10-K

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Year Ended March 31, 2006

Commission File Number: 0-23697

NEW FRONTIER MEDIA, INC.

(Exact name of registrant as specified in its charter)

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

7007 Winchester Circle, Suite 200, Boulder, CO 80301
(Address of principal executive offices and Zip Code)

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

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

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

Indicate by check mark 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 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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer   o      Accelerated filer   ý      Non-Accelerated filer   o

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, 2005 was approximately $136,087,000. On such date, the closing price of the Registrant’s common stock, as quoted on the NASDAQ National Market, was $6.02.

The Registrant had 23,835,111 shares of its common. stock outstanding on June 6, 2006.

Documents Incorporated by Reference

The information required in response to Part III of Form 10-K is hereby incorporated by reference from the Registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission with respect to the Registrant’s Annual Meeting of Stockholders to be held August 15, 2006.

Form 10-K
Form 10-K for the Fiscal Year ended March 31, 2006
Table of Contents

		Page
PART I.
Item 1.	Business		3
Item 1A.	Risk Factors		19
Item 1B.	Unresolved Staff Comments		24
Item 2.	Properties		24
Item 3.	Legal Proceedings		24
Item 4.	Submission of Matters to a Vote of Security Holders		24
PART II.
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		24
Item 6.	Selected Financial Data		25
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		48
Item 8.	Financial Statements and Supplementary Data		48
Item 9.	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure		48
Item 9a.	Controls and Procedures		48
Item 9b.	Other Information		51
PART III.
Item 10.	Directors and Executive Officers of the Registrant		51
Item 11.	Executive Compensation		51
Item 12.	Security Ownership of Certain Beneficial Owners and Management		52
Item 13.	Certain Relationships and Related Transactions		52
Item 14.	Principal Accountant Fees and Services		52
PART IV.
Item 15.	Exhibits and Financial Statement Schedules		52
SIGNATURES			55
Table of Contents to Financial Statements			F-1

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PART I.

ITEM 1. BUSINESS.

Cautionary Statement Pursuant To Safe Harbor Provisions Of The Private Securities Litigation Reform Act Of 1995

      THIS ANNUAL REPORT ON FORM 10-K AND THE INFORMATION INCORPORATED BY REFERENCE INCLUDES FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THE COMPANY INTENDS FOR THE FORWARD-LOOKING STATEMENTS TO BE COVERED BY THE SAFE HARBOR PROVISIONS FOR FORWARD-LOOKING STATEMENTS. ALL STATEMENTS REGARDING THE COMPANY’S EXPECTED FINANCIAL POSITION AND OPERATING RESULTS, ITS BUSINESS STRATEGY, ITS FINANCING PLANS AND THE OUTCOME OF ANY CONTINGENCIES ARE FORWARD-LOOKING STATEMENTS. THE WORDS “BELIEVE”, “EXPECT”, “ANTICIPATE”, “OPTIMISTIC”, “INTEND”, “WILL”, AND SIMILAR EXPRESSIONS ALSO IDENTIFY FORWARD-LOOKING STATEMENTS. THE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH OR IMPLIED BY ANY FORWARD LOOKING STATEMENTS. SOME OF THESE RISKS ARE DETAILED IN PART I, ITEM 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. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS, OR OTHERWISE.

General

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

      On October 27, 1999, New Frontier Media completed an acquisition of three related Internet companies: Interactive Gallery, Inc. (“IGallery”), Interactive Telecom Network, Inc. (“ITN”) and Card Transactions, Inc. (“CTI”). ITN and CTI are currently inactive subsidiaries. IGallery was liquidated into New Frontier Media, Inc. during the fiscal year ended March 31, 2005, and now operates as a division of this Company.

      On February 10, 2006, New Frontier Media completed an acquisition of MRG Entertainment, Inc., its subsidiaries and a related company, Lifestyles Entertainment, Inc. (collectively “MRG”).

      New Frontier Media is organized into three reportable segments:

• Pay TV Group — distributes branded adult entertainment programming via Pay-Per-View (“PPV”) networks and Video-on-Demand (“VOD”) content through electronic distribution platforms including cable television, DBS, hotels and C-Band.

• Internet Group — aggregates and resells adult content via the Internet and wireless devices. The Internet Group sells content to monthly subscribers through its broadband web site, www.TEN.com, partners with third-party gatekeepers for the distribution of www.TEN.com,

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wholesales prepackaged content to various web masters and provides content to wireless carriers both internationally and domestically.

• Film Production Group — derives revenue from three principal businesses: the production and distribution of original motion pictures, series and events (“owned product”); the licensing of domestic third party films in international markets where it acts as a sales agent for the product (“repped product”); and the contract production of one motion picture per year for a third party distributor.

      Information concerning revenue and profit attributable to each of the Company’s business segments is found in Part II, Item 7, “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” and in Part IV, Item 15 of “NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,” of this Form 10-K, which information is incorporated by reference into this Part I, Item 1.

PAY TV GROUP
Industry Overview

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

      Conditional access technology enables cable television operators or satellite providers to sell content as PPV (i.e., individual movie), a timed block of programming, or as an event for a set fee. In addition, it also permits cable television operators or satellite providers to sell the Pay TV Group’s programming on a monthly, quarterly, semiannual and annual basis. PPV and VOD programming competes well with other forms of entertainment because of its relatively low price point. Kagan Research, LLC (“Kagan”), a leader in media research, estimates that adult PPV and VOD revenue generated by cable systems and DBS providers in 2004 was $761 million (most recent data available). As the number of cable operators which offer adult content increases and distributors continue to expand their offerings, Kagan projects revenues from the adult category will grow to $1.4 billion by the year 2014.

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

      The Pay TV Group provides programming on both a PPV and subscription basis to home satellite dish viewers through large backyard satellite dishes receiving a low-power analog or digital signal (C-Band). According to General Instrument Corporation’s (“GI”) Access Control Center reports, the U.S. C-Band market has declined 47% year-over-year, from 232,746 households as of April 2005 to 124,120 as of April 2006.

      The Pay TV Group also provides PPV and subscription programming to small dish viewers receiving a high-power digital signal (via DBS providers such as EchoStar Communications Corporation’s DISH Network). As of March 31, 2006, EchoStar Communications Corporation (“DISH”) and DIRECTV Group, Inc. (“Direct TV”) had 12.04 million and 15.13 million subscribers, respectively, according to public filings made by each company. Kagan estimates that the number of DBS subscribers will grow to 35.4 million by the year 2015.

      In addition, the Pay TV Group provides its programming on a PPV, subscription and VOD basis through large multiple system operators (“MSOs”) and their affiliated cable systems, as well as independent, privately-held cable systems. As of April 2006, the Pay TV Group maintained

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distribution arrangements with nine of the ten largest domestic cable MSOs that control access to 55.0 million, or 76%, of the total basic cable household market. According to the National Cable and Telecommunications Association (“NCTA”), Cable MSOs delivered service to 65.4 million basic households in the United States as of December 2005 (the most recent statistics available). In addition, Kagan indicates that as of December 2005, total analog and digital addressable cable service (i.e., basic cable households that have the capability of receiving PPV or subscription services) was provided to 35.8 million households.

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

      According to the NCTA, as of December 31, 2005 over 44% of U.S. Cable customers, or approximately 28.5 million households, received digital cable service. This represents an increase of 14% over the number of digital subscribers receiving service at the end of 2004 (25.0 million). Kagan estimates that the number of digital cable subscribers will grow to 49.7 million by the year 2015, which will represent a 76% digital penetration rate.

      Cable operators are also using their upgraded plants to provide their digital customers with VOD services (due to technology constraints, DBS providers are not currently able to provide VOD service to their customers; however, DBS providers are expect to launch new technologies that will facilitate VOD in the future). VOD is a more advanced form of pay-per-view service which provides a digital video subscriber with the ability to watch movies, TV shows, infomercials, and other content on demand with full VCR functionality, in contrast to watching programs at preset times. The Pay TV Group currently provides programming to over 20.0 million VOD enabled households.

Description of Networks

      The Pay TV Group provides seven, 24-hour per day adult programming networks: Pleasure, TEN, TEN*Clips, TEN*Blue, TEN*Blox, TEN*Xtsy, and TEN*Max. The following table outlines the current distribution environment for each service as of March 31:

TABLE 1
Summary of Networks

		ESTIMATED NETWORK HOUSEHOLDS(2) (in thousands)
NETWORK	DISTRIBUTION METHOD	As of March 31, 2006		As of March 31, 2005		As of March 31, 2004
Pleasure	Cable		7,800		8,400		7,800
TEN	Cable/DBS		20,400		16,600		15,200
TEN*Clips	Cable/DBS		19,300		16,900		13,700
Video-on-Demand	Cable		20,900		18,300		10,500
TEN*Xtsy(1)	C-band/Cable/DBS		12,700		11,600		10,000
TEN*Max(1)	C-band/Cable		200		233		470
TEN*Blue	Cable		3,900		2,900		2,500
TEN*Blox	Cable		7,800		5,200		2,800
Total Network Households			93,000		80,133		62,970

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(1) TEN*Xtsy and TEN*Max addressable household numbers include 0.4 million, 0.2 million, and 0.1 million C-Band addressable households for the years ended March 31, 2004, 2005, and 2006, respectively.

(2) The above table reflects network household distribution. A household will be counted more than once if the home has access to more than one of the Pay TV Group’s services, since each service represents an incremental revenue stream. The Pay TV Group estimates its unique household distribution as of March 31, 2006, March 31, 2005 and March 31, 2004 to be 23.6 million, 23.1 million and 14.1 million cable homes, respectively, and 12.2 million, 11.0 million and 9.4 million DBS homes, respectively.

TEN* Family of Networks — Programming Strategy

      The TEN* family of networks is designed to be offered together as one cohesive programming package. The counter-programming strategy employed between each of the seven PPV networks and VOD service is designed to provide the widest variety of content to the consumer while at the same time supporting an efficient use of TEN’s vast content library. Premiere titles are programmed on VOD first and then are made available through the PPV networks. Because TEN does not duplicate titles across its PPV channels or between PPV and VOD in a single month, TEN is able to give its consumers access to more unique titles, a wider variety of talent, and a greater variety of studio representation than any of its competitors. TEN focuses on prime time viewing blocks and programs specific types of content in those blocks to create an appointment-viewing calendar with the intent of driving viewers to traditionally less popular nights of the week for viewing adult content. All networks are counter-programmed to one another, creating an even greater level of variety for the consumer with multiple channels. Ultimately, this strategy is responsible for the fact that TEN has 2.6 services per unique addressable home. Following are individual descriptions of each network.

Pleasure

      Pleasure, a 24-hour per day adult network, incorporates the most edited standard available in the category. Pleasure is distributed via cable television operators. Pleasure’s programming consists of adult feature-length film and video productions and is programmed to deliver subscription and PPV households up to 21 monthly premiere adult movies with a total of up to 110 adult movies per month. Pleasure is distributed via Cable system operators on either a pay-per-view or pay-per-block basis at prices ranging from $5.95 to $11.95.

TEN

      TEN, a 24-hour per day adult network, incorporates a partial editing standard targeted to cable television system operators and DBS providers. The Pay TV Group has programmed TEN with feature-length film and video productions that incorporate less editing than traditional cable adult premium networks. TEN is distributed via Cable system operators and DBS providers on either a pay-per-view or pay-per-block basis at retail prices ranging from $7.95 to $11.95 and on a monthly subscription basis for $24.95. TEN offers a diverse programming mix with movies and specials that appeal to a wide variety of tastes and interests. TEN offers subscription and PPV households up to 21 monthly premiere adult movies and up to 110 total adult movies per month. TEN was developed to capitalize on the number of cable operators/DBS providers now willing to carry partially edited adult network services and the momentum toward broader market acceptance of partially edited adult programming by their subscribers.

TEN*Clips

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

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

TEN*Blue

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

TEN*Blox

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

TEN*On Demand (Video-On-Demand)

      TEN*On Demand is the brand under which the Pay TV Group delivers its VOD service. This service is available to Cable operators in each of the Pay TV Group’s three editing standards. TEN provides a standard content package of 40 titles in addition to several 5-title add-on packages of specialized content. Content is refreshed on a monthly basis and provides for a 30-day early release window to the PPV services. Accordingly, there is no duplication of content between the PPV networks and the VOD content in any one month. Most Cable MSO’s are currently accepting 50 to 100 hours of TEN*On Demand content. TEN*On Demand is distributed via Cable operators on a per-movie basis at retail prices ranging from $7.95 to $11.95.

      In addition, the Pay TV Group provides its TEN*On Demand service to On Command Corporation (“On Command”), the leading provider of in-room interactive entertainment for the hotel industry and its guests, as well as to the Hospitality Network, a secondary provider of in-room interactive entertainment for the hotel industry primarily focused on the Las Vegas and Atlantic City Markets.

TEN*Xtsy

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

      TEN*Xtsy had 23,580, 11,727 and 7,520 active C-Band subscriptions as of March 31, 2004, 2005 and 2006, respectively. C-Band retail prices range from $24.99 to $49.99 for monthly and quarterly subscriptions.

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TEN*Max

      TEN*Max incorporates the same editing standard as TEN*Xtsy and is programmed to compliment this network by utilizing thematically organized clips (similar to the TEN*Clips format) from TEN*Xtsy’s premieres, network specials and compilations. TEN*Max is distributed via C-band DTH and Cable operators. C-band retail prices range from $24.99 to $49.99 for monthly and quarterly subscriptions. TEN*Max had 22,923, 11,442 and 7,315 active C-Band subscriptions as of March 31, 2004, 2005, and 2006, respectively.

Satellite Transmission

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

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

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

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

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

Transponder and VOD Transport Agreements

      New Frontier Media maintains satellite transponder lease agreements for two full-time analog transponders with Intelsat USA Sales Corporation (“Intelsat”) on its Intelsat Americas 6 satellite and 20.5 MHz of total bandwidth allocation on a digital transponder on its Intelsat Americas 13 satellite. These transponders provide the satellite transmission necessary to broadcast each of the Pay TV Group’s seven adult networks.

      The Pay TV Group has an agreement with iN DEMAND L.L.C. (“In Demand”) for carriage of its Pleasure network. As a result of the contract, Pleasure is available to cable operators representing approximately 4.6 million digital households across the country. In Demand carries Pleasure on Intelsat Americas 7, transponder 4. In Demand also provides transport for the Pay TV Group’s VOD content to certain Cable MSOs.

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

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      The Pay TV Group also offers its VOD service to cable MSOs via its transport agreement with TVN Entertainment (“TVN”). TVN is one of the largest, privately held digital content aggregation, management, distribution, and service companies in the country. TVN offers single-source management and distribution solutions for VOD, including content aggregation, packaging, encoding, and transport via satellite to all video service providers. As of March 31, 2006, the Pay TV Group reached approximately 5.8 million VOD households through its distribution agreement with TVN.

      In March 2005, the Pay TV Group began offering its VOD service to cable MSOs via Comcast Media Center (“CMC”). CMC is a business unit of Comcast Cable, which is a division of Comcast Corporation (“Comcast”). CMC encodes and delivers content to headends currently serving Comcast’s VOD-enabled cable systems. The CMC VOD platform helps to optimize resources at the local level by providing operators the ability to centrally manage the delivery and quality control of on-demand content. CMC’s unique VOD platform provides superior delivery speed to customers’ homes, is able to encrypt content at the national level, saving cable operators time and money at the local level, and provides encoding, metadata creation and storage. As of March 31, 2006, the Pay TV Group reached approximately 7.6 million VOD households through its distribution agreement with CMC.

Digital Broadcast Center

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

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

      The Pay TV Group has worked with its uplinking vendor, WilTel Communications, LLC (“WilTel”) to secure a license to allow an 18Ghz microwave transmission in order to provide a fully redundant path from the broadcast center to its uplink facility.

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

Network Programming

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

      The Pay TV Group now has its own office in California. This office ensures that all legal documentation is obtained for each title licensed (i.e., cast lists, talent releases and two photo identifications for each cast member), screens the content to ensure the commercial and broadcast viability of the title, and, once the title is deemed acceptable, ships the title, related documentation and promotional content to Boulder. The Pay TV Group’s in-house programming and editing departments in Boulder, Colorado conduct preliminary screening of potentially licensable content, licenses acceptable content, conforms content into appropriate editing standards (i.e., partially edited, least edited and most edited) and programs the monthly schedules for all networks and VOD services.

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      The Pay TV Group acquires 100% of its feature-length broadcast programming for each network by licensing the exclusive and non-exclusive domestic rights from over forty-five third party studios and independent producers within the industry for generally a five-year term. The Pay TV Group does not produce any of its own adult-feature content for its networks.

      The Pay TV Group acquires new premiere titles each month. In addition, the Pay TV Group may license library content on an as needed basis. Library content are titles that have generally been produced within the last three years but have never been broadcast on a cable television or DBS platform. Once the Pay TV Group licenses a title, it will undergo several rigorous quality control processes prior to playing to air to ensure compliance with the strict broadcasting standards the Pay TV Group uses for its adult content. The Pay TV Group obtains age verification documentation for each title it licenses, including two forms of photo identification for each cast member in the film. This documentation is maintained on site for the duration of the license term in accordance with 18 U.S.C. 2257.

Call Center Service

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

      The Pay TV Group’s call center is operational 17-hours per day, seven days a week, and is staffed according to call traffic patterns, which take into account time of day, day of the week, seasonal variances, holidays, and special promotions. Customers pay for their order with credit cards and electronic checks, which are authorized and charged before the order is sent electronically to GI’s Access Control Center in San Diego, California for processing. GI receives the subscriber order and the subscriber’s identification information, and sends a signal to the appropriate satellite, which “unlocks” the service ordered for the applicable period of time.

Marketing

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

      The Pay TV Group’s sales team attends at least three major industry trade shows per year, including the National Cable Television Association (NCTA) show, DISH Summit, and the Cable Television Advertising and Marketing (CTAM) Summit, along with various local trade shows.

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

      The Pay TV Group brands its services to the consumer under the TEN* name and logo. The Pay TV Group seeks out low cost, high impact ways to reach its consumer audience and build brand recognition.

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Competition

      The Pay TV Group principally competes with Playboy in the subscription, PPV and VOD markets. Playboy has a longer operating history and broader name recognition than the Pay TV Group. Playboy’s size and market position makes it a more formidable competitor than if it did not have the resources and name recognition that it has. The Pay TV Group competes directly with Playboy with respect to the editing standards of its programming, network performance in terms of subscriber buy rates, and the license fees that the Pay TV Group offers to Cable operators and DBS providers. However, the Pay TV Group cannot and does not compete with Playboy in the amount of money spent on programming and promoting its products.

      Other competitors such as Hustler and Playgirl have recently entered the VOD market. While there can be no assurance that the Pay TV Group will be able to maintain its current distribution and fee structures in the face of competition from Playboy or any other content provider, the Pay TV Group believes that the quality and variety of its programming, and its ability to generate higher buy rates for its programming, are the critical factors which have influenced Cable operators and DBS providers to choose the Pay TV Group’s programming over its competition.

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

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

INTERNET GROUP
Industry Overview

      According to Pew Internet & American Life (“Pew”), a non-profit entity whose initiative is the timely information on the Internet’s growth and societal impact, 73% of American adults are Internet users (about 147 million), and 42% or 84 million American adults have high-speed connections in the home. According to NCTA, the U.S. cable industry served approximately 25.4 million high-speed Internet customers as of December 2005, up from 21 million high-speed Internet customers as of December 2004, an increase of 21% year-over-year. Additionally, comScore Networks, a global information provider and consultant, found that 694 million people fifteen years old and older used the Internet worldwide in March 2006, representing 14% of the world’s total population within this age group. Asian countries, including China, Japan, India and Korea, represented 25% of the total worldwide online population (or 168.1 million users).

      In anticipation of the continued increase in broadband users, during the fiscal year ended March 31, 2004 the Internet Group shifted its focus from the dial-up web surfer to creating an award-winning website targeted specifically to the broadband consumer. This site, TEN.com, features over 2,000 hours of video content, over 25,000 photos, live chat, and voyeur cams.

      TEN.com is offered to consumers on a monthly subscription basis for $29.95 or a three-month subscription for $74.95. Traffic to TEN.com is derived from advertising on the Pay TV Group’s networks. In addition, a targeted network of affiliated adult webmasters directs traffic to TEN.com and is compensated only if the traffic converts into a paying member to TEN.com. Monthly subscription revenue declined during the fiscal year ended March 31, 2006, as the Internet Group was not attracting enough new traffic to TEN.com to offset the churn of its recurring membership base.

      The Internet Group also sells TEN.com through revenue sharing partnerships with third-party gatekeepers. The Internet Group executed its first such revenue sharing agreement with On Command during the fiscal year ended March 31, 2003. Under the terms of the agreement, the Internet Group is the exclusive provider of adult content for On Command’s TV Internet Service. The Internet Group is providing a customized version of its TEN.com broadband product for delivery through On Command’s TV Internet Service in its hotel rooms nationwide.

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      During the 2006 fiscal year, the Internet Group began to focus on the development of a wireless product for distribution both domestically and internationally. An October 2005 report by the Yankee Group, a research and consulting firm, forecasts that the mobile adult content market in the U.S. could reach $0.8 billion by 2009. This estimate assumes that adult content providers can use the carriers’ billing systems easily and that consumers can easily sign up for and use these services. A report by Strategy Analytics, an independent global research and consulting firm, forecasts that the mobile adult services market is set to reach $5 billion worldwide by 2010.

      Growth in the U.S. market will initially be limited because wireless operators are reluctant to offer explicit content for fear of regulatory or consumer backlash. An October 2005 report by Gartner, the largest information technology research and advisory company, states that U.S. carriers are only offering PG-rated content. The report further states that the Cellular Telecommunications & Internet Association (“CTIA”) is currently working on a content-rating system. The two biggest issues which must be solved for U.S. carriers to be comfortable offering more explicit content on the handset are how to prevent minors from viewing adult content and what content should be restricted. The solutions will most likely require an opt-in measure so that adults can verify they are over 18 years old. The Internet Group is currently working with CTIA to develop age verification standards, and it believes that its long history and experience in compliance will be an asset in the wireless market. Wireless customers in the U.S. will still be able to access this content by browsing wireless Internet sites, such as the one that the Internet Group has developed. According to the CTIA the number of U.S. wireless subscribers as of December 2005 has increased 14% since 2004 to approximately 208 million, and worldwide subscribers have topped 2 billion.

      According to the October 2005 Gartner report, the cultural acceptance of adult content is higher in Europe. For example, SFR in France reports that 56% of the searches on its portal are for adult content while the figure is 37% for Vodafone UK. In Asia, however, only a handful of operators distribute adult content as part of their mobile content offering. Countries like Malaysia, Indonesia, and Singapore do not offer adult content, but they also do not prevent their subscribers from accessing sites by manually keying in the URL or via search engines.

      The market for mobile content is continuously evolving. The Internet Group believes that the “always on” capability of the phone will drive the market for mobile content. In addition, improvements in user interfaces to make it easier to get content, making it more intuitive and more like that of the Internet, making it simpler to purchase content with less button-clicks, and the capability to purchase from a variety of vendors will increase the revenue for this market. Further, the continued rollout of third-generation (“3G”) mobile phones will also drive the market for video mobile content.

      The Internet Group currently has agreements with third-party aggregators such as Mobix Interactive, Mobile BV, and Fone Starz to distribute its content on a revenue sharing basis to their distribution partners such as Orange, O2, and Vodaphone. Currently, the Internet Group’s content is available to 258 million mobile phone users, including 17 million in the U.S. Revenue from the Internet Group’s mobile products is minimal at this time due its limited content offering.

      During the 2006 fiscal year, the Internet Group was successful in implementing its own wireless platform through which it can distribute its own content or the content of other providers. This wireless platform will enable the Internet Group to bypass the third party aggregators and go directly to the wireless carriers for distribution of its wireless product. By going directly to the wireless carriers the Internet Group expects to increase the amount of the revenue that it is retaining, be more in control of the distribution of its product, obtain better placement of its product on the carrier deck, and obtain more timely reporting of the performance of its products.

      The Internet Group currently faces the following challenges in providing its content to the mobile industry:

• U.S. carriers’ hesitancy to launch adult content

• Lack of age verification technology in the U.S.

• Poor user interfaces resulting in poor consumer experience

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• A lack of appropriately edited content for this space (most content requested by mobile carriers has a less explicit editing standard than the Pay TV Group’s Pleasure network)

• Lack of timely and effective data on consumer buying habits

• Lag time in revenue collection (most companies remit on a quarterly basis)

• Multiple markets impedes scalability

• Content localization issues

• Difficulty in viewing the Internet Group’s content and that of its competitors given the multiple carriers in multiple locations

• Multiple, branded competitors worldwide with very few barriers to entry

      However, the Internet Group continues to believe that this market can, and will be, profitable within 18 - 24 months given the following opportunities:

• The size of the U.S. adult mobile market is expected to be $0.8 billion by 2009 and $5 billion worldwide by 2010

• The U.S. wireless market is very similar to the Pay TV Group’s business where the industry will be controlled by a small number of large companies who want to participate in adult revenue by partnering with a trusted provider

• Carriers will need a way to achieve a return on their investment into 3G network upgrades

• The Internet Group has already developed a wireless platform, which will allow it to partner directly with the wireless carriers and by pass third-party aggregators. In addition, for a share of the revenue, the Internet Group can allow other content providers to distribute content via its platform.

• Our expectation of limited competition in the U.S. market

• Existing customer base of 120 million television households of the Pay TV Group to aggressively market the Internet Group’s WAP site, SMS campaigns, and other adult mobile content products

• Ability to create unique and compelling content for wireless products

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

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

      The Internet Group generates traffic to its web sites through two primary sources. The first, “type-in” traffic, is generated when a consumer types the name of the Internet Group’s web site into their browser address bar. There is no cost to the Internet Group when traffic comes to its web site in this manner. Currently, the Internet Group actively markets its TEN.com web site on the Pay TV Group’s networks in order to drive type-in traffic to its site. Approximately 65% of the Internet Group’s traffic is currently generated from advertising on the Pay TV Group’s networks or through type-in traffic.

      The second way in which the Internet Group generates traffic is through its affiliate marketing programs utilizing banner ads, hypertext, or graphic links. The marketing programs compensate an affiliated webmaster for a referred visitor if the visitor becomes a member to TEN.com. The affiliated webmaster programs currently pay out an amount equal to 40 - 67% of the first month’s membership revenue for a new member. The Internet Group then keeps 100% of the revenue from each recurring monthly membership. During the past few years, the Internet Group has decreased its reliance on affiliated webmaster programs as a way to generate traffic to its sites.

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Business to Business: Content

      The Internet and Pay TV Groups have licensed thousands of hours of adult video content and over 500,000 still images from various adult studios, all of which have been organized thematically and, if necessary, digitized for Internet distribution. The Internet Group, in addition to using this content within its own web site, sublicenses this content to webmasters through its business-to-business programs on a monthly flat-rate or bandwidth usage basis.

Marketing

      The Internet Group currently generates approximately 65% of its traffic to TEN.com from advertising its site on the Pay TV Group’s networks and through type-in traffic.

      The Internet Group has a small group of affiliated webmasters that send traffic to TEN.com and are compensated if the traffic converts into a paying member. The affiliate webmaster programs currently pay out an amount equal to 40 - 67% of the first month’s membership revenue for a new member ($29.95). The Internet Group then keeps 100% of the revenue from each recurring monthly membership.

Data Center

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

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

E-Commerce Billing

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

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

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

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

Competition

      The adult Internet industry is highly competitive and highly fragmented given the relatively low barriers to entry. The leading adult Internet companies are constantly vying for more members while also seeking to hold down member acquisition costs paid to webmasters.

      The Internet Group believes that the primary competitive factors in the adult Internet industry include the quality of content, technology, pricing, and sales and marketing efforts. Although the Internet Group no longer actively competes for traffic with its primary Internet competitors, the

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Group believes that it has a distinct competitive advantage in forming third-party gatekeeper arrangements for the distribution of TEN.com since it already has many of the same relationships through the Pay TV Group’s contracts.

FILM PRODUCTION GROUP

      The Film Production Group is a multi-faceted film production and distribution company, which was acquired by New Frontier Media in February 2006. The Company acquired the Film Production Group to expand its portfolio to the rapidly growing market for less explicit, erotic content, as well as to the market for erotic, event-type content. This acquisition also provides established relationships in international markets and provides access to a library of content that can be monetized through the Company’s current distribution networks.

      The Film Production Group derives revenue from three principal businesses: the production and distribution of original motion pictures known as “erotic thrillers” and event-styled erotic content (i.e., “owned product”); the licensing of domestic third party films in international markets where it acts as a sales agent for the product (“repped product”); and the contract production of one motion picture per year for a third party distributor.

Owned Product

      The Film Production Group creates and produces soft, erotic thriller movies and original erotic series that are distributed in the U.S. on premium movie services, such as Cinemax and Showtime Networks, Inc. (“Showtime”), as well as internationally on similar services. The Film Production Group also develops and produces original, event or reality styled programming for sale on pay-per-view channels through cable and satellite TV systems across the United States primarily through its relationships with In Demand, DISH, and Direct TV.

      The Film Production Group produces 40 - 50 hours of new content per year with an annual production budget of approximately $2.1 million. The Film Production Group uses outside production companies to shoot the content while providing in-house oversight of all critical areas such as scripting, casting, shoot location, and post production. The Film Production Group’s library is made up of 350 hours of primarily erotic content, including such titles as “Lady Chatterley’s Stories”, “Sex Spa”, and “Sex Games Vegas”. In addition, their adult reality event franchises include “Porn Star Blind Date”, “Swingers Party”, and “Sex Factor”.

      Historically, the Film Production Group has been responsible for 25% of the total annual erotic content purchases made by Cinemax as well as one, thirteen episode erotic series and 50% or more of the total annual erotic content purchased by Showtime. Features are licensed for a one-time fee ranging from $15,000 - $65,000 per movie or episode. These movies are used by Showtime and Cinemax as part of their late-night programming and within their subscription video-on-demand product.

      In addition, the Film Production Group licenses 2 erotic feature movies and 2 events per month primarily to In Demand for distribution to cable MSOs and to Direct TV for distribution on its platform. The Film Production Group has just recently begun a relationship with DISH for distribution of both its event and erotic thriller content. The Film Production Group also has relationships with companies such as TVN, BskyB, and Rogers Cable in Canada for distribution of its erotic thriller content each month.

