**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM 10-Q**

**(MarkOne)**

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

** **

**For the quarterly period ended June30, 2007**

** **

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

**For the transition periodfrom                   to                       **

**Commission file number: 000-17287**

**Outdoor Channel Holdings, Inc.**(Exact name of Registrant as specified in its charter)

| **Delaware**                       |   | **33-0074499**                        |
|------------------------------------|--------|---------------------------------------|
| (State or other  Jurisdiction      |   | (IRS Employer  Identification Number) |
| of incorporation  or organization) |   |                                  |

 

**43445 Business Park Drive, Suite 103Temecula, California 92590**(Address and zip code of principal executive offices)

**(951) 699-6991**(Issuer’s telephone number, including area code)

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

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  xYes     o No

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

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

 

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

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date:

| **Class**                       |   | **Number  of Shares Outstanding at August 1, 2007** |
|---------------------------------|--------|-----------------------------------------------------|
| Common Stock,  $0.001 par value |   | 26,077,816                                          |

 

 

----

**OUTDOOR CHANNEL HOLDINGS, INC. ANDSUBSIDIARIESQuarterly Report on Form 10-QFor The Period Ended June 30, 2007**

**Table of Contents**
|                | ** ** | **Part  I. Financial Information**                                                                                                      |   |   |   |
|----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
|           |       |                                                                                                                                    |   |   |   |
| **Item  1.**   |       | Financial  Statements                                                                                                                   |   |   |   |
|           |       |                                                                                                                                    |   |   |   |
|           |       | Condensed Consolidated Balance Sheets as of June 30,  2007 (Unaudited) and December 31, 2006 (As Restated, Note 10)                     |   |   |   |
|           |       |                                                                                                                                    |   |   |   |
|           |       | Unaudited Condensed Consolidated Statements of  Operations for the Three and Six Months Ended June 30, 2007 and 2006                    |   |   |   |
|           |       |                                                                                                                                    |   |   |   |
|           |       | Unaudited Condensed Consolidated Statement of  Stockholders’ Equity for the Six Months Ended June 30, 2007 (As Restated,  Note 10) |   |   |   |
|           |       |                                                                                                                                    |   |   |   |
|           |       | Unaudited Condensed Consolidated Statements of Cash  Flows for the Six Months Ended June 30, 2007 and 2006                              |   |   |   |
|           |       |                                                                                                                                    |   |   |   |
|           |       | Notes to Unaudited Condensed Consolidated Financial  Statements                                                                         |   |   |   |
|           |       |                                                                                                                                    |   |   |   |
| **Item 2.**    |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                             |   |   |   |
|           |       |                                                                                                                                    |   |   |   |
|           |       | Recent Accounting Developments                                                                                                          |   |   |   |
|           |       |                                                                                                                                    |   |   |   |
| **Item 3.**    |       | Quantitative and Qualitative Disclosures About Market  Risk                                                                             |   |   |   |
|           |       |                                                                                                                                    |   |   |   |
| **Item 4.**    |       | Controls and Procedures                                                                                                                 |   |   |   |
|           |       |                                                                                                                                    |   |   |   |
|           | ** ** | **Part  II. Other Information**                                                                                                         |   |   |   |
|           |       |                                                                                                                                    |   |   |   |
| **Item  1.**   |       | Legal  Proceedings                                                                                                                      |   |   |   |
|           |       |                                                                                                                                    |   |   |   |
| **Item  1A.**  |       | Risk  Factors                                                                                                                           |   |   |   |
|           |       |                                                                                                                                    |   |   |   |
| **Item 2.**    |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                                                            |   |   |   |
|           |       |                                                                                                                                    |   |   |   |
| **Item 3.**    |       | Defaults Upon Senior Securities                                                                                                         |   |   |   |
|           |       |                                                                                                                                    |   |   |   |
| **Item 4.**    |       | Submission of Matters to a Vote of Security Holders                                                                                     |   |   |   |
|           |       |                                                                                                                                    |   |   |   |
| **Item  5.**   |       | Other  Information                                                                                                                      |   |   |   |
|           |       |                                                                                                                                    |   |   |   |
| **Item 6.**    |       | Exhibits                                                                                                                                |   |   |   |
|           |       |                                                                                                                                    |   |   |   |
| **Signatures** |       |                                                                                                                                    |   |

 

* * *

2

----

**PART I—FINANCIAL INFORMATION**

**ITEM 1.****  Financial Statements.**

**OUTDOOR CHANNEL HOLDINGS, INC. ANDSUBSIDIARIESCondensed Consolidated Balance Sheets**(In thousands, except per share data)

 
| ** **                                                                                                  | ** ** | **June 30,  2007** | ** ** | **December 31,  2006**           | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                  | ** ** | **(Unaudited)**         | ** ** | **(As Restated,  Note 10)** | ** ** |
| **Assets**                                                                                                  | ** ** | ** **              | ** ** | ** **                            | ** ** |
| Current assets:                                                                                             |       |                    |       |                                  |       |
| Cash and cash  equivalents                                                                                  |       | $                       | 18,689     |                                  | $          | 14,226 |   |
| Investment in  available-for-sale securities                                                                |       | 47,747                  |       | 42,144                                |       |
| Accounts  receivable, net of allowance for doubtful accounts of $200 and $180                               |       | 7,677                   |       | 6,816                                 |       |
| Income tax refund  receivable                                                                               |       | 222                     |       | 2,299                                 |       |
| Deferred tax  assets, net                                                                                   |       | 580                     |       | 575                                   |       |
| Prepaid  programming costs                                                                                  |       | 2,213                   |       | 2,713                                 |       |
| Other current  assets                                                                                       |       | 1,392                   |       | 835                                   |       |
| Assets of  discontinued operations                                                                          |       | —                  |       | 1,344                                 |       |
| Total current  assets                                                                                       |       | 78,520                  |       | 70,952                                |       |
|                                                                                                        |       |                    |       |                                  |       |
| Property, plant and  equipment, net                                                                         |       | 11,985                  |       | 12,445                                |       |
| Amortizable intangible  assets, net                                                                         |       | 541                     |       | 820                                   |       |
| Goodwill                                                                                                    |       | 44,457                  |       | 44,457                                |       |
| Deferred tax assets,  net                                                                                   |       | 10,896                  |       | 10,956                                |       |
| Deposits and other  assets                                                                                  |       | 2,170                   |       | 2,101                                 |       |
| Assets of discontinued  operations                                                                          |       | —                  |       | 3,390                                 |       |
| Totals                                                                                                      |       | $                       | 148,569    |                                  | $          | 145,121 |   |
|                                                                                                        |       |                    |       |                                  |       |
| **Liabilities  and Stockholders’ Equity**                                                              | ** ** | ** **              | ** ** | ** **                            | ** ** |
| Current liabilities:                                                                                        |       |                    |       |                                  |       |
| Accounts payable  and accrued expenses                                                                      |       | $                       | 3,180      |                                  | $          | 2,766 |   |
| Accrued  severance payments                                                                                 |       | 179                     |       | 341                                   |       |
| Deferred revenue                                                                                            |       | 526                     |       | 610                                   |       |
| Customer  deposits                                                                                          |       | 12                      |       | 53                                    |       |
| Liabilities of  discontinued operations                                                                     |       | —                  |       | 463                                   |       |
| Total current  liabilities                                                                                  |       | 3,897                   |       | 4,233                                 |       |
|                                                                                                        |       |                    |       |                                  |       |
| Accrued severance  payments, net of current portion                                                         |       | 33                      |       | 44                                    |       |
| Deferred satellite rent  obligations                                                                        |       | 323                     |       | 344                                   |       |
| Liabilities of  discontinued operations                                                                     |       | —                  |       | 1,362                                 |       |
| Total liabilities                                                                                           |       | 4,253                   |       | 5,983                                 |       |
|                                                                                                        |       |                    |       |                                  |       |
| Commitments and  contingencies                                                                              |       |                    |       |                                  |       |
| Stockholders’ equity:                                                                                  |       |                    |       |                                  |       |
| Preferred stock;  25,000 shares authorized; none issued                                                     |       | —                  |       | —                                |       |
| Common stock,  $0.001 par value; 75,000 shares authorized: 26,082 and 25,507 shares issued  and outstanding |       | 26                      |       | 26                                    |       |
| Additional  paid-in capital                                                                                 |       | 170,731                 |       | 165,779                               |       |
| Accumulated  other comprehensive income:                                                                    |       |                    |       |                                  |       |
| Net unrealized  gains on available-for-sale securities                                                      |       | 14                      |       | 48                                    |       |
| Total  accumulated other comprehensive income                                                               |       | 14                      |       | 48                                    |       |
| Accumulated  deficit                                                                                        |       | (26,455                 | )          | (26,715                               | )          |
| Total  stockholders’ equity                                                                            |       | 144,316                 |       | 139,138                               |       |
| Totals                                                                                                      |       | $                       | 148,569    |                                  | $          | 145,121 |   |

 

See Notes toUnaudited Condensed Consolidated Financial Statements.

3

----

**OUTDOOR CHANNEL HOLDINGS, INC. ANDSUBSIDIARIESUnaudited Condensed Consolidated Statements of Operations**(In thousands, except per share data)

 
| ** **                                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                    | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                    | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues:                                                     |       |                             |       |                           |       |   |   |   |   |
| Advertising                                                   |       | $                                | 6,753      |                           | $          | 5,663 |   | $ | 12,773 |   | $ | 11,385 |   |
| Subscriber fees                                               |       | 4,775                            |       | 4,341                          |       | 9,524 |   | 8,724 |   |
| Total revenues                                                |       | 11,528                           |       | 10,004                         |       | 22,297 |   | 20,109 |   |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| Cost of  services:                                            |       |                             |       |                           |       |   |   |   |   |
| Programming                                                   |       | 1,633                            |       | 2,180                          |       | 3,104 |   | 3,721 |   |
| Satellite transmission fees                                   |       | 636                              |       | 614                            |       | 1,232 |   | 1,252 |   |
| Production and operations                                     |       | 897                              |       | 947                            |       | 2,370 |   | 2,152 |   |
| Other direct costs                                            |       | 17                               |       | 42                             |       | 55 |   | 96 |   |
| Total cost of services                                        |       | 3,183                            |       | 3,783                          |       | 6,761 |   | 7,221 |   |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| Other expenses:                                               |       |                             |       |                           |       |   |   |   |   |
| Advertising                                                   |       | 1,766                            |       | 1,555                          |       | 2,480 |   | 3,665 |   |
| Selling, general and administrative                           |       | 6,272                            |       | 4,451                          |       | 12,895 |   | 9,127 |   |
| Depreciation and amortization                                 |       | 662                              |       | 827                            |       | 1,374 |   | 1,429 |   |
| Total other expenses                                          |       | 8,700                            |       | 6,833                          |       | 16,749 |   | 14,221 |   |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| Loss from  operations                                         |       | (355                             | )          | (612                           | )          | (1,213 | ) | (1,333 | ) |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| Interest expense                                              |       | —                           |       | (76                            | )          | — |   | (153 | ) |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| Other income                                                  |       | 812                              |       | 643                            |       | 1,515 |   | 1,266 |   |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| Income (loss)  from continuing operations before income taxes |       | 457                              |       | (45                            | )          | 302 |   | (220 | ) |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| Income tax  provision (benefit)                               |       | 106                              |       | (28                            | )          | 70 |   | (36 | ) |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| Income (loss)  from continuing operations                     |       | 351                              |       | (17                            | )          | 232 |   | (184 | ) |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| Income (loss)  from discontinued operations, net of tax       |       | (7                               | )          | 319                            |       | 28 |   | 329 |   |
| Net income                                                    |       | $                                | 344        |                           | $          | 302 |   | $ | 260 |   | $ | 145 |   |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| Basic earnings  (loss) per common share data:                 |       |                             |       |                           |       |   |   |   |   |
| From continuing operations                                    |       | $                                | 0.01       |                           | $          | — |   | $ | 0.01 |   | $ | (0.01 | ) |
| From discontinued operations                                  |       | $                                | —     |                           | $          | 0.01 |   | $ | — |   | $ | 0.01 |   |
| Basic earnings per common share                               |       | $                                | 0.01       |                           | $          | 0.01 |   | $ | 0.01 |   | $ | 0.01 |   |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| Diluted earnings  (loss) per common share data:               |       |                             |       |                           |       |   |   |   |   |
| From continuing operations                                    |       | $                                | 0.01       |                           | $          | — |   | $ | 0.01 |   | $ | (0.01 | ) |
| From discontinued operations                                  |       | $                                | —     |                           | $          | 0.01 |   | $ | — |   | $ | 0.01 |   |
| Diluted earnings per common share                             |       | $                                | 0.01       |                           | $          | 0.01 |   | $ | 0.01 |   | $ | 0.01 |   |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| Weighted average  number of common shares outstanding:        |       |                             |       |                           |       |   |   |   |   |
| Basic                                                         |       | 25,495                           |       | 24,763                         |       | 25,384 |   | 24,613 |   |
| Diluted                                                       |       | 26,242                           |       | 24,763                         |       | 25,758 |   | 24,613 |   |

 

See Notes toUnaudited Condensed Consolidated Financial Statements.

