** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

| **(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, 2006**                                                                                                                                                                                |
| ** **     |   | ** **                                                                                                                                                                                                                            |
| **o**          |   | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934**                                                                                                                                         |
| ** **     |   | ** **                                                                                                                                                                                                                            |
| ** **     |   | **For the  transition period from                to                ** |

 

**Commissionfile number: 000-17287**

**Outdoor Channel Holdings, Inc.**

(Exact name ofRegistrant as specified in its charter)

| **Delaware**                                                                        |   | **33-0074499**                        |
|-------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  Jurisdiction                                                       |   | (IRS Employer  Identification Number) |
| of incorporation  or organization)                                                  |   |                                  |
|                                                                                |   |                                  |
| **43445  Business Park Drive, Suite 113   Temecula, California 92590**              |
| (Address and zip  code of principal executive offices)                              |
|                                                                                |   |                                  |
| **(951)  699-4749**                                                                 |
| (Issuer’s  telephone number, including area code)                              |
|                                                                                |
|                                                                                |   |                                  |
| (Former name,  former address and former fiscal year, if changed since last report) |

 

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

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

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

 

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

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date:

| **Class**                       |   | **Number  of Shares Outstanding at January 31, 2007** |
|---------------------------------|--------|-------------------------------------------------------|
| Common Stock,  $0.001 par value |   | 25,527,370                                            |

 

 

----

**OUTDOORCHANNEL HOLDINGS, INC. AND SUBSIDIARIES**

**QuarterlyReport on Form 10-Q**

**ForThe Period Ended September 30, 2006**

**Tableof Contents**
|                | ** ** | **Part I. Financial Information**                                                                                           | ** ** | ** ** |
|----------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|------------|
|           |       |                                                                                                                        |       |       |
| **Item  1.**   |       | Financial  Statements                                                                                                       |       |       |
|           |       |                                                                                                                        |       |       |
|           |       | Condensed  Consolidated Balance Sheets as of September 30, 2006 (Unaudited) and December  31, 2005                          |       |       |
|           |       |                                                                                                                        |       |       |
|           |       | Unaudited  Condensed Consolidated Statements of Operations for the Three and Nine Months  Ended September 30, 2006 and 2005 |       |       |
|           |       |                                                                                                                        |       |       |
|           |       | Unaudited  Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months  Ended September 30, 2006 |       |       |
|           |       |                                                                                                                        |       |       |
|           |       | Unaudited  Condensed Consolidated Statements of Cash Flows for the Nine Months  Ended September 30, 2006 and 2005      |       |       |
|           |       |                                                                                                                        |       |       |
|           |       | Notes to Unaudited Condensed Consolidated Financial  Statements                                                             |       |       |
|           |       |                                                                                                                        |       |       |
| **Item 2.**    |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                 |       |       |
|           |       |                                                                                                                        |       |       |
|           |       | Recent Accounting Developments                                                                                              |       |       |
|           |       |                                                                                                                        |       |       |
| **Item 3.**    |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                 |       |       |
|           |       |                                                                                                                        |       |       |
| **Item 4.**    |       | Controls and  Procedures                                                                                                    |       |       |
|           |       |                                                                                                                        |       |       |
|           | ** ** | **Part  II. Other Information**                                                                                             | ** ** | ** ** |
|           |       |                                                                                                                        |       |       |
| **Item 1.**    |       | Legal Proceedings                                                                                                           |       |       |
|           |       |                                                                                                                        |       |       |
| **Item 1A.**   |       | Risk Factors                                                                                                                |       |       |
|           |       |                                                                                                                        |       |       |
| **Item 2.**    |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                |       |       |
|           |       |                                                                                                                        |       |       |
| **Item 3.**    |       | Defaults  Upon Senior Securities                                                                                            |       |       |
|           |       |                                                                                                                        |       |       |
| **Item 4.**    |       | Submission  of Matters to a Vote of Security Holders                                                                        |       |       |
|           |       |                                                                                                                        |       |       |
| **Item 5.**    |       | Other Information                                                                                                           |       |       |
|           |       |                                                                                                                        |       |       |
| **Item 6.**    |       | Exhibits                                                                                                                    |       |       |
|           |       |                                                                                                                        |       |       |
| **Signatures** |       |                                                                                                                        |       |

 

* * *

2

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**PART I—FINANCIAL INFORMATION**

**ITEM1.  Financial Statements.**

**OUTDOORCHANNEL HOLDINGS, INC. AND SUBSIDIARIES**

**Condensed Consolidated Balance Sheets**

(In thousands, except per share data)
| ** **                                                                                                  | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                  | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                  | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current assets:                                                                                             |       |                         |       |                        |       |
| Cash and cash  equivalents                                                                                  |       | $                            | 20,595     |                        | $          | 18,276 |   |
| Investment in  available-for-sale securities                                                                |       | 38,737                       |       | 38,830                      |       |
| Accounts  receivable, net of allowance for doubtful accounts of $351 and $275                               |       | 6,690                        |       | 5,320                       |       |
| Income tax  refund receivable                                                                               |       | 2,863                        |       | 3,843                       |       |
| Deferred tax  assets, net                                                                                   |       | 1,800                        |       | 1,015                       |       |
| Prepaid  programming costs                                                                                  |       | 3,304                        |       | 2,381                       |       |
| Other current  assets                                                                                       |       | 1,084                        |       | 689                         |       |
| Total current  assets                                                                                       |       | 75,073                       |       | 70,354                      |       |
|                                                                                                        |       |                         |       |                        |       |
| Property, plant and  equipment at cost, net:                                                                |       |                         |       |                        |       |
| Membership  division                                                                                        |       | 3,388                        |       | 3,526                       |       |
| Outdoor Channel  equipment and improvements                                                                 |       | 12,921                       |       | 12,097                      |       |
| Property, plant  and equipment, net                                                                         |       | 16,309                       |       | 15,623                      |       |
| Amortizable intangible  assets, net                                                                         |       | 960                          |       | 11,292                      |       |
| Goodwill                                                                                                    |       | 44,457                       |       | 44,457                      |       |
| Deferred tax assets,  net                                                                                   |       | 12,145                       |       | 9,491                       |       |
| Deposits and other  assets                                                                                  |       | 1,740                        |       | 605                         |       |
| Totals                                                                                                      |       | $                            | 150,684    |                        | $          | 151,822 |   |
|                                                                                                        |       |                         |       |                        |       |
| **Liabilities  and Stockholders’ Equity**                                                              | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                        |       |                         |       |                        |       |
| Accounts payable  and accrued expenses                                                                      |       | $                            | 3,554      |                        | $          | 2,864 |   |
| Accrued  severance payments                                                                                 |       | 18                           |       | 18                          |       |
| Current portion  of long-term debt                                                                          |       | 4,368                        |       | 708                         |       |
| Current portion  of deferred revenue                                                                        |       | 244                          |       | 422                         |       |
| Customer deposits                                                                                           |       | 66                           |       | 159                         |       |
| Total current  liabilities                                                                                  |       | 8,250                        |       | 4,171                       |       |
|                                                                                                        |       |                         |       |                        |       |
| Accrued severance  payments, net of current portion                                                         |       | 1                            |       | 16                          |       |
| Long-term debt, net of  current portion                                                                     |       | —                       |       | 4,193                       |       |
| Deferred revenue, net  of current portion                                                                   |       | 1,795                        |       | 1,271                       |       |
| Derivative instruments                                                                                      |       | 28                           |       | 72                          |       |
| Deferred satellite rent  obligations                                                                        |       | 332                          |       | 295                         |       |
| Total  liabilities                                                                                          |       | 10,406                       |       | 10,018                      |       |
|                                                                                                        |       |                         |       |                        |       |
| Commitments and  contingencies                                                                              |       |                         |       |                        |       |
| Stockholders’ equity:                                                                                  |       |                         |       |                        |       |
| Preferred stock;  25,000 shares authorized; none issued                                                     |       | —                       |       | —                      |       |
| Common stock,  $0.001 par value; 75,000 shares authorized: 25,189 and 24,409 shares issued  and outstanding |       | 25                           |       | 24                          |       |
| Additional  paid-in capital                                                                                 |       | 161,024                      |       | 158,700                     |       |
| Deferred  compensation                                                                                      |       | —                       |       | (1,520                      | )          |
| Accumulated  other comprehensive income (loss):                                                             |       |                         |       |                        |       |
| Net unrealized  losses on derivative instruments                                                            |       | (28                          | )          | (72                         | )          |
| Net unrealized  gains on available-for-sale securities                                                      |       | 44                           |       | 36                          |       |
| Total  accumulated other comprehensive income (loss)                                                        |       | 16                           |       | (36                         | )          |
| Accumulated  deficit                                                                                        |       | (20,787                      | )          | (15,364                     | )          |
| Total  stockholders’ equity                                                                            |       | 140,278                      |       | 141,804                     |       |
| Totals                                                                                                      |       | $                            | 150,684    |                        | $          | 151,822 |   |

 

See Notes to UnauditedCondensed Consolidated Financial Statements.

3

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**OUTDOOR CHANNEL HOLDINGS, INC. ANDSUBSIDIARIESUnaudited Condensed Consolidated Statements of Operations**(In thousands, except per share data)
| ** **                                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                              |       |                                                 |       |                                                |       |   |   |   |   |
| Advertising                                            |       | $                                                    | 6,845      |                                                | $          | 5,657 |   | $ | 18,198 |   | $ | 16,173 |   |
| Subscriber fees                                        |       | 4,348                                                |       | 3,846                                               |       | 13,072 |   | 11,382 |   |
| Membership  income                                     |       | 1,989                                                |       | 1,901                                               |       | 4,128 |   | 3,924 |   |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Total revenues                                         |       | 13,182                                               |       | 11,404                                              |       | 35,398 |   | 31,479 |   |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Cost of services:                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Programming                                            |       | 2,095                                                |       | 2,315                                               |       | 5,845 |   | 3,367 |   |
| Satellite  transmission fees                           |       | 667                                                  |       | 617                                                 |       | 1,919 |   | 1,866 |   |
| Production and  operations                             |       | 1,120                                                |       | 783                                                 |       | 3,153 |   | 2,509 |   |
| Other direct  costs                                    |       | 602                                                  |       | 785                                                 |       | 960 |   | 1,247 |   |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Total cost of  services                                |       | 4,484                                                |       | 4,500                                               |       | 11,877 |   | 8,989 |   |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Other expenses:                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Advertising                                            |       | 1,654                                                |       | 1,912                                               |       | 5,403 |   | 5,668 |   |
| Selling, general  and administrative                   |       | 5,187                                                |       | 4,162                                               |       | 16,269 |   | 13,351 |   |
| Impairment of  amortizable intangible assets           |       | 9,540                                                |       | —                                              |       | 9,540 |   | — |   |
| Depreciation and  amortization                         |       | 931                                                  |       | 693                                                 |       | 2,494 |   | 2,015 |   |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Total other  expenses                                  |       | 17,312                                               |       | 6,767                                               |       | 33,706 |   | 21,034 |   |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Income (loss) from  operations                         |       | (8,614                                               | )          | 137                                                 |       | (10,185 | ) | 1,456 |   |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Interest expense                                       |       | (73                                                  | )          | —                                              |       | (228 | ) | (2 | ) |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Other income, net                                      |       | 715                                                  |       | 396                                                 |       | 1,983 |   | 486 |   |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Income (loss) before  income taxes                     |       | (7,972                                               | )          | 533                                                 |       | (8,430 | ) | 1,940 |   |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Income tax provision  (benefit)                        |       | (2,404                                               | )          | 285                                                 |       | (3,007 | ) | 878 |   |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Net income (loss)                                      |       | $                                                    | (5,568     | )                                                   | $          | 248 |   | $ | (5,423 | ) | $ | 1,062 |   |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Earnings (loss) per  common share:                     |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                  |       | $                                                    | (0.22      | )                                                   | $          | 0.01 |   | $ | (0.22 | ) | $ | 0.05 |   |
| Diluted                                                |       | $                                                    | (0.22      | )                                                   | $          | 0.01 |   | $ | (0.22 | ) | $ | 0.04 |   |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average number  of common shares outstanding: |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                  |       | 24,813                                               |       | 24,236                                              |       | 24,404 |   | 20,444 |   |
| Diluted                                                |       | 24,813                                               |       | 27,658                                              |       | 24,404 |   | 23,672 |   |

 

See Notes to UnauditedCondensed Consolidated Financial Statements.

4

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**OUTDOORCHANNEL HOLDINGS, INC. AND SUBSIDIARIES**

**Unaudited Condensed Consolidated Statement of Stockholders’Equity**

**For theNine Months Ended September 30, 2006**

(In thousands)
| ** **                                                                                                             | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** **  | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|-------------------|------------|------------------------|------------|-------------|------------|------------|------------|
| ** **                                                                                                             | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Other**              | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** **                                                                                                             | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Deferred**   | ** ** | **Comprehensive** | ** ** | **Accumulated**        | ** ** | ** **  | ** ** |
| ** **                                                                                                             | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Compensation**  | ** ** | **Income (Loss)** | ** ** | **Deficit** | ** ** | **Total**  | ** ** |
| Balance, January 1,  2006                                                                                              |       | 24,409                |       | 24          |       | 158,700        |       | (1,520            | )          | (36                    | )          | (15,364     | )          | 141,804    |       |
| Comprehensive income:                                                                                                  |       |                  |       |        |       |           |       |              |       |                   |       |        |       |       |       |
| Net loss                                                                                                               |       |                  |       |        |       |           |       |              |       |                   |       | (5,423      | )          | (5,423     | )          |
| Effect of change  in fair value of available-for-sale securities, net of deferred taxes of $29                         |       |                  |       |        |       |           |       |              |       | 8                      |       |        |       | 8          |       |
| Impact of cash flow  hedge                                                                                             |       |                  |       |        |       |           |       |              |       | 44                     |       |        |       | 44         |       |
| Total  comprehensive loss                                                                                              |       |                  |       |        |       |           |       |              |       |                   |       |        |       | (5,371     | )          |
|                                                                                                                   |       |                  |       |        |       |           |       |              |       |                   |       |        |       |       |       |
| Reclassification of  deferred compensation upon adoption of SFAS 123R                                                  |       |                  |       |        |       | (1,520         | )          | 1,520             |       |                   |       |        |       | —     |       |
|                                                                                                                   |       |                  |       |        |       |           |       |              |       |                   |       |        |       |       |       |
| Common stock issued  upon exercise of stock options                                                                    |       | 660                   |       | 1           |       | 812            |       |              |       |                   |       |        |       | 813        |       |
|                                                                                                                   |       |                  |       |        |       |           |       |              |       |                   |       |        |       |       |       |
| Issuance of restricted  stock to employees and service providers for services to be rendered, net of  forfeited shares |       | 123                   |       |        |       |           |       |              |       |                   |       |        |       | —     |       |
|                                                                                                                   |       |                  |       |        |       |           |       |              |       |                   |       |        |       |       |       |
| Stock-based employee  and service provider compensation expense                                                        |       |                  |       |        |       | 2,785          |       |              |       |                   |       |        |       | 2,785      |       |
|                                                                                                                   |       |                  |       |        |       |           |       |              |       |                   |       |        |       |       |       |
| Purchase and retirement  of treasury stock                                                                             |       | (3                    | )          |        |       | (33            | )          |              |       |                   |       |        |       | (33        | )          |
|                                                                                                                   |       |                  |       |        |       |           |       |              |       |                   |       |        |       |       |       |
| Tax benefits from  exercise of stock options                                                                           |       |                  |       |        |       | 711            |       |              |       |                   |       |        |       | 711        |       |
|                                                                                                                   |       |                  |       |        |       |           |       |              |       |                   |       |        |       |       |       |
| Change in tax benefits  from exercise of stock options                                                                 |       |                  |       |        |       | (431           | )          |              |       |                   |       |        |       | (431       | )          |
|                                                                                                                   |       |                  |       |        |       |           |       |              |       |                   |       |        |       |       |       |
| Balance, September 30, 2006                                                                                            |       | 25,189                |       | $           | 25         |           | $          | 161,024           |       | $                      | —     |        | $          | 16         |       | $ | (20,787 | ) | 140,278 |   |
|                                                                                                                        |            |                       |            |             |            |                |            |                   |            |                        |            |             |            |            |            |  |  |  |  |  |

 

See Notes to UnauditedCondensed Consolidated Financial Statements.