      The Film Production Group licenses its movies to In Demand, Direct TV, and DISH on a revenue share basis with license fees that are greater than those earned by the Pay TV segment due to the more mainstream nature of its content. These movies appear on an unbranded, linear channel within the mainstream or adult PPV movie neighborhood of the platform’s electronic programming guide. These movies or events are sold on a pay-per-movie basis with retail prices ranging from $3.99 to $14.95. Revenue is impacted by the number of plays that each distributor programs on a monthly basis. Generally, the content will play 50 - 150 times per 60-day period on each platform.

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      The Film Production Group also licenses its original content to international premium TV services primarily in Europe and other countries. International content rights are licensed for a period of time on a flat-fee basis.

Sales Agency (“Repped Title”) Business

      The Film Production Group establishes relationships with high-quality, independent mainstream filmmakers to license the international rights to their movies under its Lightning Entertainment label. Today, the Lightning portfolio consists of over 40 titles. In addition, the Film Production Group has 50 third party titles that it represents under its Mainline Releasing label. Most recently, the Film Production Group acquired the international distribution rights for “Junebug”, winner of a Special Jury Prize at the 2005 Sundance Film Festival, “Walmart: The High Cost of Low Prices”, and “Conversations with God”.

      The Film Production Group earns a commission of 15% - 25% for licensing the international rights on behalf of these producers. In addition, the Film Production Group earns a marketing fee for most titles that it represents. Each contract allows for the recoupment of costs incurred by the Film Production Group in preparing the title for market, including advertising costs, screening costs, costs to prepare the trailer, box art, and screening material, and any costs necessary to ensure the movie is market ready.

      Additionally, the Film Production Group may obtain the domestic video rights for certain titles for which it will earn higher commissions than it does for the international licensing rights. The Film Production Group has a distribution agreement with Lionsgate Home Entertainment, Universal Music Group (“Universal”) and New Line Cinema to use these titles for direct-to-video release. On average, the Film Production Group will license 9 - 12 titles annually to these customers. Based on the distribution agreements with these customers, the Film Production Group will earn its commission on any revenues remaining after Lionsgate, Universal and New Line Cinema have recouped their commission, marketing fee, and any hard costs incurred in preparing the content for market.

Other

      The Film Production Group works as a contract film producer to one major Hollywood studio each year. Most often the production involves the sequels to successful releases such as “Single White Female” where the Film Production Group produced “Single White Female 2.” The production generally results in the delivery of the film in the third or fourth quarter of the fiscal year.

Competition

      For its owned content, the Film Production Group primarily competes with a few small, privately owned companies. With respect to its international sales agency business, the Film Production Group competes with approximately 30, privately owned companies. The Film Production Group competes with these companies based on licensing fees charged, content quality, ability to deliver its product on time, relationships with decision makers in the industry, and professionalism of its sales team.

Marketing

      The Film Production Group has a sales team of three individuals. The sales and executive teams attend the Cannes Film Festival, MIP TV, MIPCOM, DISCOP, and the American Film Market each year during which they market the Film Production Group’s owned content, as well as its catalog of titles under the Mainline Releasing and Lightning Entertainment labels. In addition, the sales and acquisition teams attend the Toronto and Cannes Film Festivals each year in order to form new agency relationships for content to license internationally. The Film Production Group expects to have a large presence at each of these shows and film festivals, where they will host a booth and provide for the screening and marketing of its movies.

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Seasonality

      The Company’s business is generally not seasonal in nature.

Customer Concentration

      New Frontier Media derived 35%, 14%, and 12% of its total revenue for the year ended March 31, 2006 from DISH, Time Warner Cable and Comcast Corporation, respectively, through its Pay TV Group. The loss of any of these major customers could have a material adverse effect on the Pay TV segment and upon the Company as a whole.

Employees

      As of the date of this report, New Frontier Media and its subsidiaries had 143 employees. New Frontier Media employees are not members of a union, and New Frontier Media has never suffered a work stoppage. The Company believes that it maintains a good relationship with its employees.

Geographic Areas

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

Available Information

      The Company files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). You may read and copy any document the Company files at the SEC’s public reference room at Room 1580, 100 F Street, NE, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains a web site (www.sec.gov) that contains annual, quarterly and current reports, proxy statements and other information that issuers (including the Company) file electronically with the SEC.

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

Executive Officers of the Registrant

      The executive officers of New Frontier Media are as follows:

Name	Age	Position
Michael Weiner	63	Chairman of the Board, Chief Executive Officer, Secretary, and Director, New Frontier Media, Inc.
Karyn L. Miller	40	Chief Financial Officer, Treasurer and Assistant Secretary, New Frontier Media, Inc.
Ken Boenish	39	President, New Frontier Media, Inc. and The Erotic Networks, Inc.
Bill Mossa	43	Vice President of Affiliate Sales and Marketing, The Erotic Networks, Inc.
Ira Bahr	43	Vice President of Marketing and Corporate Strategy, New Frontier Media, Inc.
Marc Greenberg	59	Co-President, MRG Entertainment, Inc. and Director

      Michael Weiner. Mr. Weiner was appointed President of New Frontier Media in February 2003 and was then appointed to the position of Chief Executive Officer in January 2004. Prior to being appointed President, he held the title of Executive Vice President and co-founded the Company in

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1995. As Executive Vice President, Mr. Weiner oversaw content acquisitions, network programming, and all contract negotiations related to the business affairs of the Company. In addition, he was instrumental in securing over $20 million to finance the infrastructure build-out and key library acquisitions necessary to launch the Company’s seven television networks.

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

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

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

      Ken Boenish. Mr. Boenish is a 17-year veteran of the cable television industry. In October 2000, he was named President of The Erotic Networks and in June 2005 he was named President of New Frontier Media. Mr. Boenish joined The Erotic Networks as the Senior Vice President of Affiliate Sales in February 1999. Prior to joining the Company, Mr. Boenish, was employed by Jones Intercable (“Jones”) from 1994 - 1999. While at Jones he held the positions of National Sales Manager for Superaudio, a cable radio service serving more than 9 million cable customers. He was promoted to Director of Sales for Great American Country a new country music video service in 1997. While at Great American Country Mr. Boenish was responsible for adding more than 5 million new customers to the service while competing directly with Country Music Television, a CBS cable network. From 1988 - 1994 he sold cable television advertising on systems owned by Time Warner, TCI, COX, Jones, Comcast and other cable systems. Mr. Boenish holds a B.S. degree in Marketing from St. Cloud State University.

      Bill Mossa. Mr. Mossa joined The Erotic Networks, a subsidiary of New Frontier Media, Inc., as Vice President of Affiliate Sales and Marketing in 1998 and has been instrumental in growing the Company’s network distribution from zero to over 92 million addressable subscribers. Prior to joining The Erotic Networks, Mr. Mossa was the Regional Director of Affiliate Sales and Marketing for Spice Entertainment, directing all affiliate sales and marketing efforts for its northeast region. Mr. Mossa has also held positions as Affiliate Marketing Manager of the SportsChannel NY, Regional Pay-Per-View Director for Century Communications, Corporate Pay-Per-View Manager for TKR Cable, and Marketing Manager for TKR Cable. Mr. Mossa holds a Bachelors Degree in Business Administration from Northeastern University in Boston, Massachusetts.

      Ira Bahr. Mr. Bahr joined New Frontier Media in January 2006. Prior to joining New Frontier Media he served in a number of positions with Echostar Communications Corporation (“Echostar”) including Senior VP of Marketing for Dish Network and President of BingoTV, an interactive game channel owned by Echostar. Previous to his tenure with Echostar, Mr. Bahr was the number two executive at Sirius Satellite Radio (“Sirius”) serving as the Company’s Senior VP, Marketing, Alliances, and Communications. At Sirius, Mr. Bahr was the executive responsible for forging the

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Company’s relationships with automobile and radio manufacturers. In addition, he was instrumental in the acquisition of over $1 billion in capital financing and was the driving force behind the Company’s name change from CD Radio in 1999.

      From 1985-1998, Mr. Bahr was a senior executive at BBDO Worldwide (“BBDO”), one of the world’s largest advertising and marketing firms. At BBDO, he developed domestic and international marketing plans and communications programs for a range of companies including GE, Pepsi Cola, and FedEx. Mr. Bahr holds a Bachelor of Arts degree from Columbia University.

      Marc Greenberg. In 1996, Mr. Greenberg formed MRG Entertainment, Inc. with Richard Goldberg, the current Co-President. MRG was acquired by New Frontier Media on February 10, 2006, at which time Mr. Greenberg joined its Board of Directors. Mr. Greenberg is a 25-year veteran of the video and TV business. In 1984 he founded Video Marketing Concepts, a domestic video distribution company. Recognizing the changing landscape of the video business, in 1987 Mr. Greenberg renamed his company Cinema Products Video, Inc. (“CPV”) and began producing and distributing soft erotic programming, both domestically and internationally. In 1994, the Spice Networks, Inc. purchased CPV, and Mr. Greenberg continued to run CPV as a wholly owned subsidiary of the Spice Networks. Mr. Greenberg graduated from the University of Florida in 1970 with a Bachelor in Advertising. He currently resides in Marina Del Rey, California.

ITEM 1A. RISK FACTORS

      THIS REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS. YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY THEIR USE OF THE FORWARD-LOOKING WORDS “ANTICIPATE,” “ESTIMATE,” “PROJECT,” “LIKELY,” “BELIEVE,” “INTEND,” “EXPECT,” OR SIMILAR WORDS. THESE STATEMENTS DISCUSS FUTURE EXPECTATIONS, CONTAIN PROJECTIONS REGARDING FUTURE DEVELOPMENTS, OPERATIONS, OR FINANCIAL CONDITIONS, OR STATE OTHER FORWARD-LOOKING INFORMATION. WHEN CONSIDERING THE FORWARD-LOOKING STATEMENTS MADE IN THIS REPORT, YOU SHOULD CONSIDER THE RISKS SET FORTH BELOW AND OTHER CAUTIONARY STATEMENTS THROUGHOUT THIS REPORT. YOU SHOULD ALSO KEEP IN MIND THAT ALL FORWARD-LOOKING STATEMENTS ARE BASED ON MANAGEMENT’S EXISTING BELIEFS ABOUT PRESENT AND FUTURE EVENTS OUTSIDE OF MANAGEMENT’S CONTROL AND ON ASSUMPTIONS THAT MAY PROVE TO BE INCORRECT. IF ONE OR MORE RISKS IDENTIFIED IN THIS REPORT OR OTHER FILING MATERIALIZES, OR ANY OTHER UNDERLYING ASSUMPTIONS PROVE INCORRECT, OUR ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED, PROJECTED, OR INTENDED.

      The loss of any of our current major customers, Dish Network, Time Warner Cable, and Comcast Corporation, would have a material adverse affect on our operating performance and financial condition.

      DISH Network, one of the leading providers of direct broadcast satellite services in the United States, Time Warner Cable and Comcast Corporation, are major customers of our Pay TV Group. The loss of any of DISH Network, Time Warner Cable, and Comcast Corporation as customers would have a material adverse effect on our business operations and financial condition. We are currently negotiating a contract with DISH Network. As a result of these negotiations, we expect that our license fees will be reduced and that, as a result, our revenue will be negatively impacted. For our fiscal year ended March 31, 2006, our revenues from DISH Network, Time Warner Cable, and Comcast Corporation were approximately 35%, 14%, and 12%, respectively, of our total Company-wide revenues.

      DISH Network is not contractually required to carry our programming and can cancel its broadcast of our programming at any time.

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

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

      Failure to meet our performance guarantee with Direct TV could adversely affect our business, financial condition, or results of operations.

      We recently entered into a two-year agreement with Direct TV for the distribution of two of our networks. This agreement requires us to meet certain performance targets connected with our replacement of competitive services. If we are unsuccessful in meeting these performance targets, our business, financial condition, or results of operations could be materially adversely affected.

      Limits to our access to distribution channels could cause us to lose subscriber revenues and adversely affect our operating performance.

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

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

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

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

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

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

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

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

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

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

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

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performance in terms of subscriber buy rates, and the license fees that we offer to Cable operators and DBS providers.

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

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

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

      Our existing competitors, as well as potential new competitors, may have significantly greater financial, technical and marketing resources, 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 price reductions, lower margins and negatively impact our financial results.

      The continued addition of new competitors to the Video-On-Demand distribution platform will likely have a material adverse affect on our operating performance.

      Revenue from our Pay TV Group’s Video-on-Demand service became a significant part of our overall revenue mix during our fiscal year ended March 31, 2005. The continued addition of new competitors to the VOD platform, either on platforms where we have previously enjoyed exclusivity or where we currently share the platform, may continue to have an adverse affect on our operating performance.

      We face competition on the VOD platform from established adult video producers with postproduction capabilities, as well as independent companies that distribute adult entertainment. These competitors may include producers such as Hustler, Penthouse, Wicked Pictures, and Playgirl. In the event that cable companies seek to purchase adult video content for their VOD service directly from adult video producers or other independent distributors of such content our VOD business is likely to suffer.

      For the fiscal year ended March 31, 2006, revenue from our VOD service was 37% of our total Pay TV revenue.

      We may be liable for the content we make available on the internet.

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

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

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

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

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

      Continued imposition of tighter processing restrictions by the various credit card associations and acquiring banks would make it more difficult to generate revenues from our website.

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

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

• if we experience excessive chargebacks and/or credits;

• if we experience excessive fraud ratios;

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

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

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

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

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

      The Internet Group utilizes one company to process credit cards for its membership website. If this credit card company were to experience liquidity issues or become unable to process our monthly credit card transactions, it could have a material adverse effect on our business operations and financial condition.

      The loss of any of the Film Production Group’s major customers, DirecTV, InDemand, Showtime, Cinemax, Lionsgate, Universal Music Group or New Line Cinema, could have a material adverse effect on its operating performance and financial condition.

      DirecTV, InDemand, Showtime, Cinemax, Lionsgate, Universal Music Group and New Line Cinema are key customers of the Film Production Group. The loss of any of DirecTV, InDemand, Showtime, Cinemax, Lionsgate, Universal or New Line Cinema could have a material adverse effect on the Film Production Group’s business operations and financial condition. Historically, the Film Production Group has been responsible for 25% of the total annual erotic content purchases made by

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Cinemax and 50% of the total annual erotic content purchases made by Showtime. Neither DirecTV, InDemand, Showtime, Cinemax, Lionsgate, Universal Music Group nor New Line Cinema is contractually obligated to carry or purchase the Film Production Group’s programming.

      If the Film Production Group produces or acquires film content that is not well-received by its customers, it may not be able to re-coup the investment it has made in the film.

      The Film Production Group’s ability to continue to create or acquire film content that is well-received by its customers is critical to its future success. If a film produced or otherwise acquired by the Film Production Group does not sell as well as anticipated, the Film Production Group may not be able to re-coup its investment in the film, including, but not limited to, the cost of producing or acquiring the film and the costs associated with promoting the film. Historically, the average annual investment by the Film Production Group in its films has ranged from $1.5 million to $2.1 million. No assurance can be given that the Film Production Group’s past success in generating profits from its investment in its films will continue.

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

      As a small company with approximately 143 employees, our success depends upon the contributions of our executive officers and our other key personnel. The loss of the services of any of our executive officers or other key personnel could have a significant adverse effect on our business and operating results. We cannot assure that New Frontier Media will be successful in attracting and retaining these personnel.

      The three executive officers’ contracts end on March 31, 2007. If the three executive officers leave the Company, it may have a material adverse effect on our business operations. It may also be more difficult for us to attract and recruit new personnel due to the nature of our business.

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

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

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

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

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

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

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ITEM 1B: UNRESOLVED STAFF COMMENTS

NONE

ITEM 2. PROPERTIES.

      The Company uses the following principal facilities in its operations:

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

      California: New Frontier Media leases 1,200 square feet in Woodland Hills, California. The facility houses three employees of the Pay TV Group’s content acquisitions department. This facility is 100% utilized. New Frontier Media leases 4,586 square feet in Santa Monica, California. This facility houses the Film Production Group’s production and international licensing business. This facility is 100% utilized.

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

ITEM 3. LEGAL PROCEEDINGS.

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

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

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

PART II.

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

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

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

Quarter Ended	High	Low	Quarter Ended	High		Low
June 30, 2005	7.25	5.82	June 30, 2004		8.87	5.77
September 30, 2005	7.41	5.81	September 30, 2004		9.02	6.82
December 31, 2005	6.76	5.51	December 31, 2004		8.64	7.68
March 31, 2006	7.83	6.41	March 31, 2005		10.00	6.79

      As of June 1, 2006, there were approximately 2,500 beneficial owners of New Frontier Media’s Common Stock.

      New Frontier Media has not paid any cash or other dividends on its Common Stock since its inception and does not anticipate paying any such dividends in the foreseeable future. New Frontier

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Media intends to retain any earnings for use in New Frontier Media operations and to finance the expansion of its business.

ITEM 6. SELECTED FINANCIAL DATA.

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

	Fiscal Year Ended March 31,
	2006		2005		2004		2003			2002
Net Sales	$	46,851	$	46,277	$	42,878	$	36,747		$	52,435
Net income (loss)	$	11,283	$	11,122	$	10,913	$	(11,895	)	$	(582	)
Net income (loss) per basic common share	$	0.49	$	0.50	$	0.53	$	(0.56	)	$	(0.03	)
Net income (loss) per fully diluted share	$	0.48	$	0.48	$	0.50	$	(0.56	)	$	(0.03	)
Weighted average diluted shares outstanding		23,338		23,067		21,892		21,319			21,128
Total assets	$	86,765	$	60,284	$	44,762	$	35,025		$	48,132
Long term obligations	$	7,035	$	966	$	429	$	465		$	1,013
Redeemable preferred stock	$	0	$	0	$	0	$	3,750		$	0
Cash dividends	$	0	$	0	$	0	$	0		$	0
Cash flows from Operating Activities	$	12,312	$	14,992	$	13,895	$	53		$	5,810
Pay TV Group Network Households		93,000		80,133		63,970		40,940			29,700

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

Overview

      The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide the readers of our financial statements with a narrative discussion about our business. The MD&A is provided as a supplement to — and should be read in conjunction with — our financial statements and the accompanying notes. This overview provides our perspective on the individual sections of MD&A. Our MD&A includes the following sections:

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

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

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

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

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

Forward-Looking Statements

      This annual report on Form 10-K includes forward-looking statements. These are subject to certain risks and uncertainties, including those identified below, which could cause actual results to differ materially from such statements. The words “believe”, “expect”, “anticipate”, “optimistic”, “intend”, “will”, and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on

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which they are made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

      Factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to: 1) our ability to retain our major customers that account for 35%, 14%, and 12%, respectively, of our total revenue for the year ended March 31, 2006; 2) our ability to maintain the license fee structure currently in place with our customers; 3) our ability to compete effectively for quality content with our Pay TV Group’s primary competitor who has significantly greater resources than us; 4) our ability to compete effectively with our Pay TV Group’s major competitor or any other competitors that may distribute adult content to Cable MSOs, DBS providers, or to the Hotel industry; 5) our ability to retain our key executives; 6) our ability to successfully manage our credit card chargeback and credit percentages in order to maintain our ability to accept credit cards as a form of payment for our products and services; and 7) our ability to attract market support for our stock. The foregoing list of important factors is not exclusive.

Our Business

      We operate our company in three segments: Pay TV, Internet and Film Production. We acquired the Film Production segment during the fourth quarter of our current fiscal year. This segment engages in the production and distribution of mainstream films and soft, erotic features and events. Its library is distributed on U.S. premium pay TV channels such as Showtime Networks, Inc. (“Showtime”) and Cinemax, as well as on pay-per-view channels across a range of cable and satellite distribution platforms. The Film Production segment also distributes a full range of independently produced motion pictures to markets around the world and acts as a line producer for one mainstream movie a year for a major studio. We acquired the Film Production segment to expand our portfolio to the rapidly growing market for less explicit, erotic content, which resides in more mainstream areas within the multi-channel operators’ program guide, as well as to the growing market for event-type content. The acquisition also provides established relationships in international markets and provides access to a library of content that we own and that can be monetized through current distribution networks.

      As part of our overall strategy to compete in each relevant market segment, we use the following core competencies:

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

• Content library: Through our Pay TV segment, we license content from a network of over forty-five different adult studios, allowing us access to a wider variety of directors, actors and actresses, and content niches than our primary competitor. We are committed to providing our consumers with variety, breadth and depth of content in order to appeal to the widest audience base possible. We understand that our content is purchased in an impulse environment and that

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in order to capture those purchases we must provide a large amount of compelling, unique content to the consumer. We use our extensive library to program our PPV networks, VOD product, Internet website, and wireless product. Content is used continuously through the life of the license term and will be repurposed in many ways, including using “clips” of the content and creating compilations or blocks of programming from several movies. We spend approximately $3.0-$3.5 million annually licensing content for our PPV, VOD, Internet and wireless products.

We acquired the film library of our Film Production segment as part of the acquisition of this segment during the fourth quarter of our current fiscal year. This library, which consists of titles that were produced by and are owned by the Film Production Group, includes 350 hours of soft, erotic feature movies and event style content. We intend to monetize this library by distributing it through new platforms such as wireless, VOD, direct-to-consumer DVD sales, as well as by leveraging our current relationships with On Command, DISH Network, and other cable MSOs. In addition, we believe that we can monetize this content for VOD distribution internationally, where the editing standard is softer than that of the U.S. pay television market.

We expect to create 40 - 50 of hours of new content with a $2.1 million production budget during the 2007 fiscal year.

• Expertise in creation, aggregation and editing of adult content: We consider ourselves to be experts in the creation, aggregation and editing of high-quality adult content. We ensure that we have all proper documentation required to verify that the cast members of the movies that we produce or license are eighteen years or older. All of our content is in strict compliance with 18 U.S.C. 2257. We have developed processes and procedures to edit our content into various predetermined standards and censor that content for community standards. We believe that the value we provide to our distribution partners lies in our insuring the existence of all age verification documents and appropriate content censorship in order to protect the brand equity of our distribution partners.

Our Pay TV segment monitor the trends in the video sales and rental market to understand what content niches are popular and we program our networks to correspond to these trends. Our Pay TV segment monitors the trends of the VOD buys of our own content to understand what type of content is selling the best and we adjust our programming models for these trends. We understand how to create compelling VOD content packages for our customers to launch on their systems, including TEN*Latinas, TEN*Hunks, TEN*Real, “quick-n-nasty”, and double features. We strive to provide the best performing PPV networks and VOD service to the Cable/DBS/Hotel markets and the best performing soft, erotic content to our distribution partners. We program seven PPV networks in order to accommodate different editing standards and different programming niches to best serve our customers’ needs. We also ensure that the interstitial programming that we create for our PPV networks is entertaining, edgy, and appeals to our consumer audience.

• Reliable cash flows: We consider our ability to generate reliable, recurring cash flows from operations to reinvest in our business to be a strength of our business. We are able to reinvest these cash flows into capital expenditures to ensure that we are operating at maximum efficiency, that our broadcast operations are fully redundant, that our increasing storage needs are met, and that we are able to rapidly respond to changing technology requirements or platforms through which to distribute our products. In addition, we are able to reinvest our cash flows into producing and acquiring compelling, unique, quality content for our products. We also believe that our ability to generate reliable, recurring cash flows, as well as our current cash balances, will help us with the challenges of increasing competition in the VOD market and with any regulatory issues that may arise from the current conservative administration.

• Our people: We consider our employees to be a key driver to our business. We are fortunate to be able to attract high quality marketing, branding, sales and technology employees who share our desire to use technology to make ourselves as efficient and effective as possible, who share

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our desire to build a worldwide recognizable brand, and who share our desire to obtain distribution on all electronic platforms willing to distribute adult content.

Pay TV Segment

      Our Pay TV segment is focused on the distribution of its seven PPV networks and its Video-on-Demand service to cable MSOs and DBS providers. In addition, the Pay TV Group has had success in delivering its VOD service to hotel rooms through its current distribution arrangements with On Command and the Hospitality Network. The Pay TV Group earns a percentage of revenue on each pay-per-view, subscription, or VOD transaction related to its services. Revenue growth occurs as the Pay TV Group launches its services to new cable MSOs or DBS providers, experiences growth in the number of digital subscribers for systems where its services are currently distributed (“on-line growth”), launches additional services to its existing cable/DBS partners, experiences new and on-line growth for its VOD service, is able to effect increases in the retail price of its products, and is able to increase the buy rates for its products. The Pay TV Group seeks to achieve distribution for at least four of its services on every digital platform in the U.S. Based on the current market of 27.17 million DBS households and 28.5 million digital cable households, the Pay TV Group currently has 42% of its defined market share as of the year ended March 31, 2006.

      Revenue growth for the Pay TV Group for the year ended March 31, 2006 was impacted by:

• Increased competition in the cable and hotel VOD market

• Increased VOD distribution

• Growth in our PPV revenue primarily attributable to new launches with Cox Communications, Inc. (“Cox”)

• Certain cable systems removing adult from their PPV platforms in an effort to transition customers to VOD only

      Revenue from the Pay TV Group’s VOD service became a significant part of its overall revenue mix during the fiscal year ended March 31, 2004, as cable operators upgraded their systems to deliver content in this manner. The Pay TV Group currently delivers its VOD content to 20.9 million cable network households as compared to 18.3 million a year ago, as well as to 690,000 hotel rooms through its distribution arrangement with On Command as of March 31, 2006, as compared to 890,000 hotel rooms a year ago. In addition, during the 2006 fiscal year we began to distribute our VOD content to the Hospitality Network, which distributes content to 125,000 hotel rooms in several cities, including Las Vegas and Atlantic City.

      Prior to our 2005 fiscal year, we were the sole provider of adult VOD content to the two largest U.S. Cable MSOs. During the third quarter of our 2005 fiscal year, our primary competitor in this market was added to the Time Warner Cable (“Time Warner”) VOD adult platform. Although our primary competitor was added to this platform, it did not negatively impact the number of hours of VOD content that we provide to our Time Warner affiliates. Our VOD revenue from Time Warner has declined 17% year-over-year since our primary competitor was added to the platform. We fully absorbed the impact of this revenue decline during the 2006 fiscal year, and we do not anticipate that any other competitors will be added to the Time Warner VOD platform in the next 12 - 18 months.

      During our 2006 fiscal year, the largest Cable MSO in the U.S., Comcast Corporation (“Comcast”) transitioned the editing standard on its VOD platform from most edited to partially edited. At the same time, Comcast added adult content provided by two smaller competitors to its VOD platform. Our revenue was not impacted by these changes and, in fact, we did experience an increase in VOD revenue from Comcast as a result of new launches with their affiliated systems during the fiscal year. We anticipate that our primary competitor will be added to Comcast’s VOD platform during our 2007 fiscal year. At this time it is impossible for us to determine the impact, if any, that this will have on our revenue.

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      Our VOD revenue was favorably impacted during the 2006 fiscal year by growth in distribution of our VOD product to affiliated systems of Charter Communications, Inc. (“Charter”) and Adelphia Communications Corporation (“Adelphia”).

      We do anticipate that the addition of competition to VOD platforms, a change in license fee structure for one MSO, and a slowing in the growth of new VOD subscribers may result in flat to declining VOD revenues during the 2007 fiscal year.

      The Pay TV Group’s relationship with On Command generated incremental VOD revenue for the year ended March 31, 2004. However, revenue from On Command declined during our 2005 and 2006 fiscal years. The decline was a result of On Command sourcing a portion of its content from our competitors instead of exclusively through us as well as to a decline in the number of hotel rooms to which On Command is providing in-room entertainment. We continue to provide over 60% of the content on the On Command platform. Future growth from VOD revenue generated through the hospitality industry is dependent upon the addition of new hotel properties by On Command and an increase in business traveler occupancy rates. We do not anticipate that our deal with Hospitality Network will result in a material increase in VOD revenue from the hospitality industry.

      Our PPV revenue was flat year-over-year. We did experience an increase in PPV revenue during the 2006 fiscal year from new launches with Cox affiliated systems. However, this increase in PPV revenue was offset by declines in revenue from two affiliated systems of Time Warner and Charter that removed most of their adult content from their PPV platform in an effort to transition their customers to the VOD platform. However, this did not result in a revenue neutral transaction as many PPV customers are still not fully aware of VOD and how to use it. In fact, we were successful in re-launching our TEN*Blox network on Time Warner’s Manhattan system in an effort to recapture these buys.

      We do not anticipate that other Cable MSOs will remove adult entirely from their PPV platforms until VOD becomes a more generally accepted manner by which to watch video content. We believe this shift from PPV to VOD will occur slowly over a three to six year period, in the same manner in which Cable MSOs transitioned their consumer base from analog cable to digital cable. We continue to launch our PPV services to Cable MSOs, and we are anticipating new launches of our partially edited services during the 2007 fiscal year. We do anticipate that revenue from our most-edited service, Pleasure, will continue to decline during the 2007 fiscal year as more Cable MSOs transition to partially edited and least edited content.

      We recently signed a two-year agreement with Direct TV for the distribution of two of our services. These services launched in April 2006. We expect that these two services will generate approximately $7 million in additional PPV revenue during our 2007 fiscal year.

      We are currently negotiating a contract with DISH for the continued distribution of three of our PPV networks. We anticipate that this negotiation will result in a decline in our license fee structure, which will negatively impact our PPV revenue during the 2007 fiscal year. At this time, we are unable to predict with any certainty when this contract will be completed and what the overall impact of the change in license fee structure will be. We anticipate that our revenue could decline by as much as $5 - 7 million annually as a result of this license fee reset.

      To date, the focus of the Pay TV Group has been on the distribution of its PPV and VOD services to Cable, DBS and Hotel platforms in the U.S. market only. We expect to begin exploring international markets such as Canada, the UK, and Europe during our 2007 fiscal year in an effort to expand our distribution. In order to expand internationally, it will be necessary for us to acquire international rights to our content, which may result in higher content acquisition costs.

      The Pay TV Group also provides its two least-edited services to the C-Band market on a direct-to-the-consumer basis. C-Band customers contact the Pay TV Group’s in-house call center directly to purchase the networks on a one-month or three-month subscription basis. The Pay TV Group retains 100% of the revenue from these customers and over 95% of the sales are made via credit cards. This market has been declining for several years as these consumers convert from C-Band “big dish” analog satellite systems to smaller, 18-inch digital DBS satellite systems. The Pay TV Group has been

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able to decrease its transponder, uplinking, marketing, and call center costs related to this business over the years in order to maintain its margins. However, based on the rate of revenue decline and the expected erosion of its C-Band margins, the Pay TV Group expects that it will no longer be operating this business by the end of its 2007 fiscal year. The Pay TV Group expects continued declines in revenue from this segment of its business during 2007.

