**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

**FORM10-Q/A****(Amendment No. 1)**

**(Mark One)**
| **x**                                                 | ** ** | **Quarterly Report  Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|-------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
| ** **                                            | ** ** | ** **                                                                                    |
| **For the quarterly period ended September 30, 2005** |
| ** **                                            | ** ** | ** **                                                                                    |
| **o**                                                 | ** ** | **Transition Report  Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |

 

**Forthe transition periodfrom                   to              **

**Commissionfile number: 000-17287**

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

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

 

**43445 Business Park Drive, Suite 113****Temecula, California 92590**(Address and zip code of principal executive offices)

**(951) 699-4749**(Issuer’s telephone number, including area code)

(Formername, former address and former fiscal year, if changed since last report)

Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90days.  x Yes    o No

Indicate by check mark whether theregistrant is an accelerated filer (as defined in Rule 12b-2 of the ExchangeAct).  o Yes     x No

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).  o Yes     x No

Indicate the number of shares outstandingof each of the issuer’s classes of common stock, as of the latest practicabledate:

 
| **Class**                      | **Number of Shares Outstanding at November 11,  2005** |
|--------------------------------|--------------------------------------------------------|
| Common Stock, $0.001 par value | 24,303,413                                             |

 

 

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EXPLANATORY NOTE

This amendment on Form 10-Q/A reflects therestatement of the unaudited condensed consolidated financial statements ofOutdoor Channel Holdings, Inc. and Subsidiaries as of September 30, 2005 andDecember 31, 2004 and for the three and nine months ended September 31, 2005,as discussed in Management’s Discussion and Analysis of Financial Condition andResults of Operations (Item 2) and Note 10 to the unaudited condensedconsolidated financial statements to reflect the effects of a revised estimateof the useful life of intangible assets attributable to MSO relationshipsrecorded  in connection with theSeptember 8, 2004 acquisition of all of the outstanding shares of The OutdoorChannel, Inc. by Outdoor Channel Holdings, Inc. that it did not previouslyown.  Although the revised estimate ofthe useful life of these assets resulted in adjustments to and the restatementof our unaudited condensed consolidated financial statements included in thisForm 10-Q/A as of September 30, 2005 and December 31, 2004 and for the threeand nine months ended September 30, 2005, we determined that the effects ofthese adjustments were immaterial, individually and in the aggregate, to ourannual and quarterly reports filed prior to January 1, 2005 and thus we did notamend those filings.

Inaddition, to provide more detail about our operating results and to more fullycomply withtheSecurities and Exchange Commission’s (the “SEC”)  Regulation S-X, we have modified ourpresentation of the unaudited condensed consolidated statements of operations,as discussed in Management’s Discussion and Analysis of Financial Condition andResults of Operations and Note 1 to the unaudited condensed consolidatedfinancial statements, by reclassifying the amounts originally included under “expenses”in line items under either “cost of services” or “other expenses”. Further, tobetter match intangible assets with the segment to which they pertain, we havereclassified the amortizable intangible assets and the goodwill which were recordedin connection with the acquisition on September 8, 2004 along with the relatedamortization expense from “Corporate” to the “TOC” segment. Certain otherchanges have been made in the historical unaudited condensed consolidatedfinancial statements to conform with current presentations.

All of the information in this Form 10-Q/Ais as of November 14, 2005, the filing date of the original Form 10-Q for thequarter ended September 30, 2005, and has not been updated for eventssubsequent to that date other than for the effects of the matter discussedabove. Unless otherwise indicated, the exhibits previously filedwith the Form 10-Q are not filed herewith but are incorporated herein byreference.

 

2

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**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES****Quarterly Report on Form 10-Q/A****For The Period Ended September 30, 2005**

**Table of Contents**
| **Part  I. Financial Information** |
|------------------------------------|
|                               |   |   |
| **Item 1.**                        | Financial Statements |   |
|                               |   |   |
|                               | Restated  Condensed Consolidated Balance Sheets as of September 30, 2005 (Unaudited)  and December 31, 2004 |   |
|                               |   |   |
|                               | Restated Unaudited Condensed Consolidated Statements  of Operations for the Three and Nine Months Ended September 30, 2005 and 2004 |   |
|                               |   |   |
|                               | Restated Unaudited Condensed Consolidated Statement of  Stockholders’ Equity for the Nine Months Ended September 30, 2005 |   |
|                               |   |   |
|                               | Restated Unaudited Condensed Consolidated Statements  of Cash Flows for the Nine Months Ended September 30, 2005 and 2004 |   |
|                               |   |   |
|                               | Notes to  Restated Unaudited Condensed Consolidated Financial Statements |   |
|                               |   |   |
| **Item 2.**                        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                               |   |   |
|                               | Recent Accounting  Developments |   |
|                               |   |   |
|                               | Risks and Uncertainties |   |
|                               |   |   |
| **Item 3.**                        | Quantitative  and Qualitative Disclosures About Market Risk |   |
|                               |   |   |
| **Item 4.**                        | Controls and  Procedures |   |
|                               |   |   |
| **Part II. Other Information**     |
|                               |   |   |
| **Item 1.**                        | Legal Proceedings |   |
|                               |   |   |
| **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**                     |   |   |

 

 

***

3

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**PART I—FINANCIALINFORMATION**

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

**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES****Condensed Consolidated Balance Sheets**(In thousands, except per share data)
| ** **                                                                                                 | ** ** | **September 30,  2005**        | ** ** | **December 31,  2004**   | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                 | ** ** | **(Unaudited,  Restated, Note 10)** | ** ** | **(Restated,  Note 10)** | ** ** |
| **Assets**                                                                                                 |       |                                |       |                          |       |
| Current assets:                                                                                            |       |                                |       |                          |       |
| Cash and cash equivalents                                                                                  |       | $                                   | 29,775     |                          | $          | 13,105 |   |
| Investment in available-for-sale securities                                                                |       | 21,923                              |       | 741                           |       |
| Accounts receivable, net of allowance for doubtful accounts of  $275 and $207                              |       | 5,317                               |       | 4,848                         |       |
| Income tax refund receivable                                                                               |       | 3,477                               |       | 2,291                         |       |
| Prepaid programming costs                                                                                  |       | 3,121                               |       | 606                           |       |
| Deferred tax assets, net                                                                                   |       | 76                                  |       | —                        |       |
| Other current assets                                                                                       |       | 1,003                               |       | 135                           |       |
| Total current assets                                                                                       |       | 64,692                              |       | 21,726                        |       |
|                                                                                                       |       |                                |       |                          |       |
| Property, plant and equipment at cost, net:                                                                |       |                                |       |                          |       |
| Membership division                                                                                        |       | 3,615                               |       | 3,527                         |       |
| Outdoor Channel equipment and improvements                                                                 |       | 9,957                               |       | 3,199                         |       |
| Property, plant and equipment, net                                                                         |       | 13,572                              |       | 6,726                         |       |
| Amortizable intangible assets, net                                                                         |       | 11,555                              |       | 12,347                        |       |
| Goodwill                                                                                                   |       | 44,457                              |       | 44,457                        |       |
| Deferred tax assets, net                                                                                   |       | 11,362                              |       | 14,139                        |       |
| Deposits and other assets                                                                                  |       | 186                                 |       | 174                           |       |
| Totals                                                                                                     |       | $                                   | 145,824    |                          | $          | 99,569 |   |
|                                                                                                       |       |                                |       |                          |       |
| **Liabilities and Stockholders’ Equity**                                                              |       |                                |       |                          |       |
| Current liabilities:                                                                                       |       |                                |       |                          |       |
| Accounts payable and accrued expenses                                                                      |       | $                                   | 3,493      |                          | $          | 3,705 |   |
| Accrued severance payments                                                                                 |       | 18                                  |       | 28                            |       |
| Current portion of capital lease obligations                                                               |       | 16                                  |       | 26                            |       |
| Deferred tax liabilities, net                                                                              |       | —                              |       | 494                           |       |
| Current portion of deferred revenue                                                                        |       | 257                                 |       | 370                           |       |
| Customer deposits                                                                                          |       | 86                                  |       | 61                            |       |
| Total current liabilities                                                                                  |       | 3,870                               |       | 4,684                         |       |
|                                                                                                       |       |                                |       |                          |       |
| Accrued severance payments, net of current portion                                                         |       | 21                                  |       | 37                            |       |
| Capital lease obligations, net of current portion                                                          |       | —                              |       | 9                             |       |
| Deferred revenue, net of current portion                                                                   |       | 1,157                               |       | 1,145                         |       |
| Deferred satellite rent obligations                                                                        |       | 298                                 |       | 312                           |       |
| Total liabilities                                                                                          |       | 5,346                               |       | 6,187                         |       |
|                                                                                                       |       |                                |       |                          |       |
| Commitments and contingencies                                                                              |       |                                |       |                          |       |
| Stockholders’ equity:                                                                                 |       |                                |       |                          |       |
| Preferred stock; 25,000 shares authorized; none issued                                                     |       | —                              |       | —                        |       |
| Common stock, $0.001 par value; 75,000 shares authorized: 24,305  and 18,394 shares issued and outstanding |       | 24                                  |       | 18                            |       |
| Additional paid-in capital                                                                                 |       | 158,543                             |       | 111,912                       |       |
| Deferred compensation                                                                                      |       | (1,643                              | )          | (1,034                        | )          |
| Accumulated other comprehensive income                                                                     |       | 49                                  |       | 43                            |       |
| Accumulated deficit                                                                                        |       | (16,495                             | )          | (17,557                       | )          |
| Total stockholders’ equity                                                                            |       | 140,478                             |       | 93,382                        |       |
| Totals                                                                                                     |       | $                                   | 145,824    |                          | $          | 99,569 |   |

 

See Notes to Unaudited CondensedConsolidated Financial Statements.

4

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**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES****Unaudited Condensed Consolidated Statementsof Operations**(In thousands, except per share data)
| ** **                                                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                   | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                   | ** ** | **(Restated, Note 10)**                    | ** ** | **(Restated, Note 10)**                   | ** ** |
| Revenues:                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Advertising                                                  |       | $                                                    | 5,657      |                                                | $          | 5,722 |   | $ | 16,173 |   | $ | 15,886 |   |
| Subscriber fees                                              |       | 3,846                                                |       | 3,450                                               |       | 11,382 |   | 9,830 |   |
| Membership income                                            |       | 1,901                                                |       | 1,777                                               |       | 3,924 |   | 3,995 |   |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Total revenues                                               |       | 11,404                                               |       | 10,949                                              |       | 31,479 |   | 29,711 |   |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Cost of services:                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Programming                                                  |       | 2,315                                                |       | 933                                                 |       | 3,367 |   | 2,223 |   |
| Satellite transmission fees                                  |       | 617                                                  |       | 582                                                 |       | 1,866 |   | 1,759 |   |
| Production and operations                                    |       | 783                                                  |       | 588                                                 |       | 2,509 |   | 1,785 |   |
| Other direct costs                                           |       | 785                                                  |       | 540                                                 |       | 1,247 |   | 990 |   |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Total cost of services                                       |       | 4,500                                                |       | 2,643                                               |       | 8,989 |   | 6,757 |   |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Other expenses:                                              |       |                                                 |       |                                                |       |   |   |   |   |
| Advertising                                                  |       | 1,912                                                |       | 1,477                                               |       | 5,668 |   | 4,282 |   |
| Selling, general and administrative                          |       | 4,162                                                |       | 4,269                                               |       | 13,351 |   | 11,495 |   |
| Non-cash compensation expense from exchange of stock options |       | —                                               |       | 47,983                                              |       | — |   | 47,983 |   |
| Depreciation and amortization                                |       | 693                                                  |       | 340                                                 |       | 2,015 |   | 937 |   |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Total other expenses                                         |       | 6,767                                                |       | 54,069                                              |       | 21,034 |   | 64,697 |   |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Income (loss) from operations                                |       | 137                                                  |       | (45,763                                             | )          | 1,456 |   | (41,743 | ) |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Interest expense                                             |       | —                                               |       | —                                              |       | (2 | ) | — |   |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Other income, net                                            |       | 396                                                  |       | 34                                                  |       | 486 |   | 93 |   |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Income (loss) before income taxes and minority interest      |       | 533                                                  |       | (45,729                                             | )          | 1,940 |   | (41,650 | ) |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Income tax provision (benefit)                               |       | 285                                                  |       | (18,192                                             | )          | 878 |   | (16,559 | ) |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Income (loss) before minority interest                       |       | 248                                                  |       | (27,537                                             | )          | 1,062 |   | (25,091 | ) |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Minority interest in net income of consolidated subsidiary   |       | —                                               |       | 193                                                 |       | — |   | 682 |   |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Net income (loss)                                            |       | $                                                    | 248        |                                                | $          | (27,730 | ) | $ | 1,062 |   | $ | (25,773 | ) |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Earnings (loss) per common share:                            |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                        |       | $                                                    | 0.01       |                                                | $          | (1.76 | ) | $ | 0.05 |   | $ | (1.69 | ) |
| Diluted                                                      |       | $                                                    | 0.01       |                                                | $          | (1.76 | ) | $ | 0.04 |   | $ | (1.69 | ) |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average number of common shares outstanding:        |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                        |       | 24,236                                               |       | 15,789                                              |       | 20,444 |   | 15,238 |   |
| Diluted                                                      |       | 27,658                                               |       | 15,789                                              |       | 23,672 |   | 15,238 |   |

 

See Notes to Unaudited CondensedConsolidated Financial Statements.

5

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**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES****Unaudited Condensed Consolidated Statement ofStockholders’ Equity****For the Nine Months Ended September 30, 2005**(In thousands)

 
| ** **                                                                                      | ** ** | ** **               | ** ** | ** **            | ** ** | ** **  | ** ** | ** **   | ** ** | ** **        | ** ** | ** **       | ** ** | **Accumulated** | ** ** | ** **  | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|-------------|------------|--------------|------------|-------------------|------------|------------------|------------|-----------------|------------|-------------|------------|------------|------------|
| ** **                                                                                      | ** ** | ** **               | ** ** | ** **            | ** ** | ** **  | ** ** | ** **   | ** ** | **Additional**    | ** ** | ** **       | ** ** | **Other**       | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** **                                                                                      | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Deferred** | ** ** | **Comprehensive** | ** ** | **Accumulated**  | ** ** | ** **      | ** ** |
| ** **                                                                                      | ** ** | **Shares**               | ** ** | **Amount**            | ** ** | **Shares**  | ** ** | **Amount**   | ** ** | **Capital**       | ** ** | **Compensation** | ** ** | **Income**      | ** ** | **Deficit** | ** ** | **Total**  | ** ** |
| Balance, January 1, 2005 (as originally reported)                                               |       | —                   |       | $                     | —     |        | 18,394     |         | $          | 18                |       | $                | 111,912    |            | $          | (1,034      | )          | $          | 43         |   | $ | (17,457 | ) | $ | 93,482 |   |
|                                                                                            |       |                     |       |                  |       |        |       |         |       |              |       |             |       |            |       |        |       |       |       |
| Cumulative impact of restatement                                                                |       |                     |       |                  |       |        |       |         |       |              |       |             |       |            |       | (100        | )          | (100)      |       |
|                                                                                            |       |                     |       |                  |       |        |       |         |       |              |       |             |       |            |       |        |       |       |       |
| Balance, January 1, 2005 (restated, Note 10)                                                    |       | —                   |       | —                |       | 18,394      |       | 18           |       | 111,912           |       | (1,034           | )          | 43              |       | (17,557     | )          | 93,382     |       |
|                                                                                            |       |                     |       |                  |       |        |       |         |       |              |       |             |       |            |       |        |       |       |       |
| Comprehensive income:                                                                           |       |                     |       |                  |       |        |       |         |       |              |       |             |       |            |       |        |       |       |       |
| Net income (restated, Note 10)                                                                  |       |                     |       |                  |       |        |       |         |       |              |       |             |       |            |       | 1,062       |       | 1,062      |       |
| Effect of change in fair value of  available-for-sale securities, net of deferred taxes of $2   |       |                     |       |                  |       |        |       |         |       |              |       |             |       | 6               |       |        |       | 6          |       |
| Total comprehensive income (restated, Note  10)                                                 |       |                     |       |                  |       |        |       |         |       |              |       |             |       |            |       |        |       | 1,068      |       |
|                                                                                            |       |                     |       |                  |       |        |       |         |       |              |       |             |       |            |       |        |       |       |       |
| Common stock issued upon exercise of stock options                                              |       |                     |       |                  |       | 2,341       |       | 2            |       | 2,629             |       |             |       |            |       |        |       | 2,631      |       |
|                                                                                            |       |                     |       |                  |       |        |       |         |       |              |       |             |       |            |       |        |       |       |       |
| Issuance of restricted stock to employees for services to be  rendered, net of forfeited shares |       |                     |       |                  |       | 70          |       |         |       | 861               |       | (861             | )          |            |       |        |       | —     |       |
|                                                                                            |       |                     |       |                  |       |        |       |         |       |              |       |             |       |            |       |        |       |       |       |
| Common stock issued upon sale to public, net of offering cost of  $1,066                        |       |                     |       |                  |       | 3,500       |       | 4            |       | 43,346            |       |             |       |            |       |        |       | 43,350     |       |
|                                                                                            |       |                     |       |                  |       |        |       |         |       |              |       |             |       |            |       |        |       |       |       |
| Amortization of deferred compensation                                                           |       |                     |       |                  |       |        |       |         |       |              |       | 252              |       |            |       |        |       | 252        |       |
|                                                                                            |       |                     |       |                  |       |        |       |         |       |              |       |             |       |            |       |        |       |       |       |
| Change in estimate of tax benefit from exercise of stock options                                |       |                     |       |                  |       |        |       |         |       | (864              | )          |             |       |            |       |        |       | (864)      |       |
|                                                                                            |       |                     |       |                  |       |        |       |         |       |              |       |             |       |            |       |        |       |       |       |
| Tax benefit from exercise of stock options                                                      |       |                     |       |                  |       |        |       |         |       | 659               |       |             |       |            |       |        |       | 659        |       |
|                                                                                            |       |                     |       |                  |       |        |       |         |       |              |       |             |       |            |       |        |       |       |       |
| Balance, September 30, 2005  (restated, Note 10)                                                |       | —                   |       | $                     | —     |        | 24,305     |         | $          | 24                |       | $                | 158,543    |            | $          | (1,643      | )          | $          | 49         |   | $ | (16,495 | ) | $ | 140,478 |   |

 

See Notes to Unaudited CondensedConsolidated Financial Statements.

 

6

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**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES****Unaudited Condensed Consolidated Statementsof Cash Flows**(In thousands)

 
| ** **                                                                                          | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2005**                                            | ** ** | **2004** | ** ** |
| ** **                                                                                          | ** ** | **(Restated, Note 10)**                   | ** ** |
| Operating activities:                                                                               |       |                                                |       |   |   |
| Net income (loss)                                                                                   |       | $                                                   | 1,062      |   | $ | (25,773 | ) |
| Adjustments to reconcile net income (loss) to net cash provided  by (used in) operating activities: |       |                                                |       |   |   |
| Depreciation and amortization                                                                       |       | 2,015                                               |       | 937 |   |
| Provision for doubtful accounts                                                                     |       | 132                                                 |       | — |   |
| Realized gain on sale of available-for-sale securities                                              |       | —                                              |       | (34 | ) |
| Minority interest in net income of consolidated subsidiary                                          |       | —                                              |       | 682 |   |
| Tax benefit from exercise of stock options                                                          |       | —                                              |       | 466 |   |
| Deferred tax provision                                                                              |       | 2,221                                               |       | (19,113 | ) |
| Compensation expense from exchange of stock options                                                 |       | —                                              |       | 47,983 |   |
| Amortization of deferred compensation                                                               |       | 252                                                 |       | — |   |
| Changes in operating assets and liabilities:                                                        |       |                                                |       |   |   |
| Accounts receivable                                                                                 |       | (601                                                | )          | (315 | ) |
| Income tax refund receivable                                                                        |       | (1,391                                              | )          | 945 |   |
| Prepaid programming costs                                                                           |       | (2,515                                              | )          | — |   |
| Other current assets                                                                                |       | (868                                                | )          | 152 |   |
| Deposits and other assets                                                                           |       | (11                                                 | )          | (17 | ) |
| Accounts payable and accrued expenses                                                               |       | (212                                                | )          | 749 |   |
| Accrued severance payments                                                                          |       | (26                                                 | )          | (268 | ) |
| Deferred revenue                                                                                    |       | (102                                                | )          | (462 | ) |
| Customer deposits                                                                                   |       | 25                                                  |       | — |   |
| Deferred satellite rent obligations                                                                 |       | (14                                                 | )          | (51 | ) |
| Net cash provided by (used in) by operating activities                                              |       | (33                                                 | )          | 5,881 |   |
|                                                                                                |       |                                                |       |   |   |
| Investing activities:                                                                               |       |                                                |       |   |   |
| Purchases of property, plant and equipment                                                          |       | (8,069                                              | )          | (1,631 | ) |
| Purchases of available-for-sale securities                                                          |       | (21,190                                             | )          | (256 | ) |
| Proceeds from sale of available-for-sale securities                                                 |       | —                                              |       | 85 |   |
| Cost related to acquisition of minority interest                                                    |       | —                                              |       | (593 | ) |
| Net cash used in investing activities                                                               |       | (29,259                                             | )          | (2,395 | ) |
| Financing activities:                                                                               |       |                                                |       |   |   |
| Principal payments on notes payable and capital leases                                              |       | (19                                                 | )          | (151 | ) |
| Proceeds from exercise of stock options                                                             |       | 2,631                                               |       | 1,102 |   |
| Proceeds from common stock subscriptions receivable                                                 |       | —                                              |       | 30 |   |
| Proceeds from the sale of common stock, net of offering costs                                       |       | 43,350                                              |       | — |   |
| Net cash provided by financing activities                                                           |       | 45,962                                              |       | 981 |   |
| Net increase in cash and cash equivalents                                                           |       | 16,670                                              |       | 4,467 |   |
| Cash and cash equivalents, beginning of period                                                      |       | 13,105                                              |       | 7,214 |   |
| Cash and cash equivalents, end of period                                                            |       | $                                                   | 29,775     |   | $ | 11,681 |   |
|                                                                                                |       |                                                |       |   |   |
| Supplemental disclosure of cash flow information:                                                   |       |                                                |       |   |   |
|                                                                                                |       |                                                |       |   |   |
| Interest paid                                                                                       |       | $                                                   | 2          |   | $ | — |   |
|                                                                                                |       |                                                |       |   |   |
| Income taxes paid                                                                                   |       | $                                                   | 108        |   | $ | 1,139 |   |
|                                                                                                |       |                                                |       |   |   |
| Supplemental disclosures of non-cash investing and financing  activities:                           |       |                                                |       |   |   |
|                                                                                                |       |                                                |       |   |   |
| Retirement of treasury stock                                                                        |       | $                                                   | —     |   | $ | 400 |   |
| Fair value of common stock issued to acquire minority interest  in subsidiary                       |       | $                                                   | —     |   | $ | 46,062 |   |
| Effect of net increase in fair value of available-for-sale  securities, net of deferred taxes       |       | $                                                   | 6          |   | $ | — |   |
| Exchange of stock options for non-employee stock options of  subsidiary                             |       | $                                                   | —     |   | $ | 4,250 |   |

 

See Notes to Unaudited CondensedConsolidated Financial Statements.

 

7

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

**NOTE 1—ORGANIZATION ANDBUSINESS**

**Description of Operations**

OutdoorChannel Holdings, Inc. (“Outdoor Channel Holdings,” or collectively with itssubsidiaries, the “Company”) is incorporated under the laws of the State ofDelaware. The Company acquired the remaining 17.6% minority interest in itssubsidiary, The Outdoor Channel, Inc. (“TOC”), which it did not previouslyhold, on September 8, 2004. TOC operates The Outdoor Channel, which is anational television network devoted to traditional outdoor activities, such ashunting, fishing and shooting sports, as well as off-road motor sports andother related lifestyle programming. TOC also operates Outdoor Channel 2 HD,which also is a national television network with similar programming producedutilizing high definition technology.

Ourrevenues include advertising fees from advertisements aired on The OutdoorChannel, including fees paid by outside producers to purchase advertising timein connection with the airing of their programs on The Outdoor Channel, andfrom advertisements in “Gold Prospectors & Treasure Hunters in the GreatOutdoors” magazine; subscriber fees paid by cable and satellite serviceproviders that air The Outdoor Channel; membership fees from members in bothLDMA-AU, Inc. (“Lost Dutchman’s”) and Gold Prospector’s Association of America,LLC (“GPAA”); and other income including products and services related to goldprospecting, gold expositions, expeditions and outings.

