10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2009

oTransition 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 registrant as specified in its charter)

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

7007 Winchester Circle, Suite 200, Boulder, CO 80301

(Address of principal executive offices)

(303) 444-0900

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has 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 x   No o

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

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

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

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

As of August 1, 2009, 19,494,038 shares of Common Stock, par value $.0001, were outstanding.

Form 10-Q

NEW FRONTIER MEDIA, INC.

FOR THE FISCAL QUARTER ENDED JUNE 30, 2009

Table of Contents

		Page Number
Part I.	Financial Information
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Cash Flows	5
	Condensed Consolidated Statements of Comprehensive Income	6
	Condensed Consolidated Statements of Shareholders’ Equity	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	25
Part II.	Other Information
Item 1A.	Risk Factors	26
Item 6.	Exhibits	27
SIGNATURES		28

2

PART I.   FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS.

NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par values)

	(Unaudited)
	June 30,			March 31,
	2009			2009
Assets
Current assets:
Cash and cash equivalents	$	17,269		$	16,049
Restricted cash	21			16
Marketable securities	—			90
Accounts receivable, net of allowance for doubtful accounts of $261 and $308, at June 30, 2009 and March 31, 2009, respectively	10,490			10,242
Deferred producer-for-hire costs	1,084			60
Taxes receivable	301			683
Deferred tax assets	386			358
Prepaid and other assets	1,375			1,592
Total current assets	30,926			29,090
Equipment and furniture, net	5,297			5,573
Prepaid distribution rights, net	10,832			10,933
Recoupable costs and producer advances, net	5,280			4,999
Film costs, net	6,032			6,672
Goodwill	8,599			8,599
Other identifiable intangible assets, net	1,445			1,630
Other assets	1,047			1,043
Total assets	$	69,458		$	68,539
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	2,084		$	2,144
Producers payable	1,192			950
Deferred revenue	824			737
Accrued compensation	1,195			1,188
Deferred producer liabilities	2,355			1,970
Short-term debt	4,000			4,000
Accrued and other liabilities	1,385			2,112
Total current liabilities	13,035			13,101
Deferred tax liabilities	911			903
Taxes payable	242			242
Other long-term liabilities	609			718
Total liabilities	14,797			14,964
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $.10 par value, 4,999 shares authorized, no shares issued and outstanding	—			—
Common stock, $.0001 par value, 50,000 shares authorized, 19,494 shares issued and outstanding at June 30, 2009 and March 31, 2009	2			2
Additional paid-in capital	54,890			54,702
Accumulated deficit	(170		)	(997		)
Accumulated other comprehensive loss	(61		)	(132		)
Total shareholders’ equity	54,661			53,575
Total liabilities and shareholders’ equity	$	69,458		$	68,539

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

3

NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

	(Unaudited) Quarter Ended June 30,
	2009			2008
Net sales	$	12,504		$	13,061
Cost of sales	4,626			3,929
Gross margin	7,878			9,132
Operating expenses:
Sales and marketing	2,127			2,425
General and administrative	4,340			4,721
Charge for asset impairments	28			—
Total operating expenses	6,495			7,146
Operating income	1,383			1,986
Other income (expense):
Interest income	12			78
Interest expense	(76		)	(56		)
Other expense, net	(5		)	—
Total other income (expense)	(69		)	22
Income before provision for income taxes	1,314			2,008
Provision for income taxes	(487		)	(829		)
Net income	$	827		$	1,179
Basic income per share	$	0.04		$	0.05
Diluted income per share	$	0.04		$	0.05

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

4

NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	(Unaudited) Quarter Ended June 30,
	2009			2008
Cash flows from operating activities:
Net income	$	827		$	1,179
Adjustments to reconcile net income to net cash provided by operating  activities:
Depreciation and amortization	2,464			2,179
Share-based compensation	213			257
Deferred taxes	(10		)	(26		)
Charge for asset impairments	28			—
Change in operating assets and liabilities
Accounts receivable	(247		)	2,333
Accounts payable	16			46
Prepaid distribution rights, net	(833		)	(1,018		)
Film costs, net	(252		)	(371		)
Deferred producer-for-hire costs	(1,024		)	—
Deferred revenue	87			758
Producers payable	242			227
Taxes receivable and payable, net	383			716
Recoupable costs and producer advances, net	(309		)	(591		)
Accrued compensation	6			(725		)
Other assets and liabilities, net	(228		)	(495		)
Net cash provided by operating activities	1,363			4,469
Cash flows from investing activities:
Purchase of marketable securities	—			(586		)
Redemption of marketable securities	90			837
Purchases of equipment and furniture	(156		)	(1,662		)
Purchase of intangible assets	(6		)	(489		)
Payment of related party note arising from business acquisition	—			(15		)
Net cash used in investing activities	(72		)	(1,915		)
Cash flows from financing activities:
Purchases of common stock	—			(1,502		)
Payment of dividends	—			(2,982		)
Payment of long-term seller financing	(75		)	—
Net cash used in financing activities	(75		)	(4,484		)
Net increase (decrease) in cash and cash equivalents	1,216			(1,930		)
Effect of exchange rate changes on cash and cash equivalents	4			—
Cash and cash equivalents, beginning of period	16,049			18,325
Cash and cash equivalents, end of period	$	17,269		$	16,395

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

5

NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

	(Unaudited) Quarter Ended June 30,
	2009		2008
Net income	$	827	$	1,179
Other comprehensive income, net of tax:
Currency translation adjustment	71		—
Total comprehensive income	$	898	$	1,179

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

6

NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands)

	(Unaudited) Quarter Ended June 30,
	2009			2008
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	54,702			61,854
Reversal of tax benefit for stock option forfeitures/cancellations	(25		)	—
Purchases of common stock	—			(1,502		)
Share-based compensation	213			257
Balance at end of period	54,890			60,609
Retained earnings (accumulated deficit)
Balance at beginning of period	(997		)	4,191
Net income	827			1,179
Balance at end of period	(170		)	5,370
Accumulated other comprehensive loss
Balance at beginning of period	(132		)	(10		)
Currency translation adjustment	71			—
Balance at end of period	(61		)	(10		)
Total shareholders’ equity	$	54,661		$	65,971

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

7

NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 — BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

New Frontier Media, Inc. is a publicly traded holding company for its operating subsidiaries which are reflected in the Transactional TV, Film Production, Direct-to-Consumer and Corporate Administration segments.

Transactional TV Segment

The Transactional TV segment is a leading provider of adult programming to cable multiple system operators (“MSOs”) and direct broadcast satellite (“DBS”) providers. The Transactional TV segment is able to provide a variety of editing styles and programming mixes to a broad range of consumers. Ten Sales, Inc., which is also reflected within the operating results of the Transactional TV segment, is responsible for selling the segment’s services.

Film Production Segment

The Film Production segment derives its revenue from two principal businesses: a) the production and distribution of original motion pictures known as erotic thrillers, horror movies, and erotic, event styled content (collectively, “owned content”) which is provided through MRG Entertainment and b) the licensing of third party films in international and domestic markets where it acts as a sales agent for the product (“repped content”) which is provided through Lightning Entertainment Group. This segment also periodically provides contract film production services to major Hollywood studios (“producer-for-hire” arrangements).

Direct-to-Consumer Segment

The Direct-to-Consumer segment primarily derives revenue by aggregating and reselling adult content through consumer websites. This segment also launched new product test initiatives in early fiscal year 2009 including the development of a set-top box and internet protocol television (“IPTV”) business model which allows consumers to access adult content through the internet and view the content on television using a set-top box. Based on lower than expected subscriber additions for the IPTV service and other considerations during the second half of fiscal year 2009, the Company restructured the operations of this segment in March 2009 to reduce the resources allocated to new product offering operations.

Corporate Administration Segment

Expenses reported as 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 Transactional TV, Film Production, or Direct-to-Consumer segments. These costs include, but are not limited to, legal and accounting expenses, insurance, registration and filing fees with NASDAQ, executive employee costs, and the United States Securities and Exchange Commission (“SEC”), investor relations and printing costs associated with the Company’s public filings and shareholder communications.

8

NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

Basis of Presentation

The accompanying financial statements of New Frontier Media, Inc. and its wholly owned subsidiaries (collectively hereinafter referred to as “New Frontier Media,” the “Company,” “we,” and other similar pronouns) have been prepared without audit pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. The Company believes these statements include all adjustments, which are of a normal and recurring nature, considered necessary for a fair presentation of New Frontier Media’s 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 filed with the SEC on June 12, 2009.

The results of operations for the three month period ended June 30, 2009 are not necessarily indicative of the results to be expected for the full year.

The Company has performed an evaluation of subsequent events through August 7, 2009, which is the date the financial statements were issued.

Significant Accounting Policies

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of New Frontier Media.  All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates have been made by the Company in several areas, including, but not limited to, estimated revenue for certain Transactional TV segment pay-per-view (“PPV”) and video-on-demand (“VOD”) services; the recognition and measurement of income tax expenses, assets and liabilities (including the measurement of uncertain tax positions and valuation of deferred tax assets); the valuation of recoupable costs and producer advances; the assessment of film costs and the forecast of anticipated revenue (“ultimate” revenue), which is used to amortize film costs; the amortization methodology and valuation of prepaid distribution rights; the valuation of goodwill, intangible and other long-lived assets; and the valuation and recognition of share-based compensation.

The Company bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from these estimates.

Fair Values of Financial Instruments

The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements, effective April 1, 2008 for all financial assets and liabilities and for nonfinancial assets and liabilities recognized or disclosed at fair value on a recurring basis. There was no material impact on the Company’s consolidated financial statements from the adoption of SFAS No. 157. SFAS No. 157 establishes a framework for measuring fair value in accordance with GAAP. SFAS No. 157 is intended to enable the readers of financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. SFAS No. 157 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following categories:

9

NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.

As of June 30, 2009, the Company did not have any financial assets and liabilities carried at fair value.

