10-Q

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

FORM 10-Q

ý   Quarterly report under Section 13 or 15(d) of the Securities and Exchange
Act of 1934.

For the quarterly period ended December 31, 2005

o   Transition Report under Section 13 or 15(d) of the Exchange Act.

For the transition period from                          to                         

0-23697
(Commission file number)

NEW FRONTIER MEDIA, INC.

(Exact name of small business issuer as specified in its charter)

Colorado	84-1084061
(State or other jurisdiction of Incorporation or organization)	(I.R.S. Employer Identification Number)

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

(303) 444-0900
(Issuer’s telephone number)

(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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. Yes ý   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerator filer, or a non-accerator filer. See defintion of “accelerator filer and large accelerator filer” in Rule 12b-2 of the Exchange Act). (Check one):

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

As of February 3, 2006, 22,876,022 shares of Common Stock, par value $.0001, were outstanding.

Form 10-Q
NEW FRONTIER MEDIA, INC.
Index

		Page Number
Part I.	Financial Information
Item 1.	Financial Statements
	Consolidated Condensed Balance Sheets		3-4
	Consolidated Condensed Statements of Operations		5
	Consolidated Condensed Statements of Cash Flows		6
	Consolidated Condensed Statements of Comprehensive Income		7
	Consolidated Condensed Statements of Changes in Shareholders’ Equity		8
	Notes to Consolidated Condensed Financial Statements		9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		26
Item 4.	Controls and Procedures		26
Part II.	Other Information
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		27
Item 6.	Exhibits		27
SIGNATURES			28

2

PART I.   FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

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

ASSETS

	(Unaudited) December 31, 2005		March 31, 2005
CURRENT ASSETS:
Cash and cash equivalents	$	22,910	$	18,403
Marketable securities		15,192		9,075
Accounts receivable, net of allowance for doubtful accounts of $21 and $24, respectively		9,195		8,034
Prepaid expenses		568		529
Deferred tax asset		404		382
Income taxes receivable		—		157
Other		422		564
TOTAL CURRENT ASSETS		48,691		37,144
FURNITURE AND EQUIPMENT, net		3,874		4,191
OTHER ASSETS:
Prepaid distribution rights, net		9,088		9,721
Marketable Securities		3,888		4,547
Deferred tax asset		83		—
Goodwill		3,743		3,743
Other identifiable intangible assets, net		17		101
Other		938		837
TOTAL OTHER ASSETS		17,757		18,949
TOTAL ASSETS	$	70,322	$	60,284

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

3

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

LIABILITIES AND SHAREHOLDERS’ EQUITY

	(Unaudited) December 31, 2005			March 31, 2005
CURRENT LIABILITIES:
Accounts payable	$	1,537		$	1,868
Current portion of obligations under capital leases		19			154
Deferred revenue		509			484
Current portion of notes payable		—			275
Taxes payable		1,597			—
Accrued liabilities		2,941			2,871
TOTAL CURRENT LIABILITIES		6,603			5,652
LONG-TERM LIABILITIES:
Deferred rent		204			205
Deferred tax liability		—			5
Deferred lease incentive liability		679			756
TOTAL LONG-TERM LIABILITIES		883			966
TOTAL LIABILITIES		7,486			6,618
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY
Common stock, $.0001 par value, 50,000,000 shares authorized, 22,870,916 and 22,574,854, shares issued and outstanding at December 31, 2005 and March 31, 2005, respectively		2			2
Preferred stock, $.10 par value, 5,000,000 shares authorized:
Class A, no shares issued and outstanding		—			—
Class B, no shares issued and outstanding		—			—
Additional paid-in capital		56,393			55,173
Accumulated earnings (deficit)		6,528			(1,454	)
Accumulated other comprehensive loss		(87	)		(55	)
TOTAL SHAREHOLDERS’ EQUITY		62,836			53,666
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	70,322		$	60,284

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

4

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

	(Unaudited) Quarter Ended December 31,						(Unaudited) Nine Months Ended December 31,
	2005			2004			2005			2004
NET SALES	$	11,524		$	11,991		$	33,912		$	35,493
COST OF SALES		3,441			4,000			10,735			12,078
GROSS MARGIN		8,083			7,991			23,177			23,415
OPERATING EXPENSES:
Sales and marketing		1,237			1,084			3,654			3,410
General and administrative		2,598			2,615			7,708			7,499
Restructuring expense		—			(146	)		—			(146	)
TOTAL OPERATING EXPENSES		3,835			3,553			11,362			10,763
OPERATING INCOME		4,248			4,438			11,815			12,652
OTHER INCOME (EXPENSE):
Interest income		369			120			893			235
Interest expense		(9	)		(23	)		(38	)		(85	)
Other income		13			21			14			45
TOTAL OTHER INCOME		373			118			869			195
NET INCOME BEFORE PROVISION FOR INCOME TAXES		4,621			4,556			12,684			12,847
Provision for income taxes		(1,743	)		(1,632	)		(4,702	)		(4,133	)
NET INCOME	$	2,878		$	2,924		$	7,982		$	8,714
Basic income per share	$	0.13		$	0.13		$	0.35		$	0.39
Diluted income per share	$	0.12		$	0.13		$	0.34		$	0.38

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

5

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in 000s)

	(Unaudited) Nine Months Ended December 31,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	7,982		$	8,714
Adjustments to reconcile net income to net cash provided by operating activities:
Tax provision for capital transaction		—			(1,122	)
Depreciation and amortization		4,078			4,480
Tax benefit from option/warrant exercise		494			3,221
(Increase) Decrease in operating assets
Accounts receivable		(1,161	)		(566	)
Prepaid expenses and other current assets		267			(448	)
Prepaid distribution rights		(2,446	)		(1,489	)
Deferred tax asset		(97	)		(534	)
Other assets		(110	)		127
Increase (Decrease) in operating liabilities
Accounts payable		(331	)		(249	)
Deferred revenue, net		25			(587	)
Taxes payable		1,597			2,392
Deferred tax liability		8			170
Accrued liabilities and other currrent liabilities		(7	)		(423	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		10,299			13,686
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities		(35,513	)		(17,512	)
Redemption of marketable securities		30,003			5,939
Purchase of equipment and furniture		(598	)		(1,034	)
NET CASH USED IN INVESTING ACTIVITIES		(6,108	)		(12,607	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations		(135	)		(290	)
Decrease in note payable		—			(400	)
Proceeds from exercise of stock options/warrants		726			1,891
Decrease in other financing obligations		(275	)		(184	)
NET CASH PROVIDED BY FINANCING ACTIVITIES		316			1,017
NET INCREASE IN CASH AND CASH EQUIVALENTS		4,507			2,096
CASH AND CASH EQUIVALENTS, beginning of period		18,403			15,352
CASH AND CASH EQUIVALENTS, end of period	$	22,910		$	17,448

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

6

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(in 000s)

	(Unaudited) Quarter Ended December 31,						(Unaudited) Nine Months Ended December 31,
	2005			2004			2005			2004
Net income	$	2,878		$	2,924		$	7,982		$	8,714
Other comprehensive loss Unrealized loss on available-for-sale marketable securities, net of tax		(13	)		(39	)		(32	)		(42	)
Total comprehensive income	$	2,865		$	2,885		$	7,950		$	8,672

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

7

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY
(in 000s)

	(Unaudited) Nine Months Ended December 31,
	2005			2004
COMMON STOCK
Balance at beginning of period	$	2		$	2
Balance at end of period		2			2
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period		55,173			49,590
Exercise of stock options/warrants		726			2,450
Tax benefit for stock option/warrant exercise		494			3,221
Tax provision for capital transaction		—			(1,122	)
Retirement of stock		—			(559	)
Balance at end of period		56,393			53,580
ACCUMULATED EARNINGS (DEFICIT)
Balance at beginning of period		(1,454	)		(12,576	)
Net income		7,982			8,714
Balance at end of period		6,528			(3,862	)
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of year		(55	)		—
Unrealized losses on available-for-sale securities		(32	)		(42	)
Balance at end of period		(87	)		(42	)
TOTAL SHAREHOLDERS’ EQUITY	$	62,836		$	49,678

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

8

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization

The accompanying financial statements of New Frontier Media Inc. (“New Frontier Media”, the “Company” or “we” and other similar pronouns) have been prepared without audit pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) have been condensed or omitted pursuant to such rules and regulations. Management believes these statements include all adjustments considered necessary for a fair presentation of financial position and results of operations. The financial statements included herein should be read in conjunction with the financial statements and notes thereto included in New Frontier Media’s latest annual report on Form 10-K.

