year 2009.

        See Note 9—Income Taxes within the Notes to Consolidated Financial Statements for additional information on our income taxes.

Discontinued Operations

        The Direct-to-Consumer segment acquired certain intellectual property rights to an IPTV set-top box and other identifiable intangible assets in late fiscal year 2008 in an effort to expand the product lines that are delivered directly to consumers. Based primarily on (a) lower than expected subscriber additions for the IPTV business model during the second half of fiscal year 2009, (b) the significant downturn in economic conditions and related reduction in consumer spending during the second half of fiscal year 2009, and (c) slower than expected development of new product lines, we restructured the Direct-to-Consumer segment operations as it related to new product lines. In connection with the restructuring and an analysis of the future expected benefits from the operations, we determined that certain other identifiable intangible assets associated with the related new product lines were impaired and recorded $0.9 million in other identifiable intangible asset impairment charges in the fourth quarter of fiscal year 2009. Additionally, several contracts were cancelled prior to the end of the related term in connection with the restructuring and as a result, we also incurred an early contract termination fee of approximately $0.2 million in the fourth quarter of fiscal year 2009 which was paid in April 2009.

        During fiscal year 2010, we entered into arrangements with third-party affiliates to distribute the IPTV set-top box in Europe and the U.S. Throughout fiscal year 2010, these affiliates marketed the IPTV set-top box product through a variety of advertising programs including print, billboards and other miscellaneous media. The performance of the IPTV set-top box business in fiscal year 2010 was lower than expected and as a result, we implemented a plan to discontinue the operations of the IPTV set-top box business in the fourth quarter of fiscal year 2010. As a result, we recorded inventory obsolescence impairment charges of $0.1 million and equipment impairment charges of $0.1 million. We do not expect to incur material expenses or cash flows in the future associated with the discontinued operations.

LIQUIDITY AND CAPITAL RESOURCES

        Our current priorities for the use of our cash and cash equivalents are:

•

investments in processes intended to improve the quality and marketability of our products;



•

funding our operating and capital requirements; and



•

funding, from time to time, opportunities to enhance shareholder value, whether in the form of repurchase of shares of our common stock, cash dividends or other strategic transactions.

        We anticipate that our existing cash, cash equivalents and cash flows from operations will be sufficient during the next 12 months to satisfy our operating requirements. We also anticipate that we

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will be able to fund our estimated outlay for capital expenditures, repayment of outstanding debt and other related purchases that may occur during the next 12 months through our available cash, cash equivalents and our expected cash flows from operations during that period.

        In summary, our cash flows from continuing operations were as follows:

Cash Flows from Operating Activities of Continuing Operations

        Cash provided by operating activities of continuing operations during fiscal year 2011 as compared to fiscal year 2010 was primarily impacted by the following:

•

a decrease in cash flows from lower operating income (excluding the impact of goodwill, impairment and related charges) primarily associated with the Transactional TV segment's performance; and



•

a comparable increase in cash flows from collections of outstanding accounts receivable balances primarily associated with the Film Production segment's completion of an episodic series and a producer-for-hire arrangement. The production cash outflows for these arrangements occurred in the prior fiscal year, and the increase in cash flows from these collections was reflected within the change in the accounts receivable, film costs and deferred producer-for-hire costs accounts.

        Cash provided by operating activities of continuing operations during fiscal year 2010 as compared to fiscal year 2009 was primarily impacted by the following:

•

the decline in the operating income (excluding the impact of goodwill, impairment and related charges) primarily associated with the Transactional TV segment's performance;



•

a $3.8 million comparable decrease in cash flows from accounts receivable collections because fiscal year 2009 benefited from the collection of certain Transactional TV and Film Production segment customer balances and similar collections did not recur in fiscal year 2010;



•

a $0.5 million decrease in cash flows from the use of funds for the Film Production segment's producer-for-hire services; and



•

a $4.1 million comparable increase in cash flows related to recoupable costs and producer advances because we generated a net recovery of these funds in fiscal year 2010 whereas the prior fiscal year reflected net cash outflows.