For all other nonfinancial assets and liabilities, the Company adopted the provisions of SFAS No. 157 effective April 1, 2009, in accordance with Financial Accounting Standards Board (“FASB”) Staff Position SFAS No. 157-2, Effective Date of FASB Statement No. 157, which deferred the original application date of the provisions of SFAS No. 157 for all nonfinancial assets and liabilities except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis until the Company’s first quarter of fiscal year 2010. The adoption of the nonfinancial assets and liabilities provisions of SFAS No. 157 primarily relate to fair value measurements of goodwill, intangible assets with indefinite lives and nonfinancial long-lived assets. The adoption of the nonfinancial assets and liabilities provisions of SFAS No. 157 did not have a material impact on the Company’s results of operations and financial position.

Recently Issued Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.  SFAS No. 168 will become the single source of authoritative nongovernmental GAAP, superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force, and related accounting literature.  SFAS No. 168 reorganizes the GAAP pronouncements into accounting topics and displays them using a consistent structure.  SFAS No. 168 also organizes the relevant SEC guidance using the same topical structure.  SFAS No. 168 is effective for the Company beginning July 1, 2009.  The adoption of SFAS No. 168 will impact the Company’s future references to authoritative accounting literature beginning in the period of adoption.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events.  SFAS No. 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. SFAS No. 165 was effective for the Company beginning April 1, 2009.  The Company’s adoption of SFAS No. 165 did not have a material impact on its results of operations and financial position.

In April 2009, the FASB issued Staff Position No FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairment (“FSP 115-2/124-2”).  FSP 115-2/124-2 amends the requirements for the recognition and measurement of other-than-temporary impairments for debt securities by modifying the pre-existing “intent and ability” indicator.  Under FSP 115-2/124-2, an other-than-temporary impairment is triggered when there is an intent to sell the security, it is more likely than not that the security will be required to be sold before recovery, or the security is not expected to recover the entire amortized cost basis of the security. FSP 115-2/124-2 is effective for the Company beginning July 1, 2009. The Company does not expect the adoption of FSP 115-2/124-2 will have a material impact on its results of operations and financial position.

In April 2009, the FASB issued Staff Position No. FAS 107-1 and APB 28-1, Interim Disclosure about Fair Value of Financial Instruments (“FSP 107-1/APB 28-1”). FSP 107-1/APB 28-1 requires interim disclosures regarding the fair values of financial instruments that are within the scope of SFAS No. 107, Disclosures about the Fair Value of Financial Instruments. Additionally, FSP 107-1/APB 28-1 requires disclosures about the methods and assumptions used to estimate the fair value of financial instruments on a interim basis as well as changes in the methods and significant assumptions from prior periods. FSP 107-1/APB 28-1 is effective for the Company beginning July 1, 2009.  The Company does not expect the adoption of FSP 107-1/APB 28-1 will have a material impact on its results of operations and financial position.

10

NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

NOTE 2 — INCOME PER SHARE

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

	Quarter Ended June 30,
	2009		2008
Net income	$	827	$	1,179
Average outstanding shares of common stock	19,494		23,692
Dilutive effect of warrants/stock options	4		43
Common stock and common stock equivalents	19,498		23,735
Basic income per share	$	0.04	$	0.05
Diluted income per share	$	0.04	$	0.05

The Company computed basic income per share using net income and the weighted average number of common shares outstanding during the period. The Company computed diluted income per share using net income and the weighted average number of common shares outstanding plus potentially dilutive common shares outstanding during the period. The Company excluded 1.9 million and 2.2 million options and warrants from the calculation of diluted earnings per share for the quarters ended June 30, 2009 and 2008, respectively, because inclusion of these options and warrants would be antidilutive.

NOTE 3 — EMPLOYEE EQUITY INCENTIVE PLANS

The Company adopted the New Frontier Media, Inc. 2007 Stock Incentive Plan (the “2007 Plan”) during fiscal year 2008. The 2007 Plan was approved by the Company’s shareholders and the purpose of the 2007 Plan was to replace prior plans with one incentive plan. No awards or grants are available to be made under prior plans. Under the 2007 Plan, employees and directors of the Company may be granted incentive stock options, restricted stock, bonus stock and other awards, or any combination thereof. There were 1,250,000 shares of the Company’s common stock originally authorized for issuance under the 2007 Plan and the maximum number of shares of common stock that may be subject to one or more awards granted to a participant during any calendar year is 350,000 shares. Awards granted under the 2007 Plan that are subsequently forfeited or cancelled may be reissued under the provisions of the 2007 Plan. Options have been granted to employees and non-employee directors of New Frontier Media with exercise prices equal to, or in excess of, the fair market value of the underlying common stock at the date of grant. Generally, the stock options vest ratably over a four-year vesting period and expire ten years from the date of grant. As of June 30, 2009, approximately 0.6 million awards were available for issuance under the 2007 Plan.

Share-Based Compensation

In accordance with the provisions of SFAS No. 123(R), the Company accounts for employee and non-employee director stock options under the fair value method which requires the use of an option pricing model for estimating fair value. Accordingly, share-based compensation is measured at grant date based on the estimated fair value of the award. The Company uses the straight-line attribution method to recognize share-based compensation costs over the requisite service period of the award. Share-based compensation is determined using the Black-Scholes option pricing model for estimating the fair value of options granted under the Company’s equity incentive plan. The Company uses certain assumptions in order to calculate the fair value of an option using the Black-Scholes option pricing model. The volatility assumptions are derived using historical volatility data. The expected term assumptions are stratified between officers and non-officers and are determined using the estimated weighted average exercise behavior for these two groups of employees. The dividend yield assumption is based on dividends declared by the Company’s Board of Directors and estimates of dividends to be declared in the future. The weighted average estimated fair values of stock option grants and the weighted average assumptions that were used

11

NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

in calculating such values for the quarter ended June 30, 2008 are reflected below.  No stock options were granted during the quarter ended June 30, 2009.

	Quarter Ended June 30, 2008
Weighted average estimated fair values per award	$	2.33
Expected term from grant date (in years)	5
Risk free interest rate	2.7		%
Expected volatility	52		%
Expected dividend yield	—		%

Equity-based compensation expense recognized in the condensed consolidated statements of operations is based on awards ultimately expected to vest, which considers estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company recognizes the effect of adjusting the forfeiture rate for all expense amortization in the period that the Company changes the forfeiture estimate. The effect of forfeiture adjustments was not significant during the periods presented.

The following table summarizes the effects of share-based compensation resulting from the application of SFAS No. 123(R) to options granted under the Company’s equity incentive plans. This expense is included in cost of salesand selling, general and administrative expenses (in thousands, except per share amounts):

	Quarter Ended June 30,
	2009			2008
Share-based compensation expense before income taxes	$	213		$	257
Income tax benefit	(79		)	(106		)
Total share-based compensation expense after income taxes	$	134		$	151
Share-based compensation effects on basic earnings per common share	$	0.01		$	0.01
Share-based compensation effects on diluted earnings per common share	$	0.01		$	0.01

Stock option transactions during the quarter ended June 30, 2009 are summarized as follows:

	Shares		Weighted Avg. Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value(1) (in thousands)
Outstanding at March 31, 2009	1,991,902		$	6.08
Forfeited/Expired	(178,750	)	$	6.57
Outstanding at June 30, 2009	1,813,152		$	6.03	6.2	$	7
Options exercisable at June 30, 2009	1,224,352		$	6.44	5.2	$	7
Options vested and expected to vest—Non-Officers	716,481		$	6.66	6.3	$	7
Options vested and expected to vest—Officers	990,643		$	5.70	5.9	$	—

(1) The aggregate intrinsic value represents the difference between the exercise price and the value of New Frontier Media, Inc. stock at the time of exercise or at the end of the quarter if unexercised.

12

NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

The Company issues new shares of common stock upon the exercise of stock options. As of June 30, 2009, there was $0.1 million and $0.8 million of total unrecognized compensation costs for non-officers and officers, respectively, related to stock options granted under the Company’s equity incentive plan. The unrecognized compensation cost for non-officers and officers is expected to be recognized over a weighted average period of 2 years.

NOTE 4 — SEGMENT INFORMATION

The Company presents segment information in accordance with 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 chief operating decision maker.

The Company has the following reportable operating segments:

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

·Film Production—produces and distributes mainstream films and erotic features and events. These titles are distributed on U.S. and international premium channels, PPV channels and VOD systems across a range of cable and satellite distribution platforms. The Film Production segment also distributes a full range of independently produced motion pictures to markets around the world. Additionally, this segment periodically provides producer-for-hire services to major Hollywood studios.

·Direct-to-Consumer—aggregates and resells adult content via the Internet. The Direct-to-Consumer segment sells content to subscribers primarily through its consumer websites. This segment also operates an IPTV set-top box business model.

·Corporate Administration—expenses reported as 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 Transactional TV, Film Production, or Direct-to-Consumer segments. These costs include, but are not limited to, legal and accounting expenses, insurance, registration and filing fees with NASDAQ, executive employee costs, and the SEC, investor relations and printing costs associated with the Company’s public filings and shareholder communications.

