Outdoor Channel 10Q 2007 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2007


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

For the transition period from to

Commission file number: 000-17287

Outdoor Channel Holdings, Inc.

(Exact name of Registrant as specified in its charter)


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

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

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

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

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

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


Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o

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

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


Class		Number of Shares Outstanding at January 29, 2008

Common Stock, $0.001 par value		26,982,500

OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
For The Period Ended September 30, 2007

Table of Contents



	Part I. Financial Information

Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2007 (Unaudited) and December 31, 2006 (As Restated)	3
	Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2007 and 2006 (As Restated)	4
	Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2007 (As Restated)	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006 (As Restated)	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	27

	Part II. Other Information

Item 1A.	Risk Factors	29
Item 6.	Exhibits	38
Signatures		38
EXHIBIT 10.29
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

* * *

PART I—FINANCIAL INFORMATION

ITEM 1. Financial Statements.

OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except per share data)


	September 30,			December 31,
	2007			2006
	(Unaudited)			(As Restated,
				Note 10)
Assets
Current assets:
Cash and cash equivalents	$	23,928		$	14,226
Investment in available-for-sale securities		45,252			42,144
Accounts receivable, net of allowance for doubtful accounts of $100 and $180		8,837			6,816
Income tax refund receivable		204			2,299
Deferred tax assets, net		541			608
Prepaid programming costs		3,008			2,713
Other current assets		1,321			835
Assets of discontinued operations		—			1,344

Total current assets		83,091			70,985


Property, plant and equipment, net		11,935			12,494
Amortizable intangible assets, net		401			820
Goodwill		43,124			43,816
Deferred tax assets, net		11,140			11,344
Deposits and other assets		1,984			2,101
Assets of discontinued operations		—			3,390

Total assets	$	151,675		$	144,950


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	4,396		$	2,765
Accrued severance payments		100			341
Deferred revenue		222			610
Current portion of deferred obligations		96			40
Customer deposits		12			53
Liabilities of discontinued operations		—			463

Total current liabilities		4,826			4,272

Accrued severance payments, net of current portion		28			44
Deferred obligations		285			326
Liabilities of discontinued operations		—			1,362

Total liabilities		5,139			6,004


Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 25,000 shares authorized; none issued		—			—
Common stock, $0.001 par value; 75,000 shares authorized: 26,172 and 25,507 shares issued and outstanding, respectively		26			26
Additional paid-in capital		173,893			165,205
Accumulated other comprehensive income (loss)		(1	)		48
Accumulated deficit		(27,382	)		(26,333	)

Total stockholders’ equity		146,536			138,946

Total liabilities and stockholders’ equity	$	151,675		$	144,950

See Notes to Unaudited Condensed Consolidated Financial Statements.

OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per share data)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
				(As Restated,						(As Restated,
				Note 10)						Note 10)
Revenues:
Advertising	$	7,917		$	6,957		$	20,908		$	18,350
Subscriber fees		4,739			4,348			14,263			13,072


Total revenues		12,656			11,305			35,171			31,422


Cost of services:
Programming		1,521			2,095			4,625			5,816
Satellite transmission fees		637			667			1,869			1,919
Production and operations		1,101			986			3,375			3,053
Other direct costs		46			45			101			54


Total cost of services		3,305			3,793			9,970			10,842


Other expenses:
Advertising		1,558			1,537			4,088			5,299
Selling, general and administrative		6,524			4,184			21,525			13,371
Impairment of amortizable intangible assets		—			9,540			—			9,540
Depreciation and amortization		686			843			1,993			2,227


Total other expenses		8,768			16,104			27,606			30,437


Income (loss) from operations		583			(8,592	)		(2,405	)		(9,857	)

Interest expense		12			73			12			227

Other income		894			715			2,409			1,981


Income (loss) from continuing operations before income taxes		1,465			(7,950	)		(8	)		(8,103	)

Income tax provision (benefit)		(33	)		(2,982	)		320			(2,791	)


Income (loss) from continuing operations		1,498			(4,968	)		(328	)		(5,312	)

Income (loss) from discontinued operations, net of tax		—			(331	)		29			(2	)


Net income (loss)	$	1,498		$	(5,299	)	$	(299	)	$	(5,314	)


Basic earnings (loss) per common share data:
From continuing operations	$	0.06		$	(0.20	)	$	(0.01	)	$	(0.21	)

From discontinued operations	$	—		$	(0.01	)	$	—		$	—

Basic earnings per common share	$	0.06		$	(0.21	)	$	(0.01	)	$	(0.21	)


Diluted earnings (loss) per common share data:
From continuing operations	$	0.06		$	(0.20	)	$	(0.01	)	$	(0.21	)

From discontinued operations	$	—		$	(0.01	)	$	—		$	—

Diluted earnings per common share	$	0.06		$	(0.21	)	$	(0.01	)	$	(0.21	)


Weighted average number of common shares outstanding:
Basic		26,054			25,000			25,846			24,737

Diluted		26,747			25,000			25,846			24,737

See Notes to Unaudited Condensed Consolidated Financial Statements.

OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statement of Stockholders’ Equity
For the Nine Months Ended September 30, 2007
(In thousands)


									Accumulated
						Additional			Other
	Common Stock					Paid-in			Comprehensive			Accumulated
	Shares			Amount		Capital			Income (Loss)			Deficit			Total

Balance, December 31, 2006 (as restated, Note 10)		25,507		$	26	$	165,205		$	48		$	(26,333	)	$	138,946

Comprehensive income:
Net income (loss)													(299	)		(299	)
Effect of change in fair value of available-for-sale securities, net of deferred tax benefit of $33		—			—		—			(49	)		—			(49	)

Total comprehensive income (loss)																(348	)


Common stock issued upon exercise of stock options		363			—		604			—			—			604

Issuance of restricted stock to employees and service providers for services to be rendered, net of forfeited shares		332			—		—			—			—			—

Share-based employee and service provider compensation expense		—			—		8,392			—			—			8,392

Purchase and retirement of treasury stock related to employee and service provider share-based compensation activity		(30	)		—		(308	)		—			—			(308	)

Cumulative effect of adoption of new accounting pronouncement (Note 9)		—			—		—			—			(750	)		(750	)


Balance, September 30, 2007		26,172		$	26	$	173,893		$	(1	)	$	(27,382	)	$	146,536

See Notes to Unaudited Condensed Consolidated Financial Statements.

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


	Nine Months Ended
	September 30,
	2007			2006
				(As Restated,
				Note 10)
Operating activities:
Net loss	$	(299	)	$	(5,314	)
Adjustments to reconcile income to net cash provided by operating activities of continuing operations:
Loss (income) from discontinued operations		(29	)		2
Depreciation and amortization		2,359			2,300
Gain on sale of equipment		(1	)		—
Impairment of amortizable intangible assets		—			9,540
Provision for doubtful accounts		100			74
Share-based employee and service provider compensation		8,392			2,594
Deferred tax provision (benefit)		245			(2,963	)
Tax benefits from exercise of stock options in excess of recognized expense		(7	)		(825	)

Changes in operating assets and liabilities:
Accounts receivable		(2,121	)		(1,553	)
Income tax refund receivable		2,095			980
Prepaid programming costs		(295	)		(923	)
Other current assets		(486	)		(386	)
Deposits and other assets		(250	)		(1,212	)
Accounts payable and accrued expenses		1,558			699
Deferred revenue		(388	)		249
Customer deposits		(41	)		27
Accrued severance payments		(257	)		(15	)
Deferred obligations		15			53

Net cash provided by operating activities of continuing operations		10,590			3,327


Investing activities:
Purchases of property, plant and equipment		(943	)		(2,353	)
Proceeds from sale of equipment		4			—
Proceeds from sale of discontinued operations		3,589			—
Purchases of available-for-sale securities		(104,001	)		(112,279	)
Proceeds from sale of available-for-sale securities		100,811			112,430

Net cash used in investing activities of continuing operations		(540	)		(2,202	)


Financing activities:
Principal payments on long-term debt and capital leases		—			(524	)
Proceeds from exercise of stock options		604			813
Purchase of treasury stock		(308	)		(33	)
Tax benefits from exercise of stock options in excess of recognized expense		7			825

Net cash provided by financing activities of continuing operations		303			1,081


Cash flows from discontinued operations:
Net cash used in operating activities of discontinued operations		(582	)		(975	)
Net cash used in investing activities of discontinued operations		(69	)		(75	)
Net cash used in financing activities of discontinued operations		—			(9	)

Net cash used in discontinued operations		(651	)		(1,059	)


Net increase in cash and cash equivalents		9,702			1,147
Cash and cash equivalents, beginning of period		14,226			17,672

Cash and cash equivalents, end of period	$	23,928		$	18,819


Supplemental disclosure of cash flow information:
Interest paid	$	12		$	226

Income taxes paid	$	99		$	—


Supplemental disclosures of noncash investing and financing activities:
Effect of net increase (decrease) in fair value of available-for-sale securities, net of deferred taxes	$	(49	)	$	8

Property, plant and equipment costs incurred but not paid	$	122		$	24

Effect of net increase in fair value of cash flow hedge	$	—		$	44

See Notes to Unaudited Condensed Consolidated Financial Statements.

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

NOTE 1—ORGANIZATION AND BUSINESS

Description of Operations

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

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

Recent Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“ FIN 48 “), which became effective for the Company on January 1, 2007. FIN 48 sets out the use of a single comprehensive model to address uncertainty in tax positions and clarifies the accounting for income taxes by establishing the minimum recognition threshold and a measurement attribute for tax positions taken or expected to be taken in a tax return in order to be recognized in the financial statements.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued FAS No. 157, “Fair Value Measurements” (“ FAS 157 “). FAS 157 establishes a common definition of fair value to be used when the Company is required to use a fair-value measure for recognition or disclosure purposes under GAAP. In addition, in February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“ FAS 159 “) which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Both FAS 157 and FAS 159 will be effective for the Company on January 1, 2008. The Company is currently evaluating the impact that the adoption of FAS 157 and FAS 159 will have, if any, on its consolidated financial statements.

NOTE 2—UNAUDITED INTERIM FINANCIAL STATEMENTS

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

Certain amounts in the 2006 unaudited condensed consolidated financial statements have been reclassified to conform to the 2007 presentation. The results of the Company’s operations for the three and nine months ended September 30, 2007 are not necessarily indicative of the results of operations for the full year ending December 31, 2007.

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

NOTE 3—STOCK INCENTIVE PLANS

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payments” (“SFAS 123R”) using the modified prospective transition method. This method requires compensation cost to be recognized in the financial statements over the service period for the fair value of all awards (including awards to employees) granted after the date of adoption as well as for existing awards for which the requisite service had not been rendered as of the date of adoption and requires that prior periods not be restated. Our stock incentive plans provide for the granting of qualified and nonqualified options, restricted stock and stock appreciation rights (“SARs”) to our officers, directors and employees. Outstanding options generally vest over a period from 90 days to four years after the date of the grant and expire no more than ten years after the grant. We satisfy the exercise of options and awards of restricted stock by issuing previously unissued common shares. Currently we have not awarded any SARs. Prior to September 30, 2006 we had not awarded any performance units but did so in the fourth quarter of 2006. Prior to the adoption of SFAS 123R, we used the intrinsic value method to account for stock options granted to employees and made no charges against earnings with respect to those options at the date of grant since our employee options had exercise prices that were equal to the market price, however, as explained in the 10-K, we recognized a charge in the third quarter of 2004 when we issued fully-vested options to purchase shares in Outdoor Channel Holdings in exchange for fully-vested options held by employees of TOC on September 8, 2004.