The results of operations for the quarter and nine-month period ended December 31, 2005 are not necessarily indicative of the results to be expected for the full year.

Business

New Frontier Media 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 gate-keepers 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.

Significant Accounting Policies

 Principles Of Consolidation

The accompanying consolidated financial statements include the accounts of New Frontier Media 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 US GAAP 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, accrued restructuring expenses, the valuation of chargebacks and reserves, 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

9

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from these estimates.

Adjustments to Financial Statements

During the period 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. These adjustments have no impact on operating income, net income or on net cash flows from operations for the current or prior periods.

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 Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“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 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 for the nine months ended December 31, 2005: risk free interest rate of 3.97%; dividend yield of 0%; expected lives of 4 years; and expected volatility of 66%. No options were granted during the quarter ended December 31, 2005. For the nine months ended December 31, 2004; risk free interest rate of 3.73%; dividend yield of 0%; expected lives of 2 years; and expected volatility of 78%. No options were granted during the quarter ended December 31, 2004.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized 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

10

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

costs for the Company’s stock option plans been determined based on fair value at the date of grant consistent with the provisions of SFAS No. 123 for the quarter and nine months ended December 31, 2005 and 2004 are as follows (in thousands, except per share data):

	(Unaudited) Quarter Ended December 31,						(Unaudited) Nine Months Ended December 31,
	2005			2004			2005			2004
Net income
As reported	$	2,878		$	2,924		$	7,982		$	8,714
Deduct:
Total stock-based employee compensation expense determined under fair value based method for awards granted, modified, or settled, net of tax		(212	)		(61	)		(522	)		(260	)
Pro forma	$	2,666		$	2,863		$	7,460		$	8,454
Basic income per share
As reported	$	0.13		$	0.13		$	0.35		$	0.39
Pro forma	$	0.12		$	0.13		$	0.33		$	0.38
Diluted income per share
As reported	$	0.12		$	0.13		$	0.34		$	0.38
Pro forma	$	0.11		$	0.13		$	0.32		$	0.37

Recently Issued Accounting Pronouncements

In December 2004, the FASB 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 and to awards modified, repurchased or cancelled after that 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. The Company will adopt SFAS 123R as of April 1, 2006 using the Modified Prospective Method. The Company has not yet determined what effect SFAS 123R will have on the Company’s financial statements.

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

11

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 has not completed its assessment of whether the adoption of this statement will have a material effect on its financial statements.

NOTE 2 — INCOME PER SHARE

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

	(Unaudited) Quarter Ended December 31,				(Unaudited) Nine Months Ended December 31,
	2005		2004		2005		2004
Net income	$	2,878	$	2,924	$	7,982	$	8,714
Average outstanding shares of common stock		22,863		21,995		22,738		22,194
Dilutive effect of Warrants/Employee Stock Options		395		869		458		949
Common stock and common stock equivalents		23,258		22,864		23,196		23,143
Basic income per share	$	0.13	$	0.13	$	0.35	$	0.39
Diluted income per share	$	0.12	$	0.13	$	0.34	$	0.38

Options and warrants which were excluded from the calculation of diluted earnings per share because the exercise price of the options and warrants were equal to or greater than the average market price of the common shares were approximately 1,191,000 and 487,500 for the quarter and nine months ended December 31, 2005, respectively; and 176,000 for the quarter and nine months ended December 31, 2004. Inclusion of these options and warrants would be antidilutive.

NOTE 3 — SEGMENT INFORMATION

The Company has adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which establishes reporting and disclosure standards for an enterprise’s operating segments. 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 two reportable segments:

      •   Pay TV Group — distributes branded adult entertainment programming networks and Video-On-Demand (“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 webmasters, and aggregates and resells adult content to wireless platforms in the United States and internationally.

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.

12

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	(Unaudited) Quarter Ended December 31,						(Unaudited) Nine Months Ended December 31,
	2005			2004			2005			2004
NET SALES
Pay TV	$	10,877		$	11,278		$	32,002		$	33,416
Internet Group		647			713			1,910			2,077
Total	$	11,524		$	11,991		$	33,912		$	35,493
SEGMENT PROFIT
Pay TV	$	5,665		$	5,669		$	16,033		$	16,453
Internet Group		88			308			280			282
Corporate Administration		(1,132	)		(1,421	)		(3,629	)		(3,888	)
Total	$	4,621		$	4,556		$	12,684		$	12,847
INTEREST INCOME
Pay TV		11			—			11			—
Corporate Administration	$	358		$	120		$	882		$	235
Total	$	369		$	120		$	893		$	235
INTEREST EXPENSE
Pay TV	$	4		$	16		$	23		$	62
Internet Group		1			2			3			11
Corporate Administration		4			5			12			12
Total	$	9		$	23		$	38		$	85
DEPRECIATION AND AMORTIZATION
Pay TV	$	1,225		$	1,387		$	3,864		$	4,233
Internet Group		76			79			207			242
Corporate Administration		3			—			7			5
Total	$	1,304		$	1,466		$	4,078		$	4,480

	(Unaudited) December 31, 2005			March 31, 2005
IDENTIFIABLE ASSETS
Pay TV	$	72,748		$	57,310
Internet Group		14,815			14,541
Corporate Administration		45,675			35,670
Eliminations		(62,916	)		(47,237	)
Total	$	70,322		$	60,284

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 and Internet 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 costs, and printing costs associated with the Company’s public filings.

NOTE 4 — MAJOR CUSTOMERS

The Company’s major customers (revenues in excess of 10% of total sales) are EchoStar Communications Corporation (EchoStar), Time Warner, Inc. (Time Warner) and Comcast Corporation (Comcast). EchoStar, Time Warner and Comcast are included in the Pay TV Group. Revenue from Echostar’s DISH Network, Time Warner and Comcast as a percentage of total revenue for each of the quarters and nine months ended December 31 are as follows:

13

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	(Unaudited) Quarter Ended December 31,				(Unaudited) Nine Months Ended December 31,
	2005		2004		2005		2004
EchoStar		38%		34%		37%		34%
Time Warner		14%		17%		14%		19%
Comcast		12%		12%		12%		10%

At December 31, 2005 and March 31, 2005, accounts receivable from EchoStar was approximately $4,996,000 and $4,123,000, respectively. At December 31, 2005 and March 31, 2005, accounts receivable from Time Warner was approximately $844,000 and $865,000, respectively. At December 31, 2005 and March 31, 2005, accounts receivable from Comcast was approximately $1,144,000 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 5 — STOCK OPTIONS

During the quarter ended September 30, 2005, the Company issued 730,000 options to executives, certain employees and members of the Board of Directors from the 2000 incentive stock option plan.

NOTE 6 — 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 expired in June of 2005 and was renewed in July 2005. The line 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 has not drawn down on the line of credit during the quarter and nine months ended December 31, 2005.