        Cash provided by operating activities of continuing operations during fiscal year 2011 was significantly higher as compared to the operating loss incurred as a result of asset impairment and other charges. Cash from operating activities was also higher as compared to the operating loss incurred during fiscal year 2011 because we collected cash from the completion of an episodic series and from producer-for-hire services during fiscal year 2011, but the production cash outflows from these arrangements occurred in the prior fiscal year. Cash from operating activities during fiscal years

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2010 and 2009 was significantly higher as compared to the related operating income (loss) incurred primarily as a result of goodwill, asset impairment and other charges.

Cash Flows from Investing Activities of Continuing Operations

        Cash from investing activities of continuing operations during fiscal year 2011 included $5.0 million of cash used to purchase property and equipment. Approximately $1.3 million of the cash outflows relate to building improvements incurred for a new leased facility discussed in more detail below. The remaining cash outflows for property and equipment were incurred primarily to purchase storage, transponder receiver, and other broadcast and distribution equipment. The storage and other broadcast and distribution equipment was purchased to support the Transactional TV segment's international growth and expanded domestic content distribution. The transponder receiver equipment was purchased to supplement a change in the Transactional TV segment's transponder services, which is expected to stabilize or reduce domestic transponder costs in the future.

        In October 2010, we entered into an operating lease agreement to rent an approximately 48,500 square foot facility. We plan to relocate our corporate and digital broadcast facilities to the new facility, with occupancy scheduled to be completed in July 2011. During fiscal year 2011, we incurred approximately $1.3 million in cash outflows for building improvements and $0.1 million in cash outflows for equipment in connection with the planned occupancy of the new facility. We expect to incur an additional $2.0 million in investing cash outflows for building improvements and $1.2 million in investing cash outflows for equipment related to the new facility during fiscal year 2012. We also expect to receive approximately $1.7 million of operating cash inflows in fiscal year 2012 associated with a tenant improvement allowance. We are continuing to review and may modify our relocation plans in the future, and modifications to our plans could result in a material change to the expected cash outflows associated with the relocation.

        Cash from investing activities of continuing operations during fiscal year 2010 included approximately $0.1 million of cash received from net redemptions of investments, approximately $1.1 million of cash used to purchase property and equipment, and approximately $0.1 million of cash disbursements associated with purchases of intangible assets within our Direct-to-Consumer segment.

        Cash used in investing activities of continuing operations during fiscal year 2009 reflected approximately $0.8 million of cash received from net redemptions of investments. Approximately $2.3 million of cash was used to purchase property and equipment primarily for additional electronic storage equipment for our Transactional TV segment and to upgrade certain administrative hardware and software, such as our financial reporting system. We also used approximately $0.3 million to purchase intangible assets associated with our internet website operations within the Direct-to-Consumer segment.

Cash Flows from Financing Activities of Continuing Operations

        Net cash used in financing activities of continuing operations during fiscal year 2011 consisted of $0.5 million of cash used to reduce the outstanding principal of our line of credit, $0.4 million of cash used to repurchase approximately 0.2 million shares of common stock at an average purchase price of $1.57 per share, and $0.1 million in payments for long-term seller financing related to our purchase of a patent.

        Our cash flows from financing activities of continuing operations during fiscal year 2010 were primarily impacted by net payments to reduce the outstanding principal of our line of credit of

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$3.0 million. Also impacting the cash flows from financing activities was $0.1 million used to repurchase approximately 62,000 shares of common stock at an average purchase price of $1.99 per share, and $0.1 million in payments for long-term seller financing related to our purchase of a patent.

        Net cash used in financing activities of continuing operations during fiscal year 2009 included $9.1 million for the purchase of approximately 4.3 million shares of our common stock and $3.0 million in payments for cash dividends that were declared in the fourth quarter of fiscal year 2008 and paid in the first quarter of fiscal year 2009. We borrowed $4.0 million from our line of credit to support our working capital needs.

