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

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.

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             Percent
                                    June 30,                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.

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              Percent
                                     June 30,                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 )           #

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.

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.

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              Percent
                                     June 30,                 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 %

^ 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

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       Percent
                         June 30,          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.