**United StatesSecurities and Exchange Commission**

**Washington, D.C. 20549**

**FORM 10-K**

**x**                              AnnualReport Pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934

**For the fiscal year ended**December 31, 2006

**or**

**o**                                 TransitionReport Pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934

**For thetransition period from                         to**

**Commission file number:** 000-17287

**OUTDOOR CHANNELHOLDINGS, INC.**

(Exact name of registrant as specified inits charter)

| **Delaware**                                                    |   | **33-0074499**                       |
|-----------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer Identification No.) |

 

**43445Business Park Dr., Suite 113, Temecula, California 92590**

(Addressof principal executive offices) (Zip Code)

Registrant’stelephone number, including area code: **(951)699-4749**

Securitiesregistered pursuant to Section 12 (b) of the Act:

|                                | **Title of Each Class** | ** **               |   | ** ** | **Name of Each Exchange on Which Registered** | ** ** |
|--------------------------------|-------------------------|--------------------------|--------|------------|-----------------------------------------------|------------|
| Common Stock, $0.001 par value |                    | The Nasdaq Global Market |

 

Securities registered pursuant to Section 12 (g) of theAct: **None**

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes  o  No  x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act. Yes  o  No  x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes  x  No  o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o  Accelerated filer  x  Non-accelerated filer  o

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

The aggregate market valueof voting stock held by non-affiliates of the registrant as of June 30,2006 was approximately $123.7 million computed by reference to the closingprice on such date.

On March 20, 2007, thenumber of shares of common stock outstanding of the registrant’s common stockwas 25,842,712.

**DOCUMENTS INCORPORATED BYREFERENCE**

The information required byPart III of this report, to the extent not set forth herein, isincorporated herein by reference from the registrant’s definitive proxystatement relating to the Annual Meeting of Stockholders to be held in 2007,which definitive proxy statement shall be filed with the Securities andExchange Commission within 120 days after the end of the fiscal year to whichthis report relates.

 

----

**OUTDOOR CHANNEL HOLDINGS, INC.FORM 10-KTABLE OF CONTENTS**

|               |   | PART I                                                                                                             |   |   |   |
|---------------|--------|-------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| Item 1.  |   | Business                                                                                                                |   | 3      |   |
| Item 1A. |   | Risk Factors                                                                                                            |   | 18     |   |
| Item 1B. |   | Unresolved Staff  Comments                                                                                              |   | 31     |   |
| Item 2.  |   | Properties                                                                                                              |   | 31     |   |
| Item 3.  |   | Legal Proceedings                                                                                                       |   | 32     |   |
| Item 4.  |   | Submission of  Matters to a Vote of Security Holders                                                                    |   | 32     |   |
|          |   | PART II                                                                                                            |   |   |   |
| Item 5.  |   | Market for the  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |   | 33     |   |
| Item 6.  |   | Selected Financial  Data                                                                                                |   | 34     |   |
| Item 7.  |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                             |   | 36     |   |
| Item 7A. |   | Quantitative and  Qualitative Disclosures About Market Risk                                                             |   | 57     |   |
| Item 8.  |   | Financial  Statements and Supplementary Data                                                                            |   | 58     |   |
| Item 9.  |   | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                              |   | 96     |   |
| Item 9A. |   | Controls and  Procedures                                                                                                |   | 96     |   |
| Item 9B. |   | Other Information                                                                                                       |   | 99     |   |
|          |   | PART III                                                                                                           |   |   |   |
| Item 10. |   | Directors,  Executive Officers and Corporate Governance                                                                 |   | 100    |   |
| Item 11. |   | Executive  Compensation                                                                                                 |   | 100    |   |
| Item 12. |   | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                        |   | 100    |   |
| Item 13. |   | Certain  Relationships and Related Transactions, and Director Independence                                              |   | 100    |   |
| Item 14. |   | Principal  Accountant Fees and Services                                                                                 |   | 100    |   |
|          |   | PART IV                                                                                                            |   |   |   |
| Item 15. |   | Exhibits and  Financial Statement Schedules                                                                             |   | 101    |   |
| SIGNATURES    |   | 105                                                                                                                     |   |

 

2

----

**PART I**

**ITEM 1.**                BUSINESS.

As used in this annualreport on Form 10-K, the terms “we,” “us,” “our” and the “Company”refer to Outdoor Channel Holdings, Inc. and its subsidiaries as a combinedentity, except where noted or where the context makes clear the reference isonly to Outdoor Channel Holdings, Inc. or one of its subsidiaries.

**Forward-LookingStatements**

The informationcontained in this report may include forward-looking statements. Ouractual results could differ materially from those discussed in anyforward-looking statements. The statements contained in this report that arenot historical are “forward-looking statements” within the meaning of Section 27Aof the Securities Act of 1933, as amended (the “Securities Act”), and Section 21Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”),including statements, without limitation, regarding our expectations, beliefs,intentions or strategies regarding the future. We intend that suchforward-looking statements be subject to the safe-harbor provisions containedin those sections. Such forward-looking statements relate to, among otherthings: (1) expected revenue and earnings growth and changes in mix; (2) anticipatedexpenses including advertising, programming, personnel and others; (3) NielsenMedia Research, which we refer to as Nielsen, estimates regarding totalhouseholds and cable and satellite homes subscribing to and viewers (ratings)of The Outdoor Channel; and (4) other matters. We undertake no obligationto publicly update or revise any forward-looking statements, whether as aresult of new information, future events or otherwise.

These statements involve significant risks and uncertainties andare qualified by important factors that could cause our actual results todiffer materially from those reflected by the forward-looking statements. Suchfactors include but are not limited to risks and uncertainties which arediscussed below under “Item 1A Risk Factors” and other risks anduncertainties discussed elsewhere in this report. In assessing forward-lookingstatements contained herein, readers are urged to read carefully all cautionarystatements contained in this Form 10-K and in our other filings withthe Securities and Exchange Commission. For these forward-looking statements, weclaim the protection of the safe harbor for forward-looking statements in Section 27Aof the Securities Act and Section 21E of the Exchange Act.

**Company Overview**

We own and operateThe Outdoor Channel®, a national television network devoted to traditionaloutdoor activities such as hunting, fishing and shooting sports, as well asoff-road motor sports and other outdoor related lifestyle programming. Ourtarget audience is comprised of sportsmen and outdoor enthusiasts throughoutthe U.S. According to a survey by the U.S. Fish and Wildlife Service,in 2001 there were over 82 million outdoor enthusiasts throughout theU.S. who spent in excess of $100 billion in pursuit of their outdooractivities. As of December 2006, we had relationships or agreements withthe 10 largest cable and satellite companies in the U.S. Through thesearrangements and others, The Outdoor Channel is carried by approximately 6,200individual cable and satellite service providers making The Outdoor Channelavailable to, meaning that it could potentially be subscribed to by, over81.1 million U.S. households. According to estimates by Nielsen, TheOutdoor Channel was subscribed to by approximately 29.7 million householdsin December 2006.

Nielsen is theleading provider of television audience measurement and advertising informationservices worldwide. Nielsen’s estimate of the number of households subscribingto a particular network is based upon a statistical method, and this estimateis generally accepted in the industry as being the standard for measuring thenumber of households a buyer of network advertising time can potentially reach.Typically the Nielsen estimate of the number of subscribing households to aparticular network 

3

----

exceedsthe number of subscribers on which the network is being paid by the serviceproviders for the following reasons, among others:

·       inherenterrors in Nielsen’s statistical methodology;

·       atwo to four month delay in the reporting of the number of subscribers on whichthe service provider is paying the network;

·       serviceproviders paying a network on a lower number of subscribers than those actuallysubscribing to the network because of special arrangements they have made withvarious groups of subscribers, for example, a service provider may agree tocharge an apartment complex for only 100 units in a 150 unit complex; Nielsen’sestimate theoretically includes the entire 150 households, but the serviceprovider only reports 100 subscribing households; and

·       theftof a service provider’s television service; again, Nielsen should include thesehouseholds in its estimate, but the service provider would not report suchhousehold as a subscriber.

Please note that the estimate regarding The OutdoorChannel’s subscriber base is made by Nielsen Media Research and is theirsalone, and does not represent our opinions, forecasts or predictions. It shouldnot be implied that we endorse nor necessarily concur with such information,simply due to our reference to or distribution of their estimate. Although werealize Nielsen’s estimate is typically greater than the number of subscriberson which a network is paid by the service providers, we are currentlyexperiencing a greater difference than we would expect, and we anticipate thisdifference to decrease as we grow our total number of subscribers.

The OutdoorChannel was established in 1993 and began broadcasting 24 hours a day in May 1994.Since inception, we have been committed to providing excellent programming andcustomer service to our distribution partners. In recognition of our efforts,The Outdoor Channel was named Programmer of the Year in 2003 by the NationalCable Television Cooperative. We believe The Outdoor Channel provides viewerswith a unique destination for authentic, informative and entertaining outdoor programming.As a result, we believe that our viewers tend to be more loyal and spend moretime watching The Outdoor Channel than other networks that offer outdoorprogramming. We also believe that The Outdoor Channel has become a desirablenetwork for advertisers of products and services used by outdoor enthusiasts.

We also own and operate two national membership organizations,Gold Prospector’s Association of America, LLC, or GPAA, and LDMA-AU, Inc.,or Lost Dutchman’s. The theme of these organizations is the search for golddeposits and treasures while enjoying the outdoors. Initially, we created TheOutdoor Channel to market memberships in these organizations by airingprogramming related to these activities. Through this process, we discoveredthat members in these organizations were very enthusiastic about theiractivities which resulted in a strong consumer demand for The Outdoor Channel.We believe by airing programs associated with our membership organizations andother membership, or affinity, organizations, such as the National RifleAssociation and the North American Hunting and Fishing Clubs, we enhanceconsumer demand and consequently provide opportunities to increase the numberof subscribers to The Outdoor Channel.

**2006 Developments**

During 2006, we completed the build-out of our newdigital broadcast facility with the grand opening on March 31, 2006. Thisfacility provided the infrastructure such that we now own a play-back andsatellite up-link for multiple signals including our east and west coast feedsas well as our high definition feed. We continued to expand our in-houseprogramming efforts to increase advertising inventory, improve quality controland better positioning ourselves for the future launch of a multichannelbroadband product, VOD and other re-purposing strategy.

4

----

In the third quarter of 2006, we hired outsideconsultants to assist us in reviewing all aspects of our business including ourstrategy for subscriber growth. These consultants recommended that we simplifyour offer to the distributors for increased distribution by offering themreduced subscriber fees for the entire number of subscribers plus marketingsupport in exchange for increased distribution instead of offering them launchsupport only for the new subscribers resulting from such increaseddistribution. In addition, these consultants made suggestions to improve ourprogramming and on-air look. We adopted these new strategies and hired cableindustry pioneer, Roger L. Werner, Jr. as CEO to implement them. Mr. Wernerhas held similar positions with ESPN, Prime Ticket (now Fox Sports West), LaCadena Deportiva (now Fox Sports Americas), Speedvision (now Fox’s SpeedChannel), and Outdoor Life Network (now Comcast’s Versus).

Under Mr. Werner’snew leadership, we have begun approaching the market with a new plan to growthe subscriber base, begun a re-branding of our channel—including a new logoand our on-air look, expanded and refocused our affiliate marketing staffefforts and have reinvigorated our advertising sales efforts. We have alsoundertaken an initiative to build and provide an updated web site to become theleading authority on outdoor activities, including the delivery of much of ourvideo content via broadband. Although we anticipate undertaking these initiativeswill increase our costs in the near term, we believe such strategic pursuitswill ultimately enhance our long-term performance.

**Industry**

Historically,television broadcasters have transmitted signals through the airwaves andhouseholds received the signals through antennas at no cost. This method ofbroadcasting signals had several disadvantages. The signal could not reach manyareas due to signal strength, remoteness of many communities and topography. Inaddition, for those households that could receive the signal, it often producedpoor picture and sound quality.

Unlike traditionaltelevision broadcasters which deliver their programming without charge, cablecompanies provide subscription television service for a fee. These serviceproviders transmit signals through coaxial cable connected directly toindividual homes. In most markets, this service delivers a much improvedpicture and sound quality and offers an increased number and wider variety ofchannels as compared to broadcast television. In addition to using cable forconnectivity, companies use satellite technology to provide subscriptiontelevision service directly to households. This industry of providingtelevision service to households for a fee, or on a subscription basis, istypically referred to as “pay television.”

The pay televisionindustry is comprised primarily of two segments: service providers andnetworks.

*ServiceProviders**.*   Pay television serviceproviders, also commonly referred to as distributors, are primarily comprisedof two types: cable and satellite. These service providers own and operate theplatforms they use to deliver television programming to subscribers. Cable andsatellite service providers compete against each other for subscribers. Theseservice providers attempt to create a mix of channels, or tiers, that will beattractive to the households in the markets they serve in an effort to attractand retain these households as subscribers. Historically, service providersgenerate revenue primarily by selling television service to households. Theyalso make many of the programming decisions, including which channels to carryand in which packaged offering, or tier, a channel should be included.

*CableSystems.*   Paytelevision cable systems consist of two groups: independent cable providers andmulti-system cable operators, or MSOs. Independent cable providers are smaller,individual systems that deliver the television signal to households in only oneor a limited number of regions. Generally, independent cable service providersoperate in distinct markets that range from large metropolitan centers to smallrural areas and do not compete directly with each other in their respectivemarkets. In comparison, MSOs are companies that are affiliated with, orcontrol, a number 

5

----

of regional or individual cable systems. Examples of MSOs includeTime Warner Cable and Comcast Cable Communications. In many instances, channelsneed to establish a relationship with an MSO in order to pursue carriage on itsaffiliated regional cable systems. As of December 2006, cable providersdelivered pay television to approximately 69.1 millionU.S. households, according to Nielsen estimates.

*SatelliteSystems.**  *Pay television satellite systemsdeliver television signals to households via orbiting satellites using digitaltechnology. Unlike cable, where the service providers generally do not competeagainst each other, satellite service providers compete against each otherdirectly because reception from any one satellite service provider is generallyavailable to substantially all viewers wishing to subscribe to it. Examples ofsatellite service providers include DIRECTV® and DISH NetworkTM. As of December 2006,there were approximately 27.3 million homes receiving pay television usingsome means other than cable, according to Nielsen. We believe that most ofthese households subscribe to a satellite service.

*Networks**.*   Networks, also commonly referred toas television channels, bring together television programs and package theminto a branded schedule of entertainment. The two types of networksinclude broadcast networks, which are available to households throughtraditional broadcast free of charge, and pay television networks, which areonly available to households through cable and satellite service providers.Most networks are owned by MSOs or media conglomerates. In order to secure thecontent necessary for a cohesive schedule, channels can produce programming internallyand acquire third-party programming from production companies. Broadcastnetworks, which are regulated by the Federal Communications Commission, or theFCC, generate revenue primarily by selling advertising whereas pay televisionnetworks generate revenue by both selling advertising included in theirprogramming and through subscription fees paid by service providers for theright to deliver the network to their customers.

To gain distribution to households, new networks need to establishcarriage agreements with service providers. In order to initiate or improvecarriage, many networks, and in particular those networks not affiliated withany major service provider, may need to offer launch incentives, which caninclude marketing support, upfront cash payments or other forms of incentives.These incentives or payments are typically made on a per-subscriber basis andgenerally before receiving any subscriber fee revenues.

***Trends in Pay Television***

*Transitionfrom Analog to Digital in Cable Systems**.*   Cable distribution has beenundergoing dramatic changes in the technologies that are used to deliverprogramming and services including digital transmission technology. Digitaltransmission enables improved picture and sound quality, faster signal transmissionand additional channel capacity. Cable system operators can now offeradditional services such as pay-per-view, video-on-demand and connectivity forInternet and telephone service. We believe households that receive a digitalsignal account for over one-third of the households reached by cable providers.

*Emergenceof High Definition Television**.*   Digital transmissiontechnology, whether used by cable or satellite systems, provides aplatform for a new content category: high-definition television, which iscommonly referred to as HD TV. HD TV offers a clearer and sharper picture andenhanced sound, as compared to standard definition television. In addition,HD TV provides a wider field of vision than a standard definitiontelevision. In order to deliver HD TV, service providers have invested and areexpected to continue to invest in HD-enabled infrastructure.

*ChannelProliferation**.*   Increased system capacityhas enabled service providers to carry channels that offer programming on morefocused subject matter and themes. These channels can capture an audience thatis interested in a particular subject and chooses to watch dedicated andconsistently themed programming. We believe the audience demographics of thesespecialized channels tend to be more highly 

6

----

concentrated than those of general entertainment or broadcastchannels. As a result, such specialized channels offer advertisers anopportunity to communicate with a highly targeted and relevant audience.

*Focused and SegmentedAdvertising**.*   We believe many advertisershave become increasingly dissatisfied with the results of broadcasting to abroad audience and have become increasingly focused on maximizing the returnsgenerated per advertising dollar. We believe that individual, specializedchannels on pay television and broadband delivery of such content offeradvertisers the opportunity to reach a more focused demographic as compared tobroadcast television. To this end, we believe many advertisers have begundedicating portions of their advertising budgets towards channels focused ontargeted market segments whether delivered via television or on the internetvia broadband.

**Our CompetitiveStrengths**

We believe the following strengths enable us to offer a networkthat is appealing to viewers, service providers and advertisers.

***Authentic, Informative and Entertaining OutdoorProgramming***

We believe that The Outdoor Channel is a preferred destination fortelevision viewers seeking high-quality, traditional outdoor programming. Weare differentiated from other television networks categorized as sportsnetworks that offer outdoor programming through our focus on traditionaloutdoor activities such as hunting, fishing and shooting sports, as well asoff-road motor sports and other outdoor related lifestyle programming. Ourprogramming does not include team sports or “extreme sports” that othernetworks offer, which we believe dilutes the interest of our target audience.We believe this strategy has enabled us to build a loyal audience that tends towatch The Outdoor Channel instead of other channels that offer a wide varietyof outdoor programming.

***Attractive Viewer Demographics***

We believe that The Outdoor Channel delivers a television audiencethat may not be as accessible through other networks and is particularlydesirable for advertisers seeking to target a large and concentrated audienceof outdoor enthusiasts. We believe The Outdoor Channel audience consistsprimarily of males between the ages of 25 and 54, representing a demographicfor which many advertisers allocate a portion of their budgets. According tostudies by Mediamark Research Inc., in 2006, approximately 80% of the viewersof The Outdoor Channel were male. Nielsen indicates that in December 2006the majority of our viewers in primetime did not watch competing specializedsports channels, such as The Golf Channel, Versus or Speed Channel.

***Large Outdoor-Focused Market***

We believe our programming appeals to traditional outdoor sportsenthusiasts, including those who hunt and fish. According to the U.S. Fishand Wildlife Service’s latest survey conducted in 2001, there were estimated tobe over 82 million people who participated in outdoor recreation and spentin excess of $100 billion pursuing these activities. Of this amount,people who participated in fishing or hunting collectively spent approximately$70 billion in pursuit of these activities. We believe that ourprogramming has strong appeal for viewers that may have participated intraditional outdoor sports in the past or desire to do so in the future. As wecontinue to increase our subscriber base, we believe that national accountswill advertise on The Outdoor Channel to reach our focused audience of outdoorenthusiasts.

***Extensive Service Provider Relationships***

We have relationships or affiliate agreements with the majority ofpay television service providers, including the 10 largest in the U.S.According to Nielsen, The Outdoor Channel had approximately 

7

----

29.7 million subscribers in December 2006.Based on our estimates, The Outdoor Channel is currently available to, andcould potentially be subscribed to by, over 81.1 million households. Asour distribution agreements expire, we attempt to negotiate and renew suchagreements. Although our agreements with some of the major distributors haveexpired (in some cases, some considerable time ago), all of such distributorshave continued to-date to carry our channel pursuant to the terms of theexpired agreement or similar terms while we negotiate renewals.

***Highly Leverageable Business Model***

We anticipate that we will be able to transmit our programming toadditional subscribers with little or no incremental delivery costs. We alsobelieve that our programming, focused on traditional outdoor activities andrecorded in natural settings, tends to be less expensive to produce thanprogramming that requires elaborate sets, soundstages, highly compensatedactors and a large production staff. Furthermore, the timeless nature of ouroutdoor programming allows us to rebroadcast and use our programming foradditional purposes.

***Experienced and Committed Management Team***

The members of our senior management team and our board ofdirectors have significant experience in the cable television sector. TheOutdoor Channel was founded by outdoor enthusiasts for outdoor enthusiasts. Webelieve that our thorough knowledge of the market for, and our activeparticipation in, outdoor activities fosters an unwavering commitment toprogramming that is relevant to our viewers, producers, advertisers andsponsors.

**Our Business GrowthStrategies**

The principal components of our strategy to grow our business areas follows.

***Seek to Grow Our Subscriber Base***

As a result of our focused content and affinity group marketinginitiatives, we have been successful in increasing our subscriber base toapproximately 29.7 million households in December 2006, as estimatedby Nielsen, from our estimate of approximately 5.3 million households in1999. We intend to seek new opportunities to continue to grow our subscriberbase through the following initiatives:

·       Expand distribution relationships. We intend to expand our marketingand sales efforts to grow our subscriber base. Through our existingrelationships with carriers, we intend to offer service providers incentives tomigrate our channel from premium packages to more affordable basic or expandedbasic service packages with a greater number of subscribers. In addition, weplan to continue to pursue agreements with additional service providers. Theincentives we intend to offer to service providers may include, but arenot limited to, the following:

·        overall per subscriber ratereduction;

·        enhanced penetration discounts;

·        commitments to purchase crosschannel promotion spots from the systems’ advertising inventory;

·        upfront payments to serviceproviders, in the form of cash or our securities;

·        local marketing support, such aspromotional materials and sharing of costs for local advertising; and

·        training support for customerservice representatives.

8

----

·       Adopt HD technology. We believe that HD televisioncomplements our outdoor-themed content. The audio and visual characteristics ofHD substantially enhance the experience and sense of adventure provided by ourprogramming. As a validation of the high quality, visually compelling nature ofour HD programming, through an arrangement with Premier Retail Networks, Inc.,we provide branded HD content being used to promote the sales of HD televisionsets in well known retail stores, such as Wal-Mart, Circuit City and Best Buy.We are ready to assist service providers as they migrate their offerings to HDTV by providing quality HD TV programming.

·       Enhance Affiliate Sales Efforts*.* We plan to augment our affiliate sales team with personnel highlyexperienced and trained in the industry. Such personnel will be locatedthroughout the United States in order to better cultivate and service theservice providers.

***Refocus Marketing Efforts***

First, we plan to expand our relationships with our affinitygroups to better leverage the power of such organizations in our efforts togrow and maintain our subscriber base. Second, we are expanding our on-airpromotions to better market our programs on our channel in an effort to enhanceratings. Finally, we are developing cross-channel advertisements to market ourchannel on other television networks.

***Increase Advertising Sales Efforts***

We plan to attractadditional national advertisers to The Outdoor Channel, and we believe it willbecome easier to do so if we are successful in our efforts to grow oursubscriber base. Over the past several years, we have increased our efforts todemonstrate the benefits of advertising on The Outdoor Channel to companiesthat advertise nationally. A significant portion of the increase in ouradvertising revenue over the last two years is attributable to increases innational advertising on The Outdoor Channel. Currently, national advertiserssuch as Ace Hardware, Dickies, Quaker State, Geico Insurance, Optima, PartyPoker, Sprint, and the U.S. Army regularly advertise on The OutdoorChannel. We believe our viewer demographics are attractive to these and manyother national advertisers. In an effort to increase our advertising revenue,we have established a New York advertising sales office and plan to increaseour visibility to national advertisers.

We also offernational advertisers the opportunity to sponsor several hours of themedprogramming as a means to increase brand awareness and visibility to a targetedaudience. These opportunities, which we refer to as block-programmingsponsorships, enable advertisers to embed advertising messages and products inthe programming itself in addition to purchasing traditional commercial spots. Beginningin January 2007, The Outdoor Channel offers nightly programming blocksoriented around the following themes: Mondays—Fishing; Tuesdays—Big Game Hunting; Wednesdays—WesternLifestyle/Shooting; Thursdays—Bird Hunting; Fridays—Off-Road Motorsports;Saturdays—Adventure; and Sundays—Big Game Hunting.

In addition, we believe we can capitalize on our position as theleader in traditional outdoor sports programming with regards to the endemicadvertisers. For those manufacturers of products and providers of servicestargeted to hunters and fishermen, we believe we offer the best value andreturn for their advertising dollars.

9

----

***Upgrade Quality of Programming and On-Air Look***

We plan to improve the quality of our programming, bothtechnically as well as content, and to improve our on-air look. All shows mustnow meet a higher minimum level of technical quality, and we have begun toeliminate those programs not meeting this standard. We are also aggressivelyseeking ideas for new programming content, while at the same time realizingthat we must remain true to our core audience. We also plan to re-brand thechannel with a new, more modern logo in the very near future and simultaneouslyrevamp the overall on-air look and feel of our channel.

***Create and Acquire More of Our Own Programs***

Historically, we have contracted with third-party producers toprovide a majority of our programming. These third-party producers retainownership of the programming that we air and typically purchase from us a blockof the advertising time available during the airing of their programming whichthey then resell to advertisers or use themselves. During 2006, we produced 28%of the programming (excluding infomercials) we aired. In the future, we intendto produce more in-house programming and acquire ownership of programs producedby third parties by entering into exclusive, multi-year agreements. We believe thiswill allow us to retain and sell more advertising time for our own account athigher rates.

***Establish Broadband Presence***

We plan to establish ourselves as the leading authority in outdooractivities by launching our redesigned web site in the very near future. Ournew web site will include broadband delivery of much of our video programmingand provide the user with training and education regarding outdoor sports andrecreation as well as the equipment and gear used in such activities. Webelieve that our new web site will allow us to offer enhanced opportunities forour advertisers, and that by providing our content via broadband we can alsoestablish an increased demand for our channel in those markets not currentlyreceiving The Outdoor Channel in a widely distributed programming package ortier.

***Expand the Membership in Our Club Organizations***

We originally founded The Outdoor Channel in an attempt to moreeffectively market our club organizations, the theme of which is the search forsmall gold deposits and other treasure. In an effort to increase the membershipbase of GPAA and Lost Dutchman’s, we intend to continue to market to viewers ofThe Outdoor Channel and by producing programs that are specifically directedtowards their interests. We will present to such viewers the benefits ofmembership in GPAA and Lost Dutchman’s while promoting subscriptions to ourGold Prospector & Treasure Hunters in the Great Outdoors magazine. Inaddition, we promote and market these two club organizations through directmail campaigns and our promotion and sponsorship throughout the country ofexpositions dedicated to gold prospecting, treasure hunting and relatedinterests. We also offer introductory outings at our campsites in an effort toincrease membership sales in our national gold prospecting campground club andto increase the number of participants attending our unique expeditions heldnear Nome, Alaska and in the Motherlode area of California.

**Sources of Revenue**

No single customer of ours accounts for greater than 10% of ourtotal revenue. Our revenues from The Outdoor Channel are derived primarily fromtwo sources, advertising fees and subscriber fees, as discussed below.

**Advertising Fees**

We have two formsof advertising fees, short-form and long-form.

10

----

*Short-form Advertising**.*   We sellshort-form advertisements on The Outdoor Channel for commercial productsand services, usually in 30 second increments. The total inventory for ourshort-form advertising consists of seven minutes per half hour. Of thisavailable advertising time, one minute is reserved for the local serviceproviders who may preempt the advertisement we insert into the programwith a local advertisement. Of the remaining six minutes, we either sell it toadvertisers for our own account or to third-party producers who then resellthis time to advertisers for their own account or use it themselves.

Advertiserspurchase from us the one minute of advertising time per half hour that isreserved for the local service providers at a discount understanding that someof the service providers will superimpose their own spots over the advertisingthat we have inserted in the program, causing these advertisements to be seenby less than all of the viewers of any program. All of this advertising time issold to direct response advertisers. Direct response advertisers rely on directappeals to our viewers to purchase products or services from toll-freetelephone numbers or websites and generally pay lower rates than nationaladvertisers.

For theadvertising time that we retain for our own account, we endeavor to sell thistime to national advertisers and their advertising agencies. The price we areable to charge for this advertising time is dependent on market conditions,perceived desirability of our viewers and, as estimated by Nielsen, the numberof households subscribing to The Outdoor Channel and actually viewing programs(ratings). If we are unable to sell all of this advertising time to nationalfirms and agencies, we sell the remaining time to direct response advertisers.We have been successful in increasing the amount of revenue generated fromnational advertisers in the last two years. The majority of our revenue fromshort-form advertising is a result of arrangements with advertisingagencies, for which we pay a commission. However, we have some relationshipswith marketers who buy directly from us.

For theadvertising time that we sell to third-party producers, we receive revenuedirectly from the producers. This revenue is often at a lower rate than we may havereceived if we were to retain such time and sell it ourselves. The producersthen resell this advertising time to others or use this time to advertise theirown products or services.

Our advertisingrevenue tends to reflect seasonal patterns of advertising expenditures, whichis common in the broadcast industry. Typically, our advertising revenue fromshort-form advertising during the second quarter is greater than the firstquarter, and the fourth quarter is greater than the third quarter of each year.

*Long-form Advertising**.*   Longform advertisements are infomercials that we typically run for30 minutes, the majority of which are during the overnight hours. In thefuture, we may reduce the programming time used for infomercials byreplacing it with traditional outdoor programming.

***Subscriber Fees***

Cable and satellite service providers typically pay monthlysubscriber fees to us for the right to broadcast our channel. Our serviceprovider contracts typically range from 5 to 10 years and contain an annualincrease in the monthly subscriber fees we charge. Our contracts also containvolume discounts for increased distribution by any one service provider. Inorder to stimulate distribution growth, we plan to reduce per subscriber feessomewhat over the next 3 years. At present our subscriber fees average lessthan $0.10 per subscriber per month. We plan to reduce these fees somewhat overthe next 3 years as a stimulus to distribution growth.

11

----

**Programming**

We offer our programming in thematic blocks which, beginningin January 2007, but subject to change as circumstance dictate,  will be nightly programming blocks orientedaround the following themes:  Mondays—Fishing;Tuesdays—Big Game Hunting; Wednesdays—Western Lifestyle/Shooting; Thursdays—BirdHunting; Fridays—Off-Road Motorsports; Saturdays—Adventure; and Sundays—BigGame Hunting.

Each nightlyprogramming environment is highlighted by a high-quality The Outdoor Channelexclusive series that exemplifies the excitement of the individual genres:

·       OnMondays, viewers can look forward to the premiere of The Outdoor Channel’sall-new adventure fishing series Speargun Hunter, featuring some of the world’sbest free divers in their incredibly dangerous pursuit of record-setting catch.In addition to Speargun Hunter, the Monday night primetime fishing line-up alsoincludes new episodes of old favorites: In Fisherman—with Doug Stange and someof North America’s finest fishing locations, and Hank Parker’s OutdoorMagazine, featuring tried-and-true techniques from the master angler.

·       OnTuesdays, fans of Big Game Hunting can tune into a line-up that features TheOutdoor Channel’s popular returning series Step Outside, with hosts DougPainter and two-time Olympic gold medalist Kim Rhode furthering the mission ofthe National Shooting Sports Foundation’s (NSSF) Step Outside program as theyhunt some of North America’s prime locations. Step Outside is part of TheOutdoor Channel’s longest running programming block “Tuesday Night Pursuits”presented by Mossy Oak Brand Camo. Mossy Oak is best known for its signatureprogram Hunting the Country, which has been part of The Outdoor Channel’sTuesday night lineup since 1999.

·       Wednesdayswill feature a block of Shooting and Western Lifestyle programming includingThe Outdoor Channel’s returning original, Cowboys, a celebration of all thingsrelated to the Cowboy including world-class Cowboy Action shooting, historicalreenactments, and skills and crafts of the Old West. Pro rodeo from the PRCAand CBR is also a Wednesday night staple.

·       Thursday’sblock features Bird Hunting and The Outdoor Channel’s exclusive series TurkeyCall, produced in association with the National Wild Turkey Federation (NWTF)and hosted by Rob Keck, this returning favorite brings viewers the best inturkey hunting throughout the world. Turkey Call joins Mossy Oak’s WhistlingWings to present some of the most exciting wing shooting adventures evercaptured.

·       Fridaynights are Motorsports nights on The Outdoor Channel featuring Ride ToAdventure, a fast-paced series hosted by world famous adventurer Bill Baker andregular coverage of major off-road races from “The Best In The Desert” series.The rest of the Friday night lineup offers the latest and greatest of TheOutdoor Channel’s Off-Road motoring programs like Four Wheeler.

·       Saturdaynights are now reserved for The Outdoor Channel’s Adventure series featuringmarine, aviation and snowmobile programming. Signature series include thepioneering aviation program Wings To Adventure, hosted by Tom Gresham, and PersonalWatercraft Television, a high-energy half-hour hosted by Kevin Cullen thatpresents the top events and latest equipment in the personal watercraftindustry.

·       Huntingprogramming wraps up The Outdoor Channel’s week on Sundays, featuring thereturn of one of The Outdoor Channel’s longest running and most popular series,Bass Pro Shops Outdoor World, showcasing top hunting pros like BrendaValentine, Jerry Martin, Bob Foulkrod, Walter Parrott and Alan Treadwell, amongothers. Also debuting on Sundays is Whitewater Trails, hosted by popularoutdoorsman Bodie Owens providing one-of-a-kind tips, stories, and epicadventures in some of the most pristine hunting and fishing locationsthroughout the country.

12

----

In addition to the new primetime programming blocks,starting in January horizontal strips of some of The Outdoor Channel’smost popular shows from past seasons including Ultimate Match Fishing, Bass ProShops Outdoor World Fishing, Getting Close, and Dream Season will air in dailyblocks from 2-4pm EST—as The Outdoor Channel shoots new episodes for afall debut. Viewers can also look forward to an all-fishing block of programson Saturday mornings from 8-11am EST, featuring past episodes of TheOutdoor Channel standards Bass Champs’ Tournament Trail, and Strike King’s ProTeam Journal.

We either acquire or produce a program in-house or we license aprogram from a third party. We have been producing in-house programs since ourfounding in 1993. On average in 2006 we produced and aired on The OutdoorChannel 26 regularly scheduled programs. Third-party programming licenseagreements typically provide that the producers retain ownership of theprogramming and that The Outdoor Channel is entitled to air each episodeseveral times per week for periods ranging from three months to three years.Substantially all of our programming contracts with third parties allow usexclusive U.S. rights and non-exclusive foreign rights during the term ofthe licensing agreement. In 2006, we produced approximately 28%, by number oftitles, of our programs in-house and licensed the remaining 72% of our programsfrom third-party producers.

**Sales and Marketing**

Our sales and marketing efforts are focused on: (a) addingsubscribers both through improved positioning with those service providersalready carrying The Outdoor Channel and through new agreements with serviceprovider systems not currently carrying The Outdoor Channel, (b) increasingdemand from the viewing audience for both accessibility to The Outdoor Channeland for viewership of our programming and (c) cultivating existing andpursuing new advertising clients.

***Service Providers***

Generally, our sales and marketing efforts, to increasedistribution, focuses on developing strong relationships with existing andpotential cable and satellite service providers through multiple points ofcontact including traditional sales visits, a dedicated customer service staff,an active local event team and the use of a dedicated web site. In addition tobuilding strong relationships with our service providers, we are involved witha wide variety of traditional marketing efforts including advertising in tradepublications, participating in industry trade shows, and supporting industryrelated associations. We anticipate that the widespread adoption of the digitaland high definition products offered by our service providers will provide uswith additional opportunities to grow and develop The Outdoor Channel. In orderto strengthen the sales efforts of these service providers, we offer a wide varietyof market specific support including the opportunity to partner with localoutdoor clubs, local promotions, direct mail campaigns and integration intoexisting consumer marketing initiatives.

***Consumers***

We market TheOutdoor Channel to potential viewers to increase brand awareness and viewershipand to drive consumer requests for carriage, or for more accessible packaging,by the service providers. These consumer-directed marketing efforts arecoordinated with and may be funded in part by the service providers.These efforts often include traditional marketing campaigns consisting ofprint, television and radio advertising. We also use our website to market andpromote The Outdoor Channel through schedule information, show synopses,games and contests.

We haverelationships with a number of outdoor clubs and organizations which provideopportunities for us to utilize their communication channels to reach theirmembership with targeted marketing messages. These relationships also allow TheOutdoor Channel to be associated with organizations that have credibility andrelevance to outdoor enthusiasts. Examples of the clubs and organizations withwhich 

13

----

we have developed these relationships include National RifleAssociation, North American Hunting Club, North American Fishing Club andthe National Wild Turkey Federation.

We also haverelationships and sponsorships with the following special interest groups:Congressional Sportsmen’s Foundation, National Shooting Sports Foundation,Paralyzed Veterans of America, International Hunter Education Association,International Association of Fish and Wildlife Agencies, U.S. Fish andWildlife Service and Farmers and Hunters Feeding the Hungry.