NOTE 7 — INVESTMENTS

Investments in debt securities are required to be categorized as either trading, available-for-sale or held-to-maturity. On December 31, 2005, the Company had no trading or held-to-maturity securities. Debt securities categorized as available-for-sale are reported at fair value as follows:

			Gross Unrealized
	Gross Amortized Cost		Gains		Losses		Estimated Fair Value
Available-for-sale securities
Bank debt	$	490	$	—	$	(1)	$	489
Floating rate securities		3,000		—		—		3,000
Mortgage-backed securities		10,915		—		(61)		10,854
Corporate debt securities		1,994		—		(46)		1,948
Debt securities issued by the US Treasury		1,046		—		(6)		1,040
Municipal securities		1,756		—		(7)		1,749
Total available-for-sale securities	$	19,201	$	—	$	(121)	$	19,080

14

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The contractual maturities of these investments as of December 31, 2005, were as follows (in thousands):

	Available-for-Sale Securities
Year Ended March 31,	Gross Amortized Cost		Fair Value
2006	$	4,441	$	4,442
2007		12,789		12,698
2008		1,971		1,940
Total Available-for-Sale Securities	$	19,201	$	19,080

NOTE 8 — SHAREHOLDER RIGHTS PLAN

On November 29, 2001, the Company’s Board of Directors adopted a Shareholder 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 9 — COMMITMENTS

During the quarter ended September 30, 2005, the Company renegotiated their transponder agreement with a third party. The agreement begins January 2006 and expires in December 2010.

Future minimum payments under this contract as of December 31, 2005 are as follows (in thousands):

Year Ended March 31,	Transponder Agreement
2006	$	138
2007		554
2008		554
2009		554
2010		554
2011		415
Total Payments	$	2,769

NOTE 10 — 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.

NOTE 11 — SUBSEQUENT EVENTS

In January 2006, the Company entered into an employment contract with the Vice President of Marketing and Corporate Strategy. This contract commenced January 20, 2006 and ends July 31, 2008. Yearly compensation is $306,000. A one time signing bonus and relocation assistance of $25,000 was

15

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

granted. Additionally, 125,000 stock options were issued at 110% of the closing stock price on commencement date.

On February 7, 2006, the Company announced that they had entered into a stock purchase agreement to acquire MRG Entertainment, Inc. and its affiliated companies. Under the terms of the agreement the Company has agreed to pay $15 million in cash, $5 million of New Frontier Media, Inc. common stock, as well as a three-year performance-based incentive of $2 million payable in cash in accordance with and subject to the provisions of an earnout agreement. In addition, the Company will be paying down MRG Entertainment’s line of credit which is currently estimated at $3.4 million. The Company expects to incur approximately $1.0 million of acquisition related costs.

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PART I. FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

FORWARD LOOKING STATEMENTS

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

Factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to: 1) our ability to retain our three major customers that account for approximately 37%, 14% and 12%, respectively, of our total revenue for the nine months ended December 31, 2005; 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.

EXECUTIVE SUMMARY

Our goal is to be the leading provider in the electronic distribution of high-quality adult entertainment via cable, satellite, broadband, and wireless platforms. We operate our Company in two different segments — Pay TV and Internet. Our core business resides within the Pay TV segment and this is where the majority of our financial and human resources are concentrated.

Pay TV Segment

Our Pay TV segment is focused on the distribution of its seven pay-per-view (“PPV”) networks and its Video-on-Demand (“VOD”) service to cable multiple system operators (“MSOs”) and direct broadcast satellite (“DBS”) providers. In addition, the Pay TV Group has had success in delivering its VOD service to hotel rooms through its current distribution arrangement with On Command Corporation (“On Command”) and, beginning this current fiscal quarter, with Hospitality Network. The Pay TV Group earns a percentage of revenue on each PPV, subscription, or VOD transaction related to its services. Revenue growth is expected to occur 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”), and launches additional services with its existing cable/DBS partners. Revenue growth is also expected to occur as the Pay TV Group 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 averaging four services on every digital platform in the U.S. Based on the current market of 27 million DBS households (from public filings) and 27.6 million digital cable households (as of September 2005, per the National Cable Television Association (“NCTA”)), the Pay TV Group, with 89 million network households, currently has approximately 41% of its defined market share.

Pay TV Group revenue for the quarter ended December 31, 2005 was primarily impacted by:

      • Increased competition in the cable and hotel VOD market

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      • Growth in our PPV revenue primarily attributable to our most recent agreement with Cox Communications, Inc.

      • 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, 2005, as cable operators upgraded their systems to deliver content in this manner. The Pay TV Group currently delivers its VOD content to 21.7 million cable network households as compared to 16.2 million a year ago, as well as to 690,000 hotel rooms through its distribution arrangement with On Command. In October we began to distribute our VOD content to Hospitality Network, which distributes content to 125,000 hotel rooms in several cities, including Las Vegas and Atlantic City.

Prior to the third quarter of 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. The addition of our primary competitor to this platform resulted in a 25% decline in VOD revenue from Time Warner for our quarter ended December 31, 2005 compared to the same quarter a year ago.

During the first quarter of our current fiscal year, the largest MSO in the U.S. began to transition its VOD editing standard from most edited to partially edited. At the same time, this MSO added content from two smaller competitors to its adult VOD platform. There was no material impact to our VOD revenue from this MSO as a result of the addition of competition to the VOD platform at the same time that this MSO transitioned the editing standard to partially edited. We anticipate that our largest competitor in this market will be added to this MSO’s VOD platform in the near future. At this time, we are unable to determine the magnitude of any impact to our revenue that adding another competitor to this MSO’s VOD platform will have.

We anticipate future launches of our partially edited networks with the largest MSO in the U.S. as this MSO continues to transition its entire platform (both PPV and VOD) from most edited to partially edited content. Toward the end of our current quarter, we launched our TEN service to over 1.5 million network households with this MSO. Additional launches are expected during our next fiscal year.

We are currently negotiating a long-term contract with our largest customer. We anticipate that our license fees may decline as a result of this negotiation. However, we also anticipate the launch of an additional service as well as other favorable changes to this customer’s platform that could mitigate the decline in revenue that may result from any change in our license fees.

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 to 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 small DBS dishes. The Pay TV Group has been able to decrease its transponder, uplinking and call center costs related to this business over the years in order to maintain its margins. The Pay TV Group expects continued declines in revenue from this segment of its business during our 2006 and 2007 fiscal years, but will continue to provide content to this platform until the margins erode to an unacceptable level.

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.

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Over 85% of our revenue from the Internet Group continues to be generated from monthly memberships to TEN.com. The decline in membership revenue has slowed slightly. During the second quarter of our prior fiscal year we increased our monthly membership price from $19.95 to $29.95. This rate applies only to new members that sign up for our site since we increased the price.

We continue to experience decreases in our revenue generated from selling pre-packaged content to webmasters. This decrease in revenue from the sale of pre-packaged content is due to a softening in demand for content by third-party webmasters. Webmasters are decreasing their reliance on outside sources for content and demanding lower prices for the content that they do purchase.

During the current fiscal year, the Internet Group will be primarily focused on the development of wireless products for distribution both domestically and internationally. To date, we have launched content products such as wallpaper, ring tones, and video content, which are being sold by wireless carriers on an a la carte basis in the U.K., France, Latin America, the U.S. and various other countries. The wireless carrier bills these products directly to its customer and we earn a percentage of the retail price. Our products are currently available to approximately 190 million wireless customers worldwide, including 17.5 million in the U.S. At this time, we are unable to project the revenues associated with this distribution as these products were just recently launched and the platforms we are contracted with only provide remittance information on a quarterly basis. We do not anticipate generating any material revenue from this platform during our current fiscal year.

PAY TV GROUP

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

		Estimated Network Households(2) (in thousands)
Network	Distribution Method	As of December 31, 2005		As of December 31, 2004		% Change
Pleasure	Cable/DBS		7,700		8,100		(5	%)
TEN	Cable/DBS		18,900		15,900		19	%
TEN*Clips	Cable/DBS		17,900		16,200		10	%
Video-On-Demand	Cable		21,700		16,200		34	%
TEN*Blue	Cable		3,600		2,800		29	%
TEN*Blox	Cable		7,300		5,000		46	%
TEN*Xtsy	C-band/Cable/DBS		11,700		11,000		6	%(1)
TEN*Max	C-band/Cable		211		300		(30	%)(1)
Total Network Households			89,011		75,500

(1) % change gives effect to a 44% decline in the C-band market’s total addressable households. Total addressable C-Band households declined from 261,000 as of December 31, 2004 to 145,000 as of December 31, 2005.

