**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

----

**Form 10-K**

**(Mark One)**

**x**                              ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

**or**

**o**                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**For the transition period from           to           .**

**CommissionFile Number: 000-30700**

----

**Crown Media Holdings, Inc.**

(ExactName of Registrant as Specified in Its Charter)

| **Delaware**                       |   | **84-1524410**       |
|------------------------------------|--------|----------------------|
| (State  or Other Jurisdiction      |   | (I.R.S.  Employer    |
| of  Incorporation or Organization) |   | Identification  No.) |

 

**12700Ventura Boulevard,**Suite 200,Studio City, California  91604

(Addressof Principal Executive Offices and Zip Code)

**(818)755-2400**

(Registrant’sTelephone Number, Including Area Code)

Securitiesregistered pursuant to Section 12(b) of the Act:  **Class A Common Stock,$0.01 par value**

Securitiesregistered pursuant to Section 12(g) of the Act:  **None**

Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act. Yes o   No x

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

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x   No o

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one):

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

 

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

The aggregate market value ofthe voting and non-voting common equity held by non-affiliates computed byreference to the price at which the common equity was last sold as of June 30,2006, the last business day of the registrant’s most recently completed secondfiscal quarter, was $63,236,129.

As of February 28,2007, the number of shares of Class A Common Stock, $.01 par valueoutstanding was 74,117,654, andthe number of shares of Class B Common Stock, $.01 par value, outstandingwas 30,670,422.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portions of the Registrant’s Proxy Statement for the2007 Annual Meeting of Stockholders, to be filed, are incorporated by referencein Part III of this Form 10-K.

 

----

**TABLEOF CONTENTS**
|                   | ** ** | ** **                                                                                                                      | ** ** | **Page** | ** ** |
|-------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| **Part I**   |       |                                                                                                                            | 1          |     |       |
| Item  1           |       | Business                                                                                                                        |       |     | 1          |   |   |
| Item 1A           |       | Risk  Factors                                                                                                                   |       |     | 10         |   |   |
| Item 1 B          |       | Unresolved Staff Comments                                                                                                       |       |     | 17         |   |   |
| Item 2            |       | Properties                                                                                                                      |       |     | 17         |   |   |
| Item  3           |       | Legal Proceedings                                                                                                               |       |     | 17         |   |   |
| Item 4            |       | Submission of Matters to a Vote of Security Holders                                                                             |       |     | 17         |   |   |
| **Part II**  |       |                                                                                                                            | 18         |     |       |
| Item 5            |       | Market for Our Common Equity, Related Stockholder  Matters and Issuer Purchases of Equity Securities                            |       |     | 18         |   |   |
| Item  6           |       | Selected Financial Data                                                                                                         |       |     | 19         |   |   |
| Item 7            |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations       |       |     | 21         |   |   |
| Item 7A           |       | Quantitative and Qualitative Disclosures About Market  Risk                                                                     |       |     | 42         |   |   |
| Item 8            |       | Financial Statements and Supplementary Data                                                                                     |       |     | 43         |   |   |
| Item 9            |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                  |       |     | 43         |   |   |
| Item 9A           |       | Controls and Procedures                                                                                                         |       |     | 43         |   |   |
| Item  9B          |       | Other Information                                                                                                               |       |     | 45         |   |   |
| **Part III** |       |                                                                                                                            | 45         |     |       |
| Item 10           |       | Directors, Executive Officers and Corporate Governance                                                                          |       |     | 45         |   |   |
| Item 11           |       | Executive Compensation                                                                                                          |       |     | 45         |   |   |
| Item 12           |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                  |       |     | 45         |   |   |
| Item 13           |       | Certain Relationships and Related Transactions and  Director Independence                                                       |       |     | 46         |   |   |
| Item 14           |       | Principal Accounting Fees and Services                                                                                          |       |     | 57         |   |   |
| **Part IV**  |       |                                                                                                                            | 57         |     |       |
| Item 15           |       | Exhibits, Financial Statement Schedules                                                                                         |       |     | 57         |   |   |
| Signatures        |       |                                                                                                                            | 68         |     |       |

