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

INTRODUCTION

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

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

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

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

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

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º Contractual Obligations and Off-Balance Sheet Arrangements. Overview of contractual obligations, commitments, off-balance sheet arrangements and contingent liabilities outstanding as of March 31, 2012, including expected payment schedule.

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

This annual report on Form 10-K includes forward-looking statements within the meaning of the safe harbor provisions of Section 27A of the Securities Act, and Section 21E of the Exchange Act. All statements regarding trend analysis and our expected financial position and operating results, business strategy, financing plans and the outcome of contingencies are forward-looking statements. Forward-looking statements are also identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "plan," "may," "should," "could," "will," "would," and similar expressions or the negative of these terms or other comparable terminology. The forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those set forth or implied by any forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to, our ability to:
1) retain our four major customers and related revenue that accounted for approximately 50% of our total revenue during the fiscal year ended March 31, 2012; 2) maintain the license fee structures currently in place with our customers; 3) maintain PPV channel and VOD shelf space with existing customers;
4) compete effectively with our current competitors and potential future competitors that distribute adult content to U.S. and international cable MSOs and DBS providers; 5) successfully compete against other forms of adult and non-adult entertainment such as pay and free adult-oriented internet websites and adult-oriented premium channel content; 6) produce film content that is well received by our Film Production segment's customers; 7) comply with current and future regulatory developments both domestically and internationally; and
8) retain our key executives. The foregoing list of factors is not exhaustive. A more complete list of factors that might cause such differences include, but are not limited to, those discussed in the Risk Factors section of this Form 10-K.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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OVERVIEW

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

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

Transactional TV Segment

The Transactional TV segment is focused on the distribution of content to consumers via MSO and DBS customers' VOD and PPV services. We earn revenue by receiving a percentage (sometimes referred to as a split) of the total retail purchase price paid by consumers to purchase our content on customers' VOD and PPV platforms. Revenue growth could occur if we launch our services to new cable MSOs or DBS providers, which would primarily occur in international markets; when the number of subscribers for customers where our services are currently distributed increases, assuming the new subscribers are not a result of consumers switching from one provider to the next; when we launch additional services or replace our competitors' services on existing customer cable and DBS platforms; or 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 continued global economic downturn; if consumers migrate to other forms of low-cost or free adult entertainment such as pay and free internet websites; if our customers pay us a smaller percentage of the consumer retail purchase price; if additional competitive channels are added to our customers' platforms; if our existing customers remove or replace our services on their platform; or if the volume of consumer buys of lower priced content is not significant enough to offset the impact of the lower prices.

The Transactional TV segment has experienced declining revenue during each of the two fiscal years ended March 31, 2012. We believe that the decline has been due to a combination of factors including a) increased competition from free and low-cost internet websites, and b) a decline in consumer purchases of our content in response to the global economic downturn. Although we are taking steps that we believe will help stabilize the Transactional TV segment's performance as discussed

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below, it is reasonably possible that competition from internet websites as well as the impact of the continued global economic downturn could cause the Transactional TV segment's revenue to further decline. A further decline in the segment's revenue could have a materially adverse impact on our consolidated financial position and results of operations. Although we believe that competition from internet websites and the global deterioration of the economy has negatively impacted the Transactional TV segment's results, it is not possible for us to precisely quantify or reasonably estimate the financial impact of these developments because the information is unavailable and cannot be reasonably obtained.

During fiscal year 2012, the Transactional TV segment's performance was unfavorable relative to our expectations due to the above noted impact of increased competition from free and low-cost internet websites as well as a continuation of lower consumer purchases of our content. Based on our assessment of the fiscal year 2012 underperformance and certain other industry factors, we adjusted downward our five year forecast for the segment. These downward adjustments resulted in a goodwill impairment charge for the segment of approximately $3.7 million, and the segment had no further goodwill assets recorded as of March 31, 2012.