Stock Repurchase and Cash Dividends

Stock Repurchase

        In June 2008, our Board of Directors extended a share repurchase plan allowing for the repurchase of approximately 1.1 million shares of common stock through June 2010. During the six month period ended September 30, 2008, we substantially completed the share repurchase plan and repurchased approximately 1.1 million shares for a total purchase price of approximately $4.3 million. The repurchased shares were returned to authorized but unissued shares of common stock in accordance with Colorado law.

        In November 2008, we entered into a Stock Purchase Agreement pursuant to which a shareholder agreed to sell and we agreed to repurchase approximately 2.6 million shares of our common stock for a cash purchase price of $1.55 per share or an aggregate purchase price for all of the shares of approximately $4.1 million. We funded the acquisition of the shares with available cash.

        In March 2009, we repurchased through one broker in an unsolicited single block trade approximately 0.5 million shares of our common stock for a cash purchase price of $1.30 per share, or an aggregate purchase price for all of the shares of approximately $0.7 million. The acquisition was funded with available cash.

        In August 2009, our Board of Directors adopted a new stock repurchase program. Under the program, we were authorized to purchase with available cash and cash from operations up to 1.0 million shares of outstanding common stock, from time to time through open market or privately negotiated transactions, as market and business conditions permit. The program will expire in March 2012. We have repurchased approximately 0.3 million shares through this repurchase program as of March 31, 2011 for a total purchase price of approximately $0.5 million.

Cash Dividends

        As of March 31, 2008, we had a dividend payable of $3.0 million that was subsequently paid in April 2008. The Board of Directors did not declare a quarterly dividend during fiscal year 2009, 2010, or 2011, and the payment of future quarterly dividends is at the discretion of the Board of Directors. We currently have no plans to effect any further dividends; however, we will continue to evaluate available methods to enhance shareholder value, whether in the form of cash dividends or otherwise.

Borrowing Arrangements

        On December 15, 2010, our former line of credit matured and we renewed the line of credit. The line of credit is secured by certain accounts receivable assets, is scheduled to mature on December 15, 2011, and bears interest at the greater of (a) the current prime rate less 0.125 percentage points per

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annum, or (b) 5.75% per annum. The line of credit may be drawn from time to time to support our operations and short-term working capital needs, if any. A loan origination fee of 0.5% of the available line was paid upon the execution of the line of credit. The line of credit includes a maximum borrowing base equal to the lesser of 75% of certain accounts receivable assets securing the line of credit or $5.0 million, and the maximum borrowing base as of March 31, 2011 was $4.8 million. The average outstanding line of credit principal balance for the fiscal years ended March 31, 2011 and 2010 was $1.0 million and $3.3 million, respectively. The interest rate on our line of credit during each of the fiscal years ended March 31, 2011 and 2010 was 5.75%.

        The line of credit contains both conditions precedent that must be satisfied prior to any borrowing and affirmative and negative covenants customary for facilities of this type, including, without limitation, (a) a requirement to maintain a current asset to current liability ratio of at least 1.5 to 1.0, (b) a requirement to maintain a total liability to tangible net worth ratio not to exceed 1.0 to 1.0, (c) prohibitions on additional borrowing, lending, investing or fundamental corporate changes without prior consent, (d) a prohibition on declaring, without consent, any dividends, other than dividends payable in our stock, and (e) a requirement that there be no material adverse change in our current client base as it relates to our largest clients. The line of credit provides that an event of default will exist in certain circumstances, including without limitation, our failure to make payment of principal or interest on borrowed amounts when required, failure to perform certain obligations under the line of credit and related documents, defaults in certain other indebtedness, our insolvency, a change in control, any material adverse change in our financial condition and certain other events customary for facilities of this type. As of March 31, 2011, our outstanding principal balance under the line of credit was $0.5 million, and we were in compliance with the related covenants.

        Historically, we have made borrowings under the line of credit to ensure we maintained a high level of liquidity through the economic downturn and to ensure the funds were available if needed. Although we borrowed funds under the line of credit to strengthen our liquidity, we have maintained cash and cash equivalent balances and generated positive cash flows from operations that are more than sufficient to support our working capital and capital expenditure needs. We do not currently have plans to make significant strategic investments; however, we believe the availability of funds through the line of credit provides us with additional flexibility when considering strategic investments.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

Contractual Obligations

        The following table reflects our contractual cash obligations as of March 31, 2011 for each of the fiscal year time periods specified (amounts may not sum due to rounding):

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(1)

Incorporated by reference to the corresponding exhibit included in the Company's Current Report on Form 8-K filed on May 9, 2007 (File No. 000-23697).