 

i

----

*In this Annual Report on Form 10-K the terms “Crown MediaHoldings” or the “Company,” refer to Crown Media Holdings, Inc. and,unless the context requires otherwise, subsidiaries of Crown Media Holdingsthat operate or have operated our businesses, Crown Media United States, LLC (“CrownMedia United States”), until completion of the sale of our internationalbusiness in April 2005, Crown MediaInternational, LLC (“Crown Media International”) and Crown EntertainmentLimited (“Crown Entertainment”), and until the completion of the sale of ourfilm library in December 2006, Crown Media Distribution, LLC (“Crown MediaDistribution”). The term “common stock” refers to our Class A common stockand Class B common stock, unless the context requires otherwise.*

*The names Hallmark, TOTAL CHOICE and other product orservice names are trademarks or registered trademarks of their owners.*

**PART I**

**ITEM 1.**                Description of Business

***Company Overview***

We own and operate a paytelevision channel, known as the Hallmark Channel (the “channel”), dedicated tohigh-quality entertainment programming for adults and families. In addition, weown and operate the Hallmark Movie Channel (the “Hallmark Channel” and the “HallmarkMovie Channel” are collectively referred to herein as the “Channels”). OurChannels are distributed in the United States of America and its territoriesand possessions, including Puerto Rico.

The Channels offer compelling stories, masterfullywritten, directed and produced with talented actors. We believe that we haveestablished these Channels as destinations for viewers seeking high-qualityentertainment for adults and families, and as attractive outlets foradvertisers seeking to target these viewers. We have distribution agreementswith leading pay television distributors. The following table shows for theHallmark Channel: our programming sources, selected pay television distributorsand the total number of our subscribers as of December 31, 2006.

| Programming  Sources                    |   | ·  RHI  Entertainment Distribution |
|-----------------------------------------|--------|----------------------------------------------|
|                                    |   | ·  Other  third-party sources      |
|                                    |   | ·  NICC                            |
| Selected  Pay  Television  Distributors |   | ·  Cablevision                     |
|                                    |   | ·  Charter                         |
|                                    |   | ·  Comcast                         |
|                                    |   | ·  Cox                             |
|                                    |   | ·  DirecTV                         |
|                                    |   | ·  EchoStar                        |
|                                    |   | ·  Mediacom                        |
|                                    |   | ·  NCTC                            |
|                                    |   | ·  Time  Warner                    |
| Total Subscribers                       |   | 74.6  million                                |

 

As of February 28, 2007,the Hallmark Channel had approximately 75.5 million subscribers and theHallmark Movie Channel had approximately 1.0 million subscribers. At the end of2006, the Hallmark Channel had 74.6 million subscribers and the Hallmark MovieChannel had approximately 964,000 

1

----

subscribers.We view a “subscriber” as a household that receives, on a full orpart-time basis, the Hallmark Channel or the Hallmark Movie Channel on aprogram tier of a distributor. We determine our subscribers from subscribernumbers reported by Nielsen Media Research. Subscribers include both viewerswho pay a monthly fee for the tier programming and so-called “promotional”subscribers who are given free access to the tier by the distributor for alimited time.

Programming acquired from thirdparties is an important component of our Channels as we continually develop andrefine our programming strategy. Our Channels further have enjoyed the benefitsof long-term program agreements with RHI Entertainment Distribution (formerlyHallmark Entertainment Distribution, LLC), which generally provide access tothe RHI Entertainment Distribution library titles and to new production andfirst-run presentations controlled by RHI Entertainment Distribution. Theprogramming that we have access to through our program license agreements withRHI Entertainment Distribution consist of some of the most highly ratedmade-for-television movies, based on A.C. Nielson ratings. These programs havealso won numerous Emmy® Awards, Golden Globe Awards and PeabodyAwards.

Hallmark EntertainmentDistribution was owned by Hallmark Cards, Incorporated (“Hallmark Cards”)through Hallmark Card’s wholly-owned subsidiary Hallmark Entertainment, LLC. InJanuary 2006 Hallmark Cards sold its ownership interests in HallmarkEntertainment LLC, and thus also Hallmark Entertainment Distribution, to itsPresident and certain new investors. Hallmark Entertainment Distributionchanged its name to RHI Entertainment Distribution, and Hallmark EntertainmentLLC changed its name to RHI Entertainment, LLC (“RHI Entertainment”). As aresult, the programming agreements with RHI Entertainment Distribution arecurrently with a non-affiliated third party. At the same time, notes andaccounts payable by us to Hallmark Entertainment Distribution were transferredto Hallmark Entertainment Holdings, Inc., a subsidiary of Hallmark Cards.