13

NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

The accounting policies of the reportable segments are the same as those described in the summary of accounting policies contained in Note 1 above. Segment profit (loss) is based on income (loss) before income taxes. The reportable segments are distinct business units, separately managed with different distribution channels. The selected operating results of the Company’s segments during each of the quarters ended June 30 are as follows (in thousands):

	Quarter Ended June 30,
	2009			2008
Net sales
Transactional TV	$	9,644		$	10,556
Film Production	2,533			2,047
Direct-to-Consumer	327			458
Total	$	12,504		$	13,061
Segment profit (loss)
Transactional TV	$	3,978		$	5,502
Film Production	357			(68		)
Direct-to-Consumer	(385		)	(540		)
Corporate Administration	(2,636		)	(2,886		)
Total	$	1,314		$	2,008
Interest income
Film Production	$	—		$	2
Corporate Administration	12			76
Total	$	12		$	78
Interest expense
Direct-to-Consumer	$	3		$	4
Corporate Administration	73			52
Total	$	76		$	56
Depreciation and amortization
Transactional TV	$	1,283		$	1,186
Film Production	1,079			854
Direct-to-Consumer	90			136
Corporate Administration	12			3
Total	$	2,464		$	2,179

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NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

The Company’s total identifiable asset balance by operating segment as of the dates presented was as follows (in thousands):

	June 30,2009							March 31,2009
	Gross		Eliminations			Net		Gross		Eliminations			Net
Identifiable Assets
Transactional TV	$	151,485	$	(123,389	)	$	28,096	$	147,693	$	(120,509	)	$	27,184
Film Production	25,373		(2,607		)	22,766		24,695		(2,242		)	22,453
Direct-to-Consumer	17,281		(15,411		)	1,870		18,536		(16,700		)	1,836
Corporate Administration	49,677		(32,951		)	16,726		49,909		(32,843		)	17,066
Total	$	243,816	$	(174,358	)	$	69,458	$	240,833	$	(172,294	)	$	68,539

Net sales, classified by geographic billing location of the customer, during each of the quarters ended June 30 was as follows (in thousands):

	Quarter EndedJune 30,
	2009		2008
Domestic net sales	$	11,299	$	12,326
International net sales:
Europe, Middle East and Africa	317		373
Latin America	379		122
Canada	367		137
Asia	93		61
Other	49		42
Total international net sales	1,205		735
Total net sales	$	12,504	$	13,061

Approximately $0.5 million of the Company’s total assets are located in Europe as of June 30, 2009. All other assets are located in the U.S.

NOTE 5 — MAJOR CUSTOMERS

The Company’s major customers (revenue in excess of 10% of net sales) are Comcast Corporation (“Comcast”), DirecTV, Inc. (“DirecTV”), Time Warner, Inc. (“Time Warner”) and DISH Network Corporation (“DISH”). These customers are included in the Transactional TV and Film Production segments. Net sales from these customers as a percentage of total net sales for each of the quarters ended June 30 are as follows:

	Quarter EndedJune 30,
	2009		2008
Comcast	19	%	21	%
DirecTV	14	%	16	%
Time Warner	12	%	15	%
DISH	11	%	14	%

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NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

The Company’s outstanding accounts receivable balances due from its major customers as of the dates presented are as follows (in thousands):

	June 30, 2009		March 31, 2009
Comcast	$	1,520	$	1,735
DirecTV	1,161		1,121
Time Warner	785		683
DISH	1,396		940

The loss of any of the Company’s major customers would have a material adverse effect on the Company’s results of operations and financial condition.

NOTE 6 — INCOME TAXES

The Company accounts for uncertain tax positions in accordance with the provisions of Financial Accounting Standards Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109. FIN No. 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, Accounting for Income Taxes. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon effective settlement. In accordance with the provisions of FIN No. 48, at June 30, 2009 the Company had total unrecognized tax benefits of approximately $0.2 million that are not expected to be settled within one year and have been classified within long-term taxes payable. If the Company was to prevail or the uncertainties were settled in favor of the Company on all uncertain tax positions, the net effect is estimated to be a benefit to the Company’s tax expense of approximately $0.2 million. As of June 30, 2009, the Company had accrued immaterial amounts of interest expense related to uncertain tax position liabilities. If the Company was to prevail or the uncertainties were settled in favor of the Company on all uncertain tax positions, the reversal of the accrued interest would result in an immaterial benefit to the Company.

The Company files U.S. federal and state income tax returns. With few exceptions, the Company is no longer subject to examination of its federal and state income tax returns for years prior to fiscal years 2005 and 2000, respectively.

NOTE 7 — BORROWING ARRANGEMENTS

In July 2009, the Company extended the term of its $9.0 million line of credit from a third-party financial institution. Amounts borrowed under the line of credit can be used to support the Company’s short-term working capital needs. The line of credit is secured by the Company’s trade accounts receivable and will mature in December 2009. Per the contractual loan agreement, borrowings under the line of credit are based on the greater of the current prime rate less 0.125% or 5.75%. The terms of the line of credit include certain defined negative and affirmative covenants customary for facilities of this type, and the Company was in compliance with the covenants at June 30, 2009. The Company’s outstanding principal balance under the line of credit as of June 30, 2009 was $4.0 million.

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q of New Frontier Media, Inc. and its consolidated subsidiaries, or the Company or the Registrant, and the information incorporated by reference includes forward-looking statements within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements regarding trend analysis and the Company’s expected financial position and operating results, its business strategy, its financing plans and the outcome of contingencies are forward-looking statements. Forward-looking statements are also identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “could,” “will,” “would,” “are optimistic that,” and similar expressions. The forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those set forth or implied by any forward looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to, our ability to: 1) retain our four major customers that accounted for approximately 56% of our total revenue during the quarter ended June 30, 2009; 2) maintain the license fee structures currently in place with our customers; 3) compete effectively with our current competitors and potential future competitors that distribute adult content to U.S. and international cable multiple system operators (“MSOs”) and direct broadcast satellite (“DBS”) providers; 4) retain our key executives; 5) produce film content that is well received by our Film Production segment’s customers; 6) attract market support for our stock; 7) comply with future regulatory developments; and 8) successfully compete against other forms of entertainment such as adult oriented internet sites and adult oriented premium channel content. The foregoing list of factors is not exhaustive. For a more complete list of factors that may cause results to differ materially from projections, please refer to the Risk Factors section of our most recently filed Form 10-K and Item 1A located in Part II herein, as updated by periodic and current reports that we may file from time to time with the United States Securities and Exchange Commission (“SEC”) that amend or update such factors.

Executive Summary

We are a leader in transactional television and the distribution of independent general motion picture entertainment. Our key customers are large cable and satellite operators in the United States. Our products are sold to these operators who then distribute them to retail customers via pay-per-view (“PPV”) and video-on-demand (“VOD”) technology. We earn revenue through contractual percentage splits of the retail price. Our three principal businesses are reflected in the Transactional TV, Film Production and Direct-to-Consumer operating segments. Our most profitable business line has historically been the Transactional TV segment. The Film Production segment incurred an operating loss in fiscal year 2009 primarily due to large non-cash impairment charges but has returned to profitability in the first quarter of fiscal year 2010.  Our Direct-to-Consumer segment has historically incurred operating losses. Our Corporate Administration segment includes all costs associated with the operation of the public holding company, New Frontier Media, Inc., including costs such as legal and accounting expenses, human resources and training, insurance, registration and filing fees with NASDAQ, executive employee costs and the SEC, investor relations, and printing costs associated with our public filings and shareholder communications.

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

Transactional TV Segment

Our Transactional TV segment is focused on the distribution of PPV and VOD services to MSOs and DBS providers. We earn a percentage of revenue, or “split”, from our content for each VOD, PPV or subscription that is purchased on our customers’ platform. Revenue growth occurs as we launch our services to new cable MSOs or DBS providers, experience growth in the number of digital subscribers for systems where our services are currently

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distributed, when we launch additional services or replace our competitors’ services on existing customer cable and DBS platforms, and when our proportional buy rates improve relative to our competitors. Alternatively, our revenue could decline if we were to experience lower consumer buy rates as has been the case with the recent economic conditions, if the revenue splits we receive from our customers decline, if additional competitive channels are added to our customers’ platforms or if our existing customers remove our services from their platform.

Film Production Segment

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

Direct-to-Consumer Segment

Our Direct-to-Consumer segment generates revenue primarily by selling memberships to our consumer websites. We have focused our efforts on improving our internet products in terms of site design, navigation, features, content and performance in an effort to increase traffic to the websites and the conversion of that traffic into paying members.  The Direct-to-Consumer segment also operates an internet protocol television (“IPTV”) set-top box business model. Customers of the IPTV set-top box product can obtain content directly through the internet and view the content on television.  Revenue from the IPTV set-top box business has been minimal.

Corporate Administration Segment

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

Critical Accounting Policies

The significant accounting policies set forth in Note 1 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009, as updated by Note 1 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009, appropriately represent, in all material respects, the current status of our critical accounting policies, and are incorporated herein by reference.

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Transactional TV Segment

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

	(In millions, except %) Quarter Ended June 30,						Percent Change
	2009			2008			‘09 vs. ‘08
Net revenue
VOD	$	5.1		$	5.3		(4	)%
PPV	4.4			5.0			(12	)%
Other revenue	0.1			0.2			(50	)%
Total	9.6			10.6			(9	)%
Cost of sales	3.0			2.6			15	%
Gross profit	6.7			7.9			(15	)%
Gross profit percentage	70		%	75		%
Operating expenses	2.7			2.4			13	%
Operating income	$	4.0		$	5.5		(27	)%

Net Revenue

VOD

Revenue from our VOD services declined during the quarter ended June 30, 2009 as compared to the same prior year quarter primarily due to a $1.0 million reduction in revenue from several of the largest cable MSOs in the U.S. as a result of the continued adverse impact on discretionary consumer spending from the economic downturn.  We believe consumers that have historically purchased our content with discretionary income are reducing or eliminating their acquisition of our content or viewing adult content through less expensive alternatives such as the internet in response to the economic downturn.  Partially offsetting this decline in revenue was (a) a $0.5 million increase in revenue associated with incremental international VOD distribution, (b) a $0.2 million increase in domestic VOD revenue associated with distribution to a new cable MSO customer in the eastern U.S., and (c) an increase in revenue from obtaining additional distribution on existing domestic customer platforms.

PPV

PPV revenue declined during the quarter ended June 30, 2009 primarily due to a decrease in revenue from the two largest DBS providers in the U.S. and other top ten cable MSOs in the U.S. associated with the economic downturn and related reduction in discretionary consumer spending.  The decline in revenue was partially offset by a $0.1 million increase in revenue associated with our international expansion to markets primarily in Latin America.