In addition, we purchase advertisements in magazines thatspecialize in content similar to The Outdoor Channel. We currently advertise inapproximately 80 consumer publications, including *A**merican Rifleman, Buckmasters Whitetail, Dirt Rider,Fly Fisherman, Guns & Ammo,*and*Safari Times.*

***Advertisers***

Sales and distribution of The Outdoor Channel’s advertising timeare conducted by The Outdoor Channel’s in-house sales personnel. In 2002, webegan to subscribe to Nielsen’s services, and the availability of thisinformation has become a critical tool in attracting advertisers. Our sales teamsells directly to national advertising accounts, and continuously monitorsavailable spots in an effort to maximize advertising revenue. To increase ourvisibility in the advertising community, we advertise in trade publications andon trade web sites directed toward advertising executives.

**Other Businesses**

In addition to The Outdoor Channel, we own and operaterelated businesses that serve the interests of The Outdoor Channel viewers andother outdoor enthusiasts. These related businesses include Gold Prospector’sAssociation of America LLC, or GPAA, and LDMA-AU, Inc., or Lost Dutchman’s.

We believe GPAA is one of the largest gold prospectingclubs in the world. GPAA’s members currently pay an initial membership fee of$79 and annual renewal fees ranging between $24 and $54. GPAA sells productsand services related to gold prospecting and is the publisher of the “GoldProspectors & Treasure Hunters in the Great Outdoors” magazine.

Lost Dutchman’s is a national gold prospectingcampground club with properties in Arizona, California, Colorado, Georgia,Michigan, Nevada, North Carolina, Oregon and South Carolina. Lost Dutchman’smembers currently pay a membership fee ranging between $3,500 and $3,750 and anannual maintenance fee of $120. Members are entitled to use any of thecampgrounds we own or have rights to use and are entitled to keep all goldfound while prospecting on any of these properties.

We also offer uniqueexpeditions where participants enjoy gold prospecting and other outdooractivities. The expeditions include annual expeditions to the heart of thehistoric Motherlode area in central California and the camp on our 2,300-acreproperty along the Cripple River which empties into the Bering Sea near Nome,Alaska. Participants pay on a per-expedition basis.

**FinancialInformation about Segments**

Financial information related to our operating segments isincluded in Note 13 to the consolidated financial statements included inthis Form 10-K, which note is incorporated by reference herein. TheOutdoor Channel, or TOC, segment has provided 87.8%, 87.5% and 86.6% of ourconsolidated revenue during the years ended December 31, 2006, 2005 and2004, respectively.

**Competition**

We compete withother television channels for distribution, audience viewership and advertisingsales.

14

----

The OutdoorChannel competes with other television channels to be included in the offeringsof each system provider and for placement in the packaged offerings having themost subscribers. In addition, each television channel focusing on a particularform of content competes directly with other channels offering similarprogramming. In the case of The Outdoor Channel, we compete for distributionand viewers with other television networks aimed at our own target audiencewhich we believe consists primarily of males between the ages of 25 and 54. Webelieve such competitors include Versus (formerly OLN), Spike TV, ESPN andothers. It is possible that these or other competitors, many of which havesubstantially greater financial and operational resources than us, could revisetheir programming to offer more traditional outdoor activities such as hunting,fishing, shooting and other topics which are of interest to our viewers.

Certaintechnological advances, including the increased deployment of fiber opticcable, are expected to allow cable systems to greatly expand their presentchannel capacity. Such added capacity leaves room for additionalprogramming of all types which could dilute our market share by enabling theemergence of channels with programming similar to that offered by The OutdoorChannel and lead to increased competition for viewers from existing or newchannels.

We also competewith television networks that generally have large subscriber bases andsignificant investments in, and access to, competitive programming sources. Inaddition, large cable companies have the financial and technological resourcesto create and distribute their own channels. For instance, Versus (“VS”) isowned and operated by Comcast, the largest MSO in the U.S. We believe thatwhile VS currently offers some blocks of similar programs, there is asubstantial difference between the two networks. The Outdoor Channel emphasizestraditional outdoor activities, such as fishing and hunting, while VS currentlyfeatures a significant amount of programming concerning competitive, orextreme, sports. As The Outdoor Channel becomes more established, however, itis possible that other channels may attempt to offer programming similar toours. For example, The Sportsman’s Channel and Men’s Outdoor and Recreationnetwork have already begun offering programming similar to ours.

We compete foradvertising revenue with other pay television networks, broadcast networks, andlocal over-the-air television stations. In addition, we compete for advertiserswith other forms of advertising such as satellite and broadcast radio and theprint media. We believe that many of these advertising avenues may notpermit an advertiser to target the specific demographic audience who watchesThe Outdoor Channel.

While Lost Dutchman’s has numerous campground competitors, webelieve it is the largest campground club in the United States that has a goldprospecting theme. Campgrounds compete primarily by quality of facilities andamenities offered. Lost Dutchman’s has rustic facilities and few amenities andseeks to attract persons who are interested in gold prospecting and hands-onoutdoor activities and who wish to be part of an informal family-orientedenvironment. We are not aware of any national direct competitor for our goldprospecting club GPAA, although in a broad sense both GPAA and Lost Dutchman’scompete with other sources of recreational activities. Lost Dutchman’s and GPAAboth compete primarily through marketing and promotional activities involvingexpositions, advertisements and shows on The Outdoor Channel, reachingprospective members through our*GoldProspectors & Treasure Hunters in the Great Outdoors*magazine and other marketingactivities.

**Other Information**

Outdoor Channel Holdings, Inc. was originally incorporated inAlaska in 1984. On September 8, 2004, we acquired all of the outstandingshares of The Outdoor Channel, Inc. that we did not previously own.Effective September 15, 2004 we reincorporated from Alaska into Delaware.

15

----

**Employees**

As of February 1,2007, we had a total of 138 employees of which 134 were full time. None of ouremployees are covered by a collective bargaining agreement. We consider ourrelationship with our employees to be good.

**GovernmentRegulation**

Our operations are subjectto various government regulations. The operations of cable television systems,satellite distribution systems and broadcast television stations also aresubject to the Communications Act of 1934, as amended, and to regulatorysupervision by the FCC. Our uplink facility in Temecula, California is licensedby the FCC and must be operated in conformance with the terms and conditions ofthat license. The license is also subject to periodic renewal and ongoingregulatory requirements.

***Local Cable Regulation***

Cable television systems that carry our programmingare regulated by municipalities or other local or state government authoritieswhich have the jurisdiction to grant and to assign franchises and to negotiategenerally the terms and conditions of such franchises, including rates forbasic service charged to subscribers, except to the extent that suchjurisdiction is preempted by federal law. Any such rate regulation could placedownward pressure on the potential subscriber fees we can earn.

***Federal Cable Regulation***

In 1992, Congress enacted the Cable TelevisionConsumer Protection and Competition Act of 1992, or the 1992 Cable Act, whichprovides, among other things, for a “must-carry” or “retransmission consent”regime for local broadcast stations, requiring carriage of certain broadcaststations and consideration to other broadcast stations for retransmission oftheir signals. The Cable Communication Policy Act of 1984 requires cabletelevision systems with 36 or more “activated” channels to reserve a percentageof such channels for commercial use by unaffiliated third parties and permitsfranchise authorities to require channel capacity, equipment and facilities forpublic educational and government access channels.

In response to the 1992 Cable Act, the FCC adoptedregulations prohibiting programmers in which cable operators have an “attributableinterest” from discriminating between cable operators and their competitors, oramong cable operators, and for increased competition in video programmingdistribution (both within the cable industry and between cable and competingvideo distributors). The 1992 Cable Act also directed the FCC to adoptregulations limiting the percentage of nationwide subscribers any one cablesystem operator may serve and the carriage by cable systems and other videodistributors of affiliated programming services. Although the FCC adopted suchregulations, they were invalidated by a United States Court of Appeals in 2001.The FCC subsequently initiated rulemaking proceedings which remain pending.

In addition, the 1992 Cable Act requires the FCC toestablish regulations for the rates that cable operators subject to rateregulation may charge for basic cable service and certain other services.Rates are not regulated for cable systems which are subject to effectivecompetition, as defined in the FCC’s regulations. The 1992 Cable Act alsodirected the FCC to establish guidelines for determining when cable programmingmay not be provided exclusively to cable operators. The FCC’s implementingregulations preclude virtually all exclusive programming contracts betweencable operators and satellite programmers affiliated with any cable operator(unless the FCC first determines the contract serves the public interest) andgenerally prohibit a cable operator that has an attributable interest in asatellite programmer from improperly influencing the terms and conditions ofsale to unaffiliated multi-channel video programming 

16

----

distributors. The FCC hasinitiated a rulemaking proceeding regarding the possible extension of theexclusive contracting prohibition, which is scheduled to expire on October 5,2007.

In 1996, Congress enacted a comprehensive rewrite oftelecommunications law, modifying many of the provisions of the 1992 Cable Act.Among other things, the legislation allows the cable and telephone industriesto compete in each other’s markets and phased out federal cable rate regulationof non-basic services, such as the rates charged by cable operators tosubscribers for the tiers in which our programming typically is carried. Italso required the FCC to establish rules ensuring that video programmingis fully accessible to the hearing impaired through closed captioning. The rules adoptedby the FCC require substantial closed captioning over a six to ten yearphase-in period, which began in 2000, with only limited exceptions.

Congress and the FCC may,in the future, adopt new laws, regulations and policies regarding a widevariety of matters which could affect The Outdoor Channel. We are unable topredict the outcome of future federal legislation, regulation or policies, orthe impact of any such laws, regulations or policies on The Outdoor Channel’soperations.

*GPAA and LostDutchman’s Regulations*

To operate our campgroundsand mining sites, we must obtain discretionary permits or approvals issued bylocal governments under local zoning ordinances and other state laws. Inaddition, to construct improvements we have usually been required to obtainpermits such as building and sanitary sewage permits. Some states in which wesell memberships have laws regulating campground memberships. These lawssometimes require comprehensive disclosure to prospective purchasers. Somestates have laws requiring us to register with a state agency and obtain apermit to market.

*Other Regulations*

In addition to theregulations applicable to the cable television and gold mining industries ingeneral, we are also subject to various local, state and federal regulations,including, without limitation, regulations promulgated by federal and stateenvironmental, health and labor agencies. In addition, our mining clubs aresubject to various local, state and federal statutes, ordinances, rules andregulations concerning, zoning, development, and other utilization of itsproperties.

**IntellectualProperty**

“The Outdoor Channel®” is a registered trademark,and “Outdoor Channel 2 HDSM” isa service mark, of The Outdoor Channel, Inc. We have also filed forregistration of other trademarks, none of which we consider material at thistime. In addition, we rely on copyright protection of those programs that weown.

**AvailableInformation**

We file annual, quarterly and current reports, proxystatements and other information with the Securities and Exchange Commission.You may read and copy any materials we have filed with the Securities andExchange Commission at the Securities and Exchange Commission’s PublicReference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Pleasecall the Securities and Exchange Commission at 1-800-SEC-0330for further information on the Public Reference Room. The Securities andExchange Commission also maintains a web site at http://www.sec.gov thatcontains reports, proxy and information statements and other informationconcerning issuers that file electronically with the Securities and ExchangeCommission, including us. Our common stock is listed on The Nasdaq GlobalMarket. We also maintain an internet site athttp://www.outdoorchannelholdings.com that contains information concerning us. Informationincluded or referred to on our website is not incorporated by reference in orotherwise a part of this report.

17

----

You may obtain a freecopy of our annual reports on Form 10-K, quarterly reports on Form 10-Qand current reports on Form 8-K and amendments to those reports onthe day of filing with the Securities and Exchange Commission on our website onthe World Wide Web at http://www.outdoorchannelholdings.com. We will alsoprovide without charge, upon written or oral request, a copy of any or all ofthe documents referred to above. Requests for such documents should be directedto Attention: General Counsel, 43445 Business Park Drive, Suite 113,Temecula, California 92590 (Telephone: (951) 699-4749).

**ITEM 1A.**        RISK FACTORS.

Our business and operationsare subject to a number of risks and uncertainties, and the following listshould not be considered to be a definitive list of all factors thatmay affect our business, financial condition and future operating resultsand should be read in conjunction with the risks and uncertainties, includingrisk factors, contained in our other filings with the Securities and ExchangeCommission. Any forward-looking statements made by us are made with theintention of obtaining the benefits of the “safe harbor” provisions of theSecurities Litigation Reform Act and a number of factors, including, butnot limited to those discussed below, could cause our actual results andexperiences to differ materially from the anticipated results or expectationsexpressed in any forward-looking statements.

**We do not control the methodology used by Nielsen toestimate our subscriber base or television ratings, and changes, orinaccuracies, in such estimates could cause our advertising revenue todecrease.**

Our ability to selladvertising is largely dependent on the size of our subscriber base andtelevision ratings estimated by Nielsen. We do not control the methodology usedby Nielsen for these estimates, and estimates regarding The Outdoor Channel’ssubscriber base made by Nielsen is theirs alone and does not representopinions, forecasts or predictions of Outdoor Channel Holdings, Inc. orits management. Outdoor Channel Holdings, Inc. does not by its referenceto Nielsen or distribution of the Nielsen Universe Estimate imply its endorsementof or concurrence with such information. In particular, we believe that we maybe subject to a wider difference between the number of subscribers as estimatedby Nielsen and the number of subscribers reported by our cable and satelliteMSOs than is typically expected because we are not fully distributed and aresometimes carried on poorly penetrated tiers. In addition, if Nielsen modifiesits methodology or changes the statistical sample it uses for these estimates,such as the demographic characteristics of the households, the size of oursubscriber base and our ratings could be negatively affected resulting in adecrease in our advertising revenue.

**Cable and satellite service providers coulddiscontinue or refrain from carrying The Outdoor Channel, or decide to notrenew our distribution agreements, which could substantially reduce the numberof viewers and harm our operating results.**

The success of The OutdoorChannel is dependent, in part, on our ability to enter into new carriageagreements and maintain existing agreements or arrangements with, and carriageby, satellite systems and multiple system operators’, which we refer to asMSOs, affiliated regional or individual cable systems. Although we currentlyhave arrangements or agreements with, and are being carried by, all the largestMSOs and satellite service providers, having such relationship or agreementwith a MSO does not ensure that an MSOs affiliated regional or individual cablesystems will carry or continue to carry The Outdoor Channel or that thesatellite service provider will carry our channel. Under our current contractsand arrangements, The Outdoor Channel typically offers satellite systems andcable MSOs, along with their cable affiliates, the right to broadcast TheOutdoor Channel to their subscribers, but such contracts or arrangements do notrequire that The Outdoor Channel be offered to all subscribers of, or any tiersoffered by, the service provider. Because certain carriage arrangements do notspecify on which service levels The Outdoor Channel is carried, such as analogversus basic digital, expanded digital or specialty 

18

----

tiers,and in which geographic markets The Outdoor Channel will be offered, we have noassurance that The Outdoor Channel will be carried and available to viewers ofany particular MSO or to all satellite subscribers. In addition, if we areunable to fully comply with the terms of such agreements, the service providerscould discontinue carrying The Outdoor Channel. Lastly, we are currently notunder any long-term contract with some of the service providers that arecurrently distributing our channel. Our distribution agreements with six of themajor service providers, accounting for approximately 59% of our subscriberbase as of August 2006, will have terminated as of May 1, 2007. If weare unable to renew these distribution agreements, we could lose a substantialnumber of subscribers. If cable and satellite service providers discontinue orrefrain from carrying The Outdoor Channel, or decide to not renew our distributionagreement with them, this could reduce the number of viewers and harm ouroperating results.

**We may not be able to grow our subscriber base ata sufficient rate to offset planned increased costs, decreased revenue or atall, and as a result our revenues and profitability may not increase andcould decrease.**

A major component of ourgrowth strategy is based on increasing the number of subscribers to ourchannels. Growing our subscriber base depends upon many factors, such as thesuccess of our marketing efforts in driving consumer demand for our channels;overall growth in cable and satellite subscribers; the popularity of ourprogramming; our ability to negotiate new carriage agreements, or amendmentsto, or renewals of, current carriage agreements, and maintain existingdistribution; plus other factors that are beyond our control. There can be noassurance that we will be able to maintain or increase the subscriber base ofour channels on cable and satellite systems or that our current carriage willnot decrease as a result of a number of factors or that we will be able tomaintain our current subscriber fee rates. In particular, negotiations for newcarriage agreements, or amendments to, or renewals of, current carriageagreements, are lengthy and complex, and we are not able to predict with anyaccuracy when such increases in our subscriber base may occur, if at all,of if we can maintain our current subscriber fee rates. If we are unable togrow our subscriber base, our subscriber and advertising revenues may notincrease and could decrease. In addition, as we plan and prepare for suchprojected growth in our subscriber base, we plan to increase our expensesaccordingly. If we are not able to increase our revenue to offset theseincreased expenses, and if our subscriber fee revenue decreases, ourprofitability could decrease.

**If we offer favorable terms or incentives to serviceproviders in order to grow our subscriber base, our operating resultsmay be harmed or your percentage of the Company may be diluted.**

Although we currently haveplans to offer incentives to service providers in an attempt to increase thenumber of our subscribers, we may not be able to do so economically or atall. If we are unable to increase the number of our subscribers on acost-effective basis, or if the benefits of doing so do not materialize, ourbusiness and operating results would be harmed. In particular, it may benecessary to reduce our subscriber fees in order to grow our subscriber base. Inaddition, if we make any upfront cash payments to service providers for anincrease in our subscriber base, our cash flow could be adversely impacted, andwe may incur negative cash flow for some time. In addition, if we were tomake such upfront cash payments or provide other incentives to serviceproviders, we expect to amortize such amounts ratably over the term of theagreements with the service providers. However, if a service providerterminates any such agreement prior to the expiration of the term of suchagreement, then under current accounting rules we may incur a largeexpense in that quarter in which the agreement is terminated equal to theremaining un-amortized amounts and our operating results could accordingly beadversely affected. In addition, if we offer equity incentives, the terms andamounts of such equity may not be favorable to us or our stockholders.

19

----

**If, in our attempt to increase our number ofsubscribers, we structure favorable terms or incentives with one serviceprovider in a way that would require us to offer the same terms or incentivesto all other service providers, our operating results may be harmed.**

Many of our existingagreements with cable and satellite service providers contain “most favorednation” clauses. These clauses typically provide that if we enter into anagreement with another service provider on more favorable terms, these termsmust be offered to the existing service provider, subject to some exceptionsand conditions. Future agreements with service providers may also containsimilar “most favored nation” clauses. If, in our attempt to increase ournumber of subscribers, we reduce our subscriber fees or structure launchsupport fees or other incentives to effectively offer more favorable terms toany service provider, these clauses may require us to offer similarincentives to other service providers or reduce the effective subscriber feerates that we receive from other service providers, and this could negativelyaffect our operating results.

**If our channels are placed in unpopular programpackages by cable or satellite service providers, or if service fees areincreased for our subscribers, the number of viewers of our channelmay decline which could harm our business and operating results.**

We do not control thechannels with which our channel is packaged by cable or satellite serviceproviders. The placement by a cable or satellite service provider of ourchannel in unpopular program packages could reduce or impair the growth of thenumber of our viewers and subscriber fees paid by service providers to us. Inaddition, we do not set the prices charged by cable and satellite serviceproviders to their subscribers when our channel is packaged with othertelevision channels. The prices for the channel packages in which our channel isbundled may be set too high to appeal to individuals who might otherwisebe interested in our network. Further, if our channel is bundled by serviceproviders with networks that do not appeal to our viewers or is moved topackages with fewer subscribers, we may lose viewers. These factorsmay reduce the number of viewers of our channel, which in turn wouldreduce our subscriber fees and advertising revenue.

**Consolidation among cable and satellite operatorsmay harm our business.**

Cable and satelliteoperators continue to consolidate, making The Outdoor Channel increasinglydependent on fewer operators. If these operators fail to carry The OutdoorChannel, use their increased distribution and bargaining power to negotiateless favorable terms of carriage or to obtain additional volume discounts, ourbusiness and operating results would suffer.

**We may not be able to effectively manage our futuregrowth, and our growth may not continue, which may substantially harmour business and prospects.**

We have undergone rapidand significant growth in revenue and subscribers over the last several years.There are risks inherent in rapid growth and the pursuit of new strategicobjectives, including among others: investment and development of appropriateinfrastructure, such as facilities, information technology systems and otherequipment to support a growing organization; hiring and training newmanagement, sales and marketing, production, and other personnel and thediversion of management’s attention and resources from critical areas andexisting projects; and implementing systems and procedures to successfullymanage growth, such as monitoring operations, controlling costs, maintainingeffective quality and service, and implementing and maintaining adequateinternal controls. Although we have recently moved into our new Temecula,California broadcast facility, we expect that additional expenditures will berequired as we continue to upgrade our facilities. We cannot assure you that wewill be able to successfully manage our growth, that future growth will occuror that we will be successful in managing our business objectives. We canprovide no assurance that our profitability or revenues will not 

20

----

beharmed by future changes in our business. Our operating results could be harmedif such growth does not occur, or is slower or less profitable than projected.

**We may not be able to secure additional nationaladvertising accounts, and as a result, our revenues and profitabilitymay be negatively impacted.**

Our ability to secure additionalnational advertising accounts, which generally pay higher advertising rates,depends upon the size of our audience, the popularity of our programming andthe demographics of our viewers, as well as strategies taken by ourcompetitors, strategies taken by advertisers and the relative bargaining powerof advertisers. Competition for national advertising accounts and relatedadvertising expenditures is intense. We face competition for such advertisingexpenditures from a variety of sources, including other cable network companiesand other media. We cannot assure you that our sponsors will pay advertisingrates for commercial air time at levels sufficient for us to make a profit orthat we will be able to attract new advertising sponsors or increase advertisingrevenues. If we are unable to attract national advertising accounts insufficient quantities, our revenues and profitability may be harmed.

**We have found a material weakness in our internalcontrols over financial reporting and we cannot be certain in the future thatwe will be able to report that our controls are without material weakness or tocomplete our evaluation of those controls in a timely fashion.**

Pursuant to Section 404 of the Sarbanes-Oxley Act of2002 ("Section 404"),****and the rulesand regulations promulgated by the SEC to implement Section 404, we arerequired to include in our Form 10-K an annual report by our managementregarding the effectiveness of our internal control over financial reporting.** **The report includes,among other things, an assessment of the effectiveness of****ourinternal control over financial reporting as of the end of our fiscal year.** **This assessment mustinclude disclosure of any material weaknesses in our****internalcontrol over financial reporting identified by management.** **As of December 31, 2006, ourinternal control over financial reporting was****ineffectivedue to the presence of a material weakness, as more fully described****in Item 9A of this Form 10-K.  We are actively working to correct thismaterial weakness, which will continue until we are able to hire additionalstaff in our accounting department and successfully operate and test ourcontrols with such staff in place.

If we fail to maintain an effective system ofdisclosure controls or internal****control over financialreporting, we may discover material weaknesses that we****wouldthen be required to disclose. We may not be able to accurately or timely****report on our financial results, and we might be subject toinvestigation by regulatory authorities. This could result in a loss of investor confidence****inthe accuracy and completeness of our financial reports, which may have an****adverse effect on our stock price.  

**Inaddition, all internal control systems, no matter how well designed, haveinherent limitations. Therefore, even those systems determined to be effectivecan provide only reasonable assurance with respect to the preparation andpresentation of financial statements. Projections of any evaluation of controlseffectiveness to future periods are subject to risks. Over time, controls maybecome inadequate because of changes in conditions or deterioration in thedegree of compliance with policies or procedures.**

**We may be requiredto pay additional state income taxes for past years.**

We are required to payincome taxes in various states in which we conduct our business operations. Inthe past, we had paid state income taxes only in California (where ourheadquarters is located) and had not paid income taxes to any other state. Wehave determined that we may have state income tax liability in the eightstates other than California in which our gold prospecting properties arelocated and have filed income tax returns in those states for past years. Ingeneral, we believe any income taxes paid to states other than California willbe partially offset by a refund from the State of California for income taxamounts we have overpaid to California in past years. We may, however, belimited as to the number of 

21

----

yearsfor which we can receive a refund from California for taxes previously paid,and we cannot predict when we would receive any such refund. In addition,because each state to which we may owe outstanding income taxes has adifferent methodology for calculating tax owed and a different tax rate, ouraggregate state income tax liability could be greater than what we have paid toCalifornia in prior years. Our aggregate state income tax liability, on whichwe may owe accrued interest and penalties, could be material to ourresults of operations

**Expenses relating to programming costs are generallyincreasing and a number of factors can cause cost overruns and delays, and ouroperating results may be adversely impacted if we are not able tosuccessfully recover the costs of developing and acquiring new programming.**

The average cost ofprogramming has increased recently for the cable industry and such increasesmay continue. We plan to build our programming library through theacquisition of long-term broadcasting rights from third party producers,in-house production and outright acquisition of programming, and thismay lead to increases in our programming costs. The development,production and editing of television programming requires a significant amountof capital and there are substantial financial risks inherent in developing andproducing television programs. Actual programming and production costsmay exceed their budgets. Factors such as labor disputes, death ordisability of key spokespersons or program hosts, damage to film negatives,master tapes and recordings or adverse weather conditions may cause costoverruns and delay or prevent completion of a project. If we are not able tosuccessfully recover the costs of developing or acquiring programming throughincreased revenues, whether the programming is produced by us or acquired fromthird-party producers, our business and operating results will be harmed.

**Our operating results may be negatively impactedif our Outdoor Channel 2 HD network is not as successful as we anticipate.**

In July 2005, welaunched an all new, all native high definition network called Outdoor Channel2 HD. There can be no assurance that Outdoor Channel 2 HD will not incurunexpected costs and expenses. Distribution of Outdoor Channel 2 HD will dependon successfully executing new or amended distribution agreements with cable andsatellite service providers. There can be no assurance that such agreements canbe made, and if they are made, that they will be on terms favorable to us orthat they will not require us to grant periods of free service and/or marketingcommitments to encourage carriage. The public may not adopt HD consumertelevision equipment in numbers sufficient to allow profits for anadvertiser-supported service. Bandwidth constraints may keep OutdoorChannel 2 HD from achieving sufficient distribution from service providers toreach profitability. Competition for quality HD content may increase thecosts of programming for Outdoor Channel 2 HD beyond our control orexpectations. All of these factors, combined or separately, could increasecosts or restrain revenue and adversely affect our operating results.

**Our operating results may vary significantly, andhistorical comparisons of our operating results are not necessarily meaningfuland should not be relied upon as an indicator of future performance.**

Our operations areinfluenced by many factors. These factors may cause our financial resultsto vary significantly in the future and our operating results may not meetthe expectations of securities analysts or investors. If this occurs, the priceof our stock may decline. Factors that can cause our results to fluctuateinclude, but are not limited to:

·       carriagedecisions of cable and satellite service providers;

·       demandfor advertising, advertising rates and offerings of competing media;

·       changesin the growth rate of cable and satellite subscribers;

22

----

·       cableand satellite service providers’ capital and marketing expenditures and theirimpact on programming offerings and penetration;

·       seasonaltrends in viewer interests and activities;

·       pricing,service, marketing and acquisition decisions that could reduce revenues andimpair quarterly financial results;

·       themix of cable television and satellite-delivered programming products andservices sold and the distribution channels for those products and services;

·       ourability to react quickly to changing consumer trends;

·       specificeconomic conditions in the cable television and related industries; and

·       changingregulatory requirements.

Due to the foregoing andother factors, many of which are beyond our control, our revenue and operatingresults vary from period to period and are difficult to forecast. Our expenselevels are based in significant part on our expectations of futurerevenue. Therefore, our failure to meet revenue expectations would seriouslyharm our business, operating results, financial condition and cash flows.Further, an unanticipated decline in revenue for a particular calendar quartermay disproportionately affect our profitability because our expenses wouldremain relatively fixed and would not decrease correspondingly.

23

----

**Changes to financial accounting standards or ouraccounting estimates may affect our reported operating results.**

We prepare our financial statements to conform togenerally accepted accounting principles (“GAAP”), which are subject tointerpretations by the Financial Accounting Standards Board, the Securities andExchange Commission and various bodies formed to interpret and createappropriate accounting policies. A change in those policies can have asignificant effect on our reported results and may even affect ourreporting of transactions completed before a change is announced. Accountingpolicies affecting many other aspects of our business, includingrules relating to business combinations and employee stock option grants,have recently been revised or are under review. Changes to those rules orthe questioning of current practices may adversely affect our reportedfinancial results or the way we conduct our business. In addition, ourpreparation of financial statements in accordance with GAAP requires that wemake estimates, judgments and assumptions that affect the recorded amounts ofassets and liabilities, disclosure of those assets and liabilities at the dateof the financial statements and the recorded amounts of revenue and expensesduring the reporting period. A change in the facts and circumstancessurrounding those estimates, including the interpretation of the terms andconditions of our contractual obligations, could result in a change to ourestimates and could impact our operating results.

**If we fail to develop and distribute popular programs,our viewership would likely decline, which could cause advertising andsubscriber fee revenues to decrease.**

Our operating resultsdepend significantly upon the generation of advertising revenue. Our ability togenerate advertising revenues is largely dependent on our Nielsen ratings,which estimates the number of viewers of The Outdoor Channel, and this directlyimpacts the level of interest of advertisers and rates we are able to charge.If we fail to program popular shows that maintain or increase our currentnumber of viewers, our Nielsen ratings could decline, which in turn could causeour advertising revenue to decline and adversely impact our business andoperating results. In addition, if we fail to program popular shows the numberof subscribers to our channel may also decrease, resulting in a decreasein our subscriber fee and advertising revenue.

**The market in which we operate is highly competitive,and we may not be able to compete effectively, particularly againstcompetitors with greater financial resources, brand recognition, marketplacepresence and relationships with service providers.**

We compete for viewers with other pay cable televisionand broadcast networks, including Versus (formerly OLN), Spike TV, ESPN2 andothers. If these or other competitors, many of which have substantially greaterfinancial and operational resources than us, significantly expand theiroperations with respect to outdoor-related programming or their market penetration,our business could be harmed. In addition, certain technological advances,including the deployment of fiber optic cable, which are already substantiallyunderway, are expected to allow cable systems to greatly expand their currentchannel capacity, which could dilute our market share and lead to increasedcompetition for viewers from existing or new programming services.

We also compete withtelevision network companies that generally have large subscriber bases andsignificant investments in, and access to, competitive programming sources. Insome cases, we compete with cable and satellite service providers that have thefinancial and technological resources to create and distribute their owntelevision networks, such as Versus, which is owned and operated by Comcast. Inorder to compete for subscribers, we may be required to reduce our subscriberfee rates or pay either launch fees or marketing support or both forcarriage in certain circumstances in the future which may harm ouroperating results and margins. We may also issue our securities from timeto time in connection with our attempts for broader distribution of The OutdoorChannel and the number of such securities could be significant. We compete foradvertising sales with other pay television networks, 

24

----

broadcastnetworks, and local over-the-air television stations. We also compete foradvertising sales with satellite and broadcast radio and the print media. Wecompete with other cable television networks for subscriber fees from, andaffiliation agreements with, cable and satellite service providers. Actions bythe Federal Communications Commission, which we refer to as the FCC, and thecourts have removed certain of the impediments to entry by local telephonecompanies into the video programming distribution business, and otherimpediments could be eliminated or modified in the future. These localtelephone companies may distribute programming that is competitive withthe programming provided by us to cable operators.

**Changes in corporate governance and securitiesdisclosure and compliance practices have increased and may continue toincrease our legal compliance and financial reporting costs.**

The Sarbanes-Oxley Act of2002 required us to change or supplement some of our corporate governance and securitiesdisclosure and compliance practices. The Securities and Exchange Commission andNASDAQ have revised, and continue to revise, their regulations and listingstandards. These developments have increased, and may continue toincrease, our legal compliance and financial reporting costs.

**We may not be able to attract new, or retainexisting, members in our club organizations, and as a result our revenues andprofitability may be harmed.**

Our ability to attract newmembers and retain existing members in our club organizations, GPAA and LostDutchman’s, depends, in part, upon our marketing efforts, including ourprogramming on The Outdoor Channel and such other efforts as direct mailcampaigns, continued sponsorship of expositions dedicated to gold prospecting,treasure hunting and related interests around the country and introductoryoutings held at our campsites. We cannot assure you that we will successfullyattract new members or retain existing members. A decline in membership in ourclub organizations could harm our business and operating results.

**The satellite infrastructure that we use may failor be preempted by another signal, which could impair our ability to deliverprogramming to our cable and satellite service providers.**

Our ability to deliver programmingto service providers, and their subscribers, is dependent upon the satelliteequipment and software that we use to work properly to distribute ourprogramming. If this satellite system fails, or a signal with a higher priorityreplaces our signal, which is determined by our agreement with the owner of thesatellite, we may not be able to deliver programming to our cable andsatellite service provider customers and their subscribers within the timeperiods advertised. We have negotiated for back-up capability with oursatellite provider on an in-orbit spare satellite, which provides us carriageon the back-up satellite in the event that catastrophic failure occurs on theprimary satellite. Our contract provides that our main signal is subject to preemptionand until the back-up satellite is in position, we could lose our signal for aperiod of time. A loss of our signal could harm our reputation and reduce ourrevenues and profits.

**Natural disasters and other events beyond our controlcould interrupt our signal.**

Our systems and operationsmay be vulnerable to damage or interruption from earthquakes, floods,fires, power loss, telecommunication failures and similar events. They alsocould be subject to break-ins, sabotage and intentional acts of vandalism.Since our production facilities for The Outdoor Channel are all located inTemecula, California, the results of such events could be particularlydisruptive because we do not have readily available alternative facilities fromwhich to conduct our business. Our business interruption insurance may notbe sufficient to compensate us for losses that may occur. Despite anyprecautions we may take, the occurrence of a natural disaster or otherunanticipated problems at our 

25

----

facilitiescould result in interruptions in our services. Interruptions in our servicecould harm our reputation and reduce our revenues and profits.

**Seasonal increases or decreases in advertising revenuemay negatively affect our business.**

Seasonal trends are likelyto affect our viewership, and consequently, could cause fluctuations in ouradvertising revenues. Our business reflects seasonal patterns of advertisingexpenditures, which is common in the broadcast industry. For this reason,fluctuations in our revenues and net income could occur from period to perioddepending upon the availability of advertising revenues. Due, in part, to theseseasonality factors, the results of any one quarter are not necessarilyindicative of results for future periods, and our cash flows may not correlatewith revenue recognition.

**We may be unable to access capital, or offer equity asan incentive for increased subscribers, on acceptable terms to fund our futuregrowth and operations.**

Our future capital andsubscriber growth requirements will depend on numerous factors, including thesuccess of our efforts to increase advertising revenues, the amount ofresources devoted to increasing distribution of The Outdoor Channel, andacquiring and producing programming for The Outdoor Channel. As a result, we couldbe required to raise substantial additional capital through debt or equityfinancing or offer equity as an incentive for increased distribution. To theextent that we raise additional capital through the sale of equity orconvertible debt securities, or offer equity incentives for subscriber growth,the issuance of such securities could result in dilution to existingstockholders. If we raise additional capital through the issuance of debtsecurities, the debt securities would have rights, preferences and privilegessenior to holders of common stock and the terms of such debt could imposerestrictions on our operations. We cannot assure you that additional capital,if required, will be available on acceptable terms, or at all. If we are unableto obtain additional capital, or must offer equity incentives for subscribergrowth, our current business strategies and plans and ability to fund futureoperations may be harmed.

**We may not be able to attract and retain keypersonnel.**

Our success depends to asignificant degree upon the continued contributions of the principal members ofour sales, marketing, production and management personnel, many of whom wouldbe difficult to replace. Other than our CEO, Roger L. Werner, Jr., none ofour employees are under contract and all of our employees are “at-will.” Any ofour officers or key employees could leave at any time, and we do not have “keyperson” life insurance policies covering any of our employees. The competitionfor qualified personnel has been strong in our industry. This competition couldmake it more difficult to retain our key personnel and to recruit new highlyqualified personnel. The loss of Perry T. Massie, our Chairman of theBoard, Roger L. Werner, Jr., our CEO and President, Thomas H. Massie, ourExecutive Vice President, William A. Owen, our Chief Financial Officer, orThomas E. Hornish, our COO and General Counsel, could adversely impact ourbusiness. To attract and retain qualified personnel, we may be required togrant large option or other share-based incentive awards, which may behighly dilutive to existing stockholders. We may also be required to paysignificant base salaries and cash bonuses to attract and retain theseindividuals, which payments could harm our operating results. If we are notable to attract and retain the necessary personnel we may not be able toimplement our business plan.

**New video recording technologies may reduce ouradvertising revenue.**

A number of new personalvideo recorders, such as TiVo® in the UnitedStates, have emerged in recent years. These recorders often contain featuresallowing viewers to watch pre-recorded programs without watching advertising.The effect of these recorders on viewing patterns and exposure to advertisingcould harm our operations and results if our advertisers reduce the advertisingrates they are willing to pay because they believe television advertisementsare less effective with these technologies.