5

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**OUTDOORCHANNEL HOLDINGS, INC. AND SUBSIDIARIES**

**Unaudited Condensed Consolidated Statements of Cash Flows**

(In thousands)
| ** **                                                                                    | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| Operating activities:                                                                         |       |                                                |       |   |   |
| Net income                                                                                    |       | $                                                   | (5,423     | ) | $ | 1,062 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities:  |       |                                                |       |   |   |
| Depreciation and  amortization                                                                |       | 2,630                                               |       | 2,015 |   |
| Impairment of  amortizable intangible assets                                                  |       | 9,540                                               |       | — |   |
| Provision for  doubtful accounts                                                              |       | 88                                                  |       | 132 |   |
| Stock-based employee  and service provider compensation                                       |       | 2,785                                               |       | 252 |   |
| Deferred tax  provision (benefit), net                                                        |       | (3,209                                              | )          | 2,221 |   |
| Tax benefits  from exercise of stock options in excess of recognized expense                  |       | (711                                                | )          | — |   |
|                                                                                          |       |                                                |       |   |   |
| Changes in operating  assets and liabilities:                                                 |       |                                                |       |   |   |
| Accounts  receivable                                                                          |       | (1,458                                              | )          | (601 | ) |
| Income tax  refund receivable                                                                 |       | 980                                                 |       | (1,391 | ) |
| Prepaid  programming costs                                                                    |       | (923                                                | )          | (2,515 | ) |
| Other current  assets                                                                         |       | (395                                                | )          | (868 | ) |
| Deposits and  other assets                                                                    |       | (1,269                                              | )          | (11 | ) |
| Accounts payable  and accrued expenses                                                        |       | 689                                                 |       | (212 | ) |
| Deferred revenue                                                                              |       | 346                                                 |       | (102 | ) |
| Customer  deposits                                                                            |       | (93                                                 | )          | 25 |   |
| Accrued  severance payments                                                                   |       | (15                                                 | )          | (26 | ) |
| Deferred  satellite rent obligations                                                          |       | 37                                                  |       | (14 | ) |
| Net cash  provided by (used in) operating activities                                          |       | 3,599                                               |       | (33 | ) |
|                                                                                          |       |                                                |       |   |   |
| Investing activities:                                                                         |       |                                                |       |   |   |
| Purchases of  property, plant and equipment                                                   |       | (2,388                                              | )          | (8,069 | ) |
| Purchases of  available-for-sale securities                                                   |       | (112,279                                            | )          | (21,190 | ) |
| Proceeds from  sale of available-for-sale securities                                          |       | 112,429                                             |       | — |   |
| Net cash used in  investing activities                                                        |       | (2,238                                              | )          | (29,259 | ) |
|                                                                                          |       |                                                |       |   |   |
| Financing activities:                                                                         |       |                                                |       |   |   |
| Principal  payments on long-term debt                                                         |       | (533                                                | )          | (19 | ) |
| Proceeds from  exercise of stock options                                                      |       | 813                                                 |       | 2,631 |   |
| Purchase and  retirement of treasury stock                                                    |       | (33                                                 | )          | — |   |
| Tax benefits  from exercise of stock options in excess of recognized expense                  |       | 711                                                 |       | — |   |
| Proceeds from  sale of common stock, net of offering costs                                    |       | —                                              |       | 43,350 |   |
| Net cash  provided by financing activities                                                    |       | 958                                                 |       | 45,962 |   |
| Net increase in cash  and cash equivalents                                                    |       | 2,319                                               |       | 16,670 |   |
| Cash and cash  equivalents, beginning of period                                               |       | 18,276                                              |       | 13,105 |   |
| Cash and cash  equivalents, end of period                                                     |       | $                                                   | 20,595     |   | $ | 29,775 |   |
|                                                                                          |       |                                                |       |   |   |
| Supplemental disclosure  of cash flow information:                                            |       |                                                |       |   |   |
|                                                                                          |       |                                                |       |   |   |
| Interest paid                                                                                 |       | $                                                   | 229        |   | $ | 2 |   |
|                                                                                          |       |                                                |       |   |   |
| Income taxes  paid                                                                            |       | $                                                   | —     |   | $ | 108 |   |
|                                                                                          |       |                                                |       |   |   |
| Supplemental  disclosures of non-cash investing and financing activities:                     |       |                                                |       |   |   |
|                                                                                          |       |                                                |       |   |   |
| Effect of net  increase in fair value of cash flow hedge                                      |       | $                                                   | 44         |   | $ | — |   |
|                                                                                          |       |                                                |       |   |   |
| Effect of net increase  in fair value of available-for-sale securities, net of deferred taxes |       | $                                                   | 8          |   | $ | 6 |   |

 

See Notes to UnauditedCondensed Consolidated Financial Statements.

6

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**OUTDOORCHANNEL HOLDINGS, INC. AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated FinancialStatements**

(In thousands,except per share data)

**NOTE1—ORGANIZATION AND BUSINESS**

**Descriptionof Operations**

Outdoor Channel Holdings,Inc. or “Outdoor Channel Holdings,” is incorporated under the laws of the Stateof Delaware. Collectively, with its subsidiaries, the terms “we,” “us,” “our”and the “Company” refer to Outdoor Channel Holdings, Inc. as a consolidatedentity, except where noted or where the context makes clear the reference isonly to Outdoor Channel Holdings, Inc. or one of our subsidiaries. Our whollyowned subsidiary, The Outdoor Channel, Inc. (“TOC”), operates The OutdoorChannel, which is a national television network devoted to traditional outdooractivities, such as hunting, fishing and shooting sports, as well as off-roadmotor sports and other related lifestyle programming. In addition, TOC alsooperates Outdoor Channel 2 HD, which is a national television network featuringprogramming produced and aired utilizing high definition technology.

Our revenues includeadvertising fees from advertisements aired on The Outdoor Channel, includingfees paid by outside producers to purchase advertising time in connection withthe airing of their programs on The Outdoor Channel, and from advertisements in“Gold Prospectors & Treasure Hunters in the Great Outdoors” magazine;subscriber fees paid by cable and satellite service providers that air TheOutdoor Channel; membership fees from members in both LDMA-AU, Inc. (“LostDutchman’s”) and Gold Prospector’s Association of America, LLC (“GPAA”); andother income including income from sales of products and services related togold prospecting, gold expositions, expeditions and outings.

Other business activitiesconsist of the promotion and sale of a gold prospecting expedition to ourCripple River property located near Nome, Alaska, and the sale of membershipsin Lost Dutchman’s that entitle members to engage in gold prospecting on ourArizona, California, Colorado, Georgia, Michigan, North Carolina, Oregon, andSouth Carolina properties. We have signed an agreement with anotherorganization for the mutual use of these and other properties. OutdoorChannel Holdings is also the sole member of 43455 BPD, LLC, the entity thatowns the building that houses our broadcast facility.

**NOTE2—UNAUDITED INTERIM FINANCIAL STATEMENTS**

**Basis of Presentation**

In the opinion ofmanagement, the accompanying unaudited condensed consolidated financialstatements reflect all adjustments, consisting of normal recurring adjustments,necessary to present fairly the financial position of the Company as ofSeptember 30, 2006 and its results of operations and cash flows for the threeand/or nine months ended September 30, 2006 and 2005. Information included inthe consolidated balance sheet as of December 31, 2005 has been derived from,and certain terms used herein are defined in, the audited financial statementsof the Company as of December 31, 2005 (the “Audited Financial Statements”) includedin the Company’s Annual Report on Form 10-K/A (the “10-K/A”) for the year endedDecember 31, 2005 that was previously filed with the Securities and ExchangeCommission (the “SEC”). Pursuant to the rules and regulations of the SEC,certain information and disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted from these financialstatements unless significant changes have taken place since the end of themost recent fiscal year. Accordingly, these unaudited condensed consolidatedfinancial statements should be read in conjunction with the Audited FinancialStatements and the other information also included in the 10-K/A.

**Reclassifications**

Certain amounts in the2006 and 2005 unaudited condensed consolidated financial statements have beenreclassified from amounts in the unaudited condensed consolidated financialstatements we originally filed before the restatements described in Note 3either to conform to the 2006 presentations or to provide additional detailabout our operating results and more fully comply with the Securities andExchange Commision’s Regulation S-X. In particular certain amounts includedunder “expenses” in the 2006 and 2005 unaudited condensed consolidatedstatements of operations we originally issued have been reclassified in lineitems under either “cost of services” or “other expenses”. Cost of servicesincludes programming, satellite transmission fees, production and operationsand other direct costs. Other expenses include advertising, selling, generaland administrative and depreciation and amortization. Further, to better matchintangible assets with the segment to which they pertain, we have reclassifiedthe amortizable intangible assets and the goodwill which we recorded inconnection with the acquisition on September 8, 2004 of the minority interestin TOC that we did not previously own on September 8, 2004 along with therelated amortization expense from “Corporate” to the “TOC” segment. Also, inaccordance with SFAS 123R, we

7

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have presented on aprospective basis the tax benefits from exercise of stock options in excess ofrecognized expense as a cash flow from financing activities in the accompanyingunaudited condensed consolidated statement of cash flows for the nine monthsended September 30, 2006, rather than as a cash flow from operating activities.Certain other changes have been made in the historical unaudited condensedconsolidated financial statements to conform with current presentations. Theresults of the Company’s operations for the three and nine months endedSeptember 30, 2006 are not necessarily indicative of the results of operationsfor the full year ending December 31, 2006.

**Use of Estimates**

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

**NOTE3—ADJUSTMENTS TO INTANGIBLE MSO RELATIONSHIPS ASSET**

###### Reassessmentof Useful Life

During the three monthsended September 30, 2006, we reviewed the facts and circumstances regarding theuseful life of our intangible assets attributable to multi-system cableoperator (“MSO”) relationships as of September 8, 2004 when we completed theacquisition of the minority interest in TOC that we did not previously own andallocated a portion of the excess of the cost of the minority interest over thefair value of the underlying interest in the net identifiable assets acquiredto the MSO relationships. After consideration of the facts and circumstances,the nature of our business, our experience with the MSO’s of our network, andthe proclivities of our industry, we have concluded that as of September 8,2004 our MSO relationships asset had a definite life which we have estimated tobe 21 years and 4 months and, accordingly, we reclassified all of the amountsoriginally allocated to the cost of MSO relationships from othernon-amortizable intangible assets to amortizable intangible assets as of thatdate.

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

Considerations ofImpairment of Intangible Assets

During the three monthsended September 30, 2006, we engaged third party consultants to review ourbusiness practices and strategy. Among the areas reviewed was our approach togrowing our subscriber base through our relationships with MSO’s. In September2006, the consultants concluded, and the Board of Directors accepted theirconclusions, that a complete revision of the terms of our relationships withMSO’s was necessary to meet the subscriber growth goals established by us. Uponacceptance of that conclusion and the general strategy outlined by theconsultants, we reviewed our amortizable MSO relationships and our otheramortizable intangible assets (customer lists and trademarks) for impairment inaccordance with Statement of Financial Accounting Standards No. 144, “Accountingfor Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). Based upon thechanged circumstances, we concluded that, as of the date we accepted theconsultants’ conclusion, our MSO relationships asset was fully impaired andthat our other remaining amortizable intangible assets were not. Accordingly,we have charged to expense the remaining unamortized carrying value of the MSOrelationships of $9,540 during the three and nine months ended September 30,2006.

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

8

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**NOTE 4—STOCK INCENTIVE PLANS**

Effective January 1,2006, we adopted Statement of Financial Accounting Standards No. 123 (revised2004), “Share-Based Payment” (“SFAS 123R”). We have elected to use the modifiedprospective transition method. This method requires compensation cost to berecognized in the financial statements over the service period for the fairvalue of all awards (including awards to employees) granted after the date ofadoption as well as for existing awards for which the requisite service had notbeen rendered as of the date of adoption and requires that prior periods not berestated. Our stock incentive plans provide for the granting of qualified andnonqualified options, restricted stock, performance units and stockappreciation rights (“SARs”) to our officers, directors and employees.Outstanding options generally vest and are exercisable from 90 days to fouryears after the date of the grant and expire no more than ten years after thegrant. We satisfy the exercise of options and awards of restricted stock byissuing previously unissued common shares. Currently we have not awarded anySARs. Prior to September 30, 2006, we had not awarded any performance units.Subsequent to that date we awarded 800 performance units under the plans. Priorto the adoption of SFAS 123R, we used the intrinsic value method to account forstock options granted to employees and generally, made no charges againstearnings with respect to those options at the date of grant since our employeeoptions had exercise prices that were equal to the market price. SFAS 123Rrequires that we elect an approved method to calculate the historical pool ofwindfall tax benefits upon adoption of SFAS 123R within one year of itsadoption. As of September 30, 2006, we have not made that election.

For the three and ninemonths ended September 30, 2006, the adoption of SFAS 123R increased loss fromoperations, net loss and basic and diluted loss per common share. The impact onthese items is as follows:

|                         | ** ** | **For the Periods Ended** | ** ** |
|-------------------------|------------|------------------------------------------|------------|
| ** **              | ** ** | **September 30, 2006**         | ** ** |
| ** **              | ** ** | **Three Months**                    | ** ** | **Nine Months** | ** ** |
|                    |       |                                     |       |   |   |
| Loss from  operations   |       | $                                        | (753       | ) | $ | (2,224 | ) |
| Net loss                |       | $                                        | (529       | ) | $ | (1,551 | ) |
| Loss per common  share: |       |                                     |       |   |   |
| Basic                   |       | $                                        | (0.02      | ) | $ | (0.06 | ) |
| Diluted                 |       | $                                        | (0.02      | ) | $ | (0.06 | ) |

 

In accordance with SFAS123R, we have presented on a prospective basis the tax benefits from exerciseof stock options in excess of recognized expense of $711 as a cash flow fromfinancing activities in the accompanying unaudited condensed consolidatedstatement of cash flows for the nine months ended September 30, 2006, ratherthan as a cash flow from operating activies, as was prescribed under accountingrules applicable through December 31, 2005. This requirement reduced the amountreflected as net cash provided by operating activities and increased net cashprovided by financing activities for that period. Total cash flows remainedunchanged from that which would have been reported under prior accountingrules. We recognize such benefits only if they have been realized which wedetermine by following the tax law method, which provides that currentdeductions are recognized before realizing the benefits of our net operatingloss carry forwards. Tax benefits from the exercise of stock options in excessof recognized expense of $659 have been presented as a cash flow from operatingactivities for the nine months ended September 30, 2005.

The weighted averagegrant date fair value of employee stock options granted by us in the ninemonths ended September 30, 2006 was estimated to be $6.72 per share using theBlack-Scholes option pricing model with the following assumptions:

|                             | ** ** | **Nine Months Ended   September 30, 2006** | ** ** |
|-----------------------------|------------|---------------------------------------------------------------------|------------|
| Risk-free  interest rate    |       | 4.3 - 4.9                                                           | %          |
| Dividend yield              |       | 0                                                                   | %          |
| Expected life               |       | 4.4 years                                                           |       |
| Expected volatility  factor |       | 58.5 - 62.4                                                         | %          |

 

Expected volatilities arebased on historical volatility of our stock. We have adopted the guidance of theSEC’s Staff Accounting Bulletin No. 107 that notes if share options have “plainvanilla” characteristics, a simplified method of estimating the expected lifeof the option may be employed temporarily. The simplified method utilizes theaverage of the vested term and the original contract term. We have recentlyexperienced certain events that indicate that our long-term historicalexperience is no longer valid. As such we adopted the simplified method. Ourshort-term historical experience with exercise and post-vesting employmenttermination behavior supports this method for determining the options’ expectedlife. When

9

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sufficient historicalexperience has been obtained, we will use such experience for futureestimations of the expected life. The expected life represents the period oftime that options granted are expected to be outstanding. The risk-free rate isbased on the U.S. Treasury rate with a maturity date corresponding to theoptions’ expected life.