4

----

**OUTDOOR CHANNEL HOLDINGS, INC. ANDSUBSIDIARIES**

**Unaudited Condensed ConsolidatedStatement of Stockholders’ EquityFor the Six Months Ended June 30, 2007**(In thousands)
| ** **                                                                                                             | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Accumulated** | ** ** | ** **                            | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|---------------------------------------|------------|-----------------|------------|---------------------------------------|------------|
| ** **                                                                                                             | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**                           | ** ** | **Income**      | ** ** | **Deficit**                           | ** ** | **Total** | ** ** |
| ** **                                                                                                             | ** ** | ** **            | ** ** | ** **              | ** ** | **(As Restated,  Note 10)** | ** ** | ** **      | ** ** | **(As Restated,  Note 10)** | ** ** | **(As Restated,  Note 10)** | ** ** |
| Balance, January 1,  2007                                                                                              |       | 25,507                |       | $                       | 26         |                                  | $          | 165,779         |       | $                                     | 48         |   | $ | (26,715 | ) | $ | 139,138 |   |
|                                                                                                                   |       |                  |       |                    |       |                                  |       |            |       |                                  |       |   |   |
| Comprehensive income:                                                                                                  |       |                  |       |                    |       |                                  |       |            |       |                                  |       |   |   |
| Net income                                                                                                             |       |                  |       |                    |       |                                  |       |            |       | 260                                   |       | 260 |   |
|                                                                                                                   |       |                  |       |                    |       |                                  |       |            |       |                                  |       |   |   |
| Effect of change  in fair value of available-for-sale securities, net of deferred taxes of  ($22)                      |       |                  |       |                    |       |                                  |       | (34             | )          |                                  |       | (34 | ) |
| Total  comprehensive income                                                                                            |       |                  |       |                    |       |                                  |       |            |       |                                  |       | 226 |   |
|                                                                                                                   |       |                  |       |                    |       |                                  |       |            |       |                                  |       |   |   |
| Common stock issued  upon exercise of stock options                                                                    |       | 362                   |       |                    |       | 598                                   |       |            |       |                                  |       | 598 |   |
|                                                                                                                   |       |                  |       |                    |       |                                  |       |            |       |                                  |       |   |   |
| Issuance of restricted  stock to employees and service providers for services to be rendered, net of  forfeited shares |       | 239                   |       |                    |       |                                  |       |            |       |                                  |       | — |   |
|                                                                                                                   |       |                  |       |                    |       |                                  |       |            |       |                                  |       |   |   |
| Stock-based employee  and service provider compensation expense                                                        |       |                  |       |                    |       | 4,626                                 |       |            |       |                                  |       | 4,626 |   |
|                                                                                                                   |       |                  |       |                    |       |                                  |       |            |       |                                  |       |   |   |
| Purchase and retirement  of treasury stock related to employee and service provider stock-based  compensation activity |       | (26                   | )          |                    |       | (272                                  | )          |            |       |                                  |       | (272 | ) |
|                                                                                                                   |       |                  |       |                    |       |                                  |       |            |       |                                  |       |   |   |
| Balance, June 30, 2007                                                                                                 |       | 26,082                |       | $                       | 26         |                                  | $          | 170,731         |       | $                                     | 14         |   | $ | (26,455 | ) | $ | 144,316 |   |

 

See Notes toUnaudited Condensed Consolidated Financial Statements.

5

----

**OUTDOOR CHANNEL HOLDINGS, INC. ANDSUBSIDIARIES**

**Unaudited Condensed ConsolidatedStatements of Cash Flows**(In thousands)
| ** **                                                                                                        | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                        | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| Operating  activities:                                                                                            |       |                                          |       |   |   |
| Net income                                                                                                        |       | $                                             | 260        |   | $ | 145 |   |
| Adjustments to reconcile income to net cash provided  by (used in) operating activities of continuing operations: |       |                                          |       |   |   |
| Income from discontinued operations                                                                               |       | (28                                           | )          | (329 | ) |
| Depreciation and amortization                                                                                     |       | 1,618                                         |       | 1,491 |   |
| Provision for doubtful accounts                                                                                   |       | 68                                            |       | 74 |   |
| Stock-based employee and service provider  compensation                                                           |       | 4,626                                         |       | 1,714 |   |
| Deferred tax provision (benefit), net                                                                             |       | 77                                            |       | (806 | ) |
| Tax benefits from exercise of stock options in  excess of recognized expense                                      |       | —                                        |       | (705 | ) |
|                                                                                                              |       |                                          |       |   |   |
| Changes in operating assets and liabilities:                                                                      |       |                                          |       |   |   |
| Accounts receivable                                                                                               |       | (929                                          | )          | (1,376 | ) |
| Income tax refund receivable                                                                                      |       | 2,077                                         |       | 991 |   |
| Prepaid programming costs                                                                                         |       | 500                                           |       | (512 | ) |
| Other current assets                                                                                              |       | (557                                          | )          | (584 | ) |
| Deposits and other assets                                                                                         |       | (314                                          | )          | (680 | ) |
| Accounts payable and accrued expenses                                                                             |       | 414                                           |       | 91 |   |
| Deferred revenue                                                                                                  |       | (84                                           | )          | 318 |   |
| Customer deposits                                                                                                 |       | (41                                           | )          | — |   |
| Accrued severance payments                                                                                        |       | (173                                          | )          | (8 | ) |
| Deferred satellite rent obligations                                                                               |       | (21                                           | )          | 24 |   |
| Net cash provided by (used in) operating activities  of continuing operations                                     |       | 7,493                                         |       | (152 | ) |
|                                                                                                              |       |                                          |       |   |   |
| Investing  activities:                                                                                            |       |                                          |       |   |   |
| Purchases of property, plant and equipment                                                                        |       | (634                                          | )          | (2,065 | ) |
| Proceeds from sale of discontinued operations                                                                     |       | 3,589                                         |       | — |   |
| Purchases of available-for-sale securities                                                                        |       | (59,550                                       | )          | (82,303 | ) |
| Proceeds from sale of available-for-sale securities                                                               |       | 53,890                                        |       | 86,573 |   |
| Net cash provided by (used in) investing activities  of continuing operations                                     |       | (2,705                                        | )          | 2,205 |   |
|                                                                                                              |       |                                          |       |   |   |
| Financing  activities:                                                                                            |       |                                          |       |   |   |
| Principal payments on long-term debt and capital  leases                                                          |       | —                                        |       | (349 | ) |
| Proceeds from exercise of stock options                                                                           |       | 598                                           |       | 601 |   |
| Purchase of treasury stock                                                                                        |       | (272                                          | )          | (33 | ) |
| Tax benefits from exercise of stock options in  excess of recognized expense                                      |       | —                                        |       | 705 |   |
| Net cash provided by financing activities of  continuing operations                                               |       | 326                                           |       | 924 |   |
|                                                                                                              |       |                                          |       |   |   |
| Cash flows from  discontinued operations:                                                                         |       |                                          |       |   |   |
| Net cash used in operating activities of  discontinued operations                                                 |       | (582                                          | )          | (119 | ) |
| Net cash used in investing activities of  discontinued operations                                                 |       | (69                                           | )          | (24 | ) |
| Net cash used in financing activities of  discontinued operations                                                 |       | —                                        |       | (9 | ) |
| Net cash used in discontinued operations                                                                          |       | (651                                          | )          | (152 | ) |
|                                                                                                              |       |                                          |       |   |   |
| Net increase in cash and cash equivalents                                                                         |       | 4,463                                         |       | 2,825 |   |
| Cash and cash equivalents, beginning of period                                                                    |       | 14,226                                        |       | 17,672 |   |
| Cash and cash equivalents, end of period                                                                          |       | $                                             | 18,689     |   | $ | 20,497 |   |

 

6

----

 
| Supplemental  disclosure of cash flow information:                                            |   |   |   |   |   |
|-----------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|
|                                                                                          |   |   |   |   |   |
| Interest paid                                                                                 |   | $      | — |   | $      | 155 |   |
| Income taxes paid                                                                             |   | $      | 8      |   | $      | — |   |
|                                                                                          |   |   |   |   |   |
| Supplemental  disclosures of noncash investing and financing activities:                      |   |   |   |   |   |
|                                                                                          |   |   |   |   |   |
| Effect of net decrease in fair value of  available-for-sale securities, net of deferred taxes |   | $      | (34    | )      | $      | (23 | ) |
| Effect of net  increase in fair value of cash flow hedge                                      |   | $      | — |   | $      | 131 |   |

 

See Notes toUnaudited Condensed Consolidated Financial Statements.

7

----

**OUTDOOR CHANNEL HOLDINGS, INC. ANDSUBSIDIARIES**

**Notes to Unaudited CondensedConsolidated Financial Statements**(In thousands, except per share data)

**NOTE1—ORGANIZATION AND BUSINESS**

**Descriptionof Operations**

OutdoorChannel Holdings, Inc. or “Outdoor Channel Holdings,” is incorporated under thelaws of the State of Delaware. Collectively, with its subsidiaries, the terms “we,”“us,” “our” and the “Company” refer to Outdoor Channel Holdings, Inc. as aconsolidated entity, except where noted or where the context makes clear thereference is only to Outdoor Channel Holdings, Inc. or one of our subsidiaries.Outdoor Channel Holdings, Inc. wholly owns GPAA, Inc. which in turn wholly ownsThe Outdoor Channel, Inc. (“TOC”). Outdoor Channel Holdings is also the solemember of 43455 BPD, LLC the entity that owns the building that houses ourbroadcast facility. TOC operates Outdoor Channel, which is a nationaltelevision network devoted to traditional outdoor activities, such as hunting,fishing and shooting sports, as well as off-road motor sports and other relatedlifestyle programming. In addition, TOC also operates Outdoor Channel 2 HD,which also is a national television network featuring programming producedutilizing high definition technology.

Ourrevenues include advertising fees from advertisements aired on Outdoor Channel,including fees paid by outside producers to purchase advertising time inconnection with the airing of their programs on Outdoor Channel and subscriberfees paid by cable and satellite service providers that air Outdoor Channel.

**NOTE2—UNAUDITED INTERIM FINANCIAL STATEMENTS**

In the opinion ofmanagement, the accompanying unaudited condensed consolidated financialstatements reflect all adjustments, consisting of normal recurring adjustments,necessary to present fairly the financial position of the Company as of June30, 2007 and its results of operations and cash flows for the three and sixmonths ended June 30, 2007 and 2006. Information included in the consolidatedbalance sheet as of December 31, 2006 has been derived from, and certain termsused herein are defined in, the audited financial statements of the Company asof December 31, 2006 (the “Audited Financial Statements”) included in theCompany’s Annual Report on Form 10-K (the “10-K”) for the year ended December31, 2006 that was previously filed with the Securities and Exchange Commission(the “SEC”) (see Note 10). Pursuant to the rules and regulations of the SEC,certain information and disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted from these financialstatements unless significant changes have taken place since the end of themost recent fiscal year. Accordingly, these unaudited condensed consolidatedfinancial statements should be read in conjunction with the Audited FinancialStatements and the other information also included in the 10-K.

Certain amounts inthe 2006 unaudited condensed consolidated financial statements have beenreclassified to conform to the 2007 presentation. The results of the Company’soperations for the three and six months ended June 30, 2007 are not necessarilyindicative of the results of operations for the full year ending December 31,2007.

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect reported amounts of assets and liabilities as ofthe dates of the condensed consolidated balance sheets and reported amount ofrevenues and expenses for the periods presented. Accordingly, actual resultscould materially differ from those estimates.

**NOTE3—STOCK INCENTIVE PLANS**

Effective January1, 2006, we adopted Statement of Financial Accounting Standards No. 123(revised 2004), “Share-Based Payment” (“SFAS 123R”). We have elected to use themodified prospective transition method. This method requires compensation costto be recognized in the financial statements over the service period for thefair value of all awards (including awards to employees) granted after the dateof adoption as well as for existing awards for which the requisite service hadnot been rendered as of the date of adoption and requires that prior periodsnot be restated. Our stock incentive plans provide for the granting ofqualified and nonqualified options, restricted stock and stock appreciationrights (“SARs”) to our officers, directors and employees. Outstanding optionsare generally exercisable from 90 days to four years after the date of thegrant and expire no more than ten years after the grant. We satisfy theexercise of options and awards of restricted stock by issuing previouslyunissued common shares. Currently we have not awarded any SARs. Prior toSeptember 30, 2006 we had not awarded any performance units but did so inthe fourth quarter of 2006. Prior to the adoption of SFAS 123R, we used theintrinsic value method to account for stock options granted to employees andmade 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, however, as explained in the 10-K, we did recognize a charge inthe third quarter of 2004 when we issued fully-vested options to purchaseshares in Outdoor Channel Holdings in exchange for fully-vested options held byemployees of TOC on September 8, 2004. SFAS 123R requires that we elect anapproved method to calculate the historical pool of windfall tax 

8

----

benefits upon adoption of SFAS 123R within one year ofits adoption. We have elected the method outlined in SFAS 123R, sometimesreferred to as the “long haul” method, for this calculation.

We have not capitalizedany share-based compensation to any of our assets. We expense awards at theearliest of its vesting schedule or pro rata on a straight line basis over therequisite service period. The following table summarizes share-basedcompensation expense for the three and six months ended June 30, 2007 and2006:

|                                         | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                                          | ** ** | **2006**                                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| Restricted stock                        |       | $                                                                 | 422        |                                                            | $          | 143 |   | $ | 575 |   | $ | 244 |   |
| Options                                 |       | 242                                                               |       | 756                                                             |       | 745 |   | 1,470 |   |
| Performance  units                      |       | 1,653                                                             |       | —                                                          |       | 3,306 |   | — |   |
| Total  share-based compensation expense |       | $                                                                 | 2,317      |                                                            | $          | 899 |   | $ | 4,626 |   | $ | 1,714 |   |

 

During the quarterended March 31, 2007 one employee transitioned to a service provider, thereforeon a go forward basis the Company will follow the guidance in Emerging IssueTask Force “Accounting for Equity Instruments that are Issued to Other ThanEmployees for Acquiring, or in Conjunction with Selling, Goods or Services”Issue No. 96-18 (“EITF 96-18”) related to accounting for these options. Noother options were issued during the six months ended June 30, 2007. As of thetransition date, the fair value of these stock options was estimated to be$0.47 per share. During the six months ended June 30, 2007, the impact onstock-based compensation expense related to a change in our estimatedforfeiture rate related to these options was to decrease expense by $131. Wegranted 205 employee stock options in the six months ended June 30, 2006 whichhad a weighted average fair value estimated to be $6.72 per share. Theestimated values were derived by using the Black-Scholes option pricing modelwith the following respective assumptions:

|                                     | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                          | ** ** | **2007**                                                        | ** ** | **2006** | ** ** |
| Risk-free  interest rate            |       | 4.9                                                             | %          | 4.3 -  4.9 | % |
| Dividend yield                      |       | 0                                                               | %          | 0 | % |
| Weighted average  expected life     |       | 308 days                                                        |       | 3.76 years |   |
| Volatility  factor                  |       | 39.5                                                            | %          | 52.3 - 58.9 | % |
| Weighted average  volatility factor |       | 39.5                                                            | %          | 54.6 | % |

 

Expectedvolatilities are based on historical volatility of our stock. We have adoptedthe guidance of the SEC’s Staff Accounting Bulletin No. 107 that notes ifshare options have “plain vanilla” characteristics, a simplified method ofestimating the expected life of the option may be employed temporarily. Thesimplified method utilizes the average of the vested term and the originalcontract term. We have experienced certain events that indicate that ourlong-term historical experience is no longer valid. As such we adopted thesimplified method. Our short-term historical experience with exercise andpost-vesting employment termination behavior supports this method fordetermining the options’ expected life. When sufficient historical experiencehas been obtained, we will use such experience for future estimations of theexpected life. The expected life represents the period of time that optionsgranted are expected to be outstanding. The risk-free rate is based on the U.S.Treasury rate with a maturity date corresponding to the options’ expected life.