We expense awards at the earliest of their vesting schedule or pro rata on a straight line basis over the requisite service period and have not capitalized any share-based compensation to any of our assets. The following tables summarize share-based compensation expense for the three month and nine month periods ended September 30, 2007 and 2006:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Nature of Award:
Restricted stock	$	469	$	170	$	1,172	$	404
Options		376		745		1,256		2,190
Performance units		1,016		—		5,964		—

Total share-based compensation expense	$	1,861	$	915	$	8,392	$	2,594


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Classification of Compensation Expense:
Cost of services:
Production and operations	$	46	$	57	$	125	$	139
Other expenses:
Selling, general and administrative		1,815		858		8,267		2,455

Total share-based compensation expense	$	1,861	$	915	$	8,392	$	2,594

The Company followed the guidance contained in Emerging Issue Task Force Issue No. 96-18 “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” (“EITF 96-18”) related to the accounting for awards granted to non-employees. During the three months ended March 31, 2007 one employee transitioned to an independent service provider. As of the transition date, the fair value of these stock options was estimated to be $0.47 per share. No options were issued during the nine months ended September 30, 2007. We granted 205 employee stock options in the nine months ended September 30, 2006 which had a weighted average fair value estimated to be $6.72 per share. The estimated values were derived by using the Black-Scholes option pricing model with the following assumptions:


	Nine Months Ended
	September 30,
	2007		2006

Risk-free interest rate		4.9 — 5.0%		4.3 — 4.9%
Dividend yield		0%		0%
Weighted average expected life		0.8 years		3.8 years
Volatility factor		39.2 — 39.5%		52.3 — 58.9%
Weighted average volatility factor		39.4%		54.6%

Expected volatilities are based on the historical volatility of our stock. We have adopted the guidance of the SEC’s Staff Accounting Bulletin No. 107 that notes if share options have “plain vanilla” characteristics, a simplified method of estimating the expected life of the option may be employed temporarily. The simplified method utilizes the average of the vested term and the original contract term. We have experienced certain events that indicate that our long-term historical experience is no longer valid. As such we adopted the simplified method. The use of the simplified method is permissible only through December 31, 2007 after which time we will be required to utilize another method to determine the weighted average expected term. Our short-term historical experience with exercise and post-vesting employment termination behavior supports this method for determining the options’ expected life. When sufficient historical experience has been obtained, we will use such experience for future estimations of the expected life. The expected life represents the period of time that options granted are expected to be outstanding. The risk-free rate is based on the U.S. Treasury rate with a maturity date corresponding to the options’ expected life.

NOTE 4—EARNINGS (LOSS) PER COMMON SHARE

We have presented basic and diluted earnings (loss) per common share in the accompanying condensed consolidated statements of operations in accordance with the provisions of Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (“SFAS 128”). Basic earnings (loss) per common share is calculated by dividing net earnings (loss) by the weighted average number of common shares outstanding during each period. The calculation of diluted earnings (loss) per common share is similar to that of basic earnings (loss) per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares of the Company were issued during the period if any such issuances would have had a dilutive effect.

For the three months ended September 30, 2007, the computation of diluted earnings (loss) per common share takes into account the effects of the weighted average number of common shares outstanding of the assumed exercise of the outstanding stock options and the vesting of all performance units adjusted for the application of the treasury stock method. For the three months ended September 30, 2006, outstanding options and performance units to purchase 2,003 shares of common stock were not included in the calculation of diluted earnings (loss) per share because their effect was antidilutive. For the nine months ended September 30, 2007 and 2006, outstanding options and performance units to purchase 2,900 and 1,382 shares of common stock, respectively, were not included in the calculation of diluted earnings (loss) per share because their effect was antidilutive.

The following table summarizes the reconciliations of the numerators and denominators of the basic and diluted per common share computations for of the three month and nine month periods ended September 30, 2007 and 2006:


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2007		2006			2007			2006
Numerators:
Income (loss) from continuing operations—basic	$	1,498	$	(4,968	)	$	(328	)	$	(5,312	)


Denominators:
Weighted average common shares outstanding—basic		26,054		25,000			25,846			24,737
Dilutive effect of potentially issuable common shares upon exercise of dilutive stock options of the Company as adjusted for the application of the treasury stock method		693		—			—			—

Diluted weighted average common shares outstanding		26,747		25,000			25,846			24,737

NOTE 5—EQUITY TRANSACTIONS

Issuances of Common Stock by the Company

During the three month and nine month periods ended September 30, 2007 and 2006 we received cash from the exercise of options as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Number of options exercised		1		168		363		660
Cash proceeds	$	6	$	213	$	604	$	813
Tax benefit from options exercised	$	2	$	619	$	725	$	1,463

During the nine months ended September 30, 2007, we issued to employees 377 shares of restricted stock while 48 shares of restricted stock have been canceled due to employee turnover. We also issued 3 shares to a service provider in the nine months ended September 30, 2007 which vest monthly over a twelve month period. During the three months ended September 30, 2006, we issued 6 shares to service providers, which vest annually over a five-year period.

Under SFAS 123R, the fair value of the shares and options, adjusted for a forfeiture assumption, at the respective dates of grant (which represents deferred compensation not required to be recorded initially in the consolidated balance sheet) will be amortized to share-based compensation expense as the rights to the restricted stock and options vest with an equivalent amount added to additional paid-in capital. Changes to forfeiture assumptions are based on actual experience and are recorded in accordance with the rules related to accounting for changes in estimates. For the service providers, however, the future charge will be recognized in accordance with EITF 96-18 and, except for the performance shares, will be remeasured to reflect the fair market value at the end of each reporting period until the shares vest when the related charge will be remeasured for the final time. Restricted shares issued to service providers that vest upon specific performance have been excluded from compensation expense recognition until and if such shares vest upon achievement of the performance goals.

Based on the closing market price on September 28, 2007 (the last trading day of the quarter) of $9.03 per share, the fair value of the 6 unvested service provider shares of restricted stock was $49. The decrease of share-based compensation expense in the three months ended September 30, 2007 was due to a lower period end stock price for these shares of $1. The effect of the change in estimate on earnings (loss) per common share was to increase the income of the three months ended September 30, 2007 and decrease the loss of the nine months ended September 30, 2007 by an immaterial amount. Assuming the closing market price as of September 28, 2007 does not change over the remaining vesting period, we would have $49 of expense yet to be recognized.

Stock Options

A summary of the status of the options granted under Outdoor Channel Holdings’ stock option plans and outside of those plans as of September 30, 2007 and the changes in options outstanding during the nine months then ended is as follows:


						Weighted		Aggregate
				Weighted		Average		Intrinsic
	Shares			Average		Remaining		Value
	(in			Exercise		Contractual		(in
Options	thousands)			Price		Term		thousands)

Outstanding at beginning of period		3,272		$	9.48
Granted		—			—
Exercised		(363	)		1.67
Forfeited		(180	)		13.52

Outstanding at end of period		2,729		$	10.26		2.1	$	4,941

Vested or expected to vest at end of period		2,675		$	10.18		2.1	$	4,941

Exercisable at end of period		2,095		$	9.29		1.7	$	4,941

There were no options granted during 2007. The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2006 was $5.86. The aggregate intrinsic value of options exercised during the three months ended September 30, 2007 and 2006 was $6 and $1,576, respectively. The aggregate intrinsic value of options exercised during the nine months ended September 30, 2007 and 2006 was $3,363 and $6,719, respectively.

The total fair value of options to purchase common stock that vested during the three months ended September 30, 2007 and 2006 was $300 and $875, respectively. The total fair value of options to purchase common stock that vested during the nine months ended September 30, 2007 and 2006 was $2,291 and $2,131, respectively.

Restricted Stock

A summary of the status of Outdoor Channel Holdings’ nonvested restricted shares as of September 30, 2007 and the changes in restricted shares outstanding during the nine months then ended is presented as follows:


				Weighted
	Shares			Average
	(in			Grant-Date
	thousands)			Fair Value

Nonvested at beginning of period		314		$	12.73
Granted		380			10.01
Vested		(62	)		12.46
Forfeited		(48	)		12.91

Nonvested at end of period		584		$	10.98

The fair value of nonvested shares for grants made during open market hours is determined based on the closing trading price of our shares on the trading day immediately prior to the grant date. The fair value of nonvested shares for grants made after the market closes is determined based on the closing trading price of our shares on the grant date.

Expense to be Recognized

Expense associated with our share-based compensation plans yet to be recognized as compensation expense over the employees’ remaining requisite service periods as of September 30, 2007 are as follows:


	As of September 30, 2007
			Weighted Average
			Remaining
	Expense Yet		Requisite Service
	to be Recognized		Periods

Stock options	$	3,019	2.53 years
Restricted stock		4,851	2.82 years
Performance units		619	0.15 years


Total	$	8,489	2.52 years

NOTE 6—RELATED PARTY TRANSACTIONS

We lease our administrative facilities from Musk Ox Properties, LP, which in turn is owned by Messrs. Perry T. Massie and Thomas H. Massie, principal stockholders, directors and officers of the Company. The lease agreement has a five-year term, expiring on December 31, 2010, with 2 renewal options (between 2 and 5 years) exercisable at our discretion. Monthly rent payments under this lease agreement were $29 with a 3% per year escalator clause. On April 24, 2007, in conjunction with the sale of the Membership Division, which resulted in our occupying less space, we amended the lease and the monthly rent payment was reduced to $17 per month through the end of 2007 with a 3% per year escalator clause thereafter. We paid Musk Ox Properties, LP approximately $52 and $87 in the three months ended September 30, 2007 and 2006, respectively, and $201 and $262 in the nine months ended September 30, 2007 and 2006, respectively. We recognized rent expense related to this lease of $53 and $93 in the three months ended September 30, 2007 and 2006, respectively and $206 and $278 in the nine months ended September 30, 2007 and 2006, respectively.

We have engaged Narrowstep, Inc. to assist us in developing our broadband capabilities. Roger L. Werner, Chief Executive Officer, is a shareholder and member of the board of directors of Narrowstep. During the three and nine months ended September 30, 2007, we paid Narrowstep $8 and $33, respectively. Our contract contemplates a total expenditure of approximately $75 over its life which expires on April 15, 2008. We believe the terms of the contract reflect market rates for similar services.

We sold our Membership Division to Mr. Thomas H. Massie, a principal stockholder and director of Outdoor Channel Holdings for a purchase price of $3,589 which was the combined carrying value of the businesses. Included in the carrying value was $389 net payable by us to the Membership Division upon closing. We paid the balance of the intercompany account to the Membership Division in April 2007. As part of the transition of the business’ operations, we agreed to provide accounting, human resources and information technology services for the Membership Division in exchange for $20 in each month of May, June and July. This amount is considered to be a reimbursement for expenses incurred (principally compensation of our staff members involved). We did not contemplate a mark-up over actual cost and thus we have accounted for the $60 received in the nine months ended September 30, 2007 as a reduction of selling, general and administrative expenses. In addition, we have recognized advertising revenue from the Membership Division amounting to $141 and $335 for the nine months ended September 30, 2007 and 2006, respectively.

NOTE 7—DISCONTINUED OPERATIONS

In April 2007 our Board of Directors, after considering reports of consultants and on-going analysis of management, decided that the operations of the Membership Division, comprised of GPAA, LLC and LDMA-AU, Inc., was no longer strategic to the core business of Outdoor Channel Holdings. We applied the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) to the Membership Division’s assets and liabilities classifying them as assets and liabilities of discontinued operations. The sale of the Membership Division was for its net asset value and accordingly we have not adjusted its carrying value. The sale was consummated on April 24, 2007.

Prior to June 30, 2007, we had reported separate segment information in our filings for the operations of TOC and Membership Division in the same format as reviewed by our Chief Operating Decision Maker. Due to the discontinued operations of the Membership Division, we operate in a single segment.

The operating results for the Membership Division have been separately classified and reported as discontinued operations in the condensed consolidated statement of operations as follows:


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2007		2006			2007		2006
Membership Division revenue	$	—	$	2,112		$	1,632	$	4,441
Income (loss) from operations		—		265			73		27
Income (loss) from discontinued operations, net of tax	$	—	$	(331	)	$	29	$	(2	)

A summary of the components of assets and liabilities of discontinued operations on our condensed consolidated balance sheet as of December 31, 2006 is as follows:


	December 31,
	2006
Assets held for sale:
Current assets	$	1,344
Property, plant and equipment, net		3,352
Deposits and other assets		38

Total assets of discontinued operations	$	4,734


Liabilities of discontinued operations:
Current liabilities	$	463
Deferred revenue, net of current portion		1,362

Total liabilities of discontinued operations		1,825


Net assets of discontinued operations	$	2,909

NOTE 8—INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES

Our short-term investments in marketable debt and equity securities are classified as available-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 three and nine months ended September 30, 2007 and 2006 and all amounts related to such investments prior to the three and nine months

ended September 30, 2007 and the year ended December 31, 2006 were not material. Included in investments in available-for-sale securities at September 30, 2007 and December 31, 2006 are investments in auction rate securities with short-term interest rates that generally can be reset every 28 days. The auction rate securities have long-term maturity dates and provide us with enhanced yields. However, we believe we have the ability to quickly liquidate them at their original cost, although there is no guarantee, and, accordingly, they are carried at cost, which approximates fair value, and classified as current assets. We had unrealized net holding gains (losses) on marketable equity securities at September 30, 2007 and December 31, 2006 of $(1) and $48, respectively, that are included in “accumulated other comprehensive income”.