Our historical net incomeand earnings per common share and pro forma net income (loss) and earnings(loss) per common share assuming compensation cost had been determined for thethree and nine months ended September 30, 2005 based on the fair value insteadof the intrinsic value at the grant date for all awards by us to our employees,using the Black-Scholes option pricing model consistent with the provisions ofSFAS 123R, and amortized ratably over the vesting period, are set forth below:

|                                                                                                                                         | ** ** | **For the Periods Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                              | ** ** | **September 30, 2005**         | ** ** |
| ** **                                                                                                                              | ** ** | **Three  Months**                        | ** ** | **Nine  Months** | ** ** |
|                                                                                                                                    |       |                                     |       |   |   |
| Net income  (loss):                                                                                                                     |       |                                     |       |   |   |
| As reported                                                                                                                             |       | $                                        | 248        |   | $ | 1,062 |   |
| Deduct: Stock-based employee compensation expense  assuming a fair value based method had been used for all awards, net of tax  effects |       | (456                                     | )          | (1,285 | ) |
|                                                                                                                                    |       |                                     |       |   |   |
| Pro forma —  basic and diluted                                                                                                     |       | $                                        | (208       | ) | $ | (223 | ) |
|                                                                                                                                    |       |                                     |       |   |   |
| Basic earnings  (loss) per common share:                                                                                                |       |                                     |       |   |   |
| As reported                                                                                                                             |       | $                                        | 0.01       |   | $ | 0.05 |   |
| Pro forma                                                                                                                               |       | $                                        | (0.01      | ) | $ | (0.01 | ) |
| Diluted earnings  (loss) per common share:                                                                                              |       |                                     |       |   |   |
| As reported                                                                                                                             |       | $                                        | 0.01       |   | $ | 0.04 |   |
| Pro forma                                                                                                                               |       | $                                        | (0.01      | ) | $ | (0.01 | ) |

 

The fair value of eachoption granted by us in the nine months ended September 30, 2005 was estimatedon the date of grant using the Black-Scholes option pricing model with thefollowing assumptions:

|                             | ** ** | **Nine Months Ended  September 30, 2005** | ** ** |
|-----------------------------|------------|---------------------------------------------------------------|------------|
| Risk-free  interest rate    |       | 3.7 - 4.2                                                     | %          |
| Dividend yield              |       | 0                                                             | %          |
| Expected life               |       | 3.8 - 5.1 years                                               |       |
| Expected volatility  factor |       | 37.7                                                          | %          |

 

In accordance with theprovisions of SFAS 123R, all other issuances of common stock, stock options,warrants or other equity instruments to employees and non-employees as theconsideration for goods or services received by us are accounted for based onthe fair value of the equity instruments issued (unless the fair value of theconsideration received can be more reliably measured). Generally, the fairvalue of any options, warrants or similar equity instruments issued isestimated based on the Black-Scholes option-pricing model.

**NOTE5—EARNINGS (LOSS) PER COMMON SHARE**

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

For the three and ninemonths ended September 30, 2006, the computation of diluted loss per commonshare does not take into account any of our outstanding stock options becausethe effect of their assumed exercise would be anti-dilutive. For the three andnine months ended September 30, 2005, the computation of diluted earnings percommon share took into account

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the effects on theweighted average number of common shares outstanding of the assumed exercise ofthe outstanding stock options, adjusted for the application of the treasurystock method. The greatest number of shares potentially issuable by usupon the exercise of stock options in any quarter of the nine months endedSeptember 30, 2006 and 2005 that were not included in the computation of netearnings (loss) per common share because they were anti-dilutive, totaled 3,437and 410, respectively.

The following tablesummarizes the calculation of net income (loss) and the weighted average commonshares outstanding for basic and diluted earnings (loss) per common share forthe three and nine months ended September 30, 2006 and 2005:
| ** **                                                                                                                                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                          | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                                                                                          | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Numerators:                                                                                                                                         |       |                             |       |                            |       |   |   |   |   |
| Net income (loss)                                                                                                                                   |       | $                                | (5,568     | )                               | $          | 248 |   | $ | (5,423 | ) | $ | 1,062 |   |
|                                                                                                                                                |       |                             |       |                            |       |   |   |   |   |
| Denominators:                                                                                                                                       |       |                             |       |                            |       |   |   |   |   |
| Weighted average common shares outstanding—basic                                                                                               |       | 24,813                           |       | 24,236                          |       | 24,404 |   | 20,444 |   |
| Dilutive effect of potentially issuable common  shares upon exercise of stock options as adjusted for the application of the  treasury stock method |       | —                           |       | 3,422                           |       | — |   | 3,228 |   |
| Diluted weighted  average common shares outstanding                                                                                                 |       | 24,813                           |       | 27,658                          |       | 24,404 |   | 23,672 |   |
|                                                                                                                                                     |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

**NOTE6—EQUITY TRANSACTIONS**

**Issuancesof Common Stock**

During the nine monthsended September 30, 2006 and 2005, we received cash proceeds of approximately$813 and $2,631 from the exercise of options for the purchase of 660 and 2,341shares of common stock, respectively.

During the nine monthsended September 30, 2006, we issued employees 86 shares of restricted stock.The rights to these shares vest over three and five year periods. Based on theweighted average closing market price on the day before the grants of $12.47per share and after adjustment for the estimated forfeiture rate, the fairvalue of the restricted stock was $806. Under SFAS 123R, these amounts and amounts attributable to grants madein prior periods (which represent deferred compensation not required to berecorded initially in the consolidated balance sheet) will be amortized tostock-based compensation expense as the rights to the restricted stock vestwith an equivalent amount added to additional paid-in capital. During the ninemonths ended September 30, 2006, a total of 19 shares of restricted stock havebeen cancelled due to employee turnover. As of September 30, 2006, we have 181non-vested shares of restricted stock held by employees outstanding and $1,782 of expense yet to be recognizedwhich will be amortized as compensation expense over the employees’ remainingrequisite service periods.

We also issued serviceproviders 56 shares of restricted stock during the nine months ended September30, 2006. Of the restricted shares issued to service providers, 50 shares vestupon specific performance related to subscriber growth which we  estimate will be fully earned and vested bythe end of 2007. The rights to the remaining 6 shares issued to serviceproviders vest annually over a five-year period. We did not grant anyrestricted shares to service providers prior to 2006. Under SFAS 123R, the fairvalue of the shares at the respective dates of grant (which represents deferredcompensation not required to be recorded initially in the consolidated balancesheet) will also be amortized to stock-based compensation expense as the rightsto the restricted stock vest with an equivalent amount added to additionalpaid-in capital. However, the future charge will be retroactively adjusted toreflect the fair market value at the end of each reporting period until theshares vest when the related charge will be adjusted for the final time. Basedon the closing market price on September 29, 2006 of $10.89 per share, the fairvalue of these 56 shares of restricted stock was $610. Assuming the closingmarket price as of September 30, 2006 does not change over the remainingvesting period, we would have $467 of expense yet to be recognized.

**StockOption Plans**

Descriptions of OutdoorChannel Holdings’ stock option plans are included in Note 4 herein and Note 11of our Annual Report on Form 10-K/A for the year ended December 31, 2005. Asummary of the status of the options granted under 

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Outdoor Channel Holdings’stock option plans and outside of those plans as of September 30, 2006 and thechanges in options outstanding during the nine months then ended is presentedin the table that follows:

|                                       | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted-Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|---------------------------------------|------------|------------|------------|---------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  beginning of period   |       | 3,564      |       | $                                           | 7.31       |                                               |       |                            |       |   |
| Options granted                       |       | 205        |       | 12.84                                       |       |                                               |       |                            |       |
| Options  exercised                    |       | (660       | )          | 1.23                                        |       |                                               |       |                            |       |
| Options  cancelled or expired         |       | (24        | )          | 12.99                                       |       |                                               |       |                            |       |
| Options  outstanding at end of period |       | 3,085      |       | $                                           | 8.94       |                                               | 3.7 years  |                            | $          | 15,340 |   |
|                                  |       |       |       |                                        |       |                                               |       |                            |       |
| Options exercisable at  end of period |       | 2,124      |       | $                                           | 6.96       |                                               | 3.0 years  |                            | $          | 13,106 |   |

 

We did not grant anyoptions in the three months ended September 30, 2006. The weighted-averagegrant-date fair value of options granted during the nine months ended September30, 2006 was $6.72. The total intrinsic value of stock options exercised duringthe three and nine months ended September 30, 2006 was $1,581 and $6,728,respectively.

A summary of the statusof Outdoor Channel Holdings’ non-vested restricted shares as of September 30,2006 and the changes in restricted shares outstanding during the nine monthsthen ended is presented in the table that follows:

|                                                 | ** ** | **Shares** | ** ** | **Weighted-Average  Grant Date  Fair Value** | ** ** |
|-------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|
| Non-vested  shares at beginning of period       |       | 127        |       | $                                                      | 14.43      |   |
| Granted                                         |       | 142        |       | 11.53                                                  |       |
| Vested                                          |       | (13        | )          | 14.49                                                  |       |
| Cancelled                                       |       | (19        | )          | 14.27                                                  |       |
|                                            |       |       |       |                                                   |       |
| Non-vested shares  outstanding at end of period |       | 237        |       | $                                                      | 12.71      |   |

 

As of September 30, 2006,$7,991 of expense with respect to non-vested share-based arrangements has yetto be recognized which is expected to be recognized over a weighted-averageperiod of 1.8 years.

**NOTE7—RELATED PARTY TRANSACTIONS**

We lease ouradministrative facilities from Musk Ox Properties, LP, which in turn is ownedby Messrs. Perry T. Massie and Thomas H. Massie, principal stockholders,directors and officers of the Company. In December 2005, the lease agreementswere consolidated into one lease. The new lease agreement has a five-year term,expiring on December 31, 2010, with 2 five-year renewal options at ourdiscretion. Monthly rent payments under this new lease agreement are $29 with a3% per year escalator clause. Rent expense paid to Musk Ox Properties, LPtotaled approximately $87 and $63 in the three months ended September 30, 2006and 2005, respectively, and approximately $262 and $189 in the nine monthsended September 30, 2006 and 2005, respectively.

**NOTE8—SEGMENT INFORMATION**

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

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the presentation below,amounted to $149 in each of the three months ended September 30, 2006 and 2005and $446 in each of the nine months ended September 30, 2006 and 2005.

Information with respectto these reportable segments as of and for the three and nine months endedSeptember 30, 2006 and 2005 is 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, 2006**                     | ** ** | ** **   | ** ** | ** **                                        | ** ** | ** **        | ** ** | ** **                          | ** ** | ** **                                                     | ** ** |
| TOC                                        |       | $            | 10,962     |                                              | $          | (7,991            | )          | $                                   | 75,159     |                                                           | $          | 10,522 | (1) | $ | 248 |   |
| Membership Division                        |       | 2,220        |       | 348                                               |       | 5,418             |       | 75                                  |       | 52                                                             |       |
| Subtotals of Segments                      |       | 13,182       |       | (7,643                                            | )          | 80,577            |       | 10,597                              |       | 300                                                            |       |
| Corporate(2)                               |       | —       |       | (329                                              | )          | 70,107            |       | —                              |       | —                                                         |       |
| Totals                                     |       | $            | 13,182     |                                              | $          | (7,972            | )          | $                                   | 150,684    |                                                           | $          | 10,597 |   | $ | 300 |   |
|                                       |       |         |       |                                              |       |              |       |                                |       |                                                           |       |
| **September 30, 2005**                     |       |         |       |                                              |       |              |       |                                |       |                                                           |       |
| 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(2)                               |       | —       |       | (169                                              | )          | 59,179            |       | —                              |       | —                                                         |       |
| Totals                                     |       | $            | 11,404     |                                              | $          | 533               |       | $                                   | 145,824    |                                                           | $          | 693 |   | $ | 4,696 |   |
| ** **                                 | ** ** | ** **   | ** ** | ** **                                        | ** ** | ** **        | ** ** | ** **                          | ** ** | ** **                                                     | ** ** |
| **As of  and for the Nine Months Ended:**  | ** ** | ** **   | ** ** | ** **                                        | ** ** | ** **        | ** ** | ** **                          | ** ** | ** **                                                     | ** ** |
| **September 30, 2006**                     | ** ** | ** **   | ** ** | ** **                                        | ** ** | ** **        | ** ** | ** **                          | ** ** | ** **                                                     | ** ** |
| TOC                                        |       | $            | 30,687     |                                              | $          | (7,148            | )          | $                                   | 75,159     |                                                           | $          | 11,951 | (1) | $ | 2,313 |   |
| Membership Division                        |       | 4,711        |       | 346                                               |       | 5,418             |       | 219                                 |       | 75                                                             |       |
| Subtotals of Segments                      |       | 35,398       |       | (6,802                                            | )          | 80,577            |       | 12,170                              |       | 2,388                                                          |       |
| Corporate(2)                               |       | —       |       | (1,628                                            | )          | 70,107            |       | —                              |       | —                                                         |       |
| Totals                                     |       | $            | 35,398     |                                              | $          | (8,430            | )          | $                                   | 150,684    |                                                           | $          | 12,170 |   | $ | 2,388 |   |
|                                       |       |         |       |                                              |       |              |       |                                |       |                                                           |       |
| **September 30, 2005**                     | ** ** | ** **   | ** ** | ** **                                        | ** ** | ** **        | ** ** | ** **                          | ** ** | ** **                                                     | ** ** |
| 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(2)                               |       | —       |       | (1,108                                            | )          | 59,179            |       | —                              |       | —                                                         |       |
| Totals                                     |       | $            | 31,479     |                                              | $          | 1,940             |       | $                                   | 145,824    |                                                           | $          | 2,015 |   | $ | 8,069 |   |

 

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

(2) We capture corporate overhead that is applicable to bothsegments, but not directly related to operations in a separate business unit,as “Corporate.” The expenses allocated to Corporate consist primarily of:professional fees including public relations, accounting and legal fees, taxesassociated with being incorporated in Delaware, board fees, and other corporatefees not associated directly with either TOC or the Membership division.Corporate assets consist primarily of cash not held in our operating accounts,available-for-sale securities, deferred tax asset, net and income tax refundreceivable.

**NOTE9—INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES**

Our short terminvestments in marketable debt and equity securities are classified asavailable-for-sale and are recorded at fair value at the end of each period.Gross realized gains and losses on sales of these securities during the threeand nine months ended September 30, 2006 and 2005 and all gross realized gainsand losses related to such investments prior to the three and nine months endedSeptember 30, 2006 and the year ended December 31, 2005 were not material.Included in investments in available-for-sale securities at September 30, 2006and December 31, 2005 are investments in auction rate securities withshort-term interest rates that generally can be reset every 28 days. Theauction rate securities have long-term maturity dates and provide us withenhanced yields. However, we believe we have the ability to quickly liquidatethem at

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their original cost,although there is no guaranty and, accordingly, they are carried at cost, whichapproximates fair value, and classified as current assets. All income generatedfrom these investments is recorded as interest income. We had unrealized netholding gains on marketable equity securities at September 30, 2006 andDecember 31, 2005 of $44 and $36, respectively, that are in “accumulated othercomprehensive income (loss)”.