We currently distribute theHallmark Channel through approximately 5,300 cable, satellite and otherdistribution systems. As of the end of2006, we had agreements with Cablevision, Charter, Comcast, Cox, DirecTV,EchoStar, Mediacom, the National Cable Television Cooperative, Time Warner andmany other pay television distributors, for the distribution of the HallmarkChannel. In addition, we have entered into agreements with several telephonecompanies that have started to furnish video programming to consumers,including SBC (now AT&T), the National Rural TelecommunicationsCooperative, and Verizon. Five of our distributors accounted each for more than10% of our consolidated subscriber revenue for the year ended December 31,2006 and accounted together for a total of 91% of consolidated subscriberrevenue at that date. Three of our distributors accounted each for more than15% of our consolidated subscribers for the year ended December 31, 2006and accounted together for 66% of our subscribers on that date.

We license the trademark “Hallmark” for use on ourChannels pursuant to certain trademark license agreements with a subsidiary ofHallmark Cards. We believe that the use of this trademark is extremelyimportant for our Channels due to the substantial name recognition andfavorable characteristics associated with the name in the United States. Forfurther information concerning these trademark license agreements, see Part III—Item13. Certain Relationships and Related Transactions—Hallmark Trademark LicenseAgreements.

Information concerningrevenue, operating losses and identifiable assets attributable to our paytelevision programming services and our distribution of films (through December 15,2006) may be found in Note 21 of Notes to Consolidated Financial Statements inthis Report.

***Development of Business***

Crown Media Holdings, Inc.,which was incorporated in the state of Delaware in December 1999, throughits wholly-owned subsidiary, Crown Media United States, LLC, owns, operates anddistributes pay 

2

----

televisionChannels dedicated to high-quality entertainment programming for adults andfamilies, in the United States. Significant investors in Crown Media Holdingsinclude Hallmark Entertainment Investments Co., a subsidiary of Hallmark Cards(“Hallmark Entertainment Investments”), the National Interfaith Cable Coalition, Inc.(“NICC”), and, indirectly through their investments in Hallmark EntertainmentInvestments, Liberty Media Corporation (“Liberty Media”) and J.P. MorganPartners (BHCA), L. P. (“J.P. Morgan”). Crown Media International acquired aninterest in Crown Media United States in 1998, and as a result of severaltransactions, Crown Media Holdings owned 100% of the equity interests of CrownMedia United States by March 2001. Prior to April 2005, when theCompany sold its international operations through the sale of Crown MediaInternational, the Company operated its Channels in approximately 150 countriesthroughout the world.

Hallmark Cards controlsthe Company through its ownership of more than 80% of the equity interests inHallmark Entertainment Investments and its control over the voting of our Class Aand Class B common stock held by Hallmark Entertainment Investments. Seealso the description of the Hallmark Entertainment Investments Co. StockholdersAgreement in Part III—Item 13 below and Part III—Item 12below regarding beneficial ownership of our securities.

***Industry Overview***

The pay television industry iscomprised primarily of program suppliers, pay television channel providers andpay television distributors. Program suppliers, from whom we acquire or licensea portion of our programming, include many of the major production studios andother independent production companies and independent owners of programming.These program suppliers create, develop and finance the production of, orcontrol rights to, movies, television miniseries, series and other programming.

We are a pay television channelprovider. Pay television channel providers include all channel providers(except over-the-air broadcasters) and major U.S. cable and satellite networks.Pay television channel providers often produce programming and acquire orlicense programming from program suppliers and generally package theprogramming according to an overriding theme and brand strategy. Pay televisionproviders and distributors generally restrict viewership through securityencryption devices that limit viewership to paying subscribers. Pay televisionchannel providers compete with each other for distribution and to attractviewers and advertisers. Pay television providers generally target audienceswith a certain demographic composition, so that they can then sell advertisingto advertisers seeking to reach the providers’ demographic audiences.