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


	As of		As of
	September 30, 2007		December 31, 2006
Auction rate securities	$	44,440	$	41,250
Equity securities		812		894

Total available-for-sale securities	$	45,252	$	42,144

We consider the yields we recognize from auction rate securities and from cash held in our money market accounts to be interest income. Yields we recognize from our investments in equity securities we consider to be dividend income. Both, along with gain on sale of equipment, are recorded in other income for the three and nine months ended September 30, 2007 and 2006 as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Interest income	$	875	$	694	$	2,354	$	1,926
Dividend income		18		21		54		55

Subtotal		893		715		2,408		1,981
Gain on sale of equipment		1		—		1		—

Total other income	$	894	$	715	$	2,409	$	1,981

NOTE 9—INCOME TAX PROVISION (BENEFIT)

The income tax provision (benefit) reflected in the accompanying unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2007 and 2006 is different than that computed based on the applicable statutory Federal income tax rate of 34% due to state taxes and the impact of share-based compensation expense recognized under SFAS 123R. The income tax provision reflected in the accompanying unaudited condensed consolidated statement of operations for the nine months ended September 30, 2007 was also impacted by a discrete tax expense of $290 associated with a valuation allowance established against a capital loss resulting from the sale of the Membership Division during the quarter ended June 30, 2007. The portion of the current year compensation expense relating to qualified incentive stock options, or ISOs, is recognized for financial statement purposes but is generally not deductible for tax purposes and thus is treated as a permanent difference between the two. For the three and nine months ended September 30, 2007 we recognized a charge of $81 and $203, respectively, and for the three and nine months ended September 30, 2006 we recognized a charge of $190 and $533, respectively, related to ISOs under SFAS 123R compensation expense.

We file income tax returns in the United States and various state and local tax jurisdictions. We have net operating loss and credit carry forwards that will be subject to examination beyond the year in which they are ultimately utilized. We believe any future potential adjustments of these carry forwards will be immaterial to our financial statements. Our policy is to record interest and penalties on uncertain tax positions as income tax expense. We incurred charges aggregating to $12 in interest related to income tax returns filed with various states in which we had nexus resulting from operating our Membership Division (which we sold in April 2007). We had not filed returns in certain states and through a voluntary disclosure program we completed during the nine months ended September 30, 2007, we are now current with our filings. As a result of the adoption of FIN 48, we recognized a $750 net increase to reserves for uncertain tax positions which we have classified as a decrease to non-current deferred tax assets and a decrease to opening retained earnings. As of January 1, 2007 (the adoption date of FIN 48), the Company had approximately $1,148 of gross unrecognized tax benefits, of which $750 would affect the Company’s effective tax rate if recognized. We do not reasonably estimate that the unrecognized tax benefit will change significantly within the next 12 months. There have been no material changes to the unrecognized tax benefit during the three and nine month periods ending September 30, 2007, respectively.

As of September 30, 2007, we have 612 options that will expire in December 2007. These options were assumed by us when we acquired the minority interest of TOC on September 8, 2004 and which resulted in the recognition of deferred tax assets based on a market price of $14.00 per share for our common stock at the time of the merger. If these options had been exercised at September 30, 2007, when the closing price of our stock on the last trading day of September was $9.03 per share, we would have a short-fall aggregating to $3,042.

NOTE 10—RESTATEMENT OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2006 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006

We have reviewed the accounting treatment of certain transactions and account balances as of December 31, 2006 and for the three and nine months ended September 30, 2006. We have identified certain errors related to previously recorded transactions including, as previously disclosed:

•

the recognition of deferred tax asset related to certain options to acquire common shares of TOC that were outstanding on September 8, 2004 when we completed its acquisition,

•

certain revenue cutoff issues which generally result in intra-period timing fluctuations,

•

accounting for the cost escalation provisions related to the terms of the lease of our headquarters,

•

recognition of additional income tax expense for a short-fall in our windfall benefit pool,

•

adjustment to the estimated useful life of our leasehold improvements to match the terms of our lease of our headquarters, and

•

the exclusion from expense recognition of restricted shares issued to a service provider with performance conditions that when met would result in some or all of the shares being vested.

These errors also impacted our condensed consolidated financial statements previously issued on Form 10-Q for the three month periods ended March 31, 2007 and 2006 and the three and six month periods ended June 30, 2007 and 2006. Accordingly, these condensed consolidated financial statements have been restated as set forth in our revised Reports on Form 10-Q/A filed concurrent with this report.

As previously disclosed, all of the options we assumed in the merger noted above were treated as non-qualified stock options and, after charging to compensation expense the difference between the then current fair market value of the underlying stock and the exercise price of the stock option, we recognized a deferred tax asset for the tax effect of the recognized compensation expense. After consideration of the facts and circumstances, we have concluded that as of December 31, 2004, options to acquire 751 shares of common stock did not give rise to a deferred tax asset as they were characterized as incentive stock options which are not deductible for income taxes unless certain events (such as disqualifying dispositions occur in the future).

The accounting treatment resulting from our reassessment related to these issues result in an immaterial impact on our financial statements taken as a whole and we do not believe that the effects of these adjustments are sufficiently material to require us to amend any of our previously filed quarterly or annual reports because they do not materially impact the financial statements for the respective periods quantitatively or qualitatively. We believe this approach is consistent with the principles of Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”. The balances in our financial statements, as further outlined below, have been adjusted herein accordingly after adjusting for discontinued operations discussed in Note 7.

THE EFFECT ON THE CONDENSED CONSOLIDATED BALANCE SHEET

As a result of the accumulated impact of the corrected accounting, the following consolidated balance sheet account balances as of December 31, 2006, after adjusting for discontinued operations, have been restated as follows:


	As Originally Reported
	and Adjusted for
	Discontinued Operations			As Restated			Change

Current deferred tax assets	$	575		$	608		$	33
Total current assets		70,952			70,985			33
Property, plant and equipment, net		12,445			12,494			49
Goodwill		44,457			43,816			(641	)
Deferred tax assets, net		10,956			11,344			388
Total assets		145,121			144,950			(171	)
Accounts payable and accrued expenses		2,766			2,765			(1	)
Current portion of deferred obligation		—			40			40
Total current liabilities		4,233			4,272			39
Deferred obligations		344			326			(18	)
Total liabilities		5,983			6,004			21
Additional paid-in capital		165,779			165,205			(574	)
Accumulated deficit		(26,715	)		(26,333	)		382
Total stockholders’ equity		139,138			138,946			(192	)
Total liabilities and stockholders’ equity	$	145,121		$	144,950		$	(171	)

THE EFFECTS ON THE UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

As a result of the restatement, the unaudited condensed consolidated statements of operations for three months ended September 30, 2006 changed as follows:


	As Originally
	Reported and
	Adjusted for
	Discontinued
	Operations			As Restated			Change

For the three months ended September 30, 2006
Advertising revenue	$	6,834		$	6,957		$	123
Total revenues		11,182			11,305			123
Production and operations		1,014			986			(28	)
Other direct costs		—			45			45
Total cost of services		3,776			3,793			17
Advertising expense		1,634			1,537			(97	)
Selling, general and administrative		4,264			4,184			(80	)
Depreciation and amortization		847			843			(4	)
Total other expenses		16,285			16,104			(181	)
Loss from operations		(8,879	)		(8,592	)		287
Loss from continuing operations before income taxes		(8,237	)		(7,950	)		284
Income tax provision (benefit)		(3,000	)		(2,982	)		18
Net loss		(5,568	)		(5,299	)		269
Loss per common share:
Basic from continuing operations	$	(0.22	)	$	(0.20	)	$	0.02
Diluted from continuing operations	$	(0.22	)	$	(0.20	)	$	0.02
Basic earnings per common share	$	(0.21	)	$	(0.21	)	$	—
Diluted earnings per common share	$	(0.21	)	$	(0.21	)	$	—
Weighted average number of basic common shares		24,813			25,000			187
Weighted average number of diluted common shares		24,813			25,000			187

As a result of the restatement, the unaudited condensed consolidated statements of operations for nine months ended September 30, 2006 changed as follows:


	As Originally
	Reported and
	Adjusted for
	Discontinued
	Operations			As Restated			Change

For the nine months ended September 30, 2006
Advertising revenue	$	18,219		$	18,350		$	131
Total revenues		31,291			31,422			131
Programming		5,816			5,816			—
Production and operations		3,208			3,053			(155	)
Other direct costs		54			54			—
Total cost of services		10,997			10,842			(155	)
Advertising expense		5,299			5,299			—
Selling, general and administrative		13,391			13,371			(20	)
Depreciation and amortization		2,276			2,227			(49	)
Total other expenses		30,506			30,437			(69	)
Loss from operations		(10,212	)		(9,857	)		355
Interest expense		226			227			1
Other income		1,981			1,981			—
Loss from continuing operations before income taxes		(8,457	)		(8,103	)		354
Income tax provision (benefit)		(3,036	)		(2,791	)		245
Net loss		(5,423	)		(5,314	)		109
Earnings (loss) per common share:
Basic from continuing operations	$	(0.22	)	$	(0.22	)	$	—
Diluted from continuing operations	$	(0.22	)	$	(0.22	)	$	—
Basic earnings per common share	$	(0.22	)	$	(0.22	)	$	—
Diluted earnings per common share	$	(0.22	)	$	(0.22	)	$	—
Weighted average number of basic common shares		24,404			24,737			333
Weighted average number of diluted common shares		24,404			24,737			333

THE EFFECTS ON THE UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

As a result of the restatement, the unaudited condensed consolidated statements of cash flows for nine months ended September 30, 2006 changed as follows:


	As Originally
	Reported and
	Adjusted for
	Discontinued
	Operations			As Restated			Change
For the nine months ended September 30, 2006
Net loss	$	(5,423	)	$	(5,314	)	$	109
Depreciation and amortization		2,348			2,300			(48	)
Provision for doubtful accounts		88			74			(14	)
Share-base employee and service provider compensation		2,785			2,594			(191	)
Deferred tax provision (benefit), net		(3,209	)		(2,963	)		246
Tax benefits from exercise of stock options in excess of recognized expense		(711	)		(825	)		(114	)
Change in:
Accounts receivable		(1,422	)		(1,553	)		(131	)
Other current assets		(395	)		(386	)		9
Deposits and other assets		(1,211	)		(1,212	)		(1	)
Deferred obligations		37			53			16
Net cash provided by operating activities of continuing operations		3,441			3,327			(114	)
Tax benefits from exercise of stock options in excess of recognized expense		711			825			114
Net cash provided by financing activities of continuing operations		967			1,081			114
Net increase in cash and cash equivalents		1,147			1,147			—
Cash and cash equivalents, beginning of period		17,672			17,672			—
Cash and cash equivalents, end of period		18,819			18,819			—
Property, plant and equipment costs incurred but not paid	$	—		$	24		$	24

NOTE 11—SUBSEQUENT EVENTS

On October 2, 2007, the Board of Directors approved the renewal of the revolving line of credit agreement (the “Revolver”) with U.S. Bank N.A. (the “Bank”) extending the maturity date from September 7, 2007 to September 5, 2009 and increasing the total amount which can be drawn upon under the Revolver from $8,000 to $10,000. The Revolver provides that the interest rate shall be LIBOR plus 1.25%. The Revolver was previously collateralized by substantially all of our assets. The renewed Revolver is unsecured. This credit facility contains customary financial and other covenants and restrictions, as amended on September 21, 2007, including a change of control provision and certain minimum profitability and coverage metrics, some of which are defined with non-GAAP provisions including elimination of the effects of noncash stock based employee compensation expense measured at each quarter end. As of September 30, 2007, we did not have any outstanding borrowings under this Revolver. This Revolver is guaranteed by TOC.