(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 channels, since each network represents an incremental revenue stream. The Pay TV Group estimates its unique household distribution as 26.3 million and 21.0 million digital cable homes as of December 31, 2005 and 2004, respectively, and 11.2 million and 10.5 million DBS homes as of December 31, 2005 and 2004, respectively.

The following table sets forth certain financial information for the Pay TV Group for the quarter and nine months ended December 31, 2005 and 2004:

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	(In Millions) Quarter Ended December 31,				Quarterly Percent Change			(In Millions) Year-to-Date December 31,				Year-to-Date Percent Change
	2005		2004		’05 vs’04			2005		2004		’05 vs’04
Net Revenue
PPV - Cable/DBS	$	6.2	$	6.3		(2	%)	$	18.3	$	18.1		1	%
VOD - Cable/Hotel		4.0		4.1		(2	%)		11.5		12.3		(7	%)
C-Band		0.7		0.9		(22	%)		2.2		3.0		(27	%)
Total		10.9		11.3		(4	%)		32.0		33.4		(4	%)
Cost of Sales		3.2		3.7		(14	%)		10.0		11.1		(10	%)
Gross Profit	$	7.7	$	7.6		1	%	$	22.0	$	22.3		(1	%)
Gross Margin		71%		67%					69%		67%
Operating Expenses		2.1		1.9		11	%		6.0		5.8		3	%
Operating Income	$	5.6	$	5.7		(2	%)	$	16.0	$	16.5		(3	%)

NET REVENUE

PPV — Cable/DBS

Our PPV-Cable/DBS revenue declined slightly year-over-year for the quarter and increased slightly for the nine-month period ended December 31, 2005. During the quarter and nine-month period ended December 31, 2005, we experienced an increase in our cable/DBS PPV revenue as a result of new launches for TEN*Blue and TEN*Blox by Cox Communications, Inc. (“Cox”). We signed a distribution agreement with Cox in March 2004, and we began to see initial launches with their affiliated systems during the quarter ended September 30, 2004. Launches with Cox affiliated systems have continued over the past twelve months.

The increase in our cable/DBS PPV revenue generated by launches with Cox affiliated systems was offset by a decline in PPV revenue earned from the largest affiliated system of Time Warner and from certain affiliated systems of Charter Communications, Inc. (“Charter”). During the past twelve months, some affiliated systems of Charter and the largest affiliated system of Time Warner removed most of their adult content from their digital PPV platforms in an attempt to transition customers from digital PPV to VOD only. However, during the current year quarter, the largest affiliated system of Time Warner re-launched our TEN*Blox network on its PPV platform in order to recapture these lost buys.

Additionally, we have experienced declines in revenue from our Pleasure network during the quarter and nine-months ended December 31, 2005 due to the largest MSO changing the editing standard of its VOD content to partially edited from most edited, thereby driving buys to its VOD platform.

Revenue generated by our three services on the DISH platform increased 5% and 3% for the quarter and nine-months ended December 31, 2005, respectively.

VOD — Cable/Hotel

The 3% and 7% decline in our VOD - cable/hotel revenue for the quarter and nine months ended December 31, 2005, respectively, is due to an increase in competition in both markets. Revenue from our hotel VOD service provided to On Command declined 23% and 25% for the quarter and nine-months ended December 31, 2005, respectively. This decline is a result of On Command adding content from other providers to their platform and from 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 adult VOD content to this platform. Revenue earned during the current quarter from Hospitality Network was nominal and is not expected to be material to this revenue stream in future quarters.

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Revenue from our cable VOD service declined 1% and 4% for the quarter and nine-months ended December 31, 2005, respectively. This decline is a result of our largest competitor being added to the Time Warner VOD platform during the third quarter of our prior fiscal year. In addition, a few smaller MSOs added adult VOD content from other competitors during the prior fiscal year. This decline in cable VOD revenue was partially offset by an increase in VOD revenue as a result of new VOD launches with Adelphia Communications Corporation and Comcast Corporation.

C-BAND REVENUE

The 22% and 27% decline in C-Band revenue for the quarter and nine months ended December 31, 2005, is a result of the continued decline of the C-Band market as consumers convert from C-Band “big dish” analog satellite systems to small DBS dishes. The C-Band market has decreased 44% since December 31, 2004, from 261,000 addressable subscribers to 145,000 addressable subscribers as of December 31, 2005.

Providing our two networks to the C-Band market continues to be profitable for us. We generated operating margins of 56% and 58% for the quarter and nine months ended December 31, 2005, respectively, as compared to 49% for both the quarter and nine months ended December 31, 2004, respectively. We will continue to closely monitor this business and discontinue providing our content to this platform if margins erode to an unacceptable level. Currently, we anticipate that we will continue to provide content to this platform through our 2007 fiscal year.

COST OF SALES

Our 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 our in-house call center operations related to our C-Band business.

The 14% and 10% decline in our cost of sales year-over-year for the quarter and nine months, respectively, is primarily related to a 26% and 25% decline in our transponder and uplinking costs for the quarter and nine months ended December 31, 2005, respectively, due to the renegotiation of our contracts for these services; a 21% and 32% decrease in our call center costs for the quarter and nine months ended December 31, 2005, respectively, which we utilize for our C-Band services; a 66% and 51% decline in depreciation and operating lease costs for the quarter and nine months ended December 31, 2005, respectively, as equipment and operating leases reached end of life; and a 27% and 11% decline in VOD transport costs for the quarter and nine months ended December 31, 2005, respectively, due to the utilization of a new vendor for these services. Beginning with our current year fiscal fourth quarter, we expect to save approximately $0.3 million annually due to the renegotiation of our monthly digital transponder lease.

OPERATING INCOME

Operating income declined 2% for the quarter ended December 31, 2005 as a result of a 14% decline in cost of sales, which only partially offset a decline in revenue of 4%. Gross margin for the quarter increased to 71% from 67% for the quarter a year ago due to the decline in cost of sales. Operating expenses as a percentage of revenue increased to 19% for the current year quarter from 17% for the quarter a year ago as a result of an 11% increase in operating expenses and a 4% decline in revenue for the quarter.

Operating expenses increased 11% from the quarter a year ago primarily due to an increase in sales commissions accrued for the addition of over 6 million new network households during the quarter ended December 31, 2005, as well as sales commissions accrued on other miscellaneous revenue streams.

Operating income declined 3% for the nine months ended December 31, 2005 as a result of a 4% decline in net revenue, which was only partially offset by a 10% decline in cost of sales. Gross margin

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increased to 69% for the nine-month period ended December 31, 2005, from 67% for the same period a year ago. Operating expenses as a percentage of revenue increased to 19% for the nine-month period ended December 31, 2005, from 17% for the same period a year ago.

The 3% increase in operating expenses for the nine-month period ended December 31, 2005 is primarily related to an increase in sales commissions accrued for activity during the period and an increase in payroll and benefit costs of our in-house promotions department, which creates the interstitial and branding elements for our seven networks and VOD services. This increase in operating costs was partially offset by a decline in operating lease costs and a decline in amortization expense related to a fully amortized intangible asset.

INTERNET GROUP

The following table sets forth certain financial information for the Internet Group for the quarter and nine months ended December 31, 2005 and 2004:

	(In Millions) Quarter Ended December 31,					Quarterly Percent Change			(In Millions) Year-to-Date December 31,					Year-to-Date Percent Change
	2005		2004			’05 vs’04			2005		2004			’05 vs’04
Net Revenue
Net Membership	$	0.6	$	0.6			0	%	$	1.7	$	1.8			(6	%)
Sale of Content		0.1		0.1			0	%		0.2		0.3			(33	%)
Total		0.7		0.7			0	%		1.9		2.1			(10	%)
Cost of Sales		0.3		0.3			0	%		0.8		0.9			(11	%)
Gross Profit	$	0.4	$	0.4			0	%	$	1.1	$	1.2			(8	%)
Gross Margin		57%		57%						58%		57%
Operating Expenses		0.3		0.3			0	%	$	0.9	$	1.1			(18	%)
Restructuring Reserve Recovery		0.0		(0.1	)		100	%		0.0		(0.1	)		(100	%)
Operating Income	$	0.1	$	0.2			(50	%)	$	0.2	$	0.2			0	%

NET REVENUE

Net membership revenue was flat to slightly down for the quarter and nine months ended December 31, 2005, as we continue to experience the erosion of the sale of monthly memberships to our website, www.ten.com. We are experimenting with different pricing points and methods of billing for our membership website. During the quarter ended September 30, 2004, we increased the price of our website from $19.95 per month to $29.95 per month. At the same time, we began to offer a three-month membership for $74.95. These new price points, which apply only to new members, have helped to stabilize our revenue even as traffic to our site continues to decline.