**NOTE4—EARNINGS (LOSS) PER COMMON SHARE**

We have presented “basic”and “diluted” earnings (loss) per common share in the accompanying condensedconsolidated statements of operations in accordance with the provisions ofStatement of Financial Accounting Standards No. 128, “Earnings Per Share” (“SFAS128”). Basic earnings (loss) per common share is calculated by dividing netearnings (loss) by the weighted average number of common shares outstandingduring each period. The calculation of diluted earnings (loss) per common shareis similar to that of basic earnings (loss) per common share, except that thedenominator is increased to include the number of additional common shares thatwould have been outstanding if all potentially dilutive common shares of theCompany were issued during the period if any such issuances would have had adilutive effect.

For the three andsix months ended June 30, 2007, the computation of diluted earnings (loss) percommon share takes into account the effects of the weighted average number ofcommon shares outstanding of the assumed exercise of the outstanding stockoptions and the vesting of all restricted stock adjusted for the application ofthe treasury stock method. For the three and six months ended June 30, 2006,the computation of diluted earnings (loss) per common share does not take intoaccount the effects of these items because the effects of their assumedexercise would be anti-dilutive. The greatest number of shares potentiallyissuable by the Company at June 30, 2007 and 2006 upon the exercise of stockoptions and upon the vesting of 

9

----

restricted stock or performance units in eitherquarter during the respective six month period that were not included in thecomputation of net earnings (loss) per common share because they wereanti-dilutive totaled 3,991 and 3,437, respectively.

The followingtable summarizes the reconciliations of the numerators and denominators of thebasic and diluted per common share computations for of the three and six monthsended June 30, 2007 and 2006:
| ** **                                                                                                                                                         | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                                                                                                         | ** ** | **2007**                                                          | ** ** | **2006**                                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Numerators:                                                                                                                                                        |       |                                                              |       |                                                            |       |   |   |   |   |
| Income (loss) from continuing operations—basic                                                                                                                |       | $                                                                 | 351        |                                                            | $          | (17 | ) | $ | 232 |   | $ | (184 | ) |
|                                                                                                                                                               |       |                                                              |       |                                                            |       |   |   |   |   |
| Denominators:                                                                                                                                                      |       |                                                              |       |                                                            |       |   |   |   |   |
| Weighted average common shares outstanding—basic                                                                                                              |       | 25,495                                                            |       | 24,763                                                          |       | 25,384 |   | 24,613 |   |
| 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 |       | 747                                                               |       | —                                                          |       | 374 |   | — |   |
| Diluted weighted  average common shares outstanding                                                                                                                |       | 26,242                                                            |       | 24,763                                                          |       | 25,758 |   | 24,613 |   |
|                                                                                                                                                                    |            |                                                                   |            |                                                                 |            |  |  |  |  |  |  |  |  |

 

**NOTE5—EQUITY TRANSACTIONS**

**Issuancesof Common Stock by the Company**

For the three and sixmonths ended June 30, 2007 and 2006 we received cash from the exercise ofoptions as follows:

|                              | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                   | ** ** | **2007**                                                          | ** ** | **2006**                                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Number of  options exercised |       | 30                                                                |       | 319                                                             |       | 362 |   | 492 |   |
| Cash proceeds                |       | $                                                                 | 152        |                                                            | $          | 418 |   | $ | 598 |   | $ | 601 |   |
|                              |            |                                                                   |            |                                                                 |            |  |  |  |  |  |  |  |  |

 

During the six monthsended June 30, 2007, we issued employees 270 shares of restricted stock while34 shares of restricted stock have been canceled due to employee turnover. Wealso issued 3 shares to a service provider in the six months ended June 30,2007 which vest monthly over a twelve month period. During the three monthsended September 30, 2006, we issued 56 shares to service providers. The rightsto 6 shares issued to service providers vest annually over a five-year period.The rights to 50 shares vest upon specific performance related to subscriber growth.

Under SFAS 123R, thefair value of the shares and options, adjusted for a forfeiture assumption, atthe respective dates of grant (which represents deferred compensation notrequired to be recorded initially in the consolidated balance sheet) will beamortized to share-based compensation expense as the rights to the restrictedstock and options vest with an equivalent amount added to additional paid-incapital. Changes to forfeiture assumptions are based on actual experience andare recorded in accordance with the rules related to accounting for changes inestimates. For the service providers, however, the future charge will berecognized in accordance with EITF 96-18 and will be retroactively adjusted toreflect the fair market value at the end of each reporting period until theshares vest when the related charge will be adjusted for the final time.Previously we had estimated that 35 of the performance related service providerrestricted shares would vest by the end of 2007. We revise this estimate at theend of each reporting period and as of June 30, 2007 we believe that 30 shareswill vest by the end of 2007. We do not expect any of these shares willpotentially vest beyond 2007. Based on the closing price on March 30, 2007 of$10.22, (the last trading day of the quarter then ended) this change inestimated number of shares reduced stock-based compensation expense in thethree months ended June 30, 2007 by $49.

Based on the closingmarket price on June 29, 2007 (the last trading day of the quarter) of $11.27per share, the fair value of the 59 service provider shares of restricted stockwas $665. The increase of stock-based compensation expense in the three monthsended June 30, 2007 that resulted because of a higher period end stock pricefor these shares was $37. The combined effect of the two changes in estimate onearnings (loss) per common share was to decrease the loss by an immaterialamount. Assuming the closing market price as of June 29, 2007 does notchange over the remaining vesting period, we would have $128 of expense yet tobe recognized.

10

----

**StockOptions**

Descriptions ofOutdoor Channel Holdings’ stock option plans are included in Note 11 of theCompany’s Annual Report on Form 10-K for the year ended December 31, 2006. Asummary of the status of the options granted under Outdoor Channel Holdings’stock option plans and outside of those plans as of June 30, 2007 and 2006 andthe changes in options outstanding during the six months then ended ispresented in the table that follows:

|                                       | ** ** | **As of June 30,** | ** ** |
|---------------------------------------|------------|-----------------------------------|------------|
| ** **                            | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| ** **                            | ** ** | **Shares  (in  thousands)**       | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares  (in  thousands)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Outstanding at  beginning of period   |       | 3,272                             |       | $ | 9.48 |   | 3,564 |   | $ | 7.31 |   |
| Options granted                       |       | —                            |       | — |   | 205 |   | 12.84 |   |
| Options  exercised                    |       | (362                              | )          | 1.65 |   | (492 | ) | 1.22 |   |
| Options  forfeited or expired         |       | (160                              | )          | 13.48 |   | (14 | ) | 11.85 |   |
| Outstanding at  end of period         |       | 2,750                             |       | $ | 10.28 |   | 3,263 |   | $ | 8.56 |   |
| Options exercisable at  end of period |       | 2,056                             |       | $ | 9.25 |   | 2,185 |   | $ | 6.20 |   |

 

Certain additionalinformation regarding our stock options follows:
| ** **                                                                                                                                         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                                         | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Option price  range at June 30,                                                                                                               |       | $0.92 -   $15.75                          |       | $0.92 - $15.75                          |       | $0.92 - $15.75 |   | $0.92 - $15.75 |   |
| Weighted-average  grant-date fair value of 205 options granted during 2006, with an exercise  price equal to the market price at the date of grant |       | $                                                   | —     |                                              | $          | 6.35 |   | $ | — |   | $ | 6.72 |   |
| Weighted-average  remaining contractual life of options exercisable at June 30,                                                               |       | 3.0 years                                           |       | 3.0 years                                         |       | 3.0 years |   | 3.0 years |   |
| Aggregate  intrinsic value of options outstanding at June 30,                                                                                 |       | $                                                   | 6,333      |                                              | $          | 16,733 |   | $ | 6,333 |   | $ | 16,733 |   |
| Aggregate  intrinsic value of options exercisable at June 30,                                                                                 |       | $                                                   | 6,322      |                                              | $          | 14,617 |   | $ | 6,322 |   | $ | 14,617 |   |
| Aggregate intrinsic  value of options exercised during period                                                                                      |       | $                                                   | 153        |                                              | $          | 3,392 |   | $ | 3,357 |   | $ | 5,147 |   |

 

**RestrictedStock**

A summary of the statusof Outdoor Channel Holdings’ nonvested restricted shares as of June 30,2007 and 2006 and the changes in restricted shares outstanding during the sixmonths then ended is presented in the table that follows:

|                                   | ** ** | **As of June 30,** | ** ** |
|-----------------------------------|------------|-----------------------------------|------------|
| ** **                        | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| ** **                        | ** ** | **Shares  (in  thousands)**       | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** | **Shares  (in  thousands)** | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
| Nonvested at  beginning of period |       | 364                               |       | $ | 12.42 |   | 127 |   | $ | 14.43 |   |
| Granted                           |       | 273                               |       | 10.43 |   | 86 |   | 12.47 |   |
| Vested                            |       | (48                               | )          | 12.67 |   | (12 | ) | 14.91 |   |
| Forfeited or  expired             |       | (34                               | )          | 7.84 |   | (13 | ) | 14.67 |   |
| Nonvested at end of  period       |       | 555                               |       | $ | 11.35 |   | 188 |   | $ | 13.50 |   |

 

11

----

**Expense to be Recognized**

Expense associatedwith our stock-based compensation plans yet to be recognized as compensationexpense over the employees’ remaining requisite service periods as ofJune 30, 2007 and 2006 are as follows:

|                    | ** ** | **As of June 30,**            | ** ** |
|--------------------|------------|----------------------------------------------|------------|
| ** **         | ** ** | **2007**                                     | ** ** | **2006** | ** ** |
| ** **         | ** ** | **Expense Yet  to be  Recognized** | ** ** | **Weighted Average  Remaining  Requisite Service  Periods** | ** ** | **Expense Yet  to be  Recognized** | ** ** | **Weighted Average  Remaining  Requisite Service  Periods** | ** ** |
| Stock options      |       | $                                            | 2,085      |   | 1.4 |   | $ | 6,495 |   | 1.9 |   |
| Restricted stock   |       | 4,821                                        |       | 1.8 |   | 1,990 |   | 2.0 |   |
| Performance  units |       | 3,306                                        |       | 0.5 |   | — |   | — |   |
|               |       |                                         |       |   |   |   |   |   |   |
| Total              |       | $                                            | 10,212     |   | 1.3 |   | $ | 8,485 |   | 1.9 |   |

 

**NOTE6—RELATED PARTY TRANSACTIONS**

We lease ouradministrative facilities from Musk Ox Properties, LP, which in turn is ownedby Messrs. Perry T. Massie and Thomas H. Massie, principal stockholders,directors and officers of the Company. The lease agreement has a five-yearterm, expiring on December 31, 2010, with 2 five-year renewal options at ourdiscretion. Monthly rent payments under this lease agreement were $29 with a 3%per year escalator clause. On April 24, 2007, in conjunction with the sale ofthe Membership Division, we have amended the lease with Musk Ox Properties, LP.The monthly rent is reduced to $17 per month through the end of 2007 with a 3%escalator per annum thereafter. Rent expense paid to Musk Ox Properties, LPtotaled approximately $59 and $87 in the three months ended June 30, 2007 and2006, respectively, and $149 and $174 in the six months ended June 30, 2007 and2006, respectively.

As discussed inNote 7—Discontinued Operations, on April 24, 2007, we consummated the sale ofour Membership Division to Mr. Thomas H. Massie, a principal stockholder anddirector of Outdoor Channel Holdings for a purchase price of $3,589 which isthe combined carrying value of the businesses. Included in the carrying valuewas $389 of net intercompany receivable which was a net payable by us to theMembership Division upon closing. We paid the balance of the intercompanyaccount to the Membership Division in April 2007. As part of the transition ofthe business’ operations, we agreed to provide accounting, human resources andinformation technology services for the Membership Division in exchange for $20in each month of May, June and July. This amount is considered to be areimbursement for expenses incurred (principally compensation of our staffmembers involved). We did not contemplate a mark-up over actual cost and thuswe have accounted for the $40 received in the three months ended June 30, 2007as a reduction of selling, general and administrative expenses. In addition, wehave recognized advertising revenue from the Membership Division amounting to$30 and $112 for the three months ended June 30, 2007 and 2006, respectively,and $141 and $223 for the six months ended June 30, 2007 and 2006,respectively. As of June 30, 2007, the Membership Division owes us $50 which wehave recorded in accounts receivable.

**NOTE7—DISCONTINUED OPERATIONS**

In April 2007 ourBoard of Directors, after considering reports of consultants and on-goinganalysis of management, decided the operations of the Membership Division,comprised of GPAA, LLC and LDMA-AU, Inc., was no longer strategic to the corebusiness of Outdoor Channel Holdings. We have applied the provisions of Statementof Financial Accounting Standards No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets” (“SFAS 144”) to the Membership Division’s assetsand liabilities classifying them as assets and liabilities of discontinuedoperations. The sale of the Membership Division was for its net asset value andaccordingly we have not adjusted its carrying value. The sale was consummatedon April 24, 2007.

Prior to June 30,2007, we had reported separate segment information in our filings for the operationsof TOC and Membership Division in the same format as reviewed by our ChiefOperating Decision Maker. Due to the discontinued operations of the MembershipDivision, we no longer are required to present segment information.