The investment inavailable-for-sale securities is as follows:
| ** **                           | ** ** | **As of  September 30, 2006** | ** ** | **As of  December 31, 2005** | ** ** |
|--------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| Auction rate  securities             |       | $                                            | 37,850     |                                        | $          | 38,000 |   |
| Equities                             |       | 887                                          |       | 830                                         |       |
| Total  available-for-sale securities |       | $                                            | 38,737     |                                        | $          | 38,830 |   |

 

**NOTE10—INCOME TAX PROVISION (BENEFIT)**

The income tax benefitreflected in the accompanying unaudited condensed consolidated statement ofoperations for the nine months ended September 30, 2006 is different than theexpected tax benefit computed based on the pre-tax loss and the applicablestatutory Federal income tax rate of 34% and state tax rate, net of Federal taxeffects, of 5.83%. Interim tax provisions and benefits are determined using anestimate of the annual effective tax rate. As of September 30, 2006, ourestimated annual tax benefit for the year ending December 31, 2006 wasapproximately 35.7%, which was below the expected statutory benefit primarilyas a result of permanent differences between our loss before taxes forfinancial reporting purposes and our loss for tax reporting purposes for thenine months then ended. Our most significant permanent difference was relatedto the portion of our compensation expense recognized for financial reportingpurposes that was attributable to the non-cash, charges recorded under SFAS123R for the fair value of qualified incentive stock options, or ISOs, grantedto employees, which are generally not deductible for tax reporting purposes. Werecognized non-cash, non-deductible charges to compensation expense of $533 inthe nine months ended September 30, 2006 related to ISOs under SFAS 123R.

Our estimate for statetaxes is based on the California statutory rates. During the nine months endedSeptember 30, 2006, we filed income tax returns for voluntary disclosure withthe Multistate Tax Commission or directly with the various states, as required,as it pertains to states in which we have nexus but have not previously filedincome tax returns to apportion our income to such states. We believe that wewill be able to amend our California returns to reflect the apportionment. Inthe event we are not able to amend our California returns, we could incuradditional state income taxes which could increase our effective tax rate.

**NOTE11—LONG- TERM DEBT AND LINE OF CREDIT**

We have two long-termloans and a line of credit with U.S. Bank N.A. (the “Bank”). Aggregateoutstanding borrowings as of September 30, 2006 under the long-term loans were$4,368. We did not have any borrowings under the line of credit. Theseloans and the line of credit contain customary covenants including certainminimum profitability metrics measured at each quarter end. The covenants alsocontain a requirement to provide our financial statements to the Bank within 60days of the end of the quarter. We have not supplied these financial statementswithin the required time frame and, accordingly, these loans are callable bythe Bank. As a result of the covenant violation and our intention to repay theseloans (see Note 12), we have classified all outstanding debt as currentliabilities as of September 30, 2006.

**NOTE12—SUBSEQUENT EVENTS**

OnOctober 19, 2006, we repaid the two long-term loans, which at September 30,2006 had an aggregate balance of $4,368 plus accrued interest thereon. We areseeking a covenant violation waiver as it relates to our line of credit but noassurances may be given that such waiver will be granted.

On October 16, 2006, weappointed Roger L. Werner, Jr. President of Outdoor Channel Holdings, Inc. andentered into an employment agreement (the “Agreement”) with him, which setsforth terms and provisions governing his employment as President, and effectiveas of November 10, 2006, the appointment of Mr. Werner as the Company’s ChiefExecutive Officer.  On November 9, 2006we amended the Agreement to have Mr. Werner to be appointed as the Company’sCEO on the date after we file our Form 10-Q for the three and nine months endedSeptember 30, 2006. The Agreement has an initial term of three years, whichwill be automatically extended each year for an additional one year term unlessthe other party provides written notice of non-renewal at least 60 days priorto the date of automatic renewal. The Agreement may be terminated at

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any time by either partywith or without cause. The agreement contains provisions for severance paymentsin the event that the Company terminates Mr. Werner’s employment without “Cause”(as defined in the Agreement) or Mr. Werner resigns for “Good Reason” (as alsodefined in the Agreement). Mr. Werner’s annual salary is $300 and he received asigning bonus of $300.   Mr. Werner willbe eligible to receive an annual cash incentive payable for the achievement ofperformance goals in amounts that are equal to at least 50% of his base salary,and he is eligible to participate in all benefit programs available to ourexecutive officers.

Mr. Werner was grantednonstatutory stock options to purchase 300 shares of Company common stock underthe Company’s 2004 Long-Term Incentive Plan (the “Plan”) at an exercise priceequal to the closing price per share on the Nasdaq Global Market for the commonstock of the Company on October 16, 2006. The shares are subject to a vestingschedule assuming Mr. Werner’s continued employment with the Company on eachscheduled vesting date. Mr. Werner was granted 150 shares of restricted stockunder the Plan. The restricted stock will vest in equal monthly installmentsbeginning on  October 16, 2006 such thatthe entire 150 shares are 100% vested on October 16, 2009 assuming Mr. Werner’scontinued employment with the Company on each scheduled vesting date. Mr.Werner was also granted 800 performance units under the Plan subject to vestingcriteria, and once vested, shall be settled by the Company’s issuance of sharesof Company common stock reflecting an equal number of vested performance units.If after October 16, 2007 the Company terminates Mr. Werner’s employmentwithout “Cause” or Mr. Werner resigns for “Good Reason”, then 100% of theoptions and restricted stock shall vest upon such termination.

* * *

**ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

**SafeHarbor Statement**

The information containedin this report may include forward-looking statements. Our actual resultscould differ materially from those discussed in any forward-looking statements.The statements contained in this report that are not historical are “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended (the “Securities Act”), and Section 21E of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”), including statements,without limitation, regarding our expectations, beliefs, intentions orstrategies regarding the future. We intend that such forward-looking statementsbe subject to the safe-harbor provisions contained in those sections. Suchforward-looking statements relate to, among other things: (1) increasedsubscriber growth; (2) expected revenue and earnings growth and changes in mix;(3) anticipated expenses including advertising, programming, personnel andothers; (4) Nielsen Media Research, which we refer to as Nielsen,estimates regarding total households and cable and satellite homes subscribingto and viewers (ratings) of The Outdoor Channel; and (5) more control overour programming. We undertake no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise.

These statements involvesignificant risks and uncertainties and are qualified by important factors thatcould cause our actual results to differ materially from those reflected by theforward-looking statements. Such factors include but are not limited to risksand uncertainties, which are included in Part II, Item 1A Risk Factors belowand other risks and uncertainties discussed elsewhere in this report. Inassessing forward-looking statements, readers are urged to read carefully allcautionary statements contained in this Form 10-Q and in our other filingswith the Securities and Exchange Commission. For these forward-lookingstatements, we claim the protection of the safe harbor for forward-lookingstatements in Section 27A of the Securities Act and Section 21E ofthe Exchange Act.

**ADJUSTMENTSTO INTANGIBLE MSO RELATIONSHIPS ASSET**

During the three monthsended September 30, 2006, we reviewed the facts and circumstances regarding theuseful life of our intangible assets attributable to multi-system cableoperator (“MSO”) relationships as of September 8, 2004 when we completed theacquisition of the minority interest in TOC that we did not previously own andallocated a portion of the excess of the cost of the minority interest over thefair value of the underlying interest in the net identifiable assets acquiredto the MSO relationships. After consideration of the facts and circumstances,the nature of our business, our experience with the MSO’s of our network, andthe proclivities of our industry, we have concluded that as of September 8,2004 our MSO relationships asset had a definite life which we have estimated tobe 21 years and 4 months and, accordingly, we reclassified all of the amountsoriginally allocated to the cost of MSO relationships from othernon-amortizable intangible assets to amortizable intangible assets as of thatdate.

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

Considerations ofImpairment of Intangible Assets

During the three monthsended September 30, 2006, we engaged third party consultants to review ourbusiness practices and strategy. Among the areas reviewed was our approach togrowing our subscriber base through our relationships with MSOs. In September2006, the consultants concluded, and the Board of Directors accepted theirconclusions, that a complete revision of the terms of our relationships withMSO’s was necessary to meet the subscriber growth goals established by us. Uponacceptance of that conclusion and the general strategy outlined by theconsultants, we reviewed our amortizable MSO relationships and our otheramortizable intangible assets (customer lists and trademarks) for impairment inaccordance with Statement of Financial Accounting Standards No. 144, “Accountingfor Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). Based upon thechanged circumstances, we concluded that, as of the date we accepted theconsultants’ conclusion, our MSO relationships asset was fully impaired andthat our other remaining amortizable intangible assets were not. Accordingly,we have charged to expense the remaining unamortized carrying value of the MSOrelationships of $9,540,000 during the three and nine months ended September30, 2006.

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

**General**

Through our indirectwholly owned subsidiary, The Outdoor Channel, Inc. or TOC, we own andoperate The Outdoor Channel which is a national television network devotedprimarily to traditional outdoor activities, such as hunting, fishing andshooting sports, as well as off-road motor sports and other outdoor relatedlifestyle programming. We also own and operate related businesses which servethe interests of The Outdoor Channel’s viewers and other outdoor enthusiasts.These related businesses include: LDMA-AU, Inc., which we refer to as LostDutchman’s, and Gold Prospector’s Association of America, LLC, which we referto as GPAA. Lost Dutchman’s is a national gold prospecting campground club withproperties in Arizona, California, Colorado, Georgia, Michigan, North Carolina,Oregon and South Carolina. Among other services offered, GPAA is the publisherof the*Gold Prospector & TreasureHunters in the Great Outdoors* magazine. In addition, we are theowner of a 2,300 acre property near Nome, Alaska used to provide outingsfor a fee to the members of Lost Dutchman’s and GPAA. Outdoor Channel Holdingsalso wholly owns 43455 BPD, LLC that owns the building housing our broadcastfacility.

Our revenues include (1)advertising fees from advertisements aired on The Outdoor Channel and fromadvertisements in*Gold Prospector &Treasure Hunters in the Great Outdoors* magazine; (2) subscriberfees paid by cable and satellite service providers that air The OutdoorChannel; and (3) membership fees from members in both Lost Dutchman’s andGPAA and other income including magazine sales, products and services relatedto gold prospecting, gold expositions, expeditions and outings. Advertisingfees also include fees paid by third-party programmers to purchase advertisingtime in connection with the airing of their programs on The Outdoor Channel.

Certain amounts in the2006 and 2005 unaudited condensed consolidated financial statements have beenreclassified from amounts in the unaudited condensed consolidated financialstatements we originally filed before the restatements described in Note 3either to conform to the 2006 presentations or to provide additional detailabout our operating results and more fully comply with the Securities andExchange Commision’s Regulation S-X. In particular certain amounts includedunder “expenses” in the 2006 and 2005 unaudited condensed consolidatedstatements of operations we originally issued have been

16

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reclassified in lineitems under either “cost of services” or “other expenses”. Cost of servicesincludes programming, satellite transmission fees, production and operationsand other direct costs. Other expenses include advertising, selling, generaland administrative and depreciation and amortization. In the three and ninemonths ended September 30, 2006, we have also included in other expenses,impairment of intangible assets. Further, to better match intangible assetswith the segment to which they pertain, we have reclassified the amortizableintangible assets and the goodwill which we recorded in connection with theacquisition on September 8, 2004 of the minority interest in TOC that we didnot previously own on September 8, 2004 along with the related amortizationexpense from “Corporate” to the “TOC” segment. Also, in accordance with SFAS123R, we have presented on a prospective basis the tax benefits from exerciseof stock options in excess of recognized expense as a cash flow from financingactivities in the accompanying unaudited condensed consolidated statement ofcash flows for the nine months ended September 30, 2006, rather than as a cashflow from operating activities. Certain other changes have been made in thehistorical unaudited condensed consolidated financial statements to conformwith current presentations.

**RecentAccounting Developments**

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

In June 2006, the FASBissued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — aninterpretation of FAS No. 109” (“FIN 48”), which clarifies the accounting foruncertainty in income taxes. Currently, the accounting for uncertainty inincome taxes is subject to significant and varied interpretations that haveresulted in diverse and inconsistent accounting practices and measurements.Addressing such diversity, FIN 48 prescribes a consistent recognition thresholdand measurement attribute, as well as clear criteria for subsequentlyrecognizing, derecognizing and measuring changes in such tax positions forfinancial statement purposes. FIN 48 also requires expanded disclosure withrespect to the uncertainty in income taxes. FIN 48 is effective for fiscalyears beginning after December 15, 2006. We have not yet determined the impactof FIN 48 on our consolidated financial position, results of operations, cashflows or financial statement disclosures.

The FASB had issued certainother accounting pronouncements as of September 30, 2006 that will becomeeffective in subsequent periods; however, our management does not believe thatany of those pronouncements would have significantly affected our financialaccounting measurements or disclosures had they been in effect during the threeand nine months ended September 30, 2006.

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**Comparisonof Operating Results for the Three Months Ended September 30, 2006 andSeptember 30, 2005**

The following tablediscloses certain financial information for the periods presented, expressed interms of dollars, dollar change, percentage change and as a percent of totalrevenue (all dollar amounts are in thousands):
| ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** | **% of Total  Revenue** | ** ** |
|----------------------------------------------|------------|------------|------------|------------|------------|------------|------------|-----------------------------------|------------|
| ** **                                   | ** ** | **2006**   | ** ** | **2005**   | ** ** | **$**      | ** ** | **%**                             | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                    |       |       |       |       |       |       |       |                              |       |   |   |   |   |
| Advertising                                  |       | $          | 6,845      |       | $          | 5,657      |       | $                                 | 1,188      |   | 21.0 | % | 51.9 | % | 49.6 | % |
| Subscriber fees                              |       | 4,348      |       | 3,846      |       | 502        |       | 13.1                              |       | 33.0 |   | 33.7 |   |
| Membership  income                           |       | 1,989      |       | 1,901      |       | 88         |       | 4.6                               |       | 15.1 |   | 16.7 |   |
| Total revenues                               |       | 13,182     |       | 11,404     |       | 1,778      |       | 15.6                              |       | 100.0 |   | 100.0 |   |
|                                         |       |       |       |       |       |       |       |                              |       |   |   |   |   |
| Cost of Services:                            |       |       |       |       |       |       |       |                              |       |   |   |   |   |
| Programming                                  |       | 2,095      |       | 2,315      |       | (220       | )          | (9.5                              | )          | 15.9 |   | 20.3 |   |
| Satellite  transmission fees                 |       | 667        |       | 617        |       | 50         |       | 8.1                               |       | 5.1 |   | 5.4 |   |
| Production and  operations                   |       | 1,120      |       | 783        |       | 337        |       | 43.0                              |       | 8.5 |   | 6.9 |   |
| Other direct  costs                          |       | 602        |       | 785        |       | (183       | )          | (23.3                             | )          | 4.5 |   | 6.9 |   |
|                                         |       |       |       |       |       |       |       |                              |       |   |   |   |   |
| Total cost of  services                      |       | 4,484      |       | 4,500      |       | (16        | )          | (0.4                              | )          | 34.0 |   | 39.5 |   |
|                                         |       |       |       |       |       |       |       |                              |       |   |   |   |   |
| Other Expenses:                              |       |       |       |       |       |       |       |                              |       |   |   |   |   |
| Advertising                                  |       | 1,654      |       | 1,912      |       | (258       | )          | (13.5                             | )          | 12.5 |   | 16.7 |   |
| Selling, general  and administrative         |       | 5,187      |       | 4,162      |       | 1,025      |       | 24.6                              |       | 39.4 |   | 36.5 |   |
| Impairment of  amortizable intangible assets |       | 9,540      |       | —     |       | 9,540      |       | 100.0                             |       | 72.4 |   | — |   |
| Depreciation and  amortization               |       | 931        |       | 693        |       | 238        |       | 34.3                              |       | 7.1 |   | 6.1 |   |
|                                         |       |       |       |       |       |       |       |                              |       |   |   |   |   |
| Total other  expenses                        |       | 17,312     |       | 6,767      |       | 10,545     |       | 155.8                             |       | 131.4 |   | 59.3 |   |
|                                         |       |       |       |       |       |       |       |                              |       |   |   |   |   |
| Income (loss) from  operations               |       | (8,614     | )          | 137        |       | (8,751     | )          | NMF                               |       | (65.4 | ) | 1.2 |   |
|                                         |       |       |       |       |       |       |       |                              |       |   |   |   |   |
| Interest expense                             |       | (73        | )          | —     |       | (73        | )          | NMF                               |       | (0.5 | ) | — |   |
|                                         |       |       |       |       |       |       |       |                              |       |   |   |   |   |
| Other income, net                            |       | 715        |       | 396        |       | 319        |       | 80.6                              |       | 5.4 |   | 3.5 |   |
|                                         |       |       |       |       |       |       |       |                              |       |   |   |   |   |
| Income (loss) before  income taxes           |       | (7,972     | )          | 533        |       | (8,505     | )          | NMF                               |       | (60.5 | ) | 4.7 |   |
|                                         |       |       |       |       |       |       |       |                              |       |   |   |   |   |
| Income tax provision  (benefit)              |       | (2,404     | )          | 285        |       | (2,689     | )          | NMF                               |       | (18.3 | ) | 2.5 |   |
|                                         |       |       |       |       |       |       |       |                              |       |   |   |   |   |
| Net income (loss)                            |       | $          | (5,568     | )          | $          | 248        |       | $                                 | (5,816     | ) | NMF |   | (42.2 | )% | 2.2 | % |