Because of the late filing of the Form 10-Q for the quarterly period ended September 30, 2007, we did not comply with two covenants under the Revolver. One requires us to submit interim financial statements no later than 60 days after the end of each fiscal quarter and the other, similarly, requires us to provide a certificate of compliance within that same 60 days. On December 18, 2007 we obtained a waiver from the Bank of these covenant violations.

On December 14, 2007, William A. Owen, the Company’s chief financial officer submitted his resignation and ceased his employment with the Company entering into a separation agreement and a consulting agreement. Under the separation

agreement the Company agreed to make a lump-sum payment of $152,000 in January 2008, reimburse Mr. Owen his payments for health care coverage and reimburse him up to $10,000 for his attorney fees. The consulting agreement provides that in exchange for a lump-sum payment of $48,000 on or before March 15, 2008, Mr. Owen will make himself available up to 4 days each month, for 12 months, to perform assignments as requested by the Company.

On November 14, 2007, the Company received a Nasdaq Staff Determination letter stating that the Company was not in compliance with the requirements for continued listing as set forth in Nasdaq marketplace Rule 4310(c)(14) because it had not timely filed its Quarterly Report on Form 10-Q for the period ended September 30, 2007. Accordingly, the Nasdaq Staff Determination letter indicated that the Company’s securities are subject to a suspension in trading on November 26, 2007 and delisting from The Nasdaq Stock Market unless the Company requests a hearing before a Nasdaq Listing Qualifications Panel (Panel). The Company timely requested a hearing and met with the Panel on January 9, 2008 where the Company’s request for continued listing was granted provided the Company file its Quarterly Report on Form 10-Q for the period ended September 30, 2007 on or before February 8, 2008.

* * *

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

Safe Harbor Statement

The information contained in this report may include forward-looking statements. Our actual results could differ materially from those discussed in any forward-looking statements. The statements contained in this report that are not historical are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements, without limitation, regarding our expectations, beliefs, intentions or strategies regarding the future. We intend that such forward-looking statements be subject to the safe-harbor provisions contained in those sections. Such forward-looking statements relate to, among other things: (1) expected revenue and earnings growth and changes in mix; (2) anticipated expenses including advertising, programming, personnel and others; (3) Nielsen Media Research, which we refer to as Nielsen, estimates regarding total households and cable and satellite homes subscribing to and viewers (ratings) of The Outdoor Channel; and (4) other matters. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

These statements involve significant risks and uncertainties and are qualified by important factors that could cause our actual results to differ materially from those reflected by the forward-looking statements. Such factors include but are not limited to risks and uncertainties which are included in Part II, Item 1A Risk Factors below and other risks and uncertainties discussed elsewhere in this report. In assessing forward-looking statements contained herein, readers are urged to read carefully all cautionary statements contained in this Form 10-Q and in our other filings with the Securities and Exchange Commission. For these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements in Section 27A of the Securities Act and Section 21E of the Exchange Act.

General

Through our indirect wholly owned subsidiary, The Outdoor Channel, Inc. or TOC, we own and operate Outdoor Channel which is a national television network devoted primarily to traditional outdoor activities, such as hunting, fishing and shooting sports, as well as off-road motor sports and other outdoor related lifestyle programming. TOC revenues include advertising fees from advertisements aired on Outdoor Channel and fees paid by third-party programmers to purchase advertising time in connection with the airing of their programs on Outdoor Channel and subscriber fees paid by cable and satellite service providers that air Outdoor Channel. Outdoor Channel Holdings also wholly owns 43455 BPD, LLC that owns the building housing our broadcast facility.

Until April 2007, we also owned and operated businesses we refer to as the “Membership Division”. These businesses include: LDMA-AU, Inc., which we refer to as Lost Dutchman’s, and Gold Prospector’s Association of America, LLC, which we refer to as GPAA. Lost Dutchman’s is a national gold prospecting campground club with properties in Arizona, California, Colorado, Georgia, Michigan, North Carolina, Oregon and South Carolina. Among other services offered, GPAA is the publisher of theGold Prospector & Treasure Hunters in the Great Outdoorsmagazine. In addition, the Membership Division owns a 2,300 acre property near Nome, Alaska used to provide outings for a fee to the members of Lost Dutchman’s and GPAA. Membership fees are earned from members in both Lost Dutchman’s and GPAA and other income including magazine sales, products and services related to gold prospecting, gold expositions, expeditions and outings.

We consummated the sale of the Membership Division on April 24, 2007 (see Note 7—Discontinued Operations). We have disclosed the Membership Division as a discontinued operation in accordance with the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). Expenses previously allocated to the Membership Division which will continue after its disposition have been reallocated as appropriate.

Recent Accounting Pronouncements

Comparison of Operating Results for the Three Months Ended September 30, 2007 and September 30, 2006

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


								Change						% of Total Revenue
	2007				2006			$			%			2007			2006
					(As Restated,						(As Restated,						(As Restated,
					Note 10)						Note 10)						Note 10)
Revenues:
Advertising	$	7,917			$	6,957		$	960			13.8	%		62.6	%		61.5	%
Subscriber fees		4,739				4,348			391			9.0			37.4			38.5

Total revenues		12,656				11,305			1,351			12.0			100.0			100.00


Cost of services:
Programming		1,521				2,095			(574	)		(27.4	)		12.0			18.5
Satellite transmission fees		637				667			(30	)		(4.5	)		5.0			5.9
Production and operations		1,101				986			115			11.7			8.7			8.7
Other direct costs		46				45			1			2.2			0.4			0.4

Total cost of services		3,305				3,793			(488	)		12.9			26.1			33.5


Other expenses:
Advertising		1,558				1,537			21			1.4			12.3			13.6
Selling, general and administrative		6,524				4,184			2,340			55.9			51.6			37.0
Impairment of amortizable intangible assets		—				9,540			(9,540	)		(100.0	)		—			84.4
Depreciation and amortization		686				843			(157	)		(18.6	)		5.4			7.5

Total other expenses		8,768				16,104			(7,336	)		(45.6	)		69.3			142.5


Income (loss) from operations		583				(8,592	)		9,175			(106.8	)		4.6			(76.0	)

Interest expense		12				73			(61	)		(83.6	)		0.1			0.6

Other income		894				715			179			25.0			7.1			6.3

				��
Income (loss) from continuing operations before income taxes		1,465				(7,950	)		9,415			(118.4	)		11.6			(70.3	)

Income tax provision (benefit)		(33	)			(2,982	)		2,949			(98.9	)		(0.2	)		(26.4	)


Income (loss) from continuing operations		1,498				(4,968	)		6,466			(130.2	)		11.8			(43.9	)

Income (loss) from discontinued operations, net of tax		—				(331	)		331			(100.0	)		—			(3.0	)


Net income (loss)	$	1,498			$	(5,299	)	$	6,797			(128.3	)%		11.8	%		(46.9	)%

Comparison of Operating Results for the Nine Months Ended September 30, 2007 and September 30, 2006


							Change						% of Total Revenue
	2007			2006			$			%			2007			2006
				(As Restated,						(As Restated,						(As Restated,
				Note 10)						Note 10)						Note 10)
Revenues:
Advertising	$	20,908		$	18,350		$	2,558			13.9	%		59.4	%		58.4	%
Subscriber fees		14,263			13,072			1,191			9.1			40.6			41.6

Total revenues		35,171			31,422			3,749			11.9			100.0			100.0


Cost of services:
Programming		4,625			5,816			(1,191	)		(20.5	)		13.1			18.5
Satellite transmission fees		1,869			1,919			(50	)		(2.6	)		5.3			6.1
Production and operations		3,375			3,053			322			10.5			9.6			9.7
Other direct costs		101			54			47			87.0			0.3			0.2

Total cost of services		9,970			10,842			(872	)		(8.0	)		28.3			34.5


Other expenses:
Advertising		4,088			5,299			(1,211	)		(22.9	)		11.6			16.9
Selling, general and administrative		21,525			13,371			8,154			61.0			61.2			42.5
Impairment of amortizable intangible assets		—			9,540			(9,540	)		(100.0	)		—			30.4
Depreciation and amortization		1,993			2,227			(234	)		(10.5	)		5.7			7.1

Total other expenses		27,606			30,437			(2,831	)		(9.3	)		78.5			96.9


Income (loss) from operations		(2,405	)		(9,857	)		7,452			(75.6	)		(6.8	)		(31.4	)

Interest expense		12			227			(215	)		(94.7	)		—			0.7

Other income		2,409			1,981			428			21.6			6.8			6.3


Income (loss) from continuing operations before income taxes		(8	)		(8,103	)		8,095			(99.9	)		—			(25.8	)

Income tax provision (benefit)		320			(2,791	)		3,111			(111.5	)		0.9			(8.9	)


Income (loss) from continuing operations		(328	)		(5,312	)		4,984			(93.8	)		(0.9	)		(16.9	)

Income (loss) from discontinued operations, net of tax		29			(2	)		31			(1,550.0	)		0.1			—


Net income (loss)	$	(299	)	$	(5,314	)	$	5,015			(94.4	)%		(0.8	)%		(16.9	)%

Revenues

Our revenues include revenues from advertising fees and subscriber fees. Advertising revenue is generated from the sale of advertising time on Outdoor Channel including advertisements shown during a program (also known as short-form advertising) and infomercials in which the advertisement is the program itself (also known as long-form advertising). Advertising revenue is also generated from fees paid by third party programmers that purchase advertising time in connection with the airing of their programs on Outdoor Channel.

Total revenues for the three months ended September 30, 2007 were $12,656,000, an increase of $1,351,000, or 12.0%, compared to revenues of $11,305,000 for the three months ended September 30, 2006. Total revenues for the nine months

ended September 30, 2007 were $35,171,000, an increase of $3,749,000, or 11.9%, compared to revenues of $31,422,000 for the nine months ended September 30, 2006.

Advertising revenue for the three months ended September 30, 2007 was $7,917,000, an increase of $960,000 or 13.8% compared to $6,957,000 for the three months ended September 30, 2006. Advertising revenue for the nine months ended September 30, 2007 was $20,908,000, an increase of $2,558,000 or 13.9% compared to $18,350,000 for the nine months ended September 30, 2006. For September 2007, Nielsen estimated that Outdoor Channel had 31.0 million viewers compared to 28.0 million for the same period a year ago. The increase in advertising revenue for the three and nine months ended September 30, 2007 principally reflects higher prices paid for advertising time partially offset by reduced revenue from sales of advertising inventory to third party programmers as a slightly higher percentage of our inventory was retained for in-house sales. We believe that the growth of advertising revenue will increase slightly in the three months ended December 31, 2007 compared to the three months ended September 30, 2007.

Nielsen revises its estimate of the number of subscribers to our channel each month, and for February 2008 Nielsen’s estimate is 30.3 million. Nielsen is the leading provider of television audience measurement and advertising information services worldwide, and its estimates and methodology are generally accepted and used in the advertising industry. Although we realize Nielsen’s estimate is typically greater than the number of subscribers on which a network is paid by the service providers, we are currently experiencing a greater difference in these two different numbers of subscribers than we would expect. We anticipate this difference to decrease as we grow our total subscriber base. There can be no assurances that Nielsen will continue to report growth of its estimate of our subscribers and in fact at some point Nielsen might even report additional declines in our subscriber estimate. If that were to happen, we could suffer a reduction in advertising revenue.

Subscriber fees for the three months ended September 30, 2007 were $4,739,000, an increase of $391,000 or 9.0% compared to $4,348,000 for the three months ended September 30, 2006. Subscriber fees for the nine months ended September 30, 2007 were $14,263,000, an increase of $1,191,000 or 9.1% compared to $13,072,000 for the nine months ended September 30, 2006. The increase in subscriber fees was primarily due to an increased number of paying subscribers both from new and existing affiliates as well as contractual subscriber fee rate increases with existing service providers carrying Outdoor Channel.