In an effort to address the Transactional segment's declining revenue, we have invested in initiatives to stabilize the segment such as developing new and unique content packages as well as investing in sales and support staff to execute our international growth strategy. We have also focused on maintaining our competitive market position by offering a wide range of high-quality content as well as adjusting our content mix and distributing new content packages. We are also executing a strategy of providing low-cost, short-form content to consumers in an effort to compete more effectively with free and low-cost internet websites. We previously performed market tests on the distribution of lower priced content to estimate whether an increase in customer buys would be sufficient to offset the lower per buy revenue in order to maintain or increase revenue. The results of those tests were favorable, so we began executing the low-priced content strategy. If the increase in customer buys is not sufficient to offset the lower per buy revenue, revenue could further decline resulting in a negative impact on our financial position and results of operations.

Our growth efforts for the Transactional TV segment continue to focus on increasing the revenue we generate from international markets. We currently distribute content in international markets including North America, Europe, Latin America and Asia. The Transactional TV segment's international revenue during the fiscal years ended March 31, 2012 and 2011 was approximately $6.2 million and $5.8 million, respectively. The large majority of the international revenue within the Transactional TV segment has occurred though the distribution of content to VOD platforms. Although the rate of international revenue growth has been lower than expected, we believe there will be opportunities to improve the international revenue rate of growth in the future primarily through new and expanded distribution in Latin America.

During fiscal year 2012, the Transactional TV segment incurred higher costs in an effort to improve its domestic and international revenue results. The increase in expenses occurred within various areas of the Transactional TV segment's cost structure including higher transport costs; higher employee costs for sales, programming, and content production; higher facility and maintenance costs from leasing a new facility; and higher depreciation costs for the new facility tenant improvements and other acquired equipment. We expect a continuation of these expenses in future periods in order to support our domestic revenue stabilization and international expansion efforts. If our attempts to increase revenue through these efforts are not successful or occur at a slower pace than expected, the segment could experience a further decline in gross and operating margins.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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Transactional TV segment revenue during fiscal year 2012 as compared to the prior fiscal year experienced the following trends:

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º Domestic VOD revenue, which represented approximately 47%, or $15.9 million, of the Transactional TV segment's total revenue during fiscal year 2012, declined by 8% as compared to the prior year results. We believe the decline in revenue was due to a combination of factors including an increase in the availability of free and low-cost adult internet websites as well as the impact of lower consumer discretionary spending in response to the challenging economic conditions. We are continuing to pursue strategies that we believe will stabilize the decline in domestic VOD revenue including introducing new content packages and lower priced film assets; however, these strategies may be unsuccessful, in which case the trend of declining VOD revenue could continue.

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º Domestic PPV revenue, which represented approximately 33%, or $11.2 million, of the Transactional TV segment's total revenue during fiscal year 2012, declined by approximately 9% as compared to the prior year results. We believe the decline in revenue was due to the impact for free and low-cost adult internet websites as well as lower consumer discretionary spending. Domestic PPV revenue also declined due to the impact of increased competition on the second largest DBS platform in the U.S. Our strategies to improve the domestic PPV revenue include the introduction of new PPV channels, the introduction of a new, low-priced film asset channel, and the distribution of new and unique content on existing channels. If these strategies are unsuccessful, the trend of declining PPV revenue could continue.

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º International revenue was $6.2 million in fiscal year 2012 and increased approximately 5% as compared to the prior year. Approximately 72% of the international revenue generated in fiscal year 2012 was from the distribution of content to VOD platforms. International revenue was higher primarily as a result of new customer launches, an increase in the quantity of content distributed to existing customers, and a general improvement in our content performance with existing customers. Although the growth in international revenue was positive, the rate of growth was lower than expected primarily due to launches that were later than expected as well as lower than expected buy rates with certain new launches. Despite the challenges, we expect to realize continued growth from international revenue in future periods.

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

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

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

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

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º reductions in opportunities to gain domestic market share due to our competitors' efforts to maintain market share including providing content at lower revenue percentages and in limited cases, free content and channels;

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

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º increased pressure from both domestic and international customers that threaten to remove one or more of our channels or content from their platform if we do not reduce the revenue percentages we receive;

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

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º continued product commoditization.

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

All the above mentioned challenges and risks, and others that we may not have identified, could have a material adverse impact on our business. We are executing initiatives as discussed above in order to mitigate the impact of these risks and challenges. However, not all the risks and challenges can be managed by us because the ultimate outcome will be dependent upon the actions of other parties such as our customers.