Other Revenue

Other revenue primarily includes revenue from advertising on our PPV channels.  Amounts are generally consistent and comparable with the same prior year quarter results.

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Cost of Sales

Our cost of sales consists of expenses associated with our digital broadcast center, satellite uplinking, satellite transponder leases, programming acquisitions, VOD transport, and amortization of content licenses. Cost of sales increased during the quarter ended June 30, 2009 primarily due to (a) a $0.1 million increase in transport costs to support the increase in U.S. VOD distribution, (b) a $0.2 million increase in transponder and uplink costs to support additional PPV channel offerings, and (c) a $0.1 million increase in prepaid distribution amortization expense associated with licensing higher quality content to attract additional customer purchases.

Operating Expenses and Operating Income

Operating expenses increased during the quarter ended June 30, 2009 primarily as a result of higher advertising and promotion costs incurred in connection with our efforts to increase domestic revenue.  Operating income for the quarter ended June 30, 2009 was $4.0 million as compared to $5.5 million in the same prior year quarter.

Film Production Segment

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

	(In millions, except %) Quarter Ended June 30,						Percent Change
	2009			2008			‘09 vs. ‘08
Net revenue
Owned content	$	2.0		$	1.7		18	%
Repped content	0.4			0.3			33	%
Other revenue	0.1			0.1			0	%
Total	2.5			2.0			25	%
Cost of sales	1.1			0.9			22	%
Gross profit	1.4			1.2			17	%
Gross profit percentage	56		%	60		%
Operating expenses	1.1			1.3			(15	)%
Operating income (loss)	$	0.4		$	(0.1	)	#

# Change is in excess of 100%.

Net Revenue

Owned Content

Revenue increased during the quarter ended June 30, 2009 primarily due to the delivery of the remaining outstanding episodes from the third installment of an owned content series to a premium cable channel customer. The prior year quarter results also included revenue from the partial delivery of the second installment of the series; however, the revenue per episode for the third installment of the series was higher as compared to the second installment which resulted in a net increase of approximately $0.5 million during the quarter ended June 30, 2009.  The increase in revenue was partially offset by a decline in owned content PPV revenue because fewer titles were distributed on DBS platforms during the quarter ended June 30, 2009 as compared to the same prior year quarter.

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Repped Content

Repped content revenue includes amounts from the licensing of film titles that we represent (but do not own) under sales agency relationships with various independent film producers. The increase in revenue was primarily due to the distribution of repped content on domestic VOD platforms during the quarter ended June 30, 2009.

Other Revenue

Other revenue relates to amounts earned through producer-for-hire arrangements, music royalty fees and the delivery of other miscellaneous film materials to distributors.  Other revenue during the quarter ended June 30, 2009 was consistent with the same prior year quarter.

Cost of Sales

Our cost of sales is comprised of the amortization of our owned content film costs as well as delivery and distribution costs related to that content. These expenses also include the costs we incur to provide producer-for-hire services.  We have recorded deferred costs during the quarter ended June 30, 2009 associated with a producer-for-hire deal which will be recognized within cost of sales upon completion of the production.  There is no significant cost of sales related to the repped content business.

The increase in cost of sales during the quarter ended June 30, 2009 as compared to the same prior year quarter was primarily due to higher film cost amortization related to the delivery of the remaining outstanding episodes from the third installment of an owned content series.  Film cost amortization as a percentage of the related owned content revenue during the quarter ended June 30, 2009 and 2008 was 44% and 39%, respectively.

Operating Expenses and Operating Income (Loss)

Operating expenses during the quarter ended June 30, 2009 declined as compared to the same prior year quarter primarily due to a reduction in tradeshow costs associated with our efforts to further reduce expenses in response to lower revenue experienced as a result of the economic downturn.  Operating income was $0.4 million during the quarter ended June 30, 2009 as compared to an operating loss of $0.1 million during the same prior year quarter.

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Direct-to-Consumer Segment

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

	(In millions, except %) Quarter Ended June 30,						Percent Change
	2009			2008			‘09 vs. ‘08
Net revenue
Net membership	$	0.3		$	0.4		(25	)%
Other	0.1			0.1			0	%
Total	0.3			0.5			(40	)%
Cost of sales	0.6			0.4			50	%
Gross profit (loss)	(0.2		)	—			#
Gross profit percentage	^			—		%
Operating expenses	0.1			0.6			(83	)%
Operating loss	$	(0.4	)	$	(0.5	)	20	%

# Change is in excess of 100%.

^ Information is not meaningful.

Net Revenue

Revenue from our Direct-to-Consumer segment primarily consists of amounts earned through the provision of internet subscriptions to customers.  Net membership revenue during the quarter ended June 30, 2009 was generally consistent with the same prior year quarter.

Other revenue during the quarter ended June 30, 2009 was consistent with the same prior year quarter.  This revenue primarily relates to the sale of content to other webmasters, the distribution of our website to the LodgeNet Entertainment Corporation customer base, and revenue from the distribution of our content through wireless platforms.

Cost of Sales

Cost of sales consists of expenses associated with credit card processing, bandwidth, traffic acquisition, content and depreciation of assets.  These costs also include expenses incurred in connection with the IPTV business model and primarily include the employee, depreciation and travel costs incurred for the future distribution of content through that product line.

The increase in cost of sales during the quarter ended June 30, 2009 was primarily due to additional internet traffic purchases incurred to improve our website membership revenue.

Operating Expenses and Operating Loss

Operating expenses decreased during the quarter ended June 30, 2009 as compared to the same quarter in the prior year due to our restructuring of the new product line operations.  Based on lower than expected subscriber additions for our IPTV set-top box business, the economic downturn and other factors, we determined during the fourth quarter of fiscal year 2009 that it was appropriate to restructure our new product line operations and materially

22

reduce the resources allocated to those operations.  We continue to offer the IPTV set-top box product, but this service is now supported through a significantly lower cost structure.  We incurred an operating loss of $0.4 million for the quarter ended June 30, 2009 as compared to $0.5 million for the same prior year quarter.

Corporate Administration Segment

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

	(In millions) Quarter Ended June 30,				Percent Change
	2009		2008		‘09 vs. ‘08
Operating expenses	$	2.6	$	2.9	(10	)%

Expenses related to the Corporate Administration segment include all costs associated with the operation of the public holding company, New Frontier Media, Inc., which are not directly allocable to the Transactional TV, Film Production, and Direct-to-Consumer segments. These costs include, but are not limited to, legal and accounting expenses, human resources and training, insurance, registration and filing fees with NASDAQ, executive employee costs and the SEC, investor relations, and printing costs associated with our public filings and shareholder communications.

Corporate administration expenses incurred during the quarter ended June 30, 2009 declined as compared to the same prior year quarter primarily due to a reduction in employee costs from the departure of our former Chief Operating Officer during the fourth quarter of fiscal year 2009 as well as lower auditing and accounting fees from ongoing cost reduction efforts.

Liquidity and Capital Resources

Our current priorities for the use of our cash are:

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

·funding our operating and capital requirements; and

·funding, from time to time, opportunities to enhance shareholder value, whether in the form of repurchase of shares of our common stock, cash dividends or other strategic transactions, although we do not currently have any foreseeable plans to participate in such opportunities.

We anticipate that our existing cash, cash equivalents and cash flows from operations will be sufficient during the next 12 months to satisfy our operating requirements. We also anticipate that we will be able to fund our estimated outlay for capital expenditures and other related purchases that may occur during the next 12 months through our available cash and cash equivalents and our expected cash flows from operations during that period.

The financial institution that provides us with our line of credit was recently sold to another financial institution. Although we have no indication that the change in ownership will impact the Company’s existing line of credit, it is possible that our ability to draw down on our line of credit will be negatively impacted by the change in ownership. As of June 30, 2009, there was a $4.0 million outstanding principal balance under the existing line of credit. We have approximately $17.3 million of available cash and cash equivalents as of June 30, 2009. We believe that if (a) we are unable to draw down additional funds through our line of credit, or (b) we were required to pay down the existing line of credit, we could satisfy our operating requirements during the next 12 months utilizing our available cash and estimated cash generated through operations during that period.

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Sources and Uses of Cash

Cash Flows from Operating and Investing Activities

Our cash flows from operating and investing activities are summarized as follows (amounts in table may not sum due to rounding):

	(In millions)Quarter Ended June 30,
	2009			2008
Net cash provided by operating activities	$	1.4		$	4.5
Cash flows from investing activities:
Purchase of marketable securities	—			(0.6		)
Redemption of marketable securities	0.1			0.8
Purchases of equipment and furniture	(0.2		)	(1.7		)
Purchase of intangible assets	(0.0		)	(0.5		)
Net cash used in investing activities	$	(0.1	)	$	(1.9	)

The decrease in cash provided by operating activities during the quarter ended June 30, 2009 as compared to the same prior year quarter is primarily from the following:

·   a $1.0 million decrease in cash flows from the Film Production segment’s producer-for-hire services; and

·   a $2.6 million decrease in cash flows from accounts receivable collections because the prior year quarter benefited from the collection of certain Transactional TV and Film Production segment customer balances which did not recur during the quarter ended June 30, 2009.

Cash from investing activities during the quarter ended June 30, 2009 included $0.1 million of cash received from the redemption of marketable securities and approximately $0.2 million of cash used to purchase miscellaneous equipment and furniture.

Cash Flows from Financing Activities

Our cash flows from financing activities are as follows (amounts in table may not sum due to rounding):

	(In millions)Quarter Ended June 30,
	2009			2008
Cash flows from financing activities:
Purchases of common stock	—			(1.5		)
Payment of dividends	—			(3.0		)
Payment of long-term seller financing	(0.1		)	—
Net cash used in financing activities	$	(0.1	)	$	(4.5	)

Net cash used in financing activities during the quarter ended June 30, 2009 consists of $0.1 million in payments for long-term seller financing related to our purchase of a patent in fiscal year 2008.