26

----

**Cable and satellite television programming signalshave been stolen or could be stolen in the future, which reduces our potentialrevenue from subscriber fees and advertising.**

The delivery ofsubscription programming requires the use of conditional access technology tolimit access to programming to only those who subscribe to programming and areauthorized to view it. Conditional access systems use, among other things,encryption technology to protect the transmitted signal from unauthorizedaccess. It is illegal to create, sell or otherwise distribute software ordevices to circumvent conditional access technologies. However, theft of cableand satellite programming has been widely reported, and the access or “smart”cards used in cable and satellite service providers’ conditional access systemshave been compromised and could be further compromised in the future. Whenconditional access systems are compromised, we do not receive the potentialsubscriber fee revenues from the cable and satellite service providers.Further, measures that could be taken by cable and satellite service providersto limit such theft are not under our control. Piracy of our copyrightedmaterials could reduce our revenue from subscriber fees and advertising andnegatively affect our business and operating results.

**Because we expect to become increasingly dependentupon our intellectual property rights, our inability to protect those rightscould negatively impact our ability to compete.**

Currently approximately72% of programs we air (exclusive of infomercials) on The Outdoor Channel areprovided by third-party television and film producers. In order to build alibrary of programs and programming distribution rights, we must obtain all ofthe necessary rights, releases and consents from the parties involved indeveloping a project or from the owners of the rights in a completed program.There can be no assurance that we will be able to obtain the necessary rightson acceptable terms, or at all, or properly maintain and document such rights.In addition, protecting our intellectual property rights by pursuing those whoinfringe or dilute our rights can be costly and time consuming. If we areunable to protect our portfolio of trademarks, service marks, copyrightedmaterial and characters, trade names and other intellectual property rights,our business and our ability to compete could be harmed.

**We may face intellectual property infringement claimsthat could be time-consuming, costly to defend and result in our loss ofsignificant rights.**

Other parties may assertintellectual property infringement claims against us, and our productsmay infringe the intellectual property rights of third parties. From timeto time, we receive letters alleging infringement of intellectual propertyrights of others. Intellectual property litigation can be expensive andtime-consuming and could divert management’s attention from our business. Ifthere is a successful claim of infringement against us, we may be requiredto pay substantial damages to the party claiming infringement or enter intoroyalty or license agreements that may not be available on acceptable ordesirable terms, if at all. Our failure to license the proprietary rights on atimely basis would harm our business.

**Some of our existing stockholders can exert controlover us and may not make decisions that are in the best interests of allstockholders.**

Our current officers,directors and greater than 5% stockholders together currently control greaterthan 50% of our outstanding common stock. As a result, these stockholders,acting together, would be able to exert significant influence over all mattersrequiring stockholder approval, including the election of directors andapproval of significant corporate transactions. In addition, this concentrationof ownership may delay or prevent a change in control of our company, evenwhen a change may be in the best interests of stockholders. In addition,the interests of these stockholders may not always coincide with ourinterests as a company or the interests of other stockholders. Accordingly,these stockholders could cause us to enter into transactions or agreements thatyou would not approve.

27

----

**The market price of our common stock has been andmay continue to be subject to wide fluctuations.**

Our stock has historicallybeen and continues to be traded at relatively low volumes and therefore hasbeen subject to price volatility. Various factors contribute to the volatilityof our stock price, including, for example, low trading volume, quarterlyvariations in our financial results, increased competition and general economicand market conditions. While we cannot predict the individual effect that thesefactors may have on the market price of our common stock, these factors,either individually or in the aggregate, could result in significant volatilityin our stock price during any given period of time. There can be no assurancethat a more active trading market in our stock will develop. As a result,relatively small trades may have a significant impact on the price of ourcommon stock. Moreover, companies that have experienced volatility in themarket price of their stock often are subject to securities class actionlitigation. If we were the subject of such litigation, it could result insubstantial costs and divert management’s attention and resources.

**Anti-takeover provisions in our certificate of incorporation,our bylaws and under Delaware law may enable our incumbent management toretain control of us and discourage or prevent a change of control thatmay be beneficial to our stockholders.**

Provisions ofDelaware law, our certificate of incorporation and bylaws could discourage,delay or prevent a merger, acquisition or other change in control thatstockholders may consider favorable, including transactions in which youmight otherwise receive a premium for your shares. These provisions also couldlimit the price that investors might be willing to pay in the future for sharesof our common stock, thereby depressing the market price of our common stock.Furthermore, these provisions could prevent attempts by our stockholders toreplace or remove our management. These provisions:

·       allowthe authorized number of directors to be changed only by resolution of ourboard of directors;

·       establisha classified board of directors, providing that not all members of the board beelected at one time;

·       requirea 662¤3%stockholder vote to remove a director, and only for cause;

·       authorizeour board of directors to issue without stockholder approval blank checkpreferred stock that, if issued, could operate as a “poison pill” to dilute thestock ownership of a potential hostile acquirer to prevent an acquisition thatis not approved by our board of directors;

·       requirethat stockholder actions must be effected at a duly called stockholder meetingand prohibit stockholder action by written consent;

·       establishadvance notice requirements for stockholder nominations to our board ofdirectors or for stockholder proposals that can be acted on at stockholdermeetings;

·       exceptas provided by law, allow only our board of directors to call a special meetingof the stockholders; and

·       requirea 662¤3%stockholder vote to amend our certificate of incorporation or bylaws.

In addition, because weare incorporated in Delaware, we are governed by the provisions of Section 203of the Delaware General Corporation Law, which may, unless certain criteria aremet, prohibit large stockholders, in particular those owning 15% or more of ouroutstanding voting stock, from merging or combining with us for a prescribedperiod of time.

28

----

**Technologies in the cable and satellite televisionindustry are constantly changing, and our failure to acquire or maintainstate-of-the-art technology may harm our business and competitiveadvantage.**

The technologies used inthe cable and satellite television industry are rapidly evolving. Manytechnologies and technological standards are in development and have thepotential to significantly transform the ways in which programming iscreated and transmitted. We cannot accurately predict the effects thatimplementing new technologies will have on our programming and broadcastingoperations. We may be required to incur substantial capital expendituresto implement new technologies, or, if we fail to do so, may facesignificant new challenges due to technological advances adopted bycompetitors, which in turn could result in harming our business and operatingresults.

**The cable and satellite television industry is subjectto substantial governmental regulation for which compliance may increase ourcosts and expose us to penalties for failure to comply.**

The cable television industry is subject to extensivelegislation and regulation at the federal and local levels, and, in someinstances, at the state level, and many aspects of such regulation arecurrently the subject of judicial proceedings and administrative or legislativeproposals. Similarly, the satellite television industry is subject to federalregulation. Operating in a regulated industry increases our cost of doingbusiness as a video programmer.

The Cable Television Consumer Protection andCompetition Act of 1992, to which we refer as the 1992 Cable Act, includesprovisions that preclude cable operators affiliated with video programmers fromfavoring their programmers over competitors. The 1992 Cable Act alsoeffectively precludes such programmers from selling their programmingexclusively to cable operators. These provisions potentially benefitindependent programmers such as us by limiting the ability of cable operatorsaffiliated with programmers from carrying only programming in which they havean ownership interest and from offering exclusive programming arrangements.However, the United States Court of Appeals for the District of ColumbiaCircuit vacated the FCC rule limiting the carriage of affiliatedprogrammers by cable operators. Although the FCC issued further notices ofproposed rulemaking in 2001 and 2005 addressing this issue, it has not adoptednew rules. The exclusivity provision is scheduled to expire in October 2007,but the FCC has initiated a rulemaking proceeding to determine if a further extensionis necessary to protect competition and diversity.

Regulatory carriage requirements also could reduce thechannel capacity available to carry The Outdoor Channel. The 1992 Cable Actgranted television broadcasters a choice of must-carry rights or retransmissionconsent rights. The rules adopted by the FCC generally provide formandatory carriage by cable systems of all local full-power commercialtelevision broadcast signals selecting must-carry rights and, depending on acable system’s channel capacity, non-commercial television broadcast signals.Such statutorily mandated carriage of broadcast stations, coupled with theprovisions of the Cable Communications Policy Act of 1984, which require cabletelevision systems with 36 or more “activated” channels to reserve a percentageof such channels for commercial use by unaffiliated third parties and permitfranchise authorities to require the cable operator to provide channelcapacity, equipment and facilities for public, educational and government accesschannels, could reduce carriage of The Outdoor Channel by limiting its carriagein cable systems with limited channel capacity. In 2001, the FCC adopted rules relatingto the cable carriage of digital television signals. Among other things, the rules clarifythat a digital-only television station can assert a right to analog or digitalcarriage on a cable system. The FCC initiated a further proceeding to determinewhether television broadcasters may assert the rights to carriage of bothanalog and digital signals during the transition to digital television and tocarriage of all digital signals. In 2005, the FCC decided that televisionbroadcasters do not have such additional must-carry rights. Broadcastersformally have requested that the FCC reconsider this decision and are seekinglegislative change to require such carriage. In June 2006, this matter wasscheduled to be heard by the FCC at its open meeting, but was removed from theagenda without discussion. The imposition of such 

29

----

additional must-carry regulation,in conjunction with any limited cable system channel capacity, would increasethe likelihood that cable operators may be forced to drop some cableprogramming services and could reduce carriage of The Outdoor Channel.

The Telecommunications Act of 1996 required the FCC toestablish rules and an implementation schedule to ensure that videoprogramming is fully accessible to the hearing impaired through closedcaptioning. The rules adopted by the FCC require substantial closedcaptioning over a six to ten year phase-in period, which began in 2000, withonly limited exemptions. As a result, we will continue to incur additionalcosts for closed captioning. Failure to meet these closed captioningrequirements could cause a service provider to discontinue carrying The OutdoorChannel and result in regulatory action by the FCC.

If we distribute television programming through othertypes of media, we may be required to obtain federal, state and locallicenses or other authorizations to offer such services. We may not beable to obtain licenses or authorizations in a timely manner, or at all, orconditions could be imposed upon licenses and authorizations that may notbe favorable to us. In the future, increased regulation of rates could, amongother things, put downward pressure on the rates charged by cable programmingservices, and affect the ability or willingness of cable system operators toretain or to add The Outdoor Channel network on their cable systems.

In addition, government-mandated a la carte carriageor small tiers of channels by cable system operators could adversely impact ourviewership levels if The Outdoor Channel is sold a la carte or moved to such atier. In response to a request from the Committee on Energy and Commerce of theHouse of Representatives, the FCC’s Media Bureau conducted a study in 2004regarding, among other things, government-mandated a la carte or mini-tierpackaging of programming services in which each subscriber would purchase onlythose channels that he or she desired instead of the larger bundles ofdifferent channels as is typical today. The Media Bureau’s report in 2004observed that such packaging would increase the cost of programming toconsumers and injure programmers. On February 9, 2006, the Media Bureaureleased a further report which stated that the 2004 report was flawed andwhich concluded that a-la-carte sales could be in the best interests ofconsumers. Although the FCC cannot mandate a-al-carte sales, its endorsement ofthe concept could encourage Congress to consider proposals to mandatea-ala-carte sales or otherwise seek to impose greater regulatory controls onhow cable programming is sold. If, in response to any statue enacted byCongress, or any rate or other government regulation, cable system operatorsimplement channel offerings that require subscribers to affirmatively choose topay a separate fee to receive The Outdoor Channel, either by itself or incombination with a limited number of other channels, the number of viewers forThe Outdoor Channel could be reduced.

The regulation ofprogramming services, cable television systems and satellite licensees issubject to the political process and has been in constant flux over the pastdecade. Further material changes in the law and regulatory requirements aredifficult to anticipate and our business may be harmed by futurelegislation, new regulation, deregulation or court decisions interpreting lawsand regulations.

**We must comply with many local, states, federal andenvironmental regulations, for which compliance may be costly and mayexpose us to substantial penalties.**

Our recreational outdooractivity entities, GPAA and Lost Dutchman’s, share the general risks of alloutdoor recreational activities such as personal injury, environmentalcompliance and real estate and environmental regulation. In addition to thegeneral cable television industry regulations, we are also subject to variouslocal, state and federal regulations, including, without limitation,regulations promulgated by federal and state environmental, health and laboragencies. Our prospecting clubs are subject to various local, state and federalstatutes, ordinances, rules and regulations concerning zoning, developmentand other utilization of their properties. We cannot predict what impactcurrent or future regulations may have on these businesses. In addition,failure to maintain required permits or licenses, or 

30

----

tocomply with applicable regulations, could result in substantial fines or costsor revocation of our operating licenses, which would have a material adverseeffect on our business and operating results.

**If our goodwill becomes impaired, we will be requiredto take a non-cash charge which could have a significant effect on our reportednet earnings.**

A significant portion ofour assets consists of goodwill. In accordance with Statement of FinancialAccounting Standards No. 142, “Goodwill and Other Intangible Assets”, orSFAS 142, we test goodwill for impairment during the fourth quarter ofeach year, and on an interim date if factors or indicators become apparent thatwould require an interim test. A significant downward revision in the presentvalue of estimated future cash flows for a reporting unit could result in animpairment of goodwill under SFAS 142 and a non-cash charge would berequired. Such a charge could have a significant effect on our reported netearnings.

**Future issuance by us of preferred shares couldadversely affect the holders of existing shares, and therefore reduce the valueof existing shares.**

We are authorized to issueup to 25,000,000 shares of preferred stock. The issuance of any preferred stockcould adversely affect the rights of the holders of shares of our common stock,and therefore reduce the value of such shares. No assurance can be given thatwe will not issue shares of preferred stock in the future.

**We do not expect to pay dividends in the foreseeablefuture.**

We do not anticipatepaying cash dividends on our common stock in the foreseeable future. Anypayment of cash dividends will also depend on our financial condition,operating results, capital requirements and other factors and will be at thediscretion of our board of directors. Furthermore, at the time of any potentialpayment of a cash dividend we may subject to contractual restrictions on, orprohibitions against, the payment of dividends.

**ITEM 1B.**       UNRESOLVED STAFF COMMENTS.

None.

**ITEM 2.**                PROPERTIES.

We are currentlyleasing approximately 32,000 square feet of commercial property located at43445 Business Park Drive in Temecula, California. In addition, we ownapproximately 36,000 square feet including 23,000 square feet of office spaceand 13,000 square feet of warehouse space located at 43455 Business Park Drivein Temecula. The property located at 43445 Business Park Drive is currently usedas our headquarters. The property located at 43455 Business Park Drive housesour broadcast facility. Both of these properties are used in connection withour two segments (The Outdoor Channel and Membership Division) and theCorporate unit.

31

----

We also own the following properties thatwe use for camping and gold prospecting in connection with our membershipdivision segment:

| **Designation of Property** | ** ** | ** ** | ** ** | **Approximate Number of Acres** | ** ** | **Location**   | ** ** |
|---------------------------------------|------------|------------|------------|------------------------------------------------|------------|----------------|------------|
| Cripple River                         |       |       | 2,300      |                                           |       | Alaska         |       |
| Loud Mine                             |       |       | 37         |                                           |       | Georgia        |       |
| Stanton Property                      |       |       | 60         |                                           |       | Arizona        |       |
| Burnt River                           |       |       | 135        |                                           |       | Oregon         |       |
| Vein Mountain Camp                    |       |       | 132        |                                           |       | North Carolina |       |
| Junction Bar Place                    |       |       | 28         |                                           |       | California     |       |
| Oconee Camp                           |       |       | 120        |                                           |       | South Carolina |       |
| Leadville Property                    |       |       | 60         |                                           |       | Colorado       |       |
| Omilak Silver Mine                    |       |       | 40         |                                           |       | Alaska         |       |
| Athens Property                       |       |       | 70         |                                           |       | Michigan       |       |
| Blue Bucket                           |       |       | 119        |                                           |       | Oregon         |       |

 

In connection withour Membership Division segment, we also have a mutual use agreement with anon-profit organization, Lost Dutchman’s Mining Association, Inc., thatowns additional properties, some adjacent to some of our properties. Thismutual use agreement allows our members to camp and prospect on the propertiesowned by Lost Dutchman’s Mining Association, Inc., and in return, themembers of Lost Dutchman’s Mining Association, Inc. may camp andprospect on our properties.

**ITEM 3.**                LEGAL PROCEEDINGS.

From time to time, we may be involved in litigation relatingto claims arising out of our operations. As of the date of this report, we arenot a party to any legal proceedings that are expected, individually or in theaggregate, to have a material adverse effect on our business, financialcondition or operating results.

**ITEM 4.**                SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS.

None.

32

----

**PART II**

**ITEM 5.**                MARKET FOR REGISTRANT’S COMMONEQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

*Market Information*

The following table sets forth the highand low closing prices of our common stock as reported on The Nasdaq GlobalMarket (formerly known as The Nasdaq National Market) for the periodsindicated.

| ** ** | ** ** | ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|------------|------------|----------------|------------|----------|------------|---------|------------|
| 2005       |       | First Quarter  |       | 14.95    |       | 13.36   |       |
|       |       | Second Quarter |       | 17.00    |       | 13.76   |       |
|       |       | Third Quarter  |       | 14.76    |       | 12.77   |       |
|       |       | Fourth Quarter |       | 16.50    |       | 13.47   |       |
| 2006       |       | First Quarter  |       | 15.27    |       | 9.87    |       |
|       |       | Second Quarter |       | 13.14    |       | 10.00   |       |
|       |       | Third Quarter  |       | 11.15    |       | 9.13    |       |
|       |       | Fourth Quarter |       | 14.08    |       | 10.84   |       |

 

As of December 31,2006, there were approximately 902 holders of record of our common stock.

**DIVIDEND POLICY**

We have never declared or paidany cash dividends on our common stock, and we do not anticipate paying anycash dividends in the foreseeable future. We currently anticipate that we willretain all of our future earnings for use in the development and expansion ofour business and for general corporate purposes. Any determination to paydividends in the future will be at the discretion of our board of directors andwill depend upon our results of operation, financial condition and otherfactors as the board of directors, in its discretion, deems relevant.

**PERFORMANCE GRAPH**

The graph below shows the five-year cumulative totalstockholder return assuming an investment of $100 and the reinvestment ofdividends, although dividends have not been declared on our common stock. Thegraph compares total stockholder returns of our common stock, of the Russell2000 Index and of a Peer Group Index consisting of Crown Media Holdings, Inc.and ION Media Networks (formerly known as Paxson Communications Corporation).The graph assumes that $100 was invested in our stock on December 31, 2001and that the same amount was invested in the Russell 2000 Index and the PeerGroup Index. Historical results are not necessarily indicative of futureperformance. Our common stock is currently traded on The Nasdaq Global Market(formerly known as The Nasdaq National Market). Prior to September 15,2004, our common stock was traded on NASD’s OTC Bulletin Board.

The stockholder returnshown on the graph below is not necessarily indicative of future performanceand the Company will not make or endorse any predictions as to futurestockholder returns.

33

----

**Outdoor ChannelHoldings, Inc.**

**Performance Graph**

**Comparison ofCumulative Total Return***

****

----

*                    Assumes$100 investment on December 31, 2001

**ITEM 6.**                SELECTED FINANCIAL DATA.

You should read the selected consolidated financialdata presented below in conjunction with the audited consolidated financialstatements appearing elsewhere in this report and the notes to those statementsand “Management’s Discussion and Analysis of Financial Condition and Results ofOperations.” The selected consolidated financial data as of December 31,2006 and 2005, and for each of the years in the three-year period ended December 31,2006 have been derived from our audited consolidated financial statements whichappear elsewhere in this report. The selected consolidated financial data as ofDecember 31, 2004, 2003 and 2002 and for each of the years in the two-yearperiod ended December 31, 2003 have been derived from our auditedconsolidated financial statements which are not included in this report. Thehistorical results are not necessarily indicative of the operating results tobe expected in the future. All financial information presented has beenprepared in United States dollars and in accordance with accounting principlesgenerally accepted in the United States of America (U.S. GAAP).

34

----

In2004, we completed the acquisition of all of the outstanding shares of TheOutdoor Channel, Inc. that we did not previously own. Please see “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Acquisitionof the Minority Interest of The Outdoor Channel, Inc.” for a discussionregarding this transaction and the comparability of the information before andafter such time.

| ** **                                                  | ** ** | **Year Ended December 31,**                            | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2006**                                                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                  | ** ** | **(In thousands, except per share amounts)** | ** ** |
| **Income Statement Data:**                                  |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Revenues:                                                   |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Advertising                                                 |       | $                                                                     | 25,679     |   | $ | 22,769 |   | $ | 21,817 |   | $ | 16,396 |   | $ | 10,969 |   |
| Subscriber fees                                             |       | 17,687                                                                |       | 15,432 |   | 13,391 |   | 10,836 |   | 6,071 |   |
| Membership income                                           |       | 5,156                                                                 |       | 4,707 |   | 4,746 |   | 4,456 |   | 4,353 |   |
| Total revenues                                              |       | 48,522                                                                |       | 42,908 |   | 39,954 |   | 31,688 |   | 21,393 |   |
| Income (loss) from operations                               |       | (13,684                                                               | )          | 2,798 |   | (39,704 | ) | 7,627 |   | 4,576 |   |
| Income (loss)  before income taxes and minority interest    |       | (11,238                                                               | )          | 3,696 |   | (39,589 | ) | 7,653 |   | 4,621 |   |
| Income tax  provision (benefit)                             |       | (3,913                                                                | )          | 1,503 |   | (16,011 | ) | 3,162 |   | 1,882 |   |
| Income (loss)  before minority interest                     |       | (7,325                                                                | )          | 2,193 |   | (23,578 | ) | 4,491 |   | 2,739 |   |
| Minority interest  in net income of consolidated subsidiary |       | —                                                                |       | — |   | 682 |   | 897 |   | 444 |   |
| Net income (loss)                                           |       | (7,325                                                                | )          | 2,193 |   | (24,260 | ) | 3,594 |   | 2,295 |   |
| Preferred stock  dividends                                  |       | —                                                                |       | — |   | — |   | — |   | (90 | ) |
| Net income (loss)  applicable to common stock               |       | $                                                                     | (7,325     | ) | $ | 2,193 |   | $ | (24,260 | ) | $ | 3,594 |   | $ | 2,205 |   |
| Earnings (loss) per  common share:                          |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Basic                                                       |       | $                                                                     | (0.30      | ) | $ | 0.10 |   | $ | (1.52 | ) | $ | 0.26 |   | $ | 0.17 |   |
| Diluted                                                     |       | $                                                                     | (0.30      | ) | $ | 0.09 |   | $ | (1.52 | ) | $ | 0.19 |   | $ | 0.15 |   |
| Weighted average number of  common shares outstanding:      |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Basic                                                       |       | 24,556                                                                |       | 21,423 |   | 15,998 |   | 13,824 |   | 13,220 |   |
| Diluted                                                     |       | 24,556                                                                |       | 24,732 |   | 15,998 |   | 14,768 |   | 14,627 |   |

 

| ** **                                   | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                   | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                   | ** ** | **(In thousands)**               | ** ** |
| **Balance Sheet Data:**                      |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                   |       | $                                     | 15,447     |   | $ | 18,276 |   | $ | 13,105 |   | $ | 7,214 |   | $ | 3,248 |   |
| Investment in  available-for-sale securities |       | 42,144                                |       | 38,830 |   | 741 |   | 550 |   | 80 |   |
| Goodwill                                     |       | 44,457                                |       | 44,457 |   | 44,457 |   | — |   | — |   |
| Total assets                                 |       | 147,957                               |       | 151,822 |   | 99,569 |   | 19,848 |   | 11,830 |   |
| Total liabilities                            |       | 5,983                                 |       | 10,018 |   | 6,187 |   | 4,353 |   | 4,405 |   |
| Minority interest  in subsidiary             |       | —                                |       | — |   | — |   | 2,302 |   | 1,263 |   |
| Stockholders’ equity                    |       | $                                     | 141,974    |   | $ | 141,804 |   | $ | 93,382 |   | $ | 13,193 |   | $ | 6,162 |   |

 

35

----

**ITEM 7.**                MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

**Safe Harbor Statement**

The informationcontained in this report may include forward-looking statements. Ouractual results could differ materially from those discussed in anyforward-looking statements. The statements contained in this report that arenot historical are “forward-looking statements” within the meaning of Section 27Aof the Securities Act of 1933, as amended (the “Securities Act”), and Section 21Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”),including statements, without limitation, regarding our expectations, beliefs,intentions or strategies regarding the future. We intend that suchforward-looking statements be subject to the safe-harbor provisions containedin those sections. Such forward-looking statements relate to, among otherthings: (1) expected revenue and earnings growth and changes in mix; (2) anticipatedexpenses including advertising, programming, personnel and others; (3) NielsenMedia Research, which we refer to as Nielsen, estimates regarding totalhouseholds and cable and satellite homes subscribing to and viewers (ratings)of The Outdoor Channel; and (4) other matters. We undertake no obligationto publicly update or revise any forward-looking statements, whether as aresult of new information, future events or otherwise.

These statements involve significant risks and uncertainties andare qualified by important factors that could cause our actual results todiffer materially from those reflected by the forward-looking statements. Suchfactors include but are not limited to risks and uncertainties which arediscussed above under “Item 1A Risk Factors” and other risks anduncertainties discussed elsewhere in this report. In assessing forward-lookingstatements contained herein, readers are urged to read carefully all cautionarystatements contained in this Form 10-K and in our other filings withthe Securities and Exchange Commission. For these forward-looking statements,we claim the protection of the safe harbor for forward-looking statements in Section 27Aof the Securities Act and Section 21E of the Exchange Act.

**General**

Through ourindirect wholly owned subsidiary, The Outdoor Channel, Inc. or TOC, we ownand operate The Outdoor Channel which is a national television network devotedprimarily to traditional outdoor activities, such as hunting, fishing andshooting sports, as well as off-road motor sports and other outdoor relatedlifestyle programming. We also own and operate related businesses which servethe interests of The Outdoor Channel’s viewers and other outdoor enthusiasts.These related businesses include: LDMA-AU, Inc., which we refer to as LostDutchman’s, and Gold Prospector’s Association of America, LLC, which we referto as GPAA. Lost Dutchman’s is a national gold prospecting campground club withproperties in Arizona, California, Colorado, Georgia, Michigan, North Carolina,Oregon and South Carolina. Among other services offered, GPAA is the publisherof the *Gold Prospector & Treasure Hunters in theGreat Outdoors* magazine. In addition, we are the owner of a2,300 acre property near Nome, Alaska used to provide outings for a fee tothe members of Lost Dutchman’s and GPAA. Outdoor Channel Holdings also whollyowns 43455 BPD, LLC that owns the building housing our broadcast facility.

Our revenues include (1) advertising fees from advertisementsaired on The Outdoor Channel and from advertisements in *GoldProspector & Treasure Hunters in the Great Outdoors*magazine; (2) subscriber fees paid by cable and satellite serviceproviders that air The Outdoor Channel; and (3) membership fees frommembers in both Lost Dutchman’s and GPAA and other income including magazinesales, products and services related to gold prospecting, gold expositions,expeditions and outings. Advertising fees include fees paid by third-partyprogrammers to purchase advertising time in connection with the airing of theirprograms on The Outdoor Channel.

36

----

**Reclassifications**

Certain amounts in the 2005 and 2004 consolidated financialstatements have been reclassified from amounts in the consolidated financialstatements we originally filed before the restatements described in Note 3 ofour financial statements either to conform to the 2006 presentations or to provideadditional detail about our operating results and more fully comply with theSecurities and Exchange Commission’s (“SEC”) Regulation S-X. In particular certainamounts included under “expenses” in the 2005 and 2004 consolidated financialstatements we originally issued have been reclassified in line items undereither “cost of services” or “other expenses”. Cost of services includes programming, satellite transmissionfees, production and operations and other direct costs. Other expenses includeadvertising, selling, general and administrative and depreciation andamortization. Further to better match intangible assets with the segment towhich they pertain, we have reclassified the amortizable intangible assets andthe goodwill which were recorded in connection with the acquisition on September 8,2004 of the remaining 17.6% minority interest in TOC along with the relatedamortization expense from “Corporate” to the “TOC” segment. Certain otherchanges have been made in the historical consolidated financial statements toconform with current presentations.

**Acquisition of the Minority Interest of The Outdoor Channel, Inc.**

On September 8,2004, we completed the acquisition of the remaining minority interest in TOCwhich we did not previously own through (i) the merger of TOC with ournewly-formed, wholly owned subsidiary, with TOC being the survivingcorporation, and (ii) the exchange of each share of TOC common stock notpreviously held by us or our subsidiaries for 0.65 shares of our common stock.In addition, each outstanding option to purchase one share of TOC common stockwas exchanged for an option to purchase 0.65 shares of our common stock. In September 2004,every two outstanding shares of our common stock were converted into fiveoutstanding shares of common stock in conjunction with our reincorporation fromAlaska to Delaware (the “5 for 2 split”).

Based on theexchange ratio in the merger we issued 3,069,790 shares of our commonstock as well as options to purchase 4,012,125 additional shares, each asadjusted for the 5 for 2 split. The shares issued include the shares of commonstock issued to a former TOC shareholder who originally exercised hisdissenters’ rights in connection with the transaction, but who later withdrew,with our consent, the demand to exercise such dissenter’s rights. Foraccounting purposes, all previously outstanding TOC common shares, includingthe dissenting shares, have been deemed to have been exchanged for shares ofour common stock in September 2004.

The acquisition ofthe 17.6% minority interest in TOC was accounted for using the purchase methodof accounting. The cost of acquiring the minority interest included theaggregate fair value of our common shares issued in exchange for common sharesof TOC and certain other direct costs. The acquisition cost was allocated basedon the fair value of the assets of TOC that were acquired and liabilities thatwere assumed, including intangible assets that arose from contractual or otherlegal rights or met certain other recognition criteria that underlie theminority interest that was acquired. The excess of the cost of the minorityinterest over the fair value of the underlying interest in the net identifiableassets acquired was allocated to goodwill. In addition, in accordance with theprovisions of Statement of Financial Accounting Standards No. 109, “Accountingfor Income Taxes” (“SFAS 109”) the tax effects of the intangible assetshave been treated as additional consideration. This additional considerationhas also been allocated to goodwill.

The cost of our acquisition of theminority interest in TOC was $54,985,000 based on the issuance at the closingof 3,069,790 shares of our common stock (including shares issued to the formerdissenter) and the average closing price of $16.24 per share of our commonstock for a specified period before and after April 20, 2004, the lasttrading day before the public announcement of the material terms of theacquisition 

37

----

plus theassumption of 325,000 fully vested options of a former employee of TOC with anintrinsic value of $4,250,000 plus certain other costs including income taxeffects. Based on the analysis of the fair value of the assets that wereacquired and liabilities that were assumed, the acquisition costs of$54,985,000 were allocated primarily to intangible assets as follows:

| ** **                                               | ** ** | **Allocation**          | ** ** | **Estimated  Useful Life** | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|---------------------------------|------------|
| ** **                                               | ** ** | **(in thousands)** | ** ** | ** **                      | ** ** |
| MSO relationships                                        |       |                    | $          | 10,573                          |       |   | 21 years, 4 months |   |
| Advertising customer relationships:                      |       |                    |       |                            |       |   |   |
| Short form                                               |       |                    | 1,351      |                            |       | 4 years |   |
| Long form                                                |       |                    | 621        |                            |       | 3 years |   |
| Total  identifiable intangible assets                    |       |                    | 12,545     |                            |       |   |   |
| Goodwill                                                 |       |                    | 44,457     |                            |       | Indefinite |   |
| Deferred tax liability associated with intangible assets |       |                    | (5,001     | )                               |       |   |   |
| Minority interest in subsidiary                          |       |                    | 2,984      |                            |       |   |   |
| Aggregate purchase price                                 |       |                    | $          | 54,985                          |       |   |   |   |

 

The exchange ofvested employee stock options by us for vested stock options held by employeesof TOC resulted in a charge to operations in our consolidated statement ofoperations on September 8, 2004 equal to the value of the options issuedon that date net of any related income tax benefit. The options to purchaseapproximately 3,687,125 shares that we issued in exchange for vested stockoptions held by the employees of TOC on September 8, 2004 had a fair valueof $14.00 per share based on the closing price of our common stock on that day.As a result, we incurred a non-cash, non-recurring charge to operating expensesof $47,983,000 and recognized an income tax benefit of $19,098,000 or a netcharge of $28,885,000.

In some of the following period-to-period comparisons, we havespecifically noted, and at times excluded the non-cash, non-recurringcompensation expense of $47,983,000 incurred by us and the related tax benefitof $19,098,000 as the result of the assumption of TOC options in connectionwith our acquisition of the minority interest in TOC as part of ouranalysis because we believe separately quantifying the effects of these itemsprovides the reader with a better understanding of our operating results. Wealso believe that an analysis of our results in this manner, when presented inconjunction with our analysis of the corresponding GAAP measures, providesuseful information to management and others in identifying and understandingour operating performance for the periods presented and in making usefulcomparisons.

**Reassessment ofUseful Life of MSO Relationships**

During the three months ended September 30, 2006,we reviewed the facts and circumstances regarding the useful life of ourintangible assets attributable to multi-system cable operator (“MSO”)relationships as of September 8, 2004 when we completed the acquisition ofthe minority interest in TOC that we did not previously own and allocated aportion of the excess of the cost of the minority interest over the fair valueof the underlying interest in the net identifiable assets acquired to the MSOrelationships. After consideration of the facts and circumstances, the natureof our business, our experience with the MSOs of our network, and theproclivities of our industry, we have concluded that as of September 8,2004 our MSO relationships asset had a definite life which we have estimated tobe 21 years and 4 months and, accordingly, we reclassified all of the amountsoriginally allocated to the cost of 

38

----

MSO relationships fromother non-amortizable intangible assets to amortizable intangible assets as ofthat date.

The accounting treatmentresulting from this reassessment of the useful life of this asset has resultedin adjustments to amortization expense and certain other related adjustments toour previously issued consolidated financial statements as of and for theperiods ended September 30, 2004 through June 30, 2006. We determinedthat the effects of these adjustments were immaterial individually and in theaggregate to our annual and quarterly reports filed prior to January 1,2005 and thus we did not amend those filings. However, we determined theeffects of these adjustments were material to our quarterly and annual reportsfiled for the periods ended March 31, 2005 through June 30, 2006 andwe have amended all of those filings. The comparative consolidated financialstatements in this report reflect the restated balances.

**Considerations ofImpairment of Intangible Assets**

During the three months ended September 30, 2006,we engaged third party consultants to review our business practices andstrategy. Among the areas reviewed was our approach to growing our subscriberbase through our relationships with MSOs. In September 2006, theconsultants concluded, and the Board of Directors accepted their conclusions,that a complete revision of the terms of our relationships with MSOs wasnecessary to meet the subscriber growth goals established by us. Uponacceptance of that conclusion and the general strategy outlined by theconsultants, we reviewed our amortizable MSO relationships and our otheramortizable intangible assets (customer lists and trademarks) for impairment inaccordance with Statement of Financial Accounting Standards No. 144, “Accountingfor Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). Based uponthe changed circumstances, we concluded that, as of the date we accepted theconsultants’ conclusion, our MSO relationships asset was fully impaired andthat our other remaining amortizable intangible assets were not. Accordingly,we have charged to expense the remaining unamortized carrying value of the MSOrelationships of $9,540 during the year ended December 31, 2006.

We further concluded thatthe carrying value of goodwill has not been impaired and that the changedcircumstances have not affected the estimated lives of the remainingamortizable intangible assets. However, these estimates will continue to bereviewed during each reporting period to determine whether circumstancescontinue to support their carrying values and, where applicable, theirestimated useful lives. Estimates are subject to risks and uncertainties, whichcould cause actual results to differ materially from those projected or impliedin the determination of the fair value. A significant downward revision in thepresent value of estimated future cash flows for a reporting unit or theundiscounted cash flows from the other remaining amortizable intangible assetscould result in an impairment of goodwill or the remaining amortizableintangibles and a non-cash charge would be required. Such a charge could have asignificant effect on our reported net earnings.

**Critical Accounting Policies and Estimates**

The preparation of financial statements in conformity with UnitedStates generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.We believe the following critical accounting policies affect our moresignificant judgments and estimates used in the preparation of financial statements.

39

----

*Revenue Recognition*

Advertisingrevenues for The Outdoor Channel are recognized when the advertisement isaired. Advertising revenues from advertisements in our bi-monthly magazine arerecognized when the magazine is distributed. Revenues from the expeditions arerecognized when they are taken in June through August each year.Revenues from outings and gold expositions are recognized at the time of theevent. Subscriber fees for The Outdoor Channel are recognized in the period theprogramming is aired by the distributor and collection is probable.

Broadcast andnational television network advertising contracts may guarantee theadvertiser a minimum audience for its advertisements over the term of thecontracts. We provide the advertiser with additional advertising time if we donot deliver the guaranteed audience size. The amount of additional advertisingtime is generally based upon the percentage of shortfall in audience size. Thisrequires us to make estimates of the audience size that will be deliveredthroughout the terms of the contracts. We base our estimate of audience size oninformation provided by ratings services and our historical experience. If wedetermine we will not deliver the guaranteed audience, an accrual for “make-good”advertisements is recorded as a reduction of revenue. The estimated make-goodaccrual is adjusted throughout the terms of the advertising contracts.