(2)

Incorporated by reference to the corresponding exhibit included in the Company's Quarterly Report filed on Form 10-Q for the quarter ended December 31, 2010 (File No. 000-23697).

(3)

Incorporated by reference to the corresponding exhibit included in the Company's Registration Statement on Form SB-2 filed on September 10, 1997 (File No. 333-35337).

(4)

Incorporated by reference to the corresponding exhibit included in the Company's Current Report on Form 8-K filed on August 1, 2008 (File No. 000-23697).

(5)

Incorporated by reference to the corresponding exhibit included in the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1999 (File No. 000-23697).

(6)

Incorporated by reference to the corresponding exhibit included in the Company's Annual Report filed on Form 10-K for the fiscal year ended March 31, 2004 (File No. 000-23697).

(7)

Incorporated by reference to the corresponding exhibit included in the Company's Quarterly Report filed on Form 10-Q for the quarter ended September 30, 2006 (File No. 000-23697).

(8)

Incorporated by reference to Exhibit A to the Company's definitive proxy statement filed under cover of Schedule 14A on August 7, 1998 (File No. 000-23697).

(9)

Incorporated by reference to Exhibit C to the Company's definitive proxy statement filed under cover of Schedule 14A on September 28, 1999 (File No. 000-23697).

(10)

Incorporated by reference to Exhibit B to the Company's definitive proxy statement filed under cover of Schedule 14A on August 29, 2000 (File No. 000-23697).

(11)

Incorporated by reference to Exhibit A to the Company's definitive proxy statement filed under cover of Schedule 14A on July 23, 2001 (File No. 000-23697).

(12)

Incorporated by reference to Appendix A to the Company's definitive proxy statement filed under cover of Schedule 14A on July 16, 2007 (File No. 000-23697).

(13)

Incorporated by reference to the corresponding exhibit included in the Company's Quarterly Report filed on Form 10-Q for the quarter ended September 30, 2008 (File No. 000-23697).

(14)

Incorporated by reference to the corresponding exhibit included in the Company's Annual Report filed on Form 10-K for the fiscal year ended March 31, 2009 (File No. 000-23697).

(15)

Incorporated by reference to the corresponding exhibit included in the Company's Quarterly Report filed on Form 10-Q for the quarter ended September 30, 2009 (File No. 000-23697).

(16)

Incorporated by reference to the corresponding exhibit included in the Company's Amended Quarterly Report filed on Form 10-Q/A for the quarter ended June 30, 2010 (File No. 000-23697).

(17)

Incorporated by reference to Appendix B to the Company's definitive proxy statement filed under cover of Schedule 14A on July 16, 2010 (File No. 000-23697).

(18)

Incorporated by reference to the corresponding exhibit included in the Company's Quarterly Report filed on Form 10-Q for the quarter ended June 30, 2010 (File No. 000-23697).

(19)

Incorporated by reference to the corresponding exhibit included in the Company's Amended Annual Report filed on Form 10-K/A for the fiscal year ended March 31, 2010 (File No. 000-23697).

(20)

Incorporated by reference to the corresponding exhibit included in the Company's Amended Current Report on Form 8-K/A filed on December 10, 2010 (File No. 000-23697).

(21)

Incorporated by reference to the corresponding exhibit included in the Company's Current Report on Form 8-K filed on September 3, 2010 (File No. 000-23697).

(22)

Incorporated by reference to the corresponding exhibit included in the Company's Quarterly Report filed on Form 10-Q for the quarter ended December 31, 2009 (File No. 000-23697).

*

Denotes management contract or compensatory plan or arrangement.

#

Confidential portions of this agreement have been redacted pursuant to a confidential treatment request filed separately with the SEC.