Pay television distributors ownand operate the platforms used to deliver channels to subscribers. Thesedistributors use several different technologies to reach their subscribers asdescribed below. Distributors attempt to create a mix of channels that will beattractive to their subscriber population in an attempt to gain new subscribersand to reduce subscriber turnover. Distributors have different levels ofservice for subscribers, with each service level containing some differentchannels. Recently, pay television distributors have created a “tier” of familyprogramming; we are on two of such tiers as of the date of this Report.Distributors have begun to offer additional broadband services such as Internetaccess, telephony and video-on-demand over their systems.

As aresult of the recently increased competition for limited analog channel spacein the United States and increased use of the digital cable capacity for newbroadband services, pay television channel providers are often required to paysubscriber acquisition fees to pay television distributors for carriage ontheir systems. These subscriber acquisition fees are paid to televisiondistributors on a per subscriber basis and generally in advance of any receiptof subscriber fee revenue from such pay television distributors.

3

----

***Distribution Platforms***

Fourmajor distribution platforms are currently used to transmit programming. First,cable television systems use coaxial or fiber optic cable to transmit multiplechannels between a central facility, known as a headend, and the individualsubscriber’s television set. Second, analog and digital satellite broadcastsystems (such as direct-to-home or “DTH”) use satellite transponders tobroadcast television programming to individual dwellings with satellitereception equipment, including a dish and a decoder. Third, digital terrestrialtelevision broadcasters (“DTT”) typically broadcast locally or through regionalor national ground-based transmission networks. In general, such broadcastersuse landline, microwave or satellite transmission systems to distributeprogramming to terrestrial transmission facilities for broadcast directly toviewers’ homes. Finally, channels can also be distributed through satellitemaster antenna television (“SMATV”). SMATV is used primarily for buildings,such as apartments and hotels that receive programming from satellites by meansof a single antenna that is connected to the buildings’ headend. The televisionsignals are then distributed to individual units in the building by cable.

***Sources of Revenue***

*Subscriber Fees*

Pay television customerssubscribe to basic services by paying monthly fees for basic channels to paytelevision distributors. The customers can also subscribe to additional packagesof premium or pay-per-view services upon payment of additional fees. See Item7, Management’s Discussion and Analysis of Financial Condition and Results ofOperations.

Generally,we charge our pay television distributors a monthly subscriber fee for theright to broadcast our Channels. Generally, these distribution agreements lastfrom three to ten years, and sometimes include annual increases of subscriberfees. A distribution agreement may also involve a payment by us for theestablishment of the relationship or, together with or in lieu of any payment,waived subscriber fees for our Channels to distributors for a period of timeand discounts or no fees if certain subscriber levels are achieved. Please seeItem 7, Management’s Discussion and Analysis of Financial Condition and Resultsof Operations, for information regarding subscriber fees. For the years ended December 31,2004, 2005, and 2006 revenue derived from subscriber fees for the Channels wereapproximately $9.9 million, $18.7 million, and $24.9 million, respectively.

*Advertising Revenue*

Television advertising is soldin a variety of formats. Many pay television channels rely largely upon thespot advertisement format. Spot advertisements are normally 30 seconds long andair during or between programs. They are often sold in packages of a certainnumber of spots or to deliver a certain number of viewers. An alternative tospot advertising is sponsorship, by which a company sponsors a program orselection of programs on a channel and receives enhanced exposure for its brandand products in these programs.

The ability of a televisionchannel to generate advertising revenue largely depends on estimated or actualviewing levels, primarily based on ratings, and on advertising rates. In theUnited States, independent ratings systems on which advertising sales can bebased are well established and widely accepted within the industry. Inaddition, pay television channel providers and distributors may also provideestimated or actual subscriber information. Our Channel typically sellsapproximately 50% of its advertising in the “up-front” season, generally in June andJuly, for the last quarter of the same year and the first three quarters of thefollowing year. We hold back a small percentage of our inventory for audiencedeficiency units, “ADUs,” and sell the remainder in the spot or scatter market.ADUs are units of inventory that are made available to advertisers ascompensation for advertising purchased in programs which did not deliver theratings which the advertisers had been guaranteed.