Revenue from the sale of content was flat to slightly down for the quarter and nine months ended December 31, 2005, due to a continued softening in demand for content by third-party webmasters. We are experimenting with alternative billing methods for our content products as well, allowing webmasters to pay for the content based on the amount of bandwidth utilized as opposed to a flat monthly fee. We are also working to encode 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, nor do we anticipate that any material revenue will be generated from the delivery of our content to wireless platforms during our current fiscal year.

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COST OF SALES

Cost of sales consists of fixed and variable expenses associated with the processing of credit cards, bandwidth, traffic acquisition costs, content costs and depreciation of assets related to our Internet infrastructure.

Costs of sales were flat to slightly down for the quarter and nine months ended December 31, 2005. Costs related to bandwidth, traffic acquisition costs, and depreciation all declined year-over-year both for the quarter and nine month period. The decline in these costs was only slightly offset by an increase in costs related to additional content acquired for use in our wireless products.

RESTRUCTURING RESERVE 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 quarter ended December 31, 2004, we reached a final settlement with the landlord on this space. As part of the settlement, we paid $375,000 to the landlord and we were released from any ongoing obligations for this space. Approximately $0.1 million accrued for the rent restructuring reserve was reversed into income during the quarter ended December 31, 2004.

OPERATING INCOME

Operating income declined 50% year-over-year for the quarter due to the release of the restructuring reserve into income during the prior year quarter. Excluding this non-recurring reserve release, operating income would have been flat year-over-year for the quarter.

Our operating expenses were flat year-over-year for the quarter. We did experience a decline in our legal costs and web development costs during the quarter. However, the decline in these costs was offset by an increase in costs related to the development and distribution of content to wireless platforms.

Operating income was flat year-over-year for the nine months ended December 31, 2005 due to the release of the restructuring reserve into income during the prior year. Excluding this non-recurring reserve release, operating income would have increased 50% for the nine months ended December 31, 2005 due to an 18% decline in operating expenses. The decline in operating expenses is related to a $0.2 million non-recurring charge for the settlement of a lawsuit incurred during the quarter ended June 30, 2004 and a decline in web development costs. The decline in these costs was partially offset by an increase in costs related to the development and distribution of content to wireless platforms.

CORPORATE ADMINISTRATION

The following table sets forth certain financial information for our Corporate Administration expenses for the quarter and nine months ended December 31, 2005 and 2004:

	(In Millions) Quarter Ended December 31,						Quarterly Percent Change			(In Millions) Year-to-Date December 31,						Year-to-Date Percent Change
	2005			2004			’05 vs’04			2005			2004			’05 vs’04
Operating Expenses	$	(1.5	)	$	(1.5	)		0	%	$	(4.5	)	$	(4.1	)		10	%

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 and Internet 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 relations costs, and printing costs associated with the Company’s public filings.

Corporate administration expenses were flat year over year for the quarter. Accounting fees, bank service fees and outside services declined from the prior year quarter. Accounting fees declined due to

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lower costs incurred during the current year quarter related to our continued compliance with Section 404 of the Sarbanes-Oxley Act. Bank service fees declined due to a change in our banking relationship, which resulted in lower fees. Outside services declined due to lower fees in the current year quarter related to audits of our MSO contracts. These declines were offset by an increase in Board of Director fees, consulting fees, and payroll costs. Board fees increased because we had one additional Board meeting during the current year quarter as compared to the quarter a year ago. The increase in consulting fees over the prior year quarter is related to fees paid to an investment-banking firm hired by our Board during the current fiscal year to analyze strategic alternatives. Payroll costs increased due to increases in the annual salaries of our executives.

The 10% increase in corporate administration expenses for the nine months ended December 31, 2005 is primarily related to an increase in legal fees, consulting fees and payroll costs. Legal fees increased due to a lawsuit that went to trial during the quarter ended September 30, 2005. We prevailed in the lawsuit and there are no further expenses related to this lawsuit expected during the current fiscal year. The increase in consulting fees is related to the investment banking firm that our Board hired during the year to analyze strategic alternatives for the Company. The increase in payroll costs is due to additional accounting personnel hired during the prior year and increases in the annual salaries of our executives. The increase in these expenses was partially offset by a decline in accounting fees, as the costs to continue to comply with Section 404 of the Sarbanes-Oxley Act are less than the initial implementation costs incurred during the prior year.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows From Operating Activities And Investing Activities:

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

	Nine Months Ended December 31,
	2005			2004
Net cash provided by operating activities	$	10.3		$	13.7
Cash flows used in investing activities:
Purchases of equipment and furniture		(0.6	)		(1.0	)
Purchase of investments		(35.5	)		(17.5	)
Sale/Redemption of investments		30.0			5.9
Net cash used in investing activities	$	(6.1	)	$	(12.6	)

The decrease in cash provided by operating activities year-over-year for the nine-month period is primarily related to a decline in profits for the nine months ended December 31, 2005 as compared to December 31, 2004. The following items also impacted our cash flows from operations for the nine months ended December 31, 2005:

      • Accounts receivable increased by $1.2 million

      • Prepaid distributions rights (content licensing) increased by $2.5 million

The decrease in cash used in investing activities year-over-year for the nine-month period is related to lower net purchases of investments. We started to invest our excess cash balances in marketable securities and certificates of deposit during the prior fiscal year. Since the prior fiscal year was the first year we started to employ this strategy, we had higher net investment purchases in order to invest the initial balances. Capital expenditures of $0.6 million for the nine months ended December 31, 2005, were related to the purchase of software for our wireless platform, editing equipment, descrambling equipment necessary for new cable launches, and miscellaneous computers, servers and software. During the nine months ended December 31, 2004, we purchased $1.0 million in equipment, which were related to the final improvements made to our broadcast facility and the purchase of servers, computers, conforming and broadcast equipment.

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Cash flows provided by financing activities

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

	Nine Months Ended December 31,
	2005			2004
Cash flows provided by financing activities:
Payments on capital lease obligations	$	(0.1	)	$	(0.3	)
Decrease in notes payable		0.0			(0.4	)
Issuance of Common Stock		0.7			1.9
Decrease in other financing obligations		(0.3	)		(0.2	)
Net cash provided by financing activities	$	0.3		$	1.0

During the nine months ended December 31, 2004 we repaid our $0.4 million secured note payable that was due to an unrelated third party. Our remaining debt is primarily related to capital lease obligations and other financing obligations. Interest expense is expected to be immaterial during the current fiscal year.

We currently have a $3 million line of credit available with a bank that 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 $0. The line of credit is secured by the Pay TV Group’s trade account receivables and requires that we comply with certain financial covenants and ratios.

If we were to lose our three major customers that account for 37%, 14% and 12% of our revenue for the nine months ended December 31, 2005, respectively, our ability to fund our operating requirements would be severely impaired.

We will be a full taxpayer during our current fiscal year and anticipate that our effective rate will be approximately 37%.

Our Pay TV Group executed a new agreement for our digital satellite transponder lease during the quarter ended September 30, 2005. This contract commits us to $2.8 million over 60 months beginning January 2006. We entered into a new employment contract with our Vice President of Corporate Marketing and Strategy in January 2006. This employment contract commits us to $0.8 million over 30 months beginning January 20, 2006.

