The man, who cannot be named to protect the identity of his two children, told the young boy, while he was wearing no pants or underwear, to act in a sexual way towards the female friend on August 21 last year at the Albion Park home he shared with his young family.

The woman objected, saying to the man, "don't tell him to do that".

However, she told police the boy tried to do it, prompting the man to laugh and say "good boy".

The incident was reported to Wollongong police and the man charged with a single count of inciting a victim under the age of 10 to commit an indecent act.

The man was initially denied court bail but later released on strict conditions.

His parents agreed to put up $25,000 surety to ensure he abided by his bail conditions.

Wollongong District Court judge Paul Conlon on Tuesday reduced the man's reporting to twice a week and deleted the surety. He indicated the man would be unlikely to be jailed for the offence when he was eventually sentenced, however, denounced his conduct.

"He's obviously a very misguided individual, it's a shame [he's] responsible for children," Judge Conlon said.