We are pursuing subscriber growth utilizing various means including deployment of rate relief for new and existing subscribers and payment of subscriber acquisition or launch support fees among other tactics. Such launch support fees are capitalized and amortized over the period that the pay television distributor is required to carry the newly acquired TOC subscriber. To the extent revenue is associated with the incremental subscribers, the amortization is charged to offset the related revenue. Any excess of launch support amortization over the related subscriber fee revenue is charged to expense. As a result of a combination of these tactics, we anticipate our net subscriber fee revenue will decrease over the short-term future as we deploy this strategy.

Cost of Services

Our cost of services consists primarily of the cost of providing our broadcast signal and programming to the distributors for transmission to the consumer. Cost of services includes programming costs, satellite transmission fees, production and operations costs, and other direct costs. Total cost of services for the three months ended September 30, 2007 was $3,305,000, a decrease of $488,000 or 12.9%, compared to $3,793,000 for the three months ended September 30, 2006. Total cost of services for the nine months ended September 30, 2007 was $9,970,000, a decrease of $872,000 or 8.0%, compared to $10,842,000 for the nine months ended September 30, 2006. As a percentage of revenues, total cost of services was 26.1% and 33.5% in the three months ended September 30, 2007 and 2006, respectively. As a percentage of revenues, total cost of services was 28.3% and 34.5% in the nine months ended September 30, 2007 and 2006, respectively. The improved rate reflects the impact of price increases noted above and reduced programming expense as more fully discussed below.

Programming expenses for the three months ended September 30, 2007 were $1,521,000, a decrease of $574,000 or 27.4% compared to $2,095,000 for the three months ended September 30, 2006. Programming expenses for the nine months ended September 30, 2007 were $4,625,000, a decrease of $1,191,000 or 20.5% compared to $5,816,000 for the nine months ended September 30, 2006. The decrease is principally a result of reducing the number of in-house produced shows while increasing the repeat rate within the schedule of our other in-house shows.

Our policy is to charge costs of specific show production to programming expense over the expected airing period beginning when the program first airs. The cost of programming is generally first recorded as prepaid programming costs and is then charged to programming expense based on the anticipated airing schedule. The anticipated airing schedule has historically been over 2 or 4 quarters that generally did not extend over more than 2 years. For 2007, the anticipated airing schedule is typically over 2 quarters but might be charged in more than one fiscal year. As the anticipated airing schedule changes, the

timing and amount of the charge to expense is prospectively adjusted accordingly. At the time we determine a program is unlikely to air or re-air, we charge programming expense with the remaining associated cost recorded in prepaid programming. We do not make any further expense or asset adjustments if in subsequent periods demand brings episodes to air that had previously been fully expensed, rather, we consider such events when we review our expected airings prospectively. As noted above, we have implemented a new programming strategy which may include more airings per show including a greater number of repeat episodes within the quarter. Programming expenses are expected to stabilize over the near term. As we enter 2008, our aggregate programming costs are expected to increase as we continue to improve the quality of our in-house produced shows. As our programming strategy evolves, we will reconsider the appropriate timing of the charge to expense of our programming costs.

Satellite transmission fees for the three months ended September 30, 2007 were $637,000, a decrease of $30,000, or 4.5%, compared to $667,000 for the three months ended September 30, 2006. Satellite transmission fees for the nine months ended September 30, 2007 were $1,869,000, a decrease of $50,000, or 2.6%, compared to $1,919,000 for the nine months ended September 30, 2006. We are in negotiations with our satellite provider to be moved to a replacement satellite in the near future and use less bandwidth for our signal at reduced rates than in the past. Final negotiations have not been completed. It is possible that our existing contract will be terminated early resulting in the write-off of deferred satellite rent obligations or if the terms so dictate, an amendment to the recognition of this obligation in our income statement. Since the final terms of the new agreement have not been negotiated, the final accounting treatment has yet to be determined. In any event, we expect to reduce satellite transmission fees in future periods.

Production and operations costs for the three months ended September 30, 2007 were $1,101,000, an increase of $115,000, or 11.7%, compared to $986,000 for the three months ended September 30, 2006. Production and operations costs for the nine months ended September 30, 2007 were $3,375,000, an increase of $322,000, or 10.5%, compared to $3,053,000 for the nine months ended September 30, 2006. The increase principally relates to a programming event that occurred in the first quarter of 2007 and costs related to our new broadcast facility.

Other direct costs for the three months ended September 30, 2007 were $46,000, an increase of $1,000, or 2.2%, compared to $45,000 for the three months ended September 30, 2006. Other direct costs for the nine months ended September 30, 2007 were $101,000, an increase of $47,000, or 87.0%, compared to $54,000 for the nine months ended September 30, 2006. The increase principally relates to a greater number of subscribers for which we have paid launch support to acquire in the last half of 2006 resulting in more expense recognized through amortization in the nine months ended September 30, 2007 compared to the same period in 2006. We anticipate other direct costs will increase over the foreseeable future. Such increases are expected to result from the amortization of subscriber acquisition fees, also referred to as launch support fees, where the costs are in excess of the related subscriber revenue.

Other Expenses

Other expenses consist of the cost of advertising, selling, general and administrative expenses, impairment of amortizable intangible assets, and depreciation and amortization.

Total other expenses for the three months ended September 30, 2007 were $8,768,000, a decrease of $7,336,000 or 45.6%, compared to $16,104,000 for the three months ended June 30, 2006. Total other expenses for the nine months ended September 30, 2007 were $27,606,000, a decrease of $2,831,000 or 9.3%, compared to $30,437,000 for the nine months ended September 30, 2006. As a percentage of revenues, total expenses were 69.3% and 142.5% in the three months ended September 30, 2007 and 2006, respectively. As a percentage of revenues, total other expenses were 78.5% and 96.9% in the nine months ended September 30, 2007 and 2006, respectively. The decrease is a result of incurring an impairment of amortizable intangible assets in 2006 of $9,540,000 for which we did not have a similar charge in the nine months ended September 30, 2007 and reduced spending on advertising in anticipation during the first half of the year to adopt a new logo and the elimination of our NASCAR sponsorship. The decrease in other expenses for the nine months ended September 30, 2007 was offset by several factors including $5,964,000 of expense related to performance units granted to our CEO in the fourth quarter of 2006, increased legal fees related to negotiation of our carriage agreements and the sale of the Membership Division, increased accounting fees incurred in the first quarter of 2007 related to an increased financial reporting effort than normal and increased professional fees related to consultants hired to help us execute our business plan as well as helping us assess our Membership Division segment.

Advertising expenses for the three months ended September 30, 2007 were $1,558,000, an increase of $21,000 or 1.4% compared to $1,537,000 for the three months ended September 30, 2006. Advertising expenses for the nine months ended September 30, 2007 were $4,088,000, a decrease of $1,211,000 or 22.9% compared to $5,299,000 for the nine months ended September 30, 2006. We reduced our spending on advertising in the first nine months of 2007 related to our print media campaigns and our race program sponsorship. We have terminated our sponsorship of a NASCAR team, believing the

expenditure will be more effectively deployed otherwise. Further, due to our re-branding initiative, we delayed other tactics to fully benefit from our new logo and programming initiatives during the first six months of 2007 which was launched during the three months ended September 30, 2007. We believe that our advertising expenses will increase in the short-term as we continue to deploy tactics to increase and maintain our subscriber base and the number of viewers watching our programming.

Selling, general and administrative expenses for the three months ended September 30, 2007 were $6,524,000, an increase of $2,340,000 or 55.9% compared to $4,184,000 for the three months ended September 30, 2006. Selling, general and administrative expenses for the nine months ended September 30, 2007 were $21,525,000, an increase of $8,154,000 or 61.0% compared to $13,371,000 for the nine months ended September 30, 2006. As a percentage of revenues, selling, general and administrative expenses were 51.6% and 37.0% in the three months ended September 30, 2007 and 2006, respectively. As a percentage of revenues, selling, general and administrative expenses were 61.2% and 42.5% in the nine months ended September 30, 2007 and 2006, respectively. We granted our CEO two tranches of performance units of 400,000 shares each which vest upon our stock price reaching stipulated levels. We have calculated their fair value using a lattice model. The first tranche has an estimated value of $4,515,000 and has an expected service period of 7 months. In the nine months ended September 30, 2007, we recognized $4,515,000 related to this grant. The second grant of 400,000 performance units was calculated to have a fair value of $4,474,000 and an expected service period of 13.3 months. In the nine months ended September 30, 2007, we recognized $3,855,000 of compensation expense related to this grant. The remainder of the increase in selling, general and administrative fees related primarily to consulting fees pertaining to execution of our strategic plan, accounting fees for the audit of our evaluation of the effectiveness of our internal control over financial reporting in 2007 related to the 2006 fiscal year and related to increased filing requirements in 2007, increased legal fees related to negotiation of carriage relationships and the sale of the Membership Division and to other operating costs.

We anticipate that selling, general and administrative costs, excluding share-based compensation charges, will continue to increase over the foreseeable future. We are adding to our professional and support staff across all departments to support our initiatives in subscriber growth and in other areas such as accounting and finance. We anticipate we will incur additional share-based compensation costs of $619,000 in the three months ending December 31, 2007 related to the performance units granted to our CEO. We utilize share-based compensation packages as incentives for our employees. During 2007, we have utilized restricted stock grants as opposed to stock options or performance units. Restricted stock awards are deductible for tax purposes at their fair market value on the day such awards vest. Further, by the end of fiscal 2007, we will have fully expensed the performance units awarded to our CEO. Although we may find it necessary to motivate prospective or current employees with additional cash and or equity awards, we expect our share-based compensation charges to decline.

Impairment of intangible assets for the three and nine months ended September 30, 2006 was $9,540,000. We did not incur such a charge in the three and nine months ended September 30, 2007. During the three months ended September 30, 2006, we engaged third party consultants to review our business practices and strategy. Among the areas reviewed was our approach to grow our subscriber base through our relationships with MSOs. Prior to this time our strategy was to focus on incremental growth opportunities without impacting our existing subscriber base. Our consultants completed a market survey and other steps they deemed appropriate. In September of 2006, the Board of Directors concluded that a complete revision of the terms of the relationships was necessary to meet the subscriber growth goals established by us. We reviewed our intangible assets for impairment. Among the components of the plan was subscriber rate relief in some form for both existing subscriber relationships and the incremental (if any) subscribers that might be added to our subscriber base as a result of the planned actions. Acknowledging the changed circumstances, we assessed fair value of our intangible assets and concluded that our MSO relationships asset had become fully impaired. Accordingly we have written off the carrying value of $9,540,000 during the three and nine months ended September 30, 2006.

We further concluded that the carrying values of our other intangible assets had not been impaired nor do we believe that the changed circumstances have affected the estimated lives of the amortizable intangible assets. We continue to believe that as of September 30, 2007 the carrying values have not been impaired nor have circumstances changed that affect their estimated lives. However, these estimates will continue to be reviewed during each reporting period to determine whether circumstances continue to support their estimated useful lives and fair value. Estimates are subject to risks and uncertainties, which could cause actual results to differ materially from those projected or implied in the determination of the fair value. A significant downward revision in the present value of estimated future cash flows for a reporting unit could result in an impairment of goodwill or the amortizable intangibles and a noncash charge would be required. Such a charge could have a significant effect on our reported net earnings.

Depreciation and amortization for the three months ended September 30, 2007 were $686,000, a decrease of $157,000 or 18.6% compared to $843,000 for the three months ended September 30, 2006. Depreciation and amortization for the nine months ended September 30, 2007 were $1,993,000, a decrease of $234,000 or 10.5% compared to $2,227,000 for the nine

months ended September 30, 2006. Such decreases resulted from the impairment of our MSO Relationship intangible asset recognized in the third quarter of 2006.