We recently announced the acquisition of MRG Entertainment, Inc. and its affiliated companies. The purchase price for this acquisition is $15 million in cash, $5 million of New Frontier Media, Inc. common stock, as well as a three-year performance incentive of $2 million payable in cash. In addition, we will be paying down MRG Entertainment’s line of credit which is currently estimated at $3.4 million and we expect to incur approximately $1.0 million of acquisition related costs.

During the current quarter, our Board of Directors approved a stock repurchase plan to purchase up to 2,000,000 shares of our stock over 30 months. At our current stock price, this would require a use of cash of approximately $13 million over the next 30 months.

We believe that our current cash balances and cash generated from operations will be sufficient to satisfy our operating requirements, and we believe that any capital expenditures that may be incurred can be financed through our cash flows from operations. We anticipate total capital expenditures for the current fiscal year to be less than $1.0 million and content licensing expenditures to be approximately $3.0 million.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued No. 123R, “Accounting for Stock-Based Compensation”. This Statement supersedes Accounting Principles Board (“APB”) 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 first annual reporting period that begins after June 15, 2005. This Statement applies

25

to all awards granted after the required effective date and to awards modified, repurchased or cancelled after that 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. The Company will adopt SFAS 123R as of April 1, 2006 using the Modified Prospective Method. The Company has not yet determined what effect SFAS 123R will have on the Company’s financial statements.

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 has not completed its assessment of whether the adoption of this statement will have a material effect on its financial statements.

ITEM 3. 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 Sensitivity. As of December 31, 2005, the Company had cash in checking and money market accounts, certificates of deposits, and marketable 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 foreign currency exposure because it currently does not transact business in foreign currencies.

ITEM 4. 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 of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely making known to them material information related 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. There has been no change in the Company’s internal control over financial reporting during the quarter ended December 31, 2005, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

26

PART II — OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the current quarter, the Company announced its intention to complete a 2.0 million-share buy back of its stock over the next 30 month. No repurchases of stock were made during the quarter ended December 31, 2005.

ITEM 6. EXHIBITS

a) Exhibits

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
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
32.01	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
32.02	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
10.01	Employment Agreement dated January 20, 2006 between New Frontier Media, Inc. and Ira Bahr

27

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed in its behalf by the undersigned thereunto duly authorized.

NEW FRONTIER MEDIA, INC.

 
 
Karyn L. Miller
Chief Financial Officer
(Principal Accounting Officer)

Dated: February 9, 2006

28

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 Quarterly Report on Form 10-Q 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: February 9, 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 Quarterly Report on Form 10-Q 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: February 9, 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 Quarterly Report of New Frontier Media, Inc. (the “Company”) on Form 10-Q for the period ending December 31, 2005 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
February 9, 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 Quarterly Report of New Frontier Media, Inc. (the “Company”) on Form 10-Q for the period ending December 31, 2005 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
February 9, 2006

EX-10

EXHIBIT 10.01

EMPLOYMENT AGREEMENT

      THIS EMPLOYMENT AGREEMENT (the “Agreement”), dated as of January 20, 2006 between IRA BAHR, an individual with a residence at 1119 S. Gilpin St. Denver, Colorado (the “Executive”), and NEW FRONTIER MEDIA, INC. (“New Frontier”), a Colorado corporation with a principal office at 7007 Winchester Circle, Suite 200, Boulder, Colorado, recites and provides as follows:

      WHEREAS, New Frontier desires to retain the services of Executive, and Executive desires to be employed by New Frontier, all on the terms and subject to the conditions set forth herein.

      NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, New Frontier and Executive agree as follows:

      1. EMPLOYMENT PERIOD. New Frontier hereby agrees to employ Executive, and Executive hereby agrees to accept employment by New Frontier, in accordance with the terms and provisions of this Agreement, for the period commencing on January 20, 2006 (“the Effective Date”) and ending at midnight on July 31, 2008 (the “Employment Period”).

      2. TERMS OF EMPLOYMENT.

            A. POSITION AND DUTIES.

                    (i) During the Employment Period, Executive shall perform such duties, and have such title, as New Frontier Media, Inc., through its Board of Directors or the Board’s designee (collectively “the Board”), in its sole discretion, shall determine. The Board has determined that, at the outset of the Employment Period, Executive shall serve as Vice President of Marketing and Corporate Strategy of New Frontier reporting to the President of New Frontier, with duties commensurate with that position.

                    (ii) During the Employment Period, Executive agrees to devote his full-time attention to the business and affairs of New Frontier. Executive’s employment under this Agreement shall be Executive’s exclusive employment during the term of this Agreement.

            B. COMPENSATION.

                    (i) Base Salary. During the Employment Period, Executive shall receive a base salary (“Base Salary”), which shall be paid in equal installments on a biweekly basis, at the rate of Three Hundred Thousand Dollars ($300,000.00) per annum. During the Employment Period, the Base Salary shall be reviewed at least annually. Any increase in Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. The term Base Salary as used in this Agreement shall mean the Base Salary as so increased.

                    (ii) Expenses. During the Employment Period, Executive shall be entitled to receive reimbursement for all employment-related expenses incurred by Executive in accordance with the policies, practices and procedures of New Frontier as in effect generally from time to time after the Effective Date with respect to executives of New Frontier.

                    (iii) Vacation and Sick Leave. Executive acknowledges that Company has no policy concerning vacation time or sick leave applicable to its executive level employees and, by executing this Agreement, Executive acknowledges and agrees that he shall not accrue any such vacation or sick leave benefits during the Employment Period. Executive is authorized to take paid time off provided he meets his professional and productivity obligations to the Company as determined by the President. Executive is to coordinate time off with the President.

                    (iv) Stock Options. Executive shall be entitled to receive a Non-Qualified Stock Option grant to buy 125,000 shares of New Frontier common stock, priced at 110% of the closing price on the Effective Date and under all other terms and conditions of the New Frontier’s Stock Option Plan in effect at the time of the grant.

                    (v) Car Allowance. During the Employment Period, the Executive shall be entitled to a $500 a month car allowance, in accordance with New Frontier’s car allowance policy, in lieu of expenses associated with the operation of his automobile.

                    (vi) Relocation Assistance and Signing Incentive. Executive shall be paid $25,000 for expenses related to the relocation of Executive’s residence in south Denver to a residence within a reasonable distance of New Frontier’s corporate offices and as a signing incentive. This amount shall be payable to Executive upon his relocation.

                    (vii) Discretionary Bonus. In addition to Executive’s Base Salary, the Compensation Committee of the Board of Directors of New Frontier (the “New Frontier Board”) may, in its sole discretion, award cash bonuses annually to Executive, if at all, in an aggregate amount of up to one hundred percent (100%) of Executive’s Base Salary, less standard deductions and withholdings.

                    (viii) Other Benefits. During the Employment Period, Executive shall be entitled to such health insurance and other benefits, as are provided generally to other executives at New Frontier, in accordance with the policies, programs and practices of New Frontier which are in effect from time to time after the Effective Date.

      3. EARLY TERMINATION OF EMPLOYMENT.

            A. DEATH OR DISABILITY. Executive’s employment shall terminate automatically upon the death of Executive. Executive’s employment may be terminated upon the reasonable and good faith determination of the Board that Executive is disabled. For purposes of this Agreement, Executive shall be deemed “disabled” if he is unable, as a result of incapacity due to mental or physical condition or illness, to perform the material functions of his job, even with reasonable accommodation, for a total of 90 days out of any 6 month period.

            B. CAUSE. New Frontier may terminate Executive’s employment during the Employment Period for Cause. For purposes of this Agreement, “Cause” shall mean and be limited to (i) the conviction of Executive for committing an act of fraud, embezzlement, theft or other act constituting a crime, or the guilty or nolo contendere plea of Executive to such a crime; (ii) fraudulent conduct or an act of dishonesty or breach of trust on the part of Executive in connection with New Frontier’s business or the business of any of its subsidiaries; (iii) material violation of any New Frontier policy instituted to protect New Frontier or its employees; (iv) material failure, neglect, or refusal by Executive properly to discharge, perform or observe any or all of Executive’s job duties, provided Executive has been given written notice of such failure, neglect or refusal, and has not cured such within 10 days thereafter; (v) material breach of any of the representations, warranties or covenants set forth in this Agreement.