We recognize merchandise sales when the product is shipped andcollection of the receivable is probable. Lost Dutchman’s campground membershipsales are generally recognized on a straight-line basis over the estimatedaverage life (7 years) of the membership. We do not record receivablesarising under these contracts. Accordingly, revenues recognized do not exceed thetotal cash payments received and cash received in excess of revenue earned isrecorded as deferred revenue. The majority of GPAA membership sales is for oneyear and is generally recognized in the year of sale. Multi-year GPAAmembership sales are recognized on a straight-line basis over the life of amembership, and an estimated life of 15 years for a lifetime membership.

*Long-Lived Assets*

Long-lived assets, such as property and equipment, MSOrelationships, advertising customer relationships, goodwill and trademarks, arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. Impairmentlosses are recognized when events or changes in circumstances indicate that theundiscounted cash flows estimated to be generated by such assets are less thantheir carrying value and, accordingly, all or a portion of such carrying valuemay not be recoverable. Impairment losses for assets to be held and usedare then measured based on the excess, if any, of the carrying amounts of theassets over their estimated fair values. Long-lived assets to be disposed of ina manner that meets specific criteria are stated at the lower of their carryingamounts or fair values less costs to sell and are no longer depreciated.

*Accounts Receivable*

We maintain an allowance for doubtful accounts for estimatedlosses that may arise if any of our customers are unable to make requiredpayments. Management specifically analyzes the age of customer balances,historical bad debt experience, customer credit-worthiness and tradepublications regarding the financial health of our larger customers and changesin customer payment terms when making estimates of the uncollectability of ourtrade accounts receivable balances. If we determine that the financialcondition of any of our customers deteriorated, whether due to customerspecific or general economic issues, increases in the allowance may bemade.

40

----

*Deferred Tax Assets and Income Taxes*

We account forincome taxes pursuant to the asset and liability method which requires deferredincome tax assets and liabilities to be computed for temporary differencesbetween the financial statement and tax bases of assets and liabilities thatwill result in taxable or deductible amounts in the future based on enactedlaws and rates applicable to the periods in which the temporary differences areexpected to affect taxable income. Valuation allowances are established whennecessary to reduce deferred tax assets to the amounts expected to be realized.The income tax provision is the tax payable or refundable for the period plusor minus the change during the period in deferred tax assets and liabilities.

With our adoption ofSFAS 123R on January 1, 2006 we present, on a prospective basis, thetax benefits from exercise of stock options in excess of recognized expense asa cash flow from financing activities in the accompanying consolidatedstatement of cash flows rather than as a cash flow from operating activities,as was prescribed under accounting rules applicable through December 31,2005. This requirement reduces the amount reflected as net cash provided byoperating activities and increases net cash provided by financing activities.Total cash flows remained unchanged from that which would have been reportedunder prior accounting rules. We recognize such benefits only if they have beenrealized which we determine by following the tax law method, which providesthat current deductions are recognized before realizing the benefits of our netoperating loss carryforwards.

**Recent Accounting Developments**

In December 2004,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 123 (revised 2004) (“SFAS 123R”) “Share-BasedPayment” which revised the standards for the accounting for transactions inwhich an entity exchanges its equity instruments for goods or services andfocuses primarily on accounting for transactions in which an entity obtainsemployee services in share-based payment transactions. SFAS 123R requiresthat the fair value of such equity instruments, including all options grantedto employees, be recognized as expense in the historical financial statementsas services are performed. Prior to the adoption of SFAS 123R, we used theintrinsic value method to account for employee stock options and, generally,made no charges against earnings with respect to those options at the date ofgrant since our employee options had exercise prices that were equal to themarket price. SFAS 123R is effective for issuers as of the beginning ofthe first annual reporting period that begins after December 15, 2005.Accordingly, we adopted the provisions of SFAS No. 123R effective January 1,2006.

In June 2006,the FASB issued Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes—an interpretation of FAS No. 109” (“FIN 48”), whichclarifies the accounting for uncertainty in income taxes. Currently, theaccounting for uncertainty in income taxes is subject to significant and variedinterpretations that have resulted in diverse and inconsistent accountingpractices and measurements. Addressing such diversity, FIN 48 prescribes aconsistent recognition threshold and measurement attribute, as well as clearcriteria for subsequently recognizing, derecognizing and measuring changes insuch tax positions for financial statement purposes. FIN 48 also requiresexpanded disclosure with respect to the uncertainty in income taxes. FIN 48 iseffective for fiscal years beginning after December 15, 2006. We have notyet determined the impact of FIN 48 on our consolidated financial position,results of operations, cash flows or financial statement disclosures.

In September 2006,the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108,“Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements”**(“SAB108”). SAB 108 provides guidance on how prior year misstatements should betaken into consideration when quantifying misstatements in current yearfinancial statements for purposes of determining whether the current year’sfinancial statements are materially 

41

----

misstated. SAB 108 is effective for fiscal years ending on orafter November 15, 2006. The adoption of SAB 108 did not have any impacton the Company’s results of operations or financial condition.

In September 2006,the FASB issued SFAS No. 157 (“SFAS No. 157”), “Fair ValueMeasurements*”.* This statement establishes aconsistent framework for measuring fair value and expands disclosures on fairvalue measurements. SFAS No. 157 is effective for fiscal yearsbeginning after November 15, 2007. We have not determined the impact, ifany, the adoption of this statement will have on our consolidated financialstatements.

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for FinancialAssets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159permits entities to choose to measure many financial assets and financialliabilities at fair value. Unrealized gains and losses on items for which thefair value option has been elected will be reported in earnings. SFAS No. 159is effective for fiscal years beginning after November 15, 2007. We havenot determined the impact, if any, the adoption of this statement will have onour consolidated financial statements.

The FASB hadissued certain other accounting pronouncements as of December 31, 2006that will become effective in subsequent periods; however, our management doesnot believe that any of those pronouncements would have significantly affectedour financial accounting measurements or disclosures had they been in effectduring 2006, 2005 or 2004.

42

----

**Comparison of Operating Results for the Years Ended December 31,2006 and December 31, 2005**

The following table discloses certainfinancial information for the periods presented, expressed in terms of dollars,dollar change, percentage change and as a percent of total revenue (all dollaramounts are in thousands):

| ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** | **% of Total  Revenue** | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|------------|------------|-----------------------------------|------------|
| ** **                                  | ** ** | **2006**   | ** ** | **2005**   | ** ** | **$**      | ** ** | **%**                             | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                   |       |       |       |       |       |       |       |                              |       |   |   |   |   |
| Advertising                                 |       | $          | 25,679     |       | $          | 22,769     |       | $                                 | 2,910      |   | 12.8 | % | 53.0 | % | 53.0 | % |
| Subscriber fees                             |       | 17,687     |       | 15,432     |       | 2,255      |       | 14.6                              |       | 36.4 |   | 36.0 |   |
| Membership income                           |       | 5,156      |       | 4,707      |       | 449        |       | 9.5                               |       | 10.6 |   | 11.0 |   |
| Total revenues                              |       | 48,522     |       | 42,908     |       | 5,614      |       | 13.1                              |       | 100.0 |   | 100.0 |   |
| Cost of services:                           |       |       |       |       |       |       |       |                              |       |   |   |   |   |
| Programming                                 |       | 8,355      |       | 5,604      |       | 2,751      |       | 49.1                              |       | 17.2 |   | 13.1 |   |
| Satellite transmission fees                 |       | 2,550      |       | 2,497      |       | 53         |       | 2.1                               |       | 5.2 |   | 5.8 |   |
| Production and operations                   |       | 4,078      |       | 3,458      |       | 620        |       | 17.9                              |       | 8.4 |   | 8.0 |   |
| Other direct costs                          |       | 1,151      |       | 1,355      |       | (204       | )          | (15.1                             | )          | 2.4 |   | 3.2 |   |
| Total cost of services                      |       | 16,134     |       | 12,914     |       | 3,220      |       | 24.9                              |       | 33.2 |   | 30.1 |   |
| Other expenses:                             |       |       |       |       |       |       |       |                              |       |   |   |   |   |
| Advertising                                 |       | 7,119      |       | 7,100      |       | 19         |       | 0.3                               |       | 14.7 |   | 16.6 |   |
| Selling, general and administrative         |       | 26,168     |       | 17,375     |       | 8,793      |       | 50.6                              |       | 53.9 |   | 40.5 |   |
| Impairment of amortizable intangible assets |       | 9,540      |       | —     |       | 9,540      |       | NMF                               |       | 19.7 |   | — |   |
| Depreciation andamortization                |       | 3,245      |       | 2,721      |       | 524        |       | 19.3                              |       | 6.7 |   | 6.3 |   |
| Total other expenses                        |       | 46,072     |       | 27,196     |       | 18,876     |       | 69.4                              |       | 95.0 |   | 63.4 |   |
| Income (loss)  from operations              |       | (13,684    | )          | 2,798      |       | (16,482    | )          | (589.1                            | )          | (28.2 | ) | 6.5 |   |
| Interest expense                            |       | (246       | )          | (45        | )          | (201       | )          | 446.7                             |       | (0.5 | ) | (0.1 | ) |
| Other income                                |       | 2,692      |       | 943        |       | 1,749      |       | 185.5                             |       | 5.5 |   | 2.2 |   |
| Income (loss)  before income taxes          |       | (11,238    | )          | 3,696      |       | (14,934    | )          | (404.1                            | )          | (23.2 | ) | 8.6 |   |
| Income tax  provision (benefit)             |       | (3,913     | )          | 1,503      |       | (5,416     | )          | (360.3                            | )          | (8.1 | ) | 3.5 |   |
| Net income (loss)                           |       | $          | (7,325     | )          | $          | 2,193      |       | $                                 | (9,518     | ) | (434.0 | )% | (15.1 | )% | 5.1 | % |

----

NMF—Not Meaningful

**Revenues**

Our revenuesinclude revenues from (1) advertising fees; (2) subscriber fees; and (3) membershipincome. Advertising revenue is generated from the sale of advertising time onThe Outdoor Channel including advertisements shown during a program (also knownas short-form advertising) and infomercials in which the advertisement isthe program itself (also known as long-form advertising) and from the saleof advertising space in publications such as the *GoldProspectors & Treasure Hunters in the Great Outdoors*magazine. Advertising revenue is also generated from fees paid by third partyprogrammers that purchase advertising time in connection with the airing oftheir programs on The Outdoor Channel. In each of the years ended December 31,2006 and 2005, The Outdoor Channel generated approximately 97.0% of ouradvertising revenue. Subscriber fees are solely related to The Outdoor Channel.Membership income is generated by our activities other than the operation ofThe Outdoor Channel and includes membership sales, magazine sales, merchandisesales, and sponsored outings and expeditions in connection with GPAA and LostDutchman’s.

43

----

Total revenues forthe year ended December 31, 2006 were $48,522,000, an increase of$5,614,000, or 13.1%, compared to revenues of $42,908,000 for the year ended December 31,2005. The net increases were the result of changes in several items comprisingrevenue as discussed below.

Advertising revenue for the year ended December 31,2006 was $25,679,000, an increase of $2,910,000 or 12.8% compared to$22,769,000 for the year ended December 31, 2005. For December 2006,Nielsen estimated that The Outdoor Channel had 29.7 million subscriberscompared to 25.7 million for the same period a year ago. The increase inadvertising revenue for the year ended December 31, 2006 principallyreflects higher prices paid by third party programmers for advertising time inconnection with the airing of their programs, incremental advertising inventoryretained by us to sell and additional revenue generated by our technicalservices department for providing production services for third partyprogrammers. These factors contributing to the increase were offset somewhat byless demand for our long-form inventory that resulted in lower prices paid forinfomercial blocks. We expect softness in the long-form market to continue forthe short-term future. We expect to provide less technical services to thirdparties in 2007 than in 2006.

Nielsen revises its estimate of the number ofsubscribers to our channel each month, and for March 2007 Nielsenincreased its estimate to almost 30 million subscribers. Nielsen is the leadingprovider of television audience measurement and advertising informationservices worldwide, and its estimates and methodology are generally acceptedand used in the advertising industry. Although we realize Nielsen’s estimate istypically greater than the number of subscribers on which a network is paid bythe service providers, we are currently experiencing a greater difference inthese two different numbers of subscribers than we would expect. We anticipatethis difference to decrease as we grow our total subscriber base. There can beno assurances that Nielsen will continue to report growth of its estimate of oursubscribers and in fact at some point Nielsen might even report declines in oursubscriber estimate. If that were to happen, we could suffer a reduction inadvertising revenue.

Subscriber fees for the year ended December 31,2006 were $17,687,000, an increase of $2,255,000 or 14.6% compared to$15,432,000 for the year ended December 31, 2005. The increase insubscriber fees for the period was primarily due to an increased number ofpaying subscribers both from new affiliates and from existing distributors aswell as contractual subscriber fee rate increases with existing serviceproviders carrying The Outdoor Channel.

We plan to accelerate our subscriber growth utilizingvarious means including deployment of rate relief for new and existingsubscribers and payment of subscriber acquisition or launch support fees amongother tactics. Such launch support fees are capitalized and amortized over theperiod that the pay television distributor is required to carry the newlyacquired TOC subscriber. To the extent revenue is associated with theincremental subscribers, the amortization is charged to offset the relatedrevenue. Any excess of launch support amortization over the related subscriberfee revenue is charged to expense. As a result of a combination of thesetactics, we anticipate subscriber fee revenue, net will decrease over theshort-term future as we deploy this strategy.

Membership income for theyear ended December 31, 2006 was $5,156,000, an increase of $449,000 or9.5% compared to $4,707,000 for the year ended December 31, 2005. Webelieve that the recent surge in gold prices has reflected itself in renewedinterest by the consuming public that led to our increased activity in 2006. Inthe near term, we do not expect significant fluctuations in membership incomeyear-to-year.

**Cost of Services**

Our cost of services consists primarily of the cost ofproviding our broadcast signal and programming to the distributors fortransmission to the consumer and costs associated with the production anddelivery of our magazine and merchandise sales. Cost of services includes (1) programmingcosts; (2) satellite transmission fees; (3) production and operationscosts; and (4) other direct costs. Total cost of services for 

44

----

the year ended December 31,2006 was $16,134,000, an increase of $3,220,000 or 24.9%, compared to$12,914,000 for the year ended December 31, 2005. As a percentage ofrevenues, total cost of services was 33.2% and 30.1% in the years ended December 31,2006 and 2005, respectively. The increase in cost of services, as furtherdiscussed below, relates principally to increased programming costs related toproducing shows to air on our second network, which we did not have in thefirst half of 2005. We expect cost of services to continue to increase in the futureas we expand our existing markets and in-house production to support ouradvertising strategy.

Programming expenses for the year ended December 31,2006 were $8,355,000, an increase of $2,751,000 or 49.1% compared to $5,604,000for year ended December 31, 2005. The increase is principally a result ofour decision to launch our second channel, Outdoor Channel 2 HD, on July 1,2005. We incurred minimal programming costs relative to this channel in thefirst and second quarters of 2005 as most of such costs incurred at that timewere charged to prepaid programming costs in anticipation of its launch in thesecond half of 2005.

Our policy is to charge costs of specific showproduction to programming expense over the expected airing period beginningwhen the program first airs. The cost of programming is generally firstrecorded as prepaid programming costs and is then charged to programmingexpense based on the anticipated airing schedule. The anticipated airingschedule has typically been over 2 or 4 quarters that generally does not extendover more than 2 years. As the anticipated airing schedule changes, the timingand amount of the charge to expense is prospectively adjusted accordingly. Atthe time we determine a program is unlikely to air or re-air, we chargeprogramming expense with the remaining associated cost recorded in prepaidprogramming. We reassessed our programming direction during the fourth quarterof 2006 and charged to expense over $900,000 of prepaid programming costs thathad otherwise been planned to air and then be expensed in the future.Programming expenses are expected to stabilize as a percentage of revenue overthe near term. Further, we are considering a new programming strategy whichwill include more airings per show including a greater number of repeatepisodes within the quarter and potentially more quarters extending over moreyears. As this plan is developed we will reconsider the appropriate timing ofthe charge to expense of our programming costs.

Satellite transmission fees for the year ended December 31,2006 were $2,550,000, an increase of $53,000, or 2.1%, compared to $2,497,000for the year ended December 31, 2005. We do not expect significantfluctuations in satellite transmission fees other than marginal increases reflectingcontractual price increases over the foreseeable future.

Production and operations costs for the year ended December 31,2006 were $4,078,000, an increase of $620,000, or 17.9%, compared to $3,458,000for the year ended December 31, 2005. The increase in costs principallyrelates to increased personnel to support our growing infrastructure as weproduce more shows in-house and to support our new broadcast facility.

Other direct costs for theyear ended December 31, 2006 were $1,151,000, a decrease of $204,000, or15.1%, compared to $1,355,000 for the year ended December 31, 2005. Thedecrease is principally related to less printed material being sent to themembers of our Membership Division including one less magazine in 2006 than in2005, and other related materials.

**Other Expenses**

Other expenses consist of the cost of (1) advertising;(2) selling, general and administrative expenses; and (3) depreciationand amortization. In addition for the year ended December 31, 2006, otherexpenses include impairment of intangible assets. For the year ended December 31,2004, other expenses included non-cash compensation expense from exchange ofstock options.

45

----

Total other expenses for the year ended December 31,2006 were $46,072,000, an increase of $18,876,000 or 69.4%, compared to$27,196,000 for the year ended December 31, 2005. As a percentage ofrevenues, total other expenses were 95.0% and 63.4% for the years ended December 31,2006 and 2005, respectively. The increase in other expenses was due to several factorsincluding the write-off of $9,540,000 of the carrying value of MSOrelationships as a result of a changed distribution strategy adopted by theBoard in September 2006, adoption of SFAS 123R effective January 1,2006 resulting in additional compensation expense of $3,496,000, in addition$2,496,000 from the recognized expense related to performance units granted toour new CEO in the fourth quarter of 2006, additional depreciation expenseresulting from our broadcast facility which was placed into service effective April 1,2006, and other items more fully described as follows.

Advertising expenses for the year ended December 31,2006 were $7,119,000 an increase of $19,000 or 0.3% compared to $7,100,000 forthe year ended December 31, 2005. We had planned increased advertisingexpenditures but delayed such in anticipation of launching a cross channeltelevision advertising campaign, which began in late September of 2006. Webelieve that our advertising expenses will substantially increase over the short-termfuture as we continue to deploy tactics to increase our subscriber base and thenumber of viewers watching our programming. We are reassessing ourbranding strategy and have decided to adopt a new logo.

Selling, general and administrative expenses for theyear ended December 31, 2006 were $26,168,000, an increase of $8,793,000or 50.6% compared to $17,375,000 for the year ended December 31, 2005. Asa percentage of revenues, selling, general and administrative expenses were53.9% and 40.5% in the years ended December 31, 2006 and 2005,respectively. The increase was primarily attributable to the adoption ofSFAS 123R as of January 1, 2006, which now requires us to charge thefair value of stock options we have issued to our employees over the vesting periodto compensation expense that we did not have to record in 2005. The non-cashcharge in the year ended December 31, 2006 amounted to $3,496,000.Additionally, we granted our new CEO two traunches of performance units of400,000 shares each which vest in 50,000 share increments based upon our stockprice reaching stipulated levels. We have calculated their fair value using alattice model. The first traunch has an estimated value of $4,634,000 and hasan expected service period of 0.6 years. In 2006, we recognized $1,655,000related to this grant. The second grant of 400,000 performance units which alsovest in 50,000 share increments based upon our stock price reaching stipulatedlevels was calculated to have a fair value of $4,474,000 and an expected serviceperiod of 1.1 years. In 2006 we recognized $841,000 of compensation expenserelated to this grant. We incurred $377,000 of severance and related feesrelated to TOC’s former CEO. The remainder of the increase in selling, generaland administrative fees related primarily to increased research fees to supportour selling efforts, consulting fees pertaining to assistance in thedevelopment of our strategic plan, accounting fees for the audit of ourevaluation of the effectiveness of our internal control over financialreporting in 2006 related to the 2005 fiscal year, legal fees incurred in thefirst quarter as a result of our ongoing efforts related to our carriageagreement negotiations and to other operating costs.

We anticipate that selling, general and administrativecosts will continue to increase over the foreseeable future. Such increases areexpected to result from the amortization of subscriber acquisition fees, alsoreferred to as launch support fees, in excess of the related subscriber revenueas well as other marketing, advertising and promotion expenses as we continueto work to gain increased distribution of our channel, as well as fromincreases in other corporate expenses. We anticipate we will incur compensationcosts in the amount of $6,612,000 in the year ending December 31, 2007related to the performance units granted to our new CEO.

Impairment of intangible assets for the year ended December 31,2006 carried a charge of $9,540,000 as a result of our quarterly impairmentreview of amortizable intangible assets and goodwill. During the year ended December 31,2006, we engaged third party consultants to review our business practices andstrategy. Among the areas reviewed was our approach to grow our subscriber basethrough our 

46

----

relationships with ourMSOs. Prior to this time our strategy was to focus on incremental growthopportunities without impacting our existing subscriber base. Our consultantscompleted a market survey and other steps they deemed appropriate. In September 2006,the consultants concluded, and the Board of Directors accepted theirconclusions, that a complete revision of the terms of the relationships wasnecessary to meet the subscriber growth goals established by us.

Upon acceptance of that conclusion and general strategyoutlined by the consultants, we reviewed our amortizable intangible assets forimpairment. Among the components of the plan was subscriber rate relief in someform for both existing subscriber relationships and the incremental (if any)subscribers that might be added to our subscriber base as a result of theplanned actions. Acknowledging the changed circumstances, we assessed the fairvalue of our amortizable intangible assets and concluded that our MSOrelationships asset had become fully impaired. Accordingly we have charged toexpense, the carrying value of $9,540,000 during the year ended December 31,2006.

We further concluded that the carrying values of ourother intangible assets have not been impaired nor do we believe that thechanged circumstances have affected the estimated lives of the amortizableintangible assets. However, these estimates will continue to be reviewed duringeach reporting period to determine whether circumstances continue to supporttheir estimated useful lives and fair value. Estimates are subject to risks anduncertainties, which could cause actual results to differ materially from thoseprojected or implied in the determination of the fair value. A significantdownward revision in the present value of estimated future cash flows for areporting unit could result in an impairment of goodwill or the amortizableintangibles and a non-cash charge would be required. Such a charge could have asignificant effect on our reported net earnings.

Depreciation andamortization for the year ended December 31, 2006 were $3,245,000, anincrease of $524,000 or 19.3% compared to $2,721,000 for the year ended December 31,2005. The increase in depreciation primarily relates to our broadcast facilitywhich was placed into service April 1, 2006.

**Income (Loss) fromOperations**

Income (loss) fromoperations for the year ended December 31, 2006 was a loss of $13,684,000,a decrease of $16,482,000 compared to income of $2,798,000 for the year ended December 31,2005. As discussed above, the losses in the year ended December 31, 2006were driven by the impairment of amortizable intangible assets resulting in acharge of $9,540,000 during the period. This loss was partially offset bygrowth of our revenue. The decrease experienced over the year ended December 31,2006 was compounded by increased programming costs associated with the launchof our second channel, Outdoor Channel 2 HD, in the second half of 2005, theexpensing of programming costs related to programs we no longer anticipateairing, increased compensation expense resulting from the adoption ofSFAS 123R and the transition of our senior management team, increasedlegal fees relating to our carriage agreements and depreciation related to ournewly opened broadcast facility. As we continue to strive to grow oursubscriber base which involves increased advertising expenditures, possiblesubscriber rate relief to our carriage partners and the ongoing and plannedpayment of launch support, we will continue to incur increased expenses such asprogramming, marketing and advertising that are unlikely to be immediatelyoffset by revenues. As a result, we anticipate our operating margins will benegatively impacted over the short-term future until scale is achieved toreverse the trend. There can be no assurance that these strategies will besuccessful.

**Interest Expense**

Interest expense for theyear ended December 31, 2006 was $246,000, an increase of $201,000compared to $45,000 for the year ended December 31, 2005. This isattributable to having obtained two term loans in November 2005 with anoriginal aggregate principal amount of $4,950,000 with effective fixed 

47

----

interestrates of 6.59% and 6.35%. We repaid these loans in October 2006 and do notexpect to incur interest expense in the foreseeable future.

**Other Income**

Other income for the yearended December 31, 2006 was $2,692,000, an increase of $1,749,000 comparedto $943,000 for the year ended December 31, 2005. This improvement wasprimarily due to increased dividends and interest earned on our increasedaverage balances of our investment in available-for-sale securities and cashand cash equivalents.

**Income (Loss)Before Income Taxes**

Income (loss) before income taxes as a percentage ofrevenues was (23.2)% for the year ended December 31, 2006 compared to 8.6%for year ended December 31, 2005.

The TOC segment’s loss before income taxes was$(9,240,000) for the year ended December 31, 2006, a decrease of $14,105,000from income of $4,865,000 for the year ended December 31, 2005.

TOC’s loss before income taxes for the year ended December 31,2006 was significantly impacted by the $9,540,000 write-off of our MSOrelationship amortizable intangible asset and the additional compensationcharges associated with the transition of our senior management includingseverance and related charges of $377,000 and performance unit expense of$2,496,000. Additional increased compensation expense resulted from of theadoption of SFAS 123R of $1,403,000. Further, we placed our new broadcastfacility into service April 1, 2006, which resulted in depreciationexpense of approximately $600,000.

Additionally, programming costs increased as a resultof having launched our second channel, Outdoor Channel 2 HD, at the beginningof the third quarter of 2005 and the planned non-airing of certain programsresulting in a write-off of their capitalized costs. Also, we incurredincremental expenses in subscriptions and research to support our programmingand selling efforts. Offsetting the increased expenses were increases in subscriberfee revenue from deeper penetration of our network with some of our carriers,increased prices charged for the service, increased advertising revenues as aresult of increased prices charged to our third party producers and toshort-form advertisers principally related to the increasing Nielsen universeestimate.

The Membership Division segment’s income before incometaxes increased to $327,000 for the year ended December 31, 2006 comparedto $280,000 for the year ended December 31, 2005. Expressed as apercentage of revenues, the Membership Division segment’s income before incometaxes improved to 5.5% for the year ended December 31, 2006 compared to5.2% for the year ended December 31, 2005. Revenue increased $562,000 or10.4% in the year ended December 31, 2006. The improvement is principallya result of a renewed interest in gold prospecting, which we believe ispartially driven by rising gold prices. Contributing to the improving segmentmargin was a slight decrease in personnel with the commensurate savings ofpayroll, payroll related expenses and travel costs. The decline in margin inthe year ended December 31, 2006 is increased compensation incurred as aresult of the adoption of SFAS 123R on January 1, 2006 resulting instock compensation expense of $113,000 not incurred in the same period of 2005.

Corporate incurred a lossbefore income taxes for the year ended December 31, 2006 amounting to$2,325,000, an increased loss of $876,000 compared to a loss of $1,449,000 forthe year ended December 31, 2005. The expenses allocated to Corporateinclude: professional fees such as public relations, accounting and legal fees,amortization of intangibles, business insurance, board of directors fees andexpenses, and an allocation of corporate officers’ payroll and relatedexpenses. Effective January 1, 2006, we prospectively adoptedSFAS 123R and Corporate incurred a charge to compensation expense 

48

----

relatedto stock options of $1,980,000 in the year ended December 31, 2006.Corporate also was allocated additional payroll costs reflecting the increasedtime spent by executive officers on corporate matters instead of operatingmatters. Offsetting these increased costs was interest and dividend incomeearned on our cash and investment in available-for-sale securities and loweraccounting fees compared to a year ago due to less impact from theimplementation of Sarbanes-Oxley procedures.

**Income TaxProvision (Benefit)**

Income tax benefit for theyear ended December 31, 2006 was $3,913,000, a change of $5,416,000 ascompared to an income tax provision of $1,503,000 for the year ended December 31,2005. The change was principally due to our incurring a loss in the year ended December 31,2006 as compared to income generated in the year ended December 31, 2005and the application of SFAS 123R as it relates to the expensing of andconcomitant income tax effect of accounting for share-based compensation. Theeffective income tax provision (benefit) was approximately (34.8%) and 40.7%,for the years ended December 31, 2006 and 2005, respectively.

**Net Income (Loss)**

Net income (loss) for the year ended December 31,2006 was a net loss of $7,325,000, a decrease of $9,518,000 compared to a netincome of $2,193,000 for the year ended December 31, 2005. The decreaseswere due to the reasons stated above.

49

----

**Comparison of Operating Results for the Years Ended December 31,2005 and December 31, 2004**

The following table discloses certainfinancial information for the periods presented, expressed in terms of dollars,dollar change, percentage change and as a percent of total revenue (all dollaramounts are in thousands):

| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** | **% of Total  Revenue** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|-----------------------------------|------------|
| ** **                                                    | ** ** | **2005**   | ** ** | **2004**   | ** ** | **$**      | ** ** | **%**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                                     |       |       |       |       |       |       |       |                              |       |   |   |   |   |
| Advertising                                                   |       | $          | 22,769     |       | $          | 21,817     |       | $                                 | 952        |   | 4.4 | % | 53.0 | % | 54.6 | % |
| Subscriber fees                                               |       | 15,432     |       | 13,391     |       | 2,041      |       | 15.2                              |       | 36.0 |   | 33.5 |   |
| Membership income                                             |       | 4,707      |       | 4,746      |       | (39        | )          | (0.8                              | )          | 11.0 |   | 11.9 |   |
| Total revenues                                                |       | 42,908     |       | 39,954     |       | 2,954      |       | 7.4                               |       | 100.0 |   | 100.0 |   |
| Cost of services:                                             |       |       |       |       |       |       |       |                              |       |   |   |   |   |
| Programming                                                   |       | 5,604      |       | 2,521      |       | 3,083      |       | 122.3                             |       | 13.1 |   | 6.3 |   |
| Satellite transmission fees                                   |       | 2,497      |       | 2,351      |       | 146        |       | 6.2                               |       | 5.8 |   | 5.9 |   |
| Production and operations                                     |       | 3,458      |       | 2,529      |       | 929        |       | 36.7                              |       | 8.0 |   | 6.4 |   |
| Other direct costs                                            |       | 1,355      |       | 1,101      |       | 254        |       | 23.1                              |       | 3.2 |   | 2.7 |   |
| Total cost of services                                        |       | 12,914     |       | 8,502      |       | 4,412      |       | 51.9                              |       | 30.1 |   | 21.3 |   |
| Other expenses:                                               |       |       |       |       |       |       |       |                              |       |   |   |   |   |
| Advertising                                                   |       | 7,100      |       | 5,596      |       | 1,504      |       | 26.9                              |       | 16.6 |   | 14.0 |   |
| Selling, general and administrative                           |       | 17,375     |       | 16,153     |       | 1,222      |       | 7.6                               |       | 40.5 |   | 40.4 |   |
| Non-cash compensation expense from exchange of stock  options |       | —     |       | 47,983     |       | (47,983    | )          | (100.0                            | )          | — |   | 120.1 |   |
| Depreciation andamortization                                  |       | 2,721      |       | 1,424      |       | 1,297      |       | 91.1                              |       | 6.3 |   | 3.6 |   |
| Total other expenses                                          |       | 27,196     |       | 71,156     |       | (43,960    | )          | (61.8                             | )          | 63.4 |   | 178.1 |   |
| Income (loss)  from operations                                |       | 2,798      |       | (39,704    | )          | 42,502     |       | NMF                               |       | 6.5 |   | (99.4 | ) |
| Interest expense                                              |       | (45        | )          | (5         | )          | (40        | )          | 800.0                             |       | (0.1 | ) | — |   |
| Other income                                                  |       | 943        |       | 120        |       | 823        |       | 685.8                             |       | 2.2 |   | 0.3 |   |
| Income (loss)  before income taxes and minority interest      |       | 3,696      |       | (39,589    | )          | 43,285     |       | NMF                               |       | 8.6 |   | (99.1 | ) |
| Income tax  provision (benefit)                               |       | 1,503      |       | (16,011    | )          | 17,514     |       | NMF                               |       | 3.5 |   | (40.1 | ) |
| Income (loss)  before minority interest                       |       | 2,193      |       | (23,578    | )          | 25,771     |       | NMF                               |       | 5.1 |   | (59.0 | ) |
| Minority interest  in net income of consolidated subsidiary   |       | —     |       | 682        |       | (682       | )          | (100.0                            | )          | — |   | 1.7 |   |
| Net income (loss)                                             |       | $          | 2,193      |       | $          | (24,260    | )          | $                                 | 26,453     |   | NMF | % | 5.1 | % | (60.7 | )% |

----

NMF—Not Meaningful

**Revenues**

For the years endedDecember 31, 2005 and 2004, The Outdoor Channel generated approximately97.0% and 97.2% of our advertising revenue, respectively. Subscriber fees aresolely related to The Outdoor Channel. Membership income is generated by ouractivities other than the operation of The Outdoor Channel and includesmembership sales, magazine sales, merchandise sales, and sponsored outings andexpeditions in connection with GPAA and Lost Dutchman’s.

Total revenues forthe year ended December 31, 2005 were $42,908,000, an increase of$2,954,000, or 7.4%, compared to revenues of $39,954,000 for the year ended December 31,2004. The net increases were the result of changes in several items comprisingrevenue as discussed below.

50

----

Advertisingrevenue for the year ended December 31, 2005 was $22,769,000, an increaseof $952,000 or 4.4% compared to $21,817,000 for the year ended December 31,2004. For December 2005, Nielsen estimated that The Outdoor Channel had25.7 million viewers compare to 24.8 million for the same period a year ago.(Nielsen revises this estimate each month and for March 2006, Nielsenincreased its estimate to approximately 26.2 million subscribers). The increasein advertising revenue for the year ended December 31, 2005 reflects alarger percentage of our short-form advertising inventory being sold tonational and endemic advertisers, generally at higher rates, than inventorybeing sold to direct response advertisers or long-form (infomercial)advertisers.

Subscriber feesfor the year ended December 31, 2005 were $15,432,000, an increase of$2,041,000 or 15.2% compared to $13,391,000 for the year ended December 31,2004. The increase in subscriber fees for the period was primarily due to anincreased number of paying subscribers both from new affiliates and fromexisting distributors and contractual subscriber fee rate increases withexisting service providers carrying The Outdoor Channel.

Membership income for the year ended December 31, 2005 was$4,707,000, a decrease of $39,000 or 0.8% compared to $4,746,000 for the yearended December 31, 2004. We do not consider this decline to besignificant; rather the relatively static balance reflects our belief that thisrevenue source has reached relative maturity. We do not expect significantchange in the balance from year-to-year in the near term.

**Cost of Services**

Total cost of services for the year ended December 31,2005 was $12,914,000, an increase of $4,412,000 or 51.9%, compared to$8,502,000 for the year ended December 31, 2004. As a percentage ofrevenues, total cost of services was 30.1% and 21.3% in the years ended December 31,2005 and 2004, respectively. We expect cost of services to continue to increasein the future as we expand our existing markets and in-house production tosupport our advertising strategy.

Programmingexpenses for the year ended December 31, 2005 were $5,604,000, an increaseof $3,083,000 or 122.3% compared to $2,521,000 for the year ended December 31,2004. The increase is principally a result of our decision to launch our secondchannel, Outdoor Channel 2 HD, on July 1, 2005. In 2005, this channel wasprogrammed with native high definition shows produced almost entirely in-houseas opposed to the preponderance of third party production on our standarddefinition channel. We produced in excess of 40 shows plus numerous specialsin-house that aired in the third and fourth quarters of 2005. In somesituations, shows that ran in 2005 on only one of our channels are planned tobe aired again in 2006, but on our other channel. We aired 16 shows that wereinternally produced during the third and fourth quarters of 2004.

Satellitetransmission fees for the year ended December 31, 2005 were $2,497,000, anincrease of $146,000, or 6.2%, compared to $2,351,000 for the year ended December 31,2004. This increase reflects an additional charge for the back-up satellitecapability negotiated with our satellite provider during the fourth quarter of2004 and a scheduled price increase of $5,000 per month in October 2005.

Production and operations costs for the year ended December 31, 2005 were$3,458,000, an increase of $929,000, or 36.7%, compared to $2,529,000 for theyear ended December 31,2004. The increase in costs principally relates to increased infrastructureincluding personnel, small equipment purchases and other items as we producemore shows in-house and support our new broadcast facility.

Other direct costs for theyear ended December 31,2005 were $1,355,000, an increase of $254,000, or 23.1%, compared to $1,101,000for the year ended December 31,2004. The increase in other direct costs principally relates to increasedAlaska trip expenses with greater number of participants and increased costs inpublishing our magazine.

51

----

**Other Expenses**

Total otherexpenses for the year ended December 31, 2005 were $27,196,000, a decreaseof $43,960,000 or 61.8%, compared to $71,156,000 for the year ended December 31,2004. As a percentage of revenues, total other expenses were 63.4% and 178.1%in the years ended December 31, 2005 and 2004, respectively. The decreasein other expenses was due to the non-recurring charge to compensation expenseincurred in September 2004 as a result of the issuance of options to TOCemployees with an intrinsic value of $47,983,000 in accordance with the termsof the acquisition by the Company of substantially all of the remaining 17.6%minority interest in TOC it did not already own. Otherwise total other expensesincreased as illustrated when the non-cash, non-recurring compensation expenseof $47,983,000 incurred in September 2004 is excluded.