Income (Loss) from Operations

Income (loss) from operations for the three months ended September 30, 2007 was $583,000, a change of $9,175,000 compared to a loss of $8,592,000 for the three months ended September 30, 2006. Income (loss) from operations for the nine months ended September 30, 2007 was a loss of $2,405,000, a change of $7,452,000 compared to a loss of $9,857,000 for the nine months ended September 30, 2006. As discussed above, the improvement in our income (loss) from operations was driven by increased prices we are realizing for our advertising inventory, growth in our subscriber base, lower advertising costs as we delayed initiatives to correspond with other tactics, lower programming cost as we re-define the number of episodes repeated during the quarter all offset by increased compensation related to our professional and support staff, professional fees and other charges. For the nine months comparative periods we incurred an impairment charge related to our MSO relationship intangible asset in 2006 which did not recur in 2007. As we continue to strive to grow our subscriber base which involves increased advertising expenditures, subscriber rate relief for our carriage partners and the ongoing and planned payment of launch or advertising support, we will continue to incur increased expenses such as broadband, marketing and advertising that are unlikely to be immediately offset by revenues. As a result, we anticipate our operating margins will be constrained for the short-term future until scale is achieved. There can be no assurance that these strategies will be successful.

Interest Expense

Interest expense for the three months ended September 30, 2007 was $12,000, a decrease of $61,000 compared to $73,000 for the three months ended September 30, 2006. Interest expense for the nine months ended September 30, 2007 was $12,000, a decrease of $215,000 compared to $227,000 for the nine months ended September 30, 2006. Interest expense incurred in the nine months ended September 30, 2007 relates to the filing of our income tax returns in states in which we had nexus but previously had not filed our income tax returns. The interest expense incurred in the nine months ended September 30, 2006 relates to two term loans obtained in November 2005 with an original aggregate principal amount of $4,950,000 with effective fixed interest rates of 6.59% and 6.35% which we repaid in October 2006.

Other Income

Other income for the three months ended September 30, 2007 was $894,000, an increase of $179,000 compared to $715,000 for the three months ended September 30, 2006. Other income for the nine months ended September 30, 2007 was $2,409,000, an increase of $428,000 compared to $1,981,000 for the nine months ended September 30, 2006. This improvement was primarily due to increased dividends and interest earned on our increased average balances of our investment in available-for-sale securities and cash and cash equivalent balances.

Income (Loss) from Continuing Operations Before Income Taxes

Income (loss) from continuing operations before income taxes as a percentage of revenues was 11.6% for the three months ended September 30, 2007 compared to (70.3)% for the three months ended September 30, 2006. Income (loss) from continuing operations before income taxes as a percentage of revenues was 0.0% for the nine months ended September 30, 2007 compared to (25.8)% for the nine months ended September 30, 2006.

Income Tax Provision (Benefit)

Income tax provision (benefit) for the three months ended September 30, 2007 was ($33,000), a change of $2,949,000 as compared to ($2,982,000) for the three months ended September 30, 2006. Income tax provision (benefit) for the nine months ended September 30, 2007 was $320,000, a change of $3,111,000 as compared to ($2,791,000) for the nine months ended September 30, 2006. The change was principally due to our recognizing a profit in the three months ended September 30, 2007 as compared to a loss for the three and nine months ended September 30, 2006. The income tax provision (benefit) reflected in the accompanying unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2007 and 2006 is different than that computed based on the applicable statutory Federal income tax rate of 34% due to state taxes and the impact of share-based compensation expense recognized under SFAS 123(R). The income tax provision reflected in the accompanying unaudited condensed consolidated statement of operations for the nine months ended September 30, 2007 was also impacted by a discrete tax expense of $290 associated with a capital loss resulting from the sale of the Membership Division during the quarter ended June 30, 2007. The portion of the current year compensation expense relating to qualified incentive stock options, or ISOs, is recognized for financial statement purposes but is generally not deductible for tax purposes and thus is treated as a permanent difference between the two. For the three and nine months

ended September 30, 2007 we recognized a charge of $81 and $203, respectively, and for the three and nine months ended September 30, 2006 we recognized a charge of $190 and $533, respectively, related to ISOs under SFAS 123R compensation expense.

Income (Loss) from Continuing Operations

Income (loss) from continuing operations for the three months ended September 30, 2007 was $1,498,000, a change of $6,466,000 compared to a loss of $4,968,000 for the three months ended September 30, 2006. Income (loss) from continuing operations for the nine months ended September 30, 2007 was a loss of $328,000, a change of $4,984,000 compared to a loss of $5,312,000 for the nine months ended September 30, 2006. The decrease was due to the reasons stated above.

Income (Loss) from Discontinued Operations, Net of Tax

We did not have discontinued operations during the three months ended September 30, 2007 as the Membership Division was sold on April 24, 2007 compared to a loss of $331,000 for the three months ended September 30, 2006. Income from discontinued operations, net of tax for the nine months ended September 30, 2007 was $29,000, a change of $31,000 compared to a loss of $2,000 for the nine months ended September 30, 2006. In the three and nine months ended September 30, 2006 we recognized tax benefits that resulted in recognition of net income from discontinued operations while we recorded a loss from discontinued operations before income tax benefit.

Net Income (Loss)

Net income (loss) for the three months ended September 30, 2007 was $1,498,000, an increase of $6,797,000 compared to a loss of $5,299,000 for the three months ended September 30, 2006. Net income (loss) for the nine months ended September 30, 2007 was a loss of $299,000, an increase of $5,015,000 compared to a loss of $5,314,000 for the nine months ended September 30, 2006.

Liquidity and Capital Resources

We generated $10,590,000 of cash from our operating activities in the nine months ended September 30, 2007, compared to $3,327,000 in the nine months ended September 30, 2006. We used $582,000 of cash in discontinued operations in the nine months ended September 30, 2007 compared to using $975,000 for the nine months ended September 30, 2006. We had a cash and cash equivalent balance of $23,928,000 at September 30, 2007, an increase of $9,702,000 from the balance of $14,226,000 at December 31, 2006. We also had short-term investments classified as available-for-sale securities of $45,252,000 at September 30, 2007, an increase of $3,108,000 from the balance of $42,144,000 at December 31, 2006. The investments at September 30, 2007 were comprised principally of auction rate securities ($44,440,000) with interest rates that generally reset every 28 days. The auction rate securities have long-term maturity dates and provide us with enhanced yields. Various equity securities ($812,000) make up the remainder of the September 30, 2007 balance. We believe we have the ability to quickly liquidate the auction rate securities at their original cost although there is no guaranty we would be able to do so. Net working capital increased to $78,265,000 at September 30, 2007, compared to $65,832,000 at December 31, 2006 excluding the current assets and current liabilities of discontinued operations.

The increase in cash flow from operating activities in the nine months ended September 30, 2007 compared to the same period in 2006 was due to a number of factors including the receipt of federal and state income tax refunds resulting from our utilization of our net operating loss for both the 2005 income tax returns and, as appropriate, carryback opportunities, greater increases in noncash costs and operating expenses as compared to the increase in costs and operating expenses as a whole, and our ability to recognize tax benefits from exercise of stock options in excess of recognized expense in 2006 but due to our 2007 outlook, we can not recognize a corresponding amount in 2007.

Net cash used in investing activities was $540,000 in the nine months ended September 30, 2007 compared to cash used by investing activities of $2,202,000 for the nine months ended September 30, 2006. We used $69,000 of cash in discontinued operations investing activities in the nine months ended September 30, 2007 compared to using $75,000 in the nine months ended September 30, 2006. The increase in cash used in investing activities related principally to the net difference of sales and purchases of short-term auction rate securities partially offset by a decrease in capital expenditures on “construction in progress” and equipment related to the build-out of our broadcast facility in 2006. Additional capital expenditures were for fixed asset replacements. The sale of our Membership Division provided $3,589,000 of cash from investing activities.

Cash provided by financing activities was $303,000 in the nine months ended September 30, 2007 compared to $1,081,000 for the nine months ended September 30, 2006. The discontinued operations did not contribute or use cash in financing activities in the nine months ended September 30, 2007 compared to using $9,000 in the nine months ended September 30, 2006. The cash provided by financing activities in the nine months ended September 30, 2007 was principally the proceeds from the

exercise of stock options offset by the purchase of treasury stock as employees used stock to satisfy withholding taxes related to vesting of restricted shares. During the nine months ended September 30, 2006, cash provided by financing activities was principally the proceeds from the exercise of stock options offset by principal payments on outstanding debt.

On October 2, 2007, the Board of Directors approved the renewal of the revolving line of credit agreement (the “Revolver”) with U.S. Bank N.A. (the “Bank”), extending the maturity date to September 5, 2009 and increasing the total amount which can be drawn upon under the Revolver from $8,000,000 to $10,000,000. Interest is payable beginning November 5, 2007, and on the same date of each consecutive month thereafter. The Revolver provides that the interest rate shall be LIBOR plus 1.25%. The Revolver was previously collateralized by substantially all of our assets. The renewed Revolver is unsecured. This credit facility contains customary financial and other covenants and restrictions, as amended on September 21, 2007, including a change of control provision, some of which are defined with non-GAAP provisions including elimination of the effects of noncash stock based employee compensation expense. As of September 30, 2007 and as of the date of this report, we did not have any amounts outstanding under this credit facility. This Revolver is guaranteed by TOC.

As of September 30, 2007, we had sufficient cash on hand and expected cash flow from operations to meet our short-term cash flow requirements. Management believes that our existing cash resources including cash on-hand and anticipated cash flows from operations will be sufficient to fund our operations at current levels and anticipated capital requirements through at least December 31, 2008. To the extent that such amounts are insufficient to finance our working capital requirements or our desire to expand operations beyond current levels, we could seek additional financing. There can be no assurance that equity or debt financing will be available if needed or, if available, will be on terms favorable to us.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

At September 30, 2007 and December 31, 2006, our investment portfolio included fixed-income securities of $45,252,000 and $42,144,000, respectively. These securities are subject to interest rate risk and will decline in value if interest rates increase. However, due to the short duration of our investment portfolio, an immediate 10% change in interest rates would have no material impact on our financial condition, operating results or cash flows. Declines in interest rates over time will, however, reduce our interest income.

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

As of September 30, 2007 and as of the date of this report, we did not have any outstanding borrowings. 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 have no material, immediate impact on our financial condition, operating results or cash flows.

ITEM 4. CONTROLS AND PROCEDURES.

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

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

Management’s report on internal control over financial reporting.Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Our internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of assets; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted

accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements prepared for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2006, based on the framework set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management reviewed the results of this evaluation with the Audit Committee of our Board of Directors, and based on this evaluation, management determined that as of December 31, 2006 a material weakness existed relating to inadequate financial department staffing and a lack of financial accounting expertise necessary to properly account for certain complex or non-routine transactions.

Management completed a current assessment of the effectiveness of our internal control over financial reporting and has concluded that as of September 30, 2007 three material weaknesses existed. These material weaknesses related to inadequate segregation of duties at the entity level surrounding the financial reporting controls; inadequate controls surrounding accounting for equity based awards to employees and non-employees and inadequate staffing and lack of financial expertise within the finance and accounting department. These deficiencies have not been remediated as of September 30, 2007, the date of this report. We do not believe that these material weaknesses will be fully remediated by December 31, 2007.

Notwithstanding the existence of these material weaknesses, we believe that the consolidated financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented. Until these deficiencies are remediated, management has concluded that there is more than a remote likelihood that a material misstatement to the annual or interim consolidated financial statements could occur and not be prevented or detected by the Company’s controls in a timely manner. Accordingly, management has determined that these control deficiencies continue to constitute material weaknesses. Because of these material weaknesses, we have concluded that we did not maintain effective internal control over financial reporting as of September 30, 2007 based on the criteria in Internal Control—Integrated Framework.

Remediation plan for material weaknesses in internal control over financial reporting.The lack of staff resources, segregation of duties, controls surrounding equity based awards and financial expertise arose as a result of several issues including time constraints imposed on the accounting staff as a result of our heavier than normal financial reporting requirements during the fourth quarter of 2006 carrying into the third quarter of 2007, employee turnover and our inability to timely fill accounting and financial-related positions. Our management, with the oversight of our Audit Committee, has devoted considerable effort in remediating the material weaknesses identified above. However, as of September 30, 2007, we had not remediated the material weaknesses in our internal control over financial reporting.