12

----

The operatingresults for the Membership Division have been separately classified andreported as discontinued operations in our condensed consolidated statement ofoperations as follows:

|                                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                              | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Membership  Division revenue                            |       | $                                               | 363        |                                          | $          | 1,034 |   | $ | 1,632 |   | $ | 2,329 |   |
| Income (loss)  from operations                          |       | 15                                              |       | (273                                          | )          | 73 |   | (238 | ) |
| Income (loss) from  discontinued operations, net of tax |       | $                                               | (7         | )                                             | $          | 319 |   | $ | 28 |   | $ | 329 |   |

 

A summary of thecomponents of assets and liabilities of discontinued operations on ourcondensed consolidated balance sheet as of December 31, 2006 is as follows:

|                                              | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|
| Assets held for  sale:                       |       |                        |       |
| Current assets                               |       | $                           | 1,344      |   |
| Property, plant and equipment, net           |       | 3,352                       |       |
| Deposits and other assets                    |       | 38                          |       |
| Total assets of discontinued operations      |       | $                           | 4,734      |   |
|                                         |       |                        |       |
| Liabilities of  discontinued operations:     |       |                        |       |
| Current liabilities                          |       | $                           | 463        |   |
| Deferred revenue, net of current portion     |       | 1,362                       |       |
| Total liabilities of discontinued operations |       | 1,825                       |       |
|                                         |       |                        |       |
| Net assets of  discontinued operations       |       | $                           | 2,909      |   |

 

**NOTE8—INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES**

Our short-terminvestments in marketable debt and equity securities are classified asavailable-for-sale and are recorded at fair value at the end of each period.Gross realized gains and losses on sales of these securities during the threeand six months ended June 30, 2007 and 2006 and all amounts related tosuch investments prior to the three and six months ended June 30, 2007 andthe year ended December 31, 2006 were not material. Included in investments inavailable-for-sale securities at June 30, 2007 and December 31, 2006 areinvestments in auction rate securities with short-term interest rates thatgenerally can be reset every 28 days. The auction rate securities havelong-term maturity dates and provide us with enhanced yields. However, webelieve we have the ability to quickly liquidate them at their original cost,although there is no guaranty, and, accordingly, they are carried at cost,which approximates fair value, and classified as current assets. We hadunrealized net holding gains on marketable equity securities at June 30,2007 and December 31, 2006 of $14 and $48, respectively, that are in “accumulatedother comprehensive income”.

The investment inavailable-for-sale securities is as follows:

|                                      | ** ** | **As of  June 30, 2007** | ** ** | **As of  December 31, 2006** | ** ** |
|--------------------------------------|------------|-----------------------------------------|------------|---------------------------------------------|------------|
| Auction rate  securities             |       | $                                       | 46,910     |                                        | $          | 41,250 |   |
| Equities                             |       | 837                                     |       | 894                                         |       |
| Total  available-for-sale securities |       | $                                       | 47,747     |                                        | $          | 42,144 |   |

 

We consider theyields we recognize from auction rate securities and from cash held in ourmoney market accounts to be interest income. Yields we recognize from ourinvestments in equity securities we consider to be dividend income. Both arerecorded in other income for the three and six months ended June 30, 2007 and2006 as follow:

|                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **          | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest income     |       | $                                               | 795        |                                          | $          | 625 |   | $ | 1,479 |   | $ | 1,232 |   |
| Dividend income     |       | 17                                              |       | 18                                            |       | 36 |   | 34 |   |
| Total other  income |       | $                                               | 812        |                                          | $          | 643 |   | $ | 1,515 |   | $ | 1,266 |   |

 

13

----

**NOTE9—INCOME TAX PROVISION (BENEFIT)**

The income taxprovision (benefit) reflected in the accompanying unaudited condensedconsolidated statement of operations for the three and six months endedJune 30, 2007 and 2006 is different than that computed based on theapplicable statutory Federal income tax rate of 34%. Interim tax provisions andbenefits are determined using an estimate of the annual effective tax rate. Asof June 30, 2007, our estimated annual tax rate for the year ending December31, 2007 was approximately 23%, which was below the expected statutory rateprimarily as a result of projection of a benefit to be realized by year end andbecause of permanent differences between our projected income (loss) beforetaxes for financial reporting purposes and our projected income (loss) for taxreporting purposes. That portion of the current year SFAS 123R compensationexpense relating to qualified incentive stock options, or ISOs, is recognizedfor financial statement purposes but is generally not deductible for taxpurposes and thus is treated as a permanent difference between the two. For thethree and six months ended June 30, 2007 we recognized a charge of $54 and$122, respectively, and for the three and six months ended June 30, 2006 werecognized a charge of $151 and $343, respectively, related to ISOs under SFAS123R compensation expense.

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accountingfor Uncertainty of Income Taxes—an interpretation of FAS No. 109,” (“FIN 48”)which addresses the uncertainty of income taxes recognized in accordance withStatement of Financial Accounting Standards No. 109 “Accounting for IncomeTaxes”. FIN 48 prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 is effective for fiscal years thatbegin after December 15, 2006. We have adopted FIN 48 as of January 1, 2007, asrequired. We file income tax returns in the United States and various state andlocal tax jurisdictions. We have net operating loss and credit carryforwardsthat will be subject to examination beyond the year in which they areultimately utilized. We believe any future potential adjustments of thesecarryforwards will be immaterial to our financial statements. Our policy is torecord interest and penalties on uncertain tax positions as income tax expense.As of June 30, 2007, we believe that there are no significant uncertaintax positions, and no amounts have been recorded for interest and penalties. Wedo not anticipate any events that would require us to record a liabilityrelated to any uncertain income tax position in 2007 as prescribed by FIN 48.

**NOTE10—DEFERRED TAX ASSET**

We have reviewed thefacts and circumstances regarding the recognition of deferred tax asset relatedto certain options to acquire common shares of The Outdoor Channel, Inc. thatwere outstanding on September 8, 2004 when we completed its acquisition.Originally all of these options were treated as non-qualified stock options andafter charging to compensation expense the difference between the then currentfair market value of the underlying stock and the exercise price of the stockoption, we recognized a deferred tax asset for the tax effect of the recognizedcompensation expense. After consideration of the facts and circumstances, wehave concluded that as of December 31, 2004 options to acquire 751 shares ofcommon stock did not give rise to a deferred tax asset as they werecharacterized as incentive stock options which are not deductible for incometaxes unless certain events such as disqualifying dispositions occur in thefuture.

The accounting treatmentresulting from this reassessment for our current reporting periods only affectcarrying values in our balance sheets and we do not believe that the effects ofthese adjustments are sufficiently material to require us to restate any of ourpreviously filed financial statements because they do not materially impactthose financial statements quantitatively or qualitatively. We believe thisapproach is consistent with the principles of Staff Accounting Bulletin No.108, “Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements”. The balances in ourfinancial statements, as further outlined below, have been adjustedaccordingly.

THE EFFECT ON THECONSOLIDATED BALANCE SHEETS

As a result of theaccumulated impact of the corrected accounting treatment, total assets,additional paid-in capital, accumulated deficit and total stockholders’ equityas of December 31, 2006, have been restated as follows:

|                                  | ** ** | **As Previously  Reported** | ** ** | **As Restated** | ** ** | **Change** | ** ** |
|----------------------------------|------------|----------------------------------|------------|----------------------|------------|------------|------------|
| Total assets                     |       | $                                | 147,957    |                 | $          | 145,121    |       | $ | (2,836 | ) |
| Additional  paid-in capital      |       | 164,589                          |       | 165,779              |       | 1,190      |       |
| Accumulated  deficit             |       | (22,689                          | )          | (26,715              | )          | (4,026     | )          |
| Total stockholders’  equity |       | 141,974                          |       | 139,138              |       | (2,836     | )          |
|                                  |            |                                  |            |                      |            |            |            |  |  |  |

 

14

----

THE EFFECT ON THECONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

As a result of therestatement, the balance of accumulated deficit as of January 1, 2007 wasdecreased by $4,026 to a deficit of $26,715 from a deficit of $22,689 andadditional paid-in capital was increased by $1,190 to $165,779 from $164,589.

THE EFFECT ON THECONSOLIDATED STATEMENTS OF OPERATIONS

The consolidatedstatements of operations for the three and six months ended June 30, 2007 and2006 were not affected by the restatement.

* * *

15

----

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

**SafeHarbor 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 ofSection 27A of the Securities Act of 1933, as amended (the “Securities Act”),and Section 21E of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), 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) anticipated expenses including advertising, programming, personnel andothers; (3) Nielsen Media Research, which we refer to as Nielsen,estimates regarding total households and cable and satellite homes subscribingto and viewers (ratings) of The Outdoor Channel; and (4) other matters. Weundertake no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.

These statementsinvolve significant risks and uncertainties and are qualified by importantfactors that could cause our actual results to differ materially from thosereflected by the forward-looking statements. Such factors include but are notlimited to risks and uncertainties which are included in Part II, Item 1A RiskFactors below and other risks and uncertainties discussed elsewhere in thisreport. In assessing forward-looking statements contained herein, readers areurged to read carefully all cautionary statements contained in thisForm 10-Q and in our other filings with the Securities and ExchangeCommission. For these forward-looking statements, we claim the protection ofthe safe harbor for forward-looking statements in Section 27A of theSecurities Act and Section 21E of the Exchange Act.

**General**

Through ourindirect wholly owned subsidiary, The Outdoor Channel, Inc. or TOC, we ownand operate 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. TOC revenues include (1) advertising fees fromadvertisements aired on Outdoor Channel and fees paid by third-partyprogrammers to purchase advertising time in connection with the airing of theirprograms on Outdoor Channel; and (2) subscriber fees paid by cable andsatellite service providers that air Outdoor Channel. Outdoor Channel Holdingsalso wholly owns 43455 BPD, LLC that owns the building housing our broadcastfacility.

Until April 2007,we also owned and operated businesses we refer to as the “Membership Division”.These 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 & TreasureHunters in the Great Outdoors* magazine. In addition, the MembershipDivision owns a 2,300 acre property near Nome, Alaska used to provideoutings for a fee to the members of Lost Dutchman’s and GPAA. Membership feesare earned from members in both Lost Dutchman’s and GPAA and other incomeincluding magazine sales, products and services related to gold prospecting,gold expositions, expeditions and outings.

We consummated thesale of the Membership Division on April 24, 2007 (see Note 7—DiscontinuedOperations). We have disclosed the Membership Division as a discontinuedoperation in accordance with the provisions of Statement of FinancialAccounting Standards No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets” (“SFAS 144”) SFAS 144. Expenses previously allocated to theMembership Division which will continue after its disposition have beenreallocated to TOC or Corporate as appropriate.

**Recent AccountingDevelopments**

InSeptember 2006, the FASB issued SFAS No. 157 (“SFAS 157”), “Fair ValueMeasurements”*.* This statement establishes aconsistent framework for measuring fair value and expands disclosures on fairvalue measurements. SFAS 157 is effective for fiscal years beginning afterNovember 15, 2007. We have not determined the impact, if any, the adoption ofthis statement will have on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair ValueOption for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 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 159 iseffective for fiscal years beginning after November 15, 2007. We have notdetermined the impact, if any, the adoption of this statement will have on ourconsolidated financial statements.

16

----

The FASB hadissued certain other accounting pronouncements as of June 30, 2007 thatwill become effective in subsequent periods; however, our management does notbelieve that any of those pronouncements would have significantly affected ourfinancial accounting measurements or disclosures had they been in effect duringthe six months ended June 30, 2007.

**Comparisonof Operating Results for the Three Months Ended June 30, 2007 and June 30, 2006**

The followingtable discloses certain financial information for the periods presented,expressed in terms of dollars, dollar change, percentage change and as apercent of total revenue (all dollar amounts are in thousands):
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** | **% of Total Revenue** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|---------------------------------------|------------|
| ** **                                                    | ** ** | **2007**   | ** ** | **2006**   | ** ** | **$**      | ** ** | **%**                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues:                                                     |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Advertising                                                   |       | $          | 6,753      |       | $          | 5,663      |       | $                                     | 1,090      |   | 19.2 | % | 58.6 | % | 56.6 | % |
| Subscriber fees                                               |       | 4,775      |       | 4,341      |       | 434        |       | 10.0                                  |       | 41.4 |   | 43.4 |   |
| Total revenues                                                |       | 11,528     |       | 10,004     |       | 1,524      |       | 15.2                                  |       | 100.0 |   | 100.0 |   |
|                                                          |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Cost of services:                                             |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Programming                                                   |       | 1,633      |       | 2,180      |       | (547       | )          | (25.1                                 | )          | 14.2 |   | 21.8 |   |
| Satellite transmission fees                                   |       | 636        |       | 614        |       | 22         |       | 3.6                                   |       | 5.5 |   | 6.1 |   |
| Production and operations                                     |       | 897        |       | 947        |       | (50        | )          | (5.3                                  | )          | 7.8 |   | 9.5 |   |
| Other direct costs                                            |       | 17         |       | 42         |       | (25        | )          | (59.5                                 | )          | 0.1 |   | 0.4 |   |
| Total cost of services                                        |       | 3,183      |       | 3,783      |       | (600       | )          | (15.9                                 | )          | 27.6 |   | 37.8 |   |
|                                                          |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Other expenses:                                               |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Advertising                                                   |       | 1,766      |       | 1,555      |       | 211        |       | 13.6                                  |       | 15.3 |   | 15.5 |   |
| Selling, general and administrative                           |       | 6,272      |       | 4,451      |       | 1,821      |       | 40.9                                  |       | 54.4 |   | 44.5 |   |
| Depreciation and amortization                                 |       | 662        |       | 827        |       | (165       | )          | (20.0                                 | )          | 5.7 |   | 8.3 |   |
| Total other expenses                                          |       | 8,700      |       | 6,833      |       | 1,867      |       | 27.3                                  |       | 75.4 |   | 68.3 |   |
|                                                          |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Loss from  operations                                         |       | (355       | )          | (612       | )          | 257        |       | (42.0                                 | )          | (3.0 | ) | (6.1 | ) |
|                                                          |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Interest expense                                              |       | —     |       | (76        | )          | 76         |       | 100.0                                 |       | — |   | (0.8 | ) |
|                                                          |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Other income                                                  |       | 812        |       | 643        |       | 169        |       | 26.3                                  |       | 7.0 |   | 6.4 |   |
|                                                          |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Income (loss)  from continuing operations before income taxes |       | 457        |       | (45        | )          | 502        |       | NM                                    |       | 4.0 |   | (0.5 | ) |
|                                                          |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Income tax  provision (benefit)                               |       | 106        |       | (28        | )          | 134        |       | (478.6                                | )          | 0.9 |   | (0.3 | ) |
|                                                          |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Income (loss)  from continuing operations                     |       | 351        |       | (17        | )          | 368        |       | NM                                    |       | 3.1 |   | (0.2 | ) |
|                                                          |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Income (loss)  from discontinued operations, net of tax       |       | (7         | )          | 319        |       | (326       | )          | (102.2                                | )          | (0.1 | ) | 3.2 |   |
| Net income                                                    |       | $          | 344        |       | $          | 302        |       | $                                     | 42         |   | 13.9 | % | 3.0 | % | 3.0 | % |