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Borrowing Arrangements

In July 2009, we extended the term of a $9.0 million line of credit from a third-party financial institution. Amounts borrowed under the line of credit can be used to support short-term working capital needs. The line of credit is secured by our trade accounts receivable and will mature in December 2009. Per the contractual loan agreement, borrowings under the line of credit are based on the greater of the current prime rate less 0.125% or 5.75%. The terms of the line of credit include certain defined negative and affirmative covenants customary for facilities of this type, and we were in compliance with the covenants at June 30, 2009. Our outstanding principal balance under the line of credit as of June 30, 2009 was $4.0 million.

Commitments and Contingencies

In connection with our adoption of FIN No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109, we have a $0.2 million liability recorded for unrecognized tax benefits at June 30, 2009. We cannot reasonably estimate when or if this liability will be paid.

Recent Accounting Pronouncements

For a discussion of the recent accounting pronouncements related to our operations, please refer to the related information provided under Note 1 — Business and Summary of Significant Accounting Policies to the accompanying Condensed Consolidated Financial Statements, which information is incorporated herein by reference.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

Interest Rate Sensitivity.    Changes in interest rates could impact our anticipated interest income on cash and cash equivalents. An adverse change in interest rates in effect at June 30, 2009 would not have a material impact on the Company’s net income or cash flows.

Changes in interest rates could also impact the amount of interest we pay on borrowings under our line of credit. A 10% adverse change in the interest rates on borrowings under our line of credit would not have a material impact on the Company’s interest expense.

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

ITEM 4. CONTROLS AND PROCEDURES.

(a) Disclosure Controls and Procedures. Our Company’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and the Chief Financial Officer concluded that, as of June 30, 2009, the Company’s disclosure controls and procedures were effective.

(b) Internal Controls. There were no changes in our internal control over financial reporting that occurred during our first quarter of fiscal year 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 1A. RISK FACTORS.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended March 31, 2009, as such risk factors have been updated by the filing with the SEC of subsequent periodic and current reports from time to time, which factors could materially affect our business, financial condition, or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or reporting results.

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ITEM 6. EXHIBITS.

Exhibit No.	Exhibit Description
10.01	Change in Terms Agreement, as supplemented (including related Business Loan Agreement), dated June 15, 2009 between New Frontier Media, Inc. and First Community Bank
31.01	Certification by CEO Michael Weiner pursuant to Rule 13a-14(a)/15d-14(d)
31.02	Certification by CFO Grant Williams pursuant to Rule 13a-14(a)/15d-14(d)
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 Grant Williams pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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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.
Dated: August 7, 2009	By:	/s/ Michael Weiner
	Name:	Michael Weiner
	Title:	Chief Executive Officer

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EXHIBIT INDEX

Exhibit No.	Exhibit Description
10.01	Change in Terms Agreement, as supplemented (including related Business Loan Agreement), dated June 15, 2009 between New Frontier Media, Inc. and First Community Bank
31.01	Certification by CEO Michael Weiner pursuant to Rule 13a-14(a)/15d-14(d)
31.02	Certification by CFO Grant Williams pursuant to Rule 13a-14(a)/15d-14(d)
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 Grant Williams pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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EX-10.01

Exhibit 10.01

CHANGE IN TERMS AGREEMENT

Principal		Loan Date	Maturity	Loan No	Call / Coll	Account	Officer SDB	Initials
$	9,000,000.00	07-01-2008	12-15-2009	281007262				SB

References in the boxes above are for Lender’s use only and do not limit the applicability of this document to any particular loan or item.  Any item above containing “***” has been omitted due to text length limitations.

Borrower:	NEW FRONTIER MEDIA, INC.	Lender:	First Community Bank
	7007 WINCHESTER CIR, STE 200		Lakewood Loan Servicing Center
	BOULDER, CO 80301		215 Union Blvd, Suite 150
			Lakewood, CO 80228
			(303) 988-2300

Principal Amount: $9,000,000.00 Date of Agreement: June 15, 2009

DESCRIPTION OF EXISTING INDEBTEDNESS.  LENDER IS THE HOLDER OF THAT CERTAIN PROMISSORY NOTE DATED JULY 1, 2008 IN THE ORIGINAL PRINCIPAL AMOUNT OF $9,000,000.00 AND ANY AND ALL CHANGE IN TERMS AGREEMENTS PREVIOUSLY EXECUTED.

DESCRIPTION OF COLLATERAL.  ALL ACCOUNTS AS MORE COMPLETELY DESCRIBED IN THE COMMERCIAL SECURITY AGREEMENT DATED JULY 1, 2008 TOGETHER WITH ALL MODIFICATIONS OF, CONSOLIDATIONS OF, ADDITIONS OF, REPLACEMENTS OF AND SUBSTITUTIONS OF THE COLLATERAL.

DESCRIPTION OF CHANGE IN TERMS. BORROWER AND LENDER HEREBY AGREE TO MODIFY THE ABOVE REFERENCED PROMISSORY NOTE AS FOLLOWS:

1)  THE MATURITY DATE SHALL BE EXTENDED FROM JULY 5, 2009 TO DECEMBER 15, 2009.

2)  MODIFICATIONS AND/OR ADDITIONS TO THE BUSINESS LOAN AGREEMENT (ASSET BASED) AS MORE COMPLETELY DESCRIBED IN SAID DOCUMENT OF EVEN DATE HEREWITH.

3)  AS OF THE DATE OF THIS AGREEMENT THE INTEREST RATE WILL BE ADJUSTED TO THE CURRENT PRIME RATE, MINUS A MARGIN OF .1250 PERCENTAGE POINTS WITH A FLOOR RATE OF 5.750 PERCENTAGE POINTS, RESULTING IN A CURRENT RATE OF 5.750 PERCENT, AS MORE COMPLETELY DESCRIBED IN THE “VARIABLE INTEREST RATE” PARAGRAPH CONTAINED HEREIN.

4)  PAYMENTS SHALL BE DUE AND PAYABLE AS DESCRIBED IN THE “PAYMENT” PARAGRAPH CONTAINED HEREIN.

PAYMENT. Borrower will pay this loan in one payment of all outstanding principal plus all accrued unpaid interest on December 15, 2009. In addition, Borrower will pay regular monthly payments of all accrued unpaid interest due as of each payment date, beginning July 15, 2009, with all subsequent interest payments to be due on the same day of each month after that.

VARIABLE INTEREST RATE. The interest rate on this loan is subject to change from time to time based on changes in an independent index which is the The Prime Rate as quoted in the Money Section of the Wall Street Journal, when a range of rates is published the highest rate will be applied (the “Index”). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notifying Borrower. Lender will tell Borrower the current Index rate upon Borrower’s request. The interest rate change will not occur more often than each day. Borrower understands that Lender may make loans based on other rates as well. The Index currently is 3.250% per annum. The interest rate to be applied to the unpaid principal balance of this loan will be calculated as described in the “INTEREST CALCULATION METHOD” paragraph using a rate of 0.125 percentage points under the Index, adjusted if necessary for any minimum and maximum rate limitations described below, resulting in an initial rate of 5.750% per annum based on a year of 360 days. NOTICE: Under no circumstances will the interest rate on this loan be less than 5.750% per annum or more than the maximum rate allowed by applicable law.

INTEREST CALCULATION METHOD. Interest on this loan is computed on a 365/360 basis; that is, by applying the ratio of the interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. All interest payable under this loan is computed using this method.

CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of the original obligation or obligations, including all agreements evidenced or securing the obligation(s), remain unchanged and in full force and effect. Consent by Lender to this Agreement does not waive Lender’s right to strict performance of the obligation(s) as changed, nor obligate Lender to make any future change in terms. Nothing in this Agreement will constitute a satisfaction of the obligation(s). It is the intention of Lender to retain as liable parties all makers and endorsers of the original obligation(s), including accommodation parties, unless a party is expressly released by Lender in writing. Any maker or endorser, including accommodation makers, will not be released by virtue of this Agreement. If any person who signed the original obligation does not sign this Agreement below, then all persons signing below acknowledge that this Agreement is given conditionally, based on the representation to Lender that the non-signing party consents to the changes and provisions of this Agreement or otherwise will not be released by it. This waiver applies not only to any initial extension, modification or release, but also to all such subsequent actions.

CERTIFICATION OF FINANCIAL INFORMATION. Borrower certifies that all financial statements supplied to Lender are true, complete and correct and fairly present the financial condition of the Borrower as of such dates for the periods covered by such statements, and there has been no material adverse change in the condition (financial or otherwise), business or operations of the Borrower. There are no liabilities of the Borrower, fixed or contingent, which are material but are not reflected in the financial statements or in the notes thereto. No information, exhibit, or report furnished by the Borrower to Lender In connection with the Note and Related Documents contained any material misstatement of fact or omitted to state a material fact or any fact necessary to make the statement contained therein not materially misleading. Borrower warrants and represents that financial statements and other information furnished to Lender in the future in connection with Borrower’s obligations under the Note and Related Documents shall meet the foregoing standards of correctness, completeness and accuracy.

PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS AGREEMENT, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE AGREEMENT.

BORROWER:

NEW FRONTIER MEDIA, INC.

By:	/s/ Michael Weiner	By:	/s/ Grant Williams
	MICHAEL WEINER, CEO of NEW FRONTIER MEDIA, INC.		GRANT WILLIAMS, CFO of NEW FRONTIER MEDIA, INC.

[ILLEGIBLE]

BUSINESS LOAN AGREEMENT (ASSET BASED)

Principal		Loan Date	Maturity	Loan No	Call / Coll	Account	Officer SDB	Initials
$	9,000,000.00	07-01-2008	12-15-2009	281007262				SB

References in the boxes above are or Lender’s use only and do not limit the applicability of this document to any particular loan or item. Any item above containing “***” has been omitted due to text length limitations.