We have recently filled certain open key positions within the accounting department and have successfully conducted a search for a candidate to take the position of Chief Accounting Officer in October 2007. In addition, we have implemented accounting software that will enhance our capabilities across many accounting disciplines, particularly as it relates to share-based compensation and we will more fully develop the technical expertise of our existing staff. We have hired additional CPAs to bolster our U.S. GAAP expertise.

Many of the remedial actions we have taken are very recent, and other remedial actions are currently being implemented including the training of recently hired accounting staff. Because our remediation efforts include the training of additional personnel many of the controls in our current system of internal controls will still rely extensively on manual review and approval, and management will not be able to conclude that the material weaknesses have been eliminated until such additional personnel have been fully engaged and the controls have been successfully operated and tested. We, along with our Audit Committee, will continue to monitor and evaluate the effectiveness of these remedial actions and make further changes as deemed appropriate.

Changes in internal control over financial reporting.Other than as noted above, during the quarter ended September 30, 2007, there was no change in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting subsequent to the date referred to above.

PART II—OTHER INFORMATION

ITEM 1A. Risk Factors.

Our business and operations are subject to a number of risks and uncertainties, and the following list should not be considered to be a definitive list of all factors that may affect our business, financial condition and future operating results and should be read in conjunction with the risks and uncertainties, including risk factors, contained in our other filings with the Securities and Exchange Commission. Any forward-looking statements made by us are made with the intention of obtaining the benefits of the “safe harbor” provisions of the Securities Litigation Reform Act and a number of factors, including, but not limited to those discussed below, could cause our actual results and experiences to differ materially from the anticipated results or expectations expressed in any forward-looking statements.

We do not control the methodology used by Nielsen to estimate our subscriber base or television ratings, and changes, or inaccuracies, in such estimates could cause our advertising revenue to decrease.

Our ability to sell advertising is largely dependent on the size of our subscriber base and television ratings estimated by Nielsen. We do not control the methodology used by Nielsen for these estimates, and estimates regarding Outdoor Channel’s subscriber base made by Nielsen is theirs alone and does not represent opinions, forecasts or predictions of Outdoor Channel Holdings, Inc. or its management. Outdoor Channel Holdings, Inc. does not by its reference to Nielsen or distribution of the Nielsen Universe Estimate imply its endorsement of or concurrence with such information. In particular, we believe that we may be subject to a wider difference between the number of subscribers as estimated by Nielsen and the number of subscribers reported by our cable and satellite MSOs than is typically expected because we are not fully distributed and are sometimes carried on poorly penetrated tiers. In addition, if Nielsen modifies its methodology or changes the statistical sample it uses for these estimates, such as the demographic characteristics of the households, the size of our subscriber base and our ratings could be negatively affected resulting in a decrease in our advertising revenue.

Cable and satellite service providers could discontinue or refrain from carrying Outdoor Channel, or decide to not renew our distribution agreements, which could substantially reduce the number of viewers and harm our operating results.

The success of Outdoor Channel is dependent, in part, on our ability to enter into new carriage agreements and maintain existing agreements or arrangements with, and carriage by, satellite systems and multiple system operators’, which we refer to as MSOs, affiliated regional or individual cable systems. Although we currently have arrangements or agreements with, and are being carried by, all the largest MSOs and satellite service providers, having such relationship or agreement with an MSO does not ensure that an MSOs affiliated regional or individual cable systems will carry or continue to carry Outdoor Channel or that the satellite service provider will carry our channel. Under our current contracts and arrangements, TOC typically offers satellite systems and cable MSOs, along with their cable affiliates, the right to broadcast Outdoor Channel to their subscribers, but such contracts or arrangements have not typically required that Outdoor Channel be offered to all subscribers of, or any tiers offered by, the service provider or a specific minimum number of subscribers. Because many of our prior carriage arrangements do not specify on which service levels Outdoor Channel is carried, such as analog versus basic digital, expanded digital or specialty tiers, or in which geographic markets Outdoor Channel will be offered, we have no assurance that Outdoor Channel will be carried and available to viewers of any particular MSO or to all satellite subscribers. In addition, under the terms of our prior agreements, the service providers could decide to discontinue carrying Outdoor Channel. Lastly, we are currently not under any long-term contract with some of the service providers that are currently distributing our channel. Our distribution agreements with five of the major service providers, accounting for approximately 60% of our subscriber base as of October 2007, have expired as of that date, although we have renewed some of such agreements for a short period or continued such agreements on a month-to-month basis. If we are unable to renew these distribution agreements for a committed number of subscribers or for multi-year terms, we could lose, or be subject to a loss of, a substantial number of subscribers. If cable and satellite service providers discontinue or refrain from carrying Outdoor Channel, or decide to not renew our distribution agreement with them, this could reduce the number of viewers and harm our operating results.

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

A major component of our financial growth strategy is based on increasing the number of subscribers to our channels. Growing our subscriber base depends upon many factors, such as the success of our marketing efforts in driving consumer demand for our channels; overall growth in cable and satellite subscribers; the popularity of our programming; our ability to negotiate new carriage agreements, or amendments to, or renewals of, current carriage agreements, and maintain existing distribution; plus other factors that are beyond our control. There can be no assurance that we will be able to maintain or

increase the subscriber base of our channels on cable and satellite systems or that our current carriage will not decrease as a result of a number of factors or that we will be able to maintain our current subscriber fee rates. In particular, negotiations for new carriage agreements, or amendments to, or renewals of, current carriage agreements, are lengthy and complex, and we are not able to predict with any accuracy when such increases in our subscriber base may occur, if at all, or if we can maintain our current subscriber fee rates. If we are unable to grow our subscriber base or we reduce our subscriber fee rates, our subscriber and advertising revenues may not increase and could decrease. In addition, as we plan and prepare for such projected growth in our subscriber base, we plan to increase our expenses accordingly. If we are not able to increase our revenue to offset these increased expenses, and if our subscriber fee revenue decreases, our profitability could decrease.

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

Although we currently have plans to offer incentives to service providers in an attempt to increase the number of our subscribers, we may not be able to do so economically or at all. If we are unable to increase the number of our subscribers on a cost-effective basis, or if the benefits of doing so do not materialize, our business and operating results would be harmed. In particular, it may be necessary to reduce our subscriber fees in order to grow or maintain our subscriber base. In addition, if we make any upfront cash payments to service providers for an increase in our subscriber base, our cash flow could be adversely impacted, and we may incur negative cash flow for some time. In addition, if we were to make such upfront cash payments or provide other incentives to service providers, we expect to amortize such amounts ratably over the term of the agreements with the service providers. However, if a service provider terminates any such agreement prior to the expiration of the term of such agreement, then under current accounting rules we may incur a large expense in that quarter in which the agreement is terminated equal to the remaining un-amortized amounts and our operating results could accordingly be adversely affected. In addition, if we offer equity incentives, the terms and amounts of such equity may not be favorable to us or our stockholders.

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

Many of our existing agreements with cable and satellite service providers contain “most favored nation” clauses. These clauses typically provide that if we enter into an agreement with another service provider on more favorable terms, these terms must be offered to the existing service provider, subject to some exceptions and conditions. Future agreements with service providers may also contain similar “most favored nation” clauses. If, in our attempt to increase our number of subscribers, we reduce our subscriber fees or structure launch support fees or other incentives to effectively offer more favorable terms to any service provider, these clauses may require us to offer similar incentives to other service providers or reduce the effective subscriber fee rates that we receive from other service providers, and this could negatively affect our operating results.

If our channels are placed in unpopular program packages by cable or satellite service providers, or if service fees are increased for our subscribers, the number of viewers of our channel may decline which could harm our business and operating results.

We do not control the channels with which our channel is packaged by cable or satellite service providers. The placement by a cable or satellite service provider of our channel in unpopular program packages could reduce or impair the growth of the number of our viewers and subscriber fees paid by service providers to us. In addition, we do not set the prices charged by cable and satellite service providers to their subscribers when our channel is packaged with other television channels or offered by itself. The prices for the channel packages in which our channel is bundled, or the price for our channel by itself, may be set too high to appeal to individuals who might otherwise be interested in our network. Further, if our channel is bundled by service providers with networks that do not appeal to our viewers or is moved to packages with fewer subscribers, we may lose viewers. These factors may reduce the number of subscribers and/or viewers of our channel, which in turn would reduce our subscriber fees and advertising revenue.

Consolidation among cable and satellite operators may harm our business.

Cable and satellite operators continue to consolidate, making us increasingly dependent on fewer operators. If these operators fail to carry Outdoor Channel, use their increased distribution and bargaining power to negotiate less favorable terms of carriage or to obtain additional volume discounts, our business and operating results would suffer.

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

We have undergone rapid and significant growth in revenue and subscribers over the last several years. There are risks inherent in rapid growth and the pursuit of new strategic objectives, including among others: investment and development of appropriate infrastructure, such as facilities, information technology systems and other equipment to support a growing organization; hiring and training new management, sales and marketing, production, and other personnel and the diversion of management’s attention and resources from critical areas and existing projects; and implementing systems and procedures to successfully manage growth, such as monitoring operations, controlling costs, maintaining effective quality and service, and implementing and maintaining adequate internal controls. We expect that additional expenditures will be required as we continue to upgrade our facilities. We cannot assure you that we will be able to successfully manage our growth, that future growth will occur or that we will be successful in managing our business objectives. We can provide no assurance that our profitability or revenues will not be harmed by future changes in our business. Our operating results could be harmed if such growth does not occur, or is slower or less profitable than projected.

We may not be able to secure additional national advertising accounts, and as a result, our revenues and profitability may be negatively impacted.

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

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

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

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

In addition, all internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to the preparation and presentation of financial statements. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

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

The average cost of programming has increased recently for the cable industry and such increases may continue. We plan to build our programming library through the acquisition of long-term broadcasting rights from third party producers, in-house production and outright acquisition of programming, and this may lead to increases in our programming costs. The development, production and editing of television programming requires a significant amount of capital and there are

substantial financial risks inherent in developing and producing television programs. Actual programming and production costs may exceed their budgets. Factors such as labor disputes, death or disability of key spokespersons or program hosts, damage to master tapes and recordings or adverse weather conditions may cause cost overruns and delay or prevent completion of a project. If we are not able to successfully recover the costs of developing or acquiring programming through increased revenues, whether the programming is produced by us or acquired from third-party producers, our business and operating results will be harmed.

Our operating results may vary significantly, and historical comparisons of our operating results are not necessarily meaningful and should not be relied upon as an indicator of future performance.

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

	•		carriage decisions of cable and satellite service providers;

	•		demand for advertising, advertising rates and offerings of competing media;

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

	•		cable and satellite service providers’ capital and marketing expenditures and their impact on programming offerings and penetration;

	•		seasonal trends in viewer interests and activities;

	•		pricing, service, marketing and acquisition decisions that could reduce revenues and impair quarterly financial results;

	•		the mix of cable television and satellite-delivered programming products and services sold and the distribution channels for those products and services;

	•		our ability to react quickly to changing consumer trends;

	•		increased compensation expenses resulting from the hiring of highly qualified employees;

	•		specific economic conditions in the cable television and related industries; and

	•		changing regulatory requirements.

Due to the foregoing and other factors, many of which are beyond our control, our revenue and operating results vary from period to period and are difficult to forecast. Our expense levels are based in significant part on our expectations of future revenue. Therefore, our failure to meet revenue expectations would seriously harm our business, operating results, financial condition and cash flows. Further, an unanticipated decline in revenue for a particular calendar quarter may disproportionately affect our profitability because our expenses would remain relatively fixed and would not decrease correspondingly.

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

We prepare our financial statements to conform to accounting principles generally accepted in the United States of America which are subject to interpretations by the Financial Accounting Standards Board, the Securities and Exchange Commission and various bodies formed to interpret and create appropriate accounting policies. A change in those policies can have a significant effect on our reported results and may even affect our reporting of transactions completed before a change is announced. Accounting policies affecting many other aspects of our business, including rules relating to business combinations and employee stock option grants, have recently been revised or are under review. Changes to those rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. In addition, our preparation of financial statements in accordance with GAAP requires that we make estimates, judgments and assumptions that affect the recorded amounts of assets and liabilities, disclosure of those assets and liabilities at the date of the financial statements and the recorded amounts of revenue and expenses during the reporting period. A change in the facts and circumstances surrounding those estimates, including the interpretation of the terms and conditions of our contractual obligations, could result in a change to our estimates and could impact our operating results.