----

NM—Not Meaningful

17

----

**Comparisonof Operating Results for the Six Months Ended June 30, 2007 and June 30, 2006**

The followingtable discloses certain financial information for the periods presented,expressed in terms of dollars, dollar change, percentage change and as apercent of total revenue (all dollar amounts are in thousands):
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** | **% of Total Revenue** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|---------------------------------------|------------|
| ** **                                                    | ** ** | **2007**   | ** ** | **2006**   | ** ** | **$**      | ** ** | **%**                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues:                                                     |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Advertising                                                   |       | $          | 12,773     |       | $          | 11,385     |       | $                                     | 1,388      |   | 12.2 | % | 57.3 | % | 56.6 | % |
| Subscriber fees                                               |       | 9,524      |       | 8,724      |       | 800        |       | 9.2                                   |       | 42.7 |   | 43.4 |   |
| Total revenues                                                |       | 22,297     |       | 20,109     |       | 2,188      |       | 10.9                                  |       | 100.0 |   | 100.0 |   |
|                                                          |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Cost of  services:                                            |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Programming                                                   |       | 3,104      |       | 3,721      |       | (617       | )          | (16.6                                 | )          | 13.9 |   | 18.5 |   |
| Satellite transmission fees                                   |       | 1,232      |       | 1,252      |       | (20        | )          | (1.6                                  | )          | 5.5 |   | 6.2 |   |
| Production and operations                                     |       | 2,370      |       | 2,152      |       | 218        |       | 10.1                                  |       | 10.6 |   | 10.7 |   |
| Other direct costs                                            |       | 55         |       | 96         |       | (41        | )          | (42.7                                 | )          | 0.3 |   | 0.5 |   |
| Total cost of services                                        |       | 6,761      |       | 7,221      |       | (460       | )          | (6.4                                  | )          | 30.3 |   | 35.9 |   |
|                                                          |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Other expenses:                                               |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Advertising                                                   |       | 2,480      |       | 3,665      |       | (1,185     | )          | (32.3                                 | )          | 11.1 |   | 18.2 |   |
| Selling, general and administrative                           |       | 12,895     |       | 9,127      |       | 3,768      |       | 41.3                                  |       | 57.8 |   | 45.4 |   |
| Depreciation and amortization                                 |       | 1,374      |       | 1,429      |       | (55        | )          | (3.8                                  | )          | 6.2 |   | 7.1 |   |
| Total other expenses                                          |       | 16,749     |       | 14,221     |       | 2,528      |       | 17.8                                  |       | 75.1 |   | 70.7 |   |
|                                                          |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Loss from  operations                                         |       | (1,213     | )          | (1,333     | )          | 120        |       | (9.0                                  | )          | (5.4 | ) | (6.6 | ) |
|                                                          |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Interest expense                                              |       | —     |       | (153       | )          | 153        |       | (100.0                                | )          | — |   | (0.8 | ) |
|                                                          |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Other income                                                  |       | 1,515      |       | 1,266      |       | 249        |       | 19.7                                  |       | 6.8 |   | 6.3 |   |
|                                                          |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Income (loss)  from continuing operations before income taxes |       | 302        |       | (220       | )          | 522        |       | (237.3                                | )          | 1.4 |   | (1.1 | ) |
|                                                          |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Income tax  provision (benefit)                               |       | 70         |       | (36        | )          | 106        |       | (294.4                                | )          | 0.3 |   | (0.2 | ) |
|                                                          |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Income (loss)  from continuing operations                     |       | 232        |       | (184       | )          | 416        |       | (226.1                                | )          | 1.1 |   | (0.9 | ) |
|                                                          |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Income (loss)  from discontinued operations, net of tax       |       | 28         |       | 329        |       | (301       | )          | (91.5                                 | )          | 0.1 |   | 1.6 |   |
| Net income                                                    |       | $          | 260        |       | $          | 145        |       | $                                     | 115        |   | 79.3 | % | 1.2 | % | 0.7 | % |

 

**Revenues**

Our revenuesinclude revenues from (1) advertising fees; and (2) subscriber fees.Advertising revenue is generated from the sale of advertising time on OutdoorChannel including advertisements shown during a program (also known asshort-form advertising) and infomercials in which the advertisement is theprogram itself (also known as long-form advertising). Advertising revenueis also generated from fees paid by third party programmers that purchaseadvertising time in connection with the airing of their programs on OutdoorChannel.

Total revenues forthe three months ended June 30, 2007 were $11,528,000, an increase of$1,524,000, or 15.2%, compared to revenues of $10,004,000 for the three monthsended June 30, 2006. Total revenues for the six months ended June 30, 2007 were$22,297,000, an increase of $2,188,000, or 10.9%, compared to revenues of$20,109,000 for the six months ended June 30, 2006. The net increases were theresult of changes in several items comprising revenue as discussed below.

Advertising revenue forthe three months ended June 30, 2007 was $6,753,000, an increase of$1,090,000 or 19.2% compared to $5,663,000 for the three months endedJune 30, 2006. Advertising revenue for the six months ended June 30, 

18

----

2007 was $12,773,000, anincrease of $1,388,000 or 12.2% compared to $11,385,000 for the six monthsended June 30, 2006. For June 2007, Nielsen estimated that Outdoor Channelhad 30.0 million viewers compared to 26.6 million for the same period a yearago. The increase in advertising revenue for the three and six months endedJune 30, 2007 principally reflects higher prices paid for advertising timewith some incremental advertising inventory retained by us to sell. Thesefactors contributing to the increase were offset somewhat by less revenuegenerated from third party programming as a slightly higher percentage of ourinventory was retained for our in-house sales. We expect demand for ouradvertising inventory will continue to be strong reflecting our position withinour programming genre and niche.

Nielsen revises itsestimate of the number of subscribers to our channel each month, and for August2007 Nielsen’s estimate was revised to 29.9 million. 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 ofour subscribers and in fact at some point Nielsen might even report additionaldeclines in our subscriber estimate. If that were to happen, we could suffer areduction in advertising revenue.

Subscriber feesfor the three months ended June 30, 2007 were $4,775,000, an increase of$434,000 or 10.0% compared to $4,341,000 for the three months endedJune 30, 2006. Subscriber fees for the six months ended June 30, 2007 were$9,524,000, an increase of $800,000 or 9.2% compared to $8,724,000 for the sixmonths ended June 30, 2006. The increase in subscriber fees for the period was primarilydue to an increased number of paying subscribers both from new affiliates andfrom existing distributors as well as contractual subscriber fee rate increaseswith existing service providers carrying Outdoor Channel.

We are pursuing subscribergrowth utilizing various means including deployment of rate relief for new andexisting subscribers and payment of subscriber acquisition or launch supportfees among other tactics. Such launch support fees are capitalized andamortized over the period that the pay television distributor is required tocarry the newly acquired TOC subscriber. To the extent revenue is associatedwith the incremental subscribers, the amortization is charged to offset therelated revenue. Any excess of launch support amortization over the relatedsubscriber fee revenue is charged to expense. As a result of a combination ofthese tactics, we anticipate subscriber fee revenue, net will decrease over theshort-term future as we deploy this strategy.

**Cost ofServices**

Our cost of servicesconsists primarily of the cost of providing our broadcast signal andprogramming to the distributors for transmission to the consumer. Cost ofservices includes (1) programming costs; (2) satellite transmission fees; (3)production and operations costs; and (4) other direct costs. Total cost ofservices for the three months ended June 30, 2007 was $3,183,000, adecrease of $600,000 or 15.9%, compared to $3,783,000 for the three monthsended June 30, 2006. Total cost of services for the six months ended June30, 2007 was $6,761,000, a decrease of $460,000 or 6.4%, compared to $7,221,000for the six months ended June 30, 2006. As a percentage of revenues, total costof services was 27.6% and 37.8% in the three months ended June 30, 2007 and2006, respectively. As a percentage of revenues, total cost of services was30.3% and 35.9% in the six months ended June 30, 2007 and 2006, respectively.Our level of cost of services reflects the similar levels of service beingprovided during the comparative quarters. The improved rate reflects the impactof price increases noted above while actually reducing programming expense asmore fully discussed below.

Programmingexpenses for the three months ended June 30, 2007 were $1,633,000, a decreaseof $547,000 or 25.1% compared to $2,180,000 for the three months ended June 30,2006. Programming expenses for the six months ended June 30, 2007 were$3,104,000, a decrease of $617,000 or 16.6% compared to $3,721,000 for the sixmonths ended June 30, 2006. The decrease is principally a result of reducingthe number of in-house produced show titles while increasing the repeat ratewithin the schedule of our other in-house shows.

Our policy is tocharge costs of specific show production to programming expense over theexpected airing period beginning when the program first airs. The cost ofprogramming is generally first recorded as prepaid programming costs and isthen charged to programming expense based on the anticipated airing schedule.The anticipated airing schedule has historically been over 2 or 4 quarters thatgenerally did not extend over more than 2 years. For 2007, the anticipatedairing schedule is typically over 2 quarters and generally will not extend morethan one year. As the anticipated airing schedule changes, the timing andamount of the charge to expense is prospectively adjusted accordingly. At thetime we determine a program is unlikely to air or re-air, we charge programmingexpense with the remaining associated cost recorded in prepaid programming. Wedo not make any further expense or asset adjustments if in subsequent periodsdemand brings episodes to air that had previously been fully expensed.Programming expenses are expected to stabilize over the near term. As notedabove, we have implemented a new programming strategy which will include moreairings per show including a greater number of repeat episodes within thequarter. As our programming strategy evolves, we will reconsider theappropriate 

19

----

timing of thecharge to expense of our programming costs.

Satellitetransmission fees for the three months ended June 30, 2007 were $636,000, anincrease of $22,000, or 3.6%, compared to $614,000 for the three months endedJune 30, 2006. Satellite transmission fees for the six months ended June 30,2007 were $1,232,000, a decrease of $20,000, or 1.6%, compared to $1,252,000for the six months ended June 30, 2006. We are in negotiations with oursatellite provider to be moved to an alternate satellite in the near future,using less bandwidth for our signal and at reduced rates than in the past.Final negotiations have not been completed. It is possible that our existingcontract will be terminated early resulting in the write-off of deferred  satellite rent obligations or if the terms sodictate, an amendment to the recognition of this obligation in our incomestatement. Since the final terms of the new agreement have not been recorded,the final accounting treatment has yet to be determined. In any event, weexpect to incur lower satellite rent soon.

Production and operationscosts for the three months ended June 30, 2007 were $897,000, a decrease of$50,000, or 5.3%, compared to $947,000 for the three months ended June 30,2006. Production and operations costs for the six months ended June 30, 2007were $2,370,000, an increase of $218,000, or 10.1%, compared to $2,152,000 forthe six months ended June 30, 2006. The increase in costs principally relatesto an annual programming event that occurred in the first quarter and costsrelated to our new broadcast facility.

Other direct costs forthe three months ended June 30, 2007 were $17,000, a decrease of $25,000, or59.5%, compared to $42,000 for the three months ended June 30, 2006. Otherdirect costs for the six months ended June 30, 2007 were $55,000, a decrease of$41,000, or 42.7%, compared to $96,000 for the six months ended June 30, 2006.The decrease principally relates to our decision to stop printing a magazinestyle programming guide. We anticipate other direct costs will increase over theforeseeable future. Such increases are expected to result from the amortizationof subscriber acquisition fees, also referred to as launch support fees, whichmight be in the form of cross channel advertising in excess of the relatedsubscriber revenue.

**OtherExpenses**

Other expenses consist ofthe cost of (1) advertising; (2) selling, general and administrativeexpenses; and (3) depreciation and amortization.

Total otherexpenses for the three months ended June 30, 2007 were $8,700,000, an increaseof $1,867,000 or 27.3%, compared to $6,833,000 for the three months ended June30, 2006. Total other expenses for the six months ended June 30, 2007 were$16,749,000, an increase of $2,528,000 or 17.8%, compared to $14,221,000 forthe six months ended June 30, 2006. As a percentage of revenues, total expenseswere 75.4% and 68.3% in the three months ended June 30, 2007 and 2006,respectively. As a percentage of revenues, total other expenses were 75.1% and70.7% in the six months ended June 30, 2007 and 2006, respectively. Theincrease in other expenses was due to several factors including $3,306,000 fromthe recognized expense related to performance units granted to our new CEO inthe fourth quarter of 2006, additional depreciation expense resulting from ourbroadcast facility which was placed into service effective April 1, 2006,increased accounting fees incurred in the first quarter of 2007 related to aheavier financial reporting effort than normal and increased professional feesrelated to consultants hired to help us execute our business plan as well ashelping us assess our Membership Division segment. Offsetting some of theaggregate increase is less spending on advertising costs as more fullydescribed below.

Advertisingexpenses for the three months ended June 30, 2007 were $1,766,000, an increaseof $211,000 or 13.6% compared to $1,555,000 for the three months ended June 30,2006. Advertising expenses for the six months ended June 30, 2007 were$2,480,000, a decrease of $1,185,000 or 32.3% compared to $3,665,000 for thesix months ended June 30, 2006. We reduced our spending on advertising in thefirst half of 2007 related to our print media campaigns and our race programsponsorship. We have terminated our sponsorship of a NASCAR team, believing theexpenditure will be more effectively deployed otherwise. Further, due toplanned re-branding initiative, we have delayed other tactics to fully benefitfrom our new logo and programming initiatives. We believe that our advertisingexpenses will substantially increase over the short-term future as we continueto deploy tactics to increase and maintain our subscriber base and the numberof viewers watching our programming.

Selling, generaland administrative expenses for the three months ended June 30, 2007 were $6,272,000,an increase of $1,821,000 or 40.9% compared to $4,451,000 for the three monthsended June 30, 2006. Selling, general and administrative expenses for the sixmonths ended June 30, 2007 were $12,895,000, an increase of $3,768,000 or 41.3%compared to $9,127,000 for the six months ended June 30, 2006. As a percentageof revenues, selling, general and administrative expenses were 54.4% and 44.5%in the three months ended June 30, 2007 and 2006, respectively. As a percentageof revenues, selling, general and administrative expenses were 57.8% and 45.4%in the six months ended June 30, 2007 and 2006, respectively. We grantedour new CEO two traunches of performance units of 400,000 shares each whichvest upon our stock price reaching stipulated levels. We have calculated theirfair value using a lattice model. The first traunch has an estimated value of$4,634,000 and has an expected service period of 0.6 years. In the six monthsended June 30, 2007, we recognized $1,490,000 related to this grant. The secondgrant of 400,000 performance units was calculated to have a fair value of 

20

----

$4,474,000 and anexpected service period of 1.1 years.  Inthe six months ended June 30, 2007, we recognized $1,816,000 of compensationexpense related to this grant. The remainder of the increase in selling,general and administrative fees related primarily to consulting fees pertainingto assistance in the execution of our strategic plan, accounting fees for theaudit of our evaluation of the effectiveness of our internal control overfinancial reporting in 2007 related to the 2006 fiscal year and related toincreased filing requirements in 2007 and to other operating costs.