4

----

As pay television channels drawaudience share, audience demographics (i.e. viewers categorized bycharacteristics such as age, sex and income) become fragmented. As a result,advertisers are able to target the specific groups of viewers who are mostlikely to purchase their products, by buying advertising on channels whichattract the desired viewer demographic.

We have advertising salesoffices in New York, Los Angeles, Chicago, and Atlanta. In addition, we have madesignificant investments in programming, research, marketing and promotions, allspecifically designed to support the sale of advertising time on our Channels.For the years ended December 31, 2004, 2005, and 2006 revenues from thesale of advertising time on our Channels were approximately $106.3 million,$146.1 million, and $174.2 million, respectively.

*Ratings*

Among the 65 ad-supportedcable channels in the United States market in 2006, the Hallmark Channel ranked8th  in total day with an average 0.755 householdrating for the year and 9th for prime time with an average 1.216 householdrating for the year, according to Nielsen Media Research. In 2005, among the 60ad-supported cable channels in the United States market, the Hallmark Channelranked 9th in total day with an average 0.707 householdrating and 11th for prime time with an average 1.033 householdrating, according to Nielsen Media Research. Total day means the time periodmeasured from the time each day the broadcast of commercially-sponsoredprogramming commences to the time such commercially-sponsored programming ends.We believe that the key demographics for the Hallmark Channel are the viewersin the groups Adults aged 25 to 54 and Women aged 25 to 54. The average medianage of a viewer of the Hallmark Channel in 2006 was 59.9.

*Licensing Revenue*

Until we sold our domesticlibrary to RHI Entertainment LLC on December 15, 2006, we licensed ourfilm assets to broadcasters and video distributors (pay television channelproviders) who paid a license fee for the right to exhibit or distribute theprogramming over a certain period of time.

***Programming***

Our Channels offer a range of high-qualityentertainment programming for adults and families including movies, miniseries,epics, historical dramas, romances, literary classics, and contemporarystories. Sources for programming on our Channels include programming licensedfrom RHI Entertainment Distribution and programming licensed from other thirdparties.

Examples of programming from the RHI Entertainment Distribution libraryinclude, Larry McMurtry’s*Lonesome Dove*,*The Outsider*, *Talking toHeaven, Frederick Forsyth’s Icon, Supernova* and Larry McMurtry’s*Dead Man’s Walk*. We benefit from these original RHI Entertainment Distribution productions,which aired and are sometimes premiered on our Channel. Examples of other thirdparty programming shown on our Channel include the popular drama series *M*A*S*H, Little House on the Prairie, Diagnosis Murder, Matlock, WalkerTexas Ranger and The Waltons*. Other examples of our third partyprogramming include acquired movies and miniseries such as *March ofthe Penguins*, *Troy,*certain *An American Girl*movies and *When HarryMet Sally*. Our license agreements with third parties typicallyprovide for a license fee paid out over the term of the license for the rightto exhibit a program in the United States within a specified period of time.

Our channels air and benefit from programmingpreviously shown as Hallmark Hall of Fame such as John Grisham’s *Painted House, Fallen Angel, Sarah, Plain and Tall* and *What the Deaf Man Heard*.

5

----

We have rights to a number oforiginal movies and mini-series under our programming agreement with RHIEntertainment Distribution. See “Hallmark Entertainment Distribution/RHIEntertainment Distribution Programming Agreement” in Item 13. CertainRelationships and Related Transactions.

Wehave sublicensed exhibition rights to several programs for 2006, 2007 and 2008in order to save on programming costs.

***Distribution***

The Hallmark Channel ended 2006 with 74.6 millionsubscribers, an increase of 6% from 70.7 million at the 2005 year-end. Wecurrently distribute the Hallmark Channel to approximately 78% of all UnitedStates pay television subscribers. The following table shows the approximatenumber of pay television households and the Hallmark Channel subscribers foreach of the eight largest pay television distributors, and all other paytelevision distributors as a group, in the United States as of December 31,2006.