            C. WITHOUT CAUSE. New Frontier may terminate Executive’s employment during the Employment Period without cause.

      In the event that New Frontier (i) terminates Executive’s employment without cause, (ii) materially diminishes Executive’s position or responsibilities, (iii) or otherwise materially breaches this Agreement, or in the event that there is a change in control as defined in Section 5 herein, New Frontier shall honor its payment obligations to Executive, Executive shall not be required to provide further services to New Frontier under this Agreement, and Executive shall be free to seek employment elsewhere without regard to whether any prospective employer is a competitor of New Frontier. However, in the event that Executive becomes employed elsewhere during the term of this Agreement, his compensation from such other employment shall be applied toward the mitigation of New Frontier’s payment obligations hereunder.

            D. NOTICE OF TERMINATION. Any termination (whether based on disability, with cause or without cause) shall be communicated by a written Notice of Termination to the other party, and may be sent via first class mail, facsimile transmission, email or personal delivery.

            E. DATE OF TERMINATION. “Date of Termination” shall mean: (i) the date of transmission of the Notice of Termination by facsimile, email or personal delivery, or (ii) three calendar days after the date of mailing by first class mail, or (iii) if Executive’s employment is

terminated by reason of Executive’s death, the Date of Termination shall be the date of death of Executive.

      4. OBLIGATIONS OF NEW FRONTIER UPON EARLY TERMINATION.

            A. WITHOUT CAUSE. If during the Employment Period, New Frontier shall terminate Executive’s employment without cause, then New Frontier shall provide to Executive the following:

                    (i) New Frontier shall pay to Executive, within thirty days after the Date of Termination, any accrued base salary, vacation pay, expense reimbursement and any other entitlements accrued by Executive under Section 2(B), to the extent not previously paid (the sum of the amounts described in this subsection shall be hereinafter referred to as the “Accrued Obligations”).

                    (ii) New Frontier shall continue to pay to Executive, in regular bi-weekly installments, Executive’s Base Salary under the Agreement for the duration of the Employment Period and New Frontier shall pay Executive any applicable bonus payments under Section 2(B)(vii). If Executive commences employment with another employer, or if Executive engages in other work for compensation, then New Frontier’s obligation to pay bi-weekly installments shall be reduced or eliminated to the extent Executive receives compensation from the other employer or work.

                    (iii) New Frontier shall continue to provide benefits to Executive at least equal to those which would have been provided to him in accordance with the plans, programs, practices and policies which are generally applicable to other peer executives, for the duration of the Employment Period. If Executive commences employment with another employer and is eligible to receive medical or other welfare benefits under another employer-provider plan, the medical and other welfare benefits to be provided by New Frontier as described herein shall terminate.

            B. DEATH. If Executive’s employment is terminated by reason of the death of Executive during the Employment Period, this Agreement shall terminate without further obligation by New Frontier to Executive’s legal representatives under this Agreement, other than for payment of Accrued Obligations (which shall be paid to Executive’s estate or beneficiary, as applicable, in a lump sum in cash within thirty days after the Date of Termination).

            C. CAUSE. If Executive’s employment shall be terminated for Cause, this Agreement shall terminate without any further obligations to Executive whatsoever, other than any obligations which may be required by law. To the extent New Frontier is required by law to make payment to Executive based on an accrued obligation, such payment shall be made within thirty days after the Date of Termination.

            D. RESIGNATION. If Executive resigns his employment with New Frontier, this Agreement shall terminate without any further obligations to Executive whatsoever, other than any obligations which may be required by law. To the extent New Frontier is required by law to make payment to Executive based on an accrued obligation, such payment shall be made within thirty days after the Date of Termination.

            E. DISABILITY. If Executive’s employment shall be terminated by reason of Executive’s Disability during the Employment Period, this Agreement shall terminate without further obligation to Executive, other than for payment of Accrued Obligations. Accrued Obligations shall be paid to Executive in a lump sum in cash within thirty days after the Date of Termination.

      5. CHANGE IN CONTROL.

      In the event of a “Change in Control” (as defined in this Section 5) of New Frontier during the Employment Period, the Executive may terminate his employment with New Frontier by giving 30 days’ notice thereof within six months after the occurrence of such Change in Control. A “Change in Control” of New Frontier shall be deemed to have occurred as of the first day that any one or more of the following conditions shall have occurred:

            A. Any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Act”), becomes the “beneficial owner” (as defined in Rule 13-d under the Act), directly or indirectly, of securities representing more than fifty percent (50%) of the total voting power represented by New Frontier’s then outstanding voting securities;

            B. A change in the composition of the Board, as a result of which fewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” shall mean directors who either (a) are directors of New Frontier as of the date hereof, or (b) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors of New Frontier); or

             C. New Frontier merges or consolidates with any other corporation after which a majority of the shares of the resulting entity are not held by the shareholders of New Frontier prior to the merger, or New Frontier adopts, and the stockholders approve, if necessary, a plan of complete liquidation of New Frontier, or New Frontier sells or disposes of substantially all of its assets.

      6. CONFIDENTIAL INFORMATION.

            A. CONFIDENTIAL INFORMATION. As used in this Agreement, “Confidential Information” includes, without limitation, design information, manufacturing information, business, financial, and technical information, sales and processing information, product information, customer lists, vendors, vendor lists, pricing information, corporation and, corporation and personal business opportunities, software, computer disks or files, or any other electronic information of any kind, Rolodex cards or other lists of names, addresses or telephone numbers, financial information, projects, potential projects, current projects, projects in development and future projects, forecasts, plans, contracts, releases, and other documents, materials, writings or information, including those which are prepared, developed or created by Executive, or which come into the possession of Executive by any means or manner, and which relate directly or indirectly to New Frontier or any of its owners, predecessors, successors, subsidiaries, affiliates, and its shareholder, directors and officers (all of the above collectively referred to as “Confidential Information”). Confidential Information includes information developed by Executive in the course of Executive’s services for New Frontier, as well as other Confidential Information to which Executive may have access in connection with Executive’s services. Confidential Information also includes the confidential information of other individuals or entities with which New Frontier has a business relationship. Confidential Information shall not include any information (a) which is in the public domain or which enters the public domain through no act of omission of Executive or (b) which was in the possession of Executive prior to the commencement of his employment with New Frontier. For purposes of this Section 6, the term “New Frontier” shall include all of its predecessors, subsidiaries and affiliates.

             B. DUTY OF CONFIDENTIALITY. Executive will maintain in confidence and will not, directly or indirectly, disclose or use (or allow others working with or related to Executive to disclose or use), either during or after the term of this Agreement, any Confidential Information belonging to New Frontier, whether in oral, written, electronic or permanent form, except solely to the extent necessary to perform services on behalf of New Frontier. Upon termination of this Agreement, or at the request of New Frontier prior to its termination, Executive shall deliver forthwith to New Frontier all original Confidential Information (and all copies thereof) in Executive’s possession or control belonging to New Frontier and all tangible items embodying or containing Confidential Information.

            C. DOCUMENTS, RECORDS, ETC. All documents, records, data, equipment and other physical property, whether or not pertaining to Confidential Information, which are furnished to Executive by New Frontier or are produced by Executive in connection with Executive’s services will be and remain the sole property of New Frontier. Executive will return to New Frontier forthwith all such materials and property upon the termination of this Agreement or sooner if requested by New Frontier.