We anticipate thatselling, general and administrative costs will continue to increase over theforeseeable future. Such increases will be reflected in marketing, advertisingand promotion expenses as we continue to work to gain increased distribution ofour channel, as well as from increases in other corporate expenses. Weanticipate we will incur compensation costs in the amount of $6,612,000 in theyear ending December 31, 2007 related to the performance units granted to ournew CEO. In addition, we are adding to our support staff across all departmentsto support our initiatives in subscriber growth and in other areas such asaccounting and finance.

Depreciation andamortization for the three months ended June 30, 2007 were $662,000, a decreaseof $165,000 or 20.0% compared to $827,000 for the three months ended June 30,2006. Depreciation and amortization for the six months ended June 30, 2007 were$1,374,000, a decrease of $55,000 or 3.8% compared to $1,429,000 for the sixmonths ended June 30, 2006. In the third quarter of 2006, we recognized theimpairment of our MSO Relationship intangible asset. Accordingly, theamortization of the asset of $248,000 in the six months ended June 30, 2006 didnot occur in the six months ended June 30, 2007.

**Lossfrom Operations**

Loss fromoperations for the three months ended June 30, 2007 was $355,000, a change of$257,000 compared to $612,000 for the three months ended June 30, 2006. Lossfrom operations for the six months ended June 30, 2007 was $1,213,000, a changeof $120,000 compared to $1,333,000 for the six months ended June 30, 2006. Asdiscussed above, the improvement in our loss from operations is driven byincreased prices we are realizing for our advertising inventory, growth in oursubscriber base, lower advertising costs as we delayed initiatives tocorrespond with other tactics, lower programming cost as we re-define thenumber of episodes repeated during the quarter all offset by increasedstock-based compensation, professional fees and other charges. As we continueto strive to grow our subscriber base which involves increased advertisingexpenditures, possible subscriber rate relief to our carriage partners and theongoing and planned payment of launch or advertising support, we will continueto incur increased expenses such as broadband, marketing and advertising thatare unlikely to be immediately offset by revenues. As a result, we anticipateour operating margins will be negatively impacted for the short-term futureuntil scale is achieved to reverse the trend. There can be no assurance thatthese strategies will be successful.

**InterestExpense**

Interest expensefor the three months ended June 30, 2006 was $76,000. We did not incur interestin the three months ended June 30, 2007. Interest expense for the six monthsended June 30, 2006 was $153,000. We did not incur interest in the six monthsended June 30, 2007. This is attributable to having obtained two term loans inNovember 2005 with original aggregate principal amount of $4,950,000 witheffective fixed interest rates of 6.59% and 6.35% which we repaid in October2006. We do not expect to incur interest expense in the foreseeable future.

**OtherIncome**

Other income forthe three months ended June 30, 2007 was $812,000, an increase of $169,000compared to $643,000 for the three months ended June 30, 2006. Other income forthe six months ended June 30, 2007 was $1,515,000, an increase of $249,000compared to $1,266,000 for the six months ended June 30, 2006. This improvementwas primarily due to increased dividends and interest earned on our increasedaverage balances of our investment in available-for-sale securities and cashand cash equivalent balances.

**Income(Loss) from Continuing Operations Before Income Taxes**

Income (loss) fromcontinuing operations before income taxes as a percentage of revenues was 4.0%for the three months ended June 30, 2007 compared to (0.5%) for the threemonths ended June 30, 2006. Income (loss) from continuing operations beforeincome taxes as a percentage of revenues was 1.4% for the six months ended June30, 2007 compared to (1.1%) for the six months ended June 30, 2006.

**IncomeTax Provision (Benefit)**

Income taxprovision (benefit) for the three months ended June 30, 2007 was $106,000, achange of $134,000 as compared to ($28,000) for the three months ended June 30,2006. Income tax provision (benefit) for the six months ended June 30, 2007 was$70,000, a change of $106,000 as compared to ($36,000) for the six months endedJune 30, 2006. The change was 

21

----

principally due toour recognizing a profit in the three and six months ended June 30, 2007 ascompared to a loss for the three and six months ended June 30, 2006. Interimtax provisions and benefits are determined using an estimate of the annualeffective tax rate. As of June 30, 2007, our estimated annual tax rate for theyear ending December 31, 2007 was approximately 23%, which was below theexpected statutory rate primarily as a result of projection of a benefit to berealized by year end and because of permanent differences between our projectedincome (loss) before taxes for financial reporting purposes and our projectedincome (loss) for tax reporting purposes. Many of our options are qualifiedincentive stock options or ISOs. That portion of the current year SFAS 123Rcompensation expense relating to ISOs is recognized for financial statementpurposes but is generally not deductible for tax purposes and thus is treatedas a permanent difference between the two. Because of this, and along with theeffects of certain other income tax adjustments, our effective tax rate for thethree months ended June 30, 2007 was 23.1% compared to 62.2% for the threemonths ended June 30, 2006. For the six months ended June 30, 2007 and 2006,our effective income tax rate was 23.1% and 16.1%, respectively.

**Income(Loss) from Continuing Operations**

Income from continuing operations for the three months ended June30, 2007 was $351,000, a change of$368,000 compared to a loss of $17,000 for the three months ended June30, 2006. Income from continuingoperations for the six months ended June 30, 2007 was $232,000, a change of $416,000 compared to a loss of $184,000for the six months ended June 30,2006. The decrease was due to the reasons stated above.

**Income(Loss) from Discontinued Operations, Net of Tax**

Loss fromdiscontinued operations, net of tax for the three months ended June 30, 2007was $7,000, a change of $326,000 compared to income of $319,000 for the threemonths ended June 30, 2006. Income from discontinued operations, net of tax forthe six months ended June 30, 2007 was $28,000, a change of $301,000 comparedto $329,000 for the six months ended June 30, 2006. In the three and six monthsended June 30, 2006 we recognized tax benefits that resulted in recognition ofnet income from discontinued operations while we recorded a loss fromdiscontinued operations before income tax benefit. Operations of the MembershipDivision ceased after just less than 4 months in 2007 such that truecomparisons of like time periods are not made between the three and six monthsended June 30, 2007 to the same periods in 2006.

**NetIncome**

Net income for thethree months ended June 30, 2007 was $344,000, an increase of $42,000 comparedto $302,000 for the three months ended June 30, 2006. Net income for the sixmonths ended June 30, 2007 was $260,000, an increase of $115,000 compared to$145,000 for the six months ended June 30, 2006.

**Liquidityand Capital Resources**

We generated$7,493,000 of cash in our operating activities in the six months ended June 30,2007, compared to using $152,000 in the six months ended June 30, 2006. We used$582,000 of cash in discontinued operations in the six months ended June 30,2007 compared to using $119,000 for the six months ended June 30, 2006. We hada cash and cash equivalent balance of $18,689,000 at June 30, 2007, an increaseof $4,463,000 from the balance of $14,226,000 at December 31, 2006. Wealso had short-term investments classified as available-for-sale securities of$47,747,000 at June 30, 2007, an increase of $5,603,000 from the balance of$42,144,000 at December 31, 2006. The investments at June 30, 2007 were comprisedprincipally of auction rate securities ($46,910,000) with interest rates thatgenerally reset every 28 days. The auction rate securities have long-termmaturity dates and provide us with enhanced yields. Various equitysecurities ($837,000) make up the remainder of the June 30, 2007 balance. Webelieve we have the ability to quickly liquidate the auction rate securities attheir original cost although there is no guaranty we would be able to do so.Net working capital increased to $74,623,000 at June 30, 2007, compared to$65,838,000 at December 31, 2006 excluding the current assets and currentliabilities of discontinued operations.

The increase incash flow from operating activities in the six months ended June 30, 2007compared to the same period in 2006 was due to a number of factors includingthe receipt of federal and state income tax refunds resulting from ourutilization of our net operating loss for both the 2005 income tax returns and,as appropriate, carryback opportunities, improvements in the timing of thecollection of our accounts receivable, greater increases in noncash costs andoperating expenses as compared to the increase in costs and operating expensesas a whole, and our ability to recognize tax benefits from exercise of stockoptions in excess of recognized expense in 2006 but due to our 2007 outlook, wecan not recognize a corresponding amount in 2007.

Net cash used ininvesting activities was $2,705,000 in the six months ended June 30, 2007compared to cash provided by investing activities of $2,205,000 for the sixmonths ended June 30, 2006. We used $69,000 of cash in discontinued operationsinvesting activities in the six months ended June 30, 2007 compared to using$24,000 in the six months ended June 30, 2006. The increase in cash used ininvesting activities was related principally to the net difference of sales andpurchases of short-term auction rate securities partially offset by adecrease in capital expenditures on “construction in progress” and equipmentrelated to the build-out of our broadcast facility. Additional capitalexpenditures were for fixed asset 

22

----

replacements. Thesale of our Membership Division provided $3,589,000 of cash from investingactivities.

Cash provided byfinancing activities was $326,000 in the six months ended June 30, 2007compared to $924,000 for the six months ended June 30, 2006. The discontinuedoperations did not contribute or use cash in investing activities in the sixmonths ended June 30, 2007 compared to using $9,000 in the six months endedJune 30, 2006. The cash provided by financing activities in the six monthsended June 30, 2007 was principally the proceeds from the exercise of stockoptions offset by the purchase of treasury stock as employees used stock tosatisfy withholding taxes related to vesting of restricted shares. During thesix months ended June 30, 2006, cash provided by financing activities wasprincipally the result of realizing tax benefits from the exercise of stock optionsin excess of recognized expense plus the proceeds from the exercise of stock options.During the three months ended June 30, 2007, we could not recognize the taxbenefits from the exercise of stock options in excess of recognized expensebecause we do not project that we will be able to realize this year’s benefitduring this year. For the three months ended June 30, 2006, cash provided byfinancing activities was offset by principal payments on outstanding debt.

OnNovember 2, 2005, we renewed our revolving line of credit agreement (the “revolver”)with U.S. Bank N.A. (the “Bank”), extending the maturity date toSeptember 7, 2007 and increasing the total amount which can be drawn uponunder the revolver from $5,000,000 to $8,000,000. The revolver providesthat the interest rate shall be LIBOR plus 1.25%. The revolver iscollateralized by substantially all of our assets. This credit facilitycontains customary financial and other covenants and restrictions, as amendedon November 2, 2005, including a change of control provision and certainminimum profitability metrics (which, as amended, exclude the effects ofnoncash stock based employee compensation expense) measured at each quarterend. As of June 30, 2007 and as of the date of this report, we did not have anyamounts outstanding under this credit facility.

As of June 30,2007, we hadsufficient cash on hand and expected cash flow from operations to meet ourshort-term cash flow requirements. Management believes that our existing cashresources including cash on-hand and anticipated cash flows from operationswill be sufficient to fund our operations at current levels and anticipatedcapital requirements through at least September 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.

**ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK.**

At June 30, 2007and December 31, 2006, our investment portfolio included fixed-incomesecurities of $47,747,000 and $42,144,000, respectively. These securities aresubject to interest rate risk and will decline in value if interest ratesincrease. However, due to the short duration of our investment portfolio, animmediate 10% change in interest rates would have no material impact on ourfinancial condition, operating results or cash flows. Declines in interestrates over time will, however, reduce our interest income.

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 June 30,2007 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. Because ofthese reasons, an immediate 10% change in interest rates would have nomaterial, immediate impact on our financial condition, operating results orcash flows.

**ITEM 4.   CONTROLS AND PROCEDURES.**

*Evaluation of disclosure controlsand procedures.*   We maintain disclosure controls andprocedures designed to provide reasonable assurance of achieving the objectivethat information in our Exchange Act reports is recorded, processed, summarizedand reported within the time periods specified and pursuant to the regulationsof the Securities and Exchange Commission. Disclosure controls and procedures,as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act, includecontrols and procedures designed to ensure the information required to bedisclosed by us in the reports we file or submit under the Exchange Act isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure. It should be noted that our system of controls,however well designed and operated, can provide only reasonable, and notabsolute, assurance that the objectives of the system are met.

Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of our disclosure controls and procedures as ofJune 30, 2007, the end of the period covered by this report. Based on thisevaluation, we have concluded that as a result of a material weakness in ourinternal control over financial reporting discussed below, our disclosurecontrols and procedures were not effective as of June 30, 2007.

*Management’s report on internalcontrol 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. Ourinternal control over financial reporting includes those policies andprocedures that (a) pertain to the maintenance of records that, in 

23

----

reasonable detail,accurately and fairly reflect the transactions and disposition of assets; (b)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures are beingmade only in accordance with authorizations of our management and directors;and (c) provide reasonable assurance regarding prevention or timely detectionof unauthorized acquisition, use or disposition of our assets that could have amaterial effect on the financial statements.

Internal control overfinancial reporting is designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsprepared for external purposes in accordance with generally accepted accountingprinciples. Because of its inherent limitations, internal control overfinancial reporting may not prevent or detect misstatements. Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

Management conducted anevaluation of the effectiveness of our internal control over financialreporting as of December 31, 2006, based on the framework set forth in InternalControl—Integrated Framework issued by the Committee of Sponsoring Organizationsof the Treadway Commission. Management reviewed the results of thisevaluation with the Audit Committee of our Board of Directors, and based onthis evaluation, management determined that as of December 31, 2006 a materialweakness existed relating to inadequate financial department staffing and alack of financial accounting expertise necessary to properly account forcertain complex or non-routine transactions. This deficiency has not beenfully remediated as of June 30, 2007, the date of this report.

Notwithstanding theexistence of this material weakness, we believe that the consolidated financialstatements included in this report fairly present in all material respects ourfinancial condition, results of operations and cash flows for the periodspresented.  Until this deficiency is remediated, management has concludedthat there is more than a remote likelihood that a material misstatement to theannual or interim consolidated financial statements could occur and not beprevented or detected by the Company’s controls in a timelymanner. Accordingly, management has determined that this controldeficiency continues to constitute a material weakness. Because of thismaterial weakness, we have concluded that we did not maintain effectiveinternal control over financial reporting as of June 30, 2007 based on thecriteria in Internal Control—Integrated Framework.