 

***NMF — Not Meaningful***

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**Comparisonof Operating Results for the Nine Months Ended September 30, 2006 and September30, 2005**

The following tablediscloses certain financial information for the periods presented, expressed interms of dollars, dollar change, percentage change and as a percent of totalrevenue (all dollar amounts are in thousands):
| ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** | **% of Total Revenue** | ** ** |
|----------------------------------------------|------------|------------|------------|------------|------------|------------|------------|---------------------------------------|------------|
| ** **                                   | ** ** | **2006**   | ** ** | **2005**   | ** ** | **$**      | ** ** | **%**                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                    |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Advertising                                  |       | $          | 18,198     |       | $          | 16,173     |       | $                                     | 2,025      |   | 12.5 | % | 51.4 | % | 51.4 | % |
| Subscriber fees                              |       | 13,072     |       | 11,382     |       | 1,690      |       | 14.8                                  |       | 36.9 |   | 36.1 |   |
| Membership  income                           |       | 4,128      |       | 3,924      |       | 204        |       | 5.2                                   |       | 11.7 |   | 12.5 |   |
| Total revenues                               |       | 35,398     |       | 31,479     |       | 3,919      |       | 12.4                                  |       | 100.0 |   | 100.0 |   |
|                                         |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Cost of Services:                            |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Programming                                  |       | 5,845      |       | 3,367      |       | 2,478      |       | 73.6                                  |       | 16.5 |   | 10.7 |   |
| Satellite  transmission fees                 |       | 1,919      |       | 1,866      |       | 53         |       | 2.8                                   |       | 5.4 |   | 5.9 |   |
| Production and  operations                   |       | 3,153      |       | 2,509      |       | 644        |       | 25.7                                  |       | 8.9 |   | 8.0 |   |
| Other direct  costs                          |       | 960        |       | 1,247      |       | (287       | )          | (23.0                                 | )          | 2.7 |   | 4.0 |   |
|                                         |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Total cost of  services                      |       | 11,877     |       | 8,989      |       | 2,888      |       | 32.1                                  |       | 33.5 |   | 28.6 |   |
|                                         |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Other Expenses:                              |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Advertising                                  |       | 5,403      |       | 5,668      |       | (265       | )          | (4.7                                  | )          | 15.3 |   | 18.0 |   |
| Selling, general  and administrative         |       | 16,269     |       | 13,351     |       | 2,918      |       | 21.9                                  |       | 46.0 |   | 42.4 |   |
| Impairment of  amortizable intangible assets |       | 9,540      |       | —     |       | 9,540      |       | 100.0                                 |       | 27.0 |   | — |   |
| Depreciation and  amortization               |       | 2,494      |       | 2,015      |       | 479        |       | 23.8                                  |       | 7.0 |   | 6.4 |   |
|                                         |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Total other  expenses                        |       | 33,706     |       | 21,034     |       | 12,672     |       | 60.2                                  |       | 95.3 |   | 66.8 |   |
|                                         |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Income (loss) from  operations               |       | (10,185    | )          | 1,456      |       | (11,641    | )          | NMF                                   |       | (28.8 | ) | 4.6 |   |
|                                         |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Interest expense                             |       | (228       | )          | (2         | )          | (226       | )          | NMF                                   |       | (0.6 | ) | — |   |
|                                         |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Other income, net                            |       | 1,983      |       | 486        |       | 1,497      |       | NMF                                   |       | 5.6 |   | 1.6 |   |
|                                         |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Income (loss) before  income taxes           |       | (8,430     | )          | 1,940      |       | (10,370    | )          | NMF                                   |       | (23.8 | ) | 6.2 |   |
|                                         |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Income tax provision  (benefit)              |       | (3,007     | )          | 878        |       | (3,885     | )          | NMF                                   |       | (8.5 | ) | 2.8 |   |
|                                         |       |       |       |       |       |       |       |                                  |       |   |   |   |   |
| Net income (loss)                            |       | $          | (5,423     | )          | $          | 1,062      |       | $                                     | (6,485     | ) | NMF |   | (15.3 | )% | 3.4 | % |

 

***NMF — Not Meaningful***

**Revenues**

Our revenues includerevenues 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 whichthe advertisement is the program itself (also known aslong-form advertising), and from the sale of advertising space inpublications such as the*GoldProspectors & Treasure Hunters in the Great Outdoors*magazine. Advertising revenue is also generated from fees paid by third partyprogrammers that purchase advertising time in connection with the airing oftheir programs on The Outdoor Channel. For the three months ended September 30,2006 and 2005, The Outdoor Channel generated approximately 96.6% and 97.0% ofour advertising revenue, respectively. For the nine months ended September 30,2006 and 2005, The Outdoor Channel generated approximately 96.8% and 97.0% ofour advertising revenue, respectively. Subscriber fees are solely related toThe Outdoor Channel. Membership income is generated by our activities otherthan the operation of The Outdoor Channel and includes membership sales,magazine sales, merchandise sales, and sponsored outings and expeditions inconnection with GPAA and Lost Dutchman’s.

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Total revenues for thethree months ended September 30, 2006 were $13,182,000, an increase of$1,778,000, or 15.6%, compared to revenues of $11,404,000 for the three monthsended September 30, 2005. Total revenues for the nine months ended September30, 2006 were $35,398,000, an increase of $3,919,000, or 12.4%, compared torevenues of $31,479,000 for the nine months ended September 30, 2005. The netincreases were the result of changes in several items comprising revenue asdiscussed below.

Advertising revenue forthe three months ended September 30, 2006 was $6,845,000, an increase of$1,188,000 or 21.0% compared to $5,657,000 for the three months ended September30, 2005. Advertising revenue for the nine months ended September 30, 2006 was$18,198,000, an increase of $2,025,000 or 12.5% compared to $16,173,000 for thenine months ended September 30, 2005. For September 2006, Nielsenestimated that The Outdoor Channel had 28.0 million subscribers compared to25.6 million for the same period a year ago. The increase in advertisingrevenue for the three and nine months ended September 30, 2006 principallyreflects higher prices paid by third party programmers for advertising time inconnection with the airing of their programs, incremental advertising inventoryretained by us to sell and additional revenue generated by our technicalservices department for providing production services for third partyprogrammers. These factors contributing to the increase were offset somewhat byless demand for our long-form inventory that resulted in lower prices paid forinfomercial blocks. We expect softness in the long-form market to continue forthe foreseeable future. We expect to provide less technical services to thirdparties in 2007 than in 2006.

Nielsen revises itsuniverse estimate each month and for February 2007, Nielsen increased itsestimate to approximately 29.9 million subscribers. The growth of subscribersreported by our distributors is not as strong as that reported by Nielsen. Weare currently investigating the differences between our respective databases.There can be no assurances that Nielsen will continue to report growth of itsestimate of our subscribers and in fact might at some point even reportdeclines in our subscriber estimate. If that were to happen, we could suffer areduction in advertising revenue.

Subscriber fees for thethree months ended September 30, 2006 were $4,348,000, an increase of $502,000or 13.1% compared to $3,846,000 for the three months ended September 30, 2005.Subscriber fees for the nine months ended September 30, 2006 were $13,072,000,an increase of $1,690,000 or 14.8% compared to $11,382,000 for the nine monthsended September 30, 2005. The increase in subscriber fees for the period wasprimarily due to an increased number of paying subscribers both from newaffiliates and from existing distributors as well as contractual subscriber feerate increases with existing service providers carrying The Outdoor Channel.

We plan to accelerate oursubscriber growth utilizing various means including deployment of rate relieffor new and existing subscribers and payment of subscriber acquisition orlaunch support fees among other tactics. Such launch support fees arecapitalized and amortized over the period that the pay television distributoris required to carry the newly acquired TOC subscriber. To the extent revenueis associated with the incremental subscribers, the amortization is charged tooffset the related revenue. Any excess of launch support amortization over therelated subscriber fee revenue is charged to expense. As a result of a combinationof these tactics, we anticipate subscriber fee revenue, net will decreaseover the short-term future as we deploy this strategy.

Membership income for thethree months ended September 30, 2006 was $1,989,000, an increase of $88,000 or4.6% compared to $1,901,000 for the three months ended September 30, 2005.Membership income for the nine months ended September 30, 2006 was $4,128,000,an increase of $204,000 or 5.2% compared to $3,924,000 for the nine monthsended September 30, 2005. We believe that the recent surge in gold prices hasreflected itself in renewed interest by the consuming public that led to ourincreased activity in 2006. In the near term, we do not expect significantfluctuations in membership income year-to-year.

**Cost ofServices**

Our cost of servicesconsists 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, 2006 was$4,484,000, a decrease of $16,000 or 0.4%, compared to $4,500,000 for the threemonths ended September 30, 2005. Total cost of services for the nine monthsended September 30, 2006 was $11,877,000, an increase of $2,888,000 or 32.1%,compared to $8,989,000 for the nine months ended September 30, 2005. As apercentage of revenues, total cost of services was 34.0% and 39.5% in the threemonths ended September 30, 2006 and 2005, respectively. As a percentage ofrevenues, total cost of services was 33.5% and

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28.6% in the nine monthsended September 30, 2006 and 2005, respectively. The increase in cost ofservices for the nine months ended September 30, 2006, as further discussedbelow, relates principally to increased programming costs related to producingshows to air on our second network, which we did not have in the first half of2005. We expect cost of services to continue to increase in the future as weexpand our existing markets and in-house production to support our advertisingstrategy.

Programming expenses forthe three months ended September 30, 2006 were $2,095,000, a decrease of$220,000 or 9.5% compared to $2,315,000 for the three months ended September30, 2005. Programming expenses for the nine months ended September 30, 2006were $5,845,000, an increase of $2,478,000 or 73.6% compared to $3,367,000 forthe nine months ended September 30, 2005. The increase is principally a resultof our decision to launch our second channel, Outdoor Channel 2 HD, onJuly 1, 2005. We incurred minimal programming costs relative to thischannel in the first and second quarters of 2005 as most of such costs incurredat that time were charged to prepaid programming costs in anticipation of itslaunch in the second half of 2005. The decline in programming expenses for thethree months ended September 30, 2006 compared to the same period a year ago,relates to our decision to re-air programs on Outdoor Channel 2 HD for a longerperiod than originally planned.

Our policy is to chargecosts of specific show production to programming expense over the expected airingperiod beginning when the program first airs. The cost of programming isgenerally first recorded as prepaid programming costs and is then charged toprogramming expense based on the anticipated airing schedule. The anticipatedairing schedule is typically over 2 or 4 quarters that generally does notextend over more than 2 years. As the anticipated airing schedule changes, thetiming and amount of the charge to expense is prospectively adjustedaccordingly. At the time we determine a program is unlikely to air or re-air,we charge programming expense with the remaining associated cost recorded inprepaid programming. We are reassessing our programming direction and maycharge to expense prepaid programming costs in the fourth quarter that hadotherwise been planned to expense in the future as they air.

Programming expenses areexpected to increase in the fourth quarter of 2006 and then stabilize relativeto revenue over the near term as we pursue our strategy to produce, or acquire,more programming in-house as opposed to selling the airtime to third partyproducers. As a result, we believe we will control more of our programs’quality, advertising inventory, sponsorship opportunities, and the potential tore-package our programming for other uses such as video-on-demand,international licensing, and production of DVDs for retail distribution. Sincewe have limited experience in re-packaging our programming for these otheruses, we do not retain costs in prepaid programming to match with thesepotential revenue sources. When we develop a sufficient history, our policymight change.

Satellite transmissionfees for the three months ended September 30, 2006 were $667,000, an increaseof $50,000, or 8.1%, compared to $617,000 for the three months ended September30, 2005. Satellite transmission fees for the nine months ended September 30,2006 were $1,919,000, an increase of $53,000, or 2.8%, compared to $1,866,000for the nine months ended September 30, 2005. We do not expect significantfluctuations in satellite transmission fees other than marginal increasesreflecting contractual price increases over the foreseeable future.

Production and operationscosts for the three months ended September 30, 2006 were $1,120,000, anincrease of $337,000, or 43.0%, compared to $783,000 for the three months endedSeptember 30, 2005. Production and operations costs for the nine months endedSeptember 30, 2006 were $3,153,000, an increase of $644,000, or 25.7%, comparedto $2,509,000 for the nine months ended September 30, 2005. The increase incosts principally relates to increased personnel to support our growinginfrastructure as we produce more shows in-house and to support our newbroadcast facility.

Other direct costs forthe three months ended September 30, 2006 were $602,000, a decrease of$183,000, or 23.3%, compared to $785,000 for the three months ended September30, 2005. Other direct costs for the nine months ended September 30, 2006 were$960,000, a decrease of $287,000, or 23.0%, compared to $1,247,000 for the ninemonths ended September 30, 2005. The decrease is principally related to lessprinted material being sent to the members of our Membership Division includingone less magazine in 2006 than in 2005, and other related materials.

**OtherExpenses**

Other expenses consist ofthe cost of (1) advertising; (2) selling, general and administrativeexpenses; and (3) depreciation and amortization. In addition for the three andnine months ended September 30, 2006, other expenses include impairment ofamortizable intangible assets.

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Total other expenses forthe three months ended September 30, 2006 were $17,312,000, an increase of$10,545,000 or 155.8%, compared to $6,767,000 for the three months endedSeptember 30, 2005. Total other expenses for the nine months ended September30, 2006 were $33,706,000, an increase of $12,672,000 or 60.2%, compared to$21,034,000 for the nine months ended September 30, 2005. As a percentage ofrevenues, total other expenses were 131.4% and 59.3% in the three months endedSeptember 30, 2006 and 2005, respectively. As a percentage of revenues, totalother expenses were 95.3% and 66.8% for the nine months ended September 30,2006 and 2005, respectively. The increase in other expenses was due to a numberof factors including the write-off of $9,540,000 of the carrying value of MSOrelationships as a result of a changed distribution strategy adopted by theBoard in September 2006, adoption of SFAS 123R effective January 1, 2006resulting in additional compensation expense of $2,224,000, additionaldepreciation expense resulting from our broadcast facility which was placedinto service effective April 1, 2006, and other items more fully described asfollows.

Advertising expenses forthe three months ended September 30, 2006 were $1,654,000, a decrease of$258,000 or 13.5% compared to $1,912,000 for the three months ended September30, 2005. Advertising expenses for the nine months ended September 30, 2006were $5,403,000, a decrease of $265,000 or 4.7% compared to $5,668,000 for thenine months ended September 30, 2005. We reduced our spending on advertising inanticipation of launching a cross channel television advertising campaign,which began in late September of 2006. We believe that our advertising expenseswill substantially increase over the remainder of 2006 and over the foreseeablefuture as we continue to deploy tactics to increase our subscriber base and thenumber of viewers watching our programming. We are reassessing ourbranding strategy and may decide to change our logo. If we do decide to changeour logo, we will incur a number of charges related to premiums and other itemsthat would be abandoned in the event they are deemed to be of no further use.