Total otherexpenses, net of the compensation expense from exchange of stock options,increased $4,023,000 or 17.4% for the year ended December 31, 2005. As apercentage of revenues, total other expenses, net of compensation expense fromthe exchange of stock options, were 63.4% and 58.0% in the years ended December 31,2005 and 2004, respectively.

The increase inother expenses was due to several factors, such as increased corporate costsincluding: (1) amortization of intangible assets; (2) costsassociated with compliance with Sarbanes-Oxley Act of 2002; and (3) costsassociated with incorporation in Delaware and listing on The Nasdaq NationalMarket, to which we became subject as of September 2004. Those increasedcosts will continue to be incurred becoming part of our cost of doingbusiness. The increase is also attributable to increased personnel costs, costsassociated with the launch of our second channel, Outdoor Channel 2 HD,marketing and promotion costs and other items more fully described as follows.

Advertisingexpenses for the year ended December 31, 2005 were $7,100,000, an increaseof $1,504,000 or 26.9% compared to $5,596,000 for the year ended December 31,2004. The increase in advertising expenses is principally a result of ourincreased spending on consumer and trade industry awareness campaigns designedto build demand for The Outdoor Channel and for Outdoor Channel 2 HD.

Selling, generaland administrative expenses for the year ended December 31, 2005 were$17,375,000, an increase of $1,222,000 or 7.6% compared to $16,153,000 for theyear ended December 31, 2004. As a percentage of revenues, selling,general and administrative expenses were 40.5% and 40.4% in the years ended December 31,2005 and 2004, respectively.

The increase wasprimarily due to the increase in the number of employees late in 2004 and early2005. We opened our New York City advertising sales office with a resultantexpense in 2005 that did not exist in the same period a year ago. We have alsoadded an executive to our management team who holds the position of GeneralCounsel. Others have been added in all departments to support our launch of asecond channel—Outdoor Channel 2 HD. We also experienced increased travel andrelated costs associated with our larger advertising sales staff, support ofour service providers and the promotion of The Outdoor Channel and OutdoorChannel 2 HD through a stronger presence at trade shows and conferences. Smallequipment purchases increased as a result of our activity related to the launchof Outdoor Channel 2 HD. We increased other corporate overhead expenses such asour activity surrounding Sarbanes-Oxley compliance in 2005, fees for ourlisting on Nasdaq National Market and fees associated with incorporation in theState of Delaware.

Compensationexpense from the exchange of stock options for the year ended December 31,2004 was $47,983,000 and was incurred as a result of the issuance of 3,687,125options to TOC option holders in accordance with the terms of the acquisitionof substantially all of the remaining 17.6% minority interest in TOC we did notalready own. This charge is both non-cash and non-recurring.

52

----

Depreciation andamortization expense for the year ended December 31, 2005 was $2,721,000, anincrease of $1,297,000 or 91.1% compared to $1,424,000 for the year ended December 31, 2004. Theincrease relates primarily to the inventory of HD cameras and edit equipmentthat we begun purchasing in 2004 and continued in 2005 to support our increasedefforts to produce more of our programming in-house as opposed to licensingsuch programming from third parties. Also contributing to the increase is afull year of amortization expense related to the intangible assets recorded inconnection with the acquisition of the minority interest of The OutdoorChannel, Inc, in September 2004.

**Income (Loss) from Operations**

Income (loss) fromoperations for the year ended December 31, 2005 was $2,798,000, a changeof $42,502,000 compared to ($39,704,000) for the year ended December 31,2004. As a percent of revenues, income (loss) from operations was 6.5% and(99.4%), respectively.

As explained above, the non-cash, non-recurring compensationcharge of $47,983,000, which resulted from the assumption of options inconnection with the acquisition of the minority interest in TOC, accounts forthe majority of the loss from operations for the year ended December 31,2004. If we excluded this charge, loss from operations for the year ended December 31,2004 would have been income from operations of $8,279,000. As a percentage ofrevenue this adjusted balance would have been 20.7% for the year ended December 31,2004.

**Interest Expense**

Interest expense for theyear ended December 31, 2005 was $45,000, an increase of $40,000 comparedto $5,000 for the year ended December 31, 2004. This is attributable tohaving obtained two term loans in November 2005 with an original aggregateprincipal amount of $4,950,000 with effective fixed interest rates of 6.59% and6.35%.

**Other Income**

Other income for the year ended December 31, 2005 was$943,000, an increase of $823,000 compared to $120,000 for the year ended December 31,2004. This improvement was primarily due to increased dividends and interestearned on our increased investment in available-for-sale securities and cashand cash equivalent balances that resulted from the sale, on July 1, 2005,of 3,500,000 shares of common stock for net cash proceeds of $43,350,000 plus$2,734,000 from the exercise of stock options during the year ended December 31,2005.

**Income (Loss) Before Income Taxes and Minority Interest in NetIncome of Consolidated Subsidiary**

Income (loss)before income taxes and minority interest as a percentage of revenues was 8.6%for the year ended December 31, 2005 compared to (99.1%) for the yearended December 31, 2004.

The TOC segment’sincome before income taxes and minority interest increased to $4,865,000 forthe year ended December 31, 2005 from a loss of $38,330,000 for the yearended December 31, 2004. Expressed as a percentage of revenue, the TOCsegment’s income before income taxes and minority interest increased to 13.0%for the year ended December 31, 2005, compared to (110.8%) for the yearended December 31, 2004. The 2004 TOC segment’s income before incometaxes, excluding the non-cash, non-recurring charge of $47,983,000 was$9,653,000 or 27.9% of revenue. The change in TOC segment’s income beforeincome taxes after the non-cash compensation charge was due mainly to thegrowth of our programming expenses and increased staff in support of the launchof our second channel, Outdoor Channel 2 HD, increased spending on advertising,personnel and travel/promotional related expenses as well as depreciationexpenses related to the deployment of additional equipment.

53

----

The MembershipDivision segment’s income before income taxes and minority interest decreasedto $280,000 for the year ended December 31, 2005 from $354,000 for theyear ended December 31, 2004. Expressed as a percentage of revenues, theMembership Division segment’s income before income taxes and minority interestdecreased to 5.2% for the year ended December 31, 2005 compared to 6.6%for the year ended December 31, 2004. The decrease is principally a resultof a 5% increase in payroll and related taxes along with a charge for stockcompensation that did not exist in 2004.

Corporate incurred a loss before income taxes and minorityinterest for the year ended December 31, 2005 amounting to $1,449,000, achange of $164,000 compared to a loss of $1,613,000 for the year ended December 31,2004. The expenses allocated to Corporate include: professional fees such aspublic relations, accounting and legal fees, business insurance, board ofdirectors fees and expenses and an allocation of corporate officers’ payrolland related expenses.

**Income Tax Provision (Benefit)**

Income tax provision for the year ended December 31, 2005 was$1,503,000, a change of $17,514,000 as compared to a benefit of $16,011,000 forthe year ended December 31, 2004. The increase was principally due to theCompany earning taxable income in 2005 as compared to a loss for 2004. Theeffective income tax rate was approximately 40.7% and 40.4% for the years endedDecember 31, 2005 and 2004, respectively.

**Minority Interest in Net Income of Consolidated Subsidiary**

Minority interest for the year ended December 31, 2004 was$682,000. Minority interest was eliminated in September 2004 as a resultof our acquisition of the remaining minority interest in TOC we did not alreadyown. Therefore, there was no minority interest for the year ended December 31,2005.

**Net Income (Loss)**

Net income (loss) for the year ended December 31, 2005 was$2,193,000, a change of $26,453,000 compared to ($24,260,000) for the yearended December 31, 2004. The increase was due to the reasons stated above.Excluding the non-cash, non-recurring charge of $47,983,000, net of income taxbenefit of $19,098,000, net income for the year ended December 31, 2004would have been $4,625,000 or 11.6% of revenue.

**Liquidity and Capital Resources**

We generated $6,649,000 of cash in our operatingactivities in the year ended December 31, 2006, compared $2,882,000 in theyear ended December 31, 2005 and had a cash and cash equivalent balance of$15,447,000 at December 31, 2006, a decrease of $2,829,000 from thebalance of $18,276,000 at December 31, 2005. We also had short-terminvestments classified as available-for-sale securities of $42,144,000 at December 31,2006, an increase of $3,314,000 from the balance of $38,830,000 at December 31,2005. The investments at December 31, 2006 were comprised principallyof auction rate securities ($41,250,000) with interest rates that generallyreset every 28 days. The auction rate securities have long-term maturitydates and provide us with enhanced yields. Various equity securities ($894,000)make up the remainder of the December 31, 2006 balance. We believe we havethe ability to quickly liquidate the auction rate securities at their originalcost although there is no guaranty we would be able to do so. Net workingcapital increased to $67,346,000 at December 31, 2006, compared to$66,183,000 at December 31, 2005.

Net cash used in investing activities was $5,738,000in the year ended December 31, 2006 compared to $48,661,000 for the yearended December 31, 2005. The decrease in cash used in investing activitieswas related principally to the net difference of sales and purchases ofshort-term auction rate securities. In 

54

----

2005, we received netproceeds from the sale of common stock of $43,350,000 that was invested duringthe year resulting in the higher amount used for investing in 2005.Additionally contributing to the decrease in cash used by investing activitieswas a decrease in capital expenditures in 2006 compared to 2005. In 2005, weacquired equipment related to our HD signal and production in anticipation ofthe launch of our second channel on July 1, 2005. Also, in 2005, wepurchased a number of vehicles we use in support of affiliate sales and ourannual Alaska trip. We completed the purchase of and had begun the constructionof improvements on a building to house our broadcast facility in 2005 incurringapproximately $7.5 million in capital expenditures in 2005. We havesubstantially completed the building improvements and placed the facility intoservice on April 1, 2006. Additional capital expenditures were for fixedasset replacements. In 2007, we have planned general replacement capitalexpenditures of $1 to $1.5 million and possibly the acquisition of some landadjacent to our broadcast facility to be used for a parking facility. If we aresuccessful in acquiring this property, we would complete the build-out ofwarehouse space to move the remainder of our TOC and corporate staff, vacatingspace we currently rent. We believe the total project cost would be between $1to $1.5 million and that we have sufficient capital either on-hand or to begenerated from operations to fund these acquisitions.

Cash used in financing activities was $3,740,000 inthe year ended December 31, 2006 compared to cash provided by financingactivities of $50,950,000 for the year ended December 31, 2005. The cashused in financing activities in the year ended December 31, 2006 wasprimarily for the retirement of our long-tem debt ($4,901,000) offset by theproceeds from the sale of shares upon the exercise of stock options andestimated tax benefits from the exercise of stock options in excess ofrecognized expense. We also used $568,000 to purchase and retire shares ofstock from employees to satisfy the employees’ income taxes due as a result ofthe shares having vested. We also received $913,000 from the exercise of stockoptions. The cash provided by financing activities in 2005 was from thecompletion, on July 1, 2005, of a public offering of our common stock,whereby we sold 3,500,000 shares of common stock and received net proceeds of$43,350,000. In addition certain selling stockholders exercised options to buy1,688,000 shares of common stock, which were resold in the public offering. On July 13,2005, the underwriters exercised their over-allotment option granted by certainselling stockholders and purchased an additional 442,000 shares of commonstock. The shares sold by the selling stockholders were purchasedimmediately before the sale through the exercise of options they held to buy commonshares from the Company. The Company received $2,168,000 in the aggregate fromthe exercise of these options. The Company also received cash proceeds ofapproximately $566,000 from the exercise of other options for the purchase of318,000 shares of common stock. In accordance with SFAS 123R, we havepresented on a prospective basis the tax benefits from exercise of stockoptions in excess of recognized expense of $816,000 as a cash flow fromfinancing activities in the accompanying unaudited consolidated statement ofcash flows for the year ended December 31, 2006, rather than as a cashflow from operating activities, as was prescribed under accounting rules applicablethrough December 31, 2005. Tax benefits from the exercise of stock optionsin excess of recognized expense of $876,000 has been included as a cash flowfrom operating activities for the year ended December 31, 2005.

On November 2, 2005, we renewed our revolvingline of credit agreement (the “revolver”) with U.S. Bank N.A. (the “Bank”),extending the maturity date to September 7, 2007 and increasing the totalamount, which can be drawn upon under the revolver from $5,000,000 to$8,000,000. The revolver provides that the interest rate shall be LIBOR plus1.25%. The revolver is collateralized by substantially all of our assets. Thiscredit facility contains customary financial and other covenants andrestrictions, as amended on November 2, 2005, including a change ofcontrol provision and certain minimum profitability metrics (which, as amended,exclude the effects of non-cash share-based employee compensation expense)measured at each quarter end. As of December 31, 2006 and as of the dateof this report, we did not have any amounts outstanding under this creditfacility.

55

----

On November 2, 2005, we obtained a $1,950,000mortgage loan from the Bank on our recently purchased building that houses ourbroadcast facility located in Temecula, California which had a 10 year termloan with a 25 year amortization schedule. This loan carried a variableinterest rate of LIBOR plus 1.35%. This loan was secured primarily by a Deed ofTrust on the property and was also secondarily secured by the same assets asthe revolver. It also contained customary financial and other covenants andrestrictions including a change of control provision and certain minimumprofitability metrics (which, as amended, excluded the effects of non-cashshare-based employee compensation expense) measured at each quarter end. On November 7,2005, we entered into an interest rate swap agreement with the Bank to reducethe potential impact of increasing interest rates and effectively fixed theinterest rate on this loan at 6.59%.

On November 2, 2005, we obtained a $3,000,000,five-year fully amortizing term loan. This loan carried a variable interestrate of LIBOR plus 1.35%. This term loan was secured by the same assets as therevolver and contained customary financial and other covenants and restrictionsincluding a change of control provision and certain minimum profitabilitymetrics (which, as amended, exclude the effects of non-cash share-basedemployee compensation expense) measured at each quarter end. On November 7,2005, we entered into an interest rate swap agreement with the Bank to reducethe potential impact of increasing interest rates and effectively fixed theinterest rate on this term loan at 6.35%. This loan was obtained to helpfinance the equipment and leasehold improvements bought in relation the buildout of our broadcast facility including delivery of our HD signal and production.

Because we did not supply our financial statements forthe three and nine months ended September 30, 2006 within the time frameprescribed by the Bank and because we did not meet the minimum profitabilitycovenant for the three months ended September 30, 2006, we were inviolation as of that date of two covenants relating to our two term loans andour revolving line-of-credit facility. Accordingly, these loans were callableby the Bank. On October 19, 2006,we elected to retire the two long-term loans, which had an aggregate balance of$4,321,000 plus accrued interest thereon. On March 22, 2007, we receivednotification that these covenant violations were waived for these occurrencesbut that these covenants continue for future periods. As of December 31,2006, we were in compliance with the debt covenants and expect to be incompliance at least through December 31, 2007.

As of December 31,2006, we had sufficient cash on hand and expected cash flow from operations tomeet our short-term cash flow requirements. Management believes that ourexisting cash resources including cash on-hand and anticipated cash flows fromoperations will be sufficient to fund our operations at current levels andanticipated capital requirements through at least March 1, 2008. To theextent that such amounts are insufficient to finance our working capitalrequirements or our desire to expand operations beyond current levels, we couldseek additional financing. There can be no assurance that equity or debtfinancing will be available if needed or, if available, will be on termsfavorable to us or our stockholders.

A summary of our contractual obligationsas of December 31, 2006 (In thousands):

| **Contractual Obligations** | ** ** | ** ** | ** ** | **Total** | ** ** | **Less than 1 year** | ** ** | **Over 1 year  Less than 3 years** | ** ** | **Over 3 years  Less than 5 years** | ** ** | **After  5 years** | ** ** |
|----------------------------------|------------|------------|------------|-----------|------------|--------------------------------|------------|--------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------|------------|
| Operating lease  obligations     |       | $          | 11,537     |      |       | $                              | 2,721      |                                                   |       |                                                    | $          | 4,439                   |       |   |   | $ | 3,817 |   |   |   | $ | 560 |   |   |
| Standby letter of credit         |       | 140        |       |      | —     |                           |       |                                                   | —     |                                                    |       |                    | —     |   |   |   | 140 |   |   |
| Purchase obligations             |       | 7,762      |       |      | 6,065      |                           |       |                                                   | 1,697      |                                                    |       |                    | —     |   |   |   | — |   |   |
| Other long-term liabilities      |       | 1,626      |       |      | 775        |                           |       |                                                   | 851        |                                                    |       |                    | —     |   |   |   | — |   |   |
| Total                            |       | $          | 21,065     |      |       | $                              | 9,561      |                                                   |       |                                                    | $          | 6,987                   |       |   |   | $ | 3,817 |   |   |   | $ | 700 |   |   |

 

56

----

Operating lease obligations principally relate to commitments fordelivery of our signal via satellite. Purchase obligations relate to purchasecommitments made for the acquisition of programming, advertising and promotionincluding magazine advertisements and radio show sponsorships, talentagreements, equipment or software maintenance, research services and otheroperating purchases. Other long-term liabilities represent our severanceagreement obligation with our former CEO of TOC and our compensationcommitments with our current CEO under his employment contract.

**ITEM 7A.**        QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK.

At December 31,2006 and 2005, our investment portfolio included fixed-income securities of$42,144,000 and $38,830,000, respectively. These securities are subject tointerest rate risk and will decline in value if interest rates increase.However, due to the short duration of our investment portfolio, an immediate10% change in interest rates would have no material impact on our financialcondition, operating results or cash flows. Declines in interest rates overtime will, however, reduce our interest income while increases in interestrates over time may increase our interest expense.

We do not have asignificant level of transactions denominated in currencies other than U.S.dollars and as a result we have very limited foreign currency exchange raterisk. The effect of an immediate 10% change in foreign exchange rates wouldhave no material impact on our financial condition, operating results or cashflows.

As of December 31,2006 and as of the date of this report, we did not have any outstandingborrowings. The rate of interest on our line-of-credit is variable, but wecurrently have no outstanding balance under this credit facility (and in factremain in default under its terms). Because of these reasons, an immediate 10%change in interest rates would not have a material, immediate impact on ourfinancial condition, operating results or cash flows.

57

----

**ITEM 8.**                FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA.

**I N D E X**

| Report of Independent  Registered Public Accounting Firm                                                        |   | 59 |   |
|-----------------------------------------------------------------------------------------------------------------|--------|----|--------|
| Consolidated Balance Sheets as of December 31,  2006 and 2005                                              |   | 60 |   |
| Consolidated Statements of Operations for the Years  Ended December 31, 2006, 2005 and 2004                |   | 61 |   |
| Consolidated Statements of Stockholders’ Equity for  the Years Ended December 31, 2006, 2005 and 2004 |   | 62 |   |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2006, 2005 and 2004                |   | 65 |   |
| Notes  to Consolidated Financial Statements                                                                     |   | 66 |   |

 

* * *

58

----

**Report ofIndependent Registered Public Accounting Firm**

To theStockholders and Board of DirectorsOutdoor Channel Holdings, Inc. and Subsidiaries

We have auditedthe accompanying consolidated balance sheets of Outdoor Channel Holdings, Inc.and subsidiaries as of December 31, 2006 and 2005, and the relatedconsolidated statements of operations, stockholders’ equity and cash flows foreach of the years in the three-year period ended December 31, 2006. Theseconsolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Outdoor ChannelHoldings, Inc., and subsidiaries as of December 31, 2006 and 2005,and their results of operations and cash flows for each of the years in thethree-year period ended December 31, 2006, in conformity with accountingprinciples generally accepted in the United States of America.

As discussed inNote 2 to the consolidated financial statements, effective January 1,2006, the Company adopted Statement of Financial Accounting Standards No. 123(Revised 2004), “Share-Based Payment.”

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Outdoor Channel Holdings, Inc. andsubsidiaries’ internal control over financial reporting as of December 31,2006, based on criteria established in “Internal Control—Integrated Framework”issued by the Committee of Sponsoring Organizations of the Treadway Commission,and our report dated March 16, 2007 expressed an unqualifiedopinion on management’s assessment, and an adverse opinion on the effectivenessof internal control over financial reporting due to a material weakness.

/s/ J.H. Cohn LLP

San Diego,CaliforniaMarch 16, 2007

59

----

**OUTDOOR CHANNEL HOLDINGS, INC. ANDSUBSIDIARIESConsolidated Balance SheetsAs of December 31, 2006 and 2005(In thousands, except per share data)**

| ** **                                                                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Assets**                                                                                                 |       |     |       |     |       |
| Current assets:                                                                                            |       |     |       |     |       |
| Cash and cash equivalents                                                                                  |       | $        | 15,447     |     | $          | 18,276 |   |
| Investment in available-for-sale securities                                                                |       | 42,144   |       | 38,830   |       |
| Accounts receivable, net of allowance for doubtful accounts of  $208 and $275                              |       | 6,845    |       | 5,320    |       |
| Income tax refund receivable                                                                               |       | 2,299    |       | 3,843    |       |
| Deferred tax assets, net                                                                                   |       | 592      |       | 1,015    |       |
| Prepaid programming costs                                                                                  |       | 2,713    |       | 2,381    |       |
| Other current assets                                                                                       |       | 929      |       | 689      |       |
| Total current assets                                                                                       |       | 70,969   |       | 70,354   |       |
| Property, plant  and equipment at cost, net:                                                               |       |     |       |     |       |
| Membership division                                                                                        |       | 3,352    |       | 3,526    |       |
| Outdoor Channel equipment and improvements                                                                 |       | 12,445   |       | 12,097   |       |
| Property, plant and equipment, net                                                                         |       | 15,797   |       | 15,623   |       |
| Amortizable intangible assets, net                                                                         |       | 820      |       | 11,292   |       |
| Goodwill                                                                                                   |       | 44,457   |       | 44,457   |       |
| Deferred tax assets, net                                                                                   |       | 13,775   |       | 9,491    |       |
| Deposits and other assets                                                                                  |       | 2,139    |       | 605      |       |
| Totals                                                                                                     |       | $        | 147,957    |     | $          | 151,822 |   |
| **Liabilities and Stockholders’ Equity**                                                              |       |     |       |     |       |
| Current  liabilities:                                                                                      |       |     |       |     |       |
| Accounts payable and accrued expenses                                                                      |       | $        | 2,902      |     | $          | 2,864 |   |
| Accrued severance payments                                                                                 |       | 341      |       | 18       |       |
| Current portion of long-term debt and capital leases                                                       |       | —   |       | 708      |       |
| Current portion of deferred revenue                                                                        |       | 225      |       | 422      |       |
| Customer deposits                                                                                          |       | 155      |       | 159      |       |
| Total current liabilities                                                                                  |       | 3,623    |       | 4,171    |       |
| Accrued severance payments, net of current portion                                                         |       | 44       |       | 16       |       |
| Long-term debt, net of current portion                                                                     |       | —   |       | 4,193    |       |
| Deferred revenue, net of current portion                                                                   |       | 1,972    |       | 1,271    |       |
| Derivative instruments                                                                                     |       | —   |       | 72       |       |
| Deferred satellite rent obligations                                                                        |       | 344      |       | 295      |       |
| Total liabilities                                                                                          |       | 5,983    |       | 10,018   |       |
| Commitments and  contingencies—See Note 9                                                             |       |     |       |     |       |
| Stockholders’  equity:                                                                                |       |     |       |     |       |
| Preferred stock; 25,000 shares authorized; none issued                                                     |       | —   |       | —   |       |
| Common stock, $0.001 par value; 75,000 shares authorized: 25,507  and 24,409 shares issued and outstanding |       | 26       |       | 24       |       |
| Additional paid-in capital                                                                                 |       | 164,589  |       | 158,700  |       |
| Deferred compensation                                                                                      |       | —   |       | (1,520   | )          |
| Accumulated  other comprehensive income (loss):                                                            |       |     |       |     |       |
| Net unrealized losses on derivative instruments                                                            |       | —   |       | (72      | )          |
| Net unrealized gains on available-for-sale securities                                                      |       | 48       |       | 36       |       |
| Total accumulated other comprehensive income (loss)                                                        |       | 48       |       | (36      | )          |
| Accumulated deficit                                                                                        |       | (22,689  | )          | (15,364  | )          |
| Total stockholders’ equity                                                                            |       | 141,974  |       | 141,804  |       |
| Totals                                                                                                     |       | $        | 147,957    |     | $          | 151,822 |   |

 

See Notes to Consolidated Financial Statements

60

----

**OUTDOOR CHANNELHOLDINGS, INC. AND SUBSIDIARIESConsolidated Statements of OperationsFor The Years Ended December 31, 2006, 2005 and 2004(In thousands, except per share data)**

| ** **                                                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Revenues:                                                     |       |     |       |     |       |     |       |
| Advertising                                                   |       | $        | 25,679     |     | $          | 22,769   |       | $ | 21,817 |   |
| Subscriber fees                                               |       | 17,687   |       | 15,432   |       | 13,391   |       |
| Membership  income                                            |       | 5,156    |       | 4,707    |       | 4,746    |       |
| Total revenues                                                |       | 48,522   |       | 42,908   |       | 39,954   |       |
| Cost of services:                                             |       |     |       |     |       |     |       |
| Programming                                                   |       | 8,355    |       | 5,604    |       | 2,521    |       |
| Satellite  transmission fees                                  |       | 2,550    |       | 2,497    |       | 2,351    |       |
| Production and  operations                                    |       | 4,078    |       | 3,458    |       | 2,529    |       |
| Other direct  costs                                           |       | 1,151    |       | 1,355    |       | 1,101    |       |
| Total cost of  services                                       |       | 16,134   |       | 12,914   |       | 8,502    |       |
| Other expenses:                                               |       |     |       |     |       |     |       |
| Advertising                                                   |       | 7,119    |       | 7,100    |       | 5,596    |       |
| Selling, general  and administrative                          |       | 26,168   |       | 17,375   |       | 16,153   |       |
| Non-cash  compensation expense from exchange of stock options |       | —   |       | —   |       | 47,983   |       |
| Impairment of  amortizable intangible assets                  |       | 9,540    |       | —   |       | —   |       |
| Depreciation and  amortization                                |       | 3,245    |       | 2,721    |       | 1,424    |       |
| Total other  expenses                                         |       | 46,072   |       | 27,196   |       | 71,156   |       |
| Income (loss)  from operations                                |       | (13,684  | )          | 2,798    |       | (39,704  | )          |
| Interest expense                                              |       | (246     | )          | (45      | )          | (5       | )          |
| Other income                                                  |       | 2,692    |       | 943      |       | 120      |       |
| Income (loss)  before income taxes and minority interest      |       | (11,238  | )          | 3,696    |       | (39,589  | )          |
| Income tax  provision (benefit)                               |       | (3,913   | )          | 1,503    |       | (16,011  | )          |
| Income (loss)  before minority interest                       |       | (7,325   | )          | 2,193    |       | (23,578  | )          |
| Minority  interest in net income of consolidated subsidiary   |       | —   |       | —   |       | 682      |       |
| Net income  (loss)                                            |       | $        | (7,325     | )        | $          | 2,193    |       | $ | (24,260 | ) |
| Earnings (loss) per common share:                             |       |     |       |     |       |     |       |
| Basic                                                         |       | $        | (0.30      | )        | $          | 0.10     |       | $ | (1.52 | ) |
| Diluted                                                       |       | $        | (0.30      | )        | $          | 0.09     |       | $ | (1.52 | ) |
| Weighted average number of common shares outstanding:         |       |     |       |     |       |     |       |
| Basic                                                         |       | 24,556   |       | 21,423   |       | 15,998   |       |
| Diluted                                                       |       | 24,556   |       | 24,732   |       | 15,998   |       |

 

See Notes to Consolidated Financial Statements

61

----

**OUTDOOR CHANNELHOLDINGS, INC. AND SUBSIDIARIESConsolidated Statements of Stockholders’ EquityFor the Years Ended December 31, 2006, 2005 and 2004(In thousands)**

| ** **                                                                                    | ** ** | **Common Stock** | ** ** | **Common  Stock  Subscriptions** | ** ** | **Treasury**   | ** ** | **Additional  Paid-in** | ** ** | **Deferred** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Retained  Earnings  (Accumulated** | ** ** | ** **   | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------------|------------|----------------|------------|-------------------------|------------|--------------|------------|-----------------------------------------------|------------|--------------------------------------|------------|--------------|------------|
| ** **                                                                                    | ** ** | **Shares**            | ** ** | **Amount**                       | ** ** | **Receivable** | ** ** | **Stock**               | ** ** | **Capital**  | ** ** | **Compensation**                              | ** ** | **(Loss)**                           | ** ** | **Deficit)** | ** ** | **Total** | ** ** |
| Balance,  January 1, 2004                                                                |       | 5,887                 |       |                             | $          | 118            |       |                    |       | $            | (30        | )                                             |       |                                 | $          | (400         | )          |   |   | $ | 6,768 |   |   |   | $ | — |   |   |   | $ | 34 |   |   |   | $ | 6,703 |   |   | $ | 13,193 |   |
| Comprehensive Income (Loss):                                                                  |       |                  |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                                      |       |                  |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |   |   |   |   |   |   |   |   |   | (24,260 | ) |   | (24,260 | ) |
| Effect of change  in fair value of available-for-sale securities, net of deferred taxes of $4 |       |                  |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |   |   |   |   |   | 9 |   |   |   |   |   |   | 9 |   |
| Total  comprehensive income (loss)                                                            |       |                  |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (24,251 | ) |
| Effect of 5 for 2  split and change in par value                                              |       | 8,830                 |       |                             | (103       | )              |       |                    |       |         |       |                                          |       |                                 |       |         | 103        |   |   |   |   |   |   |   |   |   |   |   |   |   |   | — |   |
| Common stock  issued upon exercise of stock options                                           |       | 723                   |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         | 1,285      |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 1,285 |   |
| Stock  subscriptions paid                                                                     |       |                  |       |                             |       |           |       |                    | 30         |         |       |                                          |       |                                 |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 30 |   |
| Issuance of  restricted stock to employees for services to be rendered                        |       | 75                    |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         | 1,043      |   |   |   | (1,043 | ) |   |   |   |   |   |   |   |   |   | — |   |
| Amortization of  deferred compensation                                                        |       |                  |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |   | 9 |   |   |   |   |   |   |   |   |   |   | 9 |   |
| Stock exchanged  for stock of subsidiary                                                      |       | 3,070                 |       |                             | 3          |           |       |                    |       |         |       |                                          |       |                                 |       |         | 54,100     |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 54,103 |   |
| Effect of  exchange of stock options for stock options of subsidiary                          |       |                  |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         | 47,983     |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 47,983 |   |
| Tax benefit from  exercise of stock options                                                   |       |                  |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         | 1,030      |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 1,030 |   |
| Retirement of  treasury stock                                                                 |       | (191                  | )          |                             |       |           |       |                    |       |         |       |                                          | 400        |                                 |       |         | (400       | ) |   |   |   |   |   |   |   |   |   |   |   |   |   | — |   |
| Balance,  December 31, 2004                                                              |       | 18,394                |       |                             | $          | 18             |       |                    |       | $            | —     |                                          |       |                                 | $          | —       |       |   |   | $ | 111,912 |   |   |   | $ | (1,034 | ) |   |   | $ | 43 |   |   |   | $ | (17,557 | ) |   | $ | 93,382 |   |

 

See Notes to Consolidated FinancialStatements

62

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIESConsolidated Statements of Stockholders’ Equity (Continued)For the Years Ended December 31, 2006, 2005 and 2004(In thousands)**

| ** **                                                                                       | ** ** | **Common Stock** | ** ** | **Common  Stock  Subscriptions** | ** ** | **Treasury**   | ** ** | **Additional  Paid-in** | ** ** | **Deferred** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Retained  Earnings  (Accumulated** | ** ** | ** **   | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------------|------------|----------------|------------|-------------------------|------------|--------------|------------|-----------------------------------------------|------------|--------------------------------------|------------|--------------|------------|
| ** **                                                                                       | ** ** | **Shares**            | ** ** | **Amount**                       | ** ** | **Receivable** | ** ** | **Stock**               | ** ** | **Capital**  | ** ** | **Compensation**                              | ** ** | **(Loss)**                           | ** ** | **Deficit)** | ** ** | **Total** | ** ** |
| Balance,  December 31, 2004                                                                 |       | 18,394                |       |                             | $          | 18             |       |                    |       | $            | —     |                                          |       |                                 | $          | —       |       |   |   | $ | 111,912 |   |   |   | $ | (1,034 | ) |   |   | $ | 43 |   |   |   | $ | (17,557 | ) |   | $ | 93,382 |   |
| Comprehensive Income:                                                                            |       |                  |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                       |       |                  |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |   |   |   |   |   |   |   |   |   | 2,193 |   |   | 2,193 |   |
| Effect of change  in fair value of available-for-sale securities, net of deferred taxes of ($7)  |       |                  |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |   |   |   |   |   | (7 | ) |   |   |   |   |   | (7 | ) |
| Impact of cash  flow hedge                                                                       |       |                  |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |   |   |   |   |   | (72 | ) |   |   |   |   |   | (72 | ) |
| Total  comprehensive income                                                                      |       |                  |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 2,114 |   |
| Common stock  issued upon exercise of stock options                                              |       | 2,448                 |       |                             | 2          |           |       |                    |       |         |       |                                          |       |                                 |       |         | 2,732      |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 2,734 |   |
| Issuance of  restricted stock to employees for services to be rendered, net of forfeited  shares |       | 67                    |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         | 861        |   |   |   | (861 | ) |   |   |   |   |   |   |   |   |   | — |   |
| Common stock  issued upon sale to public, net of offering costs of $1,066                        |       | 3,500                 |       |                             | 4          |           |       |                    |       |         |       |                                          |       |                                 |       |         | 43,346     |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 43,350 |   |
| Amortization of  deferred compensation                                                           |       |                  |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |   | 375 |   |   |   |   |   |   |   |   |   |   | 375 |   |
| Change in  estimate of tax benefit from exercise of stock options                                |       |                  |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         | (1,027     | ) |   |   |   |   |   |   |   |   |   |   |   |   |   | (1,027 | ) |
| Tax benefit from  exercise of stock options                                                      |       |                  |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         | 868        |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 868 |   |
| Tax benefit from  vesting of restricted stock                                                    |       |                  |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         | 8          |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 8 |   |
| Balance,  December 31, 2005                                                                 |       | 24,409                |       |                             | $          | 24             |       |                    |       | $            | —     |                                          |       |                                 | $          | —       |       |   |   | $ | 158,700 |   |   |   | $ | (1,520 | ) |   |   | $ | (36 | ) |   |   | $ | (15,364 | ) |   | $ | 141,804 |   |

 

See Notes to Consolidated FinancialStatements

63

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIESConsolidated Statements of Stockholders’ Equity (Continued)For the Years Ended December 31, 2006, 2005 and 2004(In thousands)**

| ** **                                                                                                             | ** ** | **Common Stock** | ** ** | **Common  Stock  Subscriptions** | ** ** | **Treasury**   | ** ** | **Additional  Paid-in** | ** ** | **Deferred** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Retained  Earnings  (Accumulated** | ** ** | ** **   | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------------|------------|----------------|------------|-------------------------|------------|--------------|------------|-----------------------------------------------|------------|--------------------------------------|------------|--------------|------------|
| ** **                                                                                                             | ** ** | **Shares**            | ** ** | **Amount**                       | ** ** | **Receivable** | ** ** | **Stock**               | ** ** | **Capital**  | ** ** | **Compensation**                              | ** ** | **(Loss)**                           | ** ** | **Deficit)** | ** ** | **Total** | ** ** |
| Balance, December 31,  2005                                                                                       |       | 24,409                |       |                             | $          | 24             |       |                    |       | $            | —     |                                          |       |                                 | $          | —       |       |   |   | $ | 158,700 |   |   |   | $ | (1,520 | ) |   |   | $ | (36 | ) |   |   | $ | (15,364 | ) |   | $ | 141,804 |   |
| Comprehensive Income (Loss):                                                                                           |       |                  |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net (loss)                                                                                                             |       |                  |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |   |   |   |   |   |   |   |   |   | (7,325 | ) |   | (7,325 | ) |
| Effect of change  in fair value of available-for-sale securities, net of deferred taxes of  ($25)                      |       |                  |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |   |   |   |   |   | 12 |   |   |   |   |   |   | 12 |   |
| Impact of cash  flow hedge                                                                                             |       |                  |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |   |   |   |   |   | 72 |   |   |   |   |   |   | 72 |   |
| Total  comprehensive income (loss)                                                                                     |       |                  |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (7,241 | ) |
| Reclassification  of deferred compensation upon adoption of SFAS 123R                                             |       |                  |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         | (1,520     | ) |   |   | 1,520 |   |   |   |   |   |   |   |   |   |   | — |   |
| Common stock  issued upon exercise of stock options                                                                    |       | 768                   |       |                             | 2          |           |       |                    |       |         |       |                                          |       |                                 |       |         | 911        |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 913 |   |
| Issuance of  restricted stock to employees and service providers for services to be  rendered, net of forfeited shares |       | 374                   |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Share-based  employee and service provider compensation expense                                                        |       |                  |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         | 7,066      |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 7,066 |   |
| Purchase and  retirement of treasury stock                                                                             |       | (44                   | )          |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         | (568       | ) |   |   |   |   |   |   |   |   |   |   |   |   |   | (568 | ) |
| Change in  estimate of tax benefit from exercise of stock options                                                      |       |                  |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         | (816       | ) |   |   |   |   |   |   |   |   |   |   |   |   |   | (816 | ) |
| Tax benefit from  exercise of stock options                                                                            |       |                  |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         | 816        |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 816 |   |
| Balance, December 31, 2006                                                                                        |       | 25,507                |       |                             | $          | 26             |       |                    |       | $            | —     |                                          |       |                                 | $          | —       |       |   |   | $ | 164,589 |   |   |   | $ | — |   |   |   | $ | 48 |   |   |   | $ | (22,689 | ) |   | $ | 141,974 |   |