Otherbusiness activities consist of the promotion and sale of a gold prospectingexpedition to our Cripple River property located near Nome, Alaska, and thesale of memberships in Lost Dutchman’s which entitle members to engage in goldprospecting on our Arizona, California, Colorado, Georgia, Michigan, NorthCarolina, Oregon, and South Carolina properties. We have signed an agreementwith another organization for the mutual use of these and other properties.

Outdoor Channel Holdings also wholly owns43455 BPD, LLC which owns the Company’s broadcast facility.

**Restatement of 2005 Financial Statements**

Theaccompanying unaudited condensed consolidated financial statements as ofSeptember 30, 2005 and December 31, 2004 and for the three and nine monthsended September 30, 2005 and 2004 and the related notes have been restated asfurther explained in Note 10.

**Reclassifications**

Certain amountsin the 2005 and 2004 unaudited condensed consolidated financial statements havebeen reclassified either to conform to the 2005 presentations or to provideadditional detail about our operating results and more fully comply with theSecurities and Exchange Commission’s Regulation S-X. In particular certainamounts included under “expenses” in the 2005 and 2004 unaudited condensedconsolidated statements of operations we originally issued have beenreclassified in line items under either “cost of services” or “other expenses”.  Cost of services includes programming,satellite transmission fees, production and operations and other direct costs.Other expenses include advertising, selling, general and administrative anddepreciation and amortization.  Further,to better match intangible assets with the segment to which they pertain, wehave reclassified the amortizable intangible assets and the goodwill which werecorded in connection with the acquisition on September 8, 2004 along with therelated amortization expense from “Corporate” to the “TOC” segment. Certainother changes have been made in the historical unaudited condensed consolidatedfinancial statement s to conform with current presentations.

**NOTE 2—UNAUDITED INTERIMFINANCIAL STATEMENTS**

Inthe opinion of management, the accompanying unaudited condensed consolidatedfinancial statements reflect all adjustments, consisting of normal recurringadjustments, necessary to present fairly the financial position of the Companyas of September 30, 2005 and its results of operations and cash flows for the threeand/or nine months ended September 30, 2005 and 2004. Information included inthe consolidated balance sheet, as of December 31, 2004 has been derived from,and certain terms used herein are defined in, the audited financial statementsof the Company as of December 31, 2004 (the “Audited Financial Statements”)included in the Company’s Annual Report on Form 10-K/A (the “10-K/A”) for theyear ended December 31, 2004 that was previously filed with the Securities andExchange Commission (the “SEC”). Pursuant to the rules and regulations of theSEC, certain information and disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted from thesefinancial statements unless significant changes have taken place 

8

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since the end of the most recent fiscalyear. Accordingly, these unaudited condensed consolidated financial statementsshould be read in conjunction with the Audited Financial Statements and theother information also included in the 10-K/A.

Theresults of the Company’s operations for the three and nine months endedSeptember 30, 2005 are not necessarily indicative of the results of operationsfor the full year ending December 31, 2005.

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect reported amounts of assets andliabilities as of the dates of the condensed consolidated balance sheets andreported amount of revenues and expenses for the periods presented.Accordingly, actual results could materially differ from those estimates.

**NOTE 3—EARNINGS (LOSS) PER SHARE**

Effective September 15, 2004 the Companyeffected a 5 for 2 split of its common stock in connection with itsreincorporation in Delaware. All share and per share data has been adjustedwhere appropriate to reflect this stock split. In addition, the par value ofthe Company’s common stock was changed from $0.02 to $0.001 per share.

TheCompany has presented “basic” and “diluted” earnings per common share in theaccompanying unaudited condensed consolidated statements of operations inaccordance with the provisions of Statement of Financial Accounting StandardsNo. 128, “Earnings Per Share” (“SFAS 128”). Basic earnings per common share iscalculated by dividing net income by the weighted average number of commonshares outstanding during each period. The calculation of diluted earnings percommon share is similar to that of basic earnings per common share, except thatthe denominator is increased to include the number of additional common sharesthat would have been outstanding if all potentially dilutive common shares ofthe Company were issued during the period if any such issuances have a dilutiveeffect.

Thecomputation of diluted earnings per common share takes into account the effectson the weighted average number of common shares outstanding of the assumedexercise of the outstanding stock options of the Company for the three and ninemonths ended September 30, 2005, adjusted for the application of the treasurystock method. The computation of diluted loss per common share for the threeand nine months ended September 30, 2004 does not take into account either (i)the outstanding stock options of the Company because the effect of theirassumed exercise would be anti-dilutive; or (ii) the increase in the net lossattributable to the increase in the minority interest in the net income of TOCthat results from the assumed exercise of all of TOC’s outstanding stockoptions prior to the exchange of those options for Company options on September8, 2004 because the effects of the assumed exercise of TOC stock options werenot material. The number of shares potentially issuable by the Company atSeptember 30, 2005 and 2004 upon the exercise of stock options that were notincluded in the computation of net earnings per common share because they wereanti-dilutive totaled 410 and 5,643, respectively.

Thefollowing table summarizes the calculation of net income and the weightedaverage common shares outstanding for basic and diluted earnings per share forthe three and nine months ended September 30, 2005 and 2004:
| ** **                                                                                                                                                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                                                         | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                         | ** ** | **(Restated, Note 10)**                    | ** ** | **(Restated, Note 10)**                   | ** ** |
| Numerators:                                                                                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Net income  (loss) —basic                                                                                                                                     |       | $                                                    | 248        |                                                | $          | (27,730 | ) | $ | 1,062 |   | $ | (25,773 | ) |
|                                                                                                                                                               |       |                                                 |       |                                                |       |   |   |   |   |
| Denominators:                                                                                                                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average  common shares outstanding—basic                                                                                                             |       | 24,236                                               |       | 15,789                                              |       | 20,444 |   | 15,238 |   |
| Dilutive effect  of potentially issuable common shares upon exercise of stock options of the  Company as adjusted for the application of the treasury stock method |       | 3,422                                                |       | —                                              |       | 3,228 |   | — |   |
| Diluted weighted average common shares outstanding                                                                                                                 |       | 27,658                                               |       | 15,789                                              |       | 23,672 |   | 15,238 |   |
|                                                                                                                                                                    |            |                                                      |            |                                                     |            |  |  |  |  |  |  |  |  |

 

**NOTE 4—PRO FORMA EFFECTSOF STOCK OPTIONS**

Statementof Financial Accounting Standards No. 123, “Accounting for Stock-BasedCompensation” (“SFAS 123”), provides for the use of a fair value based methodof accounting for employee stock compensation. However, SFAS 123 also allows anentity to continue to measure compensation cost for stock options granted toemployees using the intrinsic value method of accounting prescribed by AccountingPrinciples Board Opinions No. 25, “Accounting for Stock Issued to Employees” (“APB25”), which only 

9

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requires charges to compensation expensefor the excess, if any, of the fair value of the underlying stock at the date astock option is granted (or at an appropriate subsequent measurement date) overthe amount the employee must pay to acquire the stock, if such amounts differmaterially. The Company has elected to continue to account for employee stockoptions using the intrinsic value method under APB 25. By making that election,it is required by SFAS 123 and Statement of Financial Accounting Standards No.148, “Accounting for Stock-Based Compensation—Transition and Disclosure” toprovide pro forma disclosures of net income (loss) and earnings (loss) pershare as if a fair value based method of accounting had been applied.

TheCompany’s historical net income (loss) and earnings (loss) per common share andpro forma net income (loss) and earnings (loss) per common share assumingcompensation cost had been determined for the three and nine months endedSeptember 30, 2005 and 2004 based on the fair value at the grant date for allawards by the Company using the Black-Scholes option pricing model consistentwith the provisions of SFAS 123, and amortized ratably over the vesting period,are set forth below:
| ** **                                                                                                                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                              | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                              | ** ** | **(Restated, Note 10)**                    | ** ** | **(Restated, Note 10)**                   | ** ** |
| Net income (loss):                                                                                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| As reported                                                                                                                             |       | $                                                    | 248        |                                                | $          | (27,730 | ) | $ | 1,062 |   | $ | (25,773 | ) |
| Add: Stock-based  employee compensation expense included in reported net loss, net of tax  effects*                                     |       | —                                               |       | 28,885                                              |       | — |   | 28,885 |   |
| Deduct:  Stock-based employee compensation expense assuming a fair value based method  had been used for all awards, net of tax effects |       | (456                                                 | )          | (478                                                | )          | (1,285 | ) | (1,390 | ) |
|                                                                                                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Pro forma -  basic                                                                                                                      |       | $                                                    | (208       | )                                                   | $          | 677 |   | $ | (223 | ) | $ | 1,722 |   |
| Pro forma -  diluted                                                                                                                    |       | $                                                    | (208       | )                                                   | $          | 677 |   | $ | (223 | ) | $ | 1,722 |   |
|                                                                                                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Basic earnings (loss) per share:                                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| As reported                                                                                                                             |       | $                                                    | 0.01       |                                                | $          | (1.76 | ) | $ | 0.05 |   | $ | (1.69 | ) |
| Pro forma                                                                                                                               |       | $                                                    | (0.01      | )                                                   | $          | 0.04 |   | $ | (0.01 | ) | $ | 0.11 |   |
| Diluted earnings (loss) per share:                                                                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| As reported                                                                                                                             |       | $                                                    | 0.01       |                                                | $          | (1.76 | ) | $ | 0.04 |   | $ | (1.69 | ) |
| Pro forma                                                                                                                               |       | $                                                    | (0.01      | )                                                   | $          | 0.04 |   | $ | (0.01 | ) | $ | 0.11 |   |

----

*See Note 3

Thefair value of each option granted by the Company in the nine months endedSeptember 30, 2005 and the year ended December 31, 2004 was estimated on thedate of grant using the Black-Scholes option pricing model with the followingassumptions:

|                             | ** ** | **Nine Months Ended  September 30, 2005** | ** ** | **Year Ended  December 31, 2004** | ** ** |
|-----------------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------|------------|
| Risk-free interest rate     |       | 3.7 — 4.2                                                | %          | 1.7 — 4.2                                   | %          |
| Dividend yield              |       | 0                                                             | %          | 0                                                | %          |
| Expected life of the option |       | 3.8 — 5.1 yrs.                                           |       | 3 mos. — 10 yrs.                            |       |
| Volatility factor           |       | 37.7                                                          | %          | 41.7 — 79.0                                 | %          |

 

As aresult of amendments to SFAS 123, the Company will be required to charge thefair value of employee stock options as of the date of grant to expense overthe vesting period beginning with its fiscal quarter ending March 31, 2006. Theadoption of SFAS 123 (R) is expected to have a material impact on the financialstatements of Outdoor Channel Holdings, Inc.

**NOTE 5—EQUITYTRANSACTIONS**

**Issuances of Common Stockby the Company**

OnJuly 1, 2005, the Company completed a public offering of its common stock,whereby we sold 3,500 shares of common stock and received net proceeds of$43,350. In addition, certain selling stockholders exercised options to buy1,688 shares of common stock which were resold in the public offering. On July13, 2005, the underwriters exercised their over-allotment option granted bycertain selling stockholders, and purchased an additional 442 shares of commonstock. The shares sold by the selling stockholders were purchased immediatelybefore the sale through the exercise of options they held to buy common sharesfrom the Company. The Company received $2,168 in the aggregate from theexercise of these options. During the nine months ended September 30, 2005, the

10

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Company also received cash proceeds ofapproximately $463 from the exercise of other options for the purchase of 211shares of common stock.

Duringthe nine months ended September 30, 2005, the Company issued to employees anaggregate of 75 shares of restricted stock on two separate dates. The rights tothese shares vest over a three year period. Based on the closing market priceson the day before these grants of $14.95 and $13.38 per share, the fair valueof the stock was $1,103 but the aggregate charge to be incurred over thevesting period amounts to $861 representing the fair value net of  an estimated employee turnover rate and hasbeen included in deferred compensation as an offset to stockholders’equity.  The balance will be amortized tocompensation expense as the rights to the restricted stock vest. The Companyrecorded a charge for these shares of $72 and $95 for the three and nine monthsended September 30, 2005, respectively. For the restricted shares issued in 2004, the Company recorded a chargeof $52 and $156 for the same respective periods.  As of September 30, 2005, a total of 5 sharesof restricted stock have been cancelled due to employee turnover.

**Outdoor Channel Holdings,Inc. Stock Option Plans**

Descriptionsof Outdoor Channel Holdings’ stock option plans are included in Note 9 of theCompany’s Annual Report on Form 10-K/A for the year ended December 31, 2004. Asummary of the status of the options granted under Outdoor Channel Holdings’stock option plans and outside of those plans as of September 30, 2005 and thechanges in options outstanding during the nine months then ended is presentedin the table that follows:

|                                      | ** ** | **As of September 30, 2005** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **Shares**                                       | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Outstanding at beginning of period   |       | 5,630                                            |       | $ | 4.12 |   |
| Options granted                      |       | 385                                              |       | 14.60 |   |
| Options exercised                    |       | (2,341                                           | )          | 1.12 |   |
| Options canceled or expired          |       | (3                                               | )          | 6.14 |   |
|                                 |       |                                             |       |   |   |
| Options outstanding at end of period |       | 3,671                                            |       | $ | 7.13 |   |

 

**NOTE 6—RELATED PARTYTRANSACTIONS**

TheCompany is leasing its administrative facilities from Musk Ox Properties, LP,which in turn is owned by Messrs. Perry T. Massie and Thomas H. Massie,principal stockholders and officers of the Company. The lease agreementscurrently require monthly rent payments aggregating approximately $21. Theselease agreements expire on December 31, 2005. Rent expense paid to Musk OxProperties, LP totaled approximately $63 and $61 in the three months endedSeptember 30, 2005 and 2004, respectively, and approximately $189 and $183 inthe nine months ended September 30, 2005 and 2004, respectively. The Companyhas engaged a third party to determine fair market lease rates for the facilityin anticipation of renewing the lease agreements for another two-year period.

**NOTE 7—SEGMENTINFORMATION**

Pursuantto the Provisions of Statement of Financial Accounting Standards No. 131, “DisclosuresAbout Segments of an Enterprise and Related Information” (“SFAS 131”), theCompany reports segment information in the same format as reviewed by theCompany’s Chief Operating Decision Maker (the “CODM”). The Company segregatesits business activities into TOC and the Membership Division. TOC is a separatebusiness activity that broadcasts television programming on The Outdoor Channel24 hours a day, seven days a week. TOC generates revenue from advertising fees(which include fees paid by outside producers to purchase advertising time inconnection with the airing of their programs on The Outdoor Channel) andsubscriber fees. Lost Dutchman’s and GPAA membership sales and relatedactivities are reported in the Membership Division. The Membership Divisionalso includes magazine sales, the sale of products and services related to goldprospecting, gold expositions, expeditions and outings. Intersegment salesamounted to approximately $149 in each of the three months ended September 30,2005 and 2004 and $446 in each of the nine months ended September 30, 2005 and2004.

11

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Informationwith respect to these reportable segments as of and for the three and ninemonths ended September 30, 2005 and 2004 follows:
| ** **                                                                       | ** ** | **Revenues** | ** ** | **Income (Loss)  Before Income  Taxes and  Minority Interest** | ** ** | **Total  Assets** | ** ** | **Depreciation  and  Amortization** | ** ** | **Additions to  Property,  Plant and  Improvements** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------|------------|------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------------------------|------------|----------------------------------------------------------------|------------|
| **As of and for the Three Months Ended September  30, 2005 (restated, Note 10)** |       |         |       |                                                                               |       |              |       |                                |       |                                                           |       |
| TOC                                                                              |       | $            | 9,309      |                                                                               | $          | 274               |       | $                                   | 80,459     |                                                           | $          | 615 |   | $ | 4,567 |   |
| Membership Division                                                              |       | 2,095        |       | 428                                                                                |       | 6,186             |       | 78                                  |       | 129                                                            |       |
| Subtotals of  Segments                                                           |       | 11,404       |       | 702                                                                                |       | 86,645            |       | 693                                 |       | 4,696                                                          |       |
| Corporate*                                                                       |       | —       |       | (169                                                                               | )          | 59,179            |       | —                              |       | —                                                         |       |
| Totals                                                                           |       | $            | 11,404     |                                                                               | $          | 533               |       | $                                   | 145,824    |                                                           | $          | 693 |   | $ | 4,696 |   |
|                                                                             |       |         |       |                                                                               |       |              |       |                                |       |                                                           |       |
| **September 30, 2004 (restated, Note 10)**                                       |       |         |       |                                                                               |       |              |       |                                |       |                                                           |       |
| TOC                                                                              |       | $            | 9,022      |                                                                               | $          | (45,561           | )          | $                                   | 67,544     |                                                           | $          | 254 |   | $ | 581 |   |
| Membership Division                                                              |       | 1,927        |       | 306                                                                                |       | 4,400             |       | 86                                  |       | 84                                                             |       |
| Subtotals of  Segments                                                           |       | 10,949       |       | (45,255                                                                            | )          | 71,944            |       | 340                                 |       | 665                                                            |       |
| Corporate*                                                                       |       | —       |       | (474                                                                               | )          | 19,539            |       | —                              |       | —                                                         |       |
| Totals                                                                           |       | $            | 10,949     |                                                                               | $          | (45,729           | )          | $                                   | 91,483     |                                                           | $          | 340 |   | $ | 665 |   |
|                                                                             |       |         |       |                                                                               |       |              |       |                                |       |                                                           |       |
| **As of and for the Nine Months Ended September  30, 2005 (restated, Note 10)**  |       |         |       |                                                                               |       |              |       |                                |       |                                                           |       |
| TOC                                                                              |       | $            | 27,061     |                                                                               | $          | 2,734             |       | $                                   | 80,459     |                                                           | $          | 1,780 |   | $ | 7,752 |   |
| Membership Division                                                              |       | 4,418        |       | 314                                                                                |       | 6,186             |       | 235                                 |       | 317                                                            |       |
| Subtotals of  Segments                                                           |       | 31,479       |       | 3,048                                                                              |       | 86,645            |       | 2,015                               |       | 8,069                                                          |       |
| Corporate*                                                                       |       | —       |       | (1,108                                                                             | )          | 59,179            |       | —                              |       | —                                                         |       |
| Totals                                                                           |       | $            | 31,479     |                                                                               | $          | 1,940             |       | $                                   | 145,824    |                                                           | $          | 2,015 |   | $ | 8,069 |   |
|                                                                             |       |         |       |                                                                               |       |              |       |                                |       |                                                           |       |
| **September 30, 2004 (restated, Note 10)**                                       |       |         |       |                                                                               |       |              |       |                                |       |                                                           |       |
| TOC                                                                              |       | $            | 25,304     |                                                                               | $          | (41,093           | )          | $                                   | 67,544     |                                                           | $          | 680 |   | $ | 1,081 |   |
| Membership Division                                                              |       | 4,407        |       | 482                                                                                |       | 4,400             |       | 257                                 |       | 550                                                            |       |
| Subtotals of  Segments                                                           |       | 29,711       |       | (40,611                                                                            | )          | 71,944            |       | 937                                 |       | 1,631                                                          |       |
| Corporate*                                                                       |       | —       |       | (1,039                                                                             | )          | 19,539            |       | —                              |       | —                                                         |       |
| Totals                                                                           |       | $            | 29,711     |                                                                               | $          | (41,650           | )          | $                                   | 91, 483    |                                                           | $          | 937 |   | $ | 1,631 |   |

----

*The Company captures corporate overhead that is applicable toboth segments, but not directly related to operations in a separate businessunit, as “Corporate.” The expenses allocated to Corporate consisted primarilyof: professional fees including public relations, accounting and legal fees,taxes associated with being incorporated in Delaware, board fees, and othercorporate fees not associated directly with either TOC or the Membershipdivision. Corporate assets consist primarily of cash not held in ouroperating accounts, available-for-sale securities, deferred tax asset, net andincome tax refund receivable. In prior periods, essentially all of theamortizable intangible assets and goodwill were classified as Corporate.  These amounts relate to, and have beenreclassified as part of, the TOC segment.

**NOTE 8—INVESTMENT INAVAILABLE-FOR-SALE SECURITIES**

TheCompany’s short term investments are classified as available-for-sale and arerecorded at fair value. Gross realized gains and losses on sales of securitiesduring 2004 were not material. Included in short-term available-for-saleinvestments are auction rate securities owned by the Company that generallyreset every 28 days.

| The investment in available-for-sale  securities at September 30, 2005 is comprised as follows: |   |   |   |
|-------------------------------------------------------------------------------------------------|--------|--------|--------|
| Auction rate  securities                                                                        |   | $      | 21,190 |   |
| Equities                                                                                        |   | 733    |   |
| Total current securities                                                                        |   | $      | 21,923 |   |

 

Thechange in net unrealized securities gains (losses) recognized in othercomprehensive income includes unrealized gains (losses) that arose from changesin market value of securities that were held during the period. The unrealizedgain (loss) associated with investments was not significant for either periodpresented.

12

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**NOTE 9—SUBSEQUENT EVENTS**

OnNovember 2, 2005, the Company renewed its revolving line of credit agreement(the “revolver”) with U.S. Bank N.A. (the “Bank”), extending the maturity dateto September 7, 2007 and increasing the total amount which can be drawn uponunder the revolver  to $8,000. Therevolver provides that the interest rate shall be LIBOR plus 1.25%. Therevolver is collateralized by substantially all of the Company’s assets. Thiscredit facility contains customary financial and other covenants andrestrictions, as amended on November 2, 2005, including a change of controlprovision. As of September 30, 2005, the Company did not have any outstandingborrowings under this revolver.

OnNovember 2, 2005, the Company obtained a $1,950 mortgage loan from the Bank onits recently purchased broadcast facility located in Temecula, California whichhas a 10 year term with a 25 year amortization schedule. This loan carries avariable interest rate of LIBOR plus 1.35%. This loan is secured primarily by aDeed of Trust on the property and is also secondarily secured by the sameassets as the revolver. It also contains customary financial and othercovenants and restrictions including a change of control provision. On November7, 2005, the Company entered into an interest rate swap agreement with its bankto reduce the potential impact of increasing interest rates and effectivelyfixed the interest rate on this loan at 6.59%.

OnNovember 2, 2005, the Company obtained a $3,000, five year fully amortizingterm loan. This term loan carries a variable interest rate of LIBOR plus 1.35%.This term loan is secured by the same assets as the revolver and containscustomary financial and other covenants and restrictions including a change ofcontrol provision. On November 7, 2005, the Company entered into an interestrate swap agreement with the Bank to reduce the potential impact of increasinginterest rates and effectively fixed the interest rate on this term loan at6.35%. The proceeds from this loan are principally to be used for the leaseholdimprovements and the purchase of equipment related to our broadcast facility.

**NOTE 10****—****RESTATEMENTSOF UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

ThisForm 10-Q/A amends our previously filed Form 10-Q for the quarter endedSeptember 30, 2005 to reflect adjustments to the unaudited condensedconsolidated financial statements as of September 30, 2005 and December 31,2004 and for the three and nine months ended September 30, 2005 and 2004arising from the effects of a reclassification of all of the amounts originallyallocated to the cost of multi-system cable operator (“MSO”) relationships fromother non-amortizable intangible assets to amortizable intangible assets andthe determination that they have an estimated useful life of 21 years and 4months. Although the revised estimate of theuseful life of these assets resulted in adjustments to and the restatement ofour condensed consolidated financial statements included in this form 10-Q/A as of December 31, 2004 and for the threeand nine months ended September 30, 2004, we determined that the effects ofthese adjustments were immaterial, individually and in the aggregate, to ourannual and quarterly reports filed prior to January 1, 2005 and thus we did notamend those filings.  In addition, certainamounts included under “expenses” in the 2005 and 2004 unaudited condensedconsolidated statements of operations we originally issued have beenreclassified in line items under either “cost of services” or “other expenses”and certain intangible assets and the related amortization expense have beenreclassified from “Corporate” to the “TOC” segment as explained in Note 1. Theadjustments to the 2005 and 2004 unauditedcondensed consolidated financial statements are a result of a correction of theaccounting treatment for the portion of the excess of the cost of the minorityinterest over the fair value of the underlying interest in the net identifiableassets acquired related to the acquisition of the remaining minority interestin TOC that we did not previously own on September 8, 2004 that was allocatedto the MSO relationships. The adjustments were based on a review in the thirdquarter of 2006 of the facts and circumstances, the nature of our business, ourexperience with the MSOs and the proclivities of our industry as of September8, 2004.  The accompanying unauditedcondensed consolidated financial statements and the related notes have beenrestated in comparison to those in our previously filed Form 10-Q for thequarter ended September 30, 2005 to reflect the effects of these adjustments asexplained below.