Selling, general andadministrative expenses for the three months ended September 30, 2006 were$5,187,000, an increase of $1,025,000 or 24.6% compared to $4,162,000 for thethree months ended September 30, 2005. Selling, general and administrativeexpenses for the nine months ended September 30, 2006 were $16,269,000, anincrease of $2,918,000 or 21.9% compared to $13,351,000 for the nine monthsended September 30, 2005. As a percentage of revenues, selling, general andadministrative expenses were 39.4% and 36.5% in the three months endedSeptember 30, 2006 and 2005, respectively. As a percentage of revenues,selling, general and administrative expenses were 46.0% and 42.4% in the ninemonths ended September 30, 2006 and 2005, respectively. The increase wasprimarily attributable to the adoption of SFAS 123R as of January 1, 2006,which now requires us to charge the fair value of stock options we have issuedto our employees over the vesting period to compensation expense that we didnot have to record in 2005. The non-cash charge in the three and nine months endedSeptember 30, 2006 amounted to $753,000 and $2,224,000, respectively. Theremainder of the increase in selling, general and administrative fees relatedprimarily to increased research fees to support our selling efforts,subscriptions to support our programming department, accounting fees for theaudit of our evaluation of the effectiveness of our internal control overfinancial reporting in 2006 related to the 2005 fiscal year, legal feesincurred in the first quarter as a result of our ongoing efforts related to ourcarriage agreement negotiations and to other operating costs.

We anticipate thatselling, general and administrative costs will continue to increase over theforeseeable future. Such increases are expected to result from the amortizationof subscriber acquisition fees, also referred to as launch support fees, inexcess of the related subscriber revenue as well as other marketing,advertising and promotion expenses as we continue to work to gain increaseddistribution of our channels, as well as from increases in other corporateexpenses. We anticipate compensation costs in the three months ending December31, 2006 to increase, principally related to costs incurred with the transitionof our senior management team.

Impairment of intangibleassets for the three and nine months ended September 30, 2006 carried a chargeof $9,540,000 as a result of our quarterly impairment review of amortizableintangible assets and goodwill. During the three months ended September 30,2006, we engaged third party consultants to review our business practices andstrategy. Among the areas reviewed was our approach to grow our subscriber basethrough our relationships with our MSOs. Prior to this time our strategy was tofocus on incremental growth opportunities without impacting our existingsubscriber base. Our consultants completed a market survey and other steps theydeemed appropriate. In September of 2006, the consultants concluded, and theBoard of Directors accepted their conclusions, that a complete revision of theterms of the relationships was necessary to meet the subscriber growth goalsestablished by us.

Upon acceptance of thatconclusion and general strategy outlined by the consultants, we reviewed ourintangible assets for impairment. Among the components of the plan wassubscriber rate relief in some form for both existing subscriber relationshipsand the incremental (if any) subscribers that might be added to our subscriberbase as a result of the planned actions. Acknowledging the changed circumstances,we assessed fair value of our intangible assets and concluded that our MSOrelationships asset had become fully impaired. Accordingly we have charged toexpense, the carrying value of $9,540,000 during the three and nine monthsended September 30, 2006.

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We further concluded thatthe carrying values of our other intangible assets have not been impaired nordo we believe that the changed circumstances have affected the estimated livesof the amortizable intangible assets. However, these estimates will continue tobe reviewed during each reporting period to determine whether circumstancescontinue to support their estimated useful lives and fair value. Estimates aresubject to risks and uncertainties, which could cause actual results to differmaterially from those projected or implied in the determination of the fairvalue. A significant downward revision in the present value of estimated futurecash flows for a reporting unit could result in an impairment of goodwill orthe amortizable intangibles and a non-cash charge would be required. Such acharge could have a significant effect on our reported net earnings.

Depreciation andamortization for the three months ended September 30, 2006 were $931,000, anincrease of $238,000 or 34.3% compared to $693,000 for the three months endedSeptember 30, 2005. Depreciation and amortization for the nine months endedSeptember 30, 2006 were $2,494,000, an increase of $479,000 or 23.8% comparedto $2,015,000 for the nine months ended September 30, 2005. The increase in depreciationprimarily relates to our broadcast facility which was placed into service April1, 2006, and, to a lesser extent, amortization of launch support incurred in2006 for which there was not a matching expense in the first nine months of2005 as our first launch support transaction closed in the fourth quarter of2005.

**Income(Loss) from Operations**

Income (loss) fromoperations for the three months ended September 30, 2006 was a loss of$8,614,000 a decrease of $8,751,000 compared to income of $137,000 for thethree months ended September 30, 2005. Income (loss) from operations for thenine months ended September 30, 2006 was a loss of $10,185,000, a decrease of$11,641,000 compared to income of $1,456,000 for the nine months endedSeptember 30, 2005. As discussed above, the losses in the three and nine monthsended September 30, 2006 were driven by the impairment of intangible assetsresulting in a charge of $9,540,000 during the period. This loss was partiallyoffset by growth of our revenue while controlling cost of services principallythrough the re-airing of programs on our Outdoor Channel 2 HD. The decreaseexperienced over the nine months ended September 30, 2006 was compounded byincreased programming costs associated with the launch of our second channel,Outdoor Channel 2 HD, in the second half of 2005, increased compensationexpense resulting from the adoption of SFAS 123R, increased legal fees relatingto our carriage agreements and depreciation related to our newly openedbroadcast facility. As we continue to strive to grow our subscriber basewhich involves increased advertising expenditures, possible subscriber raterelief to our carriage partners and the ongoing and planned payment of launchsupport, we will continue to incur increased expenses such as programming,marketing and advertising that are unlikely to be immediately offset byrevenues. As a result, we anticipate our operating margins will be negativelyimpacted over the short-term future. There can be no assurance that thesestrategies will be successful.

**InterestExpense**

Interest expense for thethree months ended September 30, 2006 was $73,000. There was not acorresponding charge for the three months ended September 30, 2005. Interestexpense for the nine months ended September 30, 2006 was $228,000, an increaseof $226,000 compared to $2,000 for the nine months ended September 30, 2005.This is attributable to having obtained two term loans in November 2005 with anoriginal aggregate principal amount of $4,950,000 with effective fixed interestrates of 6.59% and 6.35%. We repaid these loans in October of 2006 and do notexpect to incur interest expense in the foreseeable future.

**OtherIncome, Net**

Other income, net for thethree months ended September 30, 2006 was $715,000, an increase of $319,000compared to $396,000 for the three months ended September 30, 2005. Otherincome, net for the nine months ended September 30, 2006 was $1,983,000, anincrease of $1,497,000 compared to $486,000 for the nine months ended September30, 2005. This improvement was primarily due to increased dividends andinterest earned on our increased investment in available-for-sale securitiesand cash and cash equivalent balances.

**Income(Loss) Before Income Taxes**

Income (loss) beforeincome taxes as a percentage of revenues was (60.5)% for the three months endedSeptember 30, 2006 compared to 4.7% for the three months ended September 30,2005. Income (loss) before income taxes as a percentage of revenues was (23.8)%for the nine months ended September 30, 2006 compared to 6.2% for the ninemonths ended September 30, 2005.

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The TOC segment’s income(loss) before income taxes was $(7,991,000) for the three months endedSeptember 30, 2006, a decrease of $8,265,000 from $274,000 for the three monthsended September 30, 2005. The TOC segment’s income (loss) before income taxeswas $(7,148,000) for the nine months ended September 30, 2006, a decrease of$9,882,000 from $2,734,000 for the nine months ended September 30, 2005.

TOC’s income (loss)before income taxes for the three months ended September 30, 2006 wassignificantly impacted by the $9,540,000 write-off of our MSO relationshipsintangible asset. Supporting TOC’s profitability was increased subscriber feerevenue from deeper penetration of our network with some of our carriers,increased prices charged for the service, increased advertising revenues as aresult of increased prices charged to our third party producers and toshort-form advertisers principally related to the increasing Nielsen universeestimate, savings in programming resulting from re-airing programs on OutdoorChannel 2 HD, lower advertising expense in the 2006 quarter as we prepare toshift more advertising dollars to cross channel promotion from print advertising.These increases in profitability were offset somewhat by increased compensationexpense as a result of the adoption of SFAS 123R (approximately $221,000).Further tempering the improvement, we placed our new broadcast facility intoservice April 1, 2006, which resulted in depreciation expense of approximately$200,000.

The decrease in the ninemonths ended September 30, 2006 was due mainly to the impairment of intangibleassets and increased programming costs as a result of having launched oursecond channel, Outdoor Channel 2 HD, at the beginning of the third quarter of2005. Related costs were therefore incurred in the first and second quarters of2006 that were not incurred in the same periods in 2005. Further, contributingto the decline was the adoption of SFAS 123R whereby the TOC segment recognized$611,000 of compensation expense, related to employee stock options in the ninemonths ended September 30, 2006 that it did not have in the same period in2005, and depreciation related to our new broadcast facility of approximately$400,000. Also, we incurred incremental expenses in subscriptions and researchto support our programming and selling efforts. Offsetting the increasedexpenses for the nine months were increases in subscriber fees and advertisingincome as noted above.

The Membership Divisionsegment’s income before income taxes decreased to $348,000 for the three monthsended September 30, 2006 compared to $428,000 for the three months endedSeptember 30, 2005. The Membership Division segment’s income before incometaxes increased to $346,000 for the nine months ended September 30, 2006compared to $314,000 for the nine months ended September 30, 2005. Expressed asa percentage of revenues, the Membership Division segment’s income beforeincome taxes decreased to 15.7% for the three months ended September 30, 2006compared to 20.4% for the three months ended September 30, 2005. Expressed as apercentage of revenues, the Membership Division segment’s income before incometaxes improved to 7.3% for the nine months ended September 30, 2006 compared to7.1% for the nine months ended September 30, 2005. Revenue increased $125,000or 6.0% and $293,000 or 6.6% in the three and nine months ended September 30,2006, respectively. The improvement is principally a result of a renewedinterest in gold prospecting, which we believe is partially driven by risinggold prices. Contributing to the improving segment margin for the nine-monthperiod was a slight decrease in personnel with the commensurate savings of payroll,payroll related expenses and travel costs. The decline in margin in the threemonth period and reducing the improvement in the nine month period is increasedcompensation incurred as a result of the adoption of SFAS 123R on January 1,2006 resulting in stock compensation expense not incurred in the same period of2005.

Corporate incurred a lossbefore income taxes for the three months ended September 30, 2006 amounting to$329,000, an increased loss of $160,000 compared to a loss of $169,000 for thethree months ended September 30, 2005. Corporate incurred a loss before incometaxes for the nine months ended September 30, 2006 amounting to $1,628,000, anincreased loss of $520,000 compared to a loss of $1,108,000 for the nine monthsended September 30, 2005. The expenses allocated to Corporate include:professional fees such as public relations, accounting and legal fees,amortization of intangibles, business insurance, board of directors fees andexpenses, and an allocation of corporate officers’ payroll and relatedexpenses. Effective January 1, 2006, we prospectively adopted SFAS 123R andCorporate incurred a charge to compensation expense related to stock options of$489,000 and $1,495,000 in the three and nine months ended September 30, 2006,respectively. Corporate also was allocated additional payroll costs reflectingthe increased time spent by executive officers on corporate matters instead ofoperating matters. Offsetting these increased costs was interest and dividendincome earned on our cash and investment in available-for-sale securities andless accounting fees in the third quarter compared to a year ago due to lessimpact from the implementation of Sarbanes-Oxley procedures.

**IncomeTax Provision (Benefit)**

Income tax provision(benefit) for the three months ended September 30, 2006 was a benefit of$2,404,000, a change of $2,689,000 as compared to a provision of  $285,000 for the three months ended September30, 2005. Income tax provision

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(benefit) for the ninemonths ended September 30, 2006 was a benefit of $3,007,000, a change of$3,885,000 as compared to a provision of $878,000 for the nine months endedSeptember 30, 2005. The decrease was principally due to the Company incurring aloss in the first nine months of 2006 as compared to income generated in thefirst nine months of 2005. The effective income tax benefit for the three andnine months ended September 30, 2006 is 30.2% and 35.7%, respectively. For thethree and nine months ended September 30, 2005, the effective income tax ratewas approximately 53.5% and 45.3%, respectively. Interim tax provisions andbenefits are determined using an estimate of the annual effective tax rate.Because of our write-off of the balance of our MSO relationships intangibleassets, we have changed our estimate from a profitable fiscal year to a loss.This has caused us to make a significant change in the estimated income taxprovision rates.

Our estimated annualeffective tax rate is affected by permanent differences between income (loss)before taxes for financial reporting purposes and taxable income. Our mostsignificant permanent difference, and the principal reason why our estimatedeffective income tax rate is substantially greater than the statutory Federalincome tax rate, relates to the portion of our compensation expense recognizedfor financial statement reporting purposes that is attributable to the non-cashcharges recorded under SFAS 123R for the fair value of qualified incentivestock options, or ISOs, granted to employees which are generally not deductiblefor tax reporting purposes. We recognized non-cash charges to compensationexpense of $190 and $533 in the three and nine months ended September 30, 2006,respectively, related to ISOs under SFAS 123R.

**NetIncome (Loss)**

Net income (loss) for thethree months ended September 30, 2006 was a net loss of $5,568,000, a decreaseof $5,816,000 compared to net income of $248,000 for the three months endedSeptember 30, 2005. Net income (loss) for the nine months ended September 30,2006 was a net loss of $5,423,000, a decrease of $6,485,000 compared to a netincome of $1,062,000 for the nine months ended September 30, 2005. Thedecreases were due to the reasons stated above.

**Liquidityand Capital Resources**

We generated $3,599,000of cash in our operating activities in the nine months ended September 30,2006, compared to cash used in operating activities of $33,000 in the ninemonths ended September 30, 2005 and had a cash and cash equivalent balance of$20,595,000 at September 30, 2006, an increase of $2,319,000 from the balanceof $18,276,000 at December 31, 2005. We also had short-term investmentsclassified as available-for-sale securities of $38,737,000 at September 30,2006, a decrease of $93,000 from the balance of $38,830,000 at December 31,2005. The investments at September 30, 2006 were comprised principally ofauction rate securities ($37,850,000) with interest rates that generally resetevery 28 days. The auction rate securities have long-term maturity datesand provide us with enhanced yields. Various equity securities ($887,000) makeup the remainder of the September 30, 2006 balance. We believe we have theability to quickly liquidate the auction rate securities at their original costalthough there is no guaranty we would be able to do so. Net working capitalincreased to $66,823,000 at September 30, 2006, compared to $66,183,000 atDecember 31, 2005.

Net cash used ininvesting activities was $2,238,000 in the nine months ended September 30, 2006compared to $29,259,000 for the nine months ended September 30, 2005. Thedecrease in cash used in investing activities was related principally to thenet difference of sales and purchases of short-term auction rate securities.Additionally contributing to the increase in cash provided by investingactivities was a decrease in capital expenditures in the first nine months of2006 compared to the same time period in 2005. In the first half of 2005 weacquired equipment related to our HD signal and production in anticipation ofthe launch of our second channel on July 1, 2005. In 2005, we also purchased anumber of vehicles we use in support of affiliate sales and our annual Alaskatrip. After we reassessed our facilities requirements including floor spaceutilization, master control equipment, uplink equipment, and other needs, weannounced our intention to purchase a 28,000 square foot building in Temecula,California for approximately $2.6 million, on February 22, 2005. Wecompleted the purchase during the third quarter of 2005. We have substantiallycompleted the building improvements and placed the facility into service onApril 1, 2006. Additional capital expenditures were for fixed assetreplacements.