 

See Notes to Consolidated FinancialStatements

64

----

**OUTDOOR CHANNEL HOLDINGS, INC. ANDSUBSIDIARIESConsolidated Statements of Cash FlowsYears Ended December 31, 2006, 2005 and 2004(In thousands)**

| ** **                                                                                               | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Operating activities:                                                                                    |       |     |       |     |       |     |       |
| Net income (loss)                                                                                        |       | $        | (7,325     | )        | $          | 2,193    |       | $ | (24,260 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities:                |       |     |       |     |       |     |       |
| Depreciation and amortization                                                                            |       | 3,478    |       | 2,730    |       | 1,424    |       |
| Impairment of amortizable intangible assets                                                              |       | 9,540    |       | —   |       | —   |       |
| Provision for doubtful accounts                                                                          |       | 104      |       | 214      |       | 164      |       |
| Realized gain on sale of available-for-sale  securities                                                  |       | —   |       | —   |       | (34      | )          |
| Minority interest in net income of consolidated  subsidiary                                              |       | —   |       | —   |       | 682      |       |
| Tax benefit from exercise of stock options in excess  of recognized expense                              |       | (816     | )          | —   |       | 1,030    |       |
| Deferred tax provision (benefit), net                                                                    |       | (3,915   | )          | 2,994    |       | (17,684  | )          |
| Compensation expense from exchange of stock options                                                      |       | —   |       | —   |       | 47,983   |       |
| Share-based employee and service provider  compensation                                                  |       | 7,066    |       | 375      |       | 9        |       |
| Changes  in operating assets and liabilities:                                                            |       |     |       |     |       |     |       |
| Accounts receivable                                                                                      |       | (1,628   | )          | (686     | )          | (1,215   | )          |
| Income tax refund receivable                                                                             |       | 1,544    |       | (1,552   | )          | (1,126   | )          |
| Prepaid programming costs                                                                                |       | (332     | )          | (1,775   | )          | (606     | )          |
| Other current assets                                                                                     |       | (240     | )          | (554     | )          | 314      |       |
| Deposits and other assets                                                                                |       | (1,765   | )          | (444     | )          | (133     | )          |
| Accounts payable and accrued expenses                                                                    |       | 38       |       | (841     | )          | 1,914    |       |
| Accrued severance payments                                                                               |       | 351      |       | (31      | )          | (291     | )          |
| Customer deposits                                                                                        |       | (4       | )          | 98       |       | 61       |       |
| Deferred revenue                                                                                         |       | 504      |       | 178      |       | (119     | )          |
| Deferred satellite rent obligations                                                                      |       | 49       |       | (17      | )          | (68      | )          |
| Net cash provided by operating activities                                                                |       | 6,649    |       | 2,882    |       | 8,045    |       |
| Investing  activities:                                                                                   |       |     |       |     |       |     |       |
| Purchases of property, plant and equipment                                                               |       | (2,488   | )          | (10,559  | )          | (2,549   | )          |
| Purchases of available-for-sale securities                                                               |       | (132,505 | )          | (64,652  | )          | (255     | )          |
| Proceeds from sale of available-for-sale securities                                                      |       | 129,255  |       | 26,550   |       | 85       |       |
| Costs related to acquisition of minority interest                                                        |       | —   |       | —   |       | (593     | )          |
| Net cash used in investing activities                                                                    |       | (5,738   | )          | (48,661  | )          | (3,312   | )          |
| Financing  activities:                                                                                   |       |     |       |     |       |     |       |
| Principal payments on long-term debt and capital  leases                                                 |       | (4,901   | )          | (84      | )          | (157     | )          |
| Proceeds from issuance of long-term debt                                                                 |       | —   |       | 4,950    |       |     |       |
| Proceeds from exercise of stock options                                                                  |       | 913      |       | 2,734    |       | 1,285    |       |
| Proceeds from common stock subscriptions receivable                                                      |       | —   |       | —   |       | 30       |       |
| Purchase of treasury stock                                                                               |       | (568     | )          | —   |       | —   |       |
| Tax benefit from exercise of stock options in excess  of recognized expense                              |       | 816      |       | —   |       | —   |       |
| Proceeds from the sale of common stock, net of  offering costs                                           |       | —   |       | 43,350   |       | —   |       |
| Net cash provided by (used in) financing activities                                                      |       | (3,740   | )          | 50,950   |       | 1,158    |       |
| Net increase (decrease) in cash and cash equivalents                                                     |       | (2,829   | )          | 5,171    |       | 5,891    |       |
| Cash and cash equivalents, beginning of year                                                             |       | 18,276   |       | 13,105   |       | 7,214    |       |
| Cash and cash equivalents, end of year                                                                   |       | $        | 15,447     |     | $          | 18,276   |       | $ | 13,105 |   |
| Supplemental  disclosure of cash flow information:                                                       |       |     |       |     |       |     |       |
| Interest paid                                                                                            |       | $        | 270        |     | $          | 45       |       | $ | 5 |   |
| Income taxes paid                                                                                        |       | $        | 1          |     | $          | 123      |       | $ | 1,139 |   |
| Supplemental  disclosures of non-cash investing and financing activities:                                |       |     |       |     |       |     |       |
| Issuance of restricted stock to employees for  services rendered                                         |       | $        | 914        |     | $          | 861      |       | $ | 1,043 |   |
| Retirement of treasury stock                                                                             |       | $        | 568        |     | $          | —   |       | $ | 400 |   |
| Fair value of common stock issued to acquire minority  interest in subsidiary                            |       | $        | —     |     | $          | —   |       | $ | 49,853 |   |
| Effect of net increase (decrease) in fair value of  available-for-sale securities, net of deferred taxes |       | $        | 12         |     | $          | (7       | )          | $ | 9 |   |
| Exchange of stock options for non-employee stock  options ofsubsidiary                                   |       | $        | —     |     | $          | —   |       | $ | 4,250 |   |
| Effect of net  increase in fair value of cash flow hedge                                                 |       | $        | 72         |     | $          | —   |       | $ | — |   |

 

See Notes to Consolidated Financial Statements

65

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (In thousands, except per share data)**

**Note 1—Organization and Business**

*Description of Operations*

Outdoor Channel Holdings, Inc. or “Outdoor Channel Holdings,”is incorporated under the laws of the State of Delaware. Collectively, with itssubsidiaries, the terms “we,” “us,” “our” and the “Company” refer to OutdoorChannel Holdings, Inc. as a consolidated entity, except where noted orwhere the context makes clear the reference is only to Outdoor Channel Holdings, Inc.or one of our subsidiaries. Outdoor Channel Holdings, Inc. wholly ownsGPAA, Inc. which in turn wholly owns The Outdoor Channel, Inc. andalso is the sole member of GPAA, LLC. The Outdoor Channel, Inc. (“TOC”),operates The Outdoor Channel, which is a national television network devoted totraditional outdoor activities, such as hunting, fishing and shooting sports,as well as off-road motor sports and other related lifestyle programming. Inaddition, TOC also operates Outdoor Channel 2 HD, which also is a nationaltelevision network featuring programming produced utilizing high definitiontechnology.

Our revenues include advertising fees from advertisements aired onThe Outdoor Channel, including fees paid by outside producers to purchaseadvertising time in connection with the airing of their programs on The OutdoorChannel, and from advertisements in “Gold Prospectors & TreasureHunters in the Great Outdoors” magazine; subscriber fees paid by cable andsatellite service providers that air The Outdoor Channel; membership fees frommembers in both LDMA-AU, Inc. (“Lost Dutchman’s”) and Gold Prospector’sAssociation of America, LLC (“GPAA”); and other income including income fromsales of products and services related to gold prospecting, gold expositions,expeditions and outings.

Other business activities consist of the promotion and sale of agold prospecting expedition to our Cripple River property located near Nome,Alaska, and the sale of memberships in Lost Dutchman’s that entitle members toengage in gold prospecting on our Arizona, California, Colorado, Georgia,Michigan, North Carolina, Oregon, and South Carolina properties. We have signedan agreement with another organization for the mutual use of these and otherproperties. Outdoor Channel Holdings is also the sole member of 43455 BPD, LLCthe entity that owns the building that houses our broadcast facility.

**Note 2—Summary of Significant AccountingPolicies**

*Principles of Consolidation*

The consolidated financial statements include the accounts ofOutdoor Channel Holdings and its subsidiaries, Gold Prospector’s Association ofAmerica, Inc., Lost Dutchman’s, 43455 BPD, LLC, GPAA and TOC. All materialintercompany accounts and transactions have been eliminated in consolidation.

*Use of Estimates*

The preparation of financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates, judgments and assumptions. We believethat our estimates, judgments and assumptions made when accounting for itemsand matters such as customer retention patterns, allowance for bad debts,useful lives of assets, asset valuations including cash flow projections,recoverability of assets, potential unasserted claims under contractualobligations, income taxes, reserves and other provisions and contingencies arereasonable, based on information available at the time they are made. Theseestimates, judgments and assumptions can affect reported amounts of assets andliabilities as of the dates of the consolidated balance sheet and reportedamount of 

66

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note 2—Summary ofSignificant Accounting Policies** (Continued)

revenues and expenses for the periodspresented. Accordingly, actual results could materially differ from thoseestimates.

*Cash and Cash Equivalents*

We consider all highly-liquid investments with maturities of threemonths or less when acquired to be cash equivalents.

*Subscriber Acquisition Fees*

Subscriber acquisition fees are paid to obtain carriage on certainpay television distributors’ systems. Under certain of these agreements withpay television distributors, TOC is obligated to pay subscriber acquisitionfees to the pay television distributors if they meet defined criteria for theprovision of additional carriage for The Outdoor Channel on the pay televisiondistributors’ systems. Such costs are accrued when TOC receives appropriatedocumentation that the distributors have met the contractual criteria and haveprovided the additional carriage.

Subscriber acquisition fees included in other assets, areamortized over the contractual period that the pay television distributor isrequired to carry the newly acquired TOC subscriber, generally 3 to 5 years. Firstthe amortization is charged as a reduction of the subscriber fee revenue thatthe pay television distributor is obligated to pay us. If the amortizationexpense exceeds the subscriber fee revenue recognized on a per incrementalsubscriber basis, the excess amortization is included as a component of cost ofservices. We assess the recoverability of these costs periodically by comparingthe net carrying amount of the subscriber acquisition fees to the estimates offuture subscriber fees and advertising revenues. We also assess therecoverability when events such as changes in distributor relationships occuror other indicators suggest impairment.

*PrepaidProgramming Costs*

We produce a portion ofthe programming we air on our channels in-house as opposed to acquiring theprogramming from third party producers. The cost of production is expensed whenthe show airs. As such, at year-end we have incurred costs for programming thatis yet to air. These costs are accumulated on the balance sheet as “Prepaidprogramming costs.” Costs of specific shows will be charged to programmingexpense based on anticipated airings, when the program airs and the relatedadvertising revenue is recognized. At the time it is determined that a programwill not likely air, we charge to expense any remaining costs recorded inprepaid programming costs.

*Property, Plant and Equipment*

Property, plant andequipment are stated at historical cost. Depreciation of property, plant andequipment is calculated using the straight-line method over the estimateduseful lives of the assets which range from 5 to 39 years.

67

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note 2—Summary ofSignificant Accounting Policies (Continued)**

*Amortizable Intangible Assets*

Costs recorded in connection with the Company’s acquisition of theminority interest in TOC for multi-system cable operator (“MSO”) relationshipswere being amortized over a period of 21 years and 4 months and costs recordedfor advertising customer relationships are being amortized over a period ofeither 3 or 4 years. TOC has the exclusive right to the trademark The OutdoorChannel. The costs of acquiring the trademark are being amortized on astraight-line basis over an estimated useful life of 15 years.

*Impairment of Certain Long-Lived Assets*

The impairment of long-lived assets with finite lives such asproperty and equipment, MSO relationships, customer relationships andtrademarks, is recognized when events or changes in circumstances indicate thatthe undiscounted cash flows estimated to be generated by such assets are lessthan their carrying value and, accordingly, all or a portion of such carryingvalue may not be recoverable. Impairment losses are then measured by comparingthe fair value of assets to their carrying amounts. During 2006, we recognizedan impairment charge of $9,540 related to the carrying value of our MSOrelationships asset as more fully described in Note 3. We did not record anycharges for the impairment of long-lived assets in 2005 or 2004.

*Goodwill*

Goodwill represents the excess of cost over the fair value of netassets of an acquired business. Under Statement of Financial AccountingStandards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”),goodwill is deemed to have an indefinite life and is not subject toamortization over an estimated finite useful life but is tested for impairmentannually under a two-step approach, or more frequently, if events or changes incircumstances indicate that the asset might be impaired.

Impairment is assessed at the “reporting unit” level by applying afair value-based test. A reporting unit is defined as the same as, or one levelbelow the operating segment level as described in Statement of FinancialAccounting Standards No. 131, “Disclosures about Segments of an Enterpriseand Related Information” (“SFAS 131”). Under the two-step approach, thecarrying amount of the reporting unit is compared with its fair value. If thecarrying amount of the reporting unit exceeds its fair value, the “implied”fair value (as defined in SFAS 142) of the reporting unit’s goodwill iscompared with its carrying amount to measure the amount of the impairment loss,if any. When the carrying amount of the reporting unit’s goodwill exceeds theimplied fair value of the goodwill, an impairment loss is recognized in anamount equal to the excess. To date, we have not recognized any impairment ofgoodwill.

*Derivative Instruments and Certain HedgingActivity*

We account for derivatives and hedging activity under Statement ofFinancial Accounting Standards No. 133 (“SFAS 133”) “Accounting forDerivative Instruments and Certain Hedging Activities” and Statement ofFinancial Accounting Standards No. 138 (“SFAS 138”) “Accounting forDerivative Instruments and Certain Hedging Activity, an amendment of SFAS No. 133.”  All derivatives are recognized on the balancesheet at their fair value. On the date we enter into a derivative contract, we 

68

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note 2—Summary ofSignificant Accounting Policies (Continued)**

designate the derivative as a hedge of thevariability of cash flows to be paid related to a recognized liability (“cashflow hedge”). We formally document all relationships between hedginginstruments and hedged items, as well as the risk-management objective andstrategy for undertaking various hedge transactions. This process includeslinking all derivatives that are designated as cash flow hedges to specificliabilities on the balance sheet. We also formally assess, both at the hedge’sinception and on an ongoing basis, whether the derivatives that are used inhedging transactions are highly effective in offsetting changes in cash flowsof hedged items. When it is determined that a derivative is not highlyeffective as a hedge or that it has ceased to be a highly effective hedge, wediscontinue hedge accounting prospectively. During 2006, we retired two hedgedterm loans. Accordingly, as of December 31, 2006 we no longer havederivative instruments outstanding.

*Advertising*

We expense the cost of advertising and promotions as theadvertisement or promotion takes place .

*Revenue Recognition*

We generate revenues from sales of television and printadvertising, from cable and satellite subscriber fees, from membership fees andfrom sales of related products and services.

TOC’s advertising revenues are recognized when the advertisementis aired and the collectibility of fees is reasonably assured. Advertisingrevenues from advertisements in our bi-monthly magazine are recognized when themagazine is distributed. Subscriber fees for The Outdoor Channel are recognizedin the period the programming is aired by the distributor.

Broadcast and national television network advertising contractsmay guarantee the advertiser a minimum audience for its advertisements over theterm of the contracts. We provide the advertiser with additional advertisingtime if we do not deliver the guaranteed audience size. The amount ofadditional advertising time is generally based upon the percentage of shortfallin audience size. This requires us to make estimates of the audience size thatwill be delivered throughout the terms of the contracts. We base our estimateof audience size on information provided by ratings services and our historicalexperience. If we determine we will not deliver the guaranteed audience, anaccrual for “make-good” advertisements is recorded as a reduction of revenue.The estimated make-good accrual is adjusted throughout the terms of theadvertising contracts.

Lost Dutchman’s memberships are contractual arrangements thatprovide members with prospecting and mineral rights and the use of land andfacilities for camping and recreational vehicle parking. Lost Dutchman’smemberships sold by the Company generally have payment terms that provide for adown payment and monthly installments and are non-interest bearing andunsecured. Revenues are generally recognized on a straight-line basis over theestimated average life (7 years) of the Lost Dutchman’s membership. We sellGPAA memberships for one to four years and also offer a GPAA lifetime membership(“Gold Life”). The majority of the memberships are for one year. Multi-yearGPAA membership revenues are recognized on a straight-line basis over the lifeof a membership or an estimated life of 15 years for a lifetime membership.Merchandise sales for GPAA are recognized as sales when the 

69

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note 2—Summary ofSignificant Accounting Policies (Continued)**

product is shipped and collection of thereceivable is probable. Merchandise sales for GPAA are included in the “Membershipincome” revenue category.

We do not record any receivables arising under these contracts ormemberships. Accordingly, revenues recognized do not exceed the total of thecash payments received and cash received in excess of revenue earned isrecorded as deferred revenue. Revenues from the expeditions are recognized whenthey are taken in June through August each year. Revenues fromoutings and gold expositions are recognized at the time of the event.

We maintain an allowance for doubtful accounts for estimatedlosses that may arise if any of our customers are unable to make requiredpayments. Management specifically analyzes the age of customer balances,historical bad debt experience, customer credit-worthiness and tradepublications regarding the financial health of our larger customers and changesin customer payment terms when making estimates of the uncollectibility of ourtrade accounts receivable balances. If we determine that the financialcondition of any of our customers deteriorated or improved, whether due tocustomer specific or general economic conditions, we make appropriateadjustments to the allowance.

*Income Taxes*

We account for income taxes pursuant to the asset and liabilitymethod which requires deferred income tax assets and liabilities to be computedfor temporary differences between the financial statement and tax bases ofassets and liabilities that will result in taxable or deductible amounts in thefuture based on enacted laws and rates applicable to the periods in which thetemporary differences are expected to affect taxable income. Valuationallowances are established when necessary to reduce deferred tax assets to theamounts expected to be realized. The income tax provision is the tax payable orrefundable for the period plus or minus the change during the period indeferred tax assets and liabilities. Tax benefits arising from the exercise ofstock options and the issuance of common shares to pay deferred compensationare recorded as additional paid-in capital in the period the benefits areearned or realized.

With our adoption ofSFAS 123R on January 1, 2006, we present, on a prospective basis, thetax benefits from exercise of stock options in excess of recognized expense asa cash flow from financing activities in the accompanying 2006 consolidatedstatement of cash flows rather than as a cash flow from operating activities,as was prescribed under accounting rules applicable through December 31,2005. This requirement reduces the amount reflected as net cash provided byoperating activities and increases net cash provided by financing activities.Total cash flows remained unchanged from that which would have been reportedunder prior accounting rules. We recognize such benefits only if they have beenrealized which we determine by following the tax law method, which providesthat current deductions are recognized before realizing the benefits of our netoperating loss carry forwards. For the year ended December 31, 2005, taxbenefit from the exercise of stock options in excess of recognized expense of$876 has been included in cash flows from operating activities.

*Earnings (Loss) Per Share*

Effective September 15, 2004, we effected a 5 for 2 split ofour common stock in connection with our reincorporation in Delaware. All shareand per share data has been adjusted where appropriate to reflect 

70

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note 2—Summary ofSignificant Accounting Policies (Continued)**

this stock split. In addition, the parvalue of our common stock was changed from $0.02 to $0.001 per share.

We have presented “basic” and “diluted” earnings (loss) per commonshare in the accompanying consolidated statements of operations in accordancewith the provisions of Statement of Financial Accounting Standards No. 128,“Earnings Per Share” (“SFAS 128”).Basic earnings (loss) per common share is calculated by dividing net income(loss) by the weighted average number of common shares outstanding during eachperiod. The calculation of diluted earnings (loss) per common share is similarto that of basic earnings (loss) per common share, except that the denominatoris increased to include the number of additional common shares that would havebeen outstanding if all potentially dilutive common shares of the Company wereissued during the period if any such issuances would have had a dilutiveeffect.

The computation of diluted earnings per share takes into accountthe effects of the weighted average number of common shares outstanding of theassumed exercise of the outstanding non-vested restricted stock and stockoptions of the Company for the year ended December 31, 2005 adjusted forthe application of the treasury stock method. The computation of diluted lossper common share for the years ended December 31, 2006 and 2004 does nottake into account the effects of the weighted average number of common shares outstandingof the assumed exercise of the outstanding non-vested restricted stock andstock options of the Company because the effect of their assumed exercise wouldbe anti-dilutive. The computation of diluted loss per common share for the yearended December 31, 2004 does not take into account the increase in the netloss attributable to the increase in minority interest in the net income of TOCthat results from the assumed exercise of all of TOC’s outstanding stockoptions prior to the exchange of those options for our options on September 8,2004 because the effects of the assumed exercise of TOC stock options were notmaterial. The greatest number of shares potentially issuable by us upon theexercise of stock options and the vesting of restricted stock or performanceunits in any quarter during 2006, 2005 and 2004 that was not reflected in theweighted average number of common shares used in the computation of dilutedearnings (loss) per share because their effect would have been anti-dilutivetotaled 4,336, 965 and 5,630 shares, respectively.

The following table summarizes thecalculation of the weighted average common shares outstanding for basic anddiluted earnings per share for the years ended December 31, 2006, 2005 and2004:

| ** **                                                                                                                                                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Numerators:                                                                                                                                                        |       |     |       |     |       |     |       |
| Net income (loss)                                                                                                                                                  |       | $        | (7,325     | )        | $          | 2,193    |       | $ | (24,260 | ) |
| Denominators:                                                                                                                                                      |       |     |       |     |       |     |       |
| Weighted average common shares outstanding—basic                                                                                                              |       | 24,556   |       | 21,423   |       | 15,998   |       |
| Dilutive effect of potentially issuable common  shares upon exercise of stock options of the Company as adjusted for the  application of the treasury stock method |       | —   |       | 3,309    |       | —   |       |
| Diluted weighted  average common shares outstanding—diluted                                                                                                   |       | 24,556   |       | 24,732   |       | 15,998   |       |
|                                                                                                                                                                    |            |          |            |          |            |          |            |  |  |  |

 

71

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note 2—Summary ofSignificant Accounting Policies (Continued)**

*Stock Incentive Plans*

Effective January 1, 2006, we adopted Statement of FinancialAccounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”).We have elected to use the modified prospective transition method. This methodrequires compensation cost to be recognized in the financial statements overthe service period for the fair value of all awards (including awards toemployees) granted after the date of adoption as well as for existing awardsfor which the requisite service had not been rendered as of the date ofadoption and requires that prior periods not be restated.

*Investments*

Pursuant to Statement of Financial Accounting Standards No. 115,“Accounting for Certain Investments inDebt and Equity Securities”*,*our investments in marketable debt and equity securities have been classifiedas available-for-sale securities and, accordingly, are valued at fair value atthe end of each period. Any material unrealized holding gains and lossesarising from such valuation are excluded from net income and reported, net ofapplicable income taxes, in other comprehensive income. Accumulated netunrealized holding gains and losses are included at the end of each year inaccumulated other comprehensive income which is a separate component ofstockholders’ equity.

*Reclassifications*

Certain amounts in the 2005 and 2004 consolidated financialstatements have been reclassified from amounts in the consolidated financialstatements we originally filed before the restatements described in Note 3either to conform to the 2006 presentations or to provide additionaldetail about our operating results and more fully comply with the Securitiesand Exchange Commission’s (“SEC”) Regulation S-X. In particular certain amounts included under “expenses”in the 2005 and 2004 consolidated financial statements we originally issuedhave been reclassified in line items under either “cost of services” or “otherexpenses”. Cost of servicesincludes programming, satellite transmission fees, production and operationsand other direct costs. Other expenses include advertising, selling, generaland administrative and depreciation and amortization. Further, to better matchintangible assets with the segment to which they pertain, we have reclassifiedthe amortizable intangible assets and the goodwill which were recorded inconnection with the acquisition on September 8, 2004 of the remaining17.6% minority interest in TOC along with the related amortization expense from“Corporate” to the “TOC” segment. Certain other changes have been made in thehistorical consolidated financial statements to conform to currentpresentations.

**Note 3—Acquisition of MinorityInterest in The Outdoor Channel, Inc.**

On September 8, 2004, we announced the completion of theacquisition of the remaining 17.6% minority interest in TOC by Outdoor ChannelHoldings through (i) the merger of TOC with a newly-formed, wholly-ownedsubsidiary of Outdoor Channel Holdings, with TOC being the survivingcorporation, and (ii) the exchange of each share of TOC common stock notpreviously held by Outdoor Channel Holdings or its subsidiaries for0.65 shares of Outdoor Channel Holdings’ common stock. In addition, eachoutstanding option to purchase one share of TOC common stock was exchanged foran option to purchase 0.65 shares of Outdoor Channel Holdings’ commonstock.

72

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note 3—Acquisition ofMinority Interest in The Outdoor Channel, Inc.** (Continued)

Based on the exchange ratio, the 5 for 2 split as explained inNote 2 and the capitalization of TOC, Outdoor Channel Holdings issued3,070 shares of our common stock as well as options to purchase 4,012additional shares on September 8, 2004.

As previously disclosed by us, in October 2004, we receivednotice from a TOC stockholder that the stockholder was exercising dissenters’rights with respect to 144 previously outstanding TOC common shares. Thedissenter submitted a written demand that TOC repurchase the dissenter’sshares. On March 8, 2005, the dissenter withdrew this demand and accepted233 common shares of the Company in exchange for his 144 common shares of TOC.The number of sharesexchangedreflects the exchange ratio. For accounting purposes, the dissenter’s shareshave been deemed to have been exchanged as of September 8, 2004 and thecost of those shares has been recorded as additional goodwill as shown below.

The acquisition of all of the 17.6% minority interest in TOC wasaccounted for using the purchase method of accounting. The cost of acquiringthe minority interest included the aggregate fair value of the common shares ofOutdoor Channel Holdings issued in exchange for common shares of TOC andcertain other direct costs. The acquisition cost was allocated based on thefair value of the assets of TOC that were acquired and liabilities that wereassumed, including intangible assets that arose from contractual or other legalrights or met certain other recognition criteria that underlie the approximate17.6% minority interest that was acquired. The excess of the cost of theminority interest over the fair value of the underlying interest in the netidentifiable assets acquired was allocated to goodwill. In addition, inaccordance with the provisions of Statement of Financial Accounting Standards No. 109,“Accounting for Income Taxes” the tax effects of the intangible assets havebeen treated as additional consideration. This additional consideration hasalso been allocated to goodwill.

The cost of the acquisition of the minority interest in TOC byOutdoor Channel Holdings was $54,985 based on the issuance at the closing of3,070 shares of Outdoor Channel Holdings’ common stock (including theformer dissenter’s shares) and the average closing price of $16.24 pershare for a specified period before and after April 20, 2004, the lasttrading day before the public announcement of the material terms of theacquisition plus the assumption of 325 fully-vested options held by a formeremployee of TOC with an intrinsic value of $4,250 plus certain other costsincluding income tax effects. Based on the analysis of the fair value of theassets that were acquired and liabilities that were assumed, the acquisitioncosts of $54,985 were allocated primarily to intangible assets as follows:

| ** **                                                | ** ** | **Allocation** | ** ** | **Estimated  Useful Life** | ** ** |
|-----------------------------------------------------------|------------|----------------|------------|---------------------------------|------------|
| Multi-system operators  (“MSO”) relationships   |       |           | $          | 10,573                          |       |   | 21 years, 4 months |   |
| Advertising customer  relationships:                      |       |           |       |                            |       |   |   |
| Short form                                                |       |           | 1,351      |                            |       | 4 years |   |
| Long form                                                 |       |           | 621        |                            |       | 3 years |   |
| Total identifiable  intangible assets                     |       |           | 12,545     |                            |       |   |   |
| Goodwill                                                  |       |           | 44,457     |                            |       | Indefinite |   |
| Deferred tax liability  associated with intangible assets |       |           | (5,001     | )                               |       |   |   |
| Minority interest in  subsidiary                          |       |           | 2,984      |                            |       |   |   |
| Aggregate purchase price                                  |       |           | $          | 54,985                          |       |   |   |   |

 

73

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note 3—Acquisition of Minority Interest in TheOutdoor Channel, Inc. (Continued)**

The exchange ofvested options by Outdoor Channel Holdings for vested options of TOC resultedin a charge to operations in the consolidated statement of operations on September 8,2004 equal to the intrinsic value of the options issued on that date and acredit for the related income tax benefit. Outdoor Channel Holdings issued fully-vestedoptions to purchase 3,687 shares in exchange for fully-vested options held byemployees of TOC on September 8, 2004. On that day, the market price ofone share of common stock of Outdoor Channel Holdings was $14.00. As a result,the Company incurred a non-cash, non-recurring charge to operating expenses of$47,983 and recognized an income tax benefit of $19,098 or a net charge of$28,885.

Summarized unaudited pro formainformation, assuming this acquisition occurred at the beginning of the year endedDecember 31, 2004 follows:

| ** **      | ** ** | **For the Year Ended  December 31, 2004** | ** ** |
|-----------------|------------|--------------------------------------------------------------------|------------|
| Net revenues    |       |                                                               | $          | 39,954 |   |   |
| Net loss        |       |                                                               | (23,996    | ) |   |
| Loss per share: |       |                                                               |       |   |   |
| Basic           |       |                                                               | $          | (1.26 | ) |   |
| Diluted         |       |                                                               | $          | (1.26 | ) |   |

 

The acquisition did not affect net revenues. The pro forma net lossand the related loss per share have been presented as if the acquisition hadoccurred on the first day of the year ended December 31, 2004 and includes(i) the effects of additional amortization related to certain intangibleassets recorded, (ii) the elimination of the minority interest, (iii) thenon-recurring net charge of $28,885 attributable to the exchange of options and(iv) the additional shares issued by Outdoor Channel Holdings.

**Reassessment of Useful Life of MSORelationships**

During 2006, we reviewed the facts and circumstancesregarding the useful life of our intangible assets attributable to multi-systemcable operator (“MSO”) relationships as of September 8, 2004 when wecompleted the acquisition of the minority interest in TOC that we did notpreviously own and allocated a portion of the excess of the cost of theminority interest over the fair value of the underlying interest in the netidentifiable assets acquired to the MSO relationships. After consideration ofthe facts and circumstances, the nature of our business, our experience withthe MSOs of our network, and the proclivities of our industry, we haveconcluded that as of September 8, 2004 our MSO relationships asset had adefinite life which we have estimated to be 21 years and 4 months and,accordingly, we reclassified all of the amounts originally allocated to thecost of MSO relationships from other non-amortizable intangible assets toamortizable intangible assets as of that date.

The accounting treatmentresulting from this reassessment of the useful life of this asset has resultedin adjustments to amortization expense and certain other related adjustments toour previously issued consolidated financial statements as of and for theperiods ended September 30, 2004 through June 30, 2006. We determinedthat the effects of these adjustments were immaterial individually and in theaggregate to our annual and quarterly reports filed prior to January 1,2005 and thus we did not amend those filings. However, we determined theeffects of these adjustments were material to our quarterly and 

74

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note3—Acquisition of Minority Interest in The Outdoor Channel, Inc. (Continued)**

annualreports filed for the periods ended March 31, 2005 through June 30,2006 and we have amended all of those filings. The comparative consolidatedfinancial statements in this report reflect the restated balances.

**Considerations of Impairment ofIntangible Assets**

During 2006, we engaged third party consultants toreview our business practices and strategy. Among the areas reviewed was ourapproach to growing our subscriber base through our relationships with MSOs. InSeptember 2006, the consultants concluded, and the Board of Directorsaccepted their conclusions, that a complete revision of the terms of ourrelationships with MSOs was necessary to meet the subscriber growth goalsestablished by us. Upon acceptance of that conclusion and the general strategyoutlined by the consultants, we reviewed our amortizable MSO relationships andour other amortizable intangible assets (customer lists and trademarks) forimpairment in accordance with Statement of Financial Accounting Standards No. 144,“Accounting for Impairment or Disposal of Long-Lived Assets” (“SFAS 144”).Based upon the changed circumstances, we concluded that, as of the date weaccepted the consultants’ conclusion, our MSO relationships asset was fullyimpaired and that our other remaining amortizable intangible assets were not.Accordingly, we have charged to expense the remaining unamortized carryingvalue of the MSO relationships of $9,540 during the year ended December 31,2006.

We further concluded thatthe carrying value of goodwill has not been impaired and that the changedcircumstances have not affected the estimated lives of the remainingamortizable intangible assets. However, these estimates will continue to bereviewed during each reporting period to determine whether circumstancescontinue to support their carrying values and, where applicable, theirestimated useful lives. Estimates are subject to risks and uncertainties, whichcould cause actual results to differ materially from those projected or impliedin the determination of the fair value. A significant downward revision in thepresent value of estimated future cash flows for a reporting unit or theundiscounted cash flows from the other remaining amortizable intangible assetscould result in an impairment of goodwill or the remaining amortizableintangibles and a non-cash charge would be required. Such a charge could have asignificant effect on our reported net earnings.

**Note 4—Revenue To Be Earned Upon Collection**

As of December 31, 2006, theapproximate scheduled payments to be recognized as revenue, assuming suchamounts are collected in future years from existing Lost Dutchman’s salescontracts, are as follows:

| **Years Ending   December 31,** | ** ** | ** ** | ** ** | **Amount** | ** ** |
|------------------------------------------------|------------|------------|------------|------------|------------|
| 2007                                           |       |       | $          | 2,846      |       |   |
| 2008                                           |       |       | 2,168      |       |       |
| 2009                                           |       |       | 1,621      |       |       |
| 2010                                           |       |       | 1,173      |       |       |
| 2011                                           |       |       | 589        |       |       |
| Thereafter                                     |       |       | 288        |       |       |
| Total                                          |       |       | $          | 8,685      |       |   |

** **

75

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note 5—Subscriber Acquisition Fees**

Subscriber acquisition fees, which areincluded in other assets as of December 31, 2006 and 2005, are comprisedof the following:

| ** **                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Subscriber acquisition  fees, at cost |       | $        | 2,080      |     | $          | 407 |   |
| Accumulated amortization              |       | (246     | )          | (13      | )          |
| Subscriber acquisition fees, net      |       | $        | 1,834      |     | $          | 394 |   |

 

Of the net balance at December 31,2006, we expect $1,592 will be recognized as a reduction of subscriber feerevenue and $242 will be recognized as subscriber acquisition fee amortizationexpense in future periods. For the year ended December 31, 2006, $202 wascharged to revenue and $30 was charged to expense. We expect to amortize thenet balance as of December 31, 2006 as follows:

| **Years Ending  December 31,** | ** ** | ** ** | ** ** | **Amount** | ** ** |
|------------------------------------------|------------|------------|------------|------------|------------|
| 2007                                     |       |       | $          | 416        |       |   |
| 2008                                     |       |       | 416        |       |       |
| 2009                                     |       |       | 416        |       |       |
| 2010                                     |       |       | 403        |       |       |
| 2011                                     |       |       | 183        |       |       |
| Total amortization                       |       |       | $          | 1,834      |       |   |

 

For the years ended December 31, 2006 and 2005, we made cashpayments of $1,673 and $407, respectively, relating to current subscriberacquisition fee obligations.

76

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note 6—Investment inAvailable-For-Sale Securities**

The Company’sshort-term investments in marketable debt and equity securities are classifiedas available-for-sale and are recorded at fair value at the end of each period.Gross realized gains and losses on sales of securities during 2006 and allamounts related to such investments prior to the year ended December 31,2006 were not material. Included in investments in available-for-salesecurities at December 31, 2006 and 2005 are equity investments and auctionrate securities with short-term interest rates that generally can be resetevery 28 days. The auction rate securities have long-term maturity dates andprovide us with enhanced yields. However, we believe we have the ability toquickly liquidate them at their original cost, although there is no guarantee,and, accordingly, they are carried at cost, which approximates market value,and classified as current assets. We had unrealized net holding gains onmarketable equity securities at December 31, 2006 and 2005 of $48 and $36,respectively, that are in accumulated other comprehensive income (loss).