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

• Increased competition from other adult companies that may have better brand recognition

• Increased pressure on license fees from our largest customer

• Increased regulation of the adult industry

• Increased competition attempting to acquire compelling adult content and changes to the flat fee structure by which we currently pay for content

• Slowing growth of the overall adult PPV and VOD category

      Each of these challenges and risks has the potential to have a material adverse effect on our business. However, we believe that our Company is well positioned to appropriately address these challenges and risks.

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

• Future international distribution opportunities

• Implementation of technologies that will allow for distribution of our content on new platforms such as IP VOD and interactive content

• VOD distribution through DISH and Direct TV

• Acquisition and development of unique adult content

• Continued increase in the number of digital customers able to view our PPV and VOD content as cable operators transition analog customers to their digital platforms

Internet Segment

      The Internet Group generates revenue by selling monthly memberships to its website, TEN.com, by earning a percentage of revenue from third-party gatekeepers like On Command for the distribution of TEN.com to their customer base, and by selling pre-packaged video and photo content to webmasters for a monthly fee.

      Over 90% of revenue from the Internet Group continues to be generated from monthly memberships to TEN.com. However, we have seen this revenue erode over the past several years since the current traffic volume to TEN.com does not generate enough new monthly sign-ups to offset the churn of our renewing membership base. The decline in our membership revenue slowed during our 2005 and 2006 fiscal years as new marketing efforts increased traffic to TEN.com, generating monthly signups that were close to or slightly exceeding our monthly cancellation rate. In addition, we increased the retail price for our website from $19.95 to $29.95 during the 2005 fiscal year. We are working on implementing new pricing strategies to increase revenues generated by our website, including selling our searchable library of content on a pay-per-view and pay-per-minute basis and promotional pricing. Our website will also be redesigned during the 2007 fiscal year in an effort to increase the rate of conversion of traffic to the site into paying members. Additionally, we will be increasing our marketing efforts by advertising TEN.com through various search engines in order to reverse the recent revenue trends.

      We have also seen a decrease in revenue generated from selling pre-packaged content to webmasters during the past three fiscal years. This decrease in revenue from the sale of content is due to a softening in demand for content by third-party webmasters. Webmasters are decreasing their reliance on outside sources for content and demanding lower prices for the content that they do

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purchase. In addition, we have not allocated any significant resources towards a sales effort for these content products.

      During the 2006 fiscal year, our Internet Group began to focus on the development of wireless products for distribution both domestically and internationally. These wireless products include a wireless enabled web site (“WAP site”), photo and video content, and ring “moans”. Our content is sold direct-to-the-consumer via our WAP site. Our WAP site is billed to the consumer via their cell phone bill by a third-party payment processor who participates in the revenue that is generated. In addition, we have revenue sharing agreements with third-party aggregators such as Mobix Interactive, Mobile BV, and Fone Starz that distribute our content to their distribution partners such as Orange, O2, and Vodaphone. Currently, our content is available to 258 million cell phone users, including 17 million in the U.S. Revenue from our mobile products is minimal at this time due our limited content offering.

      During the 2006 fiscal year, we were successful in implementing our own wireless platform through which we can distribute our content or the content of other providers. This wireless platform will enable us to bypass the third party aggregators and go directly to the wireless carriers for distribution of our wireless product. By going directly to the wireless carriers we will be able to increase the amount of the revenue that we are retaining, be more in control of the distribution of our product, obtain better placement of our product on the carrier deck, and obtain more timely reporting of the performance of our products. Currently, these third-party aggregators remit reports and our revenue on a quarterly basis.

      During the 2007 fiscal year, we will be focused on the following for our wireless products:

• Obtaining direct distribution with several wireless carriers whereby we can utilize our own wireless platform to deliver the content;

• Creating the infrastructure necessary to create, market and deliver a full range of wireless products;

• Creating and/or acquiring unique content specifically for the wireless platform, including “mobisodes” and other short form content, which adheres to a less explicit editing standard than our Pleasure network;

• Creating SMS marketing campaigns

      We expect that both our revenue and operating costs for wireless will increase during the 2007 fiscal year, but that we will continue to generate losses while we build this business. We anticipate reaching break even for our wireless products during the 2008 fiscal year.

Film Production Segment

      We acquired the Film Production segment during the fourth quarter of our current fiscal year. This acquisition allows us to expand our portfolio to the rapidly growing market for less explicit, erotic content, as well as to the market for erotic, event-type content. This acquisition also provides established relationships in international markets, which we feel can assist the Pay TV segment with its plans to expand internationally. In addition, the acquisition provides access to a library of less explicit, erotic content that can be monetized through current distribution channels of our existing segments.

      We derive our revenue from three principal businesses in this segment: the production and distribution of original motion pictures known as “erotic, thrillers” and erotic, event-styled content (i.e., “owned product”); the licensing of domestic third party films in international markets where we act as a sales agent for the product (“repped product”); and the contract production of one motion picture per year for a third party distributor.

      We create and produce soft, erotic thriller movies and original erotic series that are distributed in the U.S. on premium movie services, such as Cinemax and Showtime, as well as internationally on similar services. We also develop and produce original, event or reality-styled programming that we

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sell on pay-per-view channels through cable and satellite TV systems across the United States primarily through our relationships with In Demand, DISH, and Direct TV.

      During the year we will produce 40 - 50 hours of new content with an annual production budget of approximately $2.1 million. We use outside production companies to shoot the content while providing in-house oversight of all critical areas such as scripting, casting, shoot location, and post production.

       We generate revenue by licensing our content for a one-time fee to premium TV services such as Cinemax and Showtime. In addition, we license our erotic thrillers and adult event content to cable operators and satellite providers through our relationships with In Demand, TVN, Direct TV, and DISH on a revenue share basis with license fees that are greater than those earned by the Pay TV Group due to the more mainstream nature of the content. We also license our original content to international premium TV services primarily in Europe and other countries. International content rights are licensed for a period of time on a flat-fee basis.

      In addition, we generate revenue by establishing relationships with high-quality, independent mainstream filmmakers to license the international rights to their movies under the Lightning Entertainment and Mainline Releasing labels. Most recently, we acquired the international distribution rights for Junebug, winner of a Special Jury Prize at the 2005 Sundance Film Festival, Walmart: The High Cost of Low Prices, and Conversations with God.

      We earn a commission of 15% - 25% for licensing the international rights on behalf of these producers as well as a marketing fee. Each contract allows for the recoupment of costs that we may incur in preparing the title for market, including advertising costs, screening costs, costs to prepare the trailer, box art and screening material, and any costs necessary to ensure the movie is market ready.

      Additionally, we may obtain the domestic video rights for certain titles for which we will earn higher commissions than we do for the international licensing rights. We have distribution agreements with Lionsgate Home Entertainment, Universal Music Group (“Universal”) and New Line Cinema who will use these titles for direct-to-video release. On average, we will license 9 - 12 titles annually to these customers for home video use. We earn our commission on any revenues remaining after Lionsgate, Universal and New Line Cinema recoup their commissions, marketing fee, and any hard costs incurred in preparing the content for market.

      Once a year we act as a contract film producer to one major Hollywood studio. Most often the production involves the sequels to successful releases such as “Single White Female” where we produced “Single White Female 2.” The production generally results in the delivery of the film in the third or fourth quarter of the fiscal. At this time we are still negotiating with the studio for the fiscal year 2007 production and no assurance can be given as to the results of this negotiation.

      We believe that we can increase our revenue in the following ways as a result of our integration with New Frontier Media’s existing segments:

• Obtain distribution for our erotic thrillers with On Command and Hospitality Network;

• Distribute our content to wireless carriers by leveraging the Internet segment’s relationships in this area

• Distribute our content to U.S. and international cable VOD platforms by leveraging the Pay TV segment’s relationships in this area

• Develop reality, event content franchises by distributing our existing content direct-to-the consumer on DVD

• Distribute our content through new media platforms such as iTunes, Real Networks, and portals like MSN or Google

• Increase distribution of our content with DISH by leveraging the Pay TV segment’s relationship

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Critical Accounting Policies

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

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

Revenue Recognition

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

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

Income Tax Expense and Accruals

      Our annual tax rate is based on our income, statutory tax rates and tax planning opportunities available to us. Significant judgment is required in determining our annual tax rate and in evaluating our tax positions. We establish reserves at the time that we determine that it is probable that we will be liable to pay additional taxes related to certain matters. We adjust these reserves, including any impact on the related interest and penalties, in light of changing facts and circumstances, such as the progress of a tax audit.

      A number of years may elapse before a particular matter, for which we have established a reserve, is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we record a reserve when we determine the likelihood of loss is probable. Such liabilities are recorded in the line item income taxes payable/receivable in the Company’s consolidated balance sheets. Settlement of any particular issue would usually require the use of cash. Favorable resolutions of tax matters for which we have previously established reserves are recognized as a reduction to our income tax expense, or Additional Paid in Capital when appropriate, when the amounts involved become known.

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      Tax law requires items to be included in the tax return at different times than when these items are reflected in the consolidated financial statements. As a result, our annual tax rate reflected in our consolidated financial statements is different than that reported in our tax return (our cash tax rate). Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences reverse over time, such as depreciation expense. These timing differences create deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities. The tax rates used to determine deferred tax assets or liabilities are the enacted tax rates in effect for the year in which the differences are expected to reverse. Based on the evaluation of all available information, the Company recognizes future tax benefits, such as net operating loss carryforwards, to the extent that realizing these benefits is considered more likely than not.

      We evaluate our ability to realize the tax benefits associated with deferred tax assets by analyzing our forecasted taxable income using both historical and projected future operating results, the reversal of existing temporary differences, taxable income in prior carry-back years (if permitted) and the availability of tax planning strategies. A valuation allowance is required to be established unless management determines that it is more likely than not that the Company will ultimately realize the tax benefit associated with a deferred tax asset.

Accounting for Investments in Debt and Equity Securities

      We hold investments in debt securities that are classified as available-for-sale under the requirements of Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”). In accordance with SFAS 115, available-for-sale securities are recorded at fair value, with unrealized gains and losses, net of the related tax effect, excluded from earnings and initially recorded as a component of accumulated other comprehensive loss in the Company’s consolidated balance sheet. Adjustments to the Available for Sale Securities fair value impact the consolidated financial statements by increasing or decreasing assets and shareholders’ equity. Realized gains and losses are determined on the specific identification method and are reflected in income.

Goodwill Impairment

      Goodwill represents the excess of cost over the fair value of the net identifiable assets acquired in a business combination accounted for under the purchase method. In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangibles” (“SFAS 142”), goodwill and intangible assets with an indefinite useful life are no longer amortized, but are tested for impairment at least annually.

      We perform an annual review in the fourth quarter of each year, or more frequently if indicators of potential impairment exist, to determine if the recorded goodwill is impaired. Our impairment process compares the fair value of each reporting unit to its carrying value, including the goodwill related to the reporting unit. We concluded for the 2004, 2005, and 2006 fiscal years that the fair value of the Company’s reporting units exceeded the carrying values and no impairment charge was required.

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

Prepaid Distribution Rights (Content Licensing) and Film Costs

      Our Pay TV and Internet Group’s film and content libraries consist of newly produced and historical film licensing agreements. We account for the licenses in accordance with SFAS 63 Financial Accounting by Broadcasters. Accordingly, we capitalize the costs associated with the licenses and certain editing costs and amortize the costs on a straight-line basis over the life of the licensing agreement (usually 1 to 5 years). Pursuant to SFAS 63, the costs associated with the license agreements should be amortized in a manner that is consistent with expected revenues to be derived from such films.

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

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

      Our Film Production Group capitalizes its share of direct film costs in accordance with the AICPA’s Statement of Position 00-2, (“Accounting by Producers or Distributors of Films”)(“SOP 00-2”). Capitalized costs of film and television product (“film costs”), which are produced or acquired for sale or license, are stated at the lower of cost, less accumulated amortization, or fair value. Film costs consist of direct production costs and production overhead and include costs associated with completed titles and those in development. Interest expense is not capitalized as the production runs are short-term in nature. Film cost valuation is reviewed on a title-by-title basis when an event or change in circumstance indicates the fair value of a title is less than the unamortized cost. Estimated losses, if any, are provided in the current period earnings on an individual film forecast basis when such losses are estimated.

      Once a film is released, capitalized film production costs are amortized in the proportion that the revenue during the period for each film bears to the estimated ultimate revenues, for a period not exceeding ten years, to be received from all sources under the individual-film-forecast-computation method as defined in SOP 00-2. Estimates of ultimate revenues can change significantly due to a variety of factors, including the level of market acceptance of film and television product. Accordingly, revenue estimates are reviewed periodically and amortization is adjusted on a prospective basis, as necessary. Such adjustments could have a material effect on results of operations in future periods.

RESULTS OF OPERATIONS

PAY TV GROUP

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

		ESTIMATED NETWORK HOUSEHOLDS(2) (in thousands)
NETWORK	DISTRIBUTION METHOD	As of March 31, 2006		As of March 31, 2005		As of March 31, 2004
Pleasure	Cable		7,800		8,400		7,800
TEN	Cable/DBS		20,400		16,600		15,200
TEN*Clips	Cable/DBS		19,300		16,900		13,700
Video-on-Demand	Cable		20,900		18,300		10,500
TEN*Xtsy(1)	C-band/Cable/DBS		12,700		11,600		10,000
TEN*Max(1)	C-band/Cable		200		233		470
TEN*Blue	Cable		3,900		2,900		2,500
TEN*Blox	Cable		7,800		5,200		2,800
Total Network Households			93,000		80,133		62,970

(1) TEN*Xtsy and TEN*Max addressable household numbers include 0.4 million, 0.2 million, and 0.1 million C-Band addressable households for the years ended March 31, 2004, 2005, and 2006, respectively.

(2) The above table reflects network household distribution. A household will be counted more than once if the home has access to more than one of the Pay TV Group’s services, since

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each service represents an incremental revenue stream. The Pay TV Group estimates its unique household distribution as of March 31, 2006, March 31, 2005 and March 31, 2004 to be 23.6 million, 23.1 million and 14.1 million cable homes, respectively, and 12.2 million, 11.0 million and 9.4 million DBS homes, respectively.

      The following table sets forth certain financial information for the Pay TV Group for the three years ended March 31:

	(In Millions) Year ended March 31									Percent Change
	2006			2005			2004			’06 vs’05			’05 vs’04
NET REVENUE
PPV-Cable/DBS	$	24.0		$	24.0		$	21.3			0	%		13	%
VOD-Cable/Hotel		16.3			15.6			12.6			4	%		24	%
C-Band		2.8			3.9			5.7			(28	%)		(32	%)
TOTAL		43.1			43.5			39.6			(1	%)		10	%
COST OF SALES		13.1			14.8			15.4			(11	%)		(4	%)
GROSS PROFIT	$	30.0		$	28.7		$	24.2			5	%		19	%
GROSS MARGIN		70	%		66	%		61	%
OPERATING EXPENSES	$	8.1		$	7.9		$	7.7			3	%		3	%
OPERATING INCOME	$	21.9		$	20.8		$	16.5			5	%		26	%

NET REVENUE
PPV — Cable/DBS Revenue 2005 to 2006

      Our Cable/DBS revenue was flat from 2005 to 2006. However, the mix of this revenue was impacted in the following manner:

      We experienced a 2% decline in revenue from the distribution of our four partially-edited PPV networks through Cable MSOs. This decline is a result of the largest affiliated system of Time Warner Cable (“Time Warner”) and several affiliated systems of Charter Communications, Inc. (“Charter”) removing most of the adult content on their PPV platforms in an attempt to transition customers to their VOD platform. We do not anticipate that any other MSOs will remove adult content from their PPV platforms entirely during the next 12 - 18 months. In fact, we were successful in convincing the largest affiliated system of Time Warner to re-launch our TEN*Blox network during the 2006 fiscal year in order to recapture these lost buys.

      This decline in revenue was partially offset by an increase in revenue from new launches of our partially-edited networks with Cox Communications, Inc. (“Cox”). We signed a distribution agreement with Cox in March 2004 and began to see initial launches with their affiliated systems in September 2004. Launches with Cox affiliated systems continued during the past twelve months resulting in an increase in revenue.

      Revenue from the Pleasure network also declined as MSO’s continue to transition both their PPV and VOD platforms to a partially-edited standard. The number of network households for Pleasure declined to 7.8 million as of March 31, 2006, from 8.4 million as of March 31, 2005, representing a decrease of 7%. We expect to experience continued erosion of revenue from our Pleasure network as the largest MSO in the U.S. completes the transition of the editing standard of its PPV platform from most edited to partially-edited during our 2007 fiscal year, resulting in continued erosion of distribution for this network.

      Revenue from our three services distributed through DISH Network was flat from 2005 to 2006.

      Revenue from advertising on our PPV networks, which represents less than 2% of our total Pay TV revenue, increased slightly from 2005, offsetting the decline in revenue from our PPV networks.

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PPV — Cable/DBS Revenue 2004 to 2005

      The 13% increase in the Pay TV Group’s PPV revenues from 2004 to 2005 was attributable to the following items:

• An 11% increase in revenues generated by our three services on the DISH platform

• A 31% increase in Cable PPV revenues from our partially edited services

      Revenue from our TEN, TEN*Clips and TEN*Xtsy networks on the DISH platform increased 11% year-over-year. We attribute this to an increase in the number of subscribers to the DISH platform as well as to certain changes that DISH has made to the way it prices and packages its adult programming networks.

      The 31% increase in revenue from our partially edited services is related to the continued growing acceptance by our consumer base for our partially edited services, TEN, TEN*Blue, TEN*Blox, and TEN*Clips. We view this as a positive development given the higher buy rates and higher retail rates associated with this editing standard.

      The distribution of our four partially edited services increased to 41.6 million network households as of March 31, 2005 from 34.2 million network households as of March 31, 2004, representing an increase of 22%. Approximately half of this increased distribution during our 2005 fiscal year can be attributed to our distribution agreement with Cox.

      At the same time that we are experiencing an increase in the distribution of our partially edited services, we are experiencing a decline in the distribution of our most edited service, Pleasure, by certain MSOs. Revenue from our Pleasure service declined 17% year-over-year as one of our largest customers transitioned from distributing primarily Pleasure in 2004 to primarily distributing our partially edited services in 2005.

VOD — Cable/Hotel Revenue 2005 to 2006

      The 4% increase in our VOD revenue is attributable to the following:

• An increase in VOD revenue due to increased distribution with several cable MSOs

      This increase in VOD revenue from 2005 was partially offset by:

• A decrease in VOD revenue from the Time Warner VOD platform as a result of competition being added to the platform during our 2005 fiscal year

• A decline in revenue from the distribution of our VOD content via the hospitality industry

      During the third and fourth quarters of our 2005 fiscal year, our largest competitor was added to the Time Warner VOD platform. Previous to this, we had been the only provider of adult VOD content for Time Warner and its affiliated systems. We have experienced a 17% decline in our year-over-year VOD revenue from Time Warner as a result of the addition of this competitor to the platform.

      The decline in revenue from the Time Warner VOD platform was fully offset by an increase in revenue from new VOD launches by Charter, Comcast Corporation and Adelphia Communications Corporation. Distribution for our VOD product increased to 20.9 million households as of March 31, 2006, from 18.3 million as of March 31, 2005, representing a 14% increase year-over-year.

      Revenue from our hotel VOD service provided to On Command Corporation declined 21% from 2005 due to On Command adding content from other providers to their platform and due to a decline in the number of hotel rooms to which On Command is providing in-room entertainment. We continue to provide approximately 60% of the adult content to this platform.

VOD — Cable/Hotel Revenue 2004 to 2005

      The 24% increase in the Pay TV Group’s VOD revenue from 2004 to 2005 is attributable to the following:

• An increase in the number of households to which TEN*On Demand is available

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      Distribution for TEN*On Demand increased to 18.3 million households as of March 31, 2005 from 11.5 million households as of March 31, 2004, representing an increase of 59%. Much of the increase in this distribution was attributable to the largest Cable MSO in the U.S. upgrading its affiliated systems to be VOD capable.

      Until the third quarter of our current fiscal year, we were the exclusive provider of adult VOD content to the Time Warner affiliated systems. At that time, our largest competitor was added to the VOD platform. Although competition has been added to the platform, we do continue to retain the largest share of VOD content, providing over 100 hours of VOD content to the Time Warner systems.

      Revenue from our hotel VOD service provided to On Command declined 28% from 2004. This decline was a result of On Command adding content from our competitors during our 2005 fiscal year.

C-Band Revenue

      The year-over-year decreases in C-Band revenue are due to the continued decline of the C-Band market as consumers convert C-Band “big dish” analog satellite systems to smaller DBS satellite systems. The total C-Band market declined 47% from 2005 to 2006 and 38% from 2004 to 2005.

      Providing service to the C-Band market continues to be profitable for us, generating operating margins of approximately 57% during the 2006 fiscal year. We will continue to closely monitor this business and when margins erode to an unacceptable level we will discontinue providing our content on this platform. We anticipate that we will no longer be providing our networks on the C-Band platform by the end of the 2007 fiscal year.

Cost of Sales

      Cost of sales consists of expenses associated with our digital broadcast facility, satellite uplinking, satellite transponder leases, programming acquisition and conforming costs, VOD transport costs, amortization of content licenses, and C-Band call center costs.

      The 11% decrease in cost of sales from the 2005 fiscal year to the 2006 fiscal year is due to: a) a 27% decline in our transponder costs, b) a 19% decline in our uplinking costs, c) a 14% decline in our VOD transport costs and d) a 52% decline in depreciation and operating lease expense. The decline in our transponder and uplinking costs is due to the renegotiation of our contracts for these services during the 2005 and 2006 fiscal years. We do not anticipate any further material declines in these costs during the 2007 fiscal year. The decline in our VOD transport costs is related to the utilization of a new vendor for the transportation of our VOD content to certain MSOs. The decline in our depreciation and operating lease costs is due to our equipment reaching the end of its depreciable life and the completion of most of the remaining operating leases during the 2006 fiscal year.

      The 4% decrease in costs of sales from fiscal year 2004 to 2005 is due to: a) a 40% decline in costs associated with our in-house call center; b) a 42% decrease in our C-Band transponder costs; c) a 28% decrease in our uplinking costs; and d) a 20% decrease in our programming and editing costs. These decreases were partially offset by a 65% increase in our VOD transport costs. Our call center costs decreased year-over-year due to staff layoffs necessitated by declining call volume as the C-Band market continues to erode. Our C-Band transponder costs decreased year-over-year due to the termination of the transponder lease related to our TEN*BluePlus network, which we ceased broadcasting during our 2004 fiscal year, as well as to the renegotiation of our existing analog transponders during our 2005 fiscal year.

      Our uplinking costs declined year-over-year due to the renegotiation of this contract with our current provider during our 2005 fiscal year. Our programming and editing costs decreased year-over-year because we were no longer outsourcing these services to a third-party in fiscal 2005. Our own in-house programming and editing departments were able to perform these services at a much lower cost than the third-party provider. VOD transport costs increased year-over-year in line with the increase in our VOD distribution and the number of programming hours that we were providing to Cable MSOs.

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Operating Income

      Operating income increased 5% from 2005 to 2006 primarily as a result of an increase in our gross margins. Gross margins increased to 70% from 66% year-over-year. Gross profit increased by 5% year-over-year due to an 11% decrease in cost of sales, which more than offset the 1% decline in revenue from 2005.

      Operating expenses as a percentage of revenue increased to 19% of revenue during our 2006 fiscal year from 18% of revenue during our 2005 fiscal year. Overall, operating expense increased by 3% year-over-year from 2005. The increase in operating expenses is related to an increase in trade show costs, marketing costs and employee salaries. The increase in trade show costs is due to our exhibition at the National Cable and Television Association industry show during the current fiscal year. Due to increased competition in the adult programming category, we felt that we needed an increased level of visibility at this trade show. In past years, we had attended but not exhibited at this show. We anticipate that we will continue to exhibit at this and other industry shows during the 2007 fiscal year. Marketing costs increased as we increased the number of co-op marketing programs that we conducted at the local level with the affiliated systems of our cable MSOs. The increase in payroll costs was necessary for us to remain competitive and to increase employee retention.

      The increase in trade show, marketing and payroll costs was partially offset by a decline in operating lease costs, due to the term of the leases ending during the 2006 fiscal year, and a decrease in amortization expense.

      Operating income increased 26% from 2004 to 2005 primarily as a result of an increase in our gross margins. Gross margins increased to 66% from 61% year-over-year due to a 10% increase in revenue combined with a 4% decrease in cost of sales.

      Operating expenses as a percentage of revenue declined from 19% of revenue during our 2004 fiscal year to 18% of revenue during our 2005 fiscal year. Overall, operating expenses increased 3%. This 3% increase in operating expenses is a result of an increase in our brand promotion costs. During the 2005 fiscal year we incurred costs for several consumer outreach events to promote the TEN brand and services. In addition, we incurred increased costs for a brand-marketing event at the major adult industry trade show held annually in January. The increase in our brand promotion costs was partially offset by a decline in marketing costs associated with our C-Band barker channel, which we discontinued using during the first quarter of our 2004 fiscal year.

Internet Group

      The following table sets forth certain financial information for the Internet Group for the three years ended March 31:

	(In Millions) Year ended March 31									Percent Change
	2006			2005			2004			’06 vs’05			’05 vs’04
NET REVENUE
Net Membership	$	2.3		$	2.4		$	2.7			(4	%)		(11	%)
Sale of Content		0.2			0.3			0.6			(33	%)		(50	%)
TOTAL		2.5			2.7			3.3			(7	%)		(18	%)
COST OF SALES		1.0			1.2			1.3			(17	%)		(8	%)
GROSS PROFIT	$	1.5		$	1.5		$	2.0			0	%		(25	%)
GROSS MARGIN		60	%		56	%		61	%
OPERATING EXPENSES	$	1.1		$	1.3		$	1.7			(15	%)		(24	%)
OPERATING INCOME	$	0.4		$	0.2		$	0.3			100	%		(33	%)

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Net Revenue

      The 4% decline in net membership revenue from 2005 to 2006 and the 11% decline in net membership revenue from 2004 to 2005 were a result of a decline in traffic to our web sites and a continued erosion of the sale of monthly memberships. We do not actively market our websites and we participate in only a select number of affiliate webmaster traffic generating programs. Instead, we depend primarily upon our adult domain names and advertising on the Pay TV Group’s networks to generate type-in traffic for TEN.com.

      During the 2005 fiscal year we implemented new pricing and marketing strategies that helped to slow the decline in our membership revenue. During the 2005 fiscal year we increased our monthly membership price to $29.95 from $19.95. In addition, we now offer a three-month membership for $74.95. This price increase applies only to new members joining our site. We believe that these new price points have helped to stabilize our revenue even as traffic to our site continues to decline.

      The decrease in revenue from the sale of content during the past three fiscal years is a result of a softening in demand for content by third-party webmasters. Webmasters are decreasing their reliance on outside sources for content and demanding lower prices for the content that they do purchase. We are experimenting with alternative billing methods for our content products, allowing webmasters to pay for content based on the amount of bandwidth utilized as opposed to a flat monthly fee. We have also encoded our video library within a digital rights management package, which will allow us to provide our video library to webmasters on a pay-per-view and pay-per-minute basis.

      To date, we have not generated any material revenue related to the distribution of our content to domestic or international wireless platforms.

Cost of Sales

      Cost of sales consists of expenses associated with credit card processing, bandwidth costs, traffic acquisition costs, content costs, and depreciation of assets. Cost of sales, as a percentage of revenue, was 40%, 44%, and 39% for the years ended March 31, 2006, 2005, and 2004, respectively.

      The 17% decrease in costs of sales from 2005 to 2006 is primarily related to a decrease in bandwidth costs, credit card processing costs, depreciation expense and traffic acquisition costs. Bandwidth costs declined as we continue to benefit from new contracts with lower per megabit costs. Credit card processing costs declined due to the year-over-year decline in our membership revenue. Depreciation costs declined as our equipment reached the end of its depreciable life. Traffic acquisition costs declined due to less traffic being sent to our website that resulted in a paying membership to us. The decline in these costs was partially offset by an increase in costs associated with the development of our wireless products.

      The 8% decrease in cost of sales from 2004 to 2005 is primarily related to a decline in depreciation expense and bandwidth costs. The decline in these costs was partially offset by an increase in content amortization and traffic acquisition costs. Depreciation costs have declined from 2004 as much of our equipment has reached the end of its depreciable life. Bandwidth costs have declined due to the continued renegotiation of these services with our vendors. Traffic acquisition costs have increased due to new marketing programs implemented during the 2005 fiscal year. These marketing programs pay webmasters a one-time fee of 40% - 67% of the first month’s membership revenue. The effect of these marketing programs has been to attract additional traffic to our site, resulting in a slight reduction in our churn rate. As a result of these new marketing programs, traffic acquisition costs increased from 0% of net membership revenue in 2004 to 7% of net membership revenue in 2005. Content amortization costs increased during 2005 because we are fully allocating the amortization of the Pleasure library to the Internet Group since this content is primarily utilized within the TEN.com website.

Operating Income

      The 100% increase in operating income form 2005 to 2006 is primarily due to the fact that our revenue, cost of sales and operating expenses all declined by $0.2 million from 2005. The 15% decline

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in our operating costs is primarily related to a decrease in legal costs. In fiscal year 2005, our legal expenses included a $0.2 million non-recurring charge for a settlement of a lawsuit. The decrease in our legal costs was partially offset by an increase in costs related to the development and distribution of content to wireless platforms. These costs included consulting costs, the hiring of dedicated wireless personnel, and our attendance at several wireless trade shows.

      The 33% decline in operating income from 2004 to 2005 is primarily due to the fact that our cost of sales and operating expenses declined by $0.5 million while our revenue declined by $0.6 million year-over-year. The 24% decline in operating expenses from 2004 to 2005 was primarily related to a decrease in legal, advertising, payroll, and property tax expenses. Legal expenses during 2005, which declined 34% from 2004, included a non-recurring $0.2 million charge for the settlement of a lawsuit during the year.