THE EFFECTS ON THE CONDENSED CONSOLIDATED BALANCESHEETS

As a result of therestatement, our unaudited condensed consolidated balance sheet as of September30, 2005 changed as follows:

|                                          | ** ** | **As  Originally  Reported** | ** ** | **As Restated** | ** ** | **Change** | ** ** |
|------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------|------------|
|                                     |       |                         |       |                 |       |       |       |
| Amortizable  intangible assets, net      |       | $                            | 1,519      |                 | $          | 11,555     |       | $ | 10,036 |   |
|                                     |       |                         |       |                 |       |       |       |
| Other  non-amortizable intangible assets |       | 10,573                       |       | —               |       | (10,573    | )          |
| Deferred tax  assets, net                |       | 11,150                       |       | 11,362               |       | 212        |       |
| Total assets                             |       | 146,149                      |       | 145,824              |       | (325       | )          |
| Accumulated  deficit                     |       | (16,170                      | )          | (16,495              | )          | (325       | )          |
| Total stockholders’  equity         |       | 140,803                      |       | 140,478              |       | (325       | )          |
|                                          |            |                              |            |                      |            |            |            |  |  |  |

 

13

----

As a result of therestatement, our condensed consolidated balance sheet as of December 31, 2004changed as follows:

|                                          | ** ** | **As  Previously  Reported** | ** ** | **As Restated** | ** ** | **Change** | ** ** |
|------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------|------------|
|                                     |       |                         |       |                 |       |       |       |
| Amortizable  intangible assets, net      |       | $                            | 1,939      |                 | $          | 12,347     |       | $ | 10,408 |   |
|                                     |       |                         |       |                 |       |       |       |
| Other  non-amortizable intangible assets |       | 10,573                       |       | —               |       | (10,573    | )          |
| Deferred tax  assets, net                |       | 14,074                       |       | 14,139               |       | 65         |       |
| Total assets                             |       | 99,669                       |       | 99,569               |       | (100       | )          |
| Accumulated  deficit                     |       | (17,457                      | )          | (17,557              | )          | (100       | )          |
| Total stockholders’  equity         |       | 93,482                       |       | 93,382               |       | (100       | )          |
|                                          |            |                              |            |                      |            |            |            |  |  |  |

 

THE EFFECTS ON THEUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

As a result of therestatement, the unaudited condensed consolidated statements of operations forthree months ended September 30, 2005 changed as follows:

|                                                          | ** ** | **As  Originally  Reported** | ** ** | **As Restated** | ** ** | **Change** | ** ** |
|----------------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------|------------|
| ** **                                               | ** ** | ** **                   | ** ** | ** **           | ** ** | ** ** | ** ** |
| **For the  three months ended September 30, 2005**       |       |                         |       |                 |       |       |       |
| Depreciation and amortization                            |       | $                            | 569        |                 | $          | 693        |       | $ | 124 |   |
| Total other expenses                                     |       | 6,643                        |       | 6,767                |       | 124        |       |
| Income (loss) from operations                            |       | 261                          |       | 137                  |       | (124       | )          |
| Income (loss) before income taxes and minority  interest |       | 657                          |       | 533                  |       | (124       | )          |
| Income tax provision (benefit)                           |       | 334                          |       | 285                  |       | (49        | )          |
| Income (loss) before minority interest                   |       | 323                          |       | 248                  |       | (75        | )          |
| Net income (loss)                                        |       | 323                          |       | 248                  |       | (75        | )          |
| Earnings (loss) per share                                |       |                         |       |                 |       |       |       |
| Basic                                                    |       | $                            | 0.01       |                 | $          | 0.01       |       | — |   |
| Diluted                                                  |       | $                            | 0.01       |                 | $          | 0.01       |       | — |   |
|                                                          |            |                              |            |                      |            |            |            |  |  |  |

 

As a result of therestatement, the unaudited condensed consolidated statements of operations fornine months ended September 30, 2005 changed as follows:

|                                                          | ** ** | **As  Originally  Reported** | ** ** | **As Restated** | ** ** | **Change** | ** ** |
|----------------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------|------------|
| ** **                                               | ** ** | ** **                   | ** ** | ** **           | ** ** | ** ** | ** ** |
| **For the  nine months ended September 30, 2005**        |       |                         |       |                 |       |       |       |
| Depreciation and amortization                            |       | $                            | 1,643      |                 | $          | 2,015      |       | $ | 372 |   |
| Total other expenses                                     |       | 20,662                       |       | 21,034               |       | 372        |       |
| Income (loss) from operations                            |       | 1,828                        |       | 1,456                |       | (372       | )          |
| Income (loss) before income taxes and minority  interest |       | 2,312                        |       | 1,940                |       | (372       | )          |
| Income tax provision (benefit)                           |       | 1,025                        |       | 878                  |       | (147       | )          |
| Income (loss) before minority interest                   |       | 1,287                        |       | 1,062                |       | (225       | )          |
| Net income (loss)                                        |       | 1,287                        |       | 1,062                |       | (225       | )          |
| Earnings (loss) per share                                |       |                         |       |                 |       |       |       |
| Basic                                                    |       | $                            | 0.06       |                 | $          | 0.05       |       | $ | (0.01 | ) |
| Diluted                                                  |       | $                            | 0.05       |                 | $          | 0.04       |       | $ | (0.01 | ) |
|                                                     |       |                         |       |                 |       |       |       |

 

14

----

As a result of therestatement, the unaudited condensed consolidated statements of operations forthree months ended September 30, 2004 changed as follows:

|                                                          | ** ** | **As  Previously  Reported** | ** ** | **As Restated** | ** ** | **Change** | ** ** |
|----------------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------|------------|
| ** **                                               | ** ** | ** **                   | ** ** | ** **           | ** ** | ** ** | ** ** |
| **For the  three months ended September 30, 2004**       |       |                         |       |                 |       |       |       |
| Depreciation and amortization                            |       | $                            | 299        |                 | $          | 340        |       | $ | 41 |   |
| Total other expenses                                     |       | 54,028                       |       | 54,069               |       | 41         |       |
| Income (loss) from operations                            |       | (45,722                      | )          | (45,763              | )          | (41        | )          |
| Income (loss) before income taxes and minority  interest |       | (45,688                      | )          | (45,729              | )          | (41        | )          |
| Income tax provision (benefit)                           |       | (18,176                      | )          | (18,192              | )          | (16        | )          |
| Income (loss) before minority interest                   |       | (27,512                      | )          | (27,537              | )          | (25        | )          |
| Net Income (loss)                                        |       | (27,705                      | )          | (27,730              | )          | (25        | )          |
| Earnings (loss) per share                                |       |                         |       |                 |       |       |       |
| Basic                                                    |       | $                            | (1.75      | )                    | $          | (1.76      | )          | $ | (0.01 | ) |
| Diluted                                                  |       | $                            | (1.75      | )                    | $          | (1.76      | )          | $ | (0.01 | ) |

 

As a result of therestatement, the unaudited condensed consolidated statements of operations fornine months ended September 30, 2004 changed as follows:

|                                                          | ** ** | **As  Previously  Reported** | ** ** | **As Restated** | ** ** | **Change** | ** ** |
|----------------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------|------------|
| ** **                                               | ** ** | ** **                   | ** ** | ** **           | ** ** | ** ** | ** ** |
| **For the  nine months ended September 30, 2004**        |       |                         |       |                 |       |       |       |
| Depreciation and amortization                            |       | $                            | 896        |                 | $          | 937        |       | $ | 41 |   |
| Total other expenses                                     |       | 64,656                       |       | 64,697               |       | 41         |       |
| Income (loss) from operations                            |       | (41,702                      | )          | (41,743              | )          | (41        | )          |
| Income (loss) before income taxes and minority  interest |       | (41,609                      | )          | (41,650              | )          | (41        | )          |
| Income tax provision (benefit)                           |       | (16,543                      | )          | (16,559              | )          | (16        | )          |
| Income (loss) before minority interest                   |       | (25,066                      | )          | (25,091              | )          | (25        | )          |
| Net income (loss)                                        |       | (25,748                      | )          | (25,773              | )          | (25        | )          |
| Earnings (loss) per share                                |       |                         |       |                 |       |       |       |
| Basic                                                    |       | $                            | (1.69      | )                    | $          | (1.69      | )          | — |   |
| Diluted                                                  |       | $                            | (1.69      | )                    | $          | (1.69      | )          | — |   |
|                                                          |            |                              |            |                      |            |            |            |  |  |  |

 

THE EFFECTS ON THEUNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’S EQUITY

As a result of therestatement, the balance of the accumulated deficit as of January 1, 2005 wasincreased by $100 to $17,557 from $17,457 and the balance as of September 30,2005 was increased by $325 to $16,495 from $16,170.

THE EFFECTS ON THEUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

As a result of therestatement, the unaudited condensed consolidated statements of cash flows forthe nine months ended September 30, 2005 changed as follows:

|                                                   | ** ** | **As  Originally  Reported** | ** ** | **As Restated** | ** ** | **Change** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------|------------|
| ** **                                        | ** ** | ** **                   | ** ** | ** **           | ** ** | ** ** | ** ** |
| **For the  nine months ended September 30, 2005** |       |                         |       |                 |       |       |       |
|                                              |       |                         |       |                 |       |       |       |
| Net income (loss)                                 |       | $                            | 1,287      |                 | $          | 1,062      |       | $ | (225 | ) |
| Depreciation and amortization                     |       | 1,643                        |       | 2,015                |       | 372        |       |
| Deferred tax  provision                           |       | 2,368                        |       | 2,221                |       | (147       | )          |
|                                                   |            |                              |            |                      |            |            |            |  |  |  |

15

----

As a result of therestatement, the unaudited condensed consolidated statements of cash flows forthe nine months ended September 30, 2004 changed as follows:

|                                                   | ** ** | **As  Previously  Reported** | ** ** | **As Restated** | ** ** | **Change** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------|------------|
| ** **                                        | ** ** | ** **                   | ** ** | ** **           | ** ** | ** ** | ** ** |
| **For the  nine months ended September 30, 2004** |       |                         |       |                 |       |       |       |
|                                              |       |                         |       |                 |       |       |       |
| Net income (loss)                                 |       | $                            | (25,748    | )                    | $          | (25,773    | )          | $ | (25 | ) |
| Depreciation and amortization                     |       | 896                          |       | 937                  |       | 41         |       |
| Deferred tax provision                            |       | (19,097                      | )          | (19,113              | )          | (16        | )          |
|                                                   |            |                              |            |                      |            |            |            |  |  |  |

 

THE EFFECTS ON NOTE 3 —EARNINGS (LOSS) PER SHARE

As a result of therestatement, net income - basic for the three months ended September 30, 2005was decreased by $75 to $248 from $323 and for the nine months ended September30, 2005 was decreased $225 to $1,062 from $1,287.  As a result of the restatement, net loss-  basic for the three months ended September30, 2004 was increased by $25 to ($ 27,730) from ($27,705) and for the ninemonths ended September 30, 2004 was increased $25 to ($25,773) from ($25,748).

THE EFFECTS ON NOTE 4 —PRO FORMA EFFECTS OF STOCK OPTIONS

The effects of therestatements on the historical and pro forma information in Note 4 are setforth below:

|                                                      | ** ** | **As  Originally  Reported** | ** ** | **As Restated** | ** ** | **Change** | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------|------------|
| ** **                                           | ** ** | ** **                   | ** ** | ** **           | ** ** | ** ** | ** ** |
| **For the  three months ended September 30, 2005**   |       |                         |       |                 |       |       |       |
|                                                 |       |                         |       |                 |       |       |       |
| Net income (loss)                                    |       | $                            | 323        |                 | $          | 248        |       | $ | (75 | ) |
| Pro forma net income (loss) — basic and diluted |       | (133                         | )          | (208                 | )          | (75        | )          |
| Basic earnings (loss) per share                      |       |                         |       |                 |       |       |       |
| As reported                                          |       | $                            | 0.01       |                 | $          | 0.01       |       | — |   |
| Pro forma                                            |       | $                            | (0.01      | )                    | $          | (0.01      | )          | — |   |
|                                                 |       |                         |       |                 |       |       |       |
| Diluted earnings (loss) per share                    |       |                         |       |                 |       |       |       |
| As reported                                          |       | $                            | 0.01       |                 | $          | 0.01       |       | — |   |
| Pro forma                                            |       | $                            | 0.00       |                 | $          | (0.01      | )          | $ | (0.01 | ) |

 

|                                                     | ** ** | **As  Originally  Reported** | ** ** | **As Restated** | ** ** | **Change** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------|------------|
| ** **                                          | ** ** | ** **                   | ** ** | ** **           | ** ** | ** ** | ** ** |
| **For the  nine months ended September 30, 2005**   |       |                         |       |                 |       |       |       |
|                                                |       |                         |       |                 |       |       |       |
| Net income (loss)                                   |       | $                            | 1,287      |                 | $          | 1,062      |       | $ | (225 | ) |
| Pro forma net income (loss)— basic and diluted |       | 2                            |       | (223                 | )          | (225       | )          |
| Basic earnings (loss) per share                     |       |                         |       |                 |       |       |       |
| As reported                                         |       | $                            | 0.06       |                 | $          | 0.05       |       | $ | (0.01 | ) |
| Pro forma                                           |       | $                            | 0.00       |                 | $          | (0.01      | )          | $ | (0.01 | ) |
|                                                |       |                         |       |                 |       |       |       |
| Diluted earnings (loss) per share                   |       |                         |       |                 |       |       |       |
| As reported                                         |       | $                            | 0.05       |                 | $          | 0.04       |       | $ | (0.01 | ) |
| Pro forma                                           |       | $                            | 0.00       |                 | $          | (0.01      | )          | $ | (0.01 | ) |

 

16

----

| ** **                                         | ** ** | **As  Previously  Reported** | ** ** | **As Restated** | ** ** | **Change** | ** ** |
|----------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------|------------|
| ** **                                         | ** ** | ** **                   | ** ** | ** **           | ** ** | ** ** | ** ** |
| **For the three months ended  September 30, 2004** |       |                         |       |                 |       |       |       |
|                                               |       |                         |       |                 |       |       |       |
| Net income  (loss)                                 |       | $                            | (27,705    | )                    | $          | (27,730    | )          | $ | (25 | ) |
| Pro forma net  income — basic and diluted     |       | 702                          |       | 677                  |       | (25        | )          |
| Basic earnings  (loss) per share                   |       |                         |       |                 |       |       |       |
| As reported                                        |       | $                            | (1.75      | )                    | $          | (1.76      | )          | $ | (0.01 | ) |
| Pro forma                                          |       | $                            | 0.04       |                 | $          | 0.04       |       | — |   |
|                                               |       |                         |       |                 |       |       |       |
| Diluted earnings  (loss) per share                 |       |                         |       |                 |       |       |       |
| As reported                                        |       | $                            | (1.75      | )                    | $          | (1.76      | )          | $ | (0.01 | ) |
| Pro forma                                          |       | $                            | 0.04       |                 | $          | 0.04       |       | — |   |

 
| ** **                                        | ** ** | **As  Previously  Reported** | ** ** | **As Restated** | ** ** | **Change** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------|------------|
| ** **                                        | ** ** | ** **                   | ** ** | ** **           | ** ** | ** ** | ** ** |
| **For the nine months ended  September 30, 2004** |       |                         |       |                 |       |       |       |
|                                              |       |                         |       |                 |       |       |       |
| Net income  (loss)                                |       | $                            | (25,748    | )                    | $          | (25,773    | )          | $ | (25 | ) |
| Pro forma net  income — basic and diluted    |       | 1,747                        |       | 1,722                |       | (25        | )          |
| Basic earnings  (loss) per share                  |       |                         |       |                 |       |       |       |
| As reported                                       |       | $                            | (1.69      | )                    | $          | (1.69      | )          | — |   |
| Pro forma                                         |       | $                            | 0.11       |                 | $          | 0.11       |       | — |   |
|                                              |       |                         |       |                 |       |       |       |
| Diluted earnings  (loss) per share                |       |                         |       |                 |       |       |       |
| As reported                                       |       | $                            | (1.69      | )                    | $          | (1.69      | )          | — |   |
| Pro forma                                         |       | $                            | 0.11       |                 | $          | 0.11       |       | — |   |
|                                                   |            |                              |            |                      |            |            |            |  |  |  |

 

THE EFFECTS ON NOTE 7 —SEGMENT INFORMATION

As a result of therestatement, segment information for the three and nine months ended September30, 2005 changed as follows:

 
| ** **                                                                    | ** ** | **Revenues** | ** ** | **Income (Loss)  Before Income  Taxes** | ** ** | **Total  Assets** | ** ** | **Depreciation   and  Amortization** | ** ** | **Additions to   Property,   Plant and  Improvements** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------|------------|---------------------------------------------------|------------|-------------------|------------|-------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| **As of  and for the Three Months Ended September 30, 2005**                  | ** ** | ** **   | ** ** | ** **                                        | ** ** | ** **        | ** ** | ** **                                | ** ** | ** **                                                                 | ** ** |
| **As reported and adjusted for the  reclassification as described in Note 7** | ** ** | ** **   | ** ** | ** **                                        | ** ** | ** **        | ** ** | ** **                                | ** ** | ** **                                                                 | ** ** |
| TOC                                                                           |       | $            | 9,309      |                                              | $          | 398               |       | $                                         | 80,996     |                                                                       | $          | 491 |   | $ | 4,567 |   |
| Membership Division                                                           |       | 2,095        |       | 428                                               |       | 6,186             |       | 78                                        |       | 129                                                                        |       |
| Subtotals of Segments                                                         |       | 11,404       |       | 826                                               |       | 87,182            |       | 569                                       |       | 4,696                                                                      |       |
| Corporate                                                                     |       | —       |       | (169                                              | )          | 58,967            |       | —                                    |       | —                                                                     |       |
| Totals                                                                        |       | $            | 11,404     |                                              | $          | 657               |       | $                                         | 146,149    |                                                                       | $          | 569 |   | $ | 4,696 |   |
|                                                                          |       |         |       |                                              |       |              |       |                                      |       |                                                                       |       |
| **As restated**                                                               | ** ** | ** **   | ** ** | ** **                                        | ** ** | ** **        | ** ** | ** **                                | ** ** | ** **                                                                 | ** ** |
| TOC                                                                           |       | $            | 9,309      |                                              | $          | 274               |       | $                                         | 80,459     |                                                                       | $          | 615 |   | $ | 4,567 |   |
| Membership Division                                                           |       | 2,095        |       | 428                                               |       | 6,186             |       | 78                                        |       | 129                                                                        |       |
| Subtotals of Segments                                                         |       | 11,404       |       | 702                                               |       | 86,645            |       | 693                                       |       | 4,696                                                                      |       |
| Corporate                                                                     |       | —       |       | (169                                              | )          | 59,179            |       | —                                    |       | —                                                                     |       |
| Totals                                                                        |       | $            | 11,404     |                                              | $          | 533               |       | $                                         | 145,824    |                                                                       | $          | 693 |   | $ | 4,696 |   |
| ** **                                                                    | ** ** | ** **   | ** ** | ** **                                        | ** ** | ** **        | ** ** | ** **                                | ** ** | ** **                                                                 | ** ** |

 

17

----

 
| ** **                                                                      | ** ** | **Revenues** | ** ** | **Income (Loss)   Before Income   Taxes** | ** ** | **Total   Assets** | ** ** | **Depreciation   and   Amortization** | ** ** | **Additions to   Property,   Plant and   Improvements** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------|------------|---------------------------------------------------------------|------------|-------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **As of  and for the Nine Months Ended September 30, 2005**                     | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |
| **As reported and adjusted for the  reclassification as described in   Note 7** | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |
| TOC                                                                             |       | $            | 27,061     |                                                          | $          | 3,106                   |       | $                                               | 80,996     |                                                                             | $          | 1,408 |   | $ | 7,752 |   |
| Membership Division                                                             |       | 4,418        |       | 314                                                           |       | 6,186                   |       | 235                                             |       | 317                                                                              |       |
| Subtotals of Segments                                                           |       | 31,479       |       | 3,420                                                         |       | 87,182                  |       | 1,643                                           |       | 8,069                                                                            |       |
| Corporate                                                                       |       | —       |       | (1,108                                                        | )          | 58,967                  |       | —                                          |       | —                                                                           |       |
| Totals                                                                          |       | $            | 31,479     |                                                          | $          | 2,312                   |       | $                                               | 146,149    |                                                                             | $          | 1,643 |   | $ | 8,069 |   |
|                                                                            |       |         |       |                                                          |       |                    |       |                                            |       |                                                                             |       |
| **As restated**                                                                 | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |
| TOC                                                                             |       | $            | 27,061     |                                                          | $          | 2,734                   |       | $                                               | 80,459     |                                                                             | $          | 1,780 |   | $ | 7,752 |   |
| Membership Division                                                             |       | 4,418        |       | 314                                                           |       | 6,186                   |       | 235                                             |       | 317                                                                              |       |
| Subtotals of Segments                                                           |       | 31,479       |       | 3,048                                                         |       | 86,645                  |       | 2,015                                           |       | 8,069                                                                            |       |
| Corporate                                                                       |       | —       |       | (1,108                                                        | )          | 59,179                  |       | —                                          |       | —                                                                           |       |
| Totals                                                                          |       | $            | 31,479     |                                                          | $          | 1,940                   |       | $                                               | 145,824    |                                                                             | $          | 2,015 |   | $ | 8,069 |   |
| ** **                                                                      | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |

 

The changes inthese balances are presented as follows:

 
| ** **                                                          | ** ** | **Revenues** | ** ** | **Income (Loss)  Before Income  Taxes** | ** ** | **Total  Assets** | ** ** | **Depreciation  and  Amortization** | ** ** | **Additions to   Property,   Plant and   Improvements** | ** ** |
|---------------------------------------------------------------------|------------|--------------|------------|---------------------------------------------------|------------|-------------------|------------|-------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **Change  as of and for the Three Months Ended September 30, 2005** |       |         |       |                                              |       |              |       |                                |       |                                                                             |       |
| TOC                                                                 |       | $            | —     |                                              | $          | (124              | )          | $                                   | (537       | )                                                                                | $          | 124 |   | $ | — |   |
| Membership Division                                                 |       | —       |       | —                                            |       | —            |       | —                              |       | —                                                                           |       |
| Subtotals of Segments                                               |       | —       |       | (124                                              | )          | (537              | )          | 124                                 |       | —                                                                           |       |
| Corporate                                                           |       | —       |       | —                                            |       | 212               |       | —                              |       | —                                                                           |       |
| Totals                                                              |       | $            | —     |                                              | $          | (124              | )          | $                                   | (325       | )                                                                                | $          | 124 |   | $ | — |   |
|                                                                |       |         |       |                                              |       |              |       |                                |       |                                                                             |       |
| **Change  as of and for the Nine Months Ended September 30, 2005**  |       |         |       |                                              |       |              |       |                                |       |                                                                             |       |
| TOC                                                                 |       | $            | —     |                                              | $          | (372              | )          | $                                   | (537       | )                                                                                | $          | 372 |   | $ | — |   |
| Membership Division                                                 |       | —       |       | —                                            |       | —            |       | —                              |       | —                                                                           |       |
| Subtotals of Segments                                               |       | —       |       | (372                                              | )          | (537              | )          | 372                                 |       | —                                                                           |       |
| Corporate                                                           |       | —       |       | —                                            |       | 212               |       | —                              |       | —                                                                           |       |
| Totals                                                              |       | $            | —     |                                              | $          | (372              | )          | $                                   | (325       | )                                                                                | $          | 372 |   | $ | — |   |
|                                                                |       |         |       |                                              |       |              |       |                                |       |                                                                             |       |

 