*Remediation plan for materialweakness in internal control over financial reporting.*   Thelack of staff resources and financial expertise arose as a result of severalissues including time constraints imposed on the accounting staff  as aresult of our heavier than normal financial reporting requirements during thefourth quarter of 2006 carrying into the first quarter of 2007, employeeturnover and our inability to timely fill accounting and financial-relatedpositions. Our management, with the oversight of our Audit Committee, hasdevoted considerable effort to remediate the material weakness identifiedabove. However, as of June 30, 2007, we had not fully remediated thematerial weakness in our internal control over financial reporting.

We have recently filledcertain open positions within the accounting department and are conducting a searchfor a candidate to take the position of Chief Accounting Officer. In addition,we are implementing accounting software that will enhance our capabilitiesacross many accounting disciplines, particularly as it relates to share-basedcompensation. We will more fully develop the technical expertise of ourexisting staff and fill open positions with qualified replacements. Wehave engaged additional outside consultants to bolster our U.S. GAAP expertiseuntil and after we have been successful in bringing the expertise in-house. Webelieve that we have been even more active in using such trained personnel inthe six months ended June 30, 2007 and believe this action has had asignificantly positive impact on our internal controls over financialreporting.

Many of the remedialactions we have taken are very recent, and other remedial actions are yet to beimplemented including the training of the additional personnel. Becauseour remediation efforts include the hiring of additional personnel many of thecontrols in our current system of internal controls will still rely extensivelyon manual review and approval, and management will not be able to conclude thatthe material weakness has been eliminated until such additional personnel havebeen engaged and the controls have been successfully operated and tested. We,along with our Audit Committee, will continue to monitor and evaluate theeffectiveness of these remedial actions and make further changes as deemedappropriate.

*Changes in internal control overfinancial reporting.*   Other than as noted above, duringthe quarter ended June 30, 2007, there was no change in our internal controlover financial reporting that materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting subsequent tothe date referred to above.

24

----

**PART II—OTHER INFORMATION**

**ITEM 1.****   Legal Proceedings.**

None.

**ITEM 1A.****   Risk Factors.**

Our business andoperations are subject to a number of risks and uncertainties, and thefollowing list should not be considered to be a definitive list of all factorsthat may affect our business, financial condition and future operatingresults and should be read in conjunction with the risks and uncertainties,including risk factors, contained in our other filings with the Securities andExchange Commission. Any forward-looking statements made by us are made withthe intention 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 donot control the methodology used by Nielsen to estimate our subscriber base ortelevision ratings, and changes, or inaccuracies, in such estimates could causeour advertising revenue to decrease.**

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 Outdoor Channel’ssubscriber base made by Nielsen is theirs alone and does not representopinions, forecasts or predictions of Outdoor Channel Holdings, Inc. or itsmanagement. Outdoor Channel Holdings, Inc. does not by its reference to Nielsenor distribution of the Nielsen Universe Estimate imply its endorsement of orconcurrence with such information. In particular, we believe that we may besubject to a wider difference between the number of subscribers as estimated byNielsen and the number of subscribers reported by our cable and satellite MSOsthan 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.

**Cableand satellite service providers could discontinue or refrain from carryingOutdoor Channel, or decide to not renew our distribution agreements, whichcould substantially reduce the number of viewers and harm our operatingresults.**

The success of 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 Outdoor Channel or that the satelliteservice provider will carry our channel. Under our current contracts andarrangements, TOC typically offers satellite systems and cable MSOs, along withtheir cable affiliates, the right to broadcast Outdoor Channel to theirsubscribers, but such contracts or arrangements typically do not require thatOutdoor Channel be offered to all subscribers of, or any tiers offered by, theservice provider. Because certain carriage arrangements do not specify on whichservice levels Outdoor Channel is carried, such as analog versus basic digital,expanded digital or specialty tiers, and in which geographic markets OutdoorChannel will be offered, we have no assurance that Outdoor Channel will becarried and available to viewers of any particular MSO or to all satellitesubscribers. In addition, if we are unable to fully comply with the terms ofsuch agreements, the service providers could discontinue carrying OutdoorChannel. Lastly, we are currently not under any long-term contract with some ofthe service providers that are currently distributing our channel. Ourdistribution agreements with six of the major service providers, accounting forapproximately 59% of our subscriber base as of August 2006, have terminated asof May 1, 2007. If we are unable to renew these distribution agreements, wecould lose a substantial number of subscribers. If cable and satellite serviceproviders discontinue or refrain from carrying Outdoor Channel, or decide tonot renew our distribution agreement with them, this could reduce the number ofviewers and harm our operating results.

**Wemay not be able to grow our subscriber base at a sufficient rate to offsetplanned increased costs, decreased revenue or at all, and as a result ourrevenues and profitability may not increase and could 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 

25

----

number of factors or thatwe will be able to maintain our current subscriber fee rates. In particular,negotiations for new carriage agreements, or amendments to, or renewals of,current carriage agreements, are lengthy and complex, and we are not able topredict with any accuracy when such increases in our subscriber basemay occur, if at all, or if we can maintain our current subscriber feerates. If we are unable to grow our subscriber base or we reduce our subscriberfee rates, our subscriber and advertising revenues may not increase andcould decrease. In addition, as we plan and prepare for such projected growthin our subscriber base, we plan to increase our expenses accordingly. If we arenot able to increase our revenue to offset these increased expenses, and if oursubscriber fee revenue decreases, our profitability could decrease.

**If weoffer favorable terms or incentives to service providers in order to grow oursubscriber base, our operating results may be harmed or your percentage ofthe Company may be diluted.**

Although we currentlyhave plans to offer incentives to service providers in an attempt to increasethe number of our subscribers, we may not be able to do so economically orat all. 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 or maintain oursubscriber base.  In addition, if we make any upfront cash payments toservice providers for an increase in our subscriber base, our cash flow couldbe adversely impacted, and we may incur negative cash flow for some time.In addition, if we were to make such upfront cash payments or provide otherincentives to service providers, we expect to amortize such amounts ratablyover the term of the agreements with the service providers. However, if a serviceprovider terminates any such agreement prior to the expiration of the term ofsuch agreement, then under current accounting rules we may incur alarge expense 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.

**If, inour attempt to increase our number of subscribers, we structure favorable termsor incentives with one service provider in a way that would require us to offerthe same terms or incentives to all other service providers, our operatingresults 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 ourchannels are placed in unpopular program packages by cable or satellite serviceproviders, or if service fees are increased for our subscribers, the number ofviewers of our channel may decline which could harm our business andoperating 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 channelis bundled may be set too high to appeal to individuals who mightotherwise be interested in our network. Further, if our channel is bundled byservice providers with networks that do not appeal to our viewers or is movedto packages with fewer subscribers, we may lose viewers. These factorsmay reduce the number of subscribers and/or viewers of our channel, whichin turn would reduce our subscriber fees and advertising revenue.

**Consolidationamong cable and satellite operators may harm our business.**

Cable and satelliteoperators continue to consolidate, making us increasingly dependent on feweroperators. If these operators fail to carry Outdoor Channel, use theirincreased distribution and bargaining power to negotiate less favorable termsof carriage or to obtain additional volume discounts, our business andoperating results would suffer.

**We maynot be able to effectively manage our future growth, and our growthmay not continue, which may substantially harm our business andprospects.**

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 

26

----

organization; hiring andtraining new management, sales and marketing, production, and other personneland the diversion of management’s attention and resources from critical areasand existing 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 be harmed byfuture changes in our business. Our operating results could be harmed if suchgrowth does not occur, or is slower or less profitable than projected.

**We maynot be able to secure additional national advertising accounts, and as aresult, our revenues and profitability may be negatively impacted.**

Our ability to secureadditional national advertising accounts, which generally pay higheradvertising rates, depends upon the size of our audience, the popularity of ourprogramming and the demographics of our viewers, as well as strategies taken byour competitors, strategies taken by advertisers and the relative bargainingpower of 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 increaseadvertising revenues. If we are unable to attract national advertising accountsin sufficient quantities, our revenues and profitability may be harmed.

**We havefound a material weakness in our internal controls over financial reporting,and we cannot be certain in the future that we will be able to report that ourcontrols are without material weakness or to complete our evaluation of thosecontrols in a timely fashion.**

Pursuant to Section 404of the Sarbanes-Oxley Act of 2002 (“Section 404”), and the rules andregulations promulgated by the SEC to implement Section 404, we are required toinclude in our Form 10K an annual report by our management regarding theeffectiveness of our internal control over financial reporting. The reportincludes, among other things, an assessment of the effectiveness of ourinternal control over financial reporting as of the end of our fiscal year.This assessment must include disclosure of any material weaknesses in ourinternal control over financial reporting identified by management. As ofDecember 31, 2006, our internal control over financial reporting wasineffective due to the presence of a material weakness, as more fully describedin Item 9A of our Form 10-K for the period ended December 31, 2006. We areactively working to correct this material weakness, which will continue untilwe are able to hire additional staff in our accounting department andsuccessfully operate and test our controls with such staff in place.

If we fail to maintain aneffective system of disclosure controls or internal control over financialreporting, we may discover material weaknesses that we would then be requiredto disclose. We may not be able to accurately or timely report on our financialresults, and we might be subject to investigation by regulatory authorities.This could result in a loss of investor confidence in the accuracy andcompleteness of our financial reports, which may have an adverse effect on ourstock price.

In addition, all internalcontrol systems, no matter how well designed, have inherent limitations.Therefore, even those systems determined to be effective can provide onlyreasonable assurance with respect to the preparation and presentation offinancial statements. Projections of any evaluation of controls effectivenessto future periods are subject to risks. Over time, controls may becomeinadequate because of changes in conditions or deterioration in the degree ofcompliance with policies or procedures.

**Expensesrelating to programming costs are generally increasing and a number of factorscan cause cost overruns and delays, and our operating results may beadversely impacted if we are not able to successfully recover the costs ofdeveloping 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 master tapes andrecordings or adverse weather conditions may cause cost overruns and delayor prevent completion of a project. If we are not able to successfully recoverthe costs of developing or acquiring programming through increased revenues,whether the programming is produced by us or acquired from third-partyproducers, our business and operating results will be harmed.

27

----

**Ouroperating results may vary significantly, and historical comparisons ofour operating results are not necessarily meaningful and should not be reliedupon 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;

·                  demand foradvertising, advertising rates and offerings of competing media;

·                  changes in thegrowth rate of cable and satellite subscribers;

·                  cable andsatellite service providers’ capital and marketing expenditures and theirimpact on programming offerings and penetration;

·                  seasonal trendsin viewer interests and activities;

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

·                  the mix of cabletelevision and satellite-delivered programming products and services sold andthe distribution channels for those products and services;

·                  our ability toreact quickly to changing consumer trends;

·                  increasedcompensation expenses resulting from the hiring of highly qualified employees;

·                  specific economicconditions 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 quarter maydisproportionately affect our profitability because our expenses would remainrelatively fixed and would not decrease correspondingly.

**Changesto financial accounting standards or our accounting estimates may affectour reported operating results.**

We prepare our financialstatements to conform to accounting principles generally accepted in theUnited States of America which are subject to interpretations by the FinancialAccounting Standards Board, the Securities and Exchange Commission and variousbodies formed to interpret and create appropriate accounting policies. A changein those policies can have a significant effect on our reported results andmay even affect our reporting of transactions completed before a change isannounced. Accounting policies affecting many other aspects of our business,including rules relating to business combinations and employee stockoption grants, have recently been revised or are under review. Changes to thoserules or the questioning of current practices may adversely affectour reported financial results or the way we conduct our business. In addition,our preparation of financial statements in accordance with GAAP requires thatwe make estimates, judgments and assumptions that affect the recorded amountsof assets and liabilities, disclosure of those assets and liabilities at thedate of the financial statements and the recorded amounts of revenue andexpenses during 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 wefail to develop and distribute popular programs, our viewership would likelydecline, which could cause advertising and subscriber 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 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 current number of viewers, our Nielsenratings could decline, which in turn could cause our advertising revenue todecline and adversely impact our business and operating results. In addition,if we fail to program popular shows the number of subscribers to our channelmay also decrease, resulting in a decrease in our subscriber fee andadvertising revenue.

28

----

**Themarket in which we operate is highly competitive, and we may not be ableto compete effectively, particularly against competitors with greater financialresources, brand recognition, marketplace presence and relationships withservice providers.**

We compete for viewerswith other pay cable television and broadcast networks, including Versus(formerly OLN), Spike TV, ESPN2 and others. If these or other competitors, manyof which have substantially greater financial and operational resources thanus, significantly expand their operations with respect to outdoor-relatedprogramming or their market penetration, our business could be harmed. Inaddition, certain technological advances, including the deployment of fiberoptic cable, which are already substantially underway, are expected to allowcable systems to greatly expand their current channel capacity, which coulddilute our market share and lead to increased competition for viewers fromexisting 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 OutdoorChannel and the number of such securities could be significant. We compete foradvertising sales with other pay television networks, broadcast networks, and localover-the-air television stations. We also compete for advertising sales withsatellite and broadcast radio and the print media. We compete with other cabletelevision networks for subscriber fees from, and affiliation agreements with,cable and satellite service providers. Actions by the Federal CommunicationsCommission, which we refer to as the FCC, and the courts have removed certainof the impediments to entry by local telephone companies into the videoprogramming distribution business, and other impediments could be eliminated ormodified in the future. These local telephone companies may distributeprogramming that is competitive with the programming provided by us to cableoperators.

**Changesin corporate governance and securities disclosure and compliance practices haveincreased and may continue to increase our legal compliance and financialreporting costs.**

The Sarbanes-Oxley Act of2002 required us to change or supplement some of our corporate governance andsecurities disclosure and compliance practices. The Securities and ExchangeCommission and NASDAQ have revised, and continue to revise, their regulationsand listing standards. These developments have increased, and may continueto increase, our legal compliance and financial reporting costs.

**Thesatellite infrastructure that we use may fail or be preempted by anothersignal, which could impair our ability to deliver programming to our cable andsatellite service providers.**

Our ability to deliverprogramming to service providers, and their subscribers, is dependent upon thesatellite equipment 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 topreemption and until the back-up satellite is in position, we could lose oursignal for a period of time. A loss of our signal could harm our reputation andreduce our revenues and profits.