The investments in available-for-sale securities is as follows:

| ** **               | ** ** | **As of December 31,** | ** ** |
|--------------------------|------------|---------------------------------------|------------|
| ** **               | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Auction rate  securities |       | $                                     | 41,250     |   | $ | 38,000 |   |
| Equities                 |       | 894                                   |       | 830 |   |
| Total current securities |       | $                                     | 42,144     |   | $ | 38,830 |   |

 

**We consider the yields we recognize fromauction rate securities and from cash held in our money market accounts to beinterest income. Yields we recognize from our investments in equity securitieswe consider to be dividend income. Both are recorded in other income asfollows:**

| ** **                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Interest income             |       | $        | 2,613      |     | $          | 864      |       | $ | 31 |   |
| Dividend income             |       | 79       |       | 79       |       | 55       |       |
| Gain on sale of  securities |       | —   |       | —   |       | 34       |       |
| Total other  income         |       | $        | 2,692      |     | $          | 943      |       | $ | 120 |   |

 

77

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note 7—Property, Plant and Equipment and Amortizable IntangibleAssets**

Property, plant and equipment at December 31,2006 and 2005 consist of the following:

| ** **                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Membership  division:         |       |     |       |     |       |
| Land                          |       | $        | 2,480      |     | $          | 2,480 |   |
| Equipment                     |       | 1,999    |       | 1,945    |       |
| Buildings and improvements    |       | 1,620    |       | 1,580    |       |
| Furniture and fixtures        |       | 144      |       | 144      |       |
| Vehicles                      |       | 857      |       | 850      |       |
|                          |       | 7,100    |       | 6,999    |       |
| Less accumulated depreciation |       | (3,748   | )          | (3,473   | )          |
| Subtotals                     |       | 3,352    |       | 3,526    |       |
| Outdoor Channel:              |       |     |       |     |       |
| Land                          |       | 600      |       | 600      |       |
| Buildings and improvements    |       | 5,407    |       | 2,073    |       |
| Equipment                     |       | 9,848    |       | 6,143    |       |
| Furniture and fixtures        |       | 134      |       | 102      |       |
| Vehicles                      |       | 632      |       | 621      |       |
| Leasehold improvements        |       | 593      |       | 412      |       |
| Video library                 |       | —   |       | 211      |       |
| Construction in progress      |       | —   |       | 4,878    |       |
|                          |       | 17,214   |       | 15,040   |       |
| Less accumulated depreciation |       | (4,769   | )          | (2,943   | )          |
| Subtotals                     |       | 12,445   |       | 12,097   |       |
| Totals                        |       | $        | 15,797     |     | $          | 15,623 |   |

 

For the yearsended December 31, 2006, 2005 and 2004, we recognized depreciation expenserelated to these assets of $2,314, $1,633, $1,109, respectively. Included in depreciationexpense is amortization of capital leases of $1, $22 and $23, respectively.

Amortizable intangible assets as of December 31,2006 and 2005 are summarized as follows:

| ** **                            | ** ** | **2006**                                 | ** ** |
|---------------------------------------|------------|------------------------------------------|------------|
| ** **                            | ** ** | **Advertising  Customer  Relationships** | ** ** | **Trademark** | ** ** | **Total  Amortizable  Intangibles** | ** ** |
| Residual value                        |       | $                                        | —     |   | $ | — |   | $ | — |   |
| Weighted average  amortization period |       | 3 years, 8 months                        |       | 15 years |   | 4 years, 10 months |   |
| Gross carrying  amount                |       | $                                        | 1,972      |   | $ | 219 |   | $ | 2,191 |   |
| Less accumulated  amortization        |       | 1,226                                    |       | 145 |   | 1,371 |   |
| Net book value                        |       | $                                        | 746        |   | $ | 74 |   | $ | 820 |   |

** **

78

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note 7—Property, Plant and Equipment andAmortizable Intangible Assets** (Continued)

 

| ** **                            | ** ** | **2005**               | ** ** |
|---------------------------------------|------------|------------------------|------------|
| ** **                            | ** ** | **MSO  Relationships** | ** ** | **Advertising  Customer  Relationships** | ** ** | **Trademark** | ** ** | **Total  Amortizable  Intangibles** | ** ** |
| Residual value                        |       | $                      | —     |   | $ | — |   | $ | — |   | $ | — |   |
| Weighted average  amortization period |       | 21 years, 4 months     |       | 3 years, 8 months |   | 15 years |   | 18 years, 6 months |   |
| Gross carrying  amount                |       | $                      | 10,573     |   | $ | 1,972 |   | $ | 219 |   | $ | 12,764 |   |
| Less accumulated  amortization        |       | 661                    |       | 681 |   | 130 |   | 1,472 |   |
| Net book value                        |       | $                      | 9,912      |   | $ | 1,291 |   | $ | 89 |   | $ | 11,292 |   |

 

As of December 31,2006, the weighted average remaining useful economic lives of the advertisingcustomer relationships, trademark and total amortizable intangibles are 1 year4 months, 5 years 3 months and 1 year 9 months, respectively.

For the years ended December 31,2006, 2005 and 2004, we incurred amortization expense as follows:

| ** ** | ** ** | **MSO  Relationships** | ** ** | **Advertising  Customer  Relationships** | ** ** | **Trademark** | ** ** | **Total  Amortizable  Intangibles** | ** ** |
|------------|------------|------------------------|------------|------------------------------------------|------------|---------------|------------|-------------------------------------|------------|
| 2006       |       |                   | $          | 372                                      |       |          |       | $                                   | 545        |   |   |   | $ | 15 |   |   |   | $ | 932 |   |   |
| 2005       |       |                   | 496        |                                     |       |          | 545        |                                |       |   | 14 |   |   |   | 1,055 |   |   |
| 2004       |       |                   | 165        |                                     |       |          | 136        |                                |       |   | 14 |   |   |   | 315 |   |   |

 

As of September 30,2006, we deemed the MSO relationship asset to be fully impaired andcorrespondingly wrote-off the balance of $9,540 on that date.

The estimated aggregate amortizationexpense for the years subsequent to December 31, 2006 for advertisingcustomer relationships and trademark are as follows:

| **Years Ending December 31,** | ** ** | ** ** | ** ** | **Total  Amortizable  Intangibles** | ** ** |
|----------------------------------------------|------------|------------|------------|-------------------------------------|------------|
| 2007                                         |       |       | $          | 508                                 |       |   |
| 2008                                         |       |       | 268        |                                |       |
| 2009                                         |       |       | 14         |                                |       |
| 2010                                         |       |       | 14         |                                |       |
| 2011                                         |       |       | 11         |                                |       |
| Thereafter                                   |       |       | 5          |                                |       |
| Total                                        |       |       | $          | 820                                 |       |   |

 

79

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note 8—Long-Term Debt, Capital Lease Obligations and Lines ofCredit**

*BankLines of Credit*

On November 2, 2005, we renewed the revolving line of creditagreement (the “revolver”) with U.S. Bank N.A. (the “Bank”) we obtained in September 2004,extending the maturity date from September 5, 2005 to September 7,2007 and increasing the total amount which can be drawn upon under therevolver from $5,000 to $8,000. The revolver provides that the interestrate shall be LIBOR plus 1.25%. The revolver is collateralized by substantiallyall of our assets. This credit facility contains customary financial and othercovenants and restrictions, as amended on November 2, 2005, including achange of control provision. As of December 31, 2006 and 2005, we did nothave any outstanding borrowings under this revolver.

*Long-TermDebt and Capital Lease Obligations*

On November 2,2005, we obtained a $1,950 mortgage loan from the Bank which had a 10 year termwith a 25 year amortization schedule. This loan carried a variable interestrate of LIBOR plus 1.35%. This loan was secured primarily by a Deed of Trust onour recently purchased broadcast facility located in Temecula, California andwas also secondarily secured by the same assets as the revolver. It alsocontained customary financial and other covenants and restrictions including achange of control provision.

On November 7,2005, we entered into an interest rate swap agreement with the Bank to reducethe potential impact of increasing interest rates on the floating ratelong-term mortgage note and effectively fixed the interest rate on this loan at6.59%. The notional principal amount was reduced by $7 per month through September 5,2015 with the balance of the note amounting to****$1,190due on that date. We expected the cash flows related to the swap to be highlyeffective in offsetting the changes in cash flows of the variable rate debt.The change in such amount was also reflected in other comprehensive income(loss) as we had designated the contract as a cash flow hedge.

On November 2,2005, we obtained a $3,000, five year, fully amortizing term loan. This termloan carried a variable interest rate of LIBOR plus 1.35%. This term loan wassecured by the same assets as the revolver and contained customary financialand other covenants and restrictions including a change of control provision.On November 7, 2005, we entered into an interest rate swap agreement withthe Bank to reduce the potential impact of increasing interest rates on thefloating rate long-term note and effectively fixed the interest rate on thisterm loan at 6.35%. The notional principal amount was reduced by $52 per monthuntil retired on September 5, 2010. The change in such amount was alsoreflected in other comprehensive income (loss) as we had designated thecontract as a cash flow hedge.

80

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note 8—Long-Term Debt, Capital Lease Obligationsand Lines of Credit**(Continued)

Long-term debt and capital lease obligations at December 31,2006 and 2005 consist of the following:

| ** **                                                                                                                                                                                                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Note payable to a  bank, payable in monthly installments of $7 plus interest, calculated at an  adjustable rate of 6.59% at December 31, 2005, due August 2015,  secured by real estate                                        |       | $—  |       | $1,944   |       |
| Note payable to a  bank, payable in monthly installments of $52 plus interest, calculated at an  adjustable rate of 6.35% at December 31, 2005, due September 2010,  secured by substantially all of the Company’s assets |       | —   |       | 2,948    |       |
| Capital lease  obligations                                                                                                                                                                                                               |       | —   |       | 9        |       |
| Totals                                                                                                                                                                                                                                   |       | —   |       | 4,901    |       |
| Less current  portion                                                                                                                                                                                                                    |       | —   |       | 708      |       |
| Long-term portion                                                                                                                                                                                                                        |       | $—  |       | $4,193   |       |

 

*Covenant Violation and Retirement*

Because we did not supplyour financial statements for the three and nine months ended September 30,2006 within the time frame prescribed by the Bank and because we did not meetthe minimum profitability covenant for the three months ended September 30,2006, we were in violation as of that date of two covenants relating to our twoterm loans and our revolving line-of-credit facility. Accordingly, these loanswere callable by the Bank. On October 19, 2006, we elected to retire thetwo long-term loans, which had an aggregate balance of $4,321 plus accruedinterest thereon. On March 22,2007, we received notification that these covenant violations were waived forthese occurrences but that these covenants continue for future periods.As of December 31, 2006, we were in compliance with the debt covenants andexpect to be in compliance at least through December 31, 2007.

**Note 9—Commitments and Contingencies**

We, from time totime, are involved in litigation as both plaintiff and defendant arising in theordinary course of business. In the opinion of management, the results of anypending litigation should not have a material adverse effect on ourconsolidated financial position or operating results.

Financialinstruments that potentially subject us to concentrations of credit riskconsist principally of temporary cash investments, available-for-salesecurities, and accounts receivable. We reduce credit risk by placing ourtemporary cash investments with major financial institutions with high creditratings. At December 31, 2006, we had cash and cash equivalents ofapproximately $15,553 with major financial institutions in certain investmentaccounts which were not covered by the Federal Deposit Insurance Corporation.

We reduce creditrisk related to accounts receivable by routinely assessing the financialstrength of our customers. We maintain an allowance for doubtful accounts basedon the credit risk of specific customers, historical trends and otherinformation that management believes will adequately provide for 

81

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note 9—Commitments and Contingencies** (Continued)

credit losses. As of December 31, 2006, we did not have onecustomer that accounted for 10% or more of our account receivable balance onthat date.

Changes in our allowance for doubtfulaccounts were as follows:

| ** **                         | ** ** | **Balance at  Beginning  of Year** | ** ** | **Additions  Charged  to Expense** | ** ** | **Deductions** | ** ** | **Balance  at End  of Year** | ** ** |
|------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------|------------|----------------|------------|----------------------------------------|------------|
| Year-ended  December 31, 2006 |       |                                         | $          | 275                                     |       |           |       | $                                      | 104        |   |   |   | $ | (171 | ) |   |   | $ | 208 |   |   |
| Year-ended  December 31, 2005 |       |                                         | 207        |                                    |       |           | 214        |                                   |       |   | (146 | ) |   |   | 275 |   |   |
| Year-ended  December 31, 2004 |       |                                         | 234        |                                    |       |           | 164        |                                   |       |   | (191 | ) |   |   | 207 |   |   |

 

As of December 31, 2006, ouragreements for maintenance, advertising, promotional and talent, research andprogramming commit us to payments over several years and are estimated to be asfollows:

| **Years Ending December 31,** | ** ** | ** ** | ** ** | **Total** | ** ** | **Maintenance  Agreements** | ** ** | **Advertising,  Promotional  and Talent** | ** ** | **Research** | ** ** | **Programming** | ** ** |
|----------------------------------------------|------------|------------|------------|-----------|------------|-----------------------------|------------|------------------------------------------------|------------|--------------|------------|-----------------|------------|
| 2007                                         |       | $          | 6,065      |      |       | $                           | 121        |                                           |       |         | $          | 1,737           |       |   |   | $ | 454 |   |   |   | $ | 3,753 |   |   |
| 2008                                         |       | 1,636      |       |      | 59         |                        |       |                                           | 565        |         |       |            | —     |   |   |   | 1,012 |   |   |
| 2009                                         |       | 61         |       |      | 61         |                        |       |                                           | —     |         |       |            | —     |   |   |   | — |   |   |
| Total                                        |       | $          | 7,762      |      |       | $                           | 241        |                                           |       |         | $          | 2,302           |       |   |   | $ | 454 |   |   |   | $ | 4,765 |   |   |

 

We have enteredinto a severance and consulting agreement with the former CEO of TOC whereby wewill pay to him or to others on his behalf approximately $325 and $44 in 2007and 2008, respectively.

We appointed Roger L.Werner, Jr. President of Outdoor Channel Holdings, Inc. and enteredinto an employment agreement (the “Agreement”) with him, which sets forth termsand provisions governing his employment as Chief Executive Officer andPresident. The Agreement has an initial term of three years beginning October 16,2006, which will be automatically extended each year for an additional one yearterm unless the other party provides written notice of non-renewal at least 60days prior to the date of automatic renewal. The Agreement may be terminated atany time by either party with or without cause. The agreement containsprovisions for severance payments in the event that the Company terminates Mr. Werner’semployment without “Cause” (as defined in the Agreement) or Mr. Wernerresigns for “Good Reason” (as also defined in the Agreement). Mr. Werner’sannual salary is $300 and he received a signing bonus of $300 in 2006. Mr. Wernerwill be eligible during the year ending December 31, 2007 to receive anannual cash incentive payable for the achievement of performance goals inamounts that are equal to at least 50% of his base salary, and he is eligibleto participate in all benefit programs available to our executive officers.

*OperatingLeases*

We leasefacilities and equipment, including access to satellites for televisiontransmission, under non-cancelable operating leases that expire at variousdates through 2012. Generally, the most significant leases are satellite leasesthat require escalating rental payments. Rent expense is recognized on astraight-line 

82

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note 9—Commitments and Contingencies (Continued)**

basis over each lease term. The excess of the expense accrued overthe amounts currently payable is reflected as deferred satellite rentobligations in the accompanying consolidated balance sheets.

We lease ouradministrative facilities from Musk Ox Properties, LP, which in turn is ownedby Messrs. Perry T. Massie and Thomas H. Massie, principal stockholdersand officers of the Company. The lease agreements were renewed effective January 1,2006 for a five-year term with 2 five-year renewal options, at our discretion.Monthly rental payments are $29 with a 3% per year escalator clause.

Rent expense, includingrent paid to Musk Ox Properties, LP, aggregated to approximately $2,981, $2,962and $2,604 in the years ended December 31, 2006, 2005 and 2004,respectively.

Total rental commitments under theoperating lease agreements described above for years ending subsequent to December 31,2006 are as follows:

| **Years Ending December 31,** | ** ** | ** ** | ** ** | **Amount** | ** ** |
|----------------------------------------------|------------|------------|------------|------------|------------|
| 2007                                         |       | $          | 2,721      |       |
| 2008                                         |       | 2,335      |       |
| 2009                                         |       | 2,104      |       |
| 2010                                         |       | 2,116      |       |
| 2011                                         |       | 1,701      |       |
| Thereafter                                   |       | 560        |       |
| Total                                        |       | $          | 11,537     |       |

 

**Note 10—Income Taxes**

The components of the provision (benefit)for income taxes for the years ended December 31, 2006, 2005 and 2004 wereas follows:

| ** **     | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------|------------|----------|------------|----------|------------|----------|------------|
| Current:       |       |     |       |     |       |     |       |
| Federal        |       | $        | —     |     | $          | (1,558   | )          | $ | 1,216 |   |
| State          |       | 2        |       | 67       |       | 457      |       |
| Total current  |       | 2        |       | (1,491   | )          | 1,673    |       |
| Deferred:      |       |     |       |     |       |     |       |
| Federal        |       | (3,079   | )          | 2,710    |       | (13,568  | )          |
| State          |       | (836     | )          | 284      |       | (4,116   | )          |
| Total deferred |       | (3,915   | )          | 2,994    |       | (17,684  | )          |
| Totals         |       | $        | (3,913     | )        | $          | 1,503    |       | $ | (16,011 | ) |

 

83

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note 10—Income Taxes (Continued)**

The tax effects of the temporarydifferences that give rise to significant portions of the deferred tax assetsand deferred tax liabilities as of December 31, 2006 and 2005 were relatedto the following:

| ** **                                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:                                                       |       |     |       |     |       |
| Net operating loss                                                         |       | $        | 7,909      |     | $          | 7,486 |   |
| Share-based compensation                                                   |       | 5,480    |       | 6,801    |       |
| Deferred revenues                                                          |       | 791      |       | 600      |       |
| Deferred rent                                                              |       | 135      |       | 117      |       |
| Current state taxes                                                        |       | 23       |       | —   |       |
| Provision for doubtful accounts                                            |       | 82       |       | 110      |       |
| Other accrued liabilities                                                  |       | 99       |       | 44       |       |
| Alternative minimum tax credit                                             |       | 113      |       | 113      |       |
| Difference in the timing of recognition of expense  related to programming |       | 366      |       | —   |       |
| Other                                                                      |       | 92       |       | 29       |       |
|                                                                       |       | 15,090   |       | 15,300   |       |
| Deferred tax  liabilities:                                                 |       |     |       |     |       |
| Fixed assets                                                               |       | (327     | )          | (251     | )          |
| Intangible assets                                                          |       | (293     | )          | (4,465   | )          |
| Other                                                                      |       | (103     | )          | (78      | )          |
|                                                                       |       | (723     | )          | (4,794   | )          |
| Deferred tax assets, net                                                   |       | $        | 14,367     |     | $          | 10,506 |   |

 

As of December 31,2006, we have a federal net operating loss carry forward of approximately$18,457 after expected carry back and a California net operating loss carryforward of approximately $25,471. California will start to expire in 2015 andfederal will start to expire in 2025. The alternative minimum tax credit of$113 does not expire. The Company believes it is more likely than not that thebenefit associated with the deferred tax assets resulting from net operatingloss carryforwards and other deferred tax assets will be ultimately realizedbased on its assessment of future taxable income during the periods in whichthe net operating losses remain available.

84

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note 10—Income Taxes (Continued)**

The provision (benefit) for income taxes reflected in theaccompanying consolidated statements of operations are different than thosecomputed based on the applicable statutory Federal income tax rate of 34% in2006, 2005 and 2004 as shown below:

| ** **                                                           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal income  tax provision (benefit) at statutory income tax rate |       | $        | (3,821     | )        | $          | 1,258    |       | $ | (13,588 | ) |
| State taxes, net  of federal benefit                                 |       | (551     | )          | 222      |       | (2,206   | )          |
| Non-deductible  expense                                              |       | 273      |       | 35       |       | 38       |       |
| Deferred  compensation                                               |       | —   |       | —   |       | (198     | )          |
| Effect of change  in state tax rates                                 |       | 162      |       | —   |       | —   |       |
| Other                                                                |       | 24       |       | (12      | )          | (57      | )          |
| Income tax provision  (benefit)                                      |       | $        | (3,913     | )        | $          | 1,503    |       | $ | (16,011 | ) |

 

**Note 11—Stock Incentive Plans**

Our stock incentive plans provide for the granting ofqualified and nonqualified options, restricted stock, performance units andstock appreciation rights (“SARs”) to our officers, directors, employees andservice providers. We satisfy the exercise of options and awards of restrictedstock by issuing previously unissued common shares. Currently we have notawarded any SARs. Prior to September 30, 2006 we had not awarded anyperformance units but did so in the fourth quarter of 2006.  Prior to the adoption of SFAS 123R, weused the intrinsic value method to account for stock options granted toemployees and generally, made no charges against earnings with respect to thoseoptions at the date of grant since our employee options had exercise pricesthat were equal to the market price.  SFAS 123R requires that we elect anapproved method to calculate the historical pool of windfall tax benefits uponadoption of SFAS 123R within one year of its adoption. We have elected themethod outlined in SFAS 123R, sometimes referred to as the “long haul”method, for this calculation.

We have four stockoption plans: 1995 Stock Option Plan (the “1995 Plan”), Long-Term IncentivePlan (the “LTIP Plan”), Non-Employee Director Stock Option Plan (the “NEDSOP”Plan) and we assumed, on September 8, 2004, TOC’s 1997 Stock Option Plan(the “1997 Plan”). No more options can be issued under the 1995 or 1997 Plans.We also may grant stock options that are not covered under any of the stockoption plans, with appropriate shareholder approvals, and have two such awardsoutstanding as of December 31, 2006. Options and stock grants are subjectto terms and conditions as determined by our Board of Directors. Stock optiongrants are generally exercisable in increments of 25% during each year ofemployment beginning three months to one year from the date of grant.Generally, stock options expire five years from the date of grant. Optionsissued under our NEDSOP Plan are generally exercisable 40% after the first 3months of service and 20% on the first anniversary of appointment and eachanniversary thereafter until 100% are vested. These options generally have 10year lives.

Our Board ofDirectors has discretion to allow our employees to forego shares in lieu ofpaying requisite withholding taxes on vested restricted shares. In turn, weremit to the appropriate taxing authorities the federal and state withholdingon the total compensation the employees have realized as a 

85

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note 11—Stock Incentive Plans** (Continued)

result of the vesting of these shares. In 2006, approximately 44shares were so repurchased with a market value of approximately $568. Weestimate that 45 to 50 shares will be so repurchased in 2007.

Following is a summary of the common stockreserved for issuance under the plans as of December 31, 2006:

| ** **       | ** ** | ** **          | ** ** | **Total Granted and Outstanding** | ** ** | ** **             | ** ** |
|------------------|------------|---------------------|------------|--------------------------------------------------|------------|------------------------|------------|
| ** **       | ** ** | **Total  Reserved** | ** ** | **Options**                                      | ** ** | **Restricted  Shares** | ** ** | **Performance  Units** | ** ** | **Available for  Future Grants** | ** ** |
| 1995 Plan        |       |                | 251        |                                             |       |                   | 251        |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   |
| NEDSOP           |       |                | 1,000      |                                             |       |                   | 625        |   |   |   | — |   |   |   | — |   |   |   | 375 |   |   |   |
| 1997 Plan        |       |                | 888        |                                             |       |                   | 888        |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   |
| Outside of plans |       |                | 463        |                                             |       |                   | 463        |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   |
| LTIP Plan        |       |                | 3,098      |                                             |       |                   | 1,045      |   |   |   | 364 |   |   |   | 700 |   |   |   | 989 |   |   |   |
|             |       |                | 5,700      |                                             |       |                   | 3,272      |   |   |   | 364 |   |   |   | 700 |   |   |   | 1,364 |   |   |   |

 

Wehave not capitalized any share-based compensation to any of our assets. Weexpense awards at the earliest of its vesting schedule or pro rata on astraight line basis over the requisite service period. The following tablesummarizes the impact that share-based compensation expense recognized underSFAS 123R has had on our loss from operations, net loss, loss per basicand diluted common share for the year ended December 31, 2006:

| ** **              | ** ** | **Compensation Related to** | ** ** |
|-------------------------|------------|---------------------------------------|------------|
| ** **              | ** ** | **Restricted Stock**             | ** ** | **Options** | ** ** | **Performance Units** | ** ** | **Total** | ** ** |
| Loss from  operations   |       |                                  | $          | 1,074 |   |   |   | $ | 3,496 |   |   |   | $ | 2,496 |   |   | $ | 7,066 |   |
| Net loss                |       |                                  | 652        |   |   |   | 2,403 |   |   |   | 1,515 |   |   | 4,570 |   |
| Loss per common  share: |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                   |       |                                  | $          | (0.03 | ) |   |   | $ | (0.10 | ) |   |   | $ | (0.06 | ) |   | $ | (0.19 | ) |
| Diluted                 |       |                                  | $          | (0.03 | ) |   |   | $ | (0.10 | ) |   |   | $ | (0.06 | ) |   | $ | (0.19 | ) |

 

The adoption ofSFAS 123R resulted in the recognition of share-based compensation relatedto our options. We would otherwise have recognized share-based compensationrelated to restricted stock and performance units under the intrinsic valuemethod.

86

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note 11—Stock Incentive Plans (Continued)**

Our historical net income (loss) and earnings (loss) per commonshare and pro forma net income (loss) and pro forma earnings (loss) per commonshare assuming compensation cost had been determined for 2005 and 2004 based onthe fair value at the grant date for all awards by us, using the Black-Scholesoption pricing model consistent with the provisions of SFAS 123, andamortized ratably over the vesting period are set forth below:

| ** **                                                                                                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net income  (loss):                                                                                                                      |       |     |       |     |       |
| As reported                                                                                                                              |       | $        | 2,193      |     | $          | (24,260 | ) |
| Add: Share-based employee compensation expense  included in reported net loss, net of tax effects*                                       |       | —   |       | 28,885   |       |
| Deduct: Share-based employee compensation expense  assuming a fair value based method had been used for all awards, net of tax  effects* |       | (1,729   | )          | (2,623   | )          |
| Pro forma—basic and diluted                                                                                                         |       | $        | 464        |     | $          | 2,002 |   |
| Basic earnings (loss) per share:                                                                                                         |       |     |       |     |       |
| As reported                                                                                                                              |       | $        | 0.10       |     | $          | (1.52 | ) |
| Pro forma                                                                                                                                |       | $        | 0.02       |     | $          | 0.13 |   |
| Diluted earnings  (loss) per common share:                                                                                               |       |     |       |     |       |
| As reported                                                                                                                              |       | $        | 0.09       |     | $          | (1.52 | ) |
| Pro forma                                                                                                                                |       | $        | 0.02       |     | $          | 0.13 |   |

----

*                    See Note 3

*Stock Options*

As a result ofamendments of SFAS 123, we began charging the fair value of all employeestock options as of the date of grant to expense over the vesting periodbeginning with our fiscal quarter ending March 31, 2006. The adoption ofSFAS 123R required us to record additional compensation expense which hasa material adverse impact on our consolidated financial statements in periodssubsequent to adoption.

In accordance with the provisions of SFAS 123, all issuancesof common stock, stock options, warrants or other equity instruments to employeesand non-employees as the consideration for goods or services received by theCompany are accounted for based on the fair value of the equity instrumentsissued (unless the fair value of the consideration received can be morereliably measured). Generally, the fair value of any options, warrants orsimilar equity instruments issued is estimated based on the Black-Scholesoption-pricing model.

87

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note 11—Stock Incentive Plans (Continued)**

*AdditionalRequired Disclosures Related to Employee Stock Options*

The fair value of each option granted byus in 2006, 2005 and 2004 was estimated on the date of grant using theBlack-Scholes options pricing model with the following assumptions:

| ** **                            | ** ** | **2006**       | ** ** | **2005**        | ** ** | **2004**          | ** ** |
|---------------------------------------|------------|----------------|------------|-----------------|------------|-------------------|------------|
| Risk-free  interest rate              |       | 4.3  - 4.9%    |       | 3.7  - 4.2%     |       | 1.7 -  4.2%       |       |
| Dividend yield                        |       | 0%             |       | 0%              |       | 0%                |       |
| Expected life of  the option          |       | 3.3  - 3.8 yrs |       | 3.8  - 5.1 yrs. |       | 3  mos. - 10 yrs. |       |
| Expected  volatility                  |       | 57.8  - 62.4%  |       | 37.7%           |       | 41.7  - 79.0%     |       |
| Weighted average  expected volatility |       | 58.6%          |       | 37.7%           |       | 49.9%             |       |

 

Expected volatilities are based on historicalvolatility of our stock. We have adopted the guidance of the SEC’s StaffAccounting Bulletin No. 107 that notes if share options have “plainvanilla” characteristics, a simplified method of estimating the expected lifeof the option may be employed temporarily. The simplified method utilizes theaverage of the vested term and the original contract term. We have recentlyexperienced certain events that indicate that our long-term historicalexperience is no longer valid. As such we adopted the simplified method. Ourshort-term historical experience with exercise and post-vesting employmenttermination behavior supports this method for determining the options’ expectedlife. When sufficient historical experience has been obtained, we will use suchexperience for future estimations of the expected life. The expected liferepresents the period of time that options granted are expected to beoutstanding. The risk-free rate is based on the U.S. Treasury rate with amaturity date corresponding to the options’ expected life.

A summary of the status of option activityunder our four stock option plans and outside of those plans as of December 31,2006, 2005 and 2004 and changes in options outstanding during the years thenended is presented in the table that follows:

| ** **                                                     | ** ** | **2006**            | ** ** | **2005**                               | ** ** | **2004**            | ** ** |
|----------------------------------------------------------------|------------|---------------------|------------|----------------------------------------|------------|---------------------|------------|
| ** **                                                     | ** ** | **Shares**          | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares**          | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| ** **                                                     | ** ** | **(in  thousands)** | ** ** | ** **                             | ** ** | **(in  thousands)** | ** ** | ** ** | ** ** | **(in  thousands)** | ** ** | ** ** | ** ** |
| Outstanding at  beginning of year                              |       |                | 3,564      |                                   |       |                | $          | 7.31 |   |   |   | 5,630 |   |   |   | $ | 4.12 |   |   |   | 1,648 |   |   |   | $ | 6.57 |   |   |
| Options granted                                                |       |                | 505        |                                   |       |                | 12.40      |   |   |   | 385 |   |   |   | 14.60 |   |   |   | 705 |   |   |   | 13.88 |   |   |
| Options granted in exchange for TOC options (see  Note 3) |       |                | —     |                                   |       |                | —     |   |   |   | — |   |   |   | — |   |   |   | 4,012 |   |   |   | 0.98 |   |   |
| Options exercised                                              |       |                | (768       | )                                      |       |                | 1.19       |   |   |   | (2,448 | ) |   |   | 1.12 |   |   |   | (723 | ) |   |   | 1.77 |   |   |
| Options canceled or expired                                    |       |                | (29        | )                                      |       |                | 13.33      |   |   |   | (3 | ) |   |   | 6.14 |   |   |   | (12 | ) |   |   | 5.71 |   |   |
| Outstanding at end of year                                     |       |                | 3,272      |                                   |       |                | $          | 9.48 |   |   |   | 3,564 |   |   |   | $ | 7.31 |   |   |   | 5,630 |   |   |   | $ | 4.12 |   |   |
| Options  exercisable at end of period                          |       |                | 2,076      |                                   |       |                | $          | 7.43 |   |   |   | 2,493 |   |   |   | $ | 4.77 |   |   |   | 4,579 |   |   |   | $ | 2.30 |   |   |

 

88

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note 11—Stock Incentive Plans (Continued)**

Certain additional information regarding our stock optionsfollows:

| ** **                                                                                                                                                                                    | ** ** | **2006**  | ** **   | **2005** | ** ** | **2004**     | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|--------------|----------|------------|--------------|------------|
| Option price  range at end of year                                                                                                                                                            |       | $         | 0.92 - $1.75 |     | $          | 0.92 - $1.75 |       | $ | 0.92 - $1.75 |   |
| Weighted-average grant-date fair value of 505; 385;  and 705 options granted during 2006, 2005 and 2004, respectively, with an  exercise price equal to the market price at the date of grant |       | $         | 5.75         |     | $          | 5.48         |       | $ | 8.21 |   |
| Weighted-average fair value of 4,012 options granted  during 2004 with an exercise price less than the market price at the date of  grant                                                     |       |      |         |     |       | $            | 13.02      |   |
| Weighted-average remaining contractual life of  options exercisable at December 31,                                                                                                      |       | 2.9 years |         |     |       |         |       |
| Aggregate intrinsic value of options outstanding at  December 31,                                                                                                                        |       | $         | 12,423       |     |       |         |       |   |
| Aggregate intrinsic value of options exercisable at  December 31,                                                                                                                        |       | $         | 11,799       |     |       |         |       |   |
| Aggregate  intrinsic value of options exercised during year                                                                                                                                   |       | $         | 8,028        |     | $          | 31,014       |       | $ | 8,940 |   |

 

The following table summarizes informationabout stock options outstanding at December 31, 2006, all of which are atfixed prices:

| ** **                                  | ** ** | ** **              | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                 | ** ** |
|---------------------------------------------|------------|-------------------------|------------|------------------------------|------------|----------------------------------------------|------------|
| ** **                                  | ** ** | ** **              | ** ** | **Weighted Average**    | ** ** | ** **                                   | ** ** | **Weighted** | ** ** |
| **Range of Exercise Prices** | ** ** | ** **              | ** ** | **Number  Outstanding**      | ** ** | **Remaining   Contractual   Life** | ** ** | **Exercise   Price** | ** ** | **Number   Exercisable** | ** ** | **Average   Exercise   Price** | ** ** |
| ** **                                  | ** ** | **(in thousands)** | ** ** | ** **                   | ** ** | ** **                                   | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| $0.92 - $1.54                               |       |                    | 888        |                         |       |                                         | 0.9 years  |   |   |   | $ | 0.95 |   |   |   | 888 |   |   |   | $ | 0.95 |   |   |
| $3.32 - $4.60                               |       |                    | 70         |                         |       |                                         | 0.3 years  |   |   |   | 3.54 |   |   |   | 66 |   |   |   | 3.48 |   |   |
| $6.14 - $11.60                              |       |                    | 639        |                         |       |                                         | 1.9 years  |   |   |   | 11.41 |   |   |   | 455 |   |   |   | 11.55 |   |   |
| $12.10 - 15.75                              |       |                    | 1,675      |                         |       |                                         | 6.8 years  |   |   |   | 13.52 |   |   |   | 667 |   |   |   | 13.64 |   |   |
|                                        |       |                    | 3,272      |                         |       |                                         | 4.1 years  |   |   |   | 9.48 |   |   |   | 2,076 |   |   |   | 7.43 |   |   |
|                                             |            |                         |            |                              |            |                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As of December 31,2006, we have $5,997 of expense associated with stock options yet to be recognizedwhich will be amortized as compensation expense over the employees’ remainingrequisite service periods which on a weighted average basis is 1.8 years.

*Performance Units*

During the fourth quarterof 2006, we awarded two performance units of 400 shares each under the plans. Oneunit has a 4 year cycle, vesting 50 common shares when the closing share priceof our common 

89

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note11—Stock Incentive Plans (Continued)**

stockover a 20 trading day period, no later than the expiration date, is equal to orgreater than $11.96 and another vesting of 50 common shares when the 20 tradingday average share price meets or exceeds $12.46. Another 100 common shares vestprovided the 20 trading day average share price reaches $13.46, $14.46 and$15.46 hurdles, respectively. In November 2006, the first two hurdles wereattained and thus an aggregate of 100 common shares vested and were issued.

*AdditionalRequired Disclosures Related to Employee Performance Units*

The fair value of each performance unitgranted by us in 2006 (none were granted in prior years) was estimated on thedate of grant using a Monte Carlo model assuming equity returns, continuouslycompounded, following a normal distribution pricing model with the followingassumptions and determinations:

| ** **                             | ** ** | **First Award** | ** ** | **Second Award** | ** ** |
|----------------------------------------|------------|-----------------|------------|------------------|------------|
| Risk-free  interest rate               |       | 4.8%            |       | 4.8%             |       |
| Dividend yield                         |       | 0%              |       | 0%               |       |
| Closing per share  price on grant date |       | $12.10          |       | $12.10           |       |
| Expected  volatility                   |       | 72.9%           |       | 72.9%            |       |
| Estimated service  period              |       | 0.6 years       |       | 1.1 years        |       |
| Fair value of one common  share        |       | $11.59          |       | $11.19           |       |

 

Expected volatilities arebased on historical volatility of our stock. The risk-free rate is based on a blendof yields on 4-year and 5-year U.S. Treasury Securities. These securitiesincluded U.S. Treasury Strips and U.S. Treasury Notes. The U.S. Treasury Noteswere adjusted to be a continuously compounded rate. As of December 31,2006, we have $6,612 of expense associated with performance units yet to berecognized which will be amortized as compensation expense over the employee’sremaining requisite service periods which is less than 1 year in both cases andon a weighted average basis.