Borrower:	NEW FRONTIER MEDIA, INC.	Lender:	First Community Bank
	7007 WINCHESTER CIR, STE 200		Lakewood Loan Servicing Center
	BOULDER, CO 80301		215 Union Blvd, Suite 150
			Lakewood, CO 80228
			(303) 988-2300

THIS BUSINESS LOAN AGREEMENT (ASSET BASED) dated June 15, 2009, is made and executed between NEW FRONTIER MEDIA, INC. (“Borrower”) and First Community Bank (“Lender”) on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans or other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement. Borrower understands and agrees that: (A) in granting, renewing, or extending any Loan, Lender is relying upon Borrower’s representations, warranties, and agreements as set forth in this Agreement; (B) the granting, renewing, or extending of any Loan by Lender at all times shall be subject to Lender’s sole judgment and discretion; and (C) all such Loans shall be and remain subject to the terms and conditions of this Agreement.

TERM. This Agreement shall be effective as of June 15, 2009, and shall continue in full force and effect until such time as all of Borrower’s Loans in favor of Lender have been paid in full, including principal, interest, costs, expenses, attorneys’ fees, and other fees and charges, or until such time as the parties may agree in writing to terminate this Agreement.

ADVANCE AUTHORITY. The following person or persons are authorized to request advances and authorize payments under the line of credit until Lender receives from Borrower, at Lender’s address shown above, written notice of revocation of such authority: MICHAEL WEINER, CEO of NEW FRONTIER MEDIA, INC.; and GRANT WILLIAMS, CFO of NEW FRONTIER MEDIA, INC.

LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time from the date of this Agreement to the Expiration Date, provided the aggregate amount of such Advances outstanding at any time does not exceed the Borrowing Base. Within the foregoing limits, Borrower may borrow, partially or wholly prepay, and reborrow under this Agreement as follows:

Conditions Precedent to Each Advance.  Lender’s obligation to make any Advance to or for the account of Borrower under this Agreement is subject to the following conditions precedent, with all documents, instruments, opinions, reports, and other items required under this Agreement to be in form and substance satisfactory to Lender:

(1)  Lender shall have received evidence that this Agreement and all Related Documents have been duly authorized, executed, and delivered by Borrower to Lender.

(2)  Lender shall have received such opinions of counsel, supplemental opinions, and documents as Lender may request.

(3)  The security interests in the Collateral shall have been duly authorized, created, and perfected with first lien prfority and shall be in full force and effect.

(4)  All guaranties required by Lender for the credit facility(ies) shall have been executed by each Guarantor, delivered to Lender, and be in full force and effect.

(5)  Lender, at its option and for its sole benefit, shall have conducted an audit of Borrower’s books, records, and operations, and Lender shall be satisfied as to their condition.

(6)  Borrower shall have paid to Lender all fees, costs, and expenses specified in this Agreement and the Related Documents as are then due and payable.

(7)  There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement, and Borrower shall have delivered to Lender the compliance certificate called for in the paragraph below titled “Compliance Certificate.”

Making Loan Advances. Advances under this credit facility, as well as directions for payment from Borrower’s accounts, may be requested orally or in writing by authorized persons. Lender may, but need not, require that all oral requests be confirmed in writing. Each Advance shall be conclusively deemed to have been made at the request of and for the benefit of Borrower (1) when credited to any deposit account of Borrower maintained with Lender or (2) when advanced in accordance with the instructions of an authorized person. Lender, at its option, may set a cutoff time, after which all requests for Advances will be treated as having been requested on the next succeeding Business Day.

Mandatory Loan Repayments. If at any time the aggregate principal amount of the outstanding Advances shall exceed the applicable Borrowing Base, Borrower, immediately upon written or oral notice from Lender, shall pay to Lender an amount equal to the difference between the outstanding principal balance of the Advances and the Borrowing Base. On the Expiration Date, Borrower shall pay to Lender in full the aggregate unpaid principal amount of all Advances then outstanding and all accrued unpaid interest, together with all other applicable fees, costs and charges, if any, not yet paid.

Loan Account. Lender shall maintain on its books a record of account in which Lender shall make entries for each Advance and such other debits and credits as shall be appropriate in connection with the credit facility. Lender shall provide Borrower with periodic statements of Borrower’s account, which statements shall be considered to be correct and conclusively binding on Borrower unless Borrower notifies Lender to the contrary within thirty (30) days after Borrower’s receipt of any such statement which Borrower deems to be incorrect.

COLLATERAL. To secure payment of the Primary Credit Facility and performance of all other Loans, obligations and duties owed by Borrower to Lender, Borrower (and others, if required) shall grant to Lender Security Interests in such property and assets as Lender may require. Lender’s Security Interests in the Collateral shall be continuing liens and shall include the proceeds and products of the Collateral, including without limitation the proceeds of any insurance. With respect to the Collateral, Borrower agrees and represents and warrants to Lender:

Perfection of Security Interests. Borrower agrees to execute all documents perfecting Lender’s Security Interest and to take whatever actions are requested by Lender to perfect and continue Lender’s Security Interests in the Collateral. Upon request of Lender, Borrower will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Borrower will note Lender’s interest upon any and all chattel paper and instruments if not delivered to Lender for possession by Lender. Contemporaneous with the execution of this Agreement, Borrower will execute one or more UCC financing statements and any statements as may be required by applicable law, and Lender will file such financing statements and all such similar statements in the appropriate location or locations. Borrower hereby appoints Lender as its irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue any Security Interest. Lender may at any time, and without further authorization from Borrower, file a carbon, photograph, facsimile, or other reproduction of any financing statement for use as a financing statement. Borrower will reimburse Lender for all expenses for the perfection, termination, andthe continuation ofthe perfection of Lender’s security interest in the Collateral. Borrower promptly will notify Lender before any change in Borrower’s name including any change to the assumed business names of Borrower. Borrower also promptly will notify Lender before any change in Borrower’s Social Security Number or Employer Identification Number. Borrower further agrees to notify Lender in writing prior to any change in address or location of Borrower’s principal governance office or should Borrower merge or consolidate with any other entity.

Collateral Records. Borrower does now, and at all times hereafter shall, keep correct and accurate records of the Collateral, all of which records shall be available to Lender or Lender’s representative upon demand for inspection and copying at any reasonable time. The above is an accurate and complete list of all locations at which Borrower keeps or maintains business records concerning Borrower’s collateral.

Collateral Schedules. Concurrently with the execution and delivery of this Agreement, Borrower shall execute and deliver to Lender schedules of in form and substance satisfactory to the Lender. Thereafter supplemental schedules shall be delivered according to the following schedule:

CONDITIONS PRECEDENT TO EACH ADVANCE. Lender’s obligation to make the initial Advance and each subsequent Advance under this Agreement shall be subject to the fulfillment to Lender’s satisfaction of all of the conditions set forth in this Agreement and in the Related Documents..

Loan Documents. Borrower shall provide to Lender the following documents for the Loan: (1) the Note; (2) Security Agreements granting to Lender security interests in the Collateral; (3) financing statements and all other documents perfecting Lender’s Security Interests; (4) evidence of insurance as required below; (5) together with all such Related Documents as Lender may require for the Loan; all in form and substance satisfactory to Lender and Lender’s counsel.

Borrower’s Authorization. Borrower shall have provided in form and substance satisfactory to Lender properly certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents. In addition, Borrower shall have provided

BUSINESS LOAN AGREEMENT (ASSET BASED)

(Continued)

Loan No: 281007262

such other resolutions, authorizations, documents and instruments as Lender or its counsel, may require.

Fees and Expenses Under This Agreement. Borrower shall have paid to Lender all fees, costs, and expenses specified in this Agreement and the Related Documents as are then due and payable.

Representations and Warranties. The representations and warranties set forth in this Agreement, in the Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct.

No Event of Default. There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement or under any Related Document.

REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists:

Organization. Borrower is a corporation for profit which is, and at all times shall be, duly organized, validly existing, and in good standing under and by virtue of the laws of the State of Colorado. Borrower is duly authorized to transact business in all other states in which Borrower is doing business, having obtained all necessary filings, governmental licenses and approvals for each state in which Borrower is doing business. Specifically, Borrower is, and at all times shall be, duly qualified as a foreign corporation in all states in which the failure to so qualify would have a material adverse effect on its business or financial condition. Borrower has the full power and authority to own its properties and to transact the business in which it is presently engaged or presently proposes to engage. Borrower maintains its principal office at 7007 WINCHESTER CIR, STE 200, BOULDER, CO 80301. Unless Borrower has designated otherwise in writing, this is the principal office at which Borrower keeps its books and records including its records concerning the Collateral. Borrower will notify Lender prior to any change in the location of Borrower’s state of organization or any change in Borrower’s name. Borrower shall do all things necessary to preserve and to keep in full force and effect its existence, rights and privileges, and shall comply with all regulations, rules, ordinances, statutes, orders and decrees of any governmental or quasi-governmental authority or court applicable to Borrower and Borrower’s business activities.

Assumed Business Names. Borrower has filed or recorded all documents or filings required by law relating to all assumed business names used by Borrower. Excluding the name of Borrower, the following is a complete list of all assumed business names under which Borrower does business: None.

Authorization. Borrower’s execution, delivery, and performance of this Agreement and all the Related Documents have been duly authorized by all necessary action by Borrower, and do not conflict with, result in a violation of, or constitute a default under (1) any provision of (a) Borrower’s articles of incorporation or organization, or bylaws, or (b) any agreement or other instrument binding upon Borrower or (2) any law, governmental regulation, court decree, or order applicable to Borrower or to Borrower’s properties.

Financial Information. Each of Borrower’s financial statements supplied to Lender truly and completely disclosed Borrower’s financial condition as of the date of the statement, and there has been no material adverse change in Borrower’s financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements.

Legal Effect. This Agreement constitutes, and any instrument or agreement Borrower is required to give under this Agreement when delivered will constitute legal, valid, and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms.