Restructuring Recovery

	(In Millions) Year ended March 31
	2006		2005		2004
Restructuring recovery	$	0.0	$	0.6	$	0.0

Restructuring Recovery

      As part of the Internet Group restructurings that were completed during the fiscal years ended March 31, 2002 and 2003, we had accrued approximately $1.6 million for excess office space in Sherman Oaks, California. During the 2005 fiscal year, we reached a final settlement with the landlord for this space. As part of the settlement, we paid $375,000 to the landlord and we were released from any ongoing obligations for the space. The $0.6 million of rent restructuring reserve remaining at that time was reversed into income as a result of this settlement.

Film Production Group

      The following table sets forth certain financial information for the Film Production Group for the year ended March 31:

	(in millions) February 11 - March 31, 2006
NET REVENUE
Repped Title Revenue	$	0.5
Owned Title Revenue		0.6
TOTAL	$	1.1
COST OF SALES		0.6
GROSS PROFIT	$	0.5
GROSS MARGIN		45	%
OPERATING EXPENSES	$	0.7
NET LOSS		($0.2	)

      We completed the acquisition of the Film Production Group on February 10, 2006. The results above are for the period February 11 through March 31, 2006.

REVENUE

      Repped title revenue represents revenue from the licensing of film titles which we represent (but do not own) under international sales agency agreements with various independent film producers. We have a portfolio of approximately 80 titles that we represent through our Mainline Releasing and Lightning Entertainment labels. We license the international television rights of these films to third parties on behalf of the various independent film producers we represent. We will prepare the title for

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market by creating trailers, art work, and by ensuring the title conforms to broadcast standards in each particular territory. Cost incurred to prepare the title for market in this manner, as well as the marketing costs incurred at the shows attended throughout the year (such as advertising and film screening costs) are paid by us on behalf of the producer.

      We will earn a commission of 15-25% of the fees collected for licensing the title plus a marketing fee for most titles that we represent. The costs we incur are recovered, as well as any monies advanced to the producer prior to licensing the movie to third parties, as fees are collected for licensing the film in the various international territories or domestically, if applicable. We recover all costs incurred and advances paid to the producer before we remit any license fees to the producer. We will typically recover all costs incurred and monies advanced to a producer, plus earn our marketing fee, within the first 12 - 18 months of the sales agency relationship. Commissions are earned on the license fees once all appropriate revenue recognition criteria has been met. We will generally earn a 25% - 75% commission for films where we represent the domestic television rights.

      Owned title revenue is earned by licensing the rights to the content in our library or newly produced content consisting of erotic thrillers and adult reality-style event content. Our library currently consists of 350 hours of content, including a small amount of mainstream genres such as horror films. We generally develop 40 - 50 hours of new content annually.

      Titles are licensed on a flat fee basis to Cinemax and Showtime. Revenue is generally earned once the content is delivered to the licensee in the case of a flat fee arrangement.

      We also license our erotic thrillers and event content on a monthly basis to Direct TV and to In Demand for distribution to Cable MSOs. Our content is licensed to Direct TV and In Demand on a revenue sharing basis. Revenue is earned once the cash is collected and the amount becomes fixed and determinable. Therefore, revenue may fluctuate based upon when cash is collected from these customers. In addition, other revenue sharing arrangements exist for distribution of our owned content through platforms such as DISH, TVN, BskyB, and Rogers Cable. We will also license the international rights for our content to various third parties on a flat fee basis.

      We have distribution agreements with Lionsgate, Universal and New Line Cinema for the delivery of generally 9 -12 titles per year, which are distributed direct-to-video by these customers. Content licensed to these customers may be our own content or content for which we represent the domestic television rights. Revenue is recognized once the cash is collected and the amount becomes fixed and determinable. Because of this, revenue may fluctuate based upon when cash is collected from these customers. We generally collect from these customers on a quarterly basis.

      Because we recently acquired The Film Production Group, and because The Film Production Group was a private company on a cash basis of accounting prior to the acquisition, it is difficult to predict the revenue for this company until we have more quarterly trends to analyze. We believe that the owned title revenue will be a fairly predictable revenue stream, but that revenue from repped titles may fluctuate based upon when we attend trade shows where these titles will be actively marketed. Additionally, because of the fact that revenue is recognized when cash is collected or content is delivered, we do not believe that the revenue earned from owned titles for the period February 11 - March 31, 2006 is necessarily indicative of a full 48-day period of time since some revenue was recognized prior to completion of the acquisition based upon the date of collection or delivery.

COST OF SALES

      Cost of sales is primarily comprised of amortization of our content as well as delivery and distribution costs related to our owned content. There are no costs of sales related to the repped title business.

      Film amortization is determined based on the revenue recognized in the current period for a title divided by the ultimate revenue expected for the title as determined at the beginning of the fiscal year times the unamortized cost for that title. Because of the valuation placed on the film library as a result of the acquisition, our unamortized film cost is higher than prior to the acquisition, resulting in higher

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amortization costs. Therefore, the margins we are recognizing on content that existed as of February 10, 2006 are much lower than we would normally recognize for the distribution of our content. As we begin to monetize films that are currently in production over the next 12 - 24 months, we would expect that our margins would increase. Currently, our film amortization represents about 68% of our costs of sales.

OPERATING LOSS

      We are generating an operating loss primarily because of our film cost amortization, the accrual of the contingent earnout payments related to the acquisition, and the amortization of intangibles identified as part of the acquisition. Under the provisions of the Earnout Agreement, the two principals of the Film Production Group are able to earn up to $2 million over three calendar years if certain EBITDA (earnings before interest, taxes, depreciation, and amortization) targets are met. These EBITDA targets are partially cumulative over the three-year period.

      Additionally, as part of the valuation of the acquisition, $4.6 million was allocated to the non-compete agreements that we have with the two principals of the Film Production Group. The value of these non-competes are being amortized over five years on a straight-line basis.

      During this period, we incurred approximately $60,000 in non-recurring costs related to outside services to assist us in integrating our accounting with the corporate accounting group. Other operating costs related to salaries, trade shows, office expense, travel and meals/entertainment are generally consistent with our expectations of these costs for the 2007 fiscal year.

Corporate Administration

The following table sets forth certain financial information for corporate administration expenses for the three years ended March 31:

	(In Millions) Year ended March 31						Percent Change
	2006		2005		2004		’06 vs’05			’05 vs’04
Operating Expenses	$	(6.0)	$	(5.8)	$	(5.0)		3	%		16	%

      Expenses related to corporate administration include all costs associated with the operation of the public holding company, New Frontier Media, Inc., that are not directly allocable to the Pay TV, Internet and Film Production operating segments. These costs include, but are not limited to, legal and accounting expenses, insurance, registration and filing fees with NASDAQ and the SEC, investor relation cost, and printing costs associated with the Company’s public filings.

      The 3% increase in corporate administrative expenses from 2005 to 2006 is primarily due to an increase in legal, consulting and payroll costs. Legal fees increased due to a lawsuit that went to trial during the current fiscal year. We prevailed in the lawsuit and we do not expect to incur any additional expenses related to this issue. The increase in consulting expense is related to fees paid to the investment-banking firm hired by our Board to assist us in analyzing strategic alternatives for the Company. This investment-banking firm continues to assist us in analyzing additional strategic opportunities for the Company. The increase in payroll costs is due to additional accounting personnel hired during the year, an increase in annual salaries of our executives, and the addition of a VP of Marketing and Corporate Strategy to the corporate staff. The increase in legal, consulting and payroll costs was partially offset by a 34% decrease in accounting fees related to lower costs associated with our continuing compliance with Section 404 of the Sarbanes-Oxley Act (“Section 404”). We anticipate that in 2007 these fees will be consistent with those incurred in our current fiscal year as we will utilize an outside consulting firm to assist us with developing and documenting the processes and procedures necessary to ensure that our Film Production Group is in compliance with Section 404.

      The 16% increase in corporate administration expenses from 2004 to 2005 is primarily due to a) an increase in outside accounting fees; b) an increase in listing fees; and c) an increase in payroll costs. These costs were partially offset by declines in consulting and legal fees. Outside accounting fees increased 84% from 2004 due to our efforts to comply with Section 404. During the current fiscal year,

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we hired an outside consulting firm to assist us with documenting and testing our internal control over financial reporting as required by Section 404. In addition, our external audit fees increased as a result of the additional audit work required for Section 404. Listing fees increased from 2004 due to the payment of a one-time fee for our application to the NASDAQ National Market during the fiscal year ended March 31, 2005. Payroll costs increased from 2004 as a result of additional personnel hired by our accounting and legal departments as well as to an increase in executive bonuses. The decline in consulting expense is related to fees paid during 2004 to our former Chief Executive Officer and to a non-cash expense related to the extension of his stock options. Outside legal fees declined due to the addition of an in-house attorney who was able to internally manage many legal issues that we had outsourced in past years.

Deferred Taxes

      SFAS 109, “Accounting for Income Taxes” requires, among other things, the separate recognition, measured at currently enacted tax rates, of deferred tax assets and deferred tax liabilities for the tax effect of temporary differences between the financial reporting and tax reporting bases of assets and liabilities, and net operating loss and tax credit carryforwards for tax purposes. A valuation allowance must be established for deferred tax assets if it is “more likely than not” that all or a portion will not be realized. The Company routinely evaluates its recorded deferred tax assets to determine whether it is still more likely than not that such deferred tax assets will be realized.

      During the 2006 fiscal year, we determined that it was more likely than not that we would utilize our net operating losses. Accordingly, we reversed the remaining valuation allowance.

      Net deferred tax liabilities of approximately $1.9 million pertain to certain temporary differences related to purchased intangibles and the film library, which were acquired as part of the MRG acquisition completed during the current fiscal year.

      During the year ended March 31, 2005, we recognized a net deferred tax asset of $377,000 related to our net operating loss carryforwards. In addition, we determined that it was more likely than not that $0.6 million of our net deferred tax assets would not be realized and, accordingly, we recorded a valuation allowance for this amount. The $0.6 million relates to potentially expiring net operating loss carryforwards.

      During the years ended March 31, 2004, we determined that it was more likely than not that our deferred tax assets would not be realized and we, accordingly, recorded a valuation allowance against the net deferred tax assets of $6.7 million.

      During the year ended March 31, 2005, the Company generated taxable income against which these tax attributes were applied, and accordingly, reversed a portion of the valuation allowance except as explained below.

      During the year ended March 31, 2004, options and warrants were exercised and certain disqualifying dispositions occurred resulting in deductions for tax purposes. Similar benefits were included in the Company’s net operating losses. These deductions resulted in a benefit of $4.0 million to Additional Paid in Capital during the fiscal year ended March 31, 2005.

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Liquidity and Capital Resources
Cash Flows from Operating Activities and Investing Activities:

      Our statements of cash flows are summarized as follows (in millions):

	Year Ended March 31,
	2006			2005			2004
Net cash provided by operating activities	$	12.3		$	15.0		$	13.9
Cash flows used in investing activities:
Purchases of equipment and furniture		(1.0	)		(1.2	)		(1.4	)
Redemption of available-for-sale securities		38.4			8.9			0.0
Purchase of available-for-sale securities		(35.5	)		(21.0	)		(1.6	)
Other		0.0			(0.3	)		0.0
Payment for business acquisitions, net of cash acquired		(13.3	)		0.0			0.0
Restricted funds held in escrow		(2.6	)		0.0			0.0
Net cash used in investing activities	$	(14.0	)	$	(13.6	)	$	(3.0	)

      The decline in cash provided by operating activities from 2005 to 2006 was primarily related to:

• The amount spent on content licensing (prepaid distribution rights) increased $0.9 million to $3.2 million for the 2006 fiscal year from $2.3 million for the 2005 fiscal year;

• Accounts receivable increased $2.1 million during the 2006 fiscal year, as compared to an increase in accounts receivable of $1.2 million in the 2005 fiscal year;

• A decline in tax benefits from the exercise of options and warrants to $0.5 million for the 2006 fiscal year from $4.0 million for the 2005 fiscal year;

• An increase in net income of $0.2 million from the 2005 fiscal year;

      The increase in cash provided by operating activities from 2004 to 2005 was primarily related to:

• The amount spend on licensing content declining to $2.3 million for the 2005 fiscal year from $2.9 million for the 2004 fiscal year.

• $4.0 million of tax benefits from the exercise of options and warrants during the 2005 fiscal year.

• An increase in net income from 2004

      Net cash used in investing activities increased slightly from 2005. We experienced a net redemption of the investments of our excess cash balances of $2.9 million during the 2006 fiscal year as we accumulated the short-term cash position necessary to complete the acquisition of MRG. We paid $13.3 million for the purchase of MRG during the fourth quarter of the 2006 fiscal year. In addition, $2.6 million related to this acquisition is being held in escrow pending the resolution of certain contingencies. Our capital expenditures for the 2006 fiscal year of $1.0 million related to the purchase of software for our wireless platform, editing equipment, descrambling equipment necessary for new cable launches, and miscellaneous computers, servers, switches and software.

      The increase in cash used in investing activities from 2004 to 2005 was primarily related to the investment of our excess cash balances in certificates of deposits and fixed income debt instruments with limited maturities during the 2005 fiscal year. In addition, our capital expenditures of $1.2 million during the 2005 fiscal year were related to the final leasehold improvements made to our digital broadcast facility, the purchase of a new storage area network solution to allow for increased redundancy and efficient future storage expansion, and various servers, computers, editing and broadcasting equipment.

      Purchases of equipment and furniture accounted for a portion of the significant cash outlays for investing activities in the fiscal year ended March 31, 2004. Purchases of equipment and furniture during the 2004 fiscal year related primarily to purchases of broadcast equipment, including a new

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broadcast cluster to allow for increased redundancy of our digital broadcast center, purchases of encrypting equipment necessary for new cable launches, and leasehold improvements necessary to upgrade our digital broadcast facility. Purchases of investments represented the next most significant investing activity during the 2004 fiscal year. These purchases related to certificates of deposits in which we invested during the year.

Financing Activities:

      Our cash flows (used in) provided by financing activities are as follows (in millions):

	Year Ended March 31,
	2006			2005			2004
Cash flows (used in) provided by financing activities:
Payments on capital lease obligations	$	(0.2	)	$	(0.4	)	$	(1.1	)
Decrease notes payable/line of credit		(4.5	)		(0.4	)		(0.1	)
Stock options/warrants exercised		0.8			2.7			6.3
Retirement of stock		0.0			0.0			(1.5	)
Issuance of redeemable preferred stock		0.0			0.0			2.0
Redemption of redeemable preferred stock		(0.0	)		0.0			(5.3	)
Other		(0.2	)		(0.2	)		(0.2	)
Net cash (used in) provided by financing activities:	$	(4.1	)	$	1.7		$	0.1

      As part of the MRG acquisition, we assumed the debt outstanding on a line of credit and interest payable in the amount of $4.5 million. We paid down this line of credit to $0 simultaneously with the closing of the acquisition. This use of cash was only slightly offset by cash received from the exercise of stock options and warrants during the year of $0.8 million.

      During the 2005 fiscal year, we received $2.7 million from the exercise of stock options and warrants. This cash from financing activities was offset by the repayment of a $0.4 million secured note payable that was due to an unrelated third party.

      During the 2004 fiscal year, we issued 2.5 million shares of Class B Redeemable Preferred Stock at $0.81 per share. The proceeds from this offering were used to redeem $1.0 million of the Company’s Class A Redeemable Preferred Stock and to fund the purchase and subsequent retirement of 2,520,750 shares of New Frontier Media, Inc. common stock, valued at $1.5 million, from Edward Bonn, a former officer of the Company. We also redeemed $5.3 million of the Class A and Class B Redeemable Preferred Stock during the 2004 fiscal year and $0.5 million of the Class B Redeemable Preferred Stock was converted into a note payable, which was then subsequently repaid. Much of our cash used in financing activities during the 2004 fiscal year was offset by the exercise of stock options and warrants which generated cash from financing activities of $6.3 million.

      If we were to lose our major customers that account for 35%, 14%, and 12% of our revenue as of the year ended March 31, 2006, respectively, our ability to finance our future operating requirements would be severely impaired.

      We currently have a $3.0 million line of credit available through a commercial banking relationship. This line of credit expires in July 2006. The interest rate applied to the line of credit is variable based on the current prime rate. The balance on the line of credit is currently $0 and we have not drawn down on it during our 2006 fiscal year. The line of credit, if utilized, would be secured by our Pay TV Group’s trade accounts receivable and it requires that we comply with certain financial covenants and ratios.

      We anticipate capital expenditures to be approximately $1.8 million, content licensing expenditures to be approximately $3.5 million, and our film production expenditures to be approximately $2.1 million during our 2007 fiscal year.

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      In December 2005, our Board of Directors approved a stock repurchase plan to purchase up to 2.0 million shares of our stock over 30 months. At our current stock price, this would require a use of cash of approximately $18 million over the next 30 months. To date no shares have been repurchased.

      As part of the MRG acquisition we entered into an earnout agreement, which would require a $2.0 million payment over three calendar years if certain EBITDA targets are met.

      We entered into a two-year agreement with Direct TV for the distribution of two of our services beginning April 2006. This agreement requires us to meet certain performance targets. If we are unsuccessful in meeting these performance targets, we may have to provide certain rebates to Direct TV up to, but not exceeding, the amount of the license fees earned from Direct TV.

      We believe that existing cash and cash generated from operations will be sufficient to satisfy our operating requirements, and we believe that any capital expenditures, content licensing or film production costs that may be incurred can be financed through our cash flows from operations.

      The following is a summary of the Company’s contractual obligations for the periods indicated that existed as of March 31, 2006, and is based on information appearing in the Notes to the Consolidated Statements:

	Payments Due by Period (in 000’s)
Contractual Obligations	Total		Less than 1 year		1-3 Years		3-5 Years		More than 5 years
Operating Lease Obligations	$	8,481	$	2,608	$	2,566	$	2,202	$	1,105

      The above table does not include obligations for employment contracts that expire through March 31, 2009. The Company’s obligations under employment agreements total $3.0 million, $1.7 million, and $1.2 million for years ended March 31, 2007, 2008 and 2009, respectively and include the Company’s obligation under the Earnout provisions for the acquisition of MRG which occurred on February 10, 2006.

NEW ACCOUNTING PRONOUNCEMENTS

      In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R, “Accounting for Stock-Based Compensation” (“SFAS 123R”). This Statement supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and its related implementation guidance and is effective as of the beginning of the annual reporting period that begins after June 15, 2005. This Statement applies to all awards granted after the required effective date, to awards modified, repurchased or cancelled after that date, and to all unvested options at the adoption date. The cumulative effect of initially applying this Statement, if any, is recognized as of the required effective date. This Statement addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity, in an exchange for goods or services, incurs liabilities that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. The Statement eliminates the ability to account for share-based compensation transactions using APB 25, and generally requires instead that such transactions be accounted for using a fair-value-based method. SFAS No. 123(R) allows for either prospective recognition of compensation expense or retrospective recognition. As of April 1, 2006, the company began to apply the prospective recognition method and implemented the provisions of SFAS No. 123(R). For the coming fiscal year ending March 31, 2007, the Company anticipates the impact of the provisions of adopting SFAS No. 123(R) for all options currently outstanding will reduce net income by approximately $500,000.

      In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions. This statement eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, and replaces it with an exception for exchanges that do not have commercial substance. The provisions of the statement are effective for

47

fiscal periods beginning after June 15, 2005. The Company does not anticipate that the adoption of this statement will have a material impact on its financial statements.

      In May 2005 the FASB issued SFAS No. 154 Accounting Changes and Error Corrections which replaced APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements and changes the requirements for the accounting for and reporting of a change in accounting principle. This statement applied to all voluntary changes in accounting principles. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. The Company does not anticipate that the adoption of this statement will have a material impact on its financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

      Market Risk. The Company’s exposure to market risk is principally confined to cash in the bank, money market accounts, and notes payable, which have short maturities and, therefore, minimal and immaterial market risk.

      Interest Rate Risk. As of June 1, 2006, the Company had cash in checking and money market accounts, certificates of deposits, and fixed income debt securities. Because of the short maturities of these instruments, a sudden change in market interest rates would not have a material impact on the fair value of these assets. Furthermore, the Company’s borrowings are at fixed interest rates, limiting the Company’s exposure to interest rate risk.

      Foreign Currency Exchange Risk. The Company does not have any material foreign currency exposure.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

      The consolidated financial statements of New Frontier Media, Inc. and its subsidiaries, including the notes thereto and the report of independent accountants therein, commence at page F-2 of this Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

      The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities and Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely making known to them material information relating to the Company and the Company’s consolidated subsidiaries required to be disclosed in the Company’s reports filed or submitted under the Exchange Act.

Changes in Internal Control over Financial Reporting

      As a result of our acquisition of MRG in the fourth quarter of our 2006 fiscal year, the Company has expanded its internal controls over financial reporting to include consolidation of MRG’s results of operations as well as acquisition related accounting and disclosures. There were no other changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

48

SOX 404
Summary Management Report
As of March 31, 2006

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) under the Securities Exchange Act of 1934 (“Exchange Act”). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Consolidated Financial Statements.

Internal control over financial reporting includes those written policies and procedures that:

• Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of New Frontier Media, Inc.;

• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America;

• Provide reasonable assurance that receipts and expenditures of New Frontier Media, Inc. are being made only in accordance with authorization of management and directors of New Frontier Media, Inc.; and

• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.

Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices and actions taken to correct deficiencies as identified.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of New Frontier Media, Inc.’s internal control over financial reporting as of March 31, 2006. Management based this assessment on criteria for effective internal control over financial reporting described in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of New Frontier Media, Inc.’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors.

The Company has excluded from its evaluation the internal control over financial reporting of MRG Entertainment, Inc. (“MRG”), which was acquired on February 10, 2006. As of March 31, 2006, and for the period from February 10, 2006 through March 31, 2006, total assets and total revenues subject to MRG’s internal control over financial reporting represented 36% and 2% of the Company’s total assets and total revenues as of and for the year ended March 31, 2006. Our internal control over financial reporting includes policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

Based on this assessment, management determined that, as of March 31, 2006, New Frontier Media, Inc. maintained effective internal control over financial reporting.

The Company’s independent auditors, Grant Thornton LLP, a registered public accounting firm, are appointed by the Audit Committee of the Company’s Board of Directors, subject to ratification by our Company’s shareowners. Grant Thornton LLP have audited and reported on the Consolidated Financial Statements of New Frontier Media, Inc. and its subsidiaries, management’s assessment of the

49

effectiveness of the Company’s internal control over financial reporting and the effectiveness of the Company’s internal control over financial reporting. The reports of the independent auditors are included herein.

May 18, 2006

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Board of Directors and Shareholders of
   New Frontier Media Inc. and Subsidiaries

We have audited management’s assessment, included in the accompanying Management Report on Internal Control Over Financial Reporting, that New Frontier Media, Inc. and Subsidiaries (the “Company”) maintained effective internal control over financial reporting as of March 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As indicated in the accompanying Management’s Assessment of the Effectiveness of Internal Controls, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of MRG Entertainment Inc. and its subsidiaries, and Lifestyles Entertainment Inc. (collectively “MRG”), which are included in the 2006 consolidated financial statements of the Company and constituted $29.9 million and $18.3 million of total assets and net assets, respectively, as of March 31, 2006 and $1.2 million and $.2 million of revenues and net loss, respectively, for the year then ended. Management did not assess the

50

effectiveness of internal control over financial reporting at MRG because the Company acquired MRG on February 10, 2006. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of MRG.

In our opinion, management’s assessment that New Frontier Media, Inc. and Subsidiaries maintained effective internal control over financial reporting as of March 31, 2006, is fairly stated, in all material respects, based on the criteria established by COSO. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2006, based on the criteria established by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of March 31, 2006 and 2005, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows and financial statement schedule for each of the three years in the period ended March 31, 2006, and our report dated May 19, 2006 expressed an unqualified opinion on those financial statements and financial statement schedule.

New York, New York
May 19, 2006

ITEM 9B. OTHER INFORMATION.

None.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

      The information required by Item 10 regarding the Board of Directors and Audit Committee will be included in our proxy statement to be filed relating to the annual meeting of stockholders to be held on August 15, 2006, which will be filed within 120 days after the close of our fiscal year ended March 31, 2006, and is incorporated herein by reference, pursuant to General Instruction G(3). Please see “Executive Officers of the Registrant” in Part I of this form.

      Pursuant to Section 16 of the Exchange Act, the Company’s directors and executive officers and beneficial owners of more than 10% of the Company’s Common Stock are required to file certain reports, within specified time periods, indicating their holdings of and transactions in the Common Stock and derivative securities of the Company. Based solely on a review of such reports provided to the Company and written representations from such persons regarding the necessity to file such reports, the Company is not aware of any failures to file reports or report transactions in a timely manner during the Company’s fiscal year ended March 31, 2006.

      The Company has adopted a code of business conduct and ethics applicable to the Company’s Directors, officers, and employees, known as the Code of Business Conduct and Ethics. The Code of Business Conduct and Ethics is available on the Company’s website. In the event that we amend or waive any of the provisions of the Code of Business Conduct and Ethics applicable to our principal executive officer, principal financial officer or controller that relates to any element of the code of ethics definition enumerated in Item 406(b) of Regulation S-K, we intend to disclose the same on the Company’s website at www.noof.com.

ITEM 11. EXECUTIVE COMPENSATION.

      The information required by Item 11 will be included in our proxy statement to be filed relating to the annual meeting of stockholders to be held on August 15, 2006, which will be filed within 120 days after the close of our fiscal year ended March 31, 2006, and is incorporated herein by reference, pursuant to General Instruction G(3).

51

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

      The information required by Item 12 will be included in our proxy statement to be filed relating to the annual meeting of stockholders to be held on August 15, 2006 which will be filed within 120 days after the close of our fiscal year ended March 31, 2006, and is incorporated herein by reference, pursuant to General Instruction G(3).

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

      The information required by Item 13 will be included in our proxy statement to be filed relating to the annual meeting of stockholders to be held on August 15, 2006, which will be filed within 120 days after the close of our fiscal year ended March 31, 2006, and is incorporated herein by reference, pursuant to General Instruction G(3).

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

      The information required by Item 14 will be included in our proxy statement to be filed relating to the annual meeting of stockholders to be held on August 15, 2006 which will be filed within 120 days after the close of our fiscal year ended March 31, 2006, and is incorporated herein by reference, pursuant to General Instruction G(3).

PART IV.

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

      The following documents are filed as part of this report:

      1) FINANCIAL STATEMENTS

The financial statements listed in the Table of Contents to Consolidated Financial Statements are filed as part of this report.

      2) FINANCIAL STATEMENT SCHEDULES — All schedules have been included in the Consolidated Financial Statements or Notes thereto.

      3) EXHIBITS

Exhibits Number		Description
	3.01	—Articles of Incorporation of Company, with Amendment(1)
	3.02	—First Amended ByLaws of Company(1)
	4.01	—Form of Common Stock Certificate(1)
	10.01	—Office Lease Agreement, dated August 12, 1998, for premises at 5435 Airport Boulevard, Boulder CO.(2)
	10.02	—Agreement between Colorado Satellite Broadcasting, Inc. and Loral Skynet Concerning Skynet Transponder Service(4)
	10.03	—Agreement between Colorado Satellite Broadcasting, Inc. and Loral Skynet Concerning Skynet Space Segment Service(4)
	10.04	—Amendment No. 1 to Agreement between Colorado Satellite Broadcasting, Inc. and Loral Skynet Concerning Skynet Space Segment Service(4)
	10.05	—Employment Agreement between New Frontier Media, Inc. and Karyn L. Miller(4)
	10.06	—License Agreement between Colorado Satellite Broadcasting, Inc. and Metro Global Media, Inc.(4)
	10.07	—Employment Agreement between Ken Boenish and Colorado Satellite Broadcasting, Inc.(5)
	10.08	—Amendment Number Two to the Agreement between Colorado Satellite Broadcasting, Inc. and Loral Skynet Concerning Skynet Space Segment Service(5)

52

10.09	—Amendment Number 1 between Colorado Satellite Broadcasting, Inc. and Loral Skynet Concerning Skynet Transponder Service(6)
10.10	—Amendment Number 4 between Colorado Satellite Broadcasting, Inc. and Loral Skynet Concerning Skynet Space Segment Service(9)
10.11	—Employment Agreement between Michael Weiner and New Frontier Media, Inc.(7)
10.12	—Separation and Consulting Agreement between Mark Kreloff and New Frontier Media, Inc.(7)
10.13	—Amendment to Employment Agreement between Michael Weiner and New Frontier Media, Inc.(8)
10.14	—Amendment to Employment Agreement between Ken Boenish and Colorado Satellite Broadcasting, Inc.(8)
10.15	—Amendment to Employment Agreement between Karyn Miller and New Frontier Media, Inc.(8)
10.16	—Office Lease Agreement dated April 11, 2001 between New Frontier Media, Inc. and Northview Properties, LLC(9)
10.17	—Lease Modification Agreement between New Frontier Media, Inc. and LakeCentre Plaza Limited, LLP dated July 2003(9)
10.18	—Catalog License Agreement between Pleasure Productions, Inc. and Colorado Satellite Broadcasting, Inc.(9)
10.19	—Telecommunications Services Agreement between WilTel Communications, LLC and Colorado Satellite Broadcasting, Inc.(10)
10.20	—Employment Agreement between Bill Mossa, VP of Affiliate Sales and Marketing, and TEN Sales, Inc.(11)
10.21	—January 11, 2005 Amendment to the Employment Agreement between New Frontier Media, Inc. and Michael Weiner dated February 17, 2003, as amended.(12)
10.22	—January 11, 2005 Amendment to the Employment Agreement between New Frontier Media, Inc. and Karyn Miller dated August 1, 2002, as amended.(12)
10.23	—January 11, 2005 Amendment to the Employment Agreement between TEN and Ken Boenish dated April 1, 2003, as amended.(12)
10.24	—Amendment No. 3 to Contract Number T70112100 between Colorado Satellite Broadcasting, Inc. and Intelsat USA Sales Corp.(13)
10.25	—Employment Agreement dated January 20, 2006 between New Frontier Media, Inc. and Ira Bahr(14)
10.26	—Affiliation Agreement for DTH Satellite Exhibition Programming of Cable Network Programming between Directv, Inc. and Colorado Satellite Broadcasting, Inc. dated March 31, 2006(15)
14.00	—Code of Ethics for New Frontier Media, Inc.’s Financial Management(7)
21.01	—Subsidiaries of the Company(15)
23.01	—Consent of Grant Thornton LLP(15)
31.01	—Certification by CEO Michael Weiner pursuant to U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(15)
31.02	—Certification by CFO Karyn Miller pursuant to U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(15)
32.03	—Certification by CEO Michael Weiner pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(15)
32.04	—Certification by CFO Karyn Miller pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(15)

53

⁽¹⁾   Incorporated by reference to the Company’s Registration Statement on Form SB-2 (File No. 333-35337).