18

----

As a result of therestatement, segment information for the three and nine months ended September30, 2004 changed as follows:

 
| ** **                                                                    | ** ** | **Revenues** | ** ** | **Income (Loss)   Before Income   Taxes** | ** ** | **Total   Assets** | ** ** | **Depreciation   and   Amortization** | ** ** | **Additions to   Property,   Plant and   Improvements** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------|------------|---------------------------------------------------------------|------------|-------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **As of  and for the Three Months Ended September 30, 2004**                  | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |
| **As reported and adjusted for the  reclassification as described in Note 7** | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |
| TOC                                                                           |       | $            | 9,022      |                                                          | $          | (45,520                 | )          | $                                               | 67,585     |                                                                             | $          | 213 |   | $ | 581 |   |
| Membership Division                                                           |       | 1,927        |       | 306                                                           |       | 4,400                   |       | 86                                              |       | 84                                                                               |       |
| Subtotals of Segments                                                         |       | 10,949       |       | (45,214                                                       | )          | 71,985                  |       | 299                                             |       | 665                                                                              |       |
| Corporate                                                                     |       | —       |       | (474                                                          | )          | 19,523                  |       | —                                          |       | —                                                                           |       |
| Totals                                                                        |       | $            | 10,949     |                                                          | $          | (45,688                 | )          | $                                               | 91,508     |                                                                             | $          | 299 |   | $ | 665 |   |
|                                                                          |       |         |       |                                                          |       |                    |       |                                            |       |                                                                             |       |
| **As restated**                                                               | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |
| TOC                                                                           |       | $            | 9,022      |                                                          | $          | (45,561                 | )          | $                                               | 67,544     |                                                                             | $          | 254 |   | $ | 581 |   |
| Membership Division                                                           |       | 1,927        |       | 306                                                           |       | 4,400                   |       | 86                                              |       | 84                                                                               |       |
| Subtotals of Segments                                                         |       | 10,949       |       | (45,255                                                       | )          | 71,944                  |       | 340                                             |       | 665                                                                              |       |
| Corporate                                                                     |       | —       |       | (474                                                          | )          | 19,539                  |       | —                                          |       | —                                                                           |       |
| Totals                                                                        |       | $            | 10,949     |                                                          | $          | (45,729                 | )          | $                                               | 91,483     |                                                                             | $          | 340 |   | $ | 665 |   |
| ** **                                                                    | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |

 

 
| ** **                                                                    | ** ** | **Revenues** | ** ** | **Income (Loss)   Before Income   Taxes** | ** ** | **Total   Assets** | ** ** | **Depreciation   and   Amortization** | ** ** | **Additions to   Property,   Plant and   Improvements** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------|------------|---------------------------------------------------------------|------------|-------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **As of  and for the Nine Months Ended September 30, 2004**                   | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |
| **As reported and adjusted for the  reclassification as described in Note 7** | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |
| TOC                                                                           |       | $            | 25,304     |                                                          | $          | (41,052                 | )          | $                                               | 67,585     |                                                                             | $          | 639 |   | $ | 1,081 |   |
| Membership Division                                                           |       | 4,407        |       | 482                                                           |       | 4,400                   |       | 257                                             |       | 550                                                                              |       |
| Subtotals of Segments                                                         |       | 29,711       |       | (40,570                                                       | )          | 71,985                  |       | 896                                             |       | 1,631                                                                            |       |
| Corporate                                                                     |       | —       |       | (1,039                                                        | )          | 19,523                  |       | —                                          |       | —                                                                           |       |
| Totals                                                                        |       | $            | 29,711     |                                                          | $          | (41,609                 | )          | $                                               | 91,508     |                                                                             | $          | 896 |   | $ | 1,631 |   |
|                                                                          |       |         |       |                                                          |       |                    |       |                                            |       |                                                                             |       |
| ** **                                                                    | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |
| ** **                                                                    | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |
| **As restated**                                                               | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |
| TOC                                                                           |       | $            | 25,304     |                                                          | $          | (41,093                 | )          | $                                               | 67,544     |                                                                             | $          | 680 |   | $ | 1,081 |   |
| Membership Division                                                           |       | 4,407        |       | 482                                                           |       | 4,400                   |       | 257                                             |       | 550                                                                              |       |
| Subtotals of Segments                                                         |       | 29,711       |       | (40,611                                                       | )          | 71,944                  |       | 937                                             |       | 1,631                                                                            |       |
| Corporate                                                                     |       | —       |       | (1,039                                                        | )          | 19,539                  |       | —                                          |       | —                                                                           |       |
| Totals                                                                        |       | $            | 29,711     |                                                          | $          | (41,650                 | )          | $                                               | 91,483     |                                                                             | $          | 937 |   | $ | 1,631 |   |
| ** **                                                                    | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |

 

19

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The changes inthese balances were as follows:

 
| ** **                                                          | ** ** | **Revenues** | ** ** | **Income (Loss)  Before Income  Taxes** | ** ** | **Total  Assets** | ** ** | **Depreciation  and  Amortization** | ** ** | **Additions to   Property,   Plant and   Improvements** | ** ** |
|---------------------------------------------------------------------|------------|--------------|------------|---------------------------------------------------|------------|-------------------|------------|-------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **Change  as of and for the Three Months Ended September 30, 2004** |       |         |       |                                              |       |              |       |                                |       |                                                                             |       |
| TOC                                                                 |       | $            | —     |                                              | $          | (41               | )          | $                                   | (41        | )                                                                                | $          | 41 |   | $ | — |   |
| Membership Division                                                 |       | —       |       | —                                            |       | —            |       | —                              |       | —                                                                           |       |
| Subtotals of Segments                                               |       | —       |       | (41                                               | )          | (41               | )          | 41                                  |       | —                                                                           |       |
| Corporate                                                           |       | —       |       | —                                            |       | 16                |       | —                              |       | —                                                                           |       |
| Totals                                                              |       | $            | —     |                                              | $          | (41               | )          | $                                   | (25        | )                                                                                | $          | 41 |   | $ | — |   |
|                                                                |       |         |       |                                              |       |              |       |                                |       |                                                                             |       |
| **Change  as of and for the Nine Months Ended September 30, 2004**  |       |         |       |                                              |       |              |       |                                |       |                                                                             |       |
| TOC                                                                 |       | $            | —     |                                              | $          | (41               | )          | $                                   | (41        | )                                                                                | $          | 41 |   | $ | — |   |
| Membership Division                                                 |       | —       |       | —                                            |       | —            |       | —                              |       | —                                                                           |       |
| Subtotals of Segments                                               |       | —       |       | (41                                               | )          | (41               | )          | 41                                  |       | —                                                                           |       |
| Corporate                                                           |       | —       |       | —                                            |       | 16                |       | —                              |       | —                                                                           |       |
| Totals                                                              |       | $            | —     |                                              | $          | (41               | )          | $                                   | (25        | )                                                                                | $          | 41 |   | $ | — |   |
|                                                                |       |         |       |                                              |       |              |       |                                |       |                                                                             |       |

 

* * *

 

20

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**ITEM 2.****                 ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS.**

**Safe Harbor Statement**

The information contained in this reportmay include forward-looking statements. The Company’s actual results coulddiffer materially from those discussed in any forward-looking statements. Thestatements contained in this report that are not historical are “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, asamended (the “Securities Act”), and Section 21E of the Securities Exchange Actof 1934, as amended (the “Exchange Act”), including statements, withoutlimitation, regarding our expectations, beliefs, intentions or strategiesregarding the future. We intend that such forward-looking statements be subjectto the safe-harbor provisions contained in those sections. Such forward-lookingstatements relate to, among other things: (1) future performance that mayresult from the taking of strategic initiatives; (2) expected revenue andearnings growth and changes in mix; (3) anticipated expenses includingadvertising, programming, personnel and others; (4) Nielsen Media Research,which we refer to as Nielsen, estimates regarding total households and cableand satellite homes subscribing to and viewers (ratings) of The OutdoorChannel; and (5) other matters. We undertake no obligation to publicly updateor revise any forward-looking statements, whether as a result of newinformation, future events or otherwise.

These statements involve significant risksand uncertainties and are qualified by important factors that could cause ouractual results to differ materially from those reflected by the forward-lookingstatements. Such factors include but are not limited to risks and uncertaintieswhich are discussed below under the caption “Risks and Uncertainties” and otherrisks and uncertainties discussed elsewhere in this report. In assessingforward-looking statements contained herein, readers are urged to readcarefully all cautionary statements contained in this Form 10-Q/A and in ourother filings with the Securities and Exchange Commission. For theseforward-looking statements, we claim the protection of the safe harbor forforward-looking statements in Section 27A of the Securities Act and Section 21Eof the Exchange Act.

**Effects of Restatement**

This Form 10-Q/Aamends our previously filed Form 10-Q for the quarter ended September 30, 2005to reflect adjustments to the unaudited condensed consolidated financialstatements asof September 30, 2005 and December 31, 2004 and for the three and nine monthsended September 30, 2005 arising from the effects of a reclassificationof all of the amounts originally allocated to the cost of MSO relationshipsfrom other non-amortizable intangible assets to amortizable intangible assetsand the determination that they have an estimated useful life of 21 years and 4months. In addition, certainamounts included under “expenses” in the 2005 and 2004 unaudited condensedconsolidated financial statements we originally issued have been reclassifiedto either “cost of services” or “other expenses” to provide additional detailabout our operating results and more fully comply with the Securities andExchange Commission’s Regulation S-X. Cost of services includes programming,satellite transmission fees, production and operations and other direct costs.Other expenses include advertising, selling, general and administrative anddepreciation and amortization.  Further,to better match intangible assets with the segment to which they pertain, wehave reclassified the amortizable intangible assets and the goodwill which werecorded in connection with the acquisition on September 8, 2004 along with therelated amortization expense from “Corporate” to the “TOC” segment.  Certain other changes have been made in thehistorical condensed consolidated financial statements to conform with currentpresentations. The adjustments to the 2005 and 2004 unaudited condensed consolidated financialstatements are a result of a correction of the accounting treatment forthe portion of the excess of the cost of the minority interest over the fairvalue of the underlying interest in the net identifiable assets acquiredrelated to the acquisition of the remaining minority interest in The OutdoorChannel, Inc. (“TOC”) that we did not previously own on September 8, 2004 thatwas allocated to the MSO relationships. The adjustments were based on a review in the third quarter of2006 of the facts and circumstances, the nature of our business, our experiencewith the MSOs and the proclivities of our industry as of September 8, 2004.Although the revised estimate of the useful life of these assets resulted inadjustments to and the restatement of our condensed consolidated financialstatements included in this Form 10-Q/A as of December 31, 2004 and for thethree and nine months ended September 30, 2004, we determined that the effectsof these adjustments were immaterial, individually and in the aggregate, to ourannual and quarterly reports filed prior to January 1, 2005 and thus we did notamend those filings.  The accompanyingunaudited condensed consolidated financial statements and the related noteshave been restated to reflect the effects of the adjustments arising from thereassessment of the estimated useful life of the MSO relationships as explainedin Note 10 and below:

21

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As a result of the determination of theestimated useful life of MSO relationships discussed above we have restated thefollowing Items and sections of this Form 10-Q/A:

Item 1. Financial Statements andSupplementary Data:

Restated Condensed Consolidated BalanceSheets as of September 30, 2005 (Unaudited) and December 31, 2004;

Restated Unaudited Condensed ConsolidatedStatements of Operations for the three and nine months ended September 30, 2005and 2004;

Restated Unaudited Condensed ConsolidatedStatements of Stockholders’ Equity for the nine months ended September 30,2005;

Restated Unaudited Condensed ConsolidatedStatements of Cash Flows for the nine months ended September 30, 2005 and 2004;

Note 3 to Unaudited Condensed ConsolidatedFinancial Statements; Earnings (Loss) Per Share;

Note 4 to Unaudited Condensed ConsolidatedFinancial Statements; Pro Forma Effects of Stock Options;

Note 7 to Unaudited Condensed ConsolidatedFinancial Statements; Segment Information; and

Note 10 to Unaudited CondensedConsolidated Financial Statements; Restatements of Unaudited CondensedConsolidated Financial Statements.

Item 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations

Except for the related corrections toNotes 3, 4, and 7 to the unaudited condensed consolidated financial statementsand certain other immaterial corrections, the remaining Items required by Form10-Q are not amended hereby, but are included herewith for ease of the reader.Except as expressly noted herein, this report continues to speak as of the dateof the original filing, and we have not updated the disclosures in this reportto speak as of a later date.

Except as otherwise expressly notedherein, this Form 10-Q/A does not reflect events occurring after the November14, 2005 filing of our Quarterly Report on Form 10-Q in any way, except thoserequired to reflect the effects of this restatement of our unaudited condensedconsolidated financial statements for the periods presented or as deemednecessary in connection with the completion of restated financial statements.

While this report primarily relates to the historical periodscovered, events may have taken place since the original filing that might havebeen reflected in this report if they had taken place prior to the originalfiling.

THE EFFECTS ON THE CONDENSED CONSOLIDATED BALANCESHEETS

As a result of therestatement, our unaudited condensed consolidated balance sheet as of September30, 2005 changed as follows:

|                                          | ** ** | **As  Originally  Reported** | ** ** | **As Restated** | ** ** | **Change** | ** ** |
|------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------|------------|
|                                     |       |                         |       |                 |       |       |       |
| Amortizable  intangible assets, net      |       | $                            | 1,519      |                 | $          | 11,555     |       | $ | 10,036 |   |
|                                     |       |                         |       |                 |       |       |       |
| Other  non-amortizable intangible assets |       | 10,573                       |       | —               |       | (10,573    | )          |
| Deferred tax  assets, net                |       | 11,150                       |       | 11,362               |       | 212        |       |
| Total assets                             |       | 146,149                      |       | 145,824              |       | (325       | )          |
| Accumulated  deficit                     |       | (16,170                      | )          | (16,495              | )          | (325       | )          |
| Total stockholders’  equity         |       | 140,803                      |       | 140,478              |       | (325       | )          |
|                                          |            |                              |            |                      |            |            |            |  |  |  |

22

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As a result of therestatement, our condensed consolidated balance sheet as of December 31, 2004changed as follows:

|                                          | ** ** | **As  Previously  Reported** | ** ** | **As Restated** | ** ** | **Change** | ** ** |
|------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------|------------|
|                                     |       |                         |       |                 |       |       |       |
| Amortizable  intangible assets, net      |       | $                            | 1,939      |                 | $          | 12,347     |       | $ | 10,408 |   |
|                                     |       |                         |       |                 |       |       |       |
| Other  non-amortizable intangible assets |       | 10,573                       |       | —               |       | (10,573    | )          |
| Deferred tax  assets, net                |       | 14,074                       |       | 14,139               |       | 65         |       |
| Total assets                             |       | 99,669                       |       | 99,569               |       | (100       | )          |
| Accumulated  deficit                     |       | (17,457                      | )          | (17,557              | )          | (100       | )          |
| Total stockholders’  equity         |       | 93,482                       |       | 93,382               |       | (100       | )          |
|                                          |            |                              |            |                      |            |            |            |  |  |  |

 

THE EFFECTS ON THEUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

As a result of therestatement, the unaudited condensed consolidated statements of operations forthree months ended September 30, 2005 changed as follows:

|                                                          | ** ** | **As  Originally  Reported** | ** ** | **As Restated** | ** ** | **Change** | ** ** |
|----------------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------|------------|
| ** **                                               | ** ** | ** **                   | ** ** | ** **           | ** ** | ** ** | ** ** |
| **For the  three months ended September 30, 2005**       |       |                         |       |                 |       |       |       |
| Depreciation and amortization                            |       | $                            | 569        |                 | $          | 693        |       | $ | 124 |   |
| Total other expenses                                     |       | 6,643                        |       | 6,767                |       | 124        |       |
| Income (loss) from operations                            |       | 261                          |       | 137                  |       | (124       | )          |
| Income (loss) before income taxes and minority  interest |       | 657                          |       | 533                  |       | (124       | )          |
| Income tax provision (benefit)                           |       | 334                          |       | 285                  |       | (49        | )          |
| Income (loss) before minority interest                   |       | 323                          |       | 248                  |       | (75        | )          |
| Net income (loss)                                        |       | 323                          |       | 248                  |       | (75        | )          |
| Earnings (loss) per share                                |       |                         |       |                 |       |       |       |
| Basic                                                    |       | $                            | 0.01       |                 | $          | 0.01       |       | — |   |
| Diluted                                                  |       | $                            | 0.01       |                 | $          | 0.01       |       | — |   |
|                                                          |            |                              |            |                      |            |            |            |  |  |  |

 

As a result of therestatement, the unaudited condensed consolidated statements of operations fornine months ended September 30, 2005 changed as follows:

|                                                          | ** ** | **As  Originally  Reported** | ** ** | **As Restated** | ** ** | **Change** | ** ** |
|----------------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------|------------|
| ** **                                               | ** ** | ** **                   | ** ** | ** **           | ** ** | ** ** | ** ** |
| **For the  nine months ended September 30, 2005**        |       |                         |       |                 |       |       |       |
| Depreciation and amortization                            |       | $                            | 1,643      |                 | $          | 2,015      |       | $ | 372 |   |
| Total other expenses                                     |       | 20,662                       |       | 21,034               |       | 372        |       |
| Income (loss) from operations                            |       | 1,828                        |       | 1,456                |       | (372       | )          |
| Income (loss) before income taxes and minority  interest |       | 2,312                        |       | 1,940                |       | (372       | )          |
| Income tax provision (benefit)                           |       | 1,025                        |       | 878                  |       | (147       | )          |
| Income (loss) before minority interest                   |       | 1,287                        |       | 1,062                |       | (225       | )          |
| Net income (loss)                                        |       | 1,287                        |       | 1,062                |       | (225       | )          |
| Earnings (loss) per share                                |       |                         |       |                 |       |       |       |
| Basic                                                    |       | $                            | 0.06       |                 | $          | 0.05       |       | $ | (0.01 | ) |
| Diluted                                                  |       | $                            | 0.05       |                 | $          | 0.04       |       | $ | (0.01 | ) |

23

----

 

As a result of therestatement, the unaudited condensed consolidated statements of operations forthree months ended September 30, 2004 changed as follows:

|                                                          | ** ** | **As  Previously  Reported** | ** ** | **As Restated** | ** ** | **Change** | ** ** |
|----------------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------|------------|
| ** **                                               | ** ** | ** **                   | ** ** | ** **           | ** ** | ** ** | ** ** |
| **For the  three months ended September 30, 2004**       |       |                         |       |                 |       |       |       |
| Depreciation and amortization                            |       | $                            | 299        |                 | $          | 340        |       | $ | 41 |   |
| Total other expenses                                     |       | 54,028                       |       | 54,069               |       | 41         |       |
| Income (loss) from operations                            |       | (45,722                      | )          | (45,763              | )          | (41        | )          |
| Income (loss) before income taxes and minority  interest |       | (45,688                      | )          | (45,729              | )          | (41        | )          |
| Income tax provision (benefit)                           |       | (18,176                      | )          | (18,192              | )          | (16        | )          |
| Income (loss) before minority interest                   |       | (27,512                      | )          | (27,537              | )          | (25        | )          |
| Net income (loss)                                        |       | (27,705                      | )          | (27,730              | )          | (25        | )          |
| Earnings (loss) per share                                |       |                         |       |                 |       |       |       |
| Basic                                                    |       | $                            | (1.75      | )                    | $          | (1.76      | )          | $ | (0.01 | ) |
| Diluted                                                  |       | $                            | (1.75      | )                    | $          | (1.76      | )          | $ | (0.01 | ) |

 

As a result of therestatement, the unaudited condensed consolidated statements of operations fornine months ended September 30, 2004 changed as follows:

|                                                          | ** ** | **As  Previously  Reported** | ** ** | **As Restated** | ** ** | **Change** | ** ** |
|----------------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------|------------|
| ** **                                               | ** ** | ** **                   | ** ** | ** **           | ** ** | ** ** | ** ** |
| **For the  nine months ended September 30, 2004**        |       |                         |       |                 |       |       |       |
| Depreciation and amortization                            |       | $                            | 896        |                 | $          | 937        |       | $ | 41 |   |
| Total other expenses                                     |       | 64,656                       |       | 64,697               |       | 41         |       |
| Income(loss) from operations                             |       | (41,702                      | )          | (41,743              | )          | (41        | )          |
| Income (loss) before income taxes and minority  interest |       | (41,609                      | )          | (41,650              | )          | (41        | )          |
| Income tax provision (benefit)                           |       | (16,543                      | )          | (16,559              | )          | (16        | )          |
| Income (loss) before minority interest                   |       | (25,066                      | )          | (25,091              | )          | (25        | )          |
| Net income (loss)                                        |       | (25,748                      | )          | (25,773              | )          | (25        | )          |
| Earnings (loss) per share                                |       |                         |       |                 |       |       |       |
| Basic                                                    |       | $                            | (1.69      | )                    | $          | (1.69      | )          | — |   |
| Diluted                                                  |       | $                            | (1.69      | )                    | $          | (1.69      | )          | — |   |
|                                                          |            |                              |            |                      |            |            |            |  |  |  |

 

THE EFFECTS ON THEUNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

As a result of therestatement, the balance of the accumulated deficit as of January 1, 2005 wasincreased by $100 to $17,557 from $17,457 and the balance as of September 30,2005 was  increased by $325 to $16,495from $16,170.

THE EFFECTS ON THEUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

As a result of therestatement, the unaudited condensed consolidated statements of cash flows forthe nine months ended September 30, 2005 changed as follows:

|                                                   | ** ** | **As  Originally  Reported** | ** ** | **As Restated** | ** ** | **Change** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------|------------|
| ** **                                        | ** ** | ** **                   | ** ** | ** **           | ** ** | ** ** | ** ** |
| **For the  nine months ended September 30, 2005** |       |                         |       |                 |       |       |       |
|                                              |       |                         |       |                 |       |       |       |
| Net income (loss)                                 |       | $                            | 1,287      |                 | $          | 1,062      |       | $ | (225 | ) |
| Depreciation and amortization                     |       | 1,643                        |       | 2,015                |       | 372        |       |
| Deferred tax  provision                           |       | 2,368                        |       | 2,221                |       | (147       | )          |
|                                                   |            |                              |            |                      |            |            |            |  |  |  |

24

----

As a result of therestatement, the unaudited condensed consolidated statements of cash flows forthe nine months ended September 30, 2004 changed as follows:

|                                                   | ** ** | **As  Previously  Reported** | ** ** | **As Restated** | ** ** | **Change** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------|------------|
| ** **                                        | ** ** | ** **                   | ** ** | ** **           | ** ** | ** ** | ** ** |
| **For the  nine months ended September 30, 2004** |       |                         |       |                 |       |       |       |
|                                              |       |                         |       |                 |       |       |       |
| Net (loss)                                        |       | $                            | (25,748    | )                    | $          | (25,773    | )          | $ | (25 | ) |
| Depreciation and amortization                     |       | 896                          |       | 937                  |       | 41         |       |
| Deferred tax provision                            |       | (19,097                      | )          | (19,113              | )          | (16        | )          |
|                                                   |            |                              |            |                      |            |            |            |  |  |  |

 

THE EFFECTS ON NOTE 3 —EARNINGS (LOSS) PER SHARE

As a result of therestatement, net income - basic for the three months ended September 30, 2005was decreased by $75 to $248 from $323 and for the nine months ended September30, 2005 was decreased $225 to $1,062 from $1,287. As a result of therestatement, net loss - basic for the three months ended September 30, 2004 wasincreased by $25 to ($27,730) from ($27,705) and for the nine months endedSeptember 30, 2004 was increased $225 to ($25,773) from ($25,748).