90

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note11—Stock Incentive Plans (Continued)**

*Restricted Stock*

Asummary of the status of Outdoor Channel Holdings’ non-vested restricted sharesas of December 31, 2006, 2005 and 2004 and the changes in restrictedshares outstanding during the years then ended is presented in the table thatfollows:

| ** **                       | ** ** | **2006**            | ** ** | **2005**                                           | ** ** | **2004**            | ** ** |
|----------------------------------|------------|---------------------|------------|----------------------------------------------------|------------|---------------------|------------|
| ** **                       | ** ** | **Shares**          | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** | **Shares**          | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** | **Shares** | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
| ** **                       | ** ** | **(in  thousands)** | ** ** | ** **                                         | ** ** | **(in  thousands)** | ** ** | ** ** | ** ** | **(in  thousands)** | ** ** | ** ** | ** ** |
| Non-vested at  beginning of year |       |                | 127        |                                               |       |                | $          | 14.43 |   |   |   | 75 |   |   |   | $ | 13.90 |   |   |   | — |   |   |   | — |   |   |
| Granted                          |       |                | 295        |                                               |       |                | 11.83      |   |   |   | 75 |   |   |   | 14.91 |   |   |   | 75 |   |   |   | $ | 13.90 |   |   |
| Vested                           |       |                | (37        | )                                                  |       |                | 13.70      |   |   |   | (15 | ) |   |   | 13.90 |   |   |   | — |   |   |   | — |   |   |
| Canceled or expired              |       |                | (21        | )                                                  |       |                | 14.13      |   |   |   | (8 | ) |   |   | 14.95 |   |   |   | — |   |   |   | — |   |   |
| Non-vested at end of year        |       |                | 364        |                                               |       |                | $          | 12.42 |   |   |   | 127 |   |   |   | $ | 14.43 |   |   |   | 75 |   |   |   | $ | 13.90 |   |   |

 

As of December 31, 2006, we have $3,682 ofexpense associated with restricted stock yet to be recognized which will beamortized as compensation expense over the employees’ and service providers’remaining requisite service periods which on a weighted average basis is 1.8years.

As of December 31,2006, $16,291 of expense with respect to all non-vested share-basedarrangements has yet to be recognized which is expected to be recognized over aweighted average period of 1.5 years.

**Note 12—Equity Transactions**

*PreferredStock*

As of December 31, 2006 and 2005, we were authorized to issueup to 25,000 shares of preferred stock, $0.001 par value per share in one ormore series with designations, rights and preferences as determined by ourBoard of Directors, respectively.

*Issuancesof Common Stock by the Company*

We received cash from the exercise ofoptions as follows:

| ** **                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Number of options  exercised |       | 768      |       | 2,448    |       | 723      |       |
| Cash proceeds                |       | $        | 913        |     | $          | 2,734    |       | $ | 1,285 |   |
|                              |            |          |            |          |            |          |            |  |  |  |

 

In July 2005,we completed a public offering of our common stock, whereby we sold 3,500shares of common stock and received net proceeds of $43,350. In addition,certain selling stockholders exercised options to buy 2,130 (inclusive of theunderwriters over-allotment option) shares of common stock which 

91

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note 12—Equity Transactions** (Continued)

were resold in the public offering. The shares sold by the sellingstockholders were purchased immediately before the sale through the exercise ofoptions they held to buy common shares from us.

We issuedemployees, directors and service providers in aggregate 295, 75, and 75 sharesof restricted common stock in 2006, 2005 and 2004, respectively. The rights tothese shares generally vest over a five year period. Included in the 2006issuance are 56 shares issued to service providers. Of the restricted sharesissued to service providers, 50 shares vest upon specific performance relatedto subscriber growth which we estimate will be fully earned and vested by the endof 2007. The rights to the remaining 6 shares issued to service providers vestannually over a five-year period. We did not grant any restricted shares toservice providers prior to 2006.

Under SFAS 123R, the fair value of the shares, adjusted for aforfeiture assumption, at the respective dates of grant (which representsdeferred compensation not required to be recorded initially in the consolidatedbalance sheet) will be amortized to share-based compensation expense as therights to the restricted stock vest with an equivalent amount added toadditional paid-in capital. For the service providers, however, the futurecharge will be recognized in accordance with Emerging Issue Task Force “Accountingfor Equity Instruments That are Issued to Other Than Employees for Acquiring,or in Conjunction with Selling, Goods or Services” Issue No. 96—18 (“EITF96-18”) and will be retroactively adjusted to reflect the fair marketvalue at the end of each reporting period until the shares vest when therelated charge will be adjusted for the final time. Based on the closing marketprice on December 29, 2006 (the last trading day of 2006) of $12.83 pershare, the fair value of these 56 shares of restricted stock was $718. Assumingthe closing market price as of December 31, 2006 does not change over theremaining vesting period, we would have $349 of expense yet to be recognized.

**Note 13—Related Party Transactions**

We lease our administrative facilities from Musk Ox Properties,LP, which in turn is owned by Messrs. Perry T. Massie and Thomas H.Massie, principal stockholders and officers of the Company. In December 2005,the lease agreements were consolidated into one lease. The new lease agreementhas a five-year term, expiring on December 31, 2010, with 2 five-yearrenewal options at our discretion. Monthly rental payments are $29 with a 3%per year escalator clause. Rent expense paid to Musk Ox Properties, LP totaledapproximately $349, $251 and $244 in 2006, 2005 and 2004, respectively.

**Note 14—Segment Information**

Pursuant to theProvisions of Statement of Financial Accounting Standards No. 131, “Disclosures About Segments of an Enterpriseand Related Information”**(“SFAS 131”),we report segment information in the same format as reviewed by our ChiefOperating Decision Maker (the “CODM”). We segregate our business activitiesinto TOC and the Membership Division. TOC is a separate business activity thatbroadcasts television programming on The Outdoor Channel and Outdoor Channel 2HD 24 hours a day, seven days a week. TOC generates revenue from advertisingfees (which include fees paid by outside producers to purchase advertising timein connection with the airing of their programs on The Outdoor Channel) andsubscriber fees. Lost Dutchman’s and GPAA membership sales and relatedactivities are reported in the Membership Division. The Membership Divisionalso includes magazine sales, advertisements within the magazine, the sale of products and servicesrelated to gold prospecting, gold 

92

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note 14—Segment Information** (Continued)

expositions, expeditions and outings. Intersegment sales, whichare excluded in the presentation below, amounted to $595 for each of 2006, 2005 and 2004.

Information with respect to thesereportable segments for the years ended December 31, 2006, 2005 and 2004is as follows:

| ** **            | ** ** | **Revenues** | ** ** | **Income (Loss)  Before Income  Taxes and  Minority Interest** | ** ** | **Total  Assets** | ** ** | **Depreciation  and  Amortization** | ** ** | **Additions to  Property,  Plant and  Improvements** | ** ** |
|-----------------------|------------|--------------|------------|------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------------------------|------------|----------------------------------------------------------------|------------|
| **2006**              |       |         |       |                                                                               |       |              |       |                                |       |                                                           |       |   |   |   |   |   |   |
| TOC                   |       | $            | 42,579     |                                                                               |       | $                 | (9,240     | )                                   |       | $                                                              | 74,215     |   |   | $ | 12,735 | (1) |   |   | $ | 2,385 |   |   |
| Membership  Division  |       | 5,943        |       |                                                                               | 327        |              |       | 4,733                               |       |                                                           | 283        |   |   |   | 103 |   |   |
| Subtotals of Segments |       | 48,522       |       |                                                                               | (8,913     | )                 |       | 78,948                              |       |                                                           | 13,018     |   |   |   | 2,488 |   |   |
| Corporate(2)          |       | —       |       |                                                                               | (2,325     | )                 |       | 69,009                              |       |                                                           | —     |   |   |   | — |   |   |
| Totals                |       | $            | 48,522     |                                                                               |       | $                 | (11,238    | )                                   |       | $                                                              | 147,957    |   |   | $ | 13,018 |   |   |   | $ | 2,488 |   |   |
| **2005**              |       |         |       |                                                                               |       |              |       |                                |       |                                                           |       |   |   |   |   |   |   |
| TOC                   |       | $            | 37,527     |                                                                               |       | $                 | 4,865      |                                |       | $                                                              | 79,025     |   |   | $ | 2,388 |   |   |   | $ | 10,224 |   |   |
| Membership  Division  |       | 5,381        |       |                                                                               | 280        |              |       | 5,017                               |       |                                                           | 342        |   |   |   | 335 |   |   |
| Subtotals of Segments |       | 42,908       |       |                                                                               | 5,145      |              |       | 84,042                              |       |                                                           | 2,730      |   |   |   | 10,559 |   |   |
| Corporate(2)          |       | —       |       |                                                                               | (1,449     | )                 |       | 67,780                              |       |                                                           | —     |   |   |   | — |   |   |
| Totals                |       | $            | 42,908     |                                                                               |       | $                 | 3,696      |                                |       | $                                                              | 151,822    |   |   | $ | 2,730 |   |   |   | $ | 10,559 |   |   |
| **2004**              |       |         |       |                                                                               |       |              |       |                                |       |                                                           |       |   |   |   |   |   |   |
| TOC                   |       | $            | 34,596     |                                                                               |       | $                 | (38,330    | )                                   |       | $                                                              | 78,574     |   |   | $ | 1,080 |   |   |   | $ | 1,938 |   |   |
| Membership  Division  |       | 5,358        |       |                                                                               | 354        |              |       | 6,857                               |       |                                                           | 344        |   |   |   | 611 |   |   |
| Subtotals of Segments |       | 39,954       |       |                                                                               | (37,976    | )                 |       | 85,431                              |       |                                                           | 1,424      |   |   |   | 2,549 |   |   |
| Corporate(2)          |       | —       |       |                                                                               | (1,613     | )                 |       | 14,138                              |       |                                                           | —     |   |   |   | — |   |   |
| Totals                |       | $            | 39,954     |                                                                               |       | $                 | (39,589    | )                                   |       | $                                                              | 99,569     |   |   | $ | 1,424 |   |   |   | $ | 2,549 |   |   |

----

(1)          Includes impairment ofintangible assets charge of $9,540.

(2)          We capture corporate overhead thatis applicable to both segments, but not directly related to operations in aseparate business unit, as “Corporate.” The expenses allocated to Corporateconsisted primarily of professional fees including public relations, accountingand legal fees, taxes associated with being incorporated in Delaware, boardfees, and other corporate fees not associated directly with either TOC or theMembership division. Corporate assets consist primarily of cash not held in ouroperating accounts, available-for-sale securities, deferred tax assets, net andincome tax refund receivable.

**Note 15—Fair Value of Financial Instruments**

Our material financial instruments consist of cash and cashequivalents, investments in available-for-sale securities, accounts receivable,and accounts payable and accrued expenses. The carrying amounts of ourfinancial instruments generally approximated their fair values at December 31,2006 and 2005.

93

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note 16—401(k) Savings Plan**

We maintain a 401(k) Plan (the “401(k) Plan”). We arerequired to make matching contributions to the 401(k) Plan in the amountof 50% of the first 6% of wages deferred by each participating employee up tostatutory maximums. During 2006, 2005 and 2004, we incurred total charges ofapproximately $141, $124 and $91 for employer matching contributions,respectively.

**Note 17—Accounts Payableand Accrued Expenses**

Accountspayable and accrued expenses consist of the following:

| ** **                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Trade accounts  payable               |       | $        | 1,032      |     | $          | 1,580 |   |
| Accrued payroll  and related expenses |       | 806      |       | 626      |       |
| Estimated  make-good accrual          |       | 590      |       | 280      |       |
| Accrued expenses                      |       | 474      |       | 378      |       |
| Total                                 |       | $        | 2,902      |     | $          | 2,864 |   |

 

**Note 18—Quarterly Financial Information (Unaudited)**

Summarizedunaudited operating data for each of the quarters in the years ended December 31,2006 and 2005 follows:

| ** **                        | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **March 31**                | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| 2006                              |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                           |       |                             | $          | 11,289 |   |   | $ | 10,927 |   |   | $ | 13,182 |   |   |   | $ | 13,124 |   |   |
| Income (loss) from operations     |       |                             | (685       | ) |   | (886 | ) |   | (8,614 | ) |   |   | (3,499 | ) |   |
| Net income (loss)                 |       |                             | (157       | ) |   | 302 |   |   | (5,568 | ) |   |   | (1,902 | ) |   |
| Earnings (loss) per common share: |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                             |       |                             | $          | (0.01 | ) |   | $ | 0.01 |   |   | $ | (0.22 | ) |   |   | $ | (0.08 | ) |   |
| Diluted                           |       |                             | $          | (0.01 | ) |   | $ | 0.01 |   |   | $ | (0.22 | ) |   |   | $ | (0.08 | ) |   |
| 2005                              |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                           |       |                             | $          | 10,061 |   |   | $ | 10,014 |   |   | $ | 11,404 |   |   |   | $ | 11,429 |   |   |
| Income from operations            |       |                             | 604        |   |   | 715 |   |   | 137 |   |   |   | 1,342 |   |   |
| Net income                        |       |                             | 377        |   |   | 437 |   |   | 248 |   |   |   | 1,131 |   |   |
| Earnings per common share:        |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                             |       |                             | $          | 0.02 |   |   | $ | 0.02 |   |   | $ | 0.01 |   |   |   | $ | 0.05 |   |   |
| Diluted                           |       |                             | $          | 0.02 |   |   | $ | 0.02 |   |   | $ | 0.01 |   |   |   | $ | 0.04 |   |   |

 

94

----

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (In thousands, except per share data)**

**Note 18—Quarterly Financial Information(Unaudited)**(Continued)

Year-end transactions that had a material impact on the operatingresults of the fourth quarter include:

| ** **               | ** ** | **2006** | ** ** |
|--------------------------|------------|----------|------------|
| Programming              |       | $        | 932        |   |
| Executive  severance     |       | 377      |       |
| Executive signing  bonus |       | 300      |       |
| Promotional  material    |       | 221      |       |
|                     |       | $        | 1,830      |   |

 

Excluded from these charges are share-based compensation expensecharges related to our new CEO for performance units that amounted to $2,496 inthe fourth quarter of 2006.

* * *

95

----

**ITEM 9.**                CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

Not Applicable.

**ITEM 9A.**        CONTROLS AND PROCEDURES.

***Evaluation ofdisclosure controls and procedures.***

We maintaindisclosure controls and procedures designed to provide reasonable assurance ofachieving the objective that information in our Exchange Act reports is recorded,processed, summarized and reported within the time periods specified andpursuant to the regulations of the Securities and Exchange Commission.Disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e)under the Exchange Act, include controls and procedures designed to ensure theinformation required to be disclosed by us in the reports we file or submitunder the Exchange Act is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosure. It shouldbe noted that our system of controls, however well designed and operated, canprovide only reasonable, and not absolute, assurance that the objectives of thesystem are met.

Our management, with the participation of our Chief ExecutiveOfficer and Chief Financial Officer, evaluated the effectiveness of ourdisclosure controls and procedures as of December 31, 2006, the end of theperiod covered by this report.  Based onthis evaluation, we have concluded that as a result of a material weakness inour internal control over financial reporting discussed below, our disclosurecontrols and procedures were not effective as of December 31, 2006.

***Management’sreport on internal control over financial reporting.***

Management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as defined in Rule 13a-15(f) of the Exchange Act.  Our internal control over financial reportingincludes those policies and procedures that (a) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect thetransactions and disposition of assets; (b) provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures are being made only in accordance withauthorizations of our management and directors; and (c) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition,use or disposition of our assets that could have a material effect on thefinancial statements.

Internal controlover financial reporting is designed to provide reasonable assurance regardingthe reliability of financial reporting and the preparation of financialstatements prepared for external purposes in accordance with generally acceptedaccounting principles. Because of its inherent limitations, internal control overfinancial reporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

Management conducted an evaluation of the effectiveness of ourinternal control over financial reporting as of December 31, 2006, based on theframework set forth in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission.  Management reviewed the results of thisevaluation with the Audit Committee of our Board of Directors, and based onthis evaluation, management has determined that as of December 31, 2006 amaterial weakness existed relating to inadequate financial department staffingand a lack of financial accounting expertise necessary to properly account forcertain complex or non-routine transactions. Notwithstanding the existence of this material weakness, we believe thatthe consolidated financial statements included in 

96

----

this report fairly present in all materialrespects our financial condition, results of operations and cash flows for theperiods presented.  This deficiencyresulted in the need for certain adjustments to equity-based compensationexpense including segment allocation of this expense and certain other expenseestimates. Although none of these adjustments were material, until thisdeficiency is remediated, management has concluded that there is more than aremote likelihood that a material misstatement to the annual or interimconsolidated financial statements could occur and not be prevented or detectedby the Company’s controls in a timely manner. Accordingly, management has determined that this control deficiencyconstitutes a material weakness. Because of this material weakness, we haveconcluded that we did not maintain effective internal control over financialreporting as of December 31, 2006 based on the criteria in InternalControl—Integrated Framework.

***Remediation planfor material weakness in internal control over financial reporting***

The lack of staffresources and financial expertise arose as a result of several issues includingtime constraints imposed on the accounting staff  as a result of our heavier than normalfinancial reporting requirements during the fourth quarter of 2006 carryinginto February 2007, employee turnover and our inability to timely fillaccounting and financial-related positions. Our management, with the oversight of our Audit Committee, has devotedconsiderable effort to remediate the material weakness identified above.  However, as of December 31, 2006, we had notfully remediated the material weakness in our internal control over financialreporting.

We have alreadyadded one additional manager to the accounting department and we are activelyrecruiting to fill additional open positions. In addition, we are implementing accounting software that will enhanceour capabilities across many accounting disciplines, particularly as it relatesto share-based compensation.  We willmore fully develop the technical expertise of our existing staff and fill openpositions with qualified replacements.  We will engage additional outside consultants to bolster our U.S. GAAPexpertise until and after we have been successful in bringing the expertisein-house.

We believe thatthe actions described above and resulting improvement in controls willgenerally strengthen our disclosure controls and procedures, as well as ourinternal control over financial reporting and will, over time, address thematerial weakness that we have identified in our internal control overfinancial reporting as of December 31, 2006. Many of the remedial actions we have taken are very recent, and otherremedial actions are yet to be implemented including the hiring of additionalpersonnel.  Because our remediationefforts include the hiring of additional personnel many of the controls in our currentsystem of internal controls will still rely extensively on manual review andapproval, and management will not be able to conclude that the materialweakness has been eliminated until such additional personnel has been hired andthe controls have been successfully operated and tested. While there can be noassurance that we will be successful on a timely basis, we believe that weshould be able to adequately recruit and staff the accounting function. Weexpect the effort may take up to six months in order to complete the recruitingand hiring of additional staff. 

We, along with ourAudit Committee, will continue to monitor and evaluate the effectiveness ofthese remedial actions and make further changes as deemed appropriate. 

Management’s assessment of the effectiveness of internal controlover financial reporting as of December 31, 2006, has been audited by J.H. CohnLLP, the independent registered public accounting firm that audited ourconsolidated financial statements, as stated in their report which is includedin this report.

97

----

***Changes ininternal control over financial reporting. ***

Other than as noted above, during the quarter ended December 31,2006, there was no change in our internal control over financial reporting thatmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting subsequent to the date referred to above.

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and StockholdersOutdoor Channel Holdings, Inc.

We have audited management’s assessment, included inthe accompanying “Management’s Report on Internal Control over FinancialReporting”, that Outdoor Channel Holdings, Inc. did not maintain effectiveinternal control over financial reporting as of December 31, 2006, becauseof the effect of the material weakness identified in management’s assessment,based on criteria established in *Internal Control -Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Outdoor ChannelHoldings, Inc.’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting. Our responsibilityis to express an opinion on management’s assessment and an opinion on theeffectiveness of the Company’s internal control over financial reporting basedon our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control and performing such other procedures as weconsidered  necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with accounting principles generally accepted in theUnited States of America. A company’s internal control over financial reportingincludes those policies and procedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial  statements in accordance with accounting principles generally acceptedin the United States of America, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or dispositionof the company’s assets that could have a material effect on the financialstatements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

A material weakness is a control deficiency, orcombination of control deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. The following material weaknesshas been identified and included in management’s assessment. In its assessmentas of December 31, 2006, management has determined that a materialweakness exists relating to inadequate financial department staffing and a lackof financial 

98

----

accounting expertise necessaryto properly account for certain complex or non-routine transactions. Thisdeficiency resulted in the need for certain adjustments to equity-basedcompensation expense including segment allocation of this expense and certainother expense estimates. Although none of these adjustments were material,until this deficiency is remediated, there is more than a remote likelihoodthat a material misstatement to the annual or interim consolidated financialstatements could occur and not be prevented or detected by the Company’scontrols in a timely manner. This material weakness was considered indetermining the nature, timing and extent of our audit tests applied in our auditof the 2006 consolidated financial statements, and this report does not affectour report dated March 16, 2007 on those financial statements.

In our opinion, management’s assessment that OutdoorChannel Holdings, Inc. did not maintain effective internal control overfinancial reporting as of December 31, 2006, is fairly stated, in allmaterial respects, based on criteria established in*InternalControl -Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Also, in our opinion, becauseof the effects of the material weakness described above in the achievement ofthe objective of the control criteria, the Company has not maintained effectiveinternal control over financial reporting as of December 31, 2006, basedon criteria established in *Internal Control -Integrated Framework* issued by the Committee of SponsoringOrganizations of the Trading Commission (COSO).

We do not express an opinion or any other form ofassurance on management’s statements relating to new controls being implementedand tested.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States) the consolidated balance sheets of Outdoor ChannelHoldings, Inc. and subsidiaries as of December 31, 2006 and 2005, andthe related consolidated statements of operations, stockholders’ equity andcash flows for each of the three years in the three year period ending December 31,2006 and our report dated March 16, 2007 (which report included anexplanatory paragraph regarding the Company’s adoption of Statement ofFinancial Accounting Standards No. 123 (Revised 2004) “Share-BasedPayment”) expressed an unqualified opinion.

/s/ J.H. Cohn LLP

San Diego, CaliforniaMarch 16, 2007

**ITEM 9B.**       OTHER INFORMATION.

Not Applicable.

99

----

**PART III**

**ITEM 10.**         DIRECTORS, EXECUTIVE OFFICERS ANDCORPORATE GOVERNANCE.

Information required byItem 10 of Part III is included in our Proxy Statement relating toour 2007 Annual Meeting of Stockholders and is incorporated herein byreference.

**ITEM 11.**         EXECUTIVE COMPENSATION.

Information required byItem 11 of Part III is included in our Proxy Statement relating toour 2007 Annual Meeting of Stockholders and is incorporated herein byreference.

**ITEM 12.**         SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Information required byItem 12 of Part III is included in our Proxy Statement relating toour 2007 Annual Meeting of Stockholders and is incorporated herein byreference.

**ITEM 13.**         CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Information required byItem 13 of Part III is included in our Proxy Statement relating toour 2007 Annual Meeting of Stockholders and is incorporated herein byreference.

**ITEM 14.**         PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Information required by Item 14 of Part IIIis included in our Proxy Statement relating our 2007 Annual Meeting ofStockholders and is incorporated herein by reference.

100

----

**PART IV**

**ITEM 15.**         EXHIBITS AND FINANCIAL STATEMENTSCHEDULES.

**(a)**          The following documents areincluded as part of this Annual Report on Form 10-K.

(1)          Financial Statements

Index to Financial StatementsReports of Independent Registered Public Accounting FirmConsolidated Balance SheetsConsolidated Statements of OperationsConsolidated Statements of Stockholders’ EquityConsolidated Statements of Cash FlowsNotes to Consolidated Financial Statements

(2)          Financial Statement Schedules

All schedules are omitted as the information is not required, isnot material or is otherwise provided.

(3)          List of exhibits required byItem 601 of Regulation S-K. See part (b) below.

**(b)**          Exhibits
| Exhibit   Number | ** ** | **Description** | ** ** |
|------------------|------------|-----------------|------------|
|             | 2          | .1              |       | Amended and Restated Agreement and Plan  of Merger among The Outdoor Channel, Inc., Outdoor Channel  Holdings, Inc. and Gold Prospector’s Association of America, Inc.  dated as of April 20, 2004, as amended and restated as of May 12,  2004 (filed as Exhibit 2.1 to the Company’s Current Report on  Form 8-K filed on May 18, 2004 and incorporated herein by  reference). |   |
|             | 2          | .2              |       | Agreement and Plan of Merger between Outdoor Channel  Holdings, Inc., a Delaware corporation, and Outdoor Channel  Holdings, Inc., an Alaska corporation, dated as of September 8,  2004 (filed as Exhibit 2.1 to the Company’s Current Report on  Form 8-K filed on September 20, 2004 and incorporated herein  by reference). |   |
|             | 3          | .1              |       | Certificate of Incorporation of Outdoor Channel Holdings, Inc, a  Delaware corporation (filed as Exhibit 3.1 to the Company’s Current  Report on Form 8-K filed on September 20, 2004 and  incorporated herein by reference). |   |
|             | 3          | .2              |       | By-Laws of Outdoor Channel Holdings, Inc., a Delaware  corporation (filed as Exhibit 3.2 to the Company’s Current Report on  Form 8-K filed on September 20, 2004 and incorporated herein  by reference). |   |
|             | 4          | .1              |       | Instruments defining the rights of security holders, including  debentures (see exhibits 3.1 and 3.2 above). |   |
|             | 10         | .1              |       | Letter of intent dated August 27, 1993, regarding the  proposed acquisition of Gold Prospector’s Association of America, Inc.  by the Company (filed as Exhibit 10.4 to the Company’s Form 10-Q  for the quarter ended September 30, 1993 and incorporated herein by  reference). |   |
|             | 10         | .2              |       | Agreement and Plan of Reorganization dated February 13,  1995, by and between the Registrant and Gold Prospector’s Association of  America, Inc. (filed as Exhibit B to the Company’s Form 8-K  dated February 13, 1995 and incorporated herein by reference). |   |

101

----

 
|        | 10 | .3*  |   | Form of Indemnification Agreement  between Outdoor Channel Holdings, Inc. and its directors and certain  executive officers (filed as Exhibit 10.1 to the Company’s Form 10-Q  for the quarter ended September 30, 2004 and incorporated herein by  reference).                                                                               |   |
|--------|----|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | 10 | .4   |   | Revolving Credit Agreement and related agreements by and between  the Company and U.S. Bank N.A. dated September 30, 2004 (filed as  Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended  September 30, 2004 and incorporated herein by reference).                                                                                      |   |
|   | 10 | .5*  |   | 1995 Stock Option Plan (filed as Exhibit 10.6 to the  Company’s Form 10-KSB for the year ended December 31, 1995  and incorporated herein by reference).                                                                                                                                                                                                |   |
|   | 10 | .6*  |   | Form of Stock Option Agreement pursuant to the Company’s  1995 Stock Option Plan (filed as Exhibit 4.2 to the Company’s  Registration Statement on Form S-8 with respect to the shares  underlying such plan that was filed on November 12, 2004 and  incorporated herein by reference).                                                      |   |
|   | 10 | .7*  |   | The Outdoor Channel, Inc. 1997 Stock Option Plan (filed as  Exhibit 4.1 to the Company’s Registration Statement on Form S-8  with respect to the shares underlying the options assumed by the Company  under such plan that was filed on November 12, 2004 and incorporated  herein by reference).                                                 |   |
|   | 10 | .8*  |   | Form of Stock Option Agreement pursuant to The Outdoor  Channel, Inc. 1997 Stock Option Plan (filed as Exhibit 4.2 to the  Company’s Registration Statement on Form S-8 with respect to the  shares underlying the options assumed by the Company under such plan that was  filed on November 12, 2004 and incorporated herein by reference). |   |
|   | 10 | .9*  |   | Non-Statutory Stock Option Plan and Agreement, dated as of  November 13, 2003, by and between the Company and William A. Owen, as  amended (filed as Exhibit 4.1 to the Company’s Registration Statement on  Form S-8 with respect to the shares underlying such plan that was  filed on November 12, 2004 and incorporated herein by reference).  |   |
|   | 10 | .10* |   | Non-Employee Directors Stock Option Plan, as amended (filed as  Exhibit 4.1 to the Company’s Registration Statement on Form S-8  with respect to the shares underlying such plan that was filed on  November 12, 2004 and incorporated herein by reference).                                                                                            |   |
|   | 10 | .11* |   | Form of Stock Option Agreement pursuant to Non-Employee  Directors Stock Option Plan (filed as Exhibit 10.13 to the Company’s  Form 10-KSB for the year ended December 31, 2003 and  incorporated herein by reference).                                                                                                                            |   |
|   | 10 | .12* |   | 2004 Long-Term Incentive Plan (filed as Exhibit 4.1 to the  Company’s Registration Statement on Form S-8 with respect to the  shares underlying such plan that was filed on November 12, 2004 and  incorporated herein by reference).                                                                                                                   |   |
|   | 10 | .13* |   | Form of Stock Option Award Agreement pursuant to 2004  Long-Term Incentive Plan (filed as Exhibit 99.1 to the Company’s  Form 8-K dated December 20, 2004 and incorporated herein by  reference).                                                                                                                                                  |   |
|   | 10 | .14* |   | Form of Restricted Shares Award Agreement pursuant to 2004  Long-Term Incentive Plan (filed as Exhibit 99.2 to the Company’s  Form 8-K dated December 20, 2004 and incorporated herein by  reference).                                                                                                                                             |   |
|   | 10 | .15  |   | Omitted.                                                                                                                                                                                                                                                                                                                                                                    |   |

102

----

 
|        | 10 | .16* |   | Outdoor Channel Holdings, Inc.  Executive Annual Cash Bonus Plan effective April 21, 2005 (filed as  Exhibit 10.2 to the Company’s Form 10-Q/A for the quarter  ended March 31, 2005 and incorporated herein by reference).                                                                           |   |
|--------|----|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | 10 | .17* |   | Selling Stockholders Registration Rights Agreement, dated as of  June 27, 2005, among Outdoor Channel Holdings, Inc. and the selling  stockholders who are a party (filed as Exhibit 10.1 to the Company’s  current report on Form 8-K filed on June 28, 2005 and  incorporated herein by reference). |   |
|   | 10 | .18  |   | Amendment to Loan Agreement and Note and related agreements by  and between the Company and U.S. Bank N.A. dated October 18, 2005 (filed  as Exhibit 10.18 to the Company’s Annual Report on Form 10-K  filed on March 16, 2006 and incorporated herein by reference).                                     |   |
|   | 10 | .19  |   | Term Loan Agreement and related agreements by and between 43455  BPD, LLC and U.S. Bank N.A. dated as of October 18, 2005 (filed as  Exhibit 10.19 to the Company’s Annual Report on Form 10-K  filed on March 16, 2006 and incorporated herein by reference).                                             |   |
|   | 10 | .20  |   | Term Loan Agreement and related agreements by and between the  Company and U.S. Bank N.A. dated as of October 18, 2005 (filed as  Exhibit 10.20 to the Company’s Annual Report on Form 10-K  filed on March 16, 2006 and incorporated herein by reference).                                                |   |
|   | 10 | .21* |   | Optionholders Registration Rights Agreement by and among the  Company, Ray V. Miller and Elizabeth J. Sanderson dated as of  December 5, 2005 (filed as Exhibit 10.1 to the Company’s current  report on Form 8-K filed on December 6, 2005 and incorporated  herein by reference).                        |   |
|   | 10 | .22* |   | Lease by and between the Company and Musk Ox Properties, L.P.  dated as of January 1, 2006 (filed as Exhibit 10.22 to the  Company’s Annual Report on Form 10-K filed on March 16, 2006  and incorporated herein by reference).                                                                            |   |
|   | 10 | .23  |   | Employment  Agreement with Roger L. Werner, Jr., effective as of October 16,  2006 (filed as Exhibit 10.1 to the Company’s Current Report on  Form 8-K filed on October 20, 2006 and incorporated herein by  reference).                                                                              |   |
|   | 10 | .24  |   | Form of  Performance Unit Agreement (filed as Exhibit 10.2 to the Company’s  Current Report on Form 8-K filed on October 20, 2006 and  incorporated herein by reference).                                                                                                                                  |   |
|   | 10 | .25  |   | Amendment of Employment  Agreement with Roger L. Werner, Jr., effective as of November 9,  2006 (filed as Exhibit 10.1 to the Company’s Current Report on  Form 8-K filed on November 9, 2006 and incorporated herein by  reference).                                                                 |   |
|   | 10 | .26  |   | Separation  Agreement and Release between The Outdoor Channel, Inc. and  Mr. Andrew J. Dale dated December 21, 2006 (filed as  Exhibit 10.1 to the Company’s Current Report on Form 8-K  filed on December 28, 2006 and incorporated herein by reference).                                       |   |
|   | 10 | .27  |   | Consulting  Agreement between The Outdoor Channel, Inc. and Mr. Andrew J. Dale  dated January 2, 2007 (filed as Exhibit 10.2 to the Company’s  Current Report on Form 8-K filed on December 28, 2006 and  incorporated herein by reference).                                                     |   |
|   | 10 | .28  |   | Form of  Change of Control Severance Agreement (filed as Exhibit 10.2 to the  Company’s Form 10-Q for the quarter ended September 30, 2006,  which was filed on February 16, 2007, and incorporated herein by  reference).                                                                            |   |
|   | 21 | .1   |   | Subsidiaries of Registrant                                                                                                                                                                                                                                                                                                          |   |
|   | 23 | .1   |   | Consent of J.H. Cohn LLP, Independent Registered Public  Accounting Firm                                                                                                                                                                                                                                                            |   |

103

----

 
|        | 24 | .1   |   | Power of Attorney (included on signature  page)            |   |
|--------|----|------|--------|------------------------------------------------------------|--------|
|   | 31 | .1   |   | Certification by Chief Executive Officer                   |   |
|   | 31 | .2   |   | Certification by Chief Financial Officer                   |   |
|   | 32 | .1** |   | Section 1350 Certification by Chief Executive Officer |   |
|   | 32 | .2** |   | Section 1350 Certification by Chief Financial Officer |   |

----

*                    Designates a management contract orcompensatory plan or arrangement.

**             Pursuant to Commission Release No. 33-8238,this certification will be treated as “accompanying” this Annual Report on Form 10-Kand not “filed” as part of such report for purposes of Section 18 of theSecurities Exchange Act of 1934, as amended, or otherwise subject to theliability of Section 18 of the Securities Exchange Act of 1934, asamended, and this certification will not be deemed to be incorporated byreference into any filing under the Securities Act of 1933, as amended, or theSecurities Exchange Act of 1934, as amended, except to the extent that theregistrant specifically incorporates it by reference.

104

----

**SIGNATURES**

Pursuant to the requirements of section 13or 15 (d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|        | **OUTDOOR CHANNEL  HOLDINGS, INC.** |
|--------|-------------------------------------|
|   | By:                                 | /s/ ROGER L.  WERNER, JR. |
|   |                                | Roger L.  Werner, Jr.,*Chief Executive Officer and President* |
|   |                                | Dated: March 30,  2007 |

 

**POWER OF ATTORNEY**

Know all men bythese presents, that each person whose signature appears below constitutes andappoints Roger L. Werner, Jr. or William A. Owen, his or herattorney-in-fact, with power of substitution in any and all capacities, to signany amendments to this annual report on Form 10-K, and to file thesame with exhibits thereto, and other documents in connection therewith, withthe Securities and Exchange Commission, hereby ratifying and confirming allthat the attorney-in-fact or his or her substitute or substitutes may do orcause to be done by virtue hereof. This power of attorney may be executed inmultiple counterparts, each of which shall be deemed an original, but whichtaken together shall constitute one instrument.

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.
|                           | **Signature** | ** **                                               | ** ** | ** **          | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|---------------------------|---------------|----------------------------------------------------------|------------|---------------------|-----------|------------|------------|------------|----------|------------|
| /s/ PERRY  T. MASSIE      |          | Chairman of the Board                                    |       | March 30, 2007 |
| Perry T. Massie           |          |                                                     |       |                |
| /s/ ROGER  L. WERNER. JR. |          | Chief Executive Officer and                              |       | March 30, 2007 |
| Roger L. Werner. Jr.      |          | President (Principal  Executive Officer), Director       |       |                |
| /s/ WILLIAM  A. OWEN      |          | Chief Financial Officer and                              |       | March 30, 2007 |
| William A. Owen           |          | Controller (Principal  Financial and Accounting Officer) |       |                |
| /s/ THOMAS  H. MASSIE     |          | Executive Vice President,                                |       | March 30, 2007 |
| Thomas H. Massie          |          | Secretary and  Vice Chairman of the Board                |       |                |
| /s/ JERRY  R. BERGLUND    |          | Director                                                 |       | March 30, 2007 |
| Jerry R. Berglund         |          |                                                     |       |                |

105

----

 
| /s/ DAVID C. MERRITT       |   | Director |   | March 30, 2007 |
|----------------------------|--------|----------|--------|---------------------|
| David C. Merritt           |   |     |   |                |
| /s/ RAY  V. MILLER         |   | Director |   | March 30, 2007 |
| Ray V. Miller              |   |     |   |                |
| /s/ ELIZABETH J. SANDERSON |   | Director |   | March 30, 2007 |
| Elizabeth J. Sanderson     |   |     |   |                |
| /s/ T.  BAHNSON STANLEY    |   | Director |   | March 30, 2007 |
| T. Bahnson Stanley         |   |     |   |                |

 

106

----