⁽²⁾   Incorporated by reference to the Company’s Annual Report on Form 10-KSB for the year ended March 31, 1999.

⁽³⁾   Incorporated by reference to the Company’s Annual Report on Form 10-KSB for the year ended March 31, 2000.

⁽⁴⁾   Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.

⁽⁵⁾   Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.

⁽⁶⁾   Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2002.

⁽⁷⁾   Incorporated by reference to the Company’s Annual Report filed on Form 10-K for the year ended March 31, 2003.

⁽⁸⁾   Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2003.

⁽⁹⁾   Incorporated by reference to the Company’s Annual Report filed on Form 10-K for the year ended March 31, 2004.

⁽¹⁰⁾   Incorporated by reference to the Company’s Quarterly Report filed on Form 10-Q for the quarter ended September 30, 2004.

⁽¹¹⁾   Incorporated by reference to Form 8-K filed on September 10, 2004.

⁽¹²⁾   Incorporated by reference to Form 8-K filed on January 18, 2005.

⁽¹³⁾   Incorporated by reference to the Company’s Quarterly Report filed on Form 10-Q for the quarter ended September 30, 2005.

⁽¹⁴⁾   Incorporated by reference to the Company’s Quarterly Report filed on Form 10-Q for the quarter ended December 31, 2005.

⁽¹⁵⁾   Filed herewith.

54

SIGNATURES

      In accordance with the requirements of Section 13 or 15(d) of the Exchange Act, New Frontier Media has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

NEW FRONTIER MEDIA, INC.

 
 
 
Michael Weiner
Chief Executive Officer

Name and Capacity	Date
/s/ MICHAEL WEINER	June 13, 2006
Name: Michael Weiner Title: Chief Executive Officer (Principal Executive Officer)
/s/ KARYN MILLER	June 13, 2006
Name: Karyn Miller Title: Chief Financial Officer (Principal Financial and Accounting Officer)
/s/ SKENDER FANI	June 13, 2006
Name: Skender Fani Title: Director
/s/ MARC GREENBERG	June 13, 2006
Name: Marc Greenberg Title: Director
/s/ MELISSA HUBBARD	June 13, 2006
Name: Melissa Hubbard Title: Director
/s/ ALAN ISAACMAN	June 13, 2006
Name: Alan Isaacman Title: Director
/s/ DAVID NICHOLAS	June 13, 2006
Name: David Nicholas Title: Director
/s/ HIRAM WOO	June 13, 2006
Name: Hiram Woo Title: Director

55

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

TABLE OF CONTENTS

	Page
Report of Registered Public Accounting Firm	F-2
Consolidated Balance Sheets	F-3
Consolidated Statements of Operations	F-5
Consolidated Statements of Comprehensive Income (Loss)	F-6
Consolidated Statements of Changes in Shareholders’ Equity	F-7
Consolidated Statements of Cash Flows	F-8
Notes to Consolidated Financial Statements	F-10
SUPPLEMENTAL INFORMATION
Valuation and Qualifying Accounts — Schedule II	F-34

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Board of Directors and Shareholders of
   New Frontier Media, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of New Frontier Media, Inc. and Subsidiaries (the “Company”) as of March 31, 2006 and 2005, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended March 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of New Frontier Media, Inc. and Subsidiaries at March 31, 2006 and 2005 and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended March 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II — Valuation and Qualifying Accounts is presented for the purpose of complying with the Securities and Exchange Commission¹s rules and is not part of the basic financial statements. For each of the three years in the period ended March 31, 2006, this schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of New Frontier Media Inc. and Subsidiaries’ internal control over financial reporting as of March 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated May 19, 2006 expressed an unqualified opinion thereon.

/s/ GRANT THORNTON LLP

New York, New York
May 19, 2006

F-2

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in 000s)

ASSETS

	March 31,
	2006		2005
CURRENT ASSETS:
Cash and cash equivalents	$	12,611	$	18,403
Restricted cash		2,646		—
Marketable securities		8,730		9,075
Accounts receivable, net of allowance for doubtful accounts of $32 and $24, respectively		12,395		8,034
Deferred tax asset		444		382
Other		871		1,250
TOTAL CURRENT ASSETS		37,697		37,144
EQUIPMENT AND FURNITURE, net		4,082		4,191
OTHER ASSETS:
Prepaid distribution rights, net		8,877		9,721
Marketable securities		1,936		4,547
Recoupable costs and producer advances		1,203		—
Film costs, net		10,412		—
Goodwill		16,744		3,743
Other identifiable intangible assets, net		4,687		101
Other		1,127		837
TOTAL OTHER ASSETS		44,986		18,949
TOTAL ASSETS	$	86,765	$	60,284

The accompanying notes are an integral part of the audited consolidated financial statements.

F-3

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(in 000s except share data)

LIABILITIES AND SHAREHOLDERS’ EQUITY

	March 31,
	2006			2005
CURRENT LIABILITIES:
Accounts payable	$	2,151		$	1,868
Taxes payable		677			—
Producer payable		546			—
Deferred revenue		754			484
Due to related party		250			—
Accrued compensation		1,857			1,263
Accrued transport fees		645			647
Accrued legal and accounting fees		240			662
Accrued liabilities and other		1,365			728
TOTAL CURRENT LIABILITIES		8,485			5,652
LONG-TERM LIABILITIES:
Deferred tax liability		1,268			5
Due to related party		1,000			—
Taxes payable		1,359			—
Other		3,408			961
TOTAL LONG-TERM LIABILITIES		7,035			966
TOTAL LIABILITIES		15,520			6,618
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
Preferred stock, $.10 par value, 5,000,000 shares authorized:
Class A, no shares issued and outstanding		—			—
Class B, no shares issued and outstanding		—			—
Common stock, $.0001 par value, 50,000,000 shares authorized, 23,649,986 and 22,574,854 shares issued and outstanding, at March 31, 2006 and 2005, respectively		2			2
Additional paid-in capital		61,488			55,173
Retained earnings (accumulated deficit)		9,829			(1,454	)
Accumulated other comprehensive loss		(74	)		(55	)
TOTAL SHAREHOLDERS’ EQUITY		71,245			53,666
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	86,765		$	60,284

The accompanying notes are an integral part of the audited consolidated financial statements.

F-4

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in 000s except per share data)

	Year Ended March 31,
	2006			2005			2004
NET SALES	$	46,851		$	46,277		$	42,878
COST OF SALES		14,848			16,047			16,696
GROSS MARGIN		32,003			30,230			26,182
OPERATING EXPENSES:
Sales and marketing		5,103			4,862			4,653
General and administrative		10,900			10,097			9,813
Restructuring recovery		—			(546	)		—
TOTAL OPERATING EXPENSES		16,003			14,413			14,466
OPERATING INCOME		16,000			15,817			11,716
OTHER INCOME (EXPENSE):
Interest income		1,155			403			50
Interest expense		(41	)		(104	)		(1,157	)
Other income (loss)		(7	)		47			311
TOTAL OTHER INCOME (EXPENSE)		1,107			346			(796	)
INCOME BEFORE PROVISION FOR INCOME TAXES		17,107			16,163			10,920
Provision for income taxes		(5,824	)		(5,041	)		(7	)
NET INCOME	$	11,283		$	11,122		$	10,913
Basic income per share	$	0.49		$	0.50		$	0.53
Diluted income per share	$	0.48		$	0.48		$	0.50

The accompanying notes are an integral part of the audited consolidated financial statements.

F-5

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in 000s)

	Year Ended March 31,
	2006			2005			2004
Net income	$	11,283		$	11,122		$	10,913
Other comprehensive loss Unrealized loss on available-for-sale marketable securities, net of income tax benefit of $12 and $25, respectively		(19	)		(55	)		—
Total comprehensive income	$	11,264		$	11,067		$	10,913

The accompanying notes are an integral part of the audited consolidated financial statements.

F-6

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in 000s except share data)

	Common Stock $.0001 Par Value
	Shares			Amounts		Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Loss			Total
BALANCES, March 31, 2003		21,322,816		$	2	$	45,943		$	(23,489	)	$	—		$	22,456
Exercise of stock options/warrants		2,391,414					6,239									6,239
Cashless exercise of warrants		675,347					—									—
Legal settlement		60,000					45									45
Retirement of stock		(2,520,750	)				(1,500	)								(1,500	)
Cancellation of warrants associated with license agreement							(1,152	)								(1,152	)
Repurchase of shares for URLs							(558	)								(558	)
Stock issued in connection with financing		500,000					410									410
Other		(42,819	)				163									163
Net income										10,913						10,913
BALANCES, March 31, 2004		22,386,008			2		49,590			(12,576	)		—			37,016
Exercise of stock options/warrants		1,104,023					2,685									2,685
Cashless exercise of warrants		14,073					—									—
Retirement of stock		(929,250	)				—									—
Tax provision for capital transactions							(1,122	)								(1,122	)
Tax benefit for stock option/warrant exercise							4,020									4,020
Unrealized losses on available-for-sale securities													(55	)		(55	)
Net income										11,122						11,122
BALANCES, March 31, 2005		22,574,854			2		55,173			(1,454	)		(55	)		53,666
Exercise of stock options/warrants		326,562					830									830
Stock issued for acquisition of MRG		748,570					5,000									5,000
Tax benefit for stock option/warrant exercise							485									485
Unrealized losses on available-for-sale securities													(19	)		(19	)
Net income										11,283						11,283
BALANCES, March 31, 2006		23,649,986		$	2	$	61,488		$	9,829		$	(74	)	$	71,245

The accompanying notes are an integral part of the audited consolidated financial statements.

F-7

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in 000s)

	Year Ended March 31,
	2006			2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	11,283		$	11,122		$	10,913
Adjustments to reconcile net income to net cash provided by operating actvities:
Depreciation and amortization		5,991			5,836			5,976
Tax benefit from option/warrant exercise		485			4,020			—
Tax provision for capital transaction		—			(1,122	)		—
Other		—			—			899
(Increase) Decrease in operating assets
Accounts receivable		(2,120	)		(1,161	)		(1,192	)
Receivables and prepaid expenses		251			(535	)		158
Prepaid distribution rights		(3,225	)		(2,287	)		(2,945	)
Capitalized film costs		(285	)		—			—
Deferred tax asset		(62	)		(357	)		—
Other assets		(184	)		283			455
Increase (Decrease) in operating liabilities
Accounts payable		(207	)		170			(213	)
Deferred revenue, net		59			(820	)		(919	)
Producer payable		(263	)		—			—
Taxes payable		1,516			—			—
Deferred tax liability		(695	)		5			—
Accrued restructuring cost		(41	)		(935	)		(279	)
Other accrued liabilities		(191	)		773			1,042
NET CASH PROVIDED BY OPERATING ACTIVITIES		12,312			14,992			13,895
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted funds held in escrow		(2,564	)		—			—
Payment for business acquisitions, net of cash acquired		(13,332	)		—			—
Purchase of investments available-for-sale		(35,522	)		(21,018	)		(1,578	)
Redemption of investments available-for-sale		38,448			8,893			—
Purchase of equipment and furniture		(991	)		(1,164	)		(1,367	)
Other		(24	)		(328	)		—
NET CASH USED IN INVESTING ACTIVITIES		(13,985	)		(13,617	)		(2,945	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations		(154	)		(356	)		(1,125	)
Decrease in notes payable		—			(400	)		(100	)
Payments on line of credit		(4,520	)		—			—
Proceeds from stock options and warrant exercises		830			2,685			6,258
Retirement of stock		—			—			(1,500	)
Redemption of redeemable preferred stock		—			—			(5,250	)
Issuance of redeemable preferred stock		—			—			2,000
Decrease in other financing obligations		(275	)		(253	)		(145	)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(4,119	)		1,676			138

The accompanying notes are an integral part of the unaudited consolidated financial statements.

F-8

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in 000s)

	Year Ended March 31,
	2006			2005		2004
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	$	(5,792	)	$	3,051	$	11,088
CASH AND CASH EQUIVALENTS, beginning of year		18,403			15,352		4,264
CASH AND CASH EQUIVALENTS, end of year	$	12,611		$	18,403	$	15,352
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid	$	49		$	115	$	1,280
Income taxes paid	$	4,583		$	2,656	$	7
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Purchase of equipment via capital lease obligation	$	—		$	—	$	135
Stock issued for purchase of business acquisition	$	5,000		$	—	$	—
Conversion of Class B Redeemable Preferred Stock to notes payable	$	—		$	—	$	500

The accompanying notes are an integral part of the unaudited consolidated financial statements.

F-9

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization

New Frontier Media, Inc. is a publicly traded holding company for its operating subsidiaries.

Colorado Satellite Broadcasting, Inc. (“CSB”), d/b/a The Erotic Networks (“TEN”), is a leading provider of adult programming to multi-channel television providers and low-powered direct-to-home households. Through its VOD service and its networks — Pleasure, TEN, TEN*Clips, TEN*Xtsy, TEN*Blue, TEN*Blox, and TEN*Max — TEN is able to provide a variety of editing styles and programming mixes that appeal to a broad range of adult consumers. Ten Sales, Inc., formed in April 2003, is responsible for selling TEN’s services.

Interactive Gallery (“IGI”), a division of New Frontier Media, aggregates and resells adult content over the Internet. IGI sells content to monthly subscribers through its broadband site, www.TEN.com, partners with third-party gatekeepers for the distribution of www.TEN.com, wholesales pre-packaged content to various webmasters, and aggregates and resells adult content to wireless carriers in the United States and internationally.

On February 10, 2006, New Frontier Media completed an acquisition of MRG Entertainment, Inc., its subsidiaries and a related company, Lifestyles Entertainment, Inc. (collectively “MRG”). MRG derives revenue from three principal businesses: the production and distribution of original motion pictures (“owned product”); the licensing of domestic third party films in international markets where it acts as a sales agent for the product (“repped product”); and the contract production of one motion picture per year for a third party distributor.

The majority of the Company’s sales are derived from the United States. International sales were approximately $807,000, $222,000 and $403,000 for the years ended March 31, 2006, 2005 and 2004, respectively.

Significant Accounting Policies

 Principles Of Consolidation

The accompanying consolidated financial statements include the accounts of New Frontier Media, Inc. and its majority owned subsidiaries (collectively hereinafter referred to as “New Frontier Media” or the “Company”). All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates have been made by management in several areas, including, but not limited to, the realizability of accounts receivable, recoupable producer costs and producer advances, accrued restructuring expenses, the valuation of chargebacks and reserves, the forecast of anticipated revenues (“ultimate” revenues), which is used to amortize film costs, the valuation allowance associated with deferred income tax assets, and the expected useful life and valuation of our prepaid distribution rights. Management bases its estimates and judgments on historical experience and on various other factors that are believed 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 could differ materially from these estimates.

F-10

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

During the quarter ended December 31, 2005, management determined that certain lease incentives received by the Company at the inception of two leases, having a net carrying value of approximately $756,000 at March 31, 2005, should have been recognized as an increase to leasehold improvements with a corresponding increase to deferred lease incentive liability. Both the asset and liability will be amortized on a straight-line basis, over the life of the lease as an increase to amortization expense and reduction in rent expense, respectively. The Company has adjusted the accompanying financial statements as follows to reflect the proper accounting for the lease incentives:

Furniture and equipment, net previously reported as $3,435,000 as of March 31, 2005, has been increased by $756,000. Deferred lease incentive liability, previously reported as $0 as of March 31, 2005 has been increased by $756,000 and is presented in Other Long-Term Liabilities on the balance sheet. These adjustments have no impact on operating income, net income or on net cash flows from operations for the current or prior periods.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, cash in banks and cash equivalents, which are highly liquid instruments with original maturities of less than 90 days.

Restricted Cash

Restricted cash includes amounts held in escrow pursuant to the acquisition agreement, as well as amounts on deposit with a bank that are contractually designated by agreements between the Company and certain film producers related to amounts received from licensing arrangements of the producers’ films.

FDIC Limits

The Company maintains cash deposits with major banks, which exceed federally insured limits. At March 31, 2006, the Company exceeded the federally insured limits by approximately $11,964,000. The Company periodically assesses the financial condition of the institutions and believes that the risk of any loss is minimal.

Marketable Securities

For the years ended March 31, 2006 and 2005, short and long-term marketable securities are classified as ‘available-for-sale’ securities and are stated at fair market value. Marketable securities consist of certificates of deposits and debt securities with varying maturity lengths. These are recorded at fair value on the Consolidated Balance Sheet.

Fair Value of Financial Instruments

The fair value of cash and cash equivalents, restricted cash, accounts receivable, marketable securities, accounts payable, accrued expenses and other liabilities approximate their carrying value due to their short maturities. The fair value of obligations under capital leases approximate the carrying value and is estimated based on the current interest rates offered to the Company for debt of similar maturity.

F-11

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Accounts Receivable

The majority of the Company’s accounts receivable are due from customers in the cable and satellite industries and from the film distribution industry. Credit is extended based on an evaluation of a customer’s financial condition and collateral is not required. Accounts receivable are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the cable and satellite industries as a whole.

For represented titles in the Company’s film production group, accounts receivable include the entire license fee due the Company from the licensee, which includes amounts payable to producers.

Accounts receivable with contractual due dates in excess of one year are recorded at a discounted rate. As of March 31, 2006 and 2005, accounts receivable, net of discount, with a due date greater than one year was approximately $281,000 and $0, respectively.

Prepaid Distribution Rights

The Company’s Pay TV and Internet Group’s film and content libraries consist of newly produced and historical film licensing agreements. The Company accounts for the licenses in accordance with Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 63 Financial Accounting by Broadcasters. Accordingly, the Company capitalizes the costs associated with the licenses and certain editing costs and amortizes these costs on a straight-line basis over the life of the licensing agreement (generally 5 years). Pursuant to the SFAS No. 63, the costs associated with the license agreements should be amortized in a manner that is consistent with expected revenues to be derived from such films. Management has determined that it is appropriate to amortize these costs on a straight-line basis under the assertion that each usage of the film is expected to generate similar revenues. The Company regularly reviews and evaluates the appropriateness of amortizing film costs on a straight-line basis and assesses if an accelerated method would more appropriately reflect the revenue generation of the content. Through its analysis, management has concluded that the current policy of recognizing the costs incurred to license the film library on a straight-line basis most accurately reflects the estimated revenue to be generated by each film.

Management periodically reviews the film library and assesses if the unamortized cost approximates the fair market value of the films. In the event that the unamortized costs exceed the fair market value of the film library, the Company will expense the excess of the unamortized costs to reduce the carrying value of the film library to the fair market value.

Film Costs

The Company capitalizes its share of film costs in accordance with the American Institute of Certified Public Accountants Statement of Position 00-2, (“Accounting by Producers or Distributors of Films”)(“SOP 00-2”). Film and television products (“film costs”), which are produced or acquired for sale or license, are stated at the lower of cost, less accumulated amortization, or fair value. All films are direct-to-television in nature. Film costs include costs to develop and produce films, which primarily consists of salaries, equipment and overhead; and include costs associated with completed titles and those 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 our films. Interest expense is not capitalized as the production runs are short-term in nature.

F-12

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Film costs and acquired film libraries are amortized based on the ratio of the current period’s revenues to estimated ultimate revenues, for a period not exceeding ten years, from all sources on an individual-film-forecast-computation method as defined in SOP 00-2. Film cost valuation is reviewed on a title-by-title basis when an event or change in circumstance indicates the fair value of a title is less than the unamortized cost. Estimates of ultimate revenues can change significantly due to a variety of factors, including the level of market acceptance of television product. Accordingly, revenue estimates are reviewed periodically and amortization is adjusted on a prospective basis, as necessary. Estimated losses, if any, are provided in the current period earnings on an individual film forecast basis when such losses are estimated. Such adjustments could have a material effect on results of operations in future periods.

Equipment and Furniture

Equipment and furniture are stated at cost less accumulated depreciation. The cost of maintenance and repairs is charged to operations as incurred; significant additions and betterments are capitalized. Depreciation is computed using the straight-line method over the estimated useful life of the assets.

The estimated useful lives of the assets are as follows:

Furniture and fixtures	3 to 5 years
Computers, equipment and servers	2 to 5 years

Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter.

Recoupable Costs and Producer Advances

Recoupable costs and producer advances represent amounts contractually allowed and non-refundable advances as provided in distribution arrangements with producers. Such amounts will be recouped against future licensing fees before submitting to producers the residual distribution fees. The Company evaluates recoupable costs and producer advances for impairment based on estimates of future licensing fees.

Goodwill and Other Intangible Assets

Goodwill represents the excess of cost over the fair market value of net assets acquired. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and intangible assets with indefinite useful lives are not amortized but instead are tested for impairment annually.

Other identifiable intangible assets primarily include amounts paid to acquire non-compete agreements with certain key executives, below market rent, urls and trademarks. These costs are capitalized and amortized on a straight-line basis over their estimated useful lives that range from 2.5 to 15 years.

Long-Lived Assets

The Company continually reviews long-lived assets and certain identifiable intangibles held and used for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” In evaluating the fair value and future benefits of such assets, the Company performs an analysis of the anticipated undiscounted future net cash flows of the individual assets over the remaining amortization period and recognizes an impairment loss if the carrying value exceeds the expected future cash flows. The impairment loss is measured based upon the difference between the fair value of the asset and its recorded carrying value.

F-13

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Income Per Share

Basic income per share is computed on the basis of the weighted average number of common shares outstanding. Diluted income per share is computed on the basis of the weighted average number of common shares outstanding plus the potential dilutive effect of outstanding warrants and stock options using the “treasury stock” method.

Revenue Recognition

The Pay TV Group’s Cable/DBS revenues are recognized based on pay-per-view or video-on-demand buys and monthly subscriber counts reported each month by its cable and DBS affiliates. The cable/DBS affiliates do not report actual monthly sales for each of their systems to the Pay TV Group until approximately 60 - 90 days after the month of service ends. This practice requires management to make monthly revenue estimates based on the Pay TV Group’s historical experience for each affiliated system. Revenue is subsequently adjusted to reflect the actual amount earned upon receipt by the Pay TV Group. Adjustments made to adjust revenue from estimated to actual have historically been immaterial.

Revenue from sales of C-Band network subscriptions, ranging from one to three months, is recognized monthly on a straight line basis over the term of the subscription.

Revenue from hotel VOD is recognized on a monthly basis based on buy counts reported each month by a third party provider. The third party provider does not report actual monthly sales for its hotels until approximately 30 days after the month of service. This practice requires management to make monthly revenue estimates based on the third party provider’s historical experience. Revenue is subsequently adjusted to reflect the actual amount earned upon receipt. Adjustments made to adjust revenue from estimated to actual have historically been immaterial.

Revenue from internet membership fees is recognized over the life of the membership, which ranges from one to three months. The Company provides an allowance for refunds based on expected membership cancellations, credits and chargebacks. Processing fees related to membership revenue are recorded in the period the related revenue is recognized.

Revenue from advertising of products on the Company’s PPV networks is recognized in the month the product is sold as reported by the Company’s third party partners. Revenue from spot advertising is recognized in the month the spot is run on the Pay TV Group’s networks.

Revenue from the sale or licensing of films and television programs is recognized when earned and reasonably estimable in accordance with the revenue recognition requirements in accordance with SOP 00-2. For films where the license fee is fixed and determinable, licensing revenues are recognized on the date when the license period commences for each film, the film is delivered to the distributor for exploitation pursuant to the terms and conditions of the licensing agreement, and collectibility of the license fee is reasonably assured. For distribution in the home video market and the pay-per-view market, the Company’s share of licensing revenues is recognized when it is reported by third-party providers.

For represented titles, the Company only recognizes its percentage share of the licensing revenues. The producers’ share or participation of licensing revenues is recorded as a liability until remitted to the producer. There are no producers’ participations on owned films. The Company is generally allowed a marketing fee under the terms of its distribution contracts with producers, which is usually stated as a fixed amount typically recoupable over a 12 to 18 month period. The marketing fee is recognized as revenue when recouped as such recoupments generally correspond to the performance of the related marketing activities.

F-14

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Deferred revenue includes cash payments to the Company and accrued licensing revenue for which revenue recognition criteria has not been met.

Advertising Costs

The Company expenses advertising costs, which includes tradeshow related expenses, as incurred. Advertising costs for the years ended March 31, 2006, 2005 and 2004 were approximately $862,000, $610,000 and $875,000, respectively.

Income Taxes

The Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities.

Stock-Based Compensation

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock Based Compensation Transition and Disclosure”, which was issued to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amended the disclosure requirements of SFAS 123, “Accounting for Stock-Based Compensation” to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.

The Company applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB Opinion No. 25”) and related interpretations in accounting for its plans and complies with the disclosure provisions of SFAS No. 123. Under APB Opinion No. 25, compensation expense is measured as the excess, if any, of the fair value of the Company’s common stock at the date of the grant over the amount a grantee must pay to acquire the stock. The Company’s stock option plans enable the Company to grant options with an exercise price not less than the fair value of the Company’s common stock at the date of the grant. Accordingly, no compensation expense has been recognized in the accompanying consolidated statements of operations for its stock-based compensation plans.

Pro forma information regarding net income and income per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for the years ended March 31, 2006, 2005 and 2004, respectively: risk free interest rates of 4.01%, 3.73%, and 4.62%, respectively; dividend yields of 0%; expected lives of 4 years, 2 years and 5 years, respectively; and expected volatility of 66%, 95% and 95%.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.

F-15

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized, using a method that approximates a straight-line basis, to expense over the options vesting period. Adjustments are made for options forfeited prior to vesting. The effect on compensation expense, net income, and net income per common share had compensation costs for the Company’s stock option plans been determined based on a fair value at the date of grant consistent with the provisions of SFAS No. 123 for the years ended March 31, 2006, 2005 and 2004 is as follows (in thousands, except share data):

	Year Ended March 31,
	2006			2005			2004
Net income
As reported	$	11,283		$	11,122		$	10,913
Deduct:
Total stock-based employee compensation expense determined under fair value based method for awards granted, modified, or settled, net of tax		(747	)		(413	)		(877	)
Pro forma	$	10,536		$	10,709		$	10,036
Basic earnings per common share
As reported	$	0.49		$	0.50		$	0.53
Pro forma	$	0.46		$	0.48		$	0.49
Diluted earnings per common share
As reported	$	0.48		$	0.48		$	0.50
Pro forma	$	0.45		$	0.46		$	0.46

Comprehensive Income

Comprehensive income, as defined in SFAS No. 130, “Reporting Comprehensive Income,” includes all changes in equity (net assets) during a period from non-owner sources. Comprehensive income includes, as it relates to the Company, unrealized gains and losses on available-for-sale securities.

Recently Issued Accounting Pronouncements

In December 2004, the SFAS issued No. 123R, “Accounting for Stock-Based Compensation”. This Statement supersedes APB Opinion No. 25, and its related implementation guidance and is effective as of the beginning of the first annual reporting period that begins after June 15, 2005. This Statement applies to all awards granted after the required effective date, to awards modified, repurchased or cancelled after that date, and to all unvested options at the adoption date. The cumulative effect of initially applying this Statement, if any, is recognized as of the required effective date. This Statement addresses the acounting for transactions in which an entity exchanges its equity intruments for goods or services. It also addresses transactions in which an entity, in an exchange for goods or services, incurs liabilitites that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. The Statement eliminates the ability to account for share-based compensation transactions using APB 25, and generally requires instead that such transactions be accounted for using a fair-value-based method. SFAS No. 123(R) allows for either prospective recognition of compensation expense or retrospective recognition. As of April 1, 2006, the

F-16

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

company began to apply the prospective recognition method and implemented the provisions of SFAS No. 123(R). For the coming fiscal year ending March 31, 2007, the Company anticipates the impact of adopting the provisions of SFAS No. 123(R) for all options currently outstanding will reduce net income by approximately $500,000.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions”. This statement eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, and replaces it with an exception for exchanges that do not have commercial substance. The provisions of the statement are effective for fiscal periods beginning after June 15, 2005. The Company does not anticipate that the adoption of this statement will have a material impact on its financial statements.

In May 2005 the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”, which replaced APB Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements” and changes the requirements for the accounting for and reporting of a change in accounting principle. This statement applied to all voluntary changes in accounting principles. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. The Company does not anticipate that the adoption of this statement will have a material impact on its financial statements.

NOTE 2 — INCOME PER SHARE

The components of basic and diluted income per share are as follows (in 000s, except per share data):

	Year Ended March 31,
	2006		2005		2004
Net income	$	11,283	$	11,122	$	10,913
Average outstanding shares of common stock		22,876		22,265		20,522
Dilutive effect of Warrants/Employee Stock Options		462		802		1,370
Common stock and common stock equivalents		23,338		23,067		21,892
Basic income per share	$	0.49	$	0.50	$	0.53
Diluted income per share	$	0.48	$	0.48	$	0.50

Options and warrants which were excluded from the calculation of diluted earnings per share because the exercise prices of the options and warrants were greater than the average market price of the common shares and/or because the Company reported a net loss during the period were approximately 487,000, 0 and 485,750 for the years ended March 31, 2006, 2005 and 2004, respectively. Inclusion of these options and warrants would be antidilutive.

F-17

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 3 — EQUIPMENT AND FURNITURE

Equipment and furniture at March 31, consisted of the following (in 000s):

	2006			2005
Furniture and fixtures	$	957		$	955
Computers, equipment and servers		8,178			7,547
Leasehold improvements		2,681			2,670
Equipment and furniture, at cost		11,816			11,172
Less accumulated depreciation		(7,734	)		(6,981	)
EQUIPMENT AND FURNITURE, NET	$	4,082		$	4,191

Depreciation expense was approximately $1,247,000, $1,558,000 and $1,808,000 for the years ended March 31, 2006, 2005 and 2004, respectively.

NOTE 4 — FINANCIAL ARRANGEMENTS

During the quarter ended June 30, 2004, the Company obtained a $3 million line of credit from an outside financial institution. The line of credit is secured by the Pay TV Group’s trade accounts receivable. The interest rate applied on the line of credit is variable based on the current prime rate. The line of credit requires that the Company maintain certain restrictive financial covenants and ratios. The Company did not draw down on the line of credit during the fiscal years ended March 31, 2006 or 2005.