| **PAY TELEVISION DISTRIBUTOR** | ** ** | ** **                                            | ** ** | **TOTAL U.S. PAY   TV  HOUSEHOLDS(1)** | ** ** | **HALLMARK  CHANNEL—U.S.  SUBSCRIBERS(1)** | ** ** | **HALLMARK  CHANNEL—U.S.  % OF PAY TV  HOUSEHOLDS** | ** ** |
|------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **(In thousands, except percentages)** | ** ** |
| Comcast                                  |       |                                                  | 26,254     |                                                  |       |                                            | 20,527     |                                                                    |       |   | 78.2 | % |   |
| DirecTV                                  |       |                                                  | 15,678     |                                                  |       |                                            | 15,586     |                                                                    |       |   | 99.4 | % |   |
| Time Warner                              |       |                                                  | 16,685     |                                                  |       |                                            | 13,464     |                                                                    |       |   | 80.7 | % |   |
| Cox                                      |       |                                                  | 5,496      |                                                  |       |                                            | 4,502      |                                                                    |       |   | 81.9 | % |   |
| Charter                                  |       |                                                  | 5,870      |                                                  |       |                                            | 4,470      |                                                                    |       |   | 76.1 | % |   |
| Echostar                                 |       |                                                  | 12,755     |                                                  |       |                                            | 5,660      |                                                                    |       |   | 44.4 | % |   |
| Cablevision                              |       |                                                  | 3,003      |                                                  |       |                                            | 2,473      |                                                                    |       |   | 82.4 | % |   |
| All others                               |       |                                                  | 9,727      |                                                  |       |                                            | 7,959      |                                                                    |       |   | 81.8 | % |   |
| Total                                    |       |                                                  | 95,468     |                                                  |       |                                            | 74,641     |                                                                    |       |   | 78.2 | % |   |

----

(1)          Source:  Nielsen Code and The Nielsen Public U.E. December 2006.

**Our subscribers in the United States have grown fromapproximately 16.0 million full time subscribers at January 1, 2001 toapproximately 74.6 million full time subscribers at December 31, 2006.**

**Our major distributionagreements have terms which expire at various times through February 2012.Of these distribution agreements, agreements accounting for approximately 70%of our subscriber base at December 31, 2006, will expire and be thesubject of renewal negotiations on or prior to December 31, 2007. TheCompany has recently renewed its agreements with two major distributors.**

***Sales and Marketing***

Our primary target demographics are women aged 25 to54 and adults aged 25 to 54 and our secondary target is adults aged 18 to 49. Ourprogramming is targeted to adults, but is generally appropriate for viewing bythe entire family, which is important to viewers, advertisers and affiliatesalike.

For over fifty years Hallmark has been a leader inhigh-quality original television production. The Hallmark Channel and theHallmark Movie Channel are the only major cable television channels whichbroadcast the movies previously shown as Hallmark Hall of Fame, a selection ofmovies from an award-winning entertainment series.

6

----

The power of theHallmark brand and the quality and viewer appeal of RHI Entertainment Distribution programming combine to:

·       provideour viewers with tangible evidence of our commitment to the best inentertainment for the entire family;

·       enhanceour ability to attract advertising commitments and higher Cost-Per-Thousands (“CPM”)from the largest advertisers; and

·       providea competitive advantage in negotiating long-term distribution agreements withpay television distributors.

**Crown Media Holdings currently uses the websiteswww.hallmarkchannel.com and www.hallmarkmoviechannel.com to promote thechannels and their programs, and to provide information to potential viewers. Thesewebsites contain information regarding the channel’s program schedule, detailedinformation on the channel’s programs and their stars, and provide platformsfor participation in the channels’ sweepstakes promotions. The sites includeadvertiser imaging including banner messages and video content. Crown MediaHoldings also uses internet “micro sites” to further support major programmingevents such as the television premier of “March of the Penguins.”  These sites provide additional programminginformation and advertiser sponsorship opportunities.**

***Hallmark Movie Channel***

We fully launched oursecond 24-hour linear channel, the Hallmark Movie Channel, during thefirst quarter of 2005. The Hallmark Movie Channel focuses on movies andmini-series. The launch of the Hallmark Movie Channel provides an opportunityfor the Company to build a second programming asset and use this programmingasset as a value added enhancement to increase distribution of the HallmarkChannel.