During fiscal year 2013 and future periods, we expect to focus our efforts within the Transactional TV segment on achieving the below objectives:

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

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º improving the value proposition for consumers, such as reducing the retail price of our content to increase buy volume and providing over-the-top services;

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

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

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º complementing our existing core products with other value-added products and services including subscription VOD and over-the-top services;

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

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

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º improving the mix of programming.

Film Production Segment

The Film Production segment has historically derived the majority of its revenue from two principal businesses: (1) the production and distribution of original motion pictures including erotic thrillers and horror movies (collectively, owned content); and (2) the distribution of third party films where we act as a sales agent for the product (collectively, repped content). This segment also

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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periodically provides contract film production services to certain major Hollywood studios (producer-for-hire arrangements).

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

We generate repped revenue through sales agency arrangements whereby we earn a sales commission and marketing fees by selling mainstream films on behalf of film producers. The Film Production segment has established relationships with independent mainstream filmmakers and represents these filmmakers' movies primarily through Lightning Entertainment Group, Inc. We plan to further focus our efforts on obtaining higher quality content in an effort to improve our repped revenue in fiscal year 2013.

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

Film Production segment revenue during fiscal year 2012 as compared to the prior fiscal year experienced the following trends:

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º Owned content revenue declined primarily because the prior fiscal year included approximately $1.8 million of revenue from the completion of an episodic series with a premium channel customer, and no similar revenue was realized in fiscal year 2012. Revenue was also lower as a result of a $0.3 million decline in VOD revenue, and we believe the decline was due to lower consumer discretionary spending in response to the depressed economic conditions. The declines in revenue were partially offset by higher revenue from an increase in the execution and completion of one-time distribution sales agreements. Although we did not complete an episodic series arrangement in fiscal year 2012, we did produce a series in fiscal year 2012 and had related cash outflows of approximately $1.6 million. We expect to deliver and recognize revenue of approximately $2.3 million from this arrangement in fiscal year 2013.

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º Repped content revenue declined primarily due to the execution and completion of fewer distribution sales agreements as compared to the prior fiscal year.

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º Producer-for-hire and other revenue declined during fiscal year 2012 because we completed and recognized revenue of approximately $4.0 million from producer-for-hire arrangements during fiscal year 2011, and no similar producer-for-hire revenue was recognized during fiscal year 2012. We do not currently have any executed or anticipated producer-for-hire arrangements for fiscal year 2013, but we may pursue such opportunities in the future.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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When considering the future operating results of the Film Production segment, we believe the following challenges and risks could adversely impact this segment's operating results:

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º declines in one-time owned and repped content distribution sales arrangements due to a reduction in our customers' content budgets or our inability to obtain content that is well received by the market;

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º adverse impacts to our business from a continuation of reduced consumer discretionary spending as a result of unfavorable economic conditions;

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º declines in new and existing consumer VOD and PPV buys of our erotic owned content due to a migration of customers to free or low-cost adult internet websites;

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

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

All of the above mentioned challenges and risks, and others that we may not have identified, could have a material adverse impact on our business. We are executing initiatives as discussed herein in order to mitigate the impact of these risks and challenges. However, not all the risks and challenges can be managed by us because the ultimate outcome will be dependent upon the actions of other parties such as our customers.

During fiscal year 2013 and in future periods, we expect to focus our efforts within the Film Production segment on achieving the below objectives:

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

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

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

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º executing new owned content episodic series arrangements with premium movie channels.

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

During fiscal year 2012, certain owned content films underperformed as compared to our expectations. We therefore adjusted downward the expected future performance of those films, which resulted in film cost impairment charges of $0.2 million. We also recorded an increase in the allowance for unrecoverable accounts of $0.6 million because certain recoupable costs and producer advances associated with repped content films obtained prior to fiscal year 2010 were not expected to be recovered. We have a history of impairing film costs and increasing our allowance for unrecoverable accounts, and it is reasonably possible that we will incur further impairments and charges in the future.

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Direct-to-Consumer Segment

Our Direct-to-Consumer segment generates revenue primarily by selling memberships to our adult consumer websites. We have experienced declines in the Direct-to-Consumer segment revenue, which we believe is due to a decline in . . .