NOTE 5 — MARKETABLE SECURITIES

Marketable securities are required to be categorized as either trading, available-for-sale or held-to-maturity. On March 31, 2006, the Company had no trading or held-to-maturity securities. Debt securities categorized as available-for-sale as of March 31, 2006 are reported at fair value as follows (in 000s):

			Gross Unrealized
	Gross Amortized Cost		Gains		Losses		Estimated Fair Value
Available-for-sale securities
Bank debt	$	98	$	—	$	—	$	98
Mortgage-backed securities		4,175		—		(32)		4,143
Corporate debt securities		1,793		—		(54)		1,739
Municipal securities		1,501		—		(6)		1,495
Debt securities issued by the US Treasury		3,198		—		(7)		3,191
Total available-for-sale securities	$	10,765	$	—	$	(99)	$	10,666

The contractual maturities of these investments as of March 31, 2006, were as follows (in 000s):

	Available-for-Sale Securities
Year Ended March 31,	Gross Amortized Cost		Fair Value
2007	$	8,794	$	8,730
2008		1,971		1,936
Total available-for-sale securities	$	10,765	$	10,666

F-18

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On March 31, 2005, the Company had no trading or held-to-maturity securities. Debt securities categorized as available-for-sale as of March 31, 2005 are reported at fair value as follows (in 000s):

			Gross Unrealized
	Gross Amortized Cost		Gains		Losses		Estimated Fair Value
Available-for-sale securities
Bank debt	$	2,269	$	—	$	(11)	$	2,258
Mortgage-backed securities		6,746		—		(28)		6,718
Corporate debt securities		2,445		—		(27)		2,418
Debt securities issued by the US Treasury		2,242		—		(14)		2,228
Total available-for-sale securities	$	13,702	$	—	$	(80)	$	13,622

The contractual maturities of these marketable securities as of March 31, 2005, were as follows (in 000s):

	Available-for-Sale Securities
Year Ended March 31,	Gross Amortized Cost		Fair Value
2006	$	9,113	$	9,075
2007		3,618		3,590
2008		971		957
Total available-for-sale securities	$	13,702	$	13,622

NOTE 6 — ACQUISITIONS

On February 10, 2006, the Company completed the purchase of MRG Entertainment, Inc., its subsidiaries, and a related company, Lifestyles Entertainment, Inc. (collectively “MRG”) by acquiring all of the outstanding capital stock of MRG. MRG produces and distributes erotic thrillers which are distributed in the U.S. on premium movie services such as Cinemax and Showtime Networks, Inc. as well as internationally on similar services. MRG also produces and distributes adult, reality-based content that is distributed in the U.S. through both DBS providers and cable MSOs via its relationship with In Demand. Additionally, MRG acts as a line producer for one mainstream movie per year for a major movie studio and acts as an international sales agent for third party domestic film producers. The Company acquired MRG to expand its portfolio to the rapidly growing market for softer, erotic content, as well as to the market for erotic, event-type content. The acquisition also provides established relationships in international markets and provides access to a library of content that can be monetized through current distribution networks.

The aggregate purchase price of $21.0 million consisted of $15.0 million in cash, 748,570 shares of New Frontier Media common stock valued at $5 million, and $1.0 million in fees and expenses incurred by the Company. An additional $2,550,000 of cash is being held in escrow pending the resolution of certain contingencies. The $2,550,000 is presented in both Restricted Cash and Other Long-Term Liabilities on the balance sheet. Additionally, if certain EBITDA targets are met, the Company is obligated to make three earn-out payments totaling $2 million over three years. The earn-out payments will be an additional expense for this segment.

The purchase price was allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The net purchase price allocation was as follows (in 000s):

F-19

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Cash	$	287
Trade Receivables		2,242
Film Inventory		10,561
Other Current Assets		37
Property, plant and equipment		137
Recoupable Costs and Advances		1,302
Identifiable Intangible Assets		4,838
Line of Credit		(4,520	)
Accounts Payable		(490	)
Producer Payable		(1,330	)
Other Current Liabilities		(3,009	)
Deferred Tax Liability		(1,971	)
Total fair value of net assets acquired		8,084
Goodwill		13,001
Net Purchase Price	$	21,085

The allocation of the purchase price was based on a third-party valuation of the fair value of indentifiable intangible assets, and certain property, plant and equipment. The valuation of the indentifiable intangible assets is based upon a preliminary valuation and is subject to change. The cost of the identifiable intangible assets will be amortized on a straight-line basis over periods of 2.5 - 5 years. The intangible assets include a non-compete of $4.6 million (5-year life) and a below market lease of $0.2 million (2.5 year life). The value of the film library was increased by $5.2 million as a result of the third-party valuation. The film library will be amortized on the individual-film-forecast method.

Goodwill is not deductible for tax purposes and will be reported as part of the Film Production segment.

The results of MRG have been included in the consolidated financial statements since the date of acquisition of February 10, 2006.

Unaudited pro forma results of operations for the years ended March 31, 2006 and 2005 of the Company assuming the acquisition was effective April 1 of each year is as follows:

($ in 000s, except per share data)

	2006		2005
Net Sales	$	59,600	$	58,055
Net income	$	10,971	$	9,907
Basic income per share	$	0.46	$	0.43
Diluted income per share	$	0.46	$	0.42

The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.

NOTE 7 — GOODWILL AND INTANGIBLE ASSETS

On April 1, 2002, the Company adopted SFAS No. 142. Goodwill and intangible assets with indefinite lives are no longer being amortized, but are tested for impairment using the guidance for measuring impairment set forth in this statement.

F-20

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Goodwill

Changes in the carrying amount of goodwill for the years ended March 31, 2006 and 2005, by reportable segment, are as follows (in thousands):

	Pay TV		Film Production		Total
Balance as of March 31, 2004	$	3,743	$	—	$	3,743
Goodwill acquired during the period		—		—		—
Balance as of March 31, 2005		3,743		—		3,743
Goodwill acquired during the period		—		13,001		13,001
Balance as of March 31, 2006	$	3,743	$	16,744	$	16,744

The Company performs the impairment analysis at the reporting segment level as defined in SFAS No. 142. This analysis requires management to make a series of critical assumptions to: (1) evaluate whether any impairment exists and (2) measure the amount of impairment. SFAS No. 142 requires that the Company estimate the fair value of our reporting units as compared with their estimated book value. If the estimated fair value of a reporting unit is less than the estimated book value, then an impairment is deemed to have occurred. As required by SFAS No. 142, prior to conducting our goodwill impairment analysis, we assess long-lived assets for impairment in accordance with SFAS No. 144.

The Company performed the annual goodwill impairment analysis in the fourth quarter of each of our past three fiscal years. Based on our estimates at each of these dates, the Company concluded that no goodwill impairment charges were necessary during fiscal years ended March 31, 2006, 2005 and 2004, respectively.

Prepaid Distribution Rights

The components of prepaid distribution rights are as follows (in 000s):

	March 31,
	2006			2005
Gross Carrying Amount	$	20,861		$	25,812
Accumulated Amortization		(11,984	)		(16,091	)
Net Carrying Amount	$	8,877		$	9,721

Amortization expense for prepaid distribution rights for March 31, 2006, 2005 and 2004 was approximately $4,070,000, $4,125,000 and $4,031,000, respectively.

Amortization expense for prepaid distribution rights in each of the next five years is estimated to be approximately $3,248,000, $2,323,000, $1,660,000, $964,000 and $373,000, based on balances as of March 31, 2006. The average weighted life of prepaid distribution rights is approximately 5 years at inception.

F-21

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Other Identifiable Intangible Assets

The components of other identifiable intangible assets are as follows (in 000s):

	Non-Compete Agreement March 31,					Other Identifiable Intangible Assets March 31,
	2006			2005		2006			2005
Amortized Identifiable Intangible Assets
Gross Carrying Amount	$	4,637		$	—	$	278		$	827
Accumulated Amortization		(155	)		—		(73	)		(726	)
Net Carrying Amount	$	4,482		$	—	$	205		$	101

Amortization expense for intangible assets subject to amortization for March 31, 2006, 2005 and 2004 was approximately $250,000, $255,000 and $208,000 respectively.

Amortization expense for intangible assets subject to amortization in each of the next five fiscal years is estimated to be approximately $1,002,000, $1,002,000, $972,000, $929,000 and $774,000, respectively. The average weighted life of the non-compete and other intangible assets is approximately 5 years at inception.

The valuation of the identifiable intangible assets purchased in the MRG acquisition are based on a preliminary valuation and are subject to change (See Note 6).

NOTE 8 — FILM COSTS

The components of film costs, which are all direct-to-television, are as follows (in 000s):

	March 31,
	2006		2005
In release, net	$	7,500	$	—
Completed, not yet released		1,016		—
In production		1,896		—
In development		—		—
Total capitalized film costs, net	$	10,412	$	—

For films in release, the Company expects to amortize, based on current estimates, approximately $6,000,000 in capitalized film production costs during fiscal year 2007. The Company expects to amortize substantially all unamortized film costs for released films by March 31, 2009.

NOTE 9 — INCOME TAXES

The components of the income tax provision for the years ended March 31 were as follows (in 000s):

F-22

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	2006			2005			2004
Current
Federal	$	5,851		$	4,534		$	—
State		731			859			7
Total Current		6,582			5,393			7
Deferred
Federal		(620	)		(252	)		—
State		(138	)		(100	)		—
Total Deferred		(758	)		(352	)		—
Total	$	5,824		$	5,041		$	7

A reconciliation of the expected income tax computed using the federal statutory income tax rate to the Company’s effective income tax rate is as follows for the years ended March 31:

	2006			2005			2004
Income tax computed at federal statutory tax rate		34.00	%		34.00	%		34.00	%
State taxes, net of federal benefit		3.10			3.10			..06
Change in valuation allowance		(3.56	)		(5.89	)		(36.87	)
Non-deductible items		..46			..49			2.87
Other		..04			(.51	)		—
Total		34.04	%		31.19	%		..06	%

Significant components of the Company’s deferred tax liabilities and assets as of March 31 are as follows (in 000s):

	2006			2005
Deferred tax liabilities:
Depreciation	$	(307	)	$	(504	)
Goodwill		(115	)		—
Film Library		(1,822	)
Other		(70	)
Total deferred tax liabilities		(2,314	)		(504	)
Deferred tax assets:
Net operating loss carryforward		991			1,068
Deferred revenue		230			180
Accrued restructuring reserve		18			34
Allowance for doubtful accounts and reserve for sales returns		19			18
Goodwill		—			27
Capital loss carryforward		6			—
Other		226			163
Total deferred tax assets		1,490			1,490
Total deferred tax assets and liabilities		(824	)		986
Valuation allowance for deferred tax assets and liabilities		0			(609	)
Net Deferred Tax Asset (Liability)	$	(824	)	$	377

F-23

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes.

The Company has deferred tax assets that have arisen primarily as a result of operating losses incurred and other temporary differences between book and tax accounting. SFAS No. 109, “Accounting for Income Taxes,” requires the establishment of a valuation allowance when, based on an evaluation of objective evidence, there is a likelihood that some portion or all of the deferred tax assets will not be realized. The Company continually reviews the adequacy of the valuation allowance for deferred tax assets. As of March 31, 2006, the Company determined that it was more likely than not that its deferred tax asset related to its net operating losses would be recognized and it removed its valuation allowance.

Net deferred tax liabilities of approximately $1.9 million pertain to certain temporary differences related to purchased intangibles and the film library, which were acquired as part of the MRG acquisition completed during the current fiscal year.

The Company has net operating loss carryforwards of approximately $2.7 million for Federal Income Tax purposes, which expire through 2019. For tax purposes there is an annual limitation of approximately $208,000 for the remaining 13 years on all of the Company’s net operating losses under Internal Revenue Code Section 382.

Internal Revenue Code Section 382 places a limitation on the utilization of net operating losses carryforwards when an ownership change, as defined in the tax law, occurs. Generally, an ownership change occurs when there is a greater than 50 percent change in ownership. When a change occurs the actual utilization of net operating loss carryforwards, for tax purposes, is limited annually to a percentage of the fair market value of the Company at the time of such change.

During the year ended March 31, 2005, the Company recognized a net deferred tax asset of $377,000 related primarily to its net operating loss carryforwards. In addition, the Company determined that it is more likely than not that $609,000 of its net deferred tax assets will not be realized and, accordingly, recorded a valuation allowance for this amount. The $609,000 relates to potentially expiring net operating loss carryforwards.

During the year ended March 31, 2004, the Company had determined that it is more likely than not that its deferred tax assets will not be realized and, accordingly, recorded a valuation allowance against the net deferred tax assets of $6.7 million.

During the year ended March 31, 2005, the Company generated taxable income against which these tax attributes were applied, and accordingly, reversed a portion of the valuation allowance except as explained below.

During the year ended March 31, 2004, options and warrants were exercised and certain disqualifying dispositions occurred resulting in deductions for tax purposes. Similar benefits were included in the Company’s net operating losses. These deductions resulted in a benefit of $4.0 million to Additional Paid in Capital during the year ended March 31, 2005.

NOTE 10 — STOCK RETIREMENT

During the quarter ended June 30, 2004, the Company cancelled 929,250 shares of its common stock. The Company had acquired these shares in exchange for certain domain names exchanged by IGI as part of a legal settlement with a former officer in April 2003. Subsequent to the exchange, the shares were held by IGI and were used as collateral for a note payable. The Company eliminated the value of these shares against additional-paid-in-capital as part of its year-end consolidation process. See

F-24

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

“Repurchase of shares for URLs” on the Company’s Consolidated Statement of Changes in Shareholders’ Equity for the year ended March 31, 2004. Because these shares were still legally outstanding as of March 31, 2004, this elimination had no effect on the number of outstanding shares at year end.

The note payable was repaid by the Company during the quarter ended June 30, 2004, and the Company cancelled the shares at that time. See “Retirement of Stock” on the Company’s Consolidated Statement of Changes in Shareholders’ Equity for the year ended March 31, 2005.

NOTE 11 — SEGMENT INFORMATION

In accordance with Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” operating segments are defined as components of an enterprise for which separate financial information is available and regularly reviewed by the Company’s senior management.

The Company has the following three reportable segments:

• Pay TV Group — distributes branded adult entertainment programming networks and VOD content through electronic distribution platforms including cable television, C-Band, and Direct Broadcast Satellite (“DBS”)

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

• Film Production — produces and distributes mainstream films and soft erotic features and events. These titles are distributed on U.S. premium channels and pay-per-view channels across a range of cable and satellite distribution platforms. The Film Production Group also distributes a full range of independently produced motion pictures to markets around the world.

The accounting policies of the reportable segments are the same as those described in the summary of accounting policies. Segment profit is based on income before income taxes. The reportable segments are distinct business units, separately managed with different distribution channels. The following tables represent financial information by reportable segment (in 000s):

	Year Ended March 31,
	2006		2005		2004
Net Sales
Pay TV	$	43,150	$	43,514	$	39,594
Internet Group		2,529		2,763		3,284
Film Production		1,172		—		—
Corporate Administration		—		—		—
Total	$	46,851	$	46,277	$	42,878

F-25

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Segment Profit
Pay TV	$	21,879		$	20,792		$	16,417
Internet Group		354			796			204
Film Production		(216	)		—			—
Corporate Administration		(4,910	)		(5,425	)		(5,701	)
Total	$	17,107		$	16,163		$	10,920
Interest Income
Pay TV	$	11		$	—		$	—
Internet Group		—						3
Film Production		—			—			—
Corporate Administration		1,144			403			47
Total	$	1,155		$	403		$	50
Interest Expense
Pay TV	$	23		$	75		$	138
Internet Group		4			12			183
Film Production		—			—			—
Corporate Administration		14			17			836
Total	$	41		$	104		$	1,157
Depreciation and Amortization
Pay TV	$	5,084		$	5,502		$	5,610
Internet Group		289			328			351
Film Production		609			—			—
Corporate Administration		9			6			15
Total	$	5,991		$	5,836		$	5,976
	Year Ended March 31,
	2006			2005
Identifiable Assets
Pay TV	$	77,407		$	57,310
Internet Group		15,854			14,541
Film Production		32,531			—
Corporate Administration		54,111			35,670
Eliminations		(93,138	)		(47,237	)
Total	$	86,765		$	60,284

During the quarter ended June 30, 2004, the Company moved certain prepaid distribution rights, totaling $1 million, from the Pay TV Group to the Internet Group. The Company determined that these certain prepaid distribution rights will be used exclusively by the Internet Group and have, therefore, reclassified them accordingly.

Expenses related to corporate administration include all costs associated with the operation of the public holding company, New Frontier Media, Inc., that are not directly allocable to the Pay TV, Internet and Film Production operating segments. These costs include, but are not limited to, legal

F-26

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and accounting expenses, insurance, registration and filing fees with NASDAQ and the SEC, investor relation costs, and printing costs associated with the Company’s public filings.

NOTE 12 — STOCK OPTIONS AND WARRANTS
Stock Option Plans

The Company has adopted, and shareholders have approved, four stock option plans: the 1998 Incentive Stock Option Plan, the 1999 Incentive Stock Option Plan, the Millennium Incentive Stock Option Plan and the 2001 Incentive Stock Option Plan (collectively referred to as the “ISO Plans”).

Under the ISO Plans options may be granted by the Compensation Committee to officers, employees, and directors. Options granted under the ISO Plans may either be incentive stock options or non-qualified stock options. Incentive stock options are transferable only upon death. The maximum number of shares of common stock subject to options of any combination that may be granted during any 12-consecutive-month period to any one individual is limited to 250,000 shares. Incentive stock options may only be issued to employees of the Company or subsidiaries of the Company. The exercise price of the options is determined by the Compensation Committee, but in the case of incentive stock options, the exercise price may not be less than 100% of the fair market value on the date of grant.

No incentive stock option may be granted to any person who owns more than 10% (“10% Shareholders”) of the total combined voting power of all classes of the Company’s stock unless the exercise price is at least equal to 110% of the fair market value on the date of grant. No incentive stock options may be granted to an optionee if the aggregate fair market value of the stock with respect to which incentive stock options are exercisable by the optionee in any calendar year under all such plans of the Company and its affiliates exceeds $100,000. Options may be granted under each ISO Plan for terms of up to 10 years, except for incentive stock options granted to 10% Shareholders, which are limited to five-year terms.

The aggregate number of shares that may be issued under each plan is as follows:

1998 Incentive Stock Plan	750,000
1999 Incentive Stock Plan	1,500,000
Millennium Incentive Stock Plan	2,500,000
2001 Incentive Stock Plan	500,000

The ISO Plans were adopted to provide the Company with a means to promote the long-term growth and profitability of the Company by:

i) Providing key people with incentives to improve stockholder value and to contribute to the growth and financial success of the Company.

ii) Enabling the Company to attract, retain, and reward the best available people for positions of substantial responsibility.

Consultant Stock Plans

The Company adopted two Consultant Stock Plans: the 1999 Consultant Stock Plan and the Millennium Consultant Stock Plan (the “Consultant Stock Plans”).

Under the Consultant Stock Plans awards may be granted by the Board of Directors, who have sole discretion. The maximum number of shares of common stock to which awards may be granted under each of the Consultant Stock Plans is 500,000 shares. The Consultant Plans are for a term of up to 10

F-27

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

years and the Board of Directors may suspend or terminate it at any time or from time to time. However, no such action shall adversely affect the rights of a person awarded a grant under the Consultant Stock Plans prior to that date.

The Consultant Stock Plans were adopted to further the growth of the Company and its subsidiaries by allowing the Company to compensate consultants and certain other people providing bona fide services to the Company.

F-28

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Summary Information

The following table describes certain information related to the Company’s compensatory stock option and warrant activity for the years ending March 31, 2006, 2005, and 2004:

	Stock Options			Warrants			Total			Exercise Price Range		Weighted- Average Exercise Price		Approximate Weighted- Average Fair Value of Options Granted
Balance at March 31, 2003		3,560,956			3,982,308			7,543,264		$	1.00-10.25	$	3.20
Granted		250,000			350,000			600,000		$	1.00- 4.67	$	2.43	$	2.10
Exercised		(968,606	)		(2,098,155	)		(3,066,761	)	$	1.00- 6.90	$	2.75
Expired/Forfeited		(446,800	)		(1,316,153	)		(1,762,953	)	$	1.00- 7.13	$	2.73
Balance at March 31, 2004		2,395,550			918,000			3,313,550		$	1.00-10.25	$	3.64
Granted		485,000			—			485,000		$	6.82-8.62	$	8.10	$	3.12
Exercised		(894,023	)		(224,073	)		(1,118,096	)	$	1.00-8.50	$	2.49
Expired/Forfeited		(105,250	)		(535,927	)		(641,177	)	$	2.00-10.25	$	7.02
Balance at March 31, 2005		1,881,277			158,000			2,039,277		$	1.00-8.62	$	4.28
Granted		1,090,000			—			1,090,000		$	6.42-7.15	$	6.57	$	3.36
Exercised		(326,562	)		—			(326,562	)	$	2.00-4.59	$	2.54
Expired/Forfeited		(305,000	)		(40,000	)		(345,000	)	$	3.50-8.47	$	6.19
Balance at March 31, 2006		2,339,715			118,000			2,457,715		$	1.00-8.62	$	5.26
Number of options and warrants exercisable at March 31, 2006		1,442,635			118,000			1,560,635		$	1.00-8.62	$	4.41

F-29

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes additional information regarding all stock options and warrants outstanding.

	Options and Warrants Outstanding					Options and Warrants Exercisable
Range of Exercise Prices	Number Outstanding at March 31, 2006		Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number Exercisable at March 31, 2006		Weighted- Average Exercise Price
$1.00- $2.00		389,290	4.72	$	1.76		389,290	$	1.76
$2.01- $3.00		155,300	6.29	$	2.17		155,300	$	2.17
$3.01- $5.00		555,875	4.74	$	4.13		555,875	$	4.13
$5.01- $7.00		774,750	8.78	$	6.43		74,700	$	5.48
$7.01-$8.62		582,500	8.59	$	7.93		385,470	$	8.16
		2,457,715					1,560,635

NOTE 13 — MAJOR CUSTOMERS

The Company’s major customers (revenues in excess of 10% of total sales) are EchoStar Communications Corporation (“EchoStar”), Time Warner Cable (“Time Warner”) and Comcast Corporation (“Comcast”). EchoStar, Time Warner and Comcast are included in the Pay TV Segment. Revenue from EchoStar’s DISH Network, Time Warner and Comcast as a percentage of total revenue for each of the three years ended March 31 are as follows:

	2006			2005			2004
EchoStar		35	%		35	%		34	%
Time Warner		14	%		18	%		16	%
Comcast		12	%		11	%		5	%

At March 31, 2006 and 2005, accounts receivable from EchoStar was approximately $5,999,000 and $4,123,000, respectively. At March 31, 2006 and 2005, accounts receivable from Time Warner was approximately $881,000 and $865,000, respectively. At March 31, 2006 and 2005, accounts receivable from Comcast was approximately $1,245,000 and $1,093,000, respectively. The loss of any of the Company’s major customers could have a materially adverse effect on the Company’s business, operating results and/or financial condition.

NOTE 14 — COMMITMENTS AND CONTINGENCIES
Leases

The Company maintains non-cancelable leases for office space and equipment under various operating and capital leases. The leases for office space expire through October 2013 and contain annual CPI escalation clauses. Included in property and equipment at March 31, 2006 and 2005 is approximately $0 and $671,000, respectively, of equipment under capital leases. Accumulated depreciation relating to these leases under property and equipment was approximately $0 and $322,000, respectively.

In addition, TEN has entered into direct lease agreements with an unrelated party for the use of transponders to broadcast TEN’s channels on satellites. The leases expire through December 2010.

TEN, as lessee of transponders under the transponder agreements, is subject to arbitrary refusal of service by the service provider if that service provider determines that the content being transmitted by the Company is harmful to the service provider’s name or business. Any such service disruption would substantially and adversely affect the financial condition of the Company.

In addition, the Company bears the risk that the access of their networks to transponders may be restricted or denied if a governmental authority commences an investigation concerning the content of

F-30

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the transmissions. Also, certain cable operators may be reluctant to carry less edited or partially edited adult programming on their systems. This could adversely affect the Company’s business if either of the above occurs.

TEN has entered into a service agreement with an unrelated third party for the uplinking of its broadcasting channels. This agreement expires in May 2007.

Rent expense for the years ended March 31, 2006, 2005 and 2004 was approximately $2,284,000, $3,000,000 and $3,427,000 respectively, which includes transponder payments.

Future minimum lease payments under these leases as of March 31, 2006 were as follows (in 000s):

Year Ended March 31,	Operating Leases
2007	$	2,608
2008		1,396
2009		1,170
2010		1,158
2011		1,044
Thereafter		1,105
Total minimum lease payments	$	8,481

Employment Contracts

The Company employs certain key executives under non-cancelable employment contracts in Colorado, California, Arizona, Florida and Georgia. These employment contracts expire through February 2009.

Commitments under these obligations at March 31, 2006 were as follows (in 000s):

Year Ended March 31,
2007	$	2,991
2008		1,693
2009		1,220
Total obligation under employment contracts	$	5,904

NOTE 15 — DEFINED CONTRIBUTION PLAN

The Company sponsors a 401(k) retirement plan. The plan covers substantially all eligible employees of the Company. Employee contributions to the plan are elective, and the Company has discretion to match employee contributions. All contributions by the Company are vested over a three-year period. Contributions by the Company for the years ended March 31, 2006, 2005, and 2004 were approximately $200,000, $176,000 and $138,000 respectively.

NOTE 16 — RESTRUCTURING EXPENSES
Internet Restructuring 2002

During the year ended March 31, 2005 the Company reached a settlement with the landlord on its vacated office space in Sherman Oaks, California as part of the 2002 internet restructuring. As part of the settlement, the Company paid $287,000 to the landlord and was released from any ongoing

F-31

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

obligations for this space. The Company reversed the remaining reserve of $475,000 into income subsequent to the settlement.

Data Center Restructuring 2003

During the year ended March 31, 2005 the Company reached a settlement with the landlord regarding the data center space as part of the 2003 data center restructuring. As part of the settlement, the Company paid $88,000 to the landlord and was released from any ongoing obligations for this space. The Company reversed the remaining reserve of $147,000 into income subsequent to the settlement. In addition, the Company increased the reserve for contractual obligations by $76,000 during the year-ended March 31, 2005.

NOTE 17 — SHAREHOLDER RIGHTS PLAN

On November 29, 2001, the Company’s Board of Directors adopted a Stockholder Rights Plan in which Rights will be distributed at the rate of one Right for each share of the Company’s common stock held by stockholders of record as of the close of business on December 21, 2001. The Rights generally will be exercisable only if a person or group acquires beneficial ownership of 15% or more of the Company’s outstanding common stock after November 29, 2001, or commences a tender offer upon consummation of which the person or group would beneficially own 15% or more of the Company’s outstanding common stock. Each Right will initially be exercisable at $10.00 and will expire on December 21, 2011.

NOTE 18 — RELATED PARTY TRANSACTIONS

The Company paid approximately $147,000, $244,000 and $653,000 to Isaacman, Kaufman & Painter during the fiscal years ended March 31, 2006, 2005 and 2004, respectively. The Company’s board member Alan Isaacman is a Senior Member of Isaacman, Kaufman & Painter. Additionally, the Company has outstanding payables to the co-presidents of MRG totaling $1,250,000.

NOTE 19 — LITIGATION

In the normal course of business, the Company is subject to various other lawsuits and claims. Management of the Company believes that the final outcome of these matters, either individually or in the aggregate, will not have a material effect on its financial statements.

On June 12, 2003, the Company settled its litigation with Pleasure Productions. This litigation related to a complaint filed by the Company on August 3, 1999 in District Court for the city and county of Denver (Colorado Satellite Broadcasting, Inc. et al. vs. Pleasure Licensing LLC, et al., case no 99CV4652) against Pleasure Licensing LLC and Pleasure Productions, Inc. (collectively, “Pleasure”), alleging breach of contract, breach of express warranties, breach of implied warranty for a particular purpose, and rescission, seeking the return of 700,000 shares of New Frontier Media stock and warrants an additional 700,000 New Frontier Media shares which were issued to Pleasure in connection with a motion picture licensing agreement. In the settlement, the Company secured the exclusive broadcast rights to 2,000 titles from Pleasure Productions’ catalog and up to 83 new releases. In addition, Pleasure Productions agreed to the cancellation of 700,000 warrants issued to it in 1999 to purchase New Frontier common stock at $1.12 a share. As a result of the transaction, the Company reduced the carrying value of the underlying assets and equity for an amount that approximates the value of the warrants.

F-32

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 20 — QUARTERLY INFORMATION (UNAUDITED)

The consolidated results of operations on a quarterly basis were as follows (in thousands of dollars, except per share amounts).

							Earnings Per Common Share
	Revenue		Gross Margin		Net Income		Basic		Diluted
2006
First quarter	$	11,040	$	7,445	$	2,464	$	0.11	$	0.11
Second quarter		11,349		7,650		2,641		0.12		0.11
Third quarter		11,524		8,083		2,878		0.13		0.12
Fourth quarter		12,938		8,825		3,300		0.13		0.14
Total	$	46,851	$	32,003	$	11,283	$	0.49	$	0.48
2005
First quarter	$	11,476	$	7,531	$	2,728	$	0.12	$	0.12
Second quarter		12,026		7,893		3,062		0.14		0.13
Third quarter		11,990		7,991		2,924		0.13		0.13
Fourth quarter		10,785		6,815		2,408		0.11		0.10
Total	$	46,277	$	30,230	$	11,122	$	0.50	$	0.48

NOTE 21 — SUBSEQUENT EVENTS

On April 4, 2006, the Company entered into an Affiliation Agreement with DirecTV, Inc. The agreement grants to DirecTV the non-exclusive right to distribute the national feeds of the 24-hour per day, 7-day per week programming services of TEN and TEN*Clips for a two year period from the date on which DirecTV commences commercial distribution of these services. Under the terms of the agreement, if these services replace services provided by a competitor, DirecTV may, under certain conditions, earn credits related to the performance level of our services. DirecTV began commercial distribution of TEN and TEN*Clips on April 5, 2006.