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

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

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

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

We also compete with television network companies that generally have large subscriber bases and significant investments in, and access to, competitive programming sources. In some cases, we compete with cable and satellite service providers that have the financial and technological resources to create and distribute their own television networks, such as Versus, which is owned and operated by Comcast. In order to compete for subscribers, we may be required to reduce our subscriber fee rates or pay either launch fees or marketing support or both for carriage in certain circumstances in the future which may harm our operating results and margins. We may also issue our securities from time to time in connection with our attempts for broader distribution of Outdoor Channel and the number of such securities could be significant. We compete for advertising sales with other pay television networks, broadcast networks, and local over-the-air television stations. We also compete for advertising sales with satellite and broadcast radio and the print media. We compete with other cable television networks for subscriber fees from, and affiliation agreements with, cable and satellite service providers. Actions by the Federal Communications Commission, which we refer to as the FCC, and the courts have removed certain of the impediments to entry by local telephone companies into the video programming distribution business, and other impediments could be eliminated or modified in the future. These local telephone companies may distribute programming that is competitive with the programming provided by us to cable operators.

Changes in corporate governance and securities disclosure and compliance practices have increased and may continue to increase our legal compliance and financial reporting costs.

The Sarbanes-Oxley Act of 2002 required us to change or supplement some of our corporate governance and securities disclosure and compliance practices. The Securities and Exchange Commission and Nasdaq have revised, and continue to revise, their regulations and listing standards. These developments have increased, and may continue to increase, our legal compliance and financial reporting costs.

The satellite infrastructure that we use may fail or be preempted by another signal, which could impair our ability to deliver programming to our cable and satellite service providers.

Our ability to deliver programming to service providers, and their subscribers, is dependent upon the satellite equipment and software that we use to work properly to distribute our programming. If this satellite system fails, or a signal with a higher priority replaces our signal, which is determined by our agreement with the owner of the satellite, we may not be able to deliver programming to our cable and satellite service provider customers and their subscribers within the time periods advertised. We have negotiated for back-up capability with our satellite provider on an in-orbit spare satellite, which provides us carriage on the back-up satellite in the event that catastrophic failure occurs on the primary satellite. Our contract provides that our main signal 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 harm our reputation and reduce our revenues and profits.

Natural disasters and other events beyond our control could interrupt our signal.

Our systems and operations may be vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures and similar events. They also could be subject to break-ins, sabotage and intentional acts of vandalism. Since our production facilities for Outdoor Channel are all located in Temecula, California, the results of such events could be particularly disruptive because we do not have readily available alternative facilities from which to conduct our business. Our business interruption insurance may not be sufficient to compensate us for losses that may occur. Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems at our facilities could result in interruptions in our services. Interruptions in our service could harm our reputation and reduce our revenues and profits.

Seasonal increases or decreases in advertising revenue may negatively affect our business.

Seasonal trends are likely to affect our viewership, and consequently, could cause fluctuations in our advertising revenues. Our business reflects seasonal patterns of advertising expenditures, which is common in the broadcast industry. For this reason, fluctuations in our revenues and net income could occur from period to period depending upon the availability of advertising revenues. Due, in part, to these seasonality factors, the results of any one quarter are not necessarily indicative of results for future periods, and our cash flows may not correlate with revenue recognition.

We may be unable to access capital, or offer equity as an incentive for increased subscribers, on acceptable terms to fund our future growth and operations.

Our future capital and subscriber growth requirements will depend on numerous factors, including the success of our efforts to increase advertising revenues, the amount of resources devoted to increasing distribution of Outdoor Channel, and acquiring and producing programming for Outdoor Channel. As a result, we could be required to raise substantial additional capital through debt or equity financing or offer equity as an incentive for increased distribution. To the extent that we raise additional capital through the sale of equity or convertible debt securities, or offer equity incentives for subscriber growth, the issuance of such securities could result in dilution to existing stockholders. If we raise additional capital through the issuance of debt securities, the debt securities would have rights, preferences and privileges senior to holders of common stock and the terms of such debt could impose restrictions on our operations. We cannot assure you that additional capital, if required, will be available on acceptable terms, or at all. If we are unable to obtain additional capital, or must offer equity incentives for subscriber growth, our current business strategies and plans and ability to fund future operations may be harmed.

We may not be able to attract and retain key personnel.

Our success depends to a significant degree upon the continued contributions of the principal members of our sales, marketing, production and management personnel, many of whom would be difficult to replace. Other than our CEO, Roger L. Werner, Jr., none of our employees are under contract and all of our employees are “at-will.” Any of our officers or key employees could leave at any time, and we do not have “key person” life insurance policies covering any of our employees. The competition for qualified personnel has been strong in our industry. This competition could make it more difficult to retain our key personnel and to recruit new highly qualified personnel. The loss of Perry T. Massie, our Chairman of the Board, Roger L. Werner, Jr., our CEO and President, Thomas E. Hornish, our COO and General Counsel, or Shad L. Burke, our Chief Accounting Officer and interim Chief Financial Officer could adversely impact our business. To attract and retain qualified personnel, we may be required to grant large option or other share-based incentive awards, which may be highly dilutive to existing stockholders. We may also be required to pay significant base salaries and cash bonuses to attract and retain these individuals, which payments could harm our operating results. If we are not able to attract and retain the necessary personnel we may not be able to implement our business plan.

New video recording technologies may reduce our advertising revenue.

A number of new personal video recorders, such as TiVo^® in the United States, have emerged in recent years. These recorders often contain features allowing viewers to watch pre-recorded programs without watching advertising. The effect of these recorders on viewing patterns and exposure to advertising could harm our operations and results if our advertisers reduce the advertising rates they are willing to pay because they believe television advertisements are less effective with these technologies.

Cable and satellite television programming signals have been stolen or could be stolen in the future, which reduces our potential revenue from subscriber fees and advertising.

The delivery of subscription programming requires the use of conditional access technology to limit access to programming to only those who subscribe to programming and are authorized to view it. Conditional access systems use, among other things, encryption technology to protect the transmitted signal from unauthorized access. It is illegal to create, sell or

otherwise distribute software or devices to circumvent conditional access technologies. However, theft of cable and satellite programming has been widely reported, and the access or “smart” cards used in cable and satellite service providers’ conditional access systems have been compromised and could be further compromised in the future. When conditional access systems are compromised, we do not receive the potential subscriber fee revenues from the cable and satellite service providers. Further, measures that could be taken by cable and satellite service providers to limit such theft are not under our control. Piracy of our copyrighted materials could reduce our revenue from subscriber fees and advertising and negatively affect our business and operating results.

Because we expect to become increasingly dependent upon our intellectual property rights, our inability to protect those rights could negatively impact our ability to compete.

Approximately 72% of programs we aired in 2006 (exclusive of infomercials) on Outdoor Channel were provided by third-party television and film producers. In order to build a library of programs and programming distribution rights, we must obtain all of the necessary rights, releases and consents from the parties involved in developing a project or from the owners of the rights in a completed program. There can be no assurance that we will be able to obtain the necessary rights on acceptable terms, or at all or properly maintain and document such rights. In addition, protecting our intellectual property rights by pursuing those who infringe or dilute our rights can be costly and time consuming. If we are unable to protect our portfolio of trademarks, service marks, copyrighted material and characters, trade names and other intellectual property rights, our business and our ability to compete could be harmed.

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

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

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

Our current officers, directors and greater than 5% stockholders together currently control a very high percentage of our outstanding common stock. As a result, these stockholders, acting together, may be able to exert significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of our company, even when a change may be in the best interests of stockholders. In addition, the interests of these stockholders may not always coincide with our interests as a company or the interests of other stockholders. Accordingly, these stockholders could cause us to enter into transactions or agreements that you would not approve.

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

Our stock has historically been and continues to be traded at relatively low volumes and therefore has been subject to price volatility. Various factors contribute to the volatility of our stock price, including, for example, low trading volume, quarterly variations in our financial results, increased competition and general economic and market conditions. While we cannot predict the individual effect that these factors may have on the market price of our common stock, these factors, either individually or in the aggregate, could result in significant 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 will develop. As a result, relatively small trades may have a significant impact on the price of our common stock. Moreover, companies that have experienced volatility in the market price of their stock often are subject to securities class action litigation. If we were the subject of such litigation, it could result in substantial costs and divert management’s attention and resources.

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

Provisions of Delaware law, our certificate of incorporation and bylaws could discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions also could limit the price that investors might be willing to

pay in the future for shares of our common stock, thereby depressing the market price of our common stock. Furthermore, these provisions could prevent attempts by our stockholders to replace or remove our management. These provisions:

	•		allow the authorized number of directors to be changed only by resolution of our board of directors;

	•		establish a classified board of directors, providing that not all members of the board be elected at one time;

	•		require a 66 2/3% stockholder vote to remove a director, and only for cause;

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

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

	•		establish advance notice requirements for stockholder nominations to our board of directors or for stockholder proposals that can be acted on at stockholder meetings;

	•		except as provided by law, allow only our board of directors to call a special meeting of the stockholders; and

	•		require a 66 2/3% stockholder vote to amend our certificate of incorporation or bylaws.

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

Technologies in the cable and satellite television industry are constantly changing, and our failure to acquire or maintain state-of-the-art technology may harm our business and competitive advantage.

The technologies used in the cable and satellite television industry are rapidly evolving. Many technologies and technological standards are in development and have the potential to significantly transform the ways in which programming is created and transmitted. We cannot accurately predict the effects that implementing new technologies will have on our programming and broadcasting operations. We may be required to incur substantial capital expenditures to implement new technologies, or, if we fail to do so, may face significant new challenges due to technological advances adopted by competitors, which in turn could result in harming our business and operating results.

The cable and satellite television industry is subject to substantial governmental regulation for which compliance may increase our costs, hinder our growth and possibly expose us to penalties for failure to comply.

The cable television industry is subject to extensive legislation and regulation at the federal and local levels, and, in some instances, at the state level, and many aspects of such regulation are currently the subject of judicial proceedings and administrative or legislative proposals. Similarly, the satellite television industry is subject to federal regulation. Operating in a regulated industry increases our cost of doing business as a video programmer, and such regulation may in some cases also hinder our ability to increase our distribution. The regulation of programming services, cable television systems and satellite licensees is subject to the political process and has been in constant flux over the past decade. Further, material changes in the law and regulatory requirements are difficult to anticipate and our business may be harmed by future legislation, new regulation, deregulation or court decisions interpreting laws and regulations.

If our goodwill becomes impaired, we will be required to take a noncash charge which could have a significant effect on our reported net earnings.

A significant portion of our assets consists of goodwill. In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, or SFAS 142, we test goodwill for impairment during the fourth quarter of each year, and on an interim date if factors or indicators become apparent that would require an interim test. A significant downward revision in the present value of estimated future cash flows for a reporting unit could result in an impairment of goodwill under SFAS 142 and a noncash charge would be required. Such a charge could have a significant effect on our reported net earnings.

Future issuance by us of preferred shares could adversely affect the holders of existing shares, and therefore reduce the value of existing shares.

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

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

We do not anticipate 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 the discretion of our board of directors. Furthermore, at the time of any potential payment of a cash dividend we may subject to contractual restrictions on, or prohibitions against, the payment of dividends.

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)

10.29		Amendment to Loan Agreement and Note and related agreements by and between the Company and U.S. Bank N.A. dated as of September 21, 2007

31.1		Certification by Chief Executive Officer

31.2		Certification by Chief Financial Officer

32.1 *		Section 1350 Certification by Chief Executive Officer

32.2 *		Section 1350 Certification by Chief Financial Officer


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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	OUTDOOR CHANNEL HOLDINGS, INC.
	/s/ Shad L. Burke
	Shad L. Burke
	Authorized Officer, Interim Chief Financial Officer, Chief Accounting Officer and Principal Accounting Officer Date: February 1, 2008

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Outdoor Channel (OUTD) Inactive 10-Q2007 Q3 Quarterly report

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