THE EFFECTS ON NOTE 4 —PRO FORMA EFFECTS OF STOCK OPTIONS

The effects of therestatements on the historical and pro forma information in Note 4 are setforth below:

|                                                      | ** ** | **As  Originally  Reported** | ** ** | **As Restated** | ** ** | **Change** | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------|------------|
| ** **                                           | ** ** | ** **                   | ** ** | ** **           | ** ** | ** ** | ** ** |
| **For the  three months ended September 30, 2005**   |       |                         |       |                 |       |       |       |
|                                                 |       |                         |       |                 |       |       |       |
| Net income (loss)                                    |       | $                            | 323        |                 | $          | 248        |       | $ | (75 | ) |
| Pro forma net income (loss) — basic and diluted |       | (133                         | )          | (208                 | )          | (75        | )          |
| Basic earnings (loss) per share                      |       |                         |       |                 |       |       |       |
| As reported                                          |       | $                            | 0.01       |                 | $          | 0.01       |       | — |   |
| Pro forma                                            |       | $                            | (0.01      | )                    | $          | (0.01      | )          | — |   |
|                                                 |       |                         |       |                 |       |       |       |
| Diluted earnings (loss) per share                    |       |                         |       |                 |       |       |       |
| As reported                                          |       | $                            | 0.01       |                 | $          | 0.01       |       | — |   |
| Pro forma                                            |       | $                            | 0.00       |                 | $          | (0.01      | )          | $ | (0.01 | ) |

 

|                                                     | ** ** | **As  Originally  Reported** | ** ** | **As Restated** | ** ** | **Change** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------|------------|
| ** **                                          | ** ** | ** **                   | ** ** | ** **           | ** ** | ** ** | ** ** |
| **For the  nine months ended September 30, 2005**   |       |                         |       |                 |       |       |       |
|                                                |       |                         |       |                 |       |       |       |
| Net income (loss)                                   |       | $                            | 1,287      |                 | $          | 1,062      |       | $ | (225 | ) |
| Pro forma net income (loss)— basic and diluted |       | 2                            |       | (223                 | )          | (225       | )          |
| Basic Earnings (loss) per share                     |       |                         |       |                 |       |       |       |
| As reported                                         |       | $                            | 0.06       |                 | $          | 0.05       |       | $ | (0.01 | ) |
| Pro forma                                           |       | $                            | 0.00       |                 | $          | (0.01      | )          | $ | (0.01 | ) |
|                                                |       |                         |       |                 |       |       |       |
| Diluted Earnings (loss) per share                   |       |                         |       |                 |       |       |       |
| As reported                                         |       | $                            | 0.05       |                 | $          | 0.04       |       | $ | (0.01 | ) |
| Pro forma                                           |       | $                            | 0.00       |                 | $          | (0.01      | )          | $ | (0.01 | ) |

 

25

----

 

|                                                    | ** ** | **As  Previously  Reported** | ** ** | **As Restated** | ** ** | **Change** | ** ** |
|----------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------|------------|
| ** **                                         | ** ** | ** **                   | ** ** | ** **           | ** ** | ** ** | ** ** |
| **For the  three months ended September 30, 2004** |       |                         |       |                 |       |       |       |
|                                               |       |                         |       |                 |       |       |       |
| Net income  (loss)                                 |       | $                            | (27,705    | )                    | $          | (27,730    | )          | $ | (25 | ) |
| Pro forma net  income — basic and diluted     |       | 702                          |       | 677                  |       | (25        | )          |
| Basic Earnings  (loss) per share                   |       |                         |       |                 |       |       |       |
| As reported                                        |       | $                            | (1.75      | )                    | $          | (1.76      | )          | $ | (0.01 | ) |
| Pro forma                                          |       | $                            | 0.04       |                 | $          | 0.04       |       | — |   |
|                                               |       |                         |       |                 |       |       |       |
| Diluted Earnings  (loss) per share                 |       |                         |       |                 |       |       |       |
| As reported                                        |       | $                            | (1.75      | )                    | $          | (1.76      | )          | $ | (0.01 | ) |
| Pro forma                                          |       | $                            | 0.04       |                 | $          | 0.04       |       | — |   |

 

|                                                   | ** ** | **As  Previously  Reported** | ** ** | **As Restated** | ** ** | **Change** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------|------------|
| ** **                                        | ** ** | ** **                   | ** ** | ** **           | ** ** | ** ** | ** ** |
| **For the  nine months ended September 30, 2004** |       |                         |       |                 |       |       |       |
|                                              |       |                         |       |                 |       |       |       |
| Net income  (loss)                                |       | $                            | (25,748    | )                    | $          | (25,773    | )          | $ | (25 | ) |
| Pro forma net  income — basic and diluted    |       | 1,747                        |       | 1,722                |       | (25        | )          |
| Basic Earnings  (loss) per share                  |       |                         |       |                 |       |       |       |
| As reported                                       |       | $                            | (1.69      | )                    | $          | (1.69      | )          | — |   |
| Pro forma                                         |       | $                            | 0.11       |                 | $          | 0.11       |       | — |   |
|                                              |       |                         |       |                 |       |       |       |
| Diluted Earnings  (loss) per share                |       |                         |       |                 |       |       |       |
| As reported                                       |       | $                            | (1.69      |                 | $          | (1.69      | )          | — |   |
| Pro forma                                         |       | $                            | 0.11       |                 | $          | 0.11       |       | — |   |
|                                                   |            |                              |            |                      |            |            |            |  |  |  |

 

THE EFFECTS ON NOTE 7 —SEGMENT INFORMATION

As a result of therestatement, segment information for the three and nine months ended September30, 2005 changed as follows:
| ** **                                                                    | ** ** | **Revenues** | ** ** | **Income (Loss)   Before Income   Taxes** | ** ** | **Total   Assets** | ** ** | **Depreciation   and   Amortization** | ** ** | **Additions to   Property,   Plant and   Improvements** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------|------------|---------------------------------------------------------------|------------|-------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **As of  and for the Three Months Ended September 30, 2005**                  | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |
| **As  reported and adjusted for the reclassification as described in Note 7** | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |
| TOC                                                                           |       | $            | 9,309      |                                                          | $          | 398                     |       | $                                               | 80,996     |                                                                             | $          | 491 |   | $ | 4,567 |   |
| Membership Division                                                           |       | 2,095        |       | 428                                                           |       | 6,186                   |       | 78                                              |       | 129                                                                              |       |
| Subtotals of Segments                                                         |       | 11,404       |       | 826                                                           |       | 87,182                  |       | 569                                             |       | 4,696                                                                            |       |
| Corporate                                                                     |       | —       |       | (169                                                          | )          | 58,967                  |       | —                                          |       | —                                                                           |       |
| Totals                                                                        |       | $            | 11,404     |                                                          | $          | 657                     |       | $                                               | 146,149    |                                                                             | $          | 569 |   | $ | 4,696 |   |
|                                                                          |       |         |       |                                                          |       |                    |       |                                            |       |                                                                             |       |
| **As  restated**                                                              | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |
| TOC                                                                           |       | $            | 9,309      |                                                          | $          | 274                     |       | $                                               | 80,459     |                                                                             | $          | 615 |   | $ | 4,567 |   |
| Membership Division                                                           |       | 2,095        |       | 428                                                           |       | 6,186                   |       | 78                                              |       | 129                                                                              |       |
| Subtotals of Segments                                                         |       | 11,404       |       | 702                                                           |       | 86,645                  |       | 693                                             |       | 4,696                                                                            |       |
| Corporate                                                                     |       | —       |       | (169                                                          | )          | 59,179                  |       | —                                          |       | —                                                                           |       |
| Totals                                                                        |       | $            | 11,404     |                                                          | $          | 533                     |       | $                                               | 145,824    |                                                                             | $          | 693 |   | $ | 4,696 |   |

 

26

----

 
| ** **                                                                    | ** ** | **Revenues** | ** ** | **Income (Loss)   Before Income   Taxes** | ** ** | **Total   Assets** | ** ** | **Depreciation   and   Amortization** | ** ** | **Additions to   Property,   Plant and   Improvements** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------|------------|---------------------------------------------------------------|------------|-------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **As of  and for the Nine Months Ended September 30, 2005**                   | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |
| **As reported and adjusted for the  reclassification as described in Note 7** | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |
| TOC                                                                           |       | $            | 27,061     |                                                          | $          | 3,106                   |       | $                                               | 80,996     |                                                                             | $          | 1,408 |   | $ | 7,752 |   |
| Membership Division                                                           |       | 4,418        |       | 314                                                           |       | 6,186                   |       | 235                                             |       | 317                                                                              |       |
| Subtotals of Segments                                                         |       | 31,479       |       | 3,420                                                         |       | 87,182                  |       | 1,643                                           |       | 8,069                                                                            |       |
| Corporate                                                                     |       | —       |       | (1,108                                                        | )          | 58,967                  |       | —                                          |       | —                                                                           |       |
| Totals                                                                        |       | $            | 31,479     |                                                          | $          | 2,312                   |       | $                                               | 146,149    |                                                                             | $          | 1,643 |   | $ | 8,069 |   |
|                                                                          |       |         |       |                                                          |       |                    |       |                                            |       |                                                                             |       |
| **As restated**                                                               | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |
| TOC                                                                           |       | $            | 27,061     |                                                          | $          | 2,734                   |       | $                                               | 80,459     |                                                                             | $          | 1,780 |   | $ | 7,752 |   |
| Membership Division                                                           |       | 4,418        |       | 314                                                           |       | 6,186                   |       | 235                                             |       | 317                                                                              |       |
| Subtotals of Segments                                                         |       | 31,479       |       | 3,048                                                         |       | 86,645                  |       | 2,015                                           |       | 8,069                                                                            |       |
| Corporate                                                                     |       | —       |       | (1,108                                                        | )          | 59,179                  |       | —                                          |       | —                                                                           |       |
| Totals                                                                        |       | $            | 31,479     |                                                          | $          | 1,940                   |       | $                                               | 145,824    |                                                                             | $          | 2,015 |   | $ | 8,069 |   |

 

The changes inthese balances are presented as follows:
| ** **                                                          | ** ** | **Revenues** | ** ** | **Income (Loss)  Before Income  Taxes** | ** ** | **Total  Assets** | ** ** | **Depreciation  and  Amortization** | ** ** | **Additions to   Property,   Plant and   Improvements** | ** ** |
|---------------------------------------------------------------------|------------|--------------|------------|---------------------------------------------------|------------|-------------------|------------|-------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **Change  as of and for the Three Months Ended September 30, 2005** |       |         |       |                                              |       |              |       |                                |       |                                                                             |       |
| TOC                                                                 |       | $            | —     |                                              | $          | (124              | )          | $                                   | (537       | )                                                                                | $          | 124 |   | $ | — |   |
| Membership Division                                                 |       | —       |       | —                                            |       | —            |       | —                              |       | —                                                                           |       |
| Subtotals of Segments                                               |       | —       |       | (124                                              | )          | (537              | )          | 124                                 |       | —                                                                           |       |
| Corporate                                                           |       | —       |       | —                                            |       | 212               |       | —                              |       | —                                                                           |       |
| Totals                                                              |       | $            | —     |                                              | $          | (124              | )          | $                                   | (325       | )                                                                                | $          | 124 |   | $ | — |   |
|                                                                |       |         |       |                                              |       |              |       |                                |       |                                                                             |       |
| **Change  as of and for the Nine Months Ended September 30, 2005**  |       |         |       |                                              |       |              |       |                                |       |                                                                             |       |
| TOC                                                                 |       | $            | —     |                                              | $          | (372              | )          | $                                   | (537       | )                                                                                | $          | 372 |   | $ | — |   |
| Membership Division                                                 |       | —       |       | —                                            |       | —            |       | —                              |       | —                                                                           |       |
| Subtotals of Segments                                               |       | —       |       | (372                                              | )          | (537              | )          | 372                                 |       | —                                                                           |       |
| Corporate                                                           |       | —       |       | —                                            |       | 212               |       | —                              |       | —                                                                           |       |
| Totals                                                              |       | $            | —     |                                              | $          | (372              | )          | $                                   | (325       | )                                                                                | $          | 372 |   | $ | — |   |

 

27

----

As a result of therestatement, segment information for the three and nine months ended September30, 2004 changed as follows:
| ** **                                                                    | ** ** | **Revenues** | ** ** | **Income (Loss)   Before Income   Taxes** | ** ** | **Total   Assets** | ** ** | **Depreciation   and   Amortization** | ** ** | **Additions to   Property,   Plant and   Improvements** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------|------------|---------------------------------------------------------------|------------|-------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **As of  and for the Three Months Ended September 30, 2004**                  | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |
| **As reported and adjusted for the  reclassification as described in Note 7** | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |
| TOC                                                                           |       | $            | 9,022      |                                                          | $          | (45,520                 | )          | $                                               | 67,585     |                                                                             | $          | 213 |   | $ | 581 |   |
| Membership Division                                                           |       | 1,927        |       | 306                                                           |       | 4,400                   |       | 86                                              |       | 84                                                                               |       |
| Subtotals of Segments                                                         |       | 10,949       |       | (45,214                                                       | )          | 71,985                  |       | 299                                             |       | 665                                                                              |       |
| Corporate                                                                     |       | —       |       | (474                                                          | )          | 19,523                  |       | —                                          |       | —                                                                           |       |
| Totals                                                                        |       | $            | 10,949     |                                                          | $          | (45,688                 | )          | $                                               | 91,508     |                                                                             | $          | 299 |   | $ | 665 |   |
|                                                                          |       |         |       |                                                          |       |                    |       |                                            |       |                                                                             |       |
| **As restated**                                                               | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |
| TOC                                                                           |       | $            | 9,022      |                                                          | $          | (45,561                 | )          | $                                               | 67,544     |                                                                             | $          | 254 |   | $ | 581 |   |
| Membership Division                                                           |       | 1,927        |       | 306                                                           |       | 4,400                   |       | 86                                              |       | 84                                                                               |       |
| Subtotals of Segments                                                         |       | 10,949       |       | (45,255                                                       | )          | 71,944                  |       | 340                                             |       | 665                                                                              |       |
| Corporate                                                                     |       | —       |       | (474                                                          | )          | 19,539                  |       | —                                          |       | —                                                                           |       |
| Totals                                                                        |       | $            | 10,949     |                                                          | $          | (45,729                 | )          | $                                               | 91,483     |                                                                             | $          | 340 |   | $ | 665 |   |

 
| ** **                                                                    | ** ** | **Revenues** | ** ** | **Income (Loss)   Before Income   Taxes** | ** ** | **Total   Assets** | ** ** | **Depreciation   and   Amortization** | ** ** | **Additions to   Property,   Plant and   Improvements** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------|------------|---------------------------------------------------------------|------------|-------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **As of  and for the Nine Months Ended September 30, 2004**                   | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |
| **As reported and adjusted for the  reclassification as described in Note 7** | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |
| TOC                                                                           |       | $            | 25,304     |                                                          | $          | (41,052                 | )          | $                                               | 67,585     |                                                                             | $          | 639 |   | $ | 1,081 |   |
| Membership Division                                                           |       | 4,407        |       | 482                                                           |       | 4,400                   |       | 257                                             |       | 550                                                                              |       |
| Subtotals of Segments                                                         |       | 29,711       |       | (40,570                                                       | )          | 71,985                  |       | 896                                             |       | 1,631                                                                            |       |
| Corporate                                                                     |       | —       |       | (1,039                                                        | )          | 19,523                  |       | —                                          |       | —                                                                           |       |
| Totals                                                                        |       | $            | 29,711     |                                                          | $          | (41,609                 | )          | $                                               | 91,508     |                                                                             | $          | 896 |   | $ | 1,631 |   |
|                                                                          |       |         |       |                                                          |       |                    |       |                                            |       |                                                                             |       |
| ** **                                                                    | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |
| ** **                                                                    | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |
| ** **                                                                    | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |
| **As restated**                                                               | ** ** | ** **   | ** ** | ** **                                                    | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** **                                                                       | ** ** |
| TOC                                                                           |       | $            | 25,304     |                                                          | $          | (41,093                 | )          | $                                               | 67,544     |                                                                             | $          | 639 |   | $ | 1,081 |   |
| Membership Division                                                           |       | 4,407        |       | 482                                                           |       | 4,400                   |       | 257                                             |       | 550                                                                              |       |
| Subtotals of Segments                                                         |       | 29,711       |       | (40,611                                                       | )          | 71,944                  |       | 896                                             |       | 1,631                                                                            |       |
| Corporate                                                                     |       | —       |       | (1,039                                                        | )          | 19,539                  |       | —                                          |       | —                                                                           |       |
| Totals                                                                        |       | $            | 29,711     |                                                          | $          | (41,650                 | )          | $                                               | 91,483     |                                                                             | $          | 896 |   | $ | 1,631 |   |

28

----

The changes inthese balances were as follows:
| ** **                                                          | ** ** | **Revenues** | ** ** | **Income (Loss)  Before Income  Taxes** | ** ** | **Total  Assets** | ** ** | **Depreciation  and  Amortization** | ** ** | **Additions to   Property,   Plant and   Improvements** | ** ** |
|---------------------------------------------------------------------|------------|--------------|------------|---------------------------------------------------|------------|-------------------|------------|-------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **Change  as of and for the Three Months Ended September 30, 2004** |       |         |       |                                              |       |              |       |                                |       |                                                                             |       |
| TOC                                                                 |       | $            | —     |                                              | $          | (41               | )          | $                                   | (41        | )                                                                                | $          | 41 |   | $ | — |   |
| Membership Division                                                 |       | —       |       | —                                            |       | —            |       | —                              |       | —                                                                           |       |
| Subtotals of Segments                                               |       | —       |       | (41                                               | )          | (41               | )          | 41                                  |       | —                                                                           |       |
| Corporate                                                           |       | —       |       | —                                            |       | 16                |       | —                              |       | —                                                                           |       |
| Totals                                                              |       | $            | —     |                                              | $          | (41               | )          | $                                   | (25        | )                                                                                | $          | 41 |   | $ | — |   |
|                                                                |       |         |       |                                              |       |              |       |                                |       |                                                                             |       |
| **Change  as of and for the Nine Months Ended September 30, 2004**  |       |         |       |                                              |       |              |       |                                |       |                                                                             |       |
| TOC                                                                 |       | $            | —     |                                              | $          | (41               | )          | $                                   | (41        | )                                                                                | $          | 41 |   | $ | — |   |
| Membership Division                                                 |       | —       |       | —                                            |       | —            |       | —                              |       | —                                                                           |       |
| Subtotals of Segments                                               |       | —       |       | (41                                               | )          | (41               | )          | 41                                  |       | —                                                                           |       |
| Corporate                                                           |       | —       |       | —                                            |       | 16                |       | —                              |       | —                                                                           |       |
| Totals                                                              |       | $            | —     |                                              | $          | (41               | )          | $                                   | (25        | )                                                                                | $          | 41 |   | $ | — |   |

 

**General**

Outdoor Channel Holdings, Inc. (which werefer to as “Outdoor Channel Holdings” or collectively with its subsidiaries,the “Company”), through its indirect wholly owned subsidiary The OutdoorChannel, Inc. (“TOC”), owns and operates The Outdoor Channel which is anational television network devoted primarily to traditional outdooractivities, such as hunting, fishing and shooting sports, as well as off-roadmotor sports and other related lifestyle programming. The Company also owns andoperates related businesses which serve the interests of The Outdoor Channel’sviewers and other outdoor enthusiasts. These related businesses include:LDMA-AU, Inc. (“Lost Dutchman’s”) and Gold Prospector’s Association of America,LLC. (“GPAA”). Lost Dutchman’s is a national gold prospecting campground clubwith approximately 6,850 members and properties in Arizona, California,Colorado, Georgia, Michigan, North Carolina, Oregon and South Carolina. Webelieve GPAA is one of the largest gold prospecting clubs in the world withapproximately 31,700 active members. GPAA is the publisher of the “GoldProspectors & Treasure Hunters in the Great Outdoors” magazine and hasrights to a 2,300 acre property near Nome, Alaska used to provide an annualexpedition for a fee to its members.

Outdoor Channel Holdings also wholly owns43455 BPD, LLC which owns our broadcast facility.

TheCompany’s revenues include (1) advertising fees from advertisements aired onThe Outdoor Channel and from advertisements in “Gold Prospectors & TreasureHunters in the Great Outdoors” magazine; (2) subscriber fees paid by cable andsatellite service providers that air The Outdoor Channel; and (3) membershipfees from members in both Lost Dutchman’s and GPAA and other income includingmagazine sales, products and services related to gold prospecting, goldexpositions, expeditions and outings. Advertising fees include fees paid bythird-party programmers to purchase advertising time in connection with theairing of their programs on The Outdoor Channel.

Duringthe latter part of 2004, we decided to pursue strategic initiatives to increaseour long-term profitability. Such initiatives included growing The OutdoorChannel’s subscriber base, by developing a second network — Outdoor Channel 2HDSM, opening a new advertising sales office in New York, producingmore programming in-house and purchasing a new building to house our new stateof the art broadcast facility. Although we anticipate these initiatives willincrease our costs in the near term, we believe such strategic pursuits willultimately enhance our overall performance.

Insome of the following period-to-period comparisons, the Company hasspecifically noted, and at times excluded the September 2004 non-cash, non-recurringcompensation expense of $47,983,000 incurred by the Company and the related taxbenefit of $19,098,000 as the result of the assumption of TOC options inconnection with the acquisition of the minority interest in TOC because itbelieves quantifying the effects of this charge provides a better understandingof the Company’s results of operations. The Company’s management also believesthat disclosure of its results in this manner, when presented in conjunctionwith the corresponding GAAP measures, provides useful information to investorsand others in identifying and understanding the Company’s operating performancefor the periods presented.

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**Recent Accounting Developments**

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 123 (R) (“SFAS 123 (R)”). “Share-BasedPayment” which establishes standards for the accounting for transactions inwhich an entity exchanges its equity instruments for goods or services andfocuses primarily on accounting for transactions in which an entity obtainsemployee services in share-based payment transactions. SFAS 123 (R) requiresthat the fair value of such equity instruments, including all options grantedto employees, be recognized as expense in the historical financial statementsas services are performed. Prior to SFAS 123 (R), only certain pro formadisclosures of fair value were required for employee options.  The Company will adopt the standards of SFASNo. 123 (R) effective January 1, 2006. Since the Company has used the intrinsicvalue method to account for stock options, the adoption of SFAS 123 (R) isexpected to have a material impact on the financial statements of OutdoorChannel Holdings, Inc.

TheFASB had issued certain other accounting pronouncements as of September 30,2005 that will become effective in subsequent periods; however, management ofthe Company does not believe that any of those pronouncements would havesignificantly affected the Company’s financial accounting measurements or disclosureshad they been in effect during the three and nine months ended September 30,2005.