F-33

SUPPLEMENTAL INFORMATION

F-34

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS — SCHEDULE II
(in 000s)

	Balance, Beginning of Year		Additions (Deductions) Charged to Operations			Additions (Deductions) from Reserve			Balance, End of Year
Allowance for doubtful accounts
March 31, 2006	$	24	$	(1	)	$	9		$	32
March 31, 2005	$	68	$	(44	)	$	—		$	24
March 31, 2004	$	90	$	(10	)	$	(12	)	$	68
	Balance, Beginning of Year		Additions (Deductions) Charged to Operations			Additions (Deductions) from Reserve			Balance, End of Year
Valuation allowance for deferred tax asset
March 31, 2006	$	609	$	(609	)	$	—		$	—
March 31, 2005	$	6,653	$	(291	)	$	(5,753	)	$	609
March 31, 2004	$	7,211	$	(4,492	)	$	3,934		$	6,653
	Balance, Beginning of Year		Additions (Deductions) Charged to Operations			Additions (Deductions) from Reserve			Balance, End of Year
Reserve for chargebacks/credits
March 31, 2006	$	14	$	66		$	(71	)	$	9
March 31, 2005	$	13	$	89		$	(88	)	$	14
March 31, 2004	$	74	$	1		$	(62	)	$	13
	Balance, Beginning of Year		Additions (Deductions) Charged to Operations			Additions (Deductions) from Reserve			Balance, End of Year
Accrued restructuring expense
March 31, 2006	$	91	$	(18	)	$	(23	)	$	50
March 31, 2005	$	1,026	$	(546	)	$	(389	)	$	91
March 31, 2004	$	1,304	$	0		$	(278	)	$	1,026

F-35

EX-10

                              AFFILIATION AGREEMENT
                          FOR DTH SATELLITE EXHIBITION
                          OF CABLE NETWORK PROGRAMMING









                                  DIRECTV, INC.

                                       and

                      COLORADO SATELLITE BROADCASTING, INC.





                              AFFILIATION AGREEMENT

                          FOR DTH SATELLITE EXHIBITION

                          OF CABLE NETWORK PROGRAMMING


         AGREEMENT, made as of this 31st day of March, 2006 (the "Effective
Date"), by and between COLORADO SATELLITE BROADCASTING, INC., a Colorado
corporation ("Programmer"), and DIRECTV, INC., a California corporation
("DIRECTV").

         WHEREAS:

         A. DIRECTV has established a direct to home ("DTH") satellite-based
television system in North America for the distribution of video, audio, data
and/or other services, including programming distributed on a pay-per-view,
pay-per-block and pay-per-night basis (collectively referred to as "PPV"); and

         B. DIRECTV desires to obtain the rights to distribute the adult
programming television networks owned and operated by Programmer and currently
known as "TEN*Clips" and "TEN" (individually the "Service," or collectively the
"Services", as defined in Section 1.2.1 below) via the DTH Distribution System
(as defined in Section 1.1.2 below) in the United States, its territories and
possessions, including Puerto Rico (the "Territory") as restricted by Section 17
below.

         NOW, THEREFORE, IT IS MUTUALLY AGREED AS FOLLOWS:

         1.       Grant of Rights.

               1.1  Distribution; Certain Definitions.

                    1.1.1 Programmer hereby grants to DIRECTV the non-exclusive
right to distribute the Services in the Territory via the DTH Distribution
System to DIRECTV Subscribers (as defined in Section 1.1.2 below) during the
Term (as defined in Section 6.1 below) hereof. DIRECTV shall have the right to
use the names, titles or logos of the Services or any of its programs, or the
names, voices, photographs, music, likenesses or biographies of any individual
participant or performer in, or contributor to, any program or any variations
thereof, subject to the warranties and restrictions set forth in this Agreement.

                    1.1.2 The term "DTH Distribution System" shall mean the
distribution system for video and other programming services whereby the
programming satellite signal or feed is received from Programmer's Delivery
Source (as defined in Section 1.3.3 below) by a DIRECTV turnaround earth-station
facility which compresses and processes the signal or feed and then uplinks it
to a DTH communications satellite (a "DTH Satellite") for transmission to
DIRECTV Subscribers. DTH Distribution System shall also


                                       2



include any other method of distribution that DIRECTV currently
and/or subsequently uses to deliver the Services feed to DIRECTV Subscribers,
including, without limitation, MMDS and terrestrial-based transmission
infrastructures such as Internet protocol, fiber optic, twisted pairs and
coaxial cable, provided that in connection with such delivery methods, DIRECTV
complies with the following: (i) the end users to whom DIRECTV distributes the
Services are DIRECTV Subscribers; (ii) the branding and packaging that is
received by such DIRECTV Subscribers is substantially the same as the branding
and packaging received by DIRECTV Subscribers that receive the Services via
DIRECTV's direct to home satellites. "DIRECTV Subscribers" shall mean those
customers (both residential and non-residential) authorized by DIRECTV to
receive DTH service via the DTH Distribution System, excluding any customer who
to DIRECTV's knowledge: (A) charges an admission fee, cover charge, minimum or
the like; or (B) distributes all or any part of the Services to viewers who are
not located in the same residence, dwelling unit, store, hospital room, hotel
room or suite, motel room or suite, office or other singular facility occupied,
owned, leased or otherwise controlled by the customer entitled to receive the
Services.

                    1.1.3 If Programmer grants or has granted to any other
distributor that distributes a Service in the Territory the right to receive and
distribute such Service(s) and/or any Segments (as defined in Section 1.2.1
below) of Service programming (as any such Segments appear on the Service(s)) or
Programmer or an Affiliated Company (as defined in Section 8.1 below)
distributes the Service(s) (or any portion thereof) itself via a "New
Distribution Method" (as defined below), then Programmer will promptly notify
DIRECTV thereof and make available to DIRECTV the right to receive and
distribute such programming to DIRECTV Subscribers via such New Distribution
Method under the same terms and conditions such rights were made available such
other distributor directly in exchange for such rights, provided that if DIRECTV
cannot reasonably satisfy such terms and conditions, Programmer shall offer
DIRECTV comparable terms and conditions. "NEW DISTRIBUTION METHOD" shall mean,
with respect to any other distributor of a Service in the Territory, any
distribution method, device, distribution technology or format (for example,
distribution to hand-held devices, streamlining to a web site); provided that,
in all events, the current distribution methods of cable television, telco
(e.g., via Internet protocol or traditional fiber lines), direct to home
satellite, SMATV and multipoint distribution service (all as currently utilized
in the multichannel video distribution business) shall not be considered a New
Distribution Method.

               1.2  The Services.

                    1.2.1 The "Services" shall mean and consist of the national
feed (or, if Programmer uses multiple feeds for the Services, such other of such
multiple feeds designated by DIRECTV) of the following 24-hour per day, 7-day
per week programming services: (i) the programming service commonly known as
"TEN*Clips", which shall consist of thematically organized sex scenes which are
sourced from various movies (each ninety (90) minute segment on TEN*Clips shall
contain up to eight (8) individual sex scenes and shall in no instance show less
than five (5) scenes (collectively a "Segment")); and (ii) the programming
service commonly known as "TEN", which shall consist of a mix of quality

                                       3



near full-length adult features (including network specials, double features and
compilations). TEN shall feature a minimum of 285 unique movies per quarter and
95 unique movies per calendar month. Among the aforementioned unique movies, TEN
shall feature 60 channel premiers per quarter and 20 channel premiers per
calendar month. Both Services shall be comprised of non-hosted, taped (no
"live") adult programming depicting heterosexual and lesbian situations and
nudity among consenting adults. At no time shall identical programming be
exhibited on more than one Service during any month of the Term. The Services
shall at all times be identical to (or softer than) the degree of explicitness
of programming currently featured on competing adult services such as the
services currently known as Spice Hot or The Hot Zone (subject to the
description and limitations in Exhibit A, as illustrated by the programming
schedule in Exhibit C).

Notwithstanding the foregoing, upon thirty (30) days written notice to
Programmer, DIRECTV shall have the sole option at any time during the Term to
replace any one of the Services with any other programming service of the same
edit standard (i.e., "XX") distributed by Programmer in the Territory and to
distribute such other service under the terms hereof (Programmer's other
services currently offered in the "XX" edit standard include TEN*Blue and
TEN*Blox). Programmer represents and warrants that the Services shall reflect
adult content limited to the "XX" version, as described in Exhibit A and
Schedule I thereto, and shall not contain or depict any acts set forth in the
"XX 1/2" or "XXX" columns of Schedule I to Exhibit A, or otherwise prohibited by
Exhibit A. The Services shall not contain any paid programming, including,
without limitation, infomercials, home shopping programming, fundraising or
religious programming. Notwithstanding the foregoing, Programmer shall have the
right to include Programmer's brand or trademark identification on the Services
and to include promotional tags or spots solely for purposes of promoting
upcoming programs on the Services (no more than fifteen (15) minutes in each
ninety (90) minute segment of programming content); provided that in no case
shall such tags or spots promote any programming service other than the
Services. The Services shall be delivered to DIRECTV in their entirety, meaning
that the programming on the Services, as received by any Service Subscriber at a
given point in time, shall be the same as the programming that is received by
all other subscribers to the Services at such point in time. If Programmer or an
Affiliated Company (as defined in Section 8.1 hereof) distributes itself or
provides (or offers) any other programming rights, including, without
limitation, DVR push down, high definition, video-on-demand, interactive or
gaming rights (including, without limitation, data and informational
enhancements to the programming contained in or delivered along with the
Services) to any other distributor of the Services in the Territory, then
Programmer shall promptly offer to DIRECTV such rights upon terms and conditions
that are no less favorable to DIRECTV than those provided to the Other
Distributor; provided, however, that if such terms and conditions are not
relevant to DIRECTV or DIRECTV is not reasonably capable of complying with such
terms and conditions taking into consideration DIRECTV's business, including,
without limitation, DIRECTV's technology and DIRECTV's national platform, then
the parties shall negotiate comparable obligations, terms and conditions in good
faith. The terms hereunder that cannot be reduced to an economic value shall be
no less favorable to DIRECTV than such terms that are provided to Other
Distributors.


                                       4



                    1.2.2 All rights and title in and to the entire contents of
the Services, including, but not limited to, films and recordings thereof, title
or titles, names, trademarks, concepts, stories, plots, incidents, ideas,
formulas, formats, general content and any other literary, musical, artistic, or
other creative material included therein shall, as between Programmer and
DIRECTV, remain vested in Programmer.

                    1.2.3 DIRECTV is authorized to distribute the Services using
satellite master antenna television system (or similar system) ("SMATV")
operators (including telephone companies and similar service providers) that
serve multiple dwelling locations, master planned communities, multiple dwelling
unit ("MDU") buildings or complexes or commercial or business establishments
with multiple television viewing sites via such SMATV systems directly to end
users within such buildings or establishments, subject to Section 1.1.2 above.

                    1.2.4 Programmer shall not propose or impose upon DIRECTV,
nor shall DIRECTV be obligated to pay, any surcharge or other cost (other than
the License Fees provided for in Section 2 hereof) for receipt and distribution
of the Services.

               1.3  Other Distribution Obligations. In addition, the parties
agree as follows:

                    1.3.1 Subject to Programmer's obligations hereunder and
DIRECTV's rights under Section 17, DIRECTV shall distribute the Services on a
PPV basis as transmitted by Programmer, in its entirety, in the order and at the
time transmitted by Programmer without any intentional and willful editing,
delays, alterations, interruptions, deletions or additions (collectively, the
"Alterations") excepting: (i) DIRECTV's electronic guides (including without
limitation, any mosaic or similar guides), (ii) news bulletins and other public
announcements as may be required by emergencies or applicable law; and (iii) a
DIRECTV Subscriber's use of equipment, programming or other data supplied by
DIRECTV or any third party to make Alterations to the Signal as viewed on a
monitor/television screen. Programmer acknowledges that the DTH Distribution
System requires and applies digital compression and encryption processes prior
to transmission and decryption and decompression processes upon reception and
agrees that such processing does not constitute an alteration and/or other
modification of the Services. Programmer shall fully encrypt the satellite
signals of the Services utilizing encryption technology commonly used in the
satellite distribution industry.

                    1.3.2 Subject to the terms and conditions of this
Agreement, the terms and conditions upon which DIRECTV
distributes the Services to DIRECTV Subscribers, including, without limitation,
Service packaging and retail prices charged, shall be determined by DIRECTV in
its sole discretion. DIRECTV shall offer the Services to DIRECTV Subscribers
individually or packaged a la carte and/or in a "Cascade" (as defined in Section
3 of Exhibit B) on a pay-per-view, pay-per-night, pay-per-title and/or
pay-per-time-period basis (each, a "PPV Offering"), in blocks of at least
90-minutes each (or such other period as the parties shall agree), but not to
exceed 24 hours each unless Programmer consents in writing, which consent shall
not be unreasonably withheld (any such block of time, a "PPV Program").


                                       5




                    1.3.3 Programmer shall, at its sole expense, deliver the
feeds of the Services from a U.S. domestic communications satellite in the
Territory commonly used for transmission of television programming (or, at
Programmer's option and expense, a fiber optic or other facility reasonably
acceptable to DIRECTV) (the "Delivery Source") to either or both (as designated
by DIRECTV) of DIRECTV's uplink and broadcast facilities currently located in
Castle Rock, Colorado and Los Angeles, California (collectively, the "Broadcast
Centers") no later than April 3, 2006. In connection with the foregoing,
Programmer shall, at its sole cost and expense, provide DIRECTV with two
receivers and decoders for the Services for each of the Broadcast Centers.
Programmer shall have in place appropriate back-up procedures and process, or
shall reserve back-up fiber links between Programmer's broadcast center and its
satellite uplink center (VYVX), such that in the event of a failure of the first
satellite or fiber link, delivery of the Services to DIRECTV shall be only
minimally interrupted. The format of the backup feeds shall be the same format
as the primary feeds of the Services. As of the Service Commencement Date
(defined in Section 6.1), the feeds of the Services shall be delivered from
Intelsat IA13, transponder 24. The delivery of all feeds hereunder shall be
pursuant to the technical specifications set forth at Exhibit "C" hereto.

                    1.3.4 Programmer and DIRECTV shall use their respective
commercially reasonable efforts to maintain for the Services a high quality of
signal transmission in accordance with their respective technical standards and
procedures. Programmer agrees to include closed-captioning and/or video
description of the audio portion of the Services as delivered by Programmer to
DIRECTV in a manner sufficient to allow DIRECTV to comply with any applicable
closed-captioning and/or video description obligations as may be imposed upon
DIRECTV or Programmer the rules and regulations of the Federal Communications
Commission ("FCC") or other governmental body during the Term, as modified from
time to time, and Programmer shall provide DIRECTV certificates of compliance in
connection therewith with the above obligations on a quarterly basis during the
Term. Other than as required pursuant to the immediately preceding sentence,
DIRECTV shall have no liability in connection with Programmer's failure to
prepare, insert or include closed-captioning and/or video description in the
Services as required by this Section 1.3.4. Accordingly Programmer shall
indemnify, defend and hold harmless DIRECTV, as provided in Section 8 hereof,
against and from any and all losses, liabilities, claims, costs (including
without limitation, any costs of preparing and including closed-captioning
and/or video description in the Services), damages and expenses, including
without limitation, fines, forfeitures, attorneys' fees, disbursements and court
or administrative costs, arising out of third party claims (including, without
limitation, the action of any Governmental Authority, as such term is defined in
Section 5.2.10 below) as a result of Programmer's breach of this Section 1.3.4.

               1.4 Program Guide. During the Term, Programmer, at its sole cost
and expense, shall provide the daily programming schedule for the Services to
Tribune Media Service (or such other service designated by DIRECTV) in order
that DIRECTV may access the program schedule for purposes on the on-screen
program guide.


                                       6



                  1.5 VBI. Programmer acknowledges that digitizing and
compressing of the signals of the Services (the "Signal") will result in changes
to the Signal. As a consequence, the DTH Distribution System does not currently
retransmit any data or information contained in the VBI of the Signals except
line 21, fields 1 and 2, and only carries a single mono secondary audio program
provided that such secondary audio is programmed twenty-four (24) hours per
day/seven (7) days per week ("SAP"). Accordingly, in no event shall DIRECTV be
obligated to transmit more than the primary video and a single stereo pair of
primary audio programs to be associated with the Signal, a single mono SAP
associated with the Signal, and line 21, fields 1 and 2 of the VBI. Programmer
reserves and retains all rights in and to all signal distribution capacity
contained within the bandwidth of the Signal, including without limitation, the
VBI and audio subcarriers from its transmission point to the point of reception
by DIRECTV. DIRECTV retains and reserves any and all rights in and to, and may
use in its sole discretion, all distribution capacity contained within the
bandwidth of the Signals, including, without limitation, the VBI and audio
subcarriers, from the point of reception by DIRECTV to the DIRECTV Subscribers
in the Territory. Programmer shall not have any rights to use any part of a
DIRECTV Subscriber's return path for any reason whatsoever.

                  1.6 Change of Satellite. In the event Programmer either (i)
changes the satellite to which the Services are transmitted to a satellite or
other transmission medium not susceptible to viewing or utilization by DIRECTV's
then-existing earth station equipment without affecting the receipt of the
signals of any other programming or other services then received (or committed
to be received) by such DIRECTV, (ii) changes the technology used by Programmer
to encrypt the Services to a technology not compatible with DIRECTV's
then-existing descrambling equipment, or (iii) compresses, digitizes or
otherwise modifies the signal of the Services in such a manner that it cannot be
received or utilized by DIRECTV, then DIRECTV shall have the right to
discontinue carriage of the Services, immediately; provided that this right of
discontinuance and deletion shall not apply to DIRECTV if Programmer agrees to
promptly reimburse DIRECTV for (I) the cost to acquire and install equipment
necessary for DIRECTV to receive the signal of the Services from such new
satellite or other transmission medium, and/or (II) the cost to acquire and
install equipment necessary for DIRECTV to descramble and/or utilize the signal
of the Services; Programmer agrees to exercise best efforts to provide DIRECTV
with at least ninety (90) days' prior written notice of a satellite or
technology change as set forth in subsections (i) through (iii) above.

                  1.7 On-Screen Logos. It is understood and agreed that DIRECTV
may superimpose a logo or "bug" in a corner of the screen identifying DIRECTV
over the programming of the Services; provided however that DIRECTV's bug shall
appear only intermittently during any portion of the Services, and provided
further that DIRECTV shall not delete the Service's own promotion bug or its
on-screen graphics.


                                       7



         2. Reports and Payments.

                  2.1 Reports; Payments; Audit Rights. Within sixty (60) days
after the end of each month during the Term, DIRECTV shall furnish Programmer
(i) a statement containing a report of (A) the total number of DIRECTV
Subscribers as of the last day of the relevant month; (B) the number of "PPV
Orders" (defined as the number of PPV orders for the Services authorized by
DIRECTV for reception by DIRECTV Subscribers, net of any cancelled orders and/or
orders subject to a "Technical Credit" (as defined in Paragraph 2 of Exhibit
"B")) for the relevant month; and (C) the total amount of Gross Receipts (as
defined in Exhibit B, attached hereto, and made a part hereof) for the relevant
month and (ii) payment of the License Fees for the relevant month, calculated
pursuant to Section 2.2 and Exhibit B. Programmer shall accord confidential
treatment to any information contained in the aforementioned statement in
accordance with Section 15. At Programmer's request, DIRECTV shall permit
Programmer's independent representatives to review, during the Term (no more
than once each calendar year) and for one (1) year after the end of the Term and
on a one-time basis, such DIRECTV Subscriber records as required for the sole
purpose of verifying such statements at reasonable times, upon reasonable
advance written notice and during normal business hours at DIRECTV's offices.
Any third party auditors retained by Programmer shall be a certified public
accountant and/or firm specializing in media audits that has no conflict with
DIRECTV (subject to DIRECTV's reasonable approval). Such review shall be at
Programmer's sole cost and expense, unless such review reveals an underpayment
of more than five percent (5%) of License Fees due, in which case, DIRECTV shall
reimburse Programmer the reasonable cost of such audit and shall promptly make
payment of any fees due and owing, provided (I) DIRECTV does not have a bona
fide dispute with the audit findings; and (II) such audit costs shall not exceed
such underpayment. Such review shall be conducted during reasonable business
hours and in such manner as not to interfere with DIRECTV's normal business
activities and shall not continue for more than seven (7) days so long as
Programmer is given timely and reasonable access to the applicable DIRECTV
Subscriber records. Programmer shall not have the right to examine or inquire
into any matters or items which are embraced by or contained in any such
statement after the expiration of twelve (12) months from and after the date of
mailing of such statement, and such statement shall be final and conclusive upon
Programmer upon the expiration of such twelve (12) month period notwithstanding
that the matters or items embraced by or contained therein may later be
contained or referred to in a cumulative statement pertaining to more than one
accounting period. Such cumulative statement shall not be subject to audit by
Programmer to the extent the material contained therein was first reflected on a
statement submitted more than twelve (12) months prior to the date of mailing of
such cumulative statement. Programmer shall be forever barred from maintaining
or instituting any action or proceeding based upon, or in anyway relating to,
any matters that are embraced by or reflected on any statement rendered
hereunder, or the accuracy of any item appearing therein, unless written
objection thereto shall have been delivered by Programmer to DIRECTV within
twelve (12) months after the date of mailing of the statement on which such
transaction or items was first reflected and unless such action or proceeding is
commenced within twelve (12) months after delivery of such written objection.
Programmer may not commence a new audit until all prior audits have been closed
(i.e., after such closure is confirmed in writing by Programmer) and the results
have been presented to


                                       8



DIRECTV. If Programmer shall audit DIRECTV's books and records, then Programmer
shall, within sixty (60) days of the conclusion of such audit (i.e., after the
auditors conclude the audit at DIRECTV's offices), inform DIRECTV in writing of
any claim resulting therefrom (including a true copy of any third party audit),
and, except for the claims set forth in such notice, all statements rendered by
DIRECTV with respect to the period covered by such audit shall be conclusive and
binding on the parties and not subject to further audit. The information derived
from and the process of such review shall be subject to the confidentiality
provisions of Section 15, and any third party auditor shall be required to
acknowledge in writing its agreement to such confidentiality provisions.

                  2.2 License Fees. As full and complete compensation for
DIRECTV's right to distribute the Services, DIRECTV shall pay to Programmer, on
a monthly basis, for each Service Subscriber receiving the Services from DIRECTV
for such month, a "License Fee" determined pursuant to Programmer's rate card
for the Services set forth in Exhibit B hereto.

                  2.3 Late or Non-Payments. Any amounts that are not subject to
a bona fide dispute by DIRECTV and not paid by DIRECTV after (i) the date
payment is due pursuant to the first sentence of Section 2.1 and (ii) ten (10)
days after DIRECTV's receipt of written notice from Programmer of such failure
by DIRECTV, shall accrue interest at the rate of one percent (1%) per month or
the maximum allowed by law, whichever shall be the lesser, from the date such
amounts were due until they are paid.

                  2.4      Most Favored Nation.

                    2.4.1 Programmer agrees that if, at any time during the Term
(or any portion thereof), Programmer distributes or Programmer allows
(including, without limitation, by way of agreements that Programmer previously
entered into) or offers to allow any other distributor to distribute a Service
(or any Segment contained in a Service) in the Territory or in any portion
thereof by any technology whatsoever at a net effective rate per Service
subscriber that is lower than the net effective rate per "Service Subscriber"
(defined as a DIRECTV Subscriber authorized by Affiliate to receive the
Services) charged to DIRECTV hereunder ("Favored Fees"), then Programmer shall
promptly notify DIRECTV in writing of such Favored Fees and DIRECTV shall be
immediately entitled to incorporate into this Agreement the Favored Fees
effective as of the first day on which Programmer first allows or makes the
offer to allow such other distributor to distribute the Service(s) in exchange
for the Favored Fees (and for so long as such Favored Fees are available to such
other distributor). Nothing in the preceding sentence shall require DIRECTV to
incorporate the Favored Fees into this Agreement. Notwithstanding anything to
the contrary herein, if the Favored Fees contain such obligations, terms and
conditions that are not relevant to DIRECTV or DIRECTV is not reasonably capable
of complying with such terms and conditions taking into consideration DIRECTV's
business, including, without limitation, DIRECTV's technology and DIRECTV's
national platform, then Programmer shall provide DIRECTV with comparable
obligations, terms and conditions. In determining net effective rates, all
direct and indirect economic outlays in connection with or related to carriage


                                       9



of the Service(s) shall be considered, whether embodied in an agreement relating
to the Service(s) or otherwise (e.g., side letters or commitments such as
advertising purchases), including, without limitation, discounts, credits,
commissions, rebates, revenue sharing, channel position fees, advertising
purchases, launch or marketing support, or other adjustments of any kind, or
other goods or services offered by such other distributor. In determining net
effective rates, actual numbers of Service Subscribers shall be used. In no
event shall DIRECTV be required to incorporate the following as a condition to
incorporating the Favored Fees: (i) the other distributor's term hereunder
(however, DIRECTV may, in its sole discretion, elect to have the same Term as
provided to the other distributor); (ii) less favorable penetration, packaging
or subscriber benchmark requirements; (iii) launch of additional services,
programs or networks; (iv) a requirement that is designed or intended to, or
that operates to, frustrate or interfere with, or otherwise have the effect of
discriminating against DIRECTV or frustrating or circumventing the application
of this Section 2.4 and DIRECTV's ability to receive any Favored Fees; or (v) a
condition that is not specifically conditioned and directly related and
indivisible from any Favored Fees.

                  2.4.2 At DIRECTV's election, Programmer shall (i) permit
DIRECTV's independent representatives to review, during the Term (no more than
once each calendar year) and for one (1) year and on a one-time basis only
thereafter, such Programmer records as required for the sole purpose of
verifying Programmer's compliance with the terms of Section 2.4, at reasonable
times, upon reasonable advance written notice and during normal business hours
at Programmer's offices, or (ii) provide to DIRECTV an annual statement,
certified by Programmer's chief financial officer, certifying compliance with
the provisions of Section 2.4. Such review shall be at DIRECTV's sole cost and
expense, unless such review reveals an overpayment by DIRECTV of more than five
percent (5%), in which case, Programmer shall promptly reimburse DIRECTV for the
reasonable cost of such audit and shall promptly make payment of any monies due
and owing, provided (A) Programmer does not have a bona fide dispute with the
audit findings; and (B) such audit costs shall not exceed such overpayment. The
information derived from and the process of such review shall be subject to the
confidentiality provisions of Section 15, and any third party auditor shall be
required to acknowledge in writing its agreement to such confidentiality
provisions.

         3. Advertising.

         Subject to Section 1.2.1 above, Programmer hereby represents and
warrants that the Services shall not contain any advertising, direct sales or
infomercials during the Term; provided, however, that Programmer shall have the
right to include third party advertising on the Services up to a total of four
minutes in each 90-minute block of programming; and provided further that each
90 minute block of programming on the Services shall include four separate
30-second announcements that may be covered by DIRECTV via the insertion of
commercial or other announcements (including, without limitation, promotions for
any or all adult programming services distributed by DIRECTV) (such available
time defined as "Avails"). Subject to the foregoing, under no circumstances may
such announcements promote any form of competing adult entertainment, including
but not limited to: adult web sites, adult chat lines, adult wireless services,
adult pay-per-view events, adult movie channels, or adult DVDs. The Avails


                                       10



provided by Programmer to DIRECTV shall be no less favorable (in terms of the
nature, use, scheduling, availability, length of the Avails and so forth) than
those provided to any other distributor of the Services. Programmer shall
properly "tone switch", using industry recognized equipment, via inaudible
signals, all Avails to enable Affiliate to insert its commercial announcements
within 60 days of the Service Commencement Date.

         4. Marketing and Promotion.

         In addition to other rights granted herein, Programmer hereby grants to
DIRECTV, during the Term and in the Territory only, the following rights, but
not the obligation, to be exercised by DIRECTV in its sole discretion with
respect to its marketing of the Services: (i) the right to use any and all
marketing materials reasonably requested from Programmer by DIRECTV (which
materials shall be provided at no cost to DIRECTV) for the purpose of marketing
the Services; (ii) the right to manufacture and produce its own marketing
materials, subject to the prior approval of Programmer, such approval not to be
unreasonably withheld or delayed; and (iii) the right to use the names, voices,
music, recordings, images, and likenesses of any and all performers in and other
persons related to the Services, and the right to use Programmer's name and logo
to market the Services without the payment of additional consideration or of any
additional monies whatsoever. Programmer shall promote DIRECTV's carriage of the
Services at least as favorably as it promotes the carriage of the Services by
any other distributor (including, without limitation, the frequency, prominence
and calling by specific name); provided, however, that Programmer shall provide
DIRECTV with prior written notification of any planned promotion of DIRECTV's
carriage of the Services by Programmer, and any such promotion shall be subject
to DIRECTV's prior approval. Notwithstanding the foregoing, Affiliate may cease
marketing and promoting the Services if Affiliate, in its absolute sole
determination, reasonably believes that marketing or promoting the Services may
be politically harmful to Affiliate or its Affiliated Companies or adversely
affect the corporate image that Affiliate or its Affiliated Companies desires to
maintain at such time. In the event that DIRECTV, in its sole discretion, elects
to undertake a marketing campaign on behalf of the Services, DIRECTV shall
furnish a marketing plan and budget to Programmer, and Programmer and DIRECTV
shall work in good faith to jointly implement such plan.

         5. Representations, Warranties and Covenants.

             5.1      By DIRECTV.  DIRECTV warrants, represents and covenants
to  Programmer that it:

               5.1.1 is in compliance with and will comply with all material
Laws (as defined below) with respect to its rights and obligations under this
Agreement, including without limitation, all relevant provisions of the Cable
Television Consumer Protection and Competition Act of 1992 (as may be amended
and any successor, replacement or similar Law or statute) and any and all
regulations issued pursuant thereto (as used herein, "Law" shall mean any FCC
and any other governmental (whether international, federal, state, municipal or
otherwise) statute, law, rule, regulation, ordinance, code, directive or order,
including without limitation, any court order);


                                       11



               5.1.2 has the power and authority to enter into this Agreement
and to fully perform its obligations hereunder;

               5.1.3 shall distribute the Services in the Territory in
accordance with and subject to the terms and conditions set forth in this
Agreement;

               5.1.4 shall, except as otherwise set forth herein, (A) arrange
and pay for reception of the Services (excluding any authorization fees) from
the U.S. domestic communications satellite from time-to-time designated by
Programmer to DIRECTV with DIRECTV's approval of such designation; and (B)
acquire and maintain, at DIRECTV's sole expense, any equipment, including,
without limitation, backup or reserve descramblers, which may be necessary to
decode and unscramble the signal(s) for the Services;

               5.1.5 shall not, without Programmer's consent, knowingly
authorize or cause or knowingly permit any portion of the Services to be
recorded, duplicated, cablecast, exhibited or otherwise used (except on a
videocassette recorder or other home or personal recording device for private,
noncommercial use) for any purpose other than for distribution by DIRECTV at the
time the same is made available;

               5.1.6 shall not, without Programmer's prior written approval, use
the names, titles or logos of the Services or any of its programs, or the names,
voices, photographs, likenesses or biographies of any individual participant or
performer in, or contributor to, any program or any variations thereof, for any
purpose other than in material intended to advise DIRECTV Subscribers or
potential DIRECTV Subscribers of the availability and scheduling of the Services
or as a channel identifier. The restrictions set forth in this Section 5.1.6
shall apply only to the extent they are applied by Programmer uniformly with
respect to all of its distributors of the Services, and shall not apply if
DIRECTV has received a valid authorization from a third party for any of the
uses described in this Section 5.1.6;

               5.1.7 has obtained, and shall maintain in full force during the
Term hereof, such federal, state and local authorizations as are material and
necessary to operate the business it is conducting in connection with its rights
and obligations under this Agreement; and

               5.1.8 the obligations created by this Agreement, in so far as
they purport to be binding on DIRECTV, constitute legal, valid and binding
obligations of DIRECTV enforceable in accordance with their terms.