Cash provided byfinancing activities was $958,000 in the nine months ended September 30, 2006compared to $45,962,000 for the nine months ended September 30, 2005. The cashprovided by financing activities in the nine months ended September 30, 2006was primarily from the proceeds from the sale of shares upon the exercise ofstock options and tax benefits from the exercise of stock options in excess ofrecognized expense offset by principal payments on outstanding debt. The cashprovided by financing activities in 2005 was from the completion, on July 1,2005, of a public offering of our common stock, whereby we sold 3,500,000shares of common stock and received net proceeds of $43,350,000. In additioncertain selling stockholders exercised options to buy 1,688,000 shares ofcommon stock, which were resold in the public offering. On July 13, 2005, theunderwriters exercised their over-allotment option granted by certain sellingstockholders and

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purchased an additional442,000 shares of common stock. The shares sold by the sellingstockholders were purchased immediately before the sale through the exercise ofoptions they held to buy common shares from the Company. The Company received$2,168,000 in the aggregate from the exercise of these options. The Companyalso received cash proceeds of approximately $463,000 from the exercise ofother options for the purchase of 211,000 shares of common stock. In accordancewith SFAS 123R, we have presented on a prospective basis the tax benefits fromexercise of stock options in excess of recognized expense of $711,000 as a cashflow from financing activities in the accompanying unaudited condensedconsolidated statement of cash flows for the nine months ended September 30,2006, rather than as a cash flow from operating activities, as was prescribedunder accounting rules applicable through December 31, 2005. Tax benefits fromthe exercise of stock options in excess of recognized expense of $659,000 hasbeen presented as a cash flow from operating activities for the nine monthsended September 30, 2005.

On November 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, 2007and increasing the total amount, which can be drawn upon under therevolver from $5,000,000 to $8,000,000. The revolver provides that theinterest rate shall be LIBOR plus 1.25%. The revolver is collateralized bysubstantially all of our assets. This credit facility contains customaryfinancial and other covenants and restrictions, as amended on November 2,2005, including a change of control provision and certain minimum profitabilitymetrics (which, as amended, exclude the effects of non-cash stock basedemployee compensation expense) measured at each quarter end. As of September30, 2006 and as of the date of this report, we did not have any amountsoutstanding under this credit facility.

On November 2, 2005,we obtained a $1,950,000 mortgage loan from the Bank on our recently purchasedbuilding that houses our broadcast facility located in Temecula, Californiawhich has a 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 revolver. It also contains customary financial and othercovenants and restrictions including a change of control provision and certainminimum profitability metrics (which, as amended, exclude the effects ofnon-cash stock based employee compensation expense) measured at each quarterend. 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 loan at 6.59%.

On November 2, 2005,we obtained a $3,000,000, five-year fully amortizing term loan. This loancarries a variable interest rate of LIBOR plus 1.35%. This term loan is securedby the same assets as the revolver and contains customary financial and othercovenants and restrictions including a change of control provision and certainminimum profitability metrics (which, as amended, exclude the effects ofnon-cash stock based employee compensation expense) measured at each quarterend. 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%. This loan wasobtained to help finance the equipment and leasehold improvements bought inrelation the build out of our broadcast facility including delivery of our HDsignal and production.

Because we did not supplyour financial statements for the three and nine months ended September 30,2006, we were in violation as of that date of a covenant relating to our twoterm loans and our revolving line-of-credit facility. Accordingly, these loansare callable by the Bank and we have classified all outstanding debt as currentliabilities. On October 19, 2006, weretired the two long-term loans, which at September 30, 2006 had an aggregatebalance of $4,368,000 plus accrued interest thereon. We are seeking a covenantviolation waiver as it relates to our line-of-credit but no assurances may begiven that such waiver will be granted.

As of September 30, 2006,we had sufficient cash on hand and generated sufficient cash flow fromoperations to meet our short-term cash flow requirements including the paymentof unpaid taxes to those states in which we have sufficient nexus but have notpreviously apportioned income. Management believes that our anticipated cashflows from operating activity along with our existing cash resources includingcash on-hand available-for-sale securities will be sufficient to fund ouroperations at current levels and anticipated capital requirements through atleast October 1, 2007. To the extent that such amounts are insufficient tofinance our growth and working capital requirements or our desire to expandoperations beyond current levels, we could seek additional financing. There canbe no assurance that equity or debt financing will be available if needed or,if available, will be on terms favorable to us.

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**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK.**

At September 30, 2006 andDecember 31, 2005, our investment portfolio included fixed-income and equitysecurities of $38,737,000 and $38,830,000, respectively. These securities aresubject to interest rate risk and will decline in value if interest ratesincrease. However, due to the short duration of our investment portfolio, animmediate 10% change in interest rates would have no material impact on ourfinancial condition, operating results or cash flows. Declines in interestrates over time will, however, reduce our interest income while increases ininterest rates over time may increase our interest expense.

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

As of September 30, 2006,we had aggregate outstanding borrowings of approximately $4,368,000. We retiredthis debt in October 2006 and thus as of the date of this report we do not haveoutstanding debt balances. 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.

**ITEM4.  CONTROLS AND PROCEDURES.**

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

Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of our disclosure controls and procedures as ofSeptember 30, 2006, the end of the period covered by this report, and concludedthat our disclosure controls and procedures were effective as of September 30,2006.

*Changesin internal control over financial reporting.* During thethree months ended September 30, 2006, there was no change in our internalcontrol over financial reporting that materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

**PART II—OTHER INFORMATION**

**ITEM 1.****                                                                     LegalProceedings.**

From time to time, we maybe involved in litigation relating to claims arising out of our operations. Asof the date of this report, we are not a party to any legal proceedings thatare expected, individually or in the aggregate, to have a material adverseeffect on our business, financial condition or operating results.

**ITEM 1A.****                                                            RiskFactors.**

Our business andoperations are subject to a number of risks and uncertainties, and thefollowing list should not be considered to be a definitive list of all factorsthat may affect our business, financial condition and future operatingresults and should be read in conjunction with the risks and uncertainties,including risk factors, contained in our other filings with the Securities andExchange Commission. Any forward-looking statements made by us are made withthe intention of obtaining the benefits of the “safe harbor” provisions of theSecurities Litigation Reform Act and a number of factors, including, butnot limited to those discussed below, could cause our actual results andexperiences to differ materially from the anticipated results or expectationsexpressed in any forward-looking statements.

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**We donot control the methodology used by Nielsen to estimate our subscriber base ortelevision ratings, and changes, or inaccuracies, in such estimates could causeour advertising revenue to decrease.**

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

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

The success of TheOutdoor Channel is dependent, in part, on our ability to enter into newcarriage agreements and maintain existing agreements or arrangements with, andcarriage by, satellite systems and multiple system operators’, which we referto as MSOs, affiliated regional or individual cable systems. Although wecurrently have arrangements or agreements with, and are being carried by, allthe largest MSOs and satellite service providers, having such relationship oragreement with a MSO does not ensure that an MSOs affiliated regional orindividual cable systems will carry or continue to carry The Outdoor Channel orthat the satellite MSO will carry our channel. Under our current contracts andarrangements, The Outdoor Channel typically offers satellite MSOs and MSOs,along with their cable affiliates, the right to broadcast The Outdoor Channelto their subscribers, but such contracts or arrangements do not require thatThe Outdoor Channel be offered to all subscribers of, or any tiers offered by,the MSO. Because certain carriage arrangements do not specify on which servicelevels The Outdoor Channel is carried, such as analog versus basic digital,expanded digital or specialty tiers, and in which geographic markets TheOutdoor Channel will be offered, we have no assurance that The Outdoor Channelwill be carried and available to viewers of any particular MSO or to allsatellite subscribers. In addition, if we are unable to fully comply with theterms of such agreements, the service providers could discontinue carrying TheOutdoor Channel. Lastly, we are currently not under any long-term contract withsome of the service providers that are currently distributing our channel.  Our distribution agreements with six of themajor MSOs, accounting for approximately 59% of our subscriber base as ofAugust 2006, will have terminated as of May 1, 2007. If we are unable to renewthese distribution agreements, we could lose a substantial number ofsubscribers. If cable and satellite service providers discontinue or refrainfrom carrying The Outdoor Channel, or decide to not renew our distribution agreementwith them, this could reduce the number of viewers and harm our operatingresults.

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

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

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

Although wecurrently have plans to increase our marketing and sales efforts in an attemptto 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,it may be necessary to reduce our subscriber fees in order to grow oursubscriber base. In addition, if we make any upfront cash payments to serviceproviders for an increase in our subscriber base, our cash flow could beadversely impacted, and we may incur negative cash flow for some time. Inaddition, if we were to make such upfront cash payments or provide otherincentives to service providers, we expect to amortize such amounts ratablyover the term of the agreements with the service providers. However, if aservice provider terminates any such agreement prior to the expiration of theterm of such agreement, then under current accounting rules wemay incur a large expense in that quarter in which the agreement isterminated equal to the remaining un-amortized amounts and our operatingresults could accordingly be adversely affected.

**If, inour attempt to increase our number of subscribers, we structure favorable termsor incentives with one service provider in a way that would require us to offerthe same terms or incentives to all other service providers, our operatingresults may be harmed.**

Many of ourexisting 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 containsimilar “most favored nation” clauses. If, in our attempt to increase ournumber of subscribers, we reduce our subscriber fees or structure launchsupport fees or other incentives to effectively offer more favorable terms toany service provider, these clauses may require us to reduce the effectivesubscriber fee rates that we receive from other service providers, and thiscould negatively affect our operating results.

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

We do not controlthe channels with which our channels are packaged by cable or satellite serviceproviders. The placement by a cable or satellite service provider of ourchannels in unpopular program package could reduce or impair the growth of thenumber of our viewers and subscriber fees paid by service providers to us. Inaddition, we do not set the prices charged by cable and satellite serviceproviders to their subscribers when our channels are packaged with othertelevision channels. The prices for the channel packages in which our channelsare bundled may be set too high to appeal to individuals who mightotherwise be interested in our networks. Further, if our channels are bundledby service providers with networks that do not appeal to our viewers or ismoved to packages with fewer subscribers, we may lose viewers. Thesefactors may reduce the number of viewers of our channel, which in turnwould reduce our subscriber fees and advertising revenue.

**Consolidation among cable andsatellite MSOs may harm our business.**

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

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

We have undergonerapid and significant growth in revenue and subscribers over the last severalyears, and our strategic objectives include not only further developing andenhancing our existing business, but also expanding our in-house productioncapabilities. There are risks inherent in rapid growth and the pursuit of newstrategic objectives, including among others: investment and development ofappropriate infrastructure, such as facilities, information technology systemsand other equipment to support a growing organization; hiring and training newmanagement, sales and marketing, production, and other personnel and thediversion of management’s attention and resources from critical areas andexisting projects; and implementing systems and procedures to successfullymanage growth, such as monitoring operations, controlling costs, 

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maintaining effectivequality and service, and implementing and maintaining adequate internalcontrols. Although we have recently moved into our new Temecula, Californiaproduction facility, we expect that additional expenditures will be required aswe continue to upgrade our facilities. We cannot assure you that we will beable to successfully manage our growth, that future growth will occur or thatwe will be successful in managing our business objectives. We can provide noassurance that our profitability or revenues will not be harmed by futurechanges in our business. Our operating results could be harmed if such growthdoes not occur, or is slower or less profitable than projected.

**We maynot be able to secure national advertising accounts, and as a result, ourrevenues and profitability may be negatively impacted.**

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

**We may be required to pay additionalstate income taxes for past years.**

We are required topay income taxes in various states in which we conduct our business operations.In the past, we had paid state income taxes only in California (where ourheadquarters is located) and had not paid income taxes to any other state. Wehave determined that we may have state income tax liability in the eightstates other than California in which our gold prospecting properties arelocated and recently  filed income taxreturns in those states for past years. In general, we believe any income taxespaid to states other than California will be partially offset by a refund fromthe State of California for income tax amounts we have overpaid to Californiain past years. We may, however, be limited as to the number of years for whichwe can receive a refund from California for taxes previously paid, and wecannot predict when we would receive any such refund. In addition, because eachstate to which we may owe outstanding income taxes has a differentmethodology for calculating tax owed and a different tax rate, our aggregatestate income tax liability could be greater than what we have paid toCalifornia in prior years. Our aggregate state income tax liability, on whichwe may owe accrued interest and penalties, could be material to ourresults of operations

**Expensesrelating to programming costs are generally increasing and a number of factorscan cause cost overruns and delays, and our operating results may beadversely impacted if we are not able to successfully recover the costs ofdeveloping and acquiring new programming.**

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

**Our operatingresults may be negatively impacted if our Outdoor Channel 2 HD network isnot as successful as we anticipate.**

In July 2005,we launched an all new, all native high definition network called OutdoorChannel 2 HD. There can be no assurance that Outdoor Channel 2 HD will notincur unexpected costs and expenses. Distribution of Outdoor Channel 2 HD willdepend on successfully executing new or amended distribution agreements withcable and satellite service providers. There can be no assurance that suchagreements can be made, and if they are made, that they will be on termsfavorable to us or that they will not require us to grant periods of freeservice and/or marketing commitments to encourage carriage. The public may notadopt HD consumer television equipment in numbers sufficient to allow profitsfor an advertiser-supported 

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service. Bandwidthconstraints may keep Outdoor Channel 2 HD from achieving sufficientdistribution from service providers to reach profitability. Competition forquality HD content may increase the costs of programming for OutdoorChannel 2 HD beyond our control or expectations. All of these factors, combinedor separately, could increase costs or restrain revenue and adversely affectour operating results.

**Ouroperating results may vary significantly, and historical comparisons ofour operating results are not necessarily meaningful and should not be reliedupon as an indicator of future performance.**

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

·                  carriagedecisions of cable and satellite service providers;

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

·                  changesin the growth rate of cable and satellite subscribers;

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

·                  seasonaltrends in viewer interests and activities;

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

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

·                  ourability to react quickly to changing consumer trends;

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

·                  changingregulatory requirements.

Due to theforegoing and other factors, many of which are beyond our control, our revenueand operating results vary from period to period and are difficult to forecast.Our expense levels are based in significant part on our expectations offuture 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 ourexpenses would remain relatively fixed and would not decrease correspondingly.

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

We prepare ourfinancial statements to conform to generally accepted accountingprinciples (“GAAP”), which are subject to interpretations by the FinancialAccounting Standards Board, the Securities and Exchange Commission and variousbodies formed to interpret and create appropriate accounting policies. A changein those policies can have a significant effect on our reported results andmay even affect our reporting of transactions completed before a change isannounced. Accounting policies affecting many other aspects of our business,including rules relating to business combinations and employee stockoption grants, have recently been revised or are under review. Changes to thoserules or the questioning of current practices may adversely affectour reported financial results or the way we conduct our business. In addition,our preparation of financial statements in accordance with GAAP requires thatwe make estimates, judgments and assumptions that affect the recorded amountsof assets and liabilities, disclosure of those assets and liabilities at thedate of the financial statements and the recorded amounts of revenue andexpenses during the reporting period. A change in the facts and circumstancessurrounding those estimates, including the interpretation of the terms andconditions of our contractual obligations, could result in a change to ourestimates and could impact our operating results.

**If wefail to develop and distribute popular programs, our viewership would likelydecline, which could cause advertising and subscriber fee revenues to decrease.**

Our operatingresults depend significantly upon the generation of advertising revenue. Ourability to generate advertising revenues is largely dependent on our Nielsenratings, which estimates the number of viewers of The Outdoor Channel, and thisdirectly impacts the level of interest of advertisers and rates we are able tocharge. If we fail to program popular shows that maintain or increase ourcurrent number of viewers, our Nielsen ratings could decline, which in turncould cause our advertising revenue to decline and adversely impact ourbusiness and operating results. In addition, if we fail to 

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program popular shows thenumber of subscribers to our channel may also decrease, resulting in adecrease in our subscriber fee and advertising revenue.

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

We compete forviewers with other pay cable television and broadcast networks, includingVersus (formerly OLN), Spike TV, ESPN2 and others. If these or othercompetitors, many of which have substantially greater financial and operationalresources than us, significantly expand their operations with respect tooutdoor-related programming or their market penetration, our business could beharmed. In addition, certain technological advances, including the deploymentof fiber optic cable, which are already substantially underway, are expected toallow cable systems to greatly expand their current channel capacity, whichcould dilute our market share and lead to increased competition for viewersfrom existing or new programming services.