            D. ASSIGNMENT OF RIGHTS. Executive shall make full and prompt disclosure to New Frontier of any and all designs, intellectual property, software, inventions, discoveries, or improvements (individually and collectively, “Inventions”) made by Executive as a result or product of his employment relationship with New Frontier. Executive hereby assigns to New Frontier without additional compensation the entire worldwide right, title and interest in and to such Inventions, and related intellectual property rights and without limitation all copyrights, copyright renewals or reversions, trademarks, trade names, trade dress rights, industrial design, industrial model, inventions,

priority rights, patent rights, patent applications, patents, design patents and any other rights or protections in connection therewith or related thereto, for exploitation in any form or medium, of any kind or nature whatsoever, whether now known or hereafter devised. To the extent that any work created by Executive can be a work for hire pursuant to U.S. Copyright Law, the parties deem such work a work for hire and Executive should be considered the author thereof. Executive shall, at the request of New Frontier, without additional compensation from time to time execute, acknowledge and deliver to New Frontier such instruments and documents as New Frontier may require to perfect, transfer and vest in New Frontier the entire right, title and interest in and to such inventions. In the event that Executive does not timely perform such obligations, Executive hereby makes New Frontier and its officers his attorney in fact and gives them the power of attorney to perform such obligations and to execute such documents on Executive’s behalf. Executive shall cooperate with New Frontier upon New Frontier’s request and at New Frontier’s cost but without additional compensation in the preparation and prosecution of patent, trademark, industrial design and model, and copyright applications worldwide for protection of rights to any Inventions.

            E. INJUNCTIVE RELIEF. Executive acknowledges that a violation or attempted violation on Executive’s part of any agreement in this Section 6 may cause irreparable damage to New Frontier, and accordingly, Executive agrees that New Frontier shall be entitled as a manner of right to an injunction from any court of competent jurisdiction restraining any violation or further violation of such agreement by Executive; such right to an injunction, however, shall be cumulative and in addition to whatever other remedies that New Frontier may have. Terms and agreements set forth in this Section 6 shall survive the expiration or termination of this Agreement for any reason. The existence of any claim of Executive, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by New Frontier of the covenants contained in this Agreement.

       7. NON-COMPETE; NON-SOLICITATION

            A. NON-COMPETE. Except as is set forth below, for a period commencing on the Effective Date hereof and ending on the date that Executive ceases to be employed by New Frontier, (the “Non-Competition Period”), Executive shall not, directly or indirectly, either for himself or any other person, own, manage, control, materially participate in, invest in, permit his name to be used by, act as consultant or advisor to, render material services for (alone or in association with any person, firm, corporation or other business organization) or otherwise assist in any manner any business which is then a provider of adult pay-per-view television services in the US., or is otherwise a substantial competitor of New Frontier’s business at the date that Executive ceases to be employed by New Frontier (collectively, a “Competitor”); provided, however, that the restrictions set forth above shall immediately terminate and shall be of no further force or effect (i) in the event of a default by New Frontier of the performance of any of the obligations hereunder, which default is not cured within ten (10) days after notice thereof, (ii) if Executive’s employment has been terminated by New Frontier without Cause, or (iii) Executive ceases to be employed after a Change In Control. Nothing herein shall prohibit Executive from being a passive owner of not more than five percent (5%) of the equity securities of a publicly-traded enterprise which is a competitor of a substantial portion of New Frontier’s business, so long as he has no active participation in the business of such enterprise. For purposes of this Section 7, the term “New Frontier” shall include its affiliates and subsidiaries.

             B. NON-SOLICITATION. During the Non-Competition Period and for one year thereafter, Executive shall not, directly or indirectly, (i) induce or attempt to induce or aid others in inducing anyone working at New Frontier to cease working at New Frontier, or in any way interfere with the relationship between New Frontier and anyone working at New Frontier except in the proper exercise of Executive’s authority or (ii) in any way interfere with the relationship between New Frontier and any customer, supplier, licensee or other business relation of New Frontier.

            C. SCOPE. If, at the time of enforcement of this Section 7, a court shall hold that the duration, scope, area or other restrictions stated herein are unreasonable under circumstances then existing, the parties agree that the maximum duration, scope, area or other restrictions reasonable under such circumstances shall be substituted for the stated duration, scope, area or other restrictions.

             D. INDEPENDENT AGREEMENT. The covenants made in this Section 7 shall be construed as an agreement independent of any other provisions of this Agreement, and shall survive

the termination of this Agreement. Moreover, the existence of any claim or cause of action of Executive against New Frontier, whether or not predicated upon the terms of this Agreement, shall not constitute a defense to the enforcement of these covenants.

      8. ARBITRATION.

       No dispute between New Frontier (or any of its officers, directors, employees, subsidiaries, affiliates or parent corporation) and Executive, which is in any way related to the employment of Executive (including but not limited to claims of wrongful termination; racial, sexual or other discrimination or harassment; defamation; and other employment-related claims or allegations) shall be the subject of a lawsuit filed in state or federal court. Instead, any such dispute shall be submitted to binding arbitration before the American Arbitration Association (“AAA”) or any other individual or organization on which the parties agree or which a court may appoint. It is understood that both sides are hereby waiving the right to a jury trial.

       The arbitration shall be initiated in Boulder, Colorado and shall be administered by AAA under its commercial arbitration rules before a single arbitrator that shall be mutually agreed upon by the parties hereto. If the parties cannot agree on a single arbitrator, then an arbitrator shall be selected in accordance with the rules of AAA. The arbitration must be filed within six months of the act or omission which gives rise to the claim. Each party shall be entitled to take any discovery as is permitted by the Arbitrator. In determining the extent of discovery, the Arbitrator shall exercise discretion, but shall consider the expense of the desired discovery and the importance of the discovery to a just adjudication.

      The Arbitrator shall render an award which conforms to the facts, as supported by competent evidence (except that the Arbitrator may accept written declarations under penalty of perjury, in addition to live testimony), and the law as it would be applied by a court sitting in the state of Colorado. The cost of arbitration shall be advanced equally by the parties; however, the Arbitrator shall have the power, in his discretion, to award some or all of the costs of arbitration and reasonable attorneys’ fees to the prevailing party. Any party may apply to a court of competent jurisdiction for entry of judgment on the arbitration award.

      9. NO CONFLICTING OBLIGATIONS OF EXECUTIVE.

      Executive represents and warrants that he is not subject to any duties or restrictions under any prior agreement with any previous employer or other person or entity, and that he has no rights or obligations which may conflict with the interests of New Frontier or with the performance of Executive’s duties and obligations under this Agreement. Executive agrees to notify New Frontier immediately if any such conflicts occur in the future.

      Notwithstanding the above, either New Frontier or Executive may file with an appropriate state of federal court a claim for injunctive relief in any case where the filing party seeks provisional injunctive relief or where permanent injunctive relief is not available in arbitration. The filing of a claim for injunctive relief in state or federal court shall not allow either party to raise any other claim outside of arbitration.

      10. SUCCESSORS.

            A. This Agreement is personal to Executive and shall not be assignable by Executive.

      B. This Agreement shall inure to the benefit of New Frontier and its successors and assigns. Upon written approval by Executive, New Frontier may assign this Agreement to any successor or affiliated entity, subsidiary, sibling, or parent company.

       11. MISCELLANEOUS

             A. This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado, without reference to the principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement contains the full and complete understanding between the parties hereto and supersedes all prior understandings, whether written or oral pertaining to the subject matter hereof. This Agreement may

not be amended or modified otherwise than by written agreement executed by Executive and by the designated representative of the Board.

            B. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, or by facsimile, or by email, or by hand delivery to such address as either party shall have furnished to the other in writing in accordance herewith.

            C. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.

            D. New Frontier may withhold from any amounts payable under this Agreement such federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation.

            E. The failure of either party to insist upon strict compliance with any provision of this Agreement, or the failure to assert any right either party may have hereunder, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement.

             IN WITNESS WHEREOF, Executive has hereunto set Executive’s hand and, pursuant to the authorization from its Board of Directors, New Frontier has caused these presents to be executed in its name on its behalf, all as of the day and year first above written.

NEW FRONTIER MEDIA, INC. A Colorado Corporation	EXECUTIVE
By       /s/ Michael Weiner, CEO                      Michael Weiner, CEO	By       /s/ Ira Bahr                      Ira Bahr

Date:       1-20-06              
         Date:       1-20-06              
        

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