30

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**Comparison of OperatingResults for the Three Months Ended****September30****, 2005and September****30****, 2004**

The following table discloses certain financialinformation for the periods presented, expressed in terms of dollars, dollarchange, percentage change and as a percent of total revenue (all dollar amountsare in thousands):

 
| ** **                                                     | ** ** | ** **     | ** ** | ** **     | ** ** | **Change**     | ** ** | **% of Total Revenue** | ** ** |
|----------------------------------------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|---------------------------------------|------------|
| ** **                                                     | ** ** | **2005**       | ** ** | **2004**       | ** ** | **$**          | ** ** | **%**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                     | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
| **Revenues:**                                                  | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Advertising                                                    |       | $              | 5,657      |           | $          | 5,722          |       | $                                     | (65        | ) | (1.1 | )% | 49.6 | % | 52.3 | % |
| Subscriber fees                                                |       | 3,846          |       | 3,450          |       | 396            |       | 11.5                                  |       | 33.7 |   | 31.5 |   |
| Membership income                                              |       | 1,901          |       | 1,777          |       | 124            |       | 7.0                                   |       | 16.7 |   | 16.2 |   |
| Total revenues                                                 |       | 11,404         |       | 10,949         |       | 455            |       | 4.2                                   |       | 100.0 |   | 100.0 |   |
|                                                           |       |           |       |           |       |           |       |                                  |       |   |   |   |   |
| Cost of Services:                                              |       |           |       |           |       |           |       |                                  |       |   |   |   |   |
| Programming                                                    |       | 2,315          |       | 933            |       | 1,382          |       | 148.1                                 |       | 20.3 |   | 8.5 |   |
| Satellite transmission fees                                    |       | 617            |       | 582            |       | 35             |       | 6.0                                   |       | 5.4 |   | 5.3 |   |
| Production and operations                                      |       | 783            |       | 588            |       | 195            |       | 33.2                                  |       | 6.9 |   | 5.4 |   |
| Other direct costs                                             |       | 785            |       | 540            |       | 245            |       | 45.4                                  |       | 6.9 |   | 4.9 |   |
| Total cost of services                                         |       | 4,500          |       | 2,643          |       | 1,857          |       | 70.3                                  |       | 39.5 |   | 24.1 |   |
|                                                           |       |           |       |           |       |           |       |                                  |       |   |   |   |   |
| Other expenses:                                                |       |           |       |           |       |           |       |                                  |       |   |   |   |   |
| Advertising                                                    |       | 1,912          |       | 1,477          |       | 435            |       | 29.5                                  |       | 16.7 |   | 13.5 |   |
| Selling, general and administrative                            |       | 4,162          |       | 4,269          |       | (107           | )          | (2.5                                  | )          | 36.5 |   | 39.1 |   |
| Non-cash compensation expense   from exchange of stock options |       | —         |       | 47,983         |       | (47,983        | )          | (100.0                                | )          | — |   | 438.2 |   |
| Depreciation and amortization                                  |       | 693            |       | 340            |       | 353            |       | 103.8                                 |       | 6.1 |   | 3.1 |   |
| Total other expenses                                           |       | 6,767          |       | 54,069         |       | (47,302        | )          | (87.5                                 | )          | 59.3 |   | 493.9 |   |
|                                                           |       |           |       |           |       |           |       |                                  |       |   |   |   |   |
| Income (loss) from operations                                  |       | 137            |       | (45,763        | )          | 45,900         |       | (100.3                                | )          | 1.2 |   | (418.0 | ) |
|                                                           |       |           |       |           |       |           |       |                                  |       |   |   |   |   |
| Other income, net                                              |       | 396            |       | 34             |       | 362            |       | 1,064.7                               |       | 3.5 |   | 0.3 |   |
|                                                           |       |           |       |           |       |           |       |                                  |       |   |   |   |   |
| Income (loss) before income taxes and   minority interest      |       | 533            |       | (45,729        | )          | 46,262         |       | (101.2                                | )          | 4.7 |   | (417.7 | ) |
|                                                           |       |           |       |           |       |           |       |                                  |       |   |   |   |   |
| Income tax provision (benefit)                                 |       | 285            |       | (18,192        | )          | 18,477         |       | (101.6                                | )          | 2.5 |   | (166.2 | ) |
|                                                           |       |           |       |           |       |           |       |                                  |       |   |   |   |   |
| Income (loss) before minority interest                         |       | 248            |       | (27,537        | )          | 27,785         |       | (100.9                                | )          | 2.2 |   | (251.5 | ) |
|                                                           |       |           |       |           |       |           |       |                                  |       |   |   |   |   |
| Minority interest in net income of   consolidated subsidiary   |       | —         |       | 193            |       | (193           | )          | (100.0                                | )          | — |   | 1.8 |   |
|                                                           |       |           |       |           |       |           |       |                                  |       |   |   |   |   |
| Net income (loss)                                              |       | $              | 248        |           | $          | (27,730        | )          | $                                     | 27,978     |   | (100.9 | )% | 2.2 | % | (253.3 | )% |

 

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**Comparison of OperatingResults for the Nine Months Ended September****30****, 2005 and September****30****, 2004**

The following table discloses certain financialinformation for the periods presented, expressed in terms of dollars, dollarchange, percentage change and as a percent of total revenue (all dollar amountsare in thousands):

 
| ** **                                                    | ** ** | ** **     | ** ** | ** **     | ** ** | **Change**     | ** ** | **% of Total Revenue** | ** ** |
|---------------------------------------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|---------------------------------------|------------|
| ** **                                                    | ** ** | **2005**       | ** ** | **2004**       | ** ** | **$**          | ** ** | **%**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                    | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
| Revenues:                                                     |       |           |       |           |       |           |       |                                  |       |   |   |   |   |
| Advertising                                                   |       | $              | 16,173     |           | $          | 15,886         |       | $                                     | 287        |   | 1.8 | % | 51.4 | % | 53.5 | % |
| Subscriber fees                                               |       | 11,382         |       | 9,830          |       | 1,552          |       | 15.8                                  |       | 36.1 |   | 33.1 |   |
| Membership  income                                            |       | 3,924          |       | 3,995          |       | (71            | )          | (1.8                                  | )          | 12.5 |   | 13.4 |   |
| Total revenues                                                |       | 31,479         |       | 29,711         |       | 1,768          |       | 6.0                                   |       | 100.0 |   | 100.0 |   |
|                                                          |       |           |       |           |       |           |       |                                  |       |   |   |   |   |
| Cost of services:                                             |       |           |       |           |       |           |       |                                  |       |   |   |   |   |
| Programming                                                   |       | 3,367          |       | 2,223          |       | 1,144          |       | 51.5                                  |       | 10.7 |   | 7.5 |   |
| Satellite  transmission fees                                  |       | 1,866          |       | 1,759          |       | 107            |       | 6.1                                   |       | 5.9 |   | 5.9 |   |
| Production and  operations                                    |       | 2,509          |       | 1,785          |       | 724            |       | 40.6                                  |       | 8.0 |   | 6.0 |   |
| Other direct  costs                                           |       | 1,247          |       | 990            |       | 257            |       | 26.0                                  |       | 4.0 |   | 3.3 |   |
| Total cost of  services                                       |       | 8,989          |       | 6,757          |       | 2,232          |       | 33.0                                  |       | 28.6 |   | 22.7 |   |
|                                                          |       |           |       |           |       |           |       |                                  |       |   |   |   |   |
| Other expenses:                                               |       |           |       |           |       |           |       |                                  |       |   |   |   |   |
| Advertising                                                   |       | 5,668          |       | 4,282          |       | 1,386          |       | 32.4                                  |       | 18.0 |   | 14.4 |   |
| Selling, general  and administrative                          |       | 13,351         |       | 11,495         |       | 1,856          |       | 16.1                                  |       | 42.4 |   | 38.7 |   |
| Non-cash  compensation expense from exchange of stock options |       | —         |       | 47,983         |       | (47,983        | )          | (100.0                                | )          | — |   | 161.5 |   |
| Depreciation and  amortization                                |       | 2,015          |       | 937            |       | 1,078          |       | 115.0                                 |       | 6.4 |   | 3.2 |   |
| Total other  expenses                                         |       | 21,034         |       | 64,697         |       | (43,663        | )          | (67.5                                 | )          | 66.8 |   | 217.8 |   |
|                                                          |       |           |       |           |       |           |       |                                  |       |   |   |   |   |
| Income (loss) from operations                                 |       | 1,456          |       | (41,743        | )          | 43,199         |       | (103.5                                | )          | 4.6 |   | (140.5 | ) |
|                                                          |       |           |       |           |       |           |       |                                  |       |   |   |   |   |
| Other income, net                                             |       | 484            |       | 93             |       | 391            |       | 420.4                                 |       | 1.6 |   | 0.3 |   |
|                                                          |       |           |       |           |       |           |       |                                  |       |   |   |   |   |
| Income (loss) before income taxes and   minority interest     |       | 1,940          |       | (41,650        | )          | 43,590         |       | (104.7                                | )          | 6.2 |   | (140.2 | ) |
|                                                          |       |           |       |           |       |           |       |                                  |       |   |   |   |   |
| Income tax provision (benefit)                                |       | 878            |       | (16,559        | )          | 17,437         |       | (105.3                                | )          | 2.8 |   | (55.7 | ) |
|                                                          |       |           |       |           |       |           |       |                                  |       |   |   |   |   |
| Income (loss) before minority interest                        |       | 1,062          |       | (25,091        | )          | 26,153         |       | (104.2                                | )          | 3.4 |   | (84.5 | ) |
|                                                          |       |           |       |           |       |           |       |                                  |       |   |   |   |   |
| Minority interest in net income of   consolidated subsidiary  |       | —         |       | 682            |       | (682           | )          | (100.0                                | )          | — |   | 2.3 |   |
|                                                          |       |           |       |           |       |           |       |                                  |       |   |   |   |   |
| Net income (loss)                                             |       | $              | 1,062      |           | $          | (25,773        | )          | $                                     | 26,835     |   | (104.1 | )% | 3.4 | % | (86.8 | )% |

 

**Revenues**

Ourrevenues include revenues from (1) advertising fees; (2) subscriber fees; and(3) membership income. Advertising revenue is generated from the sale ofadvertising time on The Outdoor Channel including advertisements shown during aprogram (also known as short-form advertising) and infomercials in which theadvertisement is the program itself (also known as long-form advertising) andfrom the sale of advertising space in publications such as the “GoldProspectors & Treasure Hunters in the Great Outdoors” magazine. Advertisingrevenue is also generated from fees paid by third party programmers thatpurchase advertising time in connection with the airing of their programs onThe Outdoor Channel. For the three months ended September 30, 2005 and 2004,The Outdoor Channel generated approximately 97.0% and 97.4% of our advertisingrevenue, respectively. For the nine months ended September 30, 2005 and 2004,The Outdoor Channel generated approximately 97.0% and 97.4% of our advertisingrevenue, respectively. Subscriber fees are solely related to The OutdoorChannel. Membership income is generated by our activities other than theoperation of The Outdoor Channel and includes membership sales, magazine sales,merchandise sales, and sponsored outings and expeditions in connection withGPAA and Lost Dutchman’s.

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Total revenues forthe three months ended September 30, 2005 were $11,404,000, an increase of$455,000, or 4.2% compared to revenues of $10,949,000 for the three monthsended September 30, 2004. Total revenues for the nine months ended September30, 2005 were $31,479,000, an increase of $1,768,000, or 6.0%, compared torevenues of $29,711,000 for the nine months ended September 30, 2004. The netincreases were the result of changes in several items comprising revenue asdiscussed below.

Advertisingrevenue for the three months ended September 30, 2005 was $5,657,000, adecrease of $65,000 or 1.1% compared to $5,722,000 for the three months endedSeptember 30, 2004. Advertising revenue for the nine months ended September 30,2005 was $16,173,000, an increase of $287,000 or 1.8% compared to $15,886,000for the nine months ended September 30, 2004. The decline in advertisingrevenue for the three months ended September 30, 2005 principally reflects lessthan projected growth in our Nielsen Universe Estimate resulting in underdelivery of households for our advertising clients. For September of 2005,Nielsen estimated that The Outdoor Channel had 25.6 million viewers, down from26.2 million for the same period a year ago. (Nielsen revises this estimateeach month and for November, Nielsen increased its estimate to approximately25.7 million subscribers). Because of this under delivery, we record aliability, commonly referred to in the cable industry and as we refer to it as “MakeGood Liability,”  thereby reducingrevenue we might otherwise recognize and deferring it into the future when weair additional advertising for the client at no additional cost. The increasein advertising revenue for the nine months ended September 30, 2005 reflectsour ability to demonstrate the value of short-form advertising on The OutdoorChannel to national advertisers and thus sell a larger percentage of ouradvertising inventory to these accounts, generally at higher prices.

Subscriberfees for the three months ended September 30, 2005 were $3,846,000, an increaseof $396,000 or 11.5% compared to $3,450,000 for the three months endedSeptember 30, 2004. Subscriber fees for the nine months ended September 30,2005 were $11,382,000, an increase of $1,552,000 or 15.8% compared to$9,830,000 for the nine months ended September 30, 2004. The increase insubscriber fees for the period was primarily due to: an increased number ofpaying subscribers compared to the same periods a year ago, both from newaffiliates and from existing distributors and contractual subscriber fee rateincreases with existing service providers carrying The Outdoor Channel. We planto accelerate our subscriber growth utilizing various means includingdeployment of launch support fees. Such fees are capitalized and amortized overthe life of the carriage agreement. To the extent revenue is associated withthe incremental subscribers, the amortization is charged to offset the relatedrevenue. Any excess of launch support amortization over the related subscriberrevenue is charged to expense. As a result, we anticipate that subscriberrevenue, net of amortization of launch fees, may not increase over theforeseeable future once we deploy this tactic and, in fact, due to contractualvolume discounts, could actually decrease over the new contract lives.

Membershipincome for the three months ended September 30, 2005 was $1,901,000, anincrease of $124,000 or 7.0% compared to $1,777,000 for the three months endedSeptember 30, 2004. Membership income for the nine months ended September 30,2005 was $3,924,000, a decrease of $71,000 or 1.8% compared to $3,995,000 forthe nine months ended September 30, 2004. The improvement of the third quarterover last year principally reflects the increased participation of our goldprospecting expedition to our Cripple River property located near Nome, Alaska.

**Cost ofServices**

Our cost ofservices consists primarily of the cost of providing our broadcast signal andprogramming to the distributors for transmission to the consumer and costsassociated with the production and delivery of our magazine and merchandisesales. Cost of services includes (1) programming costs; (2) satellitetransmission fees; (3) production and operations costs; and (4) other directcosts. Total cost of services for the three months ended September 30, 2005 was$4,500,000, an increase of $1,857,000 or 70.3%, compared to $2,643,000 for thethree months ended September 30, 2004. Total cost of services for the ninemonths ended September 30, 2005 was $8,989,000, an increase of $2,232,000 or33.0%, compared to $6,757,000 for the nine months ended September 30, 2004. Asa percentage of revenues, total cost of services was 39.5% and 24.1% in thethree months ended September 30, 2005 and 2004, respectively. As a percentageof revenues, total cost of services was 28.6% and 22.7% in the nine monthsended September 30, 2005 and 2004, respectively. We expect cost of services tocontinue to increase in the future as we expand our existing markets andin-house production to support our advertising strategy.

Programmingexpenses for the three months ended September 30, 2005 were $2,315,000, anincrease of $1,382,000 or 148.1% compared to $933,000 for the three monthsended September 30, 2004. Programming expenses for the nine months endedSeptember 30, 2005 were $3,367,000, an increase of $1,144,000 or 51.5% compared to $2,223,000 for the nine monthsended September 30, 2004. The increase is principally a result fromour decision to launch our second channel, Outdoor Channel 2 HD, on July 1,2005. This channel is entirely programmed with shows produced in-house asopposed to the preponderance of third party production on our standarddefinition channel. We produced in excess of 40 shows plus numerous specialsin-house to air in the third and fourth quarters of 2005 and in some situationsagain in 2006. We aired 16 shows that were internally produced during the thirdand fourth quarters of 2004.

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 is typically over 2 or 4 quarters that 

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generally does not extend more than 2 years. As the anticipated airingschedule changes, the timing and amount of the charge to expense isprospectively adjusted accordingly. At the time we determine a program isunlikely to air or re-air, we charge programming expense with the remainingassociated cost recorded in prepaid programming.  We are reassessing our programming directionand may charge to expense prepaid programming costs in the fourth quarter thathad otherwise been planned to expense in the future as they air.

 

Much of the cost of programming has been recorded as prepaidprogramming costs corresponding with the full launch of Outdoor Channel 2 HD.Many of these programs began airing during the third quarter of 2005, and weanticipate re-airing the programs in the fourth quarter of 2005 and in somesituations re-airing the same programs on The Outdoor Channel in 2006. Asubstantial portion of the prepaid programming costs will be charged to expensein these quarters. Programming expenses are expected to increase as apercentage of revenue as we pursue our strategy to produce, or own, moreprogramming in-house as opposed to contracting with third party producers. As aresult, we believe we will control more of our programs’ quality, advertisinginventory and potential to re-package our programming for other use such asvideo-on-demand, international licensing and production of DVDs for retaildistribution.  Since we havelimited experience in re-packaging our programming for these other uses, we donot retain costs in prepaid programming to match with these potential revenuesources. When we develop a sufficient history, our policy might change.

Satellitetransmission fees for the three months ended September 30, 2005 were $617,000,an increase of $35,000, or 6.0%, compared to $582,000 for the three months September30, 2004. Satellite transmission fees for the nine months ended September 30,2005 were $1,866,000, an increase of $107,000, or 6.1%, compared to $1,759,000for the nine months ended September 30, 2004. This increase reflects anadditional charge for the back-up satellite capability negotiated with oursatellite provider during the fourth quarter of 2004.

Production andoperations costs for the three months ended September 30, 2005 were $783,000,an increase of $195,000, or 33.2%, compared to $588,000 for the three monthsended September 30, 2004. Production and operations costs for the nine monthsended September 30, 2005 were $2,509,000, an increase of $724,000, or 40.6%,compared to $1,785,000 for the nine months ended September 30, 2004.  The increase in costs principally relates toincreased personnel to support our growing infrastructure as we produce moreshows in-house and to support our new broadcast facility.

Other direct costsfor the three months ended September 30, 2005 were $785,000, an increase of$245,000, or 45.4%, compared to $540,000 for the three months ended September30, 2004. Other direct costs for the nine months ended September 30, 2005 were$1,247,000, an increase of $257,000, or 26.0%, compared to $990,000 for thenine months ended September 30, 2004. This increase is primarily additional expenses associated with supportof our membership segment including magazine production and outings.

**OtherExpenses**

Other expensesconsist of the cost of (1) advertising; (2) selling, general andadministrative expenses; (3) compensation expense from exchange of TOC stock options; and(4) depreciation and amortization.

Totalother expenses for the three months ended September 30, 2005 were $6,767,000, adecrease of $47,302,000, or 87.5%, compared to $54,069,000 for the three monthsended September 30, 2004. Total other expenses for the nine months endedSeptember 30, 2005 were $21,034,000, a decrease of $43,663,000 or 67.5%,compared to $64,697,000 for the nine months ended September 30, 2004. As apercentage of revenues, total other expenses were 59.3% and 493.9% in the threemonths ended September 30, 2005 and 2004, respectively. As a percentage ofrevenues, total other expenses were 66.8% and 217.8% in the nine months endedSeptember 30, 2005 and 2004, respectively. The decrease in expenses was due tothe non-recurring charge to compensation expense incurred in September 2004 asa result of the issuance of options to TOC employees with an intrinsic value of$47,983,000 in accordance with the terms of the acquisition by the Company ofsubstantially all of the remaining 17.6% minority interest in TOC it did notalready own. Otherwise total expenses increased as illustrated when thenon-cash, non-recurring compensation expense of $47,983,000 incurred inSeptember 2004 is excluded.

Totalother expenses, net of the compensation expense from exchange of stock options,increased $681,000 or 11.1% and $4,320,000 or 24.0% for the three and ninemonths, respectively. As a percentage of revenues, total other expenses, net ofcompensation expense from exchange of stock options, were 59.3% and 55.5 % inthe three months ended September 30, 2005 and 2004, respectively. As apercentage of revenues, total expenses, net of compensation expense fromexchange of stock options, were 66.8% and 56.3% in the nine months endedSeptember 30, 2005 and 2004, respectively.

Theincrease in these expenses was due to several factors, including: (1)amortization of intangible assets; (2) costs associated with compliance with Sarbanes-OxleyAct of 2002; and (3) costs associated with incorporation in Delaware andlisting on Nasdaq National Market, to which the Company became subject as ofSeptember 2004. Those increased costs will continue to be incurred becomingpart of our cost of doing business. The increase is also attributable toincreased programming and personnel costs, costs 

34

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associated with the launch of oursecond channel, Outdoor Channel 2 HD, marketing and promotion costs and otheritems more fully described as follows.

 

Advertisingexpenses for the three months ended September 30, 2005 were $1,912,000, anincrease of $435,000 or 29.5% compared to $1,477,000 for the three months endedSeptember 30, 2004. Advertising expenses for the nine months ended September30, 2005 were $5,668,000, an increase of $1,386,000 or 32.4% compared to$4,282,000 for the nine months ended September 30, 2004. The increase inadvertising expenses is principally a result of our increased spending onconsumer and trade industry awareness campaigns designed to build demand forThe Outdoor Channel and for Outdoor Channel 2 HD. We plan on continuing tospend on these awareness programs, and when expressed as a percentage ofrevenues, we are trending at higher rates than 2004.

Selling,general and administrative expenses for the three months ended September 30,2005 were $4,162,000, a decrease of $107,000 or 2.5% compared to $4,269,000 forthe three months ended September 30, 2004. As a percent of revenues, selling,general and administrative expenses were 36.5% and 39.1% in the three monthsended September 30, 2005 and 2004, respectively. Selling, general andadministrative expenses for the nine months ended September 30, 2005 were$13,351,000, an increase of $1,856,000 or 16.1% compared to $11,495,000 for thenine months ended September 30, 2004. As a percent of revenues, selling,general and administrative expenses were 42.4% and 38.7% in the nine monthsended September 30, 2005 and 2004, respectively.

The increase was primarily due to the increase in the number ofemployees. We opened our New York City advertising sales office with aresultant expense in 2005 that did not exist in the same period a year ago. Itcurrently has a staff of three employees. We have also added an executive toour management team who holds the position of General Counsel. Others have beenadded in all departments to support our launch of a second channel—OutdoorChannel 2 HD, and to support our increased efforts of providing more of ourshows in-house. We also experienced increased travel and related costsassociated with our larger advertising sales staff, support of our serviceproviders and the promotion of The Outdoor Channel and Outdoor Channel 2 HDthrough a stronger presence at trade shows, conferences and seminars. Weincreased other corporate overhead expenses such as our activity surroundingSarbanes-Oxley compliance in 2005, fees for our listing on Nasdaq NationalMarket and fees associated with incorporation in the state of Delaware.

Weanticipate that selling, general and administrative costs will continue toclimb over the foreseeable future both in dollars and when expressed as apercent of revenue as we continue to work to gain penetration of both channels,corporate spending on Sarbanes-Oxley compliance, fees to maintain our commonstock listing and improved communication with our stockholders, among othercorporate expenses.

Compensationexpense from exchange of stock options for the three and nine months endedSeptember 30, 2004 was $47,983,000 and was incurred as a result of the issuanceof 4,012,000 options to TOC option holders in accordance with the terms of theacquisition of substantially all of the remaining 17.6% minority interest inTOC we did not already own. This charge is both non-cash and non-recurring.

Depreciation andamortization for the three months ended September 30, 2005 were $693,000, anincrease of $353,000 or 103.8% compared to $340,000 for the three months endedSeptember 30, 2004. Depreciation and amortization for the nine months ended September30, 2005 were $2,015,000, an increase of $1,078,000 or 115.0% compared to$937,000 for the nine months ended September 30, 2004. The increase in depreciation andamortization is principally a result of amortization of intangible assetscreated as part of the acquisition in September 2004 of the remaining minorityinterest of TOC we did not already own. These expenses did not exist in thefirst half of 2004.  Also increaseddepreciation expense reflects the purchase and installation of the equipmentrelated to the launch of our second network, Outdoor Channel 2HD.

**Income(Loss) from Operations**

Income(loss) from operations for the three months ended September 30, 2005 was$137,000, an increase of $45,900,000 compared to ($45,763,000) for the three monthsended September 30, 2004. As a percent of revenues, income from operations was1.2% and (418.0%), respectively. Income (loss) from operations for the ninemonths ended September 30, 2005 was $1,456,000, an increase of $43,199,000compared to ($41,743,000) for the nine months ended September 30, 2004. As apercent of revenues, income from operations was 4.6% and (140.4%),respectively. As we continue to strive to drive growth of our subscriber baseincluding the planned payment of launch support and as we further develop oursecond channel, Outdoor Channel 2 HD, we will incur increased expenses such asprogramming, marketing, and advertising as well as start-up and operating costsin 2005 that are unlikely to be immediately offset by revenues. As a result, weanticipate our operating margins will be negatively impacted for theforeseeable future. There can be no assurance that these strategies will besuccessful.

Asexplained above, the non-cash, non-recurring compensation expense charge of$47,983,000 which resulted from the assumption of options in connection withthe acquisition of the minority interest in TOC accounts for the majority ofthe loss from operations for the three and nine months ended September 30,2004. If we excluded this charge, income from operations for the three monthsended September 30, 2004 would have been $2,220,000. As a percentage of revenuethis adjusted total would have been 

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20.3% for the three months endedSeptember 30, 2004. If we excluded this charge, income from operations for thenine months ended September 30, 2004 would have been $6,240,000. As apercentage of revenue this adjusted total would have been 21.0% for the ninemonths ended September 30, 2004.

 

**Other Income, Net**

Otherincome, net for the three months ended September 30, 2005 was $396,000, anincrease of $362,000 compared to $34,000 for the three months ended September30, 2004. Other income, net for the nine months ended September 30, 2005 was$484,000, an increase of $391,000 compared to $93,000 for the nine months endedSeptember 30, 2004. This improvement was primarily due to increased dividendsand interest earned on our increased investment in available-for-salesecurities and cash and cash equivalent balances that resulted from the sale,on July 1, 2005, of 3,500,000 shares of common stock for net cash proceeds of$43,350,000 plus $2,631,000 from the exercise of stock options during the ninemonths ended September 30, 2005.

**Income (Loss) BeforeIncome Taxes and Minority Interest in Net Income of Consolidated Subsidiary**

Income(loss) before income taxes and minority interest increased as a percentage ofrevenues to 4.7% for the three months ended September 30, 2005 compared to(417.7%) for the three months ended September 30, 2004. Income (loss) beforeincome taxes and minority interest decreased as a percentage of revenues to6.2% for the nine months September 30, 2005 compared to (140.2%) for the ninemonths ended September 30, 2004.

TheTOC segment’s income before income taxes and minority interest expressed as apercentage of revenue increased to 2.9% for the three months ended September30, 2005, compared to a loss of 162.4% for the three months ended September 30,2004. The TOC segment’s income before income taxes and minority interestexpressed as a percentage of revenue increased to 10.1% for the nine monthsended September 30, 2005, compared to a loss of 505.0% for the nine monthsended September 30, 2004. The decrease was due to the non-cash, non-recurringcharge of $47,983,000, and to the growth of our programming expenses andincreased staff in support of the launch of our second channel, Outdoor Channel2 HD, increased spending on advertising, personnel and travel/promotionalrelated expenses as well as depreciation expenses related to the deployment ofadditional equipment and amortization of the intangible assets related to theacquisition of the minority interest of TOC.