**Naturaldisasters and other events beyond our control could interrupt our signal.**

Our systems andoperations may be vulnerable to damage or interruption from earthquakes,floods, fires, power loss, telecommunication failures and similar events. Theyalso could be subject to break-ins, sabotage and intentional acts of vandalism.Since our production facilities for 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 facilities could result in interruptions in ourservices. Interruptions in our service could harm our reputation and reduce ourrevenues and profits.

**Seasonalincreases or decreases in advertising revenue may negatively affect ourbusiness.**

Seasonal trends arelikely to affect our viewership, and consequently, could cause fluctuations inour advertising revenues. Our business reflects seasonal patterns ofadvertising expenditures, which is common in the broadcast industry. For thisreason, fluctuations in our revenues and net income could occur from period toperiod depending upon the availability of 

29

----

advertising revenues.Due, in part, to these seasonality factors, the results of any one quarter arenot necessarily indicative of results for future periods, and our cash flowsmay not correlate with revenue recognition.

**We maybe unable to access capital, or offer equity as an incentive for increasedsubscribers, on acceptable terms to fund our future growth 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 Outdoor Channel, and acquiringand producing programming for Outdoor Channel. As a result, we could berequired 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 maynot be able to attract and retain key personnel.**

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, William A. Owen, our ChiefFinancial Officer, or Thomas E. Hornish, our COO and General Counsel, couldadversely impact our business. To attract and retain qualified personnel, wemay be required to grant large option or other stock-based incentiveawards, which may be highly dilutive to existing stockholders. We may alsobe required to pay significant base salaries and cash bonuses to attract andretain these individuals, which payments could harm our operating results. Ifwe are not able to attract and retain the necessary personnel we may notbe able to implement our business plan.

**Newvideo recording technologies may reduce our advertising revenue.**

A number of new personalvideo recorders, such as TiVo® in the United States, have emerged in recentyears. These recorders often contain features allowing viewers to watchpre-recorded programs without watching advertising. The effect of theserecorders on viewing patterns and exposure to advertising could harm ouroperations and results if our advertisers reduce the advertising rates they arewilling to pay because they believe television advertisements are lesseffective with these technologies.

**Cableand satellite television programming signals have been stolen or could bestolen in the future, which reduces our potential revenue from subscriber feesand advertising.**

The delivery of subscriptionprogramming requires the use of conditional access technology to limit accessto programming to only those who subscribe to programming and are authorized toview it. Conditional access systems use, among other things, encryptiontechnology to protect the transmitted signal from unauthorized access. It isillegal to create, sell or otherwise distribute software or devices tocircumvent conditional access technologies. However, theft of cable andsatellite programming has been widely reported, and the access or “smart” cardsused in cable and satellite service providers’ conditional access systems havebeen compromised and could be further compromised in the future. Whenconditional access systems are compromised, we do not receive the potential subscriberfee revenues from the cable and satellite service providers. Further, measuresthat could be taken by cable and satellite service providers to limit suchtheft are not under our control. Piracy of our copyrighted materials couldreduce our revenue from subscriber fees and advertising and negatively affectour business and operating results.

**Becausewe expect to become increasingly dependent upon our intellectual propertyrights, our inability to protect those rights could negatively impact our abilityto compete.**

Approximately 72% ofprograms we aired in 2006 (exclusive of infomercials) on Outdoor Channel wereprovided 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 

30

----

portfolio of trademarks,service marks, copyrighted material and characters, trade names and otherintellectual property rights, our business and our ability to compete could beharmed.

**We mayface intellectual property infringement claims that could be time-consuming, costlyto defend and result in our loss of significant 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 ofour existing stockholders can exert control over us and may not makedecisions that are in the best interests of all stockholders.**

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.

**Themarket price of our common stock has been and may continue to be subjectto wide fluctuations.**

Our stock hashistorically been and continues to be traded at relatively low volumes andtherefore has been subject to price volatility. Various factors contribute tothe volatility of our stock price, including, for example, low trading volume,quarterly variations in our financial results, increased competition andgeneral economic and market conditions. While we cannot predict the individualeffect that these factors may have on the market price of our common stock,these factors, either individually or in the aggregate, could result insignificant volatility in our stock price during any given period of time.There can be no assurance that a more active trading market in our stock willdevelop. As a result, relatively small trades may have a significantimpact on the price of our common stock. Moreover, companies that haveexperienced volatility in the market price of their stock often are subject tosecurities class action litigation. If we were the subject of suchlitigation, it could result in substantial costs and divert management’sattention and resources.

**Anti-takeoverprovisions in our certificate of incorporation, our bylaws and under Delawarelaw may enable our incumbent management to retain control of us anddiscourage or prevent a change of control that may be beneficial to ourstockholders.**

Provisions of Delawarelaw, our certificate of incorporation and bylaws could discourage, delay orprevent a merger, acquisition or other change in control that stockholdersmay consider favorable, including transactions in which you mightotherwise receive a premium for your shares. These provisions also could limitthe price that investors might be willing to pay in the future for shares ofour 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:

·                  allow theauthorized number of directors to be changed only by resolution of our board ofdirectors;

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

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

·                  authorize ourboard of directors to issue without stockholder approval blank check preferredstock that, if issued, could operate as a “poison pill” to dilute the stockownership of a potential hostile acquirer to prevent an acquisition that is notapproved by our board of directors;

·                  require thatstockholder actions must be effected at a duly called stockholder meeting andprohibit 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;

·                  except asprovided by law, allow only our board of directors to call a special meeting ofthe stockholders; and

31

----

·                  require a 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.

**Technologiesin the cable and satellite television industry are constantly changing, and ourfailure to acquire or maintain state-of-the-art technology may harm ourbusiness and competitive advantage.**

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.

**Thecable and satellite television industry is subject to substantial governmentalregulation for which compliance may increase our costs and expose us topenalties for failure to comply.**

The cable televisionindustry is subject to extensive legislation and regulation at the federal andlocal levels, and, in some instances, at the state level, and many aspects ofsuch regulation are currently the subject of judicial proceedings andadministrative or legislative proposals. Similarly, the satellite televisionindustry is subject to federal regulation. Operating in a regulated industryincreases our cost of doing business as a video programmer.

The Cable TelevisionConsumer Protection and Competition Act of 1992, to which we refer as the 1992Cable Act, includes provisions that preclude cable operators affiliated withvideo programmers from favoring their programmers over competitors. The 1992Cable Act also effectively precludes such programmers from selling theirprogramming exclusively to cable operators. These provisions potentiallybenefit independent programmers such as us by limiting the ability of cableoperators affiliated with programmers from carrying only programming in whichthey have an ownership interest and from offering exclusive programmingarrangements. However, the United States Court of Appeals for the District ofColumbia Circuit 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 adopted newrules. The exclusivity provision is scheduled to expire in October 2007,but the FCC has initiated a rulemaking proceeding to determine if a furtherextension is necessary to protect competition and diversity.

Regulatory carriagerequirements also could reduce the channel capacity available to carry OutdoorChannel. The 1992 Cable Act granted television broadcasters a choice ofmust-carry rights or retransmission consent rights. The rules adopted bythe FCC generally provide for mandatory carriage by cable systems of all localfull-power commercial television broadcast signals selecting must-carry rightsand, depending on a cable system’s channel capacity, non-commercial televisionbroadcast signals. Such statutorily mandated carriage of broadcast stations,coupled with the provisions of the Cable Communications Policy Act of 1984,which require cable television systems with 36 or more “activated” channels toreserve a percentage of such channels for commercial use by unaffiliated thirdparties and permit franchise authorities to require the cable operator toprovide channel capacity, equipment and facilities for public, educational andgovernment access channels, could reduce carriage of Outdoor Channel bylimiting its carriage in cable systems with limited channel capacity. In 2001,the FCC adopted rules relating to the cable carriage of digital televisionsignals. Among other things, the rules clarify that a digital-onlytelevision station can assert a right to analog or digital carriage on a cablesystem. The FCC initiated a further proceeding to determine whether televisionbroadcasters may assert the rights to carriage of both analog and digitalsignals during the transition to digital television and to carriage of alldigital signals. In 2005, the FCC decided that television broadcasters do nothave such additional must-carry rights. In 2007, the FCC began considering theadoption of new rules that would require cable operators to deliver to theirsubscribers both a digital and analog version of the signal of everybroadcaster with must-carry rights, as well as any HD version of thebroadcaster’s signal. Thus, if such rules are adopted, cable operators could berequired to devote significant additional bandwidth to the carriage of two, orpossibly even three, duplicative streams of each broadcaster’s programming, andcable networks could be foreclosed from carriage on such bandwidth. Theimposition of such additional must-carry regulation, in conjunction with anylimited cable system channel capacity, would increase the likelihood that cableoperators may be forced to drop some cable programming services and couldreduce carriage of Outdoor Channel.

The TelecommunicationsAct of 1996 required the FCC to establish rules and an implementationschedule to ensure that video programming is fully accessible to thehearing impaired through closed captioning. The rules adopted by the FCCrequire substantial closed captioning over a six to ten year phase-in period,which began in 2000, with only limited exemptions. As a result, we willcontinue to incur additional costs for closed captioning. Failure to meet theseclosed captioning requirements could cause a service provider to discontinuecarrying Outdoor Channel and result in regulatory 

32

----

action by the FCC.

If we distributetelevision programming through other types of media, we may be required toobtain federal, state and local licenses or other authorizations to offer suchservices. We may not be able to obtain licenses or authorizations in atimely manner, or at all, or conditions could be imposed upon licenses andauthorizations that may not be favorable to us. In the future, increasedregulation of rates could, among other things, put downward pressure on therates charged by cable programming services, and affect the ability orwillingness of cable system operators to retain or to add Outdoor Channelnetwork on their cable systems.

In addition,government-mandated a la carte carriage or small tiers of channels by cablesystem operators could adversely impact our viewership levels if OutdoorChannel is sold a la carte or moved to such a tier. In response to a requestfrom the Committee on Energy and Commerce of the House of Representatives, theFCC’s Media Bureau conducted a study in 2004 regarding, among other things,government-mandated a la carte or mini-tier packaging of programming servicesin which each subscriber would purchase only those channels that he or shedesired instead of the larger bundles of different channels as is typicaltoday. The Media Bureau’s report in 2004 observed that such packaging wouldincrease the cost of programming to consumers and injure programmers. OnFebruary 9, 2006, the Media Bureau released a further report which statedthat the 2004 report was flawed and which concluded that a-la-carte sales couldbe in the best interests of consumers. Although the FCC cannot mandatea-al-carte sales, its endorsement of the concept could encourage Congress toconsider proposals to mandate a-ala-carte sales or otherwise seek to imposegreater regulatory controls on how cable programming is sold. If, in responseto any statute enacted by Congress, or any rate or other government regulation,cable system operators implement channel offerings that require subscribers toaffirmatively choose to pay a separate fee to receive Outdoor Channel, eitherby itself or in combination with a limited number of other channels, the numberof viewers for 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.

**If ourgoodwill becomes impaired, we will be required to take a noncash charge whichcould have a significant effect on our reported net earnings.**

A significant portion ofour assets consists of goodwill.  In accordance with Statement ofFinancial Accounting Standards No. 142, “Goodwill and Other IntangibleAssets”, or SFAS 142, we test goodwill for impairment during the fourth quarterof each year, and on an interim date if factors or indicators become apparentthat would require an interim test. A significant downward revision in thepresent value of estimated future cash flows for a reporting unit could resultin an impairment of goodwill under SFAS 142 and a noncash charge would berequired. Such a charge could have a significant effect on our reported netearnings.

**Futureissuance by us of preferred shares could adversely affect the holders ofexisting shares, and therefore reduce the value of existing shares.**

We are authorized toissue up to 25,000,000 shares of preferred stock. The issuance of any preferredstock could adversely affect the rights of the holders of shares of our commonstock, and therefore reduce the value of such shares. No assurance can be giventhat we will not issue shares of preferred stock in the future.

**We donot expect to pay dividends in the foreseeable future.**

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,or prohibitions against, the payment of dividends.

33

----

**ITEM 2.****   Unregistered Sales of Equity Securitiesand Use of Proceeds.**

None.

**ITEM 3.****   Defaults Upon Senior Securities.**

None.

**ITEM 4.****   Submission of Matters to a Vote ofSecurity Holders.**

(a)  Annual meeting of stockholders was held onJune 6, 2007.

(b)  Stockholders voted for the election of Mr.Perry T. Massie and Mr. T. Bahnson Stanley as directors whose term shall expirein 2010. Messrs. Ajit M. Dalvi, Michael L. Pandzik and David D. Kinleycontinued as directors whose term shall expire in 2008. Messrs. Thomas H.Massie, David C. Merritt and Roger L. Werner continued as directors whose termshall expire in 2009.

(c)  Proposal One to elect two directors to theCompany’s board of directors to serve until the 2010 annual meeting ofstockholders resulted in the election of Mr. P. Massie with 14,057,971 (94.88%)votes for and 758,760 (5.12%) withheld, and Mr. Stanley with 13,680,730(92.33%) votes for and 1,136,001 (7.67%) withheld.

**ITEM 5.****   Other Information.**

None.

**ITEM 6.****   Exhibits.**
| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                             | ** ** |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 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 and Exhibit 4.1 to the Company’s Form 10-Q for the period  ended June 30, 2005)                                            |       |
| 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                                                                                                                                                                                      |       |

----

*       Pursuant to Commission Release No. 33-8238, this certification will be treatedas “accompanying” this Quarterly Report on Form 10-Q and not “filed” as part ofsuch report for purposes of Section 18 of the Securities Exchange Act of 1934,as amended, or otherwise subject to the liability of Section 18 of theSecurities Exchange Act of 1934, as amended, and this certification will not bedeemed to be incorporated by reference into any filing under the Securities Actof 1933, as amended, or the Securities Exchange Act of 1934, as amended, exceptto the extent that the registrant specifically incorporates it by reference.

34

----

**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|            | **OUTDOOR CHANNEL HOLDINGS, INC.**                                                          |
|------------|---------------------------------------------------------------------------------------------|
|       |                                                                                        |
|       | /s/ William A. Owen                                                                         |
| ** ** | **William A. Owen**                                                                         |
|       | Authorized Officer, Chief Financial Officer and  Controller  (Principal Accounting Officer) |
|       | Date: August 9, 2007                                                                        |

 

35

----