We also competewith television network companies that generally have large subscriber basesand significant investments in, and access to, competitive programming sources.In some cases, we compete with cable and satellite service providers that havethe financial and technological resources to create and distribute their owntelevision networks, such as Versus, which is owned and operated by Comcast. Inorder to compete for subscribers, we may pay either launch fees ormarketing support or both for carriage in certain circumstances in the future,which may require significant cash expenditures, harming our operatingresults and margins. We may also issue our securities from time to time inconnection with our attempts for broader distribution of The Outdoor Channeland the number of such securities could be significant. We compete foradvertising sales with other pay television networks, broadcast networks, andlocal over-the-air television stations. We also compete for advertising saleswith satellite and broadcast radio and the print media. We compete with othercable television networks for subscriber fees from, and affiliation agreementswith, 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 companiesmay distribute programming that is competitive with the programmingprovided by us to cable operators.

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

The Sarbanes-OxleyAct of 2002 required us to change or supplement some of our corporategovernance and securities disclosure and compliance practices. The Securitiesand Exchange Commission and NASDAQ have revised, and continue to revise, theirregulations and listing standards. These developments have increased, andmay continue to increase, our legal compliance and financial reportingcosts.

**Wemay not be able to attract new, or retain existing, members in our cluborganizations, and as a result our revenues and profitability may beharmed.**

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

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

Our ability todeliver programming to service providers, and their subscribers, is dependentupon the satellite equipment and software that we use to work properly todistribute our programming. If this satellite system fails, or a signal with ahigher priority replaces our signal, which is determined by our agreement withthe owner of the satellite, we may not be able to deliver programming toour cable and satellite service provider customers and their subscribers withinthe time periods advertised. We have negotiated for back-up capability with oursatellite provider on an in-orbit spare satellite, which provides us carriageon the back-up satellite in the event that catastrophic failure occurs on theprimary satellite. Our contract 

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provides that our mainsignal is subject to preemption and until the back-up satellite is in position,we could lose our signal for a period of time. A loss of our signal could harmour reputation and reduce our revenues and profits.

**Natural disasters and other eventsbeyond our control could interrupt our signal.**

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

**Seasonal increases or decreases inadvertising revenue may negatively affect our business.**

Seasonal trendsare likely to affect our viewership, and consequently, could cause fluctuationsin our advertising revenues. Our business reflects seasonal patterns ofadvertising expenditures, which is common in the broadcast industry. For thisreason, fluctuations in our revenues and net income could occur from period toperiod depending upon the availability of advertising revenues. Due, in part,to these seasonality factors, the results of any one quarter are notnecessarily indicative of results for future periods, and our cash flows maynot correlate with revenue recognition.

**We maybe unable to access capital on acceptable terms to fund our future operations.**

Our future capitalrequirements will depend on numerous factors, including the success of ourefforts to increase advertising revenues, the amount of resources devoted toincreasing distribution of The Outdoor Channel, and acquiring and producingprogramming for The Outdoor Channel. As a result, we could be required to raisesubstantial additional capital through debt or equity financing. To the extentthat we raise additional capital through the sale of equity or convertible debtsecurities, the issuance of such securities could result in dilution toexisting stockholders. If we raise additional capital through the issuance ofdebt securities, the debt securities would have rights, preferences andprivileges senior to holders of common stock and the terms of such debt couldimpose restrictions on our operations. We cannot assure you that additionalcapital, if required, will be available on acceptable terms, or at all. If weare unable to obtain additional capital, our current business strategies andplans and ability to fund future operations may be harmed.

**We may not be able to attract andretain key personnel.**

Our successdepends 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 Chief Executive Officerand the Co-President of The Outdoor Channel, Inc., Roger L. Werner, Jr.,our President and the CEO and Co-President of The Outdoor Channel, Inc., ThomasH. Massie, our Executive Vice President, William A. Owen, our Chief FinancialOfficer, or Thomas E. Hornish, our General Counsel, could adversely impact ourbusiness. To attract and retain qualified personnel, we may be required togrant large option or other stock-based incentive awards, which may behighly dilutive to existing stockholders. We may also be required to paysignificant base salaries and cash bonuses to attract and retain theseindividuals, which payments could harm our operating results. If we are notable to attract and retain the necessary personnel we may not be able toimplement our business plan.

**New video recording technologiesmay reduce our advertising revenue.**

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

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

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

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

Currentlyapproximately 66% of programs we air on The Outdoor Channel are provided bythird-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 businessand our ability to compete could be harmed.

**We mayface intellectual property infringement claims that could be time-consuming,costly to defend and result in our loss of significant rights.**

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

**Some ofour existing stockholders can exert control over us and may not makedecisions that are in the best interests of all stockholders.**

Our currentofficers, directors and greater than 5% stockholders together currently controlgreater than 50% 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 ourcompany, even when a change may be in the best interests of stockholders.In addition, the interests of these stockholders may not always coincidewith our interests as a company or the interests of other stockholders.Accordingly, these stockholders could cause us to enter into transactions oragreements that you would not approve.

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

Our stock hashistorically been and continues to be traded at relatively low volumes andtherefore has been subject to price volatility. Various factors contribute tothe volatility of our stock price, including, for example, low trading volume,quarterly variations in our financial results, increased competition andgeneral economic and market conditions. While we cannot predict the individualeffect that these factors may have on the market price of our commonstock, these factors, either individually or in the aggregate, could result insignificant volatility in our stock price during any given period of time.There can be no assurance that a more active trading market in our stock willdevelop. As a result, relatively small trades may have a significant impact onthe price of our common stock. Moreover, companies that have experiencedvolatility in the market 

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price of their stockoften are subject to securities class action litigation. If we were thesubject of such litigation, it could result in substantial costs and divertmanagement’s attention and resources.

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

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

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

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

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

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

·                  require thatstockholder actions must be effected at a duly called stockholder meeting andprohibit stockholder action by written consent;

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

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

·                  require a 662/3% stockholder vote to amend our certificate of incorporation or bylaws.

In addition,because we are incorporated in Delaware, we are governed by the provisions ofSection 203 of the Delaware General Corporation Law, which may, unless certaincriteria are met, prohibit large stockholders, in particular those owning 15%or more of our outstanding voting stock, from merging or combining with us fora prescribed period of time.

**Technologiesin the cable and satellite television industry are constantly changing, and ourfailure to acquireor maintain state-of-the-art technology may harm our business andcompetitive advantage.**

The technologiesused in the cable and satellite television industry are rapidly evolving. Manytechnologies and technological standards are in development and have thepotential to significantly transform the ways in which programming iscreated and transmitted. In addition, under some of our MSO contracts, wemay be 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 face significant new challenges due to technological advances adoptedby competitors, which in turn could result in harming our business andoperating results.

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

The cabletelevision industry is subject to extensive legislation and regulation at thefederal and local levels, and, in some instances, at the state level, and manyaspects of such regulation are currently the subject of judicial proceedingsand 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.

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The CableTelevision Consumer Protection and Competition Act of 1992, to which we referas the 1992 Cable Act, includes provisions that preclude cable operatorsaffiliated with video programmers from favoring their programmers overcompetitors. The 1992 Cable Act also precludes such programmers from sellingtheir programming exclusively to cable operators. These provisions potentiallybenefit independent programmers such as us by limiting the ability of cableoperators affiliated with programmers from carrying only programming in whichthey have an ownership interest and from offering exclusive programmingarrangements. However, the United States Court of Appeals for the District ofColumbia Circuit vacated the FCC Rule limiting the carriage of affiliatedprogrammers by cable operators. Although the FCC issued further notices ofproposed rulemaking in 2001 and 2005 addressing this issue, it has not adoptednew rules. The exclusivity provision is scheduled to expire inOctober 2007 unless the FCC then determines that a further extension isnecessary to protect competition and diversity. If these provisions of the 1992Cable Act expire or become no longer applicable, and if we are still able toincrease the number of subscribers to our channel, then the costs associatedwith doing so may increase significantly.

Regulatorycarriage requirements also could reduce the number of channels available tocarry The Outdoor Channel. The 1992 Cable Act granted television broadcasters achoice of must-carry rights or retransmission consent rights. Therules adopted by the FCC generally provided for mandatory carriage bycable systems of all local full-power commercial television broadcast signalsselecting must-carry rights and, depending on a cable system’s channel capacity,non-commercial television broadcast signals. Such statutorily mandated carriageof broadcast stations, coupled with the provisions of the Cable CommunicationsPolicy Act of 1984, which require cable television systems with 36 or more “activated”channels to reserve a percentage of such channels for commercial use byunaffiliated third parties and permit franchise authorities to require thecable operator to provide channel capacity, equipment and facilities forpublic, educational and government access channels, could reduce carriage ofThe Outdoor Channel by limiting its carriage in cable systems with limitedchannel capacity. In 2001, the FCC adopted rules relating to the cablecarriage of digital television signals. Among other things, the rules clarifythat a digital-only television station can assert a right to analog or digitalcarriage on a cable system. The FCC initiated a further proceeding to determinewhether television broadcasters may assert the rights to carriage of bothanalog and digital signals during the transition to digital television and tocarriage of all digital signals. On February 10, 2005, the FCC decidedthat television broadcasters do not have such additional must-carry rights.Broadcasters formally have requested that the FCC reconsider this decision andare seeking legislative change to require such carriage. On June 21, 2006, thismatter was scheduled to be heard by the FCC at its open meeting, but wasremoved from the agenda without discussion. The imposition of such additionalmust-carry regulation, in conjunction with any limited cable system channelcapacity, would increase the likelihood that cable operators may be forcedto drop some cable programming services and could reduce carriage of TheOutdoor Channel.

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

If we distributetelevision programming through other types of media, we may be required toobtain federal, state and local licenses or other authorizations to offer suchservices. We may not be able to obtain licenses or authorizations in atimely manner, or at all, or conditions could be imposed upon licenses andauthorizations that may not be favorable to us.

In the future, anyincreased regulation of rates, and in particular the rates for basic cable services,could, among other things, put downward pressure on the rates charged by cableprogramming services, and affect the ability or willingness of cable systemoperators to retain or to add The Outdoor Channel network on their cablesystems.

In addition,government-mandated or increased tiering of a limited number of channels bycable system operators could impact our viewership levels if The OutdoorChannel is moved to such a tier. 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 channels that he or she desired instead ofthe larger bundles of different channels as is typical today. The Media Bureau’sreport on November 18, 2004 observed that such packaging would increasethe cost of programming to consumers and injure programmers. OnFebruary 9, 2006, the Media Bureau released a further report which statedthat the 2004 report was flawed and which concluded that a-la-carte sales couldbe in the best interests of consumers. Although the FCC cannot mandatea-la-carte sales, its endorsement of the concept could encourage Congress toconsider proposals to mandate a-ala-carte sales or otherwise seek to imposegreater regulatory controls on how cable programming is 

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sold. For example, onJuly 20, 2006, a bill was introduced in the House of Representatives (the “FamilyChoice Act”) that would require the FCC to regulate pay-TV providers forindecent content, which, under one option, would require offering consumers afamily tier that may or may not include services such as The Outdoor Channel.If, in response to any statue enacted by Congress, or any rate or othergovernment regulation, cable system operators implement channel offerings thatrequire subscribers to affirmatively choose to pay a separate fee to receiveThe Outdoor Channel, either by itself or in combination with a limited numberof other channels, the number of viewers for The Outdoor Channel could bereduced.

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

**We mustcomply with many local, states, federal and environmental regulations, forwhich compliance may be costly and may expose us to substantial penalties.**

Our recreationaloutdoor activity entities, GPAA and Lost Dutchman’s, share the general risks ofall outdoor recreational activities such as personal injury, environmentalcompliance and real estate and environmental regulation. In addition to thegeneral cable television industry regulations, we are also subject to variouslocal, state and federal regulations, including, without limitation,regulations promulgated by federal and state environmental, health and laboragencies. Our prospecting clubs are subject to various local, state and federalstatutes, ordinances, rules and regulations concerning zoning, developmentand other utilization of their properties. We cannot predict what impactcurrent or future regulations may have on these businesses. In addition,failure to maintain required permits or licenses, or to comply with applicable regulations,could result in substantial fines or costs or revocation of our operatinglicenses, which would have a material adverse effect on our business andoperating results.

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

A significantportion of our assets consists of goodwill. In accordance with Statement of Financial Accounting StandardsNo. 142, “Goodwill and Other Intangible Assets”, or SFAS 142, we testgoodwill for impairment during the fourth quarter of each year, and on aninterim date if factors or indicators become apparent that would require aninterim test. A significant downward revision in the present value of estimatedfuture cash flows for a reporting unit could result in an impairment ofgoodwill under SFAS 142 and a non-cash charge would be required. Such a chargecould have a significant effect on our reported net earnings.

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

We are authorizedto issue up to 25,000,000 shares of preferred stock. The issuance of anypreferred stock could adversely affect the rights of the holders of shares of ourcommon stock, and therefore reduce the value of such shares. No assurance canbe given that we will not issue shares of preferred stock in the future.

**We do not expect to pay dividends inthe foreseeable future.**

We do notanticipate paying cash dividends on our common stock in the foreseeable future.Any payment of cash dividends will also depend on our financial condition,operating results, capital requirements and other factors and will be at thediscretion of our board of directors. Furthermore, at the time of any potentialpayment of a cash dividend we may subject to contractual restrictions on,or prohibitions against, the payment of dividends.

**ITEM 2.****                                                                     UnregisteredSales of Equity Securities and Use of Proceeds.**

None.

**ITEM 3.****                                                                     DefaultsUpon Senior Securities.**

None.

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

None

**ITEM 5.****                                                                     OtherInformation.**

**Entry into a Material DefinitiveAgreement**

On February 14, 2007, theCompany entered into a Change of Control Severance Agreement withMr. William A. Owen, Executive Vice President and Chief FinancialOfficer, and Thomas E. Hornish, Executive Vice President and ChiefOperating Officer, providing that if after a change of control of the Companysuch executive resigns for good reason or is involuntarily terminated withoutcause, then in exchange for a full release of claims such executive shallreceive certain benefits including twelve months of base salary and an amountequal to the sum of (A) an amount equal to the executive’s annualincentive at the target level applicable during the year of executive’stermination, and (B) an additional amount equal to the current year’sannual incentive pro-rated to the date of termination. A form of such agreementis filed with this report as Exhibit 10.1.

**ITEM 6.****                                                                     Exhibits.**
| Exhibit    | ** ** | ** **                                                                                                                                                                                                                                  | ** ** |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Number** | ** ** | **Description**                                                                                                                                                                                                                             | ** ** |
|       |       |                                                                                                                                                                                                                                        |       |
| 3.1        |       | Certificate  of Incorporation of Outdoor Channel Holdings, Inc, a Delaware corporation  (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed  on September 20, 2004 and incorporated herein by reference) |       |
| 3.2        |       | By-Laws  of Outdoor Channel Holdings, Inc., a Delaware corporation (filed as  Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on  September 20, 2004 and incorporated herein by reference)                     |       |
| 4.1        |       | Instruments  defining the rights of security holders, including debentures (see exhibits  3.1 and 3.2 above and Exhibit 4.1 to the Company’s Form 10-Q for the period  ended June 30, 2005 which is incorporated herein by reference)  |       |
| 10.1       |       | Employment  Agreement with Roger L. Werner, Jr., effective as of October 16, 2006 (filed  as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on  October 20, 2006 and incorporated herein by reference)            |       |
| 10.2       |       | Form  of Change of Control Severance Agreement                                                                                                                                                                                              |       |
| 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 ReleaseNo. 33-8238, this certification will be treated as “accompanying” thisQuarterly Report on Form 10-Q and not “filed” as part of such report forpurposes of Section 18 of the Securities Exchange Act of 1934, as amended, orotherwise subject to the liability of Section 18 of the Securities Exchange Actof 1934, as amended, and this certification will not be deemed to beincorporated by reference into any filing under the Securities Act of 1933, asamended, or the Securities Exchange Act of 1934, as amended, except to the extentthat the registrant specifically incorporates it by reference.

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|            | **OUTDOOR CHANNEL HOLDINGS, INC.**                          |
|------------|-------------------------------------------------------------|
|       |                                                        |
|       |                                                        |
|       | /s/ William A. Owen                                         |
| ** ** | **William A. Owen**                                         |
|       | Authorized Officer, Chief Financial Officer and  Controller |
|       | (Principal and Accounting Officer)                          |
|       | Date: February  16, 2007                               |

 

 

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