Properties. Except as contemplated by this Agreement or as previously disclosed in Borrower’s financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower’s properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower’s properties are titled in Borrower’s legal name, and Borrower has not used or filed a financing statement under any other name for at least the last five (5) years.

Hazardous Substances. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (1) During the period of Borrower’s ownership of the Collateral, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance by any person on, under, about or from any of the Collateral. (2) Borrower has no knowledge of, or reason to believe that there has been (a) any breach or violation of any Environmental Laws; (b) any use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance on, under, about or from the Collateral by any prior owners or occupants of any of the Collateral; or (c) any actual or threatened litigation or claims of any kind by any person relating to such matters. (3) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the Collateral shall use, generate, manufacture, store, treat, dispose of or release any Hazardous Substance on, under, about or from any of the Collateral; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation all Environmental Laws. Borrower authorizes Lender and its agents to enter upon the Collateral to make such inspections and tests as Lender may deem appropriate to determine compliance of the Collateral with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower’s expense and for Lender’s purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower’s due diligence in investigating the Collateral for hazardous waste and Hazardous Substances. Borrower hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (2) agrees to indemnify, defend, and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release of a hazardous waste or substance on the Collateral. The provisions of this section of the Agreement, including the obligation to indemnify and defend, shall survive the payment of the Indebtedness and the termination, expiration or satisfaction of this Agreement and shall not be affected by Lender’s acquisition of any Interest in any of the Collateral, whether by foreclosure or otherwise.

Litigation and Claims. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower’s financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing.

Taxes. To the best of Borrower’s knowledge, all of Borrower’s tax returns and reports that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided.

Lien Priority. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower’s Loan and Note, that would be prior or that may in any way be superior to Lender’s Security Interests and rights in and to such Collateral.

Binding-Effect. This Agreement, the note, all SecurityAgreements(if any), and allRelated Documents are binding upon the signers thereof, as well as upon their successors, representatives and assigns, and are legally enforceable in accordance with their respective terms.

AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, so long as this Agreement remains in effect, Borrower will:

Notices of Claims and Litigation. Promptly inform Lender in writing of (1) all material adverse changes in Borrower’s financial condition, and (2) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor.

Financial Records. Maintain its books and records in accordance with GAAP, applied on a consistent basis, and permit Lender to examine and audit Borrower’s books and records at all reasonable times.

Financial Statements. Furnish Lender with the following:

Annual Statements. As soon as available, but in no event later than ninety (90) days after the end of each fiscal year, Borrower’s balance sheet and income statement for the year ended, audited by a certified public accountant satisfactory to Lender.

Interim Statements. As soon as available, but in no event later than thirty (30) days after the end of each fiscal quarter, Borrower’s balance sheet and profit and loss statement for the period ended, prepared by Borrower.

Additional Requirements. Such other information as Lender may from time to time reasonably request relating to the borrower.

All financial reports required to be provided under this Agreement shall be prepared in accordance with GAAP, applied on a consistent basis, and certified by Borrower as being true and correct.

2

BUSINESS LOAN AGREEMENT (ASSET BASED)

(Continued)

Loan No: 281007262

Additional Information. Furnish such additional information and statements, as Lender may request from time to time.

Financial Covenants and Ratios.  Comply with the following covenants and ratios:

Working Capital Requirements. Borrower shall comply with the following working capital ratio requirements:

Current Ratio. Maintain a Current Ratio in excess of 1.250 to 1.000. The term “Current Ratio” means Borrower’s total Current Assets divided by Borrower’s total Current Liabilities.

Tangible Net Worth Requirements. Other Net Worth requirements are as follows: Total Liabilities to Tangible Net Worth. Customer’s “Leverage Ratio” shall not at any time exceed 1.0 to 1.0. For purposes hereof, “Leverage Ratio” shall mean the ratio of (i) Customer’s total liabilities less any subordinated debt of customer, to (ii) the sum of Customer’s Tangible Net Worth plus any subordinated debt of customer. The term “Tangible Net Worth” shall mean Customer’s net worth as shown on Customer’s regular financial statements prepared in accordance with GAAP, including net prepaid distribution rights, but excluding an amount equal to: (i) any Intangible Assets, and (ii) any amounts now or hereafter directly or indirectly owing to Customer by officers, shareholders or affiliates of Customer. “Intangible Assets” shall mean the total amount of goodwill, patents, trade names, trade or service marks, copyrights, experimental expense, organization expense, un-amortized debt discount and expense, the excess of cost of shares acquired over book value of related assets, and such other assets as are properly classified as “intangible assets” of the Customer determined in accordance with GAAP. Subordinated debt shall mean any debt of Customer for borrowed money which is subordinated in right of payment and is payable on terms and conditions junior to Lender, and in a form and manner acceptable to Lender.

Additional Requirements. Additional Outside Debt.

No additional debt in excess of 1,000,000.00 will be allowed without prior written approval/consent of Lender.

Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct.

Insurance. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower’s properties and operations, in form, amounts, coverages and with insurance companies acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least fifteen (15) days prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such lender’s loss payable or other endorsements as Lender may require.

Insurance Reports. Furnish to Lender, upon request of Lender, reports on, each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (1) the name of the Insurer; (2) the risks insured; (3) the amount of the policy; (4) the properties insured; (5) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (6) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower.

Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements.

Loan Proceeds. Use all Loan proceeds solely for Borrower’s business operations, unless specifically consented to the contrary by Lender in writing.

Taxes, Charges and Liens. Pay and discharge when due all of its Indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower’s properties, income, or profits. Provided however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (1) the legality of the same shall be contested in good faith by appropriate proceedings, and (2) Borrower shall have established on Borrower’s books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with GAAP.

Performance. Perform and comply, in a timely manner, with all terms, conditions, and provisions set forth in this Agreement, in the Related Documents, and in all other instruments and agreements between Borrower and Lender. Borrower shall notify Lender immediately in writing of any default in connection with any agreement.

Operations. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner.

Environmental Studies. Promptly conduct and complete, at Borrower’s expense, all such investigations, studies, samplings and testings as may be requested by Lender or any governmental authority relative to any substance, or any waste or by-product of any substance defined as toxic or a hazardous substance under applicable federal, state, or local law, rule, regulation, order or directive, at or affecting any property or any facility owned, leased or used by Borrower.

Compliance with Governmental Requirements. Comply with all laws, ordinances, and regulations, now or hereafter in effect, of all governmental authorities applicable to the conduct of Borrower’s properties, businesses and operations, and to the use or occupancy of the Collateral, including without limitation, the Americans With Disabilities Act. Borrower may contest in good faith any such law, ordinance, or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Borrower has notified Lender in writing prior to doing so and so long as, in Lender’s sole opinion, Lender’s interests in the Collateral are not jeopardized. Lender may require Borrower to post adequate security or a surety bond, reasonably satisfactory to Lender, to protect Lender’s interest.

Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower’s other properties and to examine or audit Borrower’s books, accounts, and records and to make copies and memoranda of Borrower’s books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower’s expense.

Compliance Certificates. Unless waived in writing by Lender, provide Lender at least annually, with a certificate executed by Borrower’s chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement.

Environmental Compliance and Reports.  Borrower shall comply in all respects with any and all Environmental Laws; not cause-or permit-to exist, as a result of an intentional or unintentional action or omission on Borrower’s part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower’s part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources.

Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, assignments, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests.

LENDER’S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender’s interest in the Collateral or if Borrower fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Borrower’s failure to discharge or pay when due any amounts Borrower is required to discharge or pay under this Agreement or any Related Documents, Lender on Borrower’s behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on any Collateral and paying all costs for insuring, maintaining and preserving any Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Borrower. All such expenses will become a part of the Indebtedness and, at Lender’s option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note’s maturity.

3

BUSINESS LOAN AGREEMENT (ASSET BASED)

(Continued)

Loan No: 281007262

NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender:

Indebtedness and Liens. (1) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (2) sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower’s assets (except as allowed as Permitted Liens), or (3) sell with recourse any of Borrower’s accounts, except to Lender.

Continuity of Operations. (1) Engage in any business activities substantially different than those in which Borrower is presently engaged, (2) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, or (3) pay any dividends on Borrower’s stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a “Subchapter S Corporation” (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of Borrower’s stock, or purchase or retire any of Borrower’s outstanding shares or alter or amend Borrower’s capital structure.

Loans, Acquisitions and Guaranties. (1) Loan, invest in or advance money or assets to any other person, enterprise or entity, (2) purchase, create or acquire any interest in any other enterprise or entity, or (3) incur any obligation as surety or guarantor other than in the ordinary course of business.

Agreements. Borrower will not enter into any agreement containing any provisions which would be violated or breached by the performance of Borrower’s obligations under this Agreement or in connection herewith.

CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (A) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (B) Borrower or any Guarantor dies, becomes incompetent or becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (C) there occurs a material adverse change in Borrower’s financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (D) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor’s guaranty of the Loan or any other loan with Lender; or (E) Lender in good faith deems itself insecure, even though no Event of Default shall have occurred.

RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower’s accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any and all such accounts, and, at Lender’s option, to administratively freeze all such accounts to allow Lender to protect Lender’s charge and setoff rights provided in this paragraph.

DEFAULT. Each of the following shall constitute an Event of Default under this Agreement:

Payment Default. Borrower fails to make any payment when due under the Loan.

Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower.

Default in Favor of Third Parties. Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower’s or any Grantor’s property or Borrower’s or any Grantor’s ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents.

False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower’s behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.

Insolvency. The dissolution or termination of Borrower’s existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower’s property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower.

Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason.

Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the Loan. This includes a garnishment of any of Borrower’s accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.

Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness.

Change in Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower.

Adverse Change. A material adverse change occurs in Borrower’s financial condition, or Lender believes the prospect of payment or performance of the Loan is impaired.

Insecurity. Lender in good faith believes itself insecure.

EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make further Loan Advances or disbursements), and, at Lender’s option, all Indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the “Insolvency” subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender’s rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender’s right to declare a default and to exercise its rights and remedies.

NO PURCHASE OF SECURITIES. Borrower agrees the proceeds of the credit facility may not be used to purchase or carry securities.

ACQUISITION. In the event the borrower or any of the subsidaries are acquired or purchased by a third party, the facility will be due and payable.

LOANS TO AFFILIATED PERSONS AND ENTITIES. Borrower agrees, without prior written consent of First Community bank, no loans or advances directly or indirectly made by Customer to affiliated person or entities.

MATERIAL CHANGE IN CLIENT BASE. Borrower agrees, no adverse, material change in the current client base as it related to the Borrowers largest clients, i.e. EchoStar Communications, Time Warner Broadcasting, Comcast and DirecTV.

ADDITIONAL OUTSIDE DEBT. Borrower agrees no additional debt in excess of $1MM will be allowed without prior First Community Bank approval.

CONTINUITY. Customer will continue to maintain its business, existence, ownership and good standing.

PROPERTY AND CASUALTY INSURANCE. Borrower shall maintain sufficient and satisfactory insurance, listing FCB as Mortgagee, against the subject property at all times. Borrower shall provide proof of insurance as the bank may reasonably request.

OTHER INFORMATION. Borrower agrees such other information as Lender may from time to time reasonably request relating to Customer or any Guarantor.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement:

4

BUSINESS LOAN AGREEMENT (ASSET BASED)

(Continued)

Loan No: 281007262

Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.

Attorneys’ Fees; Expenses. Borrower agrees to pay upon demand all of Lender’s reasonable costs and expenses, including Lender’s attorneys’ fees and Lender’s legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Borrower shall pay the reasonable costs and expenses of such enforcement. Costs and expenses include Lender’s attorneys’ fees and legal expenses whether or not there is a lawsuit, including attorneys’ fees and legal expenses far bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also shall pay all court costs and such additional fees as may be directed by the court.

Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement.

Consent to Loan Participation. Borrower agrees and consents to Lender’s sale or transfer, whether now or later, of one or more participation interests in the Loan to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy Borrower may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loan and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower’s obligation under the Loan irrespective of the failure or insolvency of any holder of any interest in the Loan. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender.

Governing Law. This Agreement will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Colorado without regard to its conflicts of law provisions. This Agreement has been accepted by Lender in the State of Colorado.

Choice of Venue. If there is a lawsuit, Borrower agrees upon Lender’s request to submit to the jurisdiction of the courts of Jefferson County, State of Colorado.

No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender’s right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender’s rights or of any of Borrower’s or any Grantor’s obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender.

Notices. Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party’s address. For notice purposes, Borrower agrees to keep Lender informed at all times of Borrower’s current address. Unless otherwise provided or required by law, if there is more than one Borrower, any notice given by Lender to any Borrower is deemed to be notice given to all Borrowers.

Severability. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement.

Subsidiaries and Affiliates of Borrower. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word “Borrower” as used in this Agreement shall include all of Borrower’s subsidiaries and affiliates. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any of Borrower’s subsidiaries or affiliates.

Successors and Assigns. All covenants and agreements by or on behalf of Borrower contained in this Agreement or any Related Documents shall bind Borrower’s successors and assigns and shall inure to the benefit of Lender and its successors and assigns. Borrower shall not, however, have the right to assign Borrower’s rights under this Agreement or any interest therein, without the prior written consent of Lender.

Survival of Representations and Warranties. Borrower understands and agrees that in extending Loan Advances, Lender is relying on all representations, warranties, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement or the Related Documents. Borrower further agrees that regardless of any investigation made by Lender, all such representations, warranties and covenants will survive the extension of Loan Advances and delivery to Lender of the Related Documents, shall be continuing in nature, shall be deemed made and redated by Borrower at the time each Loan Advance is made, and shall remain in full force and effect until such time as Borrower’s Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur.

Time is of the Essence. Time is of the essence in the performance of this Agreement.

DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. Accounting words and terms not otherwise defined in this Agreement shall have the meanings assigned to them in accordance with generally accepted accounting principles as in effect on the data of this Agreement:

Advance. The word “Advance” means a disbursement of Loan funds made, or to be made, to Borrower or on Borrower’s behalf under the terms and conditions of this Agreement.

Agreement. The word “Agreement” means this Business Loan Agreement (Asset Based), as this Business Loan Agreement (Asset Based) may be amended or modified from time to time, together with all exhibits and schedules attached his Business Loan Agreement (Asset Based) from time to time.

Borrower. The word “Borrower” means NEW FRONTIER MEDIA, INC. and includes all co-signers and co-makers signing the Note and all their successors and assigns.

Borrowing Base. The words “Borrowing Base” mean Borrowing Base and Compliance Certificate- submission of the company’s borrowing base and compliance certificate, to be submitted with 30 days of each month end. The borrowing base certificate will be signed by CEO, Michael Weiner, is required to certify the monthly compliance certificate.

Eligible accounts receivable are defined as accounts due and payable to borrower, that are less than 90 days past the stated due date of the invoice. Eligible accounts receivable additionally exclude accounts related to the ôreppedō accounts of MRG. A “repped” account is where MRG represents a mainstream producer as the sales agent for the distribution of movies, including international sales. As a result the entire receivable is not retained by MRG, with a portion passing through to the producer. Additionally, the borrowing base will be adjusted so that no one client can comprise in excess of fifty (50%) percent of the total borrowing base at any one time..

Business Day. The words “Business Day” mean a day on which commercial banks are open in the State of Colorado.

Collateral. The word “Collateral” means all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, collateral mortgage, deed of trust, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor’s lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. The word Collateral also includes without limitation all collateral described in the Collateral section of this Agreement.

5

BUSINESS LOAN AGREEMENT (ASSET BASED)

(Continued)

Loan No: 281007262

Environmental Laws.  The words “Environmental Laws” mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. (“CERCLA”), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 (“SARA”), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto.

Event of Default. The words “Event of Default” mean any of the events of default set forth in this Agreement in the default section of this Agreement.

Expiration Date. The words “Expiration Date” mean the date of termination of Lender’s commitment to lend under this Agreement.

GAAP. The word “GAAP” means generally accepted accounting principles.

Grantor. The word “Grantor” means each and all of the persons or entities granting a Security Interest in any Collateral for the Loan, including without limitation all Borrowers granting such a Security Interest.

Guarantor. The word “Guarantor” means any guarantor, surety, or accommodation party of any or all of the Loan.

Guaranty. The word “Guaranty” means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note.

Hazardous Substances. The words “Hazardous Substances” mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words “Hazardous Substances” are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term “Hazardous Substances” also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos.

Indebtedness. The word “Indebtedness” means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents.

Lender. The word “Lender” means First Community Bank, its successors and assigns.

Loan. The word “Loan” means any and all loans and financial accommodations from Lender to Borrower whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time.

Note. The word “Note” means the Promissory Note or Agreement dated July 1, 2008 in the original principal amount of $9,000,000.00 from Borrower/Grantor to Lender together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, additions of and substitutions for the Promissory Note or Agreement.

Permitted Liens. The words “Permitted Liens” mean (1) liens and security interests securing Indebtedness owed by Borrower to Lender; (2) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (3) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (4) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled “Indebtedness and Liens”; (5) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (6) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower’s assets.

Primary Credit Facility. The words “Primary Credit Facility” mean the credit facility described in the Line of Credit section of this Agreement.

Related Documents. The words “Related Documents” mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Loan.

Security Agreement. The words “Security Agreement” mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest.

Security Interest. The words “Security Interest” mean, without limitation, any and all types of collateral security, present and future, whether in the form of a lien, charge, encumbrance, mortgage, deed of trust, security deed, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor’s lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever whether created by law, contract, or otherwise.

BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT (ASSET BASED) AND BORROWER AGREES TO ITS TERMS. THIS BUSINESS LOAN AGREEMENT (ASSET BASED) IS DATED JUNE 15, 2009.

BORROWER:
NEW FRONTIER MEDIA, INC
By:	/s/ Michael Weiner	By:	/s/ Grant Williams
	MICHAEL WEINER, CEO of NEW FRONTIER MEDIA, INC.		GRANT WILLIAMS, CFO of NEW FRONTIER MEDIA, INC.

LENDER:

FIRST COMMUNITY BANK

By:	/s/ Samantha Borelli
	Authorized Signer

[ILLEGIBLE]

6

EX-31.01

Exhibit 31.01

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.;

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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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 provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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 the 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: August 7, 2009

/s/ MICHAEL WEINER

Michael Weiner

Chief Executive Officer

(Principal Executive Officer)

EX-31.02

Exhibit 31.02

CERTIFICATION

I, Grant Williams, 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.;

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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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 provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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 the 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: August 7, 2009

/s/ GRANT WILLIAMS

Grant Williams

Chief Financial Officer

(Principal Financial Officer)

EX-32.01

Exhibit 32.01

WRITTEN STATEMENT OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. Section 1350)

The undersigned, the Chief Executive Officer of New Frontier Media, Inc., a Colorado company (the “Company”), hereby certifies that, to his knowledge on the date hereof:

(a) the Form 10-Q of the Company for the fiscal quarter ended June 30, 2009, filed on the date hereof with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ MICHAEL WEINER

Michael Weiner

Chief Executive Officer

August 7, 2009

EX-32.02

Exhibit 32.02

WRITTEN STATEMENT OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. Section 1350)

The undersigned, the Chief Financial Officer of New Frontier Media, Inc., a Colorado company (the “Company”), hereby certifies that, to his knowledge on the date hereof:

(a) the Form 10-Q of the Company for the fiscal quarter ended June 30, 2009, filed on the date hereof with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ GRANT WILLIAMS

Grant Williams

Chief Financial Officer

August 7, 2009