        5.2 By Programmer. Programmer warrants, represents and covenants
to DIRECTV that:


                                       12



               5.2.1 to its best knowledge after diligent review and receipt of
advice of counsel with respect hereto, it is in compliance with and will
throughout the Term continue to comply with all Laws applicable to, or with
respect to, the Services and the provision of the Services to DIRECTV, and
Programmer's rights and obligations under this Agreement with respect to the
Services and Programmer's obligations hereunder, including without limitation,
FCC rules and regulations governing the Services, if any, all relevant
provisions of the Cable Television Consumer Protection and Competition Act of
1992, and the Communications Act of 1934, the effective portions of the
Communications Decency Act of 1996 (as any or all may be amended and any
successor, replacement or similar Laws) and any regulations promulgated under
any applicable law or any of the foregoing;

               5.2.2 it has the power and authority to enter into this Agreement
and to fully perform its obligations hereunder and once executed this Agreement
shall constitute a valid and binding agreement of Programmer enforceable in
accordance with its terms;

               5.2.3 the general quality and quantity of programming on the
Services shall not materially change from that existing as of the date of this
Agreement, and the genre of programming shall not materially change from that
described in Section 1.2.1 and existing on the date of this Agreement;

               5.2.4 it has obtained, and shall maintain in full force during
the Term hereof, such federal, state and local authorizations as are material
and necessary to operate the business it is conducting in connection with its
rights and obligations under this Agreement;

               5.2.5 it has secured and shall maintain in full force during the
Term hereof all rights necessary for DIRECTV to use and enjoy its rights in
connection with its distribution of the Services and all programming provided as
part thereof, as a whole or in parts, as PPV Offerings in the Territory,
including, without limitation, obtaining or all necessary trademarks,
copyrights, licenses and any and all other proprietary intellectual property and
other use rights necessary in connection with, and for DIRECTV's distribution
of, the Services (including without limitation, the right to use the names,
titles or logos of the Services or any of its programs, the promotional
materials supplied or approved by Programmer, the names, voices, photographs,
music, likenesses or biographies of any individual participant or performer in,
or contributor to, any program or any variations thereof) and to perform its
obligations hereunder and grant the rights granted pursuant to Section 1;

               5.2.6 it shall not, without DIRECTVs prior written approval, use
the name or logo for "DIRECTV" or any other works owned or controlled by DIRECTV
(and its related companies);

               5.2.7 as of the date hereof, the programming on the Services
consists of and during the Term hereof such programming shall consist of, that
programming described in Section 1.2.1;


                                       13



               5.2.8 there are no (and it covenants that it shall not enter into
directly or indirectly, allow or otherwise permit any) affiliation, distribution
or any other agreements, whether written or oral, granting to distributors
and/or any other third party, person or entity any form or type of exclusive or
other rights that would limit or restrict in any way DIRECTV's rights to
distribute the Services in the Territory;

               5.2.9 the obligations created by this Agreement, in so far as
they purport to be binding on Programmer constitute legal, valid and binding
obligations of Programmer enforceable in accordance with their terms;

               5.2.10 it has not (and none of its principals or Affiliated
Companies have) been convicted for the criminal violation of, and/or has not
been found by the FCC or other federal, state or local governmental authority
with appropriate jurisdiction (collectively, the "Governmental Authority") to
have violated, any federal, state or local law or regulation as applicable
concerning illegal, indecent or obscene material or the transmission thereof
(the "Obscenity Laws"), and Programmer is not currently aware of any pending
investigation (including, without limitation, a grand jury investigation)
involving the Services (or any content included in the Services) or any pending
proceeding against Programmer (or any of its principals or Affiliated Companies)
for the violation of any Obscenity Laws;

               5.2.11 it will notify DIRECTV as soon as possible, but in no
event later than the close of business on the same Business Day upon which
Programmer receives notice of, or becomes aware of, any pending investigation by
any Governmental Authority, or any pending criminal proceeding against
Programmer (or any of its principals or Affiliated Companies), which
investigation or proceeding concerns distribution of the Services or programming
in the Services, including without limitation, investigations and/or proceedings
concerning potential violations of Obscenity Laws. For purposes of this Section
5(2)(11), Programmer shall be deemed to be aware of any such investigation or
proceeding if any of the directors, officers, outside attorneys or employees of
managerial status of Programmer or an Affiliated Company has received any
communication about or otherwise becomes aware of any such investigation or
proceeding;

               5.2.12 the Services, and all programming provided as part
thereof, Programmer provides DIRECTV hereunder (A) is not intended to be obscene
and, to the best of Programmer's knowledge after diligent review, would not be
found to be obscene in any jurisdiction in the Territory, and (B) complies with
and, at all times that this Agreement is in effect, shall comply with the
description and associated restrictions set forth in the definition of "Service"
and "Services" in Section 1.2.1, Exhibit A and Schedule I thereto, including,
without limitation, Programmer represents and warrants that the Services shall
reflect adult content limited to the "XX" type, as described in Schedule I, and
shall under no circumstances contain or depict any acts set forth either of the
"XX 1/2" or "XXX" columns thereof; and

               5.2.13 as of date hereof, it is in compliance with the most
favored nations provision set forth in Section 2.4 hereof.




                                       14



        6.     Term; Termination.

               6.1 Term; Extension; Service Commencement Date. The term of this
Agreement shall be for the period commencing on the date hereof and ending on
the second anniversary of the Service Commencement Date (the "Term"). The
"Service Commencement Date" means the date on which DIRECTV commences
distribution of the Services over a DTH Satellite for revenue-generating
purposes, as determined by DIRECTV in its sole discretion. DIRECTV shall have
the option, in its sole discretion, to extend the Term for an additional period
of up to two (2) years.

               6.2 Termination for Breach, Bankruptcy; Discontinuance of
Business. In addition to any other rights or remedies, in equity or at law, this
Agreement may be terminated by either party (the "Affected Party"), in its
discretion, at any time after any of the following occurrences, except as
provided in this Agreement, with respect to the other party (the "Other Party"):

                    6.2.1 the failure by the Other Party, its successors or
assigns to perform any material obligation hereunder which is not cured within
thirty (30) days after receipt of written notice thereof from the Affected Party
or as to which reasonable steps to cure have not been commenced within such
period (or are not thereafter diligently pursued and completed within an
additional thirty (30) days);

                    6.2.2 the filing of a petition in bankruptcy or for
reorganization by or against the Other Party under any bankruptcy act; the
assignment by the Other Party for the benefit of its creditors, or the
appointment of a receiver, trustee, liquidator or custodian for all or a
substantial part of the Other Party's property, and the order of appointment is
not vacated within thirty (30) days; or the assignment or encumbrance by the
Other Party of this Agreement contrary to the terms hereof; or

                    6.2.3 if DIRECTV discontinues operation of the DTH
Distribution System, or Programmer discontinues operation and distribution of
the Services. Neither party shall have any further liability to the other, other
than as set forth in Section 6.6 below, for the discontinuance of the DTH
Distribution System or the Services, as the case may be; provided that such
discontinuance is not in connection with, and does not arise from, DIRECTV's or
Programmer's breach of this Agreement.

               6.3 Termination by DIRECTV. In addition to any other rights or
remedies, in equity or at law, DIRECTV may terminate this Agreement upon thirty
(30) days' prior written notice to Programmer:

                    6.3.1 if at any time the general quality and quantity of
programming on the Services materially changes from that existing as of the date
of this Agreement, or the genre of programming materially changes from that
described in Section 1.2.1 and



                                       15



existing on the date of this Agreement, as determined by DIRECTV in its sole
discretion; provided, however, that DIRECTV first provides Programmer with
written notice specifying in detail the material changes giving rise to
DIRECTV's determination and provides Programmer with forty-eight (48) hours to
cure;

                    6.3.2 in the event of a Programmer Transfer (as defined
below) other than (A) with DIRECTV's prior written consent to the assignment of
this Agreement to a new entity, which consent shall not be unreasonably
withheld, (B) as the result of a merger into or sale or transfer directly or
indirectly to a wholly-owned subsidiary, (C) or a transfer of a percentage of
the assets or stock ownership of Programmer or the Services where Programmer
retains ownership of at least fifty percent (50%) of the assets or stock
thereof. "Programmer Transfer" shall mean a change in the ownership of
Programmer (or the parent of Programmer) or any transfer, conveyance, exclusive
license, transfer or disposition of all or substantially all of the assets or
business of Programmer (or the parent of Programmer), whether by operation of
law or otherwise, the result of which is that a new entity, person or group of
persons, directly or indirectly, has the ability (A) to elect or control the
votes of the majority of the board of directors or other governing body of
Programmer (or the parent of Programmer), (B) to control more than 50% of the
voting interests of Programmer (or the parent of Programmer), or (C) to direct
or cause the direction of the general management and policies of Programmer (or
the parent of Programmer); or

               6.4 Offsets. Without limiting any other remedies available to it
under this Agreement, by law or at equity and, notwithstanding anything to the
contrary herein, DIRECTV shall have the right (exercisable after Programmer's
failure to cure timely a material breach in accordance with the below) to
withhold and reserve from any monies whatsoever payable to Programmer or its
designee hereunder, sums reasonably sufficient to secure DIRECTV from and
against Programmer's material breach of any of its obligations under this
Agreement which is not cured within ten (10) days after receipt of written
notice thereof from the DIRECTV.

               6.5 Force Majeure. Notwithstanding any other provision in this
Agreement, neither Programmer nor DIRECTV shall have any liability to the other
or any other person or entity with respect to any failure of Programmer or
DIRECTV, as the case may be, to transmit or distribute the Services or perform
its obligations hereunder if such failure is due to any failure or degradation
in performance of the Delivery Source or the DTH Satellite(s) or transponders on
such satellites (as applicable) or of the DTH Distribution System (in which
case, DIRECTV shall be excused from its distribution obligations under this
Agreement), or of any scrambling/descrambling equipment or any other equipment
owned or maintained by others (including, without limitation, DIRECTV's
automated billing and authorization system), any failure at the origination and
uplinking center used by Programmer or DIRECTV, any labor dispute, fire, flood,
riot, legal enactment, government regulation, Act of God, or any cause beyond
the reasonable control of Programmer or DIRECTV, as the case may be (a "Force
Majeure"), and such non-performance shall be excused for the period of time such
failure(s) causes such non-performance; provided, however, that if DIRECTV
determines in its sole discretion that it is commercially or technically



                                       16



unfeasible to cure a Force Majeure with respect to the DTH Distribution System
or DTH Satellite and so notifies Programmer, then either party may terminate
this Agreement effective upon written notice to the other party. The parties
acknowledge and agree that although the Services may at any given time be
uplinked to only one of several DTH Satellites, failure or degradation in any of
such DTH Satellites may require DIRECTV to reduce the number of programming
services available for allocation among all of the DTH Satellites, with such
reduction including, without limitation, curtailment or termination of the
distribution of the Services by DIRECTV, at DIRECTV's sole discretion.
Accordingly, Programmer further acknowledges and agrees that the provisions set
forth in the first sentence of this Section 6.5 shall apply and shall exculpate
DIRECTV and excuse the performance of DIRECTV hereunder in the event of a
failure or degradation of any of the DTH Satellites or the transponders on any
such satellites, regardless of whether the satellite to which the Services are
uplinked at the time of such failure or degradation is itself the subject of
such failure or degradation.

               6.6 Survival. Termination of this Agreement pursuant to this
Section 6 shall not relieve either party of any of its liabilities or
obligations under this Agreement, including without limitation those set forth
below in Section 8, which shall have accrued on or prior to the date of such
termination.

         7. Separate Entities. No officer, employee, agent, servant or
independent contractor of either party hereto or their respective subsidiaries
or DIRECTVs shall at any time be deemed to be an employee, servant or agent of
the other party for any purpose whatsoever, and the parties shall use
commercially reasonable efforts to prevent any such misrepresentation. Nothing
in this Agreement shall be deemed to create any joint venture, partnership or
principal-agent relationship between Programmer and DIRECTV, and neither shall
hold itself out in its advertising or in any other manner which would indicate
any such relationship with the other.

         8. Indemnification; Limitation of Liability; Insurance.

               8.1 By Programmer. Programmer shall indemnify, defend and hold
harmless each of DIRECTV, its Affiliated Companies (as defined below), DIRECTV's
contractors, subcontractors and authorized distributors and the directors,
officers, employees and agents of DIRECTV, such Affiliated Companies and such
contractors, subcontractors and distributors (collectively, the "DIRECTV
Indemnitees") from, against and with respect to any and all claims, damages,
liabilities, costs and expenses (including reasonable attorneys' and expert's
fees) incurred in connection with any third party claim (including, without
limitation, a claim by any Governmental Authority) against any of the DIRECTV
Indemnitees arising out of (i) Programmer's breach or alleged breach of any
provision of this Agreement, (ii) any content contained in the Services, (iii)
the distribution or cablecast of any programming of the Services which violates
or requires payment for use or performance of any copyright, right of privacy or
literary, music performance or dramatic right, (iv) Programmer's advertising and
marketing of the Services, and/or (v) any other materials, including advertising
or promotional copy, supplied or permitted by Programmer. In addition,


                                       17



Programmer shall pay and hold the DIRECTV Indemnitees harmless from any federal,
state, or local taxes or fees which are based upon revenues derived by, or the
operations of, Programmer. As used in this Agreement, "Affiliated Company(ies)"
shall mean, with respect to any person or entity, any other person or entity
directly or indirectly controlling, controlled by or under common control (i.e.,
the power to direct affairs by reason of ownership of voting stock, by contract
or otherwise) with such person or entity and any member, director, officer or
employee of such person or entity.

               8.2 By DIRECTV. DIRECTV shall indemnify and hold harmless each of
Programmer, its Affiliated Companies, Programmer's contractors, subcontractors
and authorized distributors, each supplier to Programmer of any portion of the
Services hereunder and each participant therein and the directors, officers,
employees and agents of Programmer, such Affiliated Companies, such contractors,
subcontractors and distributors and such suppliers and participants therein
(collectively, the "Programmer Indemnitees") from, against and with respect to
any and all claims, damages, liabilities, costs and expenses (including
reasonable attorneys' and experts' fees) incurred in connection with any third
party claim (including, without limitation, a claim by any Governmental
Authority) against the Programmer Indemnitees arising out of (i) DIRECTV's
breach or alleged breach of any provision of this Agreement, (ii) the
distribution by DIRECTV of the Services (except with respect to claims relating
to the content of the Services for which Programmer is solely responsible
pursuant to Section 8.1(ii) and Section 8.1(iii)), (iii) DIRECTV's advertising
and marketing of the Services (except with respect to such advertising and
marketing materials or content supplied or approved by Programmer), and (iv) any
other materials, including advertising or promotional copy, supplied by DIRECTV.
In addition, DIRECTV shall pay and hold Programmer harmless from any federal,
state, or local taxes or fees, including any fees payable to local franchising
authorities, which are based upon revenues derived by, or the operations of,
DIRECTV.

               8.3 Survival. Termination of this Agreement shall not affect the
continuing obligations of each of the parties hereto as indemnitors hereunder.
The party wishing to assert its rights set forth in this Section 8 shall
promptly notify the other of any claim or legal proceeding with respect to which
such party is asserting such right. Upon the written request of an indemnitee,
the indemnitor will (1) assume the sole control of the defense and settlement of
any claim, demand or action against such indemnitee and/or (2) allow the
indemnitee to participate in the defense thereof, such participation to be at
the expense of the indemnitee. Settlement by the indemnitee without the
indemnitor's prior written consent shall release the indemnitor from the
indemnity as to the claim, demand or action so settled.

               8.4 NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT:

                    8.4.1 IN NO EVENT SHALL ANY PARTY BE LIABLE FOR ANY
INCIDENTAL OR CONSEQUENTIAL DAMAGES, WHETHER FORESEEABLE OR NOT, OCCASIONED BY
ANY FAILURE TO PERFORM OR THE BREACH OF ANY OBLIGATION UNDER THIS AGREEMENT FOR
ANY CAUSE WHATSOEVER, WHETHER BASED ON NEGLIGENCE.


                                       18



                    8.4.2 IN NO EVENT SHALL ANY PROJECTIONS, FORECASTS,
ESTIMATIONS OF SALES AND/OR MARKET SHARE OR EXPECTED PROFITS, OR OTHER
ESTIMATIONS OR PROJECTIONS BY PROGRAMMER OR DIRECTV OR ANY OF THEIR DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS OR AFFILIATES, REGARDING OR RELATED TO PROGRAMMER'S
OR DIRECTV'S DTH BUSINESS BE BINDING AS COMMITMENTS OR, IN ANY WAY, PROMISES BY
PROGRAMMER OR DIRECTV.

               8.5. Insurance. Without limiting Programmer's representations,
warranties and indemnification obligations under this Agreement, Programmer
shall secure, at its sole cost and expense, the insurance policy (the
"Insurance" and/or the "Policy" set forth in this paragraph. Programmer shall
obtain a media/professional liability insurance policy covering Programmer's
distribution of the Services during the Term (including the distribution by
DIRECTV authorized under this Agreement) and for one (1) year thereafter in the
minimum amount of three million dollars ($3,000,000) per claim and five million
dollars ($5,000,000) in the aggregate, with a deductible of not greater than one
hundred thousand dollars ($100,000). The Policy shall be in form and substance
reasonably acceptable to DIRECTV, and shall name DIRECTV (and those "Affiliates"
(defined below) identified by DIRECTV) as insureds thereon. The Insurance shall
contain an endorsement that negates the "other insurance" claims in the Policy,
and shall contain a statement that the insurance being provided therein is
primary. For purposes of this Agreement, "Affiliate" shall mean any corporation
or other person or entity controlling, or controlled by, or under common control
with a party or third person, as the case may be. Programmer shall provide
DIRECTV and those Affiliates identified by DIRECTV with a certificate evidencing
the Insurance required by this paragraph on or before the Services Commencement
Date. Programmer shall ensure that DIRECTV is notified in writing thirty (30)
days in advance of any actual or proposed change to such insurance, and no such
change (and no such Insurance, nor DIRECTV's failure to disapprove of or object
to the lack thereof) shall diminish Programmer's obligations under this
Agreement.

         9. Notices. Except as set forth below, all notices hereunder shall be
in writing and delivered by hand or sent by certified mail, postage prepaid and
return receipt requested, fax, or by an overnight delivery service to the
receiving party at its address set forth above or as otherwise designated by
written notice. Notice to Programmer shall be provided as follows:

Colorado Satellite Broadcasting, Inc.
7007 Winchester Circle, Suite 200
Boulder, CO 80301
Attention:  Ken Boenish, President
Fax:  (303) 527-2872
cc:  General Counsel
Fax: (303) 527-2872


                                       19



Notice to DIRECTV shall be provided as follows:

DIRECTV, Inc.
2230 East Imperial Highway
El Segundo, California 90245
Attention:  Senior Vice President, Programming
Fax:  (310) 964-5416
cc:  Executive Vice President and General Counsel
Fax:  (310) 964-4991

Notice given by hand shall be considered to have been given on the date
delivered or, if delivery is refused, as of the date presented. Notice given by
mail shall be considered to have been given five (5) days after the date of
mailing, postage prepaid certified (return receipt requested). Notice given by
facsimile machine shall be considered to have been given on the date receipt
thereof is electronically acknowledged. Notice given by an overnight delivery
service shall be considered to have been given on the next business day.

         10. Waiver. The failure of any party to insist upon strict performance
of any provision of this Agreement shall not be construed as a waiver of any
subsequent breach of the same or similar nature. Subject to Section 8.4 above,
all rights and remedies reserved to either party shall be cumulative and shall
not be in limitation of any other right or remedy which such party may have at
law or in equity.

         11. Binding Agreement; Assignment. Subject to DIRECTV's rights under
Section 6.3.2, this Agreement shall be binding upon the parties hereto and their
respective successors and assigns, except that it may not be assigned by
transfer, by operation of law or otherwise, without the prior written consent of
the non-transferring party, which shall not be unreasonably withheld; provided,
however, that DIRECTV may assign its rights and obligations under this
Agreement, in whole or in part (including without limitation, DIRECTV's right to
distribute the Services) (i) to an Affiliated Company or to a successor entity
to DIRECTV's DTH business; (ii) to a third party as part of preparing to go or
going public or as part of a merger, consolidation or sale of all substantially
all of the assets of DIRECTV or (iii) to a third party, provided DIRECTV remains
primarily liable for the performance of such third party's obligations
hereunder.

         12. Laws of California. This Agreement shall be governed by and
construed in accordance with the laws of the State of California applicable to
contracts made and to be fully performed therein by residents of the State of
California, except to the extent that the parties' respective rights and
obligations are subject to mandatory local, State and Federal laws or
regulations. The parties hereby agree that the jurisdiction of, or the venue of,
any action brought by either party shall be in a state or federal district court
sitting in the Los Angeles, California and both parties hereby agree to waive
any right to contest such jurisdiction and venue.


                                       20



         13. Entire Agreement and Section Headings. This Agreement sets forth
the entire agreement and understanding of the parties relating to the subject
matter hereof, and supersedes all prior agreements, arrangements, or
understandings relating to the subject matter hereof. This Agreement shall not
be modified other than in a writing, signed by each of the parties hereto. The
section headings hereof are for the convenience of the parties only and shall
not be given any legal effect or otherwise affect the interpretation of this
Agreement.

         14. Severability. The parties agree that each provision of this
Agreement shall be construed as separable and divisible from every other
provision and that the enforceability of any one provision shall not limit the
enforceability, in whole or in part, of any other provision hereof. In the event
that a court of competent jurisdiction determines that a restriction contained
in this Agreement shall be unenforceable because of the extent of time or
geography, such restriction shall be deemed amended to conform to such extent of
time and/or geography as such court shall deem reasonable.

         15. Confidentiality.

               15.1 The parties agree that they and their employees have
maintained and will maintain, in confidence, the terms and provisions of this
Agreement, as well as all data, summaries, reports, proprietary information,
trade secrets and information of all kinds, whether oral or written, acquired or
devised or developed in any manner from the other party's personnel or files
(the "Confidential Information"), and that they have not and will not reveal the
same to any persons not employed by the other party except: (i) (A) by mutual
agreement; (B) to the extent necessary to comply with the law (including SEC
reporting requirements) or the valid order of a court of competent jurisdiction,
in which event the disclosing party shall so notify the other party as promptly
as practicable (and, if possible, prior to making any disclosure) and shall seek
confidential treatment of such information, or in connection with any
arbitration proceeding; (C) as part of its normal reporting or review procedure
to its parent company, its auditors and its attorneys, and such parent company,
auditors and attorneys agree to be bound by the provisions of this Section 15;
(D) in order to enforce any of its rights pursuant to this Agreement; or (E) in
the case of DIRECTV, to the NRTC, potential investors, insurers, financing
entities or any entity engaged in DIRECTV's DBS business; provided, however,
that such person described above agrees to be bound by the provisions of this
Section 15; or (ii)(A) at the time of disclosure to the recipient the
Confidential Information is in the public domain; or (B) after disclosure to the
recipient the Confidential Information becomes part of the public domain by
written publication through no fault of the recipient. During the Term, neither
party shall issue an independent press release with respect to this Agreement or
the transactions contemplated hereby without the prior written consent of the
other party. Breach of this last sentence shall be deemed a material breach of
this Agreement.

                  15.2 Notwithstanding Section 15.1, Programmer specifically
acknowledges and agrees that any lists of DIRECTV's customers or users, and all
information related to




                                       21



such customers and users, is confidential and proprietary information of DIRECTV
and cannot be disclosed by Programmer or used by Programmer for any purpose or
use whatsoever, other than for its review at DIRECTV's offices as part of
Programmer's audit rights hereunder to determine if Programmer has been paid the
License Fees due to it by DIRECTV. Also notwithstanding Section 15.1, Programmer
further acknowledges and agrees that under no circumstances will it in any way:
disclose information (whether personally identifiable or not) to any third party
regarding DIRECTV's customers or users or engage in any direct mailing or
telephone solicitation which DIRECTV's customers or users do not previously and
expressly approve (whether orally or in writing) or previously and expressly
request (whether orally or in writing), or which DIRECTV does not previously and
expressly approve in writing in DIRECTV's sole discretion.

         16. Inadequacy of Money Damages. Programmer and DIRECTV hereby
acknowledge and agree that DIRECTV's distribution and marketing of the Services
pursuant to the terms and conditions contained herein are of the essence of this
Agreement. DIRECTV further acknowledges and agrees that such carriage and
marketing requirements, subject to Force Majeure and other conditions of this
Agreement, are special and unique, and that Programmer may not be adequately
compensated by the payment of money damages in the event that DIRECTV failed to
comply with any of such requirements. Programmer acknowledges and agrees that
the grant of rights to DIRECTV hereunder are special and unique, and that
DIRECTV may not be adequately compensated by the payment of money damages in the
event that Programmer failed to comply with any of its obligations under this
Agreement, including without limitation, providing access to any Service
programming to DIRECTV, as required hereunder.

         17. Cessation of Program Distribution. If DIRECTV in good faith
reasonably believes that DIRECTV's provision of any of the programming on the
Services either violates any Law or could be found by a court or administrative
agency to violate any Law (a "Law Violation" or "Potential Law Violation") or
reasonably believes in good faith at any time that any of the programming on the
Services is adversely affecting the corporate image that DIRECTV desires to
maintain at such time (an "Image Problem") then, notwithstanding anything to the
contrary in this Agreement, (i) immediately following written notice to
Programmer in the case of a Law Violation or Potential Law Violation, or (ii) no
sooner than 30 days following written notice to Programmer in the case of an
Image Problem (if DIRECTV elects to terminate this Agreement as provided in this
Section 17): DIRECTV may terminate this Agreement, or DIRECTV may cease
distributing the offending programming or the Services (in any portion of the
Territory, or the entire Territory, as DIRECTV shall determine in its sole
discretion based on the genesis of the Law Violation; Potential Law Violation or
Image Problem) until DIRECTV determines in DIRECTV's sole discretion that there
will be no Image Problem because the Service programming at that subsequent time
is consistent with the corporate image that DIRECTV then desires to maintain or
DIRECTV reasonably determines that a Law Violation or Potential Law Violation
will not again occur.

         18. Survival of Representations and Warranties. All representations and
warranties contained herein or made by the parties, and each of them, in
connection herewith shall survive any independent investigation made by either
party.


                                       22



         19. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original and all such
counterparts together shall constitute but one and the same instrument. The
parties also agree that this Agreement shall be binding upon the faxing by each
party of a signed signature page thereof to the other party. If such a faxing
occurs, the parties agree that they will each also immediately post, by Federal
Express, a fully executed original counterpart of the Agreement to the other
party.


         IN WITNESS WHEREOF, the undersigned parties have caused this Agreement
to be executed by their duly authorized representatives as of the day and year
first above written.


                                          DIRECTV, INC.


                                          By: /s/Toby Berlin
                                              Name: Toby Berlin
                                              Title: VP of Programming
                                              Date: April 4, 2006


                                          COLORADO SATELLITE BROADCASTING, INC.


                                          By: /s/ Ken Boenish
                                              Name: Ken Boenish
                                              Title: President
                                              Date: April 4, 2006



                                       23

EX-21

EXHIBIT 21.01

LIST OF SUBSIDIARIES

Colorado Satellite Broadcasting, Inc. d/b/a TEN and The Erotic Networks

Incorporated in State of Colorado

MRG Entertainment, Inc. d/b/a Mainline Releasing, Lightning Entertainment and Lifestyles Entertainment

Incorporated in State of California

EX-23

EXHIBIT 23.01

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our reports dated May 19, 2006, accompanying the consolidated financial statements and schedule, and management’s assessment of the effectiveness of internal control over financial reporting included in the Annual Report of New Frontier Media Inc., and Subsidiaries on Form 10-K for the year ended March 31, 2006. We hereby consent to the incorporation by reference of said reports in the Registration Statement of New Frontier Media Inc. and Subsidiaries on Form S-8 (File No. 333-102694).

GRANT THORNTON LLP

New York, New York
May 19, 2006

EX-31

EXHIBIT 31.01

CHIEF EXECUTIVE CERTIFICATION

I, Michael Weiner, Chief Executive Officer of New Frontier Media, Inc., certify that:

1. I have reviewed this Annual Report on Form 10-K of New Frontier Media, Inc. (the “Registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared:

c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Dated: June 13, 2006

 
 
 
Michael Weiner
Chief Executive Officer

EX-31

EXHIBIT 31.02

CHIEF FINANCIAL OFFICER CERTIFICATION

I, Karyn L. Miller, Chief Financial Officer of New Frontier Media, Inc., certify that:

1. I have reviewed this Annual Report on Form 10-K of New Frontier Media, Inc. (the “Registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

a) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared:

c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Dated: June 13, 2006

 
 
Karyn L. Miller
Chief Financial Officer
(Principal Accounting Officer)

EX-32

EXHIBIT 32.01

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of New Frontier Media, Inc. (the “Company”) on Form 10-K for the period ending March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael Weiner, Chief Executive Officer of the Company, certify, pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 
 
 
Michael Weiner
Chief Executive Officer

June 13, 2006

EX-32

EXHIBIT 32.02

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of New Frontier Media, Inc. (the “Company”) on Form 10-K for the period ending March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Karyn L. Miller, Chief Financial Officer of the Company, certify, pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 
 
Karyn L. Miller
Chief Financial Officer

June 13, 2006