The Membership Division segment’s income before income taxes andminority interest expressed as a percentage of revenues increased to 20.4% forthe three months ended September 30, 2005 compared to 15.9% for the threemonths ended September 30, 2004. The Membership Division segment’s incomebefore income taxes and minority interest expressed as a percentage of revenuesdecreased to 7.1% for the nine months ended September 30, 2005 compared to10.9% for the nine months ended September 30, 2004. The improvement in thethird quarter’s results reflects the success of our annual Alaska trip drivenby increased number of participants. The results of this quarter did notovercome the poorer results in the prior six months of 2005 when compared to2004.

Corporateincurred a loss before income taxes and minority interest for the three monthsended September 30, 2005 amounting to $169,000, a change of $305,000 comparedto a loss of $474,000 for the three months ended September 30, 2004. Corporateincurred a loss before income taxes and minority interest for the nine monthsended September 30, 2005 amounting to $1,108,000, a decrease of $69,000compared to $1,039,000 for the nine months ended September 30, 2004. Theexpenses allocated to Corporate include: professional fees such as publicrelations, accounting and legal fees, amortization of intangibles, businessinsurance, board of directors fees and expenses and an allocation of corporateofficers’ payroll and related expenses. The increase in the expenses ofCorporate is principally related to accounting services incurred in positioningthe Company to be in compliance with the requirements of the Sarbanes-Oxley Actof 2002, taxes associated with being incorporated in Delaware, listing fees ofNasdaq National Market and amortization of the intangible assets related to theacquisition of the minority interest of TOC. Increased board fees also contributeto the increase of expenses reflecting the increase in the number ofindependent board members from two in the first eight months of 2004 to five in2005.

**Income Tax****Provision (Benefit)**

Incometax provision for the three months ended September 30, 2005 was $285,000, anincrease of $18,477,000 as compared to a benefit of $18,192,000 for the threemonths ended September 30, 2004. Income tax provision for the nine months endedSeptember 30, 2005 was $878,000, an increase of $17,437,000 as compared to abenefit of $16,559,000 for the nine months ended September 30, 2004. Theincrease was principally due to the Company earning taxable income in the 2005periods as compared to a loss for the 2004 periods. The effective income taxrate was approximately 53.5% and 39.8% for the three months ended September 30,2005 and 2004, respectively. The effective income tax rate was approximately45.3% and 39.8% for the nine months ended September 30, 2005 and 2004,respectively.  The increased effectiveincome tax rates experienced in 2005 compared to 2004 are principally a resultof increases in the estimated amount of expenditures not fully deductible andadjustments to the state tax provision rate.

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**Minority Interest in NetIncome of Consolidated Subsidiary**

Minorityinterest for the three and nine months ended September 30, 2004 was $193,000and $682,000, respectively. Minority interest was eliminated in September 2004as a result of our acquisition of the remaining minority interest in TOC we didnot already own. Therefore, there was no minority interest for the three andnine months ended September 30, 2005.

**Net Income (Loss)**

Netincome (loss) for the three months ended September 30, 2005 was $248,000 anincrease of $27,978,000 compared to ($27,730,000) for the three months endedSeptember 30, 2004. Net income (loss) for the nine months ended September 30,2005 was $1,062,000 an increase of $26,835,000 compared to ($25,773,000) forthe nine months ended September 30, 2004. The increase was due to reasonsstated above. Excluding the non-cash, non-recurring charge of $47,983,000, netof income tax benefit of $19,098,000, net income for the three months endedSeptember 30, 2004 would have been $1,180,000 or 10.8% of revenue. Excludingthe non-cash, non-recurring charge of $47,983,000, net of income tax benefit of$19,098,000, net income for the nine months ended September 30, 2004 would havebeen $3,112,000 or 10.5% of revenue.

**Liquidity and CapitalResources**

Weused $33,000 of cash in our operating activities in the nine months endedSeptember 30, 2005, compared to $5,881,000 in the nine months ended September30, 2004 and had cash and cash equivalents balance of $29,775,000 at September30, 2005, which was an increase of $16,670,000 from the balance of $13,105,000at December 31, 2004. Net working capital increased to $60,822,000 at September30, 2005, compared to $17,042,000 at December 31, 2004.

Netcash used in investing activities was $29,259,000 in the nine months endedSeptember 30, 2005 compared to $2,395,000 for the nine months ended September30, 2004. The increase in cash used in investing activities was related to thepurchase of (i) short term auction rate securities to enhance our returns oncash balances and (ii) capital expenditures on “construction in progress” andequipment related to the build-out of our new broadcast facility as furtherdiscussed below. Additional capital expenditures were to build our inventory ofcameras and edit equipment used to support our increased efforts to producemore of our programming in-house as opposed to licensing such programming fromthird parties and in particular to increase our HD camera and editingequipment.

Cash provided by financing activities in the nine months endedSeptember 30, 2005 was $45,962,000 compared to $981,000 for the nine monthsended September 30, 2004. The cash provided by financing activities in 2005 wasprimarily from the completion, on July 1, 2005, of a public offering of ourcommon stock, whereby we sold 3,500,000 shares of common stock and received netproceeds of $43,350,000. In addition, certain selling stockholders exercisedoptions to buy 1,688,000 shares of common stock which were resold in the publicoffering. On July 13, 2005, the underwriters exercised their over-allotmentoption granted by certain selling stockholders and purchased an additional442,000 shares of common stock.  Theshares sold by the selling stockholders were purchased immediately before thesale through the exercise of options they held to buy common shares from theCompany. The Company received $2,168,000 in the aggregate from the exercise ofthese options. The Company also received cash proceeds of approximately$463,000 from the exercise of other options for the purchase of 211,000 sharesof common stock. The cash provided by financing activities in 2004 wasprimarily a result of the exercise of employee and service provider stockoptions from our 1995 incentive stock option plan.

Thenet proceeds from the public offering are intended to be used to expand ourmarketing and sales efforts to increase the number of subscribers to TheOutdoor Channel and the purchase of programming from third parties , increasedinternal production of programming and for general corporate purposes.

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 to September 7,2007 and increasing the total amount which can be drawn upon under therevolver  to $8,000,000. The revolverprovides that the interest rate shall be LIBOR plus 1.25%. The revolver iscollateralized by substantially all of the Company’s assets. This creditfacility contains customary financial and other covenants and restrictions, asamended on November 2, 2005, including a change of control provision. As ofSeptember 30, 2005 and as of the date of this report, we did not have anyamounts outstanding under this credit facility.

Drivenby a need to increase office space, we reassessed our facilities includingfloor space utilization, master control equipment, uplink equipment, and otherneeds during the year ended December 31, 2004. On February 22, 2005 weannounced our intention to purchase a 28,000 square foot building in Temecula,California for approximately $2.6 million and we completed the purchase duringthe third quarter of 2005. We are in the process of completing improvements tothis building which is planned to house our broadcast facility including ourmaster control, our uplink satellite dish and various programming personnel. Wecurrently estimate that aggregate capital expenditures to complete thebuild-out including updated equipment could exceed $8 million. As of September30, 2005 we have spent approximately $4.8 million on such upgrades.

 

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OnNovember 2, 2005, we obtained a $1,950,000 mortgage loan from the Bank on ourrecently purchased broadcast facility located in Temecula, California which hasa 10 year term loan with a 25 year amortization schedule. This loan carries avariable interest rate of LIBOR plus 1.35%. This loan is secured primarily by aDeed of Trust on the property and is also secondarily secured by the sameassets as the revolver. It also contains customary financial and othercovenants and restrictions including a change of control provision. On November7, 2005, we entered into an interest rate swap agreement with the Bank toreduce the potential impact of increasing interest rates and effectively fixedthe interest rate on this loan at 6.59%.

OnNovember 2, 2005, we obtained into a $3,000,000, five year fully amortizingterm loan. This loan carries a variable interest rate of LIBOR plus 1.35%. Thisterm loan is secured by the same assets as the revolver and contains customaryfinancial and other covenants and restrictions including a change of controlprovision. On November 7, 2005, we entered into an interest rate swap agreementwith the Bank to reduce the potential impact of increasing interest rates andeffectively fixed the interest rate on this term loan at 6.35%.

As ofSeptember 30, 2005, the Company had sufficient cash on hand and generatedsufficient cash flow from operations to meet its short-term cash flowrequirements. Management believes that the Company’s existing cash resourcesincluding cash on-hand, various notes including the line-of-credit at September30, 2005 and anticipated cash flows from operations will be sufficient to fundthe Company’s operations at current levels and anticipated capital requirementsthrough at least November 1, 2006. To the extent that such amounts areinsufficient to finance the Company’s working capital requirements or theCompany’s desire to expand operations beyond current levels, the Company 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 the Company or its stockholders.

**Risk and Uncertainties**

TheCompany’s business and operations are subject to a number of risks anduncertainties, and the following list should not be considered to be adefinitive list of all factors that may affect the Company’s business,financial condition and future operating results and should be read inconjunction with the risks and uncertainties contained in the Company’s otherfilings with the Securities and Exchange Commission. Any forward-lookingstatements made by the Company are made with the intention of obtaining thebenefits of the “safe harbor” provisions of the Securities Litigation ReformAct and a number of factors, including, but not limited to those discussedbelow, could cause the Company’s actual results and experiences to differmaterially from the anticipated results or expectations expressed in anyforward-looking statements.

*We may not be able togrow our subscriber base, and as a result our revenues and profitability maynot increase and could decrease.*

Amajor component of our growth strategy is based on increasing the number ofsubscribers to our channels. Growing our subscriber base depends upon manyfactors, such as the success of our marketing efforts in driving consumerdemand for The Outdoor Channel, overall growth in cable and satellitesubscribers, the popularity of our programming, our ability to negotiate newcarriage agreements and maintain existing distribution, and other factors thatare beyond our control. There can be no assurance that we will be able tomaintain or increase the subscriber base of The Outdoor Channel on cable andsatellite systems or that such carriage will not decrease as a result of anumber of factors. If we are unable to grow our subscriber base, our subscriberand advertising revenues may not increase and could decrease. In addition, aswe plan for such growth, our expenses are expected to increase and if we arenot able to concurrently increase our revenue, our profitability coulddecrease.

*If we offer increasedlaunch support fees or other incentives to service providers in order to growour subscriber base, our operating results may be harmed.*

Althoughwe currently have plans to increase our marketing and sales efforts in anattempt to increase the number of our subscribers, we may not be able to do soeconomically or at all. If we are unable to increase the number of oursubscribers on a cost-effective basis, or if the benefits of doing so do notmaterialize, our business and operating results would be harmed. In particular,if we make any upfront cash payments to service providers for an increase inour subscriber base, our cash flow could be adversely impacted, and we mayincur negative cash flow for some time. In addition, if we were to make suchupfront cash payments or provide other incentives to service providers, weexpect to amortize such amounts ratably over the term of the agreements withthe service providers. However, if a service provider terminates any suchagreement prior to the expiration of the term of such agreement, then undercurrent accounting rules we may incur a large expense in that quarter in whichthe agreement is terminated equal to the remaining un-amortized amounts and ouroperating results could accordingly be adversely affected.

*If, in our attempt to increase our number of subscribers, we structurelaunch support fees with one service provider in a way that would require us tooffer the same support or incentives to all other service providers, ouroperating results may be harmed.*

Manyof our existing agreements with cable and satellite service providers contain “mostfavored nation” clauses. These clauses typically provide that if we enter intoan agreement 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 

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contain similar “most favorednation” clauses. If, in our attempt to increase our number of subscribers, westructure launch support fees to effectively offer more favorable terms to anyservice provider, these clauses may require us to reduce the effectivesubscriber fee rates that we receive from other service providers, and thiscould negatively affect our operating results.

*If The OutdoorChannel is placed in unpopular program packages by cable or satellite serviceproviders, or if service fees are increased for our subscribers, the number ofviewers of The Outdoor Channel may decline which could harm our business andoperating results.*

We do not control the cable channels with which The OutdoorChannel is packaged by cable or satellite service providers. The placement by acable or satellite service provider of The Outdoor Channel in an unpopularprogram package could reduce or impair the growth of the number of our viewersand subscriber fees paid by service providers to us. In addition, we do not setthe prices charged by cable and satellite service providers to theirsubscribers when The Outdoor Channel is packaged with other televisionchannels. The prices for the channel packages in which The Outdoor Channel isbundled may be set too high to appeal to individuals who might otherwise beinterested in our network. Further, if The Outdoor 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 factors mayreduce the number of viewers of The Outdoor Channel, which in turn would reduceour subscriber fees and advertising revenue.

*Cable and satellite service providers could discontinue or refrain fromcarrying The Outdoor Channel, which could reduce the number of viewers and harmour operating results.*

Thesuccess of The Outdoor Channel is dependent, in part, on our ability to enterinto new carriage agreements and maintain existing agreements with, andcarriage by, satellite systems and multiple system operators’, which we referto as MSOs, affiliated regional or individual cable systems. Although we haverelationships or agreements with most of the largest MSOs and satellite serviceproviders, execution of an agreement with an MSO does not ensure that itsaffiliated regional or individual cable systems will carry The Outdoor Channel.Under our current agreements, The Outdoor Channel typically offers MSOs andtheir cable affiliates the right to broadcast The Outdoor Channel to theirsubscribers, but such contracts do not require that The Outdoor Channel beoffered to all subscribers of, or any tiers offered by, the MSO. Becausecertain carriage agreements do not specify on which service levels The OutdoorChannel is carried, such as analog versus basic digital, expanded digital orspecialty tiers, and in which geographic markets The Outdoor Channel will beoffered, we have no assurance that The Outdoor Channel will be carried andavailable to viewers of any particular MSO or to all satellite subscribers. Ifcable and satellite service providers discontinue or refrain from carrying TheOutdoor Channel, this could reduce the number of viewers and harm our operatingresults.

*We may not be able toeffectively manage our future growth, and our growth may not continue, whichmay substantially harm our business and prospects.*

Wehave undergone rapid and significant growth in revenue and subscribers over thelast several years, and our strategic objectives include not only furtherdeveloping and enhancing our existing business, but also expanding our in-houseproduction capabilities. There are risks inherent in rapid growth and thepursuit of new strategic objectives, including among others: investment anddevelopment of appropriate infrastructure, such as facilities, informationtechnology systems and other equipment to support a growing organization;hiring and training new management, sales and marketing, production, and otherpersonnel and the diversion of management’s attention and resources fromcritical areas and existing projects; and implementing systems and proceduresto successfully manage growth, such as monitoring operations, controllingcosts, maintaining effective quality and service, and implementing andmaintaining adequate internal controls. Although we have recently upgraded ourTemecula, California production facility, we expect that additionalexpenditures will be required as we continue to upgrade our facilities and tobegin transmitting our channel from our facilities directly. In particular, wehave purchased a building near our current headquarters and are currentlybuilding out this property primarily for use as our broadcast facility in thefuture. We could incur cost overruns, delays and other difficulties with thisconstruction. In addition, moving our broadcast facility and some of our personnelinto this new facility could be disruptive to our operations. We cannot assureyou that we will be able to successfully manage our growth, that future growthwill occur or that we will be successful in managing our business objectives.We can provide no assurance that our profitability or revenues will not beharmed by future changes in our business. Our operating results could be harmedif such growth does not occur, or is slower or less profitable than projected.

*We may not be able to secure national advertising accounts, and as aresult, our revenues and profitability may be negatively impacted.*

Ourability to secure 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 companies andother media. We cannot assure you that our sponsors will pay advertising ratesfor commercial air time at 

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levels sufficient for us to make aprofit or that 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 may be required topay additional state income taxes for past years.*

We are required to pay income taxes in various states in which weconduct our business operations. In the past, we have paid state income taxesonly in California (where our headquarters is located) and have not paid incometaxes to any other state. We have determined that we may have state income taxliability in the eight states other than California in which our goldprospecting properties are located. Although we expect in the near future togather sufficient information to enable us to apportion our income to suchstates and file income tax returns in those states for past years, we can offerno assurances as to when we will be able to file state income tax returns inthose states where we may have outstanding, current and future tax liabilities.In general, we believe any income taxes that we may be required to pay tostates other than California will be partially offset by a refund from theState of California for income tax amounts we have overpaid to California inpast years. We may, however, be limited as to the number of years for which wecan receive a refund from California for taxes previously paid, and we cannotpredict when we would receive any such refund. In addition, because each stateto which we may owe outstanding income taxes has a different methodology forcalculating tax owed and a different tax rate, our aggregate state income taxliability could be greater than what we have paid to California in prior years.Our aggregate state income tax liability, on which we may owe accrued interestand penalties, could be material to our results of operations.

*Expenses relating to programming costs are generally increasing and anumber of factors can cause cost overruns and delays, and our operating resultsmay be adversely impacted if we are not able to successfully recover the costsof developing and acquiring new programming.*

Theaverage cost of programming has increased recently for the cable industry andsuch increases may continue. We plan to build our programming library throughthe acquisition of long-term broadcasting rights from third party producers,in-house production and outright acquisition of programming, and this may leadto increases in our programming costs. The development, production and editingof television programming requires a significant amount of capital and thereare substantial financial risks inherent in developing and producing televisionprograms. Actual programming and production costs may exceed their budgets.Factors such as labor disputes, death or disability of key spokespersons orprogram hosts, damage to film negatives, master tapes and recordings or adverseweather conditions may cause cost overruns and delay or prevent completion of aproject. If we are not able to successfully recover the costs of developing oracquiring programming through increased revenues, whether the programming isproduced by us or acquired from third-party producers, our business andoperating results will be harmed.

*Our operating resultsmay be negatively impacted if our Outdoor Channel 2 HD network is not assuccessful as we anticipate.*

InJuly 2005, we launched an all new, all native high definition network calledOutdoor Channel 2 HD. There can be no assurance that Outdoor Channel 2 HD willnot incur unexpected costs and expenses. Distribution of Outdoor Channel 2 HDwill depend on successfully executing distribution agreements with cable andsatellite service providers. There can be no assurance that such agreements canbe made, and if they are made, that they will be on terms favorable to us orthat they will not require us to grant periods of free service and/or marketingcommitments to encourage carriage. The public may not adopt HD consumertelevision equipment in numbers sufficient to allow profits for anadvertiser-supported service. Bandwidth constraints may keep Outdoor Channel 2HD from achieving sufficient distribution from service providers to reachprofitability. Competition for quality HD content may increase the costs ofprogramming for Outdoor Channel 2 HD beyond our control or expectations. All ofthese factors, combined or separately, could increase costs or restrain revenueand adversely affect our operating results.

*Changes in corporate governance and securities disclosureand compliance practices have increased and may continue to increase our legalcompliance and financial reporting costs.*

TheSarbanes-Oxley Act of 2002 required us to change or supplement some of ourcorporate governance and securities disclosure and compliance practices. TheSecurities and Exchange Commission and Nasdaq have revised, and continue torevise, their regulations and listing standards. These developments haveincreased, and may continue to increase, our legal compliance and financialreporting costs.

*Failure to achieve and maintain effective internal controlsin accordance with Section 404 of the Sarbanes-Oxley Act could have a materialadverse effect on our business and stock price.*

We are beginning the processes necessary to satisfy therequirements of Section 404 of the Sarbanes-Oxley Act, which requires an annualmanagement assessment of the effectiveness of internal controls over financialreporting and an opinion by our independent registered public accounting firmaddressing the assessment. During the course of our testing we may identifydeficiencies which we may not be able to remediate in time to meet the deadlinefor compliance with the requirements of Section 404. In addition, if we fail tomaintain the adequacy of our internal controls, as such standards are modified,supplemented or amended from time to time, we 

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may not be able to ensure that wecan conclude on an ongoing basis that we have effective internal controls overfinancial reporting in accordance with Section 404. Effective internal controlsare necessary for us to produce reliable financial reports and are important inthe prevention of financial fraud. If we cannot produce reliable financialreports or prevent fraud, our business and operating results could be harmed,investors could lose confidence in our reported financial information and ourstock price could decrease.

*If we fail to develop and distribute popular programs, our viewershipwould likely decline, which could cause advertising and subscriber fee revenuesto decrease.*

Ouroperating results depend significantly upon the generation of advertisingrevenue. Our ability to generate advertising revenues is largely dependent onour Nielsen ratings, which estimates the number of viewers of The OutdoorChannel, and this directly impacts the level of interest of advertisers andrates we are able to charge. If we fail to program popular shows that maintainor increase our current number of viewers, our Nielsen ratings could decline,which in turn could cause our advertising revenue to decline and adverselyimpact our business and operating results. In addition, if we fail to programpopular shows the number of subscribers to our channel may also decrease,resulting in a decrease in our subscriber fee and advertising revenue.

*Changes in themethodology used by Nielsen to estimate our subscriber base or televisionratings, or inaccuracies in such estimates, could cause our advertising revenueto decrease.*

Ourability to sell advertising is largely dependent on television ratings and oursubscriber base estimated by Nielsen. We do not control the methodology used byNielsen for these estimates. If Nielsen modifies its methodology or changes thestatistical sample it uses for these estimates, such as the demographiccharacteristics of the households, our ratings could be negatively affectedresulting in a decrease in our advertising revenue.

*The market in which we operate is highly competitive, and we may not beable to compete effectively, particularly against competitors with greaterfinancial resources, brand recognition, marketplace presence and relationshipswith service providers.*

Wecompete for viewers with other pay cable television and broadcast networks,including the Outdoor Life Network, Spike TV, ESPN2 and others. If these orother competitors, many of which have substantially greater financial andoperational resources than us, significantly expand their operations withrespect to outdoor-related programming or their market penetration, ourbusiness could be harmed. In addition, certain technological advances,including the deployment of fiber optic cable, which are already substantiallyunderway, are expected to allow cable systems to greatly expand their currentchannel capacity, which could dilute our market share and lead to increasedcompetition for viewers from existing or new programming services.

Wealso compete with television network companies that generally have largesubscriber bases and significant investments in, and access to, competitiveprogramming sources. In some cases, we compete with cable and satellite serviceproviders that have the financial and technological resources to create anddistribute their own television networks, such as the Outdoor Life Network,which is owned and operated by Comcast. In order to compete for subscribers, wemay pay either launch fees or marketing support or both for carriage in certaincircumstances in the future, which may require significant cash expenditures,harming our operating results and margins. We may also issue our securitiesfrom time to time in connection with our attempts for broader distribution ofThe Outdoor Channel and the number of such securities could be significant. Wecompete for advertising sales with other pay television networks, broadcastnetworks, and local over-the-air television stations. We also compete foradvertising sales with satellite and broadcast radio and the print media. Wecompete with other cable television networks for subscriber fees from, and affiliationagreements with, cable and satellite service providers. Actions by the FederalCommunications Commission, which we refer to as the FCC, and the courts haveremoved certain of the impediments to entry by local telephone companies intothe video programming distribution business, and other impediments could beeliminated or modified in the future. These local telephone companies maydistribute programming that is competitive with the programming provided by usto cable operators.

*We may not be able toattract new, or retain existing, members in our club organizations, and as aresult our revenues and profitability may be harmed.*

Ourability to attract new members and retain existing members in our cluborganizations, GPAA and Lost Dutchman’s, depends, in part, upon our marketingefforts, including our programming on The Outdoor Channel and such otherefforts as direct mail campaigns, continued sponsorship of expositionsdedicated to gold prospecting, treasure hunting and related interests aroundthe country and introductory outings held at our campsites. We cannot assureyou that we will successfully attract new members or retain existing members. Adecline in membership in our club organizations could harm our business andoperating results.

*Consolidation among cable and satellite distributors may harm ourbusiness.*

Cableand satellite operators continue to consolidate, making The Outdoor Channelincreasingly dependent on fewer operators. If these operators fail to carry TheOutdoor Channel, use their increased distribution and bargaining power tonegotiate less favorable terms of carriage or to obtain additional volumediscounts, our business and operating results would suffer.

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*The satelliteinfrastructure that we use may fail or be preempted by another signal, whichcould impair our ability to deliver programming to our cable and satelliteservice 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 and satelliteservice provider customers and their subscribers within the time periodsadvertised. We recently negotiated for back-up capability with our satelliteprovider on an in-orbit spare satellite, which provides us carriage on theback-up satellite in the event that catastrophic failure occurs on the primarysatellite. Our contract provides that our main signal is subject to preemptionand until the back-up satellite is in position, we could lose our signal for aperiod of time. A loss of our signal could harm our reputation and reduce ourrevenues and profits.

*Natural disasters and other events beyond our control could interruptour signal.*

Oursystems and operations may be vulnerable to damage or interruption fromearthquakes, floods, fires, power loss, telecommunication failures and similarevents. They also could be subject to break-ins, sabotage and intentional actsof vandalism. Since our production facilities for The Outdoor Channel are alllocated in Temecula, California, the results of such events could beparticularly disruptive because we do not have readily available alternativefacilities from which to conduct our business. Our business interruptioninsurance may not be sufficient to compensate us for losses that may occur.Despite any precautions we may take, the occurrence of a natural disaster orother unanticipated problems at our facilities could result in interruptions inour services. Interruptions in our service could harm our reputation and reduceour revenues and profits.

*Our operating results may vary significantly, and historicalcomparisons of our operating results are**not necessarily meaningful and should not be relied upon as an indicator offuture performance.*

Ouroperations are influenced by many factors. These factors may cause ourfinancial results to vary significantly in the future and our operating resultsmay not meet the expectations of securities analysts or investors. If thisoccurs, the price of our stock may decline. Factors that can cause our resultsto fluctuate include, but are not limited to:

·    carriage decisions of cable and satellite service providers;

·    demand for advertising, advertising rates and offerings ofcompeting media;

·    changes in the growth rate of cable and satellite subscribers;

·            cable and satellite service providers’ capital and marketingexpenditures and their impact on programming offerings and penetration;

·    seasonal trends in viewer interests and activities;

·            pricing, service, marketing and acquisition decisions that couldreduce revenues and impair quarterly financial results;

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

·    our ability to react quickly to changing consumer trends;

·    specific economic conditions in the cable television and relatedindustries; and

·    changing regulatory requirements.

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Dueto the foregoing and other factors, many of which are beyond our control, ourrevenue and operating results vary from period to period and are difficult toforecast. Our expense levels are based in significant part on our expectationsof future revenue. Therefore, our failure to meet revenue expectations wouldseriously harm our business, operating results, financial condition and cashflows. Further, an unanticipated decline in revenue for a particular calendarquarter may disproportionately affect our profitability because our expenseswould remain relatively fixed and would not decrease correspondingly.

*Seasonal increases ordecreases in advertising revenue may negatively affect our business.*

Seasonaltrends are likely to affect our viewership, and consequently, could causefluctuations in our advertising revenues. Our business reflects seasonalpatterns of advertising expenditures, which is common in the broadcastindustry. For this reason, fluctuations in our revenues and net income couldoccur from period to period depending upon the availability of advertisingrevenues. Due, in part, to these seasonality factors, the results of any onequarter are not necessarily indicative of results for future periods, and ourcash flows may not correlate with revenue recognition.

*We may be unable to access capital on acceptable terms to fund ourfuture operations.*

Ourfuture capital requirements will depend on numerous factors, including thesuccess of our efforts to increase advertising revenues, the amount ofresources devoted to increasing distribution of The Outdoor Channel, andacquiring and producing programming for The Outdoor Channel. As a result, wecould be required to raise substantial additional capital through debt orequity financing. To the extent that we raise additional capital through thesale of equity or convertible debt securities, the issuance of such securitiescould result in dilution to existing stockholders. If we raise additionalcapital through the issuance of debt securities, the debt securities would haverights, preferences and privileges senior to holders of common stock and theterms of such debt could impose restrictions on our operations. In November2005, we entered into an aggregate of up to thirteen million dollars in debtfinancing from a commercial bank. 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, our current business strategies and plans andability to fund future operations may be harmed.

*We may not be able toattract and retain key personnel.*

Oursuccess depends to a significant degree upon the continued contributions of theprincipal members of our sales, marketing, production and management personnel,many of whom would be difficult to replace. None of our employees are undercontract and all of our employees are “at-will.” Any of our officers or keyemployees could leave at any time, and we do not have “key person” lifeinsurance policies covering any of our employees. The competition for qualifiedpersonnel has been strong in our industry. This competition could make it moredifficult to retain our key personnel and to recruit new highly qualifiedpersonnel. The loss of Perry T. Massie, our President and Chief ExecutiveOfficer and Co-President of The Outdoor Channel, Inc., or Thomas H. Massie, ourExecutive Vice President, or William A. Owen, our Chief Financial Officer, orAndrew J. Dale, the Chief Executive Officer and Co-President of The OutdoorChannel, Inc., or Thomas E. Hornish, our General Counsel, could adverselyimpact our business. To attract and retain qualified personnel, we may berequired to grant large option or other stock-based incentive awards, which maybe highly dilutive to existing stockholders. We may also be required to paysignificant base salaries and cash bonuses to attract and retain theseindividuals, which payments could harm our operating results. If we are notable to attract and retain the necessary personnel we may not be able toimplement our business plan.

*New video recording technologies may reduce our advertising revenue.*

Anumber of new personal video recorders, such as TiVo® in the United States,have emerged in recent years. These recorders often contain features allowingviewers to watch pre-recorded programs without watching advertising. The effectof these recorders on viewing patterns and exposure to advertising could harmour operations and results if our advertisers reduce the advertising rates theyare willing to pay because they believe television advertisements are lesseffective with these technologies.

*Cable and satellite television programming signals have beenstolen or could be stolen in the future, which reduces our potential revenuefrom subscriber fees and advertising.*

The delivery of subscription programming requires the use ofconditional access technology to limit access to programming to only those whosubscribe to programming and are authorized to view it. Conditional accesssystems use, among other things, encryption technology to protect thetransmitted signal from unauthorized access. It is illegal to create, sell orotherwise distribute software or devices to circumvent conditional accesstechnologies. However, theft of cable and satellite programming has been widelyreported, and the access or “smart” cards used in cable and satellite serviceproviders’ conditional access systems have been compromised and could befurther compromised in the future. When conditional access systems arecompromised, we do not receive the potential subscriber fee revenues from thecable and satellite service providers. Further, measures that could be taken bycable and satellite service providers to limit such theft are not under ourcontrol. Piracy of our copyrighted materials could reduce our revenue fromsubscriber fees and advertising and negatively affect our business andoperating results.

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*Because weexpect to become increasingly dependent upon our intellectual property rights,our inability to protect those rights could negatively impact our ability tocompete.*

Wecurrently license approximately 77% of programs we air on The Outdoor Channelfrom third-party television and film producers. In order to build a library ofprograms and programming distribution rights, we must obtain all of thenecessary rights, releases and consents from the parties involved in developinga project or from the owners of the rights in a completed program. There can beno assurance that we will be able to obtain the necessary rights on acceptableterms, or at all, or properly maintain and document such rights. In addition,protecting our intellectual property rights by pursuing those who infringe ordilute our rights can be costly and time consuming. If we are unable to protectour portfolio of trademarks, service marks, copyrighted material andcharacters, trade names and other intellectual property rights, our business andour ability to compete could be harmed.

*We may face intellectual property infringement claims thatcould be time-consuming, costly to defend and result in our loss of significantrights.*

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

*Some of our existing stockholders can exert control over usand may not make decisions that are in the best interests of all stockholders.*

Ourcurrent officers, directors and greater than 5% stockholders together currentlycontrol approximately 52.8% of our outstanding common stock. As a result, thesestockholders, acting together, would be able to exert significant influenceover all matters requiring stockholder approval, including the election ofdirectors and approval of significant corporate transactions. In addition, thisconcentration of ownership may delay or prevent a change in control of our company,even when a change may be in the best interests of stockholders. In addition,the interests of these stockholders may not always coincide with our interestsas a company or the interests of other stockholders. Accordingly, thesestockholders could cause us to enter into transactions or agreements that youwould not approve.

*Anti-takeover provisions in our certificate ofincorporation, our bylaws and under Delaware law may enable our incumbentmanagement to retain control of us and discourage or prevent a change ofcontrol that may be beneficial to our stockholders.*

Provisionsof Delaware law, our certificate of incorporation and bylaws could discourage,delay or prevent a merger, acquisition or other change in control thatstockholders may consider favorable, including transactions in which 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 the authorized number of directors to be changed only byresolution of our board of directors;

·    establish a classified board of directors, providing that not allmembers of the board be elected at one time;

·    require a 66 2/3% stockholder vote to remove a director, and onlyfor cause;

·            authorize our board of directors to issue without stockholder approvalblank check preferred stock that, if issued, could operate as a “poison pill”to dilute the stock ownership of a potential hostile acquirer to prevent anacquisition that is not approved by our board of directors;

·            require that stockholder actions must be effected at a duly calledstockholder meeting and prohibit stockholder action by written consent;

·            establish advance notice requirements for stockholder nominationsto our board of directors or for stockholder proposals that can be acted on atstockholder meetings;

·            except as provided by law, allow only our board of directors tocall a special meeting of the stockholders; and

·    require a 66 2/3% stockholder vote to amend our certificate ofincorporation or bylaws.

Inaddition, because we are incorporated in Delaware, we are governed by theprovisions of Section 203 of the Delaware General Corporation Law, which may,unless certain criteria are met, prohibit large stockholders, in particularthose owning 15% or more of our outstanding voting stock, from merging orcombining with us for a prescribed period of time.

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*Technologies in the cable and satellite television industryare constantly changing, and our failure to acquire or maintainstate-of-the-art technology may harm our business and competitive advantage.*

Thetechnologies used in the cable and satellite television industry are rapidlyevolving. Many technologies and technological standards are in development andhave the potential to significantly transform the ways in which programming iscreated and transmitted. In addition, under some of our MSO contracts, we maybe required to encrypt our signal. We cannot accurately predict the effectsthat implementing new technologies will have on our programming andbroadcasting operations. We may be required to incur substantial capitalexpenditures to implement new technologies, or, if we fail to do so, may facesignificant new challenges due to technological advances adopted bycompetitors, which in turn could result in harming our business and operatingresults.

*The cable and satellite television industry is subject tosubstantial governmental regulation for which compliance may increase our costsand expose us to penalties for failure to comply.*

Thecable television industry is subject to extensive legislation and regulation atthe federal and local levels, and, in some instances, at the state level, andmany aspects of such regulation are currently the subject of judicialproceedings and administrative or legislative proposals. Similarly, the satellitetelevision industry is subject to federal regulation. Operating in a regulatedindustry increases our cost of doing business as a video programmer.

TheCable Television Consumer Protection and Competition Act of 1992, to which werefer as the 1992 Cable Act, includes provisions that precludes cable companiesaffiliated with video programmers from favoring their programmers overcompetitors. The 1992 Cable Act also precludes such programmers from sellingtheir programming exclusively to their affiliated cable companies. Theseprovisions potentially benefit independent programmers such as us by limitingthe ability of cable companies affiliated with programmers from carrying onlyprogramming in which they have an ownership interest and from offering exclusiveprogramming arrangements to cable companies. However, the United States Courtof Appeals for the District of Columbia Circuit vacated the FCC Rule limitingthe carriage of affiliated programmers by cable companies, and the FCC has notadopted a new rule. The exclusivity provision is scheduled to expire in October2007 unless the FCC then determines that a further extension is necessary toprotect competition and diversity. If these provisions of the 1992 Cable Actexpire or become no longer applicable, and if we are still able to increase thenumber of subscribers to our channel, then the costs associated with doing somay increase significantly.

Regulatory carriage requirements also could reduce the number ofchannels available to carry The Outdoor Channel. The 1992 Cable Act grantedtelevision broadcasters a choice of must-carry rights or retransmission consentrights. The rules adopted by the FCC generally provided for mandatory carriageby cable systems of all local full-power commercial television broadcastsignals selecting must-carry rights and, depending on a cable system’s channelcapacity, non-commercial television broadcast signals. Such statutorilymandated carriage of broadcast stations, coupled with the provisions of theCable Communications Policy Act of 1984, which require cable television systemswith 36 or more “activated” channels to reserve a percentage of such channelsfor commercial use by unaffiliated third parties and permit franchiseauthorities to require the cable operator to provide channel capacity,equipment and facilities for public, educational and government accesschannels, could reduce carriage of The Outdoor Channel by limiting its carriagein cable systems with limited channel capacity. In 2001, the FCC adopted rulesrelating to the cable carriage of digital television signals. Among otherthings, the rules clarify that a digital-only television station can assert aright to analog or digital carriage on a cable system. The FCC initiated afurther proceeding to determine whether television broadcasters may assert therights to carriage of both analog and digital signals during the transition todigital television and to carriage of all digital signals. On February 10,2005, the FCC decided that television broadcasters do not have such additionalmust-carry rights. Broadcasters formally have requested that the FCC reconsiderthis decision and are seeking legislative change to require such carriage. Theimposition of such additional must-carry regulation, in conjunction with thecurrent limited cable system channel capacity, would increase the likelihoodthat cable operators may be forced to drop some cable programming services andcould reduce carriage of The Outdoor Channel.

TheTelecommunications Act of 1996 required the FCC to establish rules and animplementation schedule to ensure that video programming is fully accessible tothe hearing 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.

If wedistribute television programming through other types of media, we may berequired to obtain federal, state and local licenses or other authorizations tooffer such services. We may not be able to obtain licenses or authorizations ina timely manner, or at all, or conditions could be imposed upon licenses andauthorizations that may not be favorable to us.

Inthe future, any increased regulation of rates, and in particular the rates forbasic cable services, 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 The Outdoor Channelnetwork on their cable systems. In response to a request from the Committee onEnergy and Commerce of the House of Representatives, the FCC’s Media Bureauconducted a study in 2004 regarding, among other things, government-mandated ala carte or mini-tier packaging of programming services in which eachsubscriber would purchase only those 

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channels that he or she desiredinstead of the larger bundles of different channels as is typical today. TheMedia Bureau’s report on November 18, 2004 observed that such packaging wouldincrease the cost of programming to consumers and injure programmers. If, inresponse to any rate or other government regulation, cable system operatorsimplement channel offering structures that require subscribers to affirmativelychoose to pay a separate fee to receive The Outdoor Channel network, either byitself or in combination with a limited number of other channels, the number ofviewers for The Outdoor Channel could be reduced.

Theregulation of programming services, cable television systems and satellitelicensees is subject to the political process and has been in constant fluxover the past decade. Further material changes in the law and regulatoryrequirements are difficult to anticipate and our business may be harmed byfuture legislation, new regulation, deregulation or court decisionsinterpreting laws and regulations.

*We must comply with many local, state, federal andenvironmental regulations, for which compliance may be costly and may expose usto substantial penalties.*

Ourrecreational outdoor activity entities, GPAA and Lost Dutchman’s, share thegeneral risks of all outdoor recreational activities such as personal injury,environmental compliance and real estate and environmental regulation. Inaddition to the general cable television industry regulations, we are alsosubject to various local, state and federal regulations, including, withoutlimitation, regulations promulgated by federal and state environmental, healthand labor agencies. Our prospecting clubs are subject to various local, stateand federal statutes, ordinances, rules and regulations concerning zoning,development and other utilization of their properties. We cannot predict whatimpact current or future regulations may have on these businesses. In addition,failure to maintain required permits or licenses, or to comply with applicableregulations, could result in substantial fines or costs or revocation of ouroperating licenses, which would have a material adverse effect on our businessand operating results.

*If our goodwill or other indefinite-lived intangibles becomeimpaired, we will be required to take a non-cash charge which could have asignificant effect on our reported net earnings.*

Asignificant portion of our assets consists of goodwill and otherindefinite-lived intangible assets. In accordance with Statements of FinancialAccounting Standards No. 142, “Goodwill and Other Intangible Assets”, or SFAS142, we test goodwill and other indefinite-lived intangible assets forimpairment during the fourth quarter of each year, and on an interim date iffactors or indicators become apparent that would require an interim test. Asignificant downward revision in the present value of estimated future cashflows for a reporting unit could result in an impairment of goodwill or otherindefinite-lived intangibles under SFAS 142 and a non-cash charge would berequired. Such a charge could have a significant effect on our reported netearnings.

*Changes to financial accounting standards may affect ourreported operating results.*

We prepare our financial statements to conform with GAAP, whichare subject to interpretations by the Financial Accounting Standards Board, theSecurities and Exchange Commission and various bodies formed to interpret andcreate appropriate accounting policies. A change in those policies can have asignificant effect on our reported results and may even affect our reporting oftransactions completed before a change is announced. Accounting policies affectingmany other aspects of our business, including rules relating to businesscombinations and employee stock option grants, have recently been revised orare under review. Changes to those rules or the questioning of currentpractices may adversely affect our reported financial results or the way weconduct our business. In addition, our preparation of financial statements inaccordance with GAAP requires that we make estimates and assumptions thataffect the recorded amounts of assets and liabilities, disclosure of thoseassets and liabilities at the date of the financial statements and the recordedamounts of expenses during the reporting period. A change in the facts andcircumstances surrounding those estimates could result in a change to our estimatesand could impact our future operating results.

*Future issuance by us of preferred shares could adverselyaffect the holders of existing shares, and therefore reduce the value ofexisting shares.*

We are authorized to issue up to25,000,000 shares of preferred stock. The issuance of any preferred stock couldadversely affect the rights of the holders of shares of our common stock, andtherefore reduce the value of such shares. No assurance can be given that wewill not issue shares of preferred stock in the future.

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*We do not expect to pay dividends in the foreseeable future.*

We do not anticipate paying cash dividends onour common stock in the foreseeable future. Any payment of cash dividends willalso depend on our financial condition, operating results, capital requirementsand other factors and will be at the discretion of our board of directors.Furthermore, we may in the future become subject to contractual restrictionson, or prohibitions against, the payment of dividends.

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK.**

AtSeptember 30, 2005 and December 31, 2004, our investment portfolio includedfixed-income securities of $21,923,000 and $741,000, respectively. Thesesecurities are subject to interest rate risk and will decline in value ifinterest rates increase. However, due to the short duration of our investmentportfolio, an immediate 10% change in interest rates would have no materialimpact on our financial condition, operating results or cash flows. Declines ininterest rates over time will, however, reduce our interest income whileincreases in interest rates over time may increase our interest expense.

We donot have a significant level of transactions denominated in currencies otherthan U.S. dollars, and as a result we have very limited foreign currencyexchange rate risk. The effect of an immediate 10% change in foreign exchangerates would have no material impact on our financial condition, operatingresults or cash flows.

As ofSeptember 30, 2005, we had no outstanding debt. As of November 14, 2005,the date of the original Form 10-Q for the quarter endedSeptember 30, 2005 we had aggregate outstanding borrowings ofapproximately $4,950,000. The rates of interest on our currently outstandingdebt are fixed while the rate of interest on our line-of-credit is variable,but we currently have no outstanding balance under this credit facility.Because of these reasons, an immediate 10% change in interest rates would haveno material, immediate impact on our financial condition, operating results orcash flows.

**ITEM 4. CONTROLS AND PROCEDURES.**

Wemaintain disclosure controls and procedures designed to provide reasonableassurance of achieving the objective that information in our Exchange Actreports is recorded, processed, summarized and reported within the time periodsspecified and pursuant to the regulations of the Securities and ExchangeCommission. Disclosure controls and procedures, as defined in Rule 13a-15(e)and 15d-15(e) under the Exchange Act, include controls and procedures designedto ensure the information required to be disclosed by us in the reports we fileor submit under the Exchange Act is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure. Itshould be noted that our system of controls, however well designed andoperated, can provide only reasonable, and not absolute, assurance that theobjectives of the system are met.

Ourmanagement, with the participation of our Chief Executive Officer and ChiefFinancial Officer, evaluated the effectiveness of our disclosure controls andprocedures as of September 30, 2005, the end of the period covered by thisreport, and concluded that our disclosure controls and procedures wereeffective as of September 30, 2005.

Duringthe fiscal quarter ended September 30, 2005, there was no change in ourinternal control over financial reporting that materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

**PART II—OTHER INFORMATION**

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

None

**ITEM 2.****                ****Unregistered Sales of Equity Securities and Use of Proceeds.**

On July 13, 2005, the Company issued toMr. Ray V. Miller 93,516 shares of common stock upon the exercise ofoptions.  No underwriters were involvedwith this issuance to Mr. Miller.  Theaggregate consideration paid by Mr. Miller was approximately $86,325, and suchissuance was deemed exempt from registration under the Securities Act of 1933,as amended, in reliance on Section 4(2) thereof as a transaction by an issuernot involving a public offering.

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

None

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

 

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(a) Annual Meeting of Stockholders washeld on August 30, 2005.

(b) Stockholders voted for the election ofMessrs. Jerry R. Berglund and Ray V. Miller as directors whose termshall expire in 2008. Messrs. Thomas H. Massie, David C. Merritt and Ms.Elizabeth J. Sanderson continued as directors whose term shall expire in 2006.Messrs. Perry T. Massie and T. Bahnson Stanley continued as directors whoseterm shall expire in 2007.

(c) Proposal One to elect two directors tothe Company’s board of directors to serve until the 2008 Annual Meetingresulted in the election of Mr. Berglund with 16,428,222 (99.52%) votes for and79,438 (0.48%) withheld, and Mr. Miller with 16,428,222 (99.52%) votes for and79,438 (0.48%) withheld.

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

The date of our 2006 annual meeting ofstockholders will be May 16, 2006, which is more than 30 calendar days earlierthan the date of our 2005 annual meeting of stockholders. All stockholderproposals and director nominations for the 2006 annual meeting must be submittedin accordance with the procedures set forth in our bylaws.

If a stockholder wants us to considerincluding a proposal in our proxy materials for the 2006 annual meeting,pursuant to Rule 14a-8 under the Exchange Act the stockholder must submitthe proposal no later than an expected date of November 30, 2005. Any proposalreceived at the Company’s executive offices after such date will be considereduntimely and may be excluded from the proxy statement and form of proxy for the2006 annual meeting. If the proposal complies with all of the requirements ofRule 14a-8, we will include it in the Proxy Statement and set it forth onthe form of proxy issued for the 2006 annual meeting. Any such stockholderproposals should be directed to the attention of the Company’s Secretary orAssistant Secretary at our headquarters at 43445 Business Park Drive,Suite 113, Temecula, California 92590.

With respect to any proposal that astockholder intends to present at the 2006 annual meeting but is not submittedfor inclusion in our proxy materials pursuant to Rule 14a-8, the proxy forsuch annual meeting will confer discretionary voting authority to vote on suchstockholder proposal unless we are notified of such proposal no later than anexpected date of February 13, 2006 and the proponent complies with allapplicable requirements set forth in Regulation 14A under the ExchangeAct.

On November 2, 2005, the Company renewedits line-of-credit agreement with U.S. Bank N.A. extending the maturity date toSeptember 7, 2007 and increasing the available borrowings to $8,000, 000,subject to certain provisions. This credit line carries a variable interestrate of LIBOR plus 1.25%. The borrowings under this credit facility are securedby accounts receivable, instruments, documents, chattel paper, generalintangibles, contract rights, investment property, certificates of deposit,deposit accounts, letter of credit rights, inventory, and equipment. Thiscredit facility contains customary financial and other covenants andrestrictions, as amended on November 2, 2005, including a change of controlprovision. As of date of this report, the Company did not have any amountsoutstanding under this credit facility.

On November 2, 2005, the Company enteredinto a $1,950,000 mortgage loan with U.S. Bank N.A. on its recently purchasedbroadcast facility located in Temecula, California representing a 75% loan tovalue, 10 year term loan with a 25 year amortization schedule. This loancarries a variable interest rate of LIBOR plus 1.35%. This loan is securedprimarily by a Deed of Trust on the property and is also secondarily secured bythe same assets as the line-of-credit. It also contains customary financial andother covenants and restrictions including a change of control provision. OnNovember 7, 2005, the Company entered into an interest rate swap agreement withU.S. Bank N.A. to reduce the potential impact of increasing interest rates andeffectively fixed the interest rate on this loan at 6.59%.

On November 2, 2005, the Company enteredinto a $3,000,000, 5 year fully amortizing term loan with U.S. Bank N.A. Thisloan carries a variable interest rate of LIBOR plus 1.35%. This term loan issecured by the same assets as the line-of-credit and contains customaryfinancial and other covenants and restrictions including a change of controlprovision. On November 7, 2005, the Company entered into an interest rate swapagreement with U.S. Bank N.A. to reduce the potential impact of increasinginterest rates and effectively fixed the interest rate on this term loan at6.35%.

 

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**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)                     |
| 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                                                                                                                                                                                      |

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

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| ** ** | **OUTDOOR CHANNEL  HOLDINGS, INC.**                                                             |
|------------|-------------------------------------------------------------------------------------------------|
|       |                                                                                            |
|       | /s/ William A. Owen                                                                             |   |
| ** ** | **William A. Owen**                                                                             |
|       | Authorized Officer, Chief Financial  Officer and Controller  (Principal and Accounting Officer) |
|       | Date: February 12, 2007                                                                         |

 

 

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