***Channel Operations***

The programming department hasbeen responsible for ensuring the consistent quality of the programming weoffer. The programming, scheduling and acquisitions departments work inconjunction with the traffic department and creative services to create thedistinctive appearance of our Channels. Some of these functions are outsourcedon an as-needed basis.

The creation of our Channelsbegins with the acquisition of programming. We license programming from RHIEntertainment Distribution and other program suppliers. Our staff or thirdparties review and summarize all potential programming to ensure compliancewith our quality and content standards.

The creation of on-airpromotional segments “interstitials”, which are broadcast between the featuremovies, miniseries and series, are typically outsourced to external vendors.These interstitials are intended to invite viewership, guide viewers tospecific programming, and promote “brand awareness” for the Hallmark Channeland the Hallmark Movie Channel.

The scheduling departmentcreates the play list, which contains a list of daily programming. Thescheduling department works with advertising sales and marketing personnel tocontinuously monitor the programming mix. The play list is then forwarded tothe traffic department.

Thetraffic department inserts promotional segments and advertising into the playlist and creates the daily log, which contains a detailed schedule of thestream of programming, commercials and promotional materials that willultimately be viewed by the subscribers of the Hallmark Channel.

7

----

***Channel Delivery***

We deliver the daily log anddigital tapes of the Channels’ programming, commercials and promotionalmessages to a third party “Network Operations Center” in Denver, Colorado,where the programming, advertising and promotional elements are combined andcompressed into a single signal, and transported to an uplink facility inDenver, Colorado. The uplink facility then transmits the signal to a satellitetransponder that covers the United States and the transponder transmits thesignal back to cable head-end facilities and direct-to-home satellite servicesoperated by pay television distributors who receive and decode our signal andtransmit our Channels to their subscribers.

The following chart summarizes for the primarydistribution platforms through which we deliver our Channels, our primary paytelevision distributors, and the uplink and satellites we currently use todeliver our Channels.

| **Market**    | ** ** | ** **     | ** ** | **Primary  Distribution  Platforms** | ** ** | **Primary  Pay TV  Distributors** | ** ** | **Playback  Providers/  Locations** | ** ** | **Uplink  Providers/  Locations** | ** ** | **Satellites** | ** ** |
|---------------|------------|----------------|------------|--------------------------------------|------------|----------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|----------------|------------|
| United States |       | Cable          |       | Time  Warner                         |       | Sparrowhawk                            |       | Comcast  Digital                    |       | SES  Americom—AMC 11         |       |
|          |       | Satellite      |       | DirecTV                              |       | Broadcast  Services                    |       | Media  Center                       |       |                              |       |
|          |       | Direct-to-home |       | Charter                              |       | Denver,  CO                            |       | Littleton,  CO                      |       |                              |       |
|          |       |           |       | Adelphia                             |       |                                   |       |                                |       |                              |       |
|          |       |           |       | Echostar                             |       |                                   |       |                                |       |                              |       |
|          |       |           |       | Cox                                  |       |                                   |       |                                |       |                              |       |
|          |       |           |       | Cablevision                          |       |                                   |       |                                |       |                              |       |
|          |       |           |       | Comcast                              |       |                                   |       |                                |       |                              |       |

 

The contracts with theparties providing uplink, satellite and other services for the delivery of ourChannels in the United States expire from 2012 through 2019. Such contracts maybe terminated by the vendors prior to the expiration of the contracts underconditions that are customary to contracts of this type. Amounts payable underthese contracts, as well as international contracts, are reflected in“Operating and Capital Leases” in the schedule of contractual commitments as ofDecember 31, 2006, as shown in Item 7 below.

**Competition**

The pay television industry ishighly competitive. Our Channels have competed for distribution, viewers andadvertisers with other pay television channels, broadcast television channelsand with other general forms of entertainment.

There are several sources ofcompetition within our industry, each of which affects our business strategy.The Hallmark Channel competes with other general entertainment programming fromTNT, USA Network, A&E, the Discovery Channel, Lifetime, Oxygen, ABC Familyand other similarly targeted channels. We compete with these channels forviewers and advertising dollars based upon quality of programming, number ofsubscribers, ratings and subscriber demographics. We compete with all channelsfor carriage on cable, satellite and telephone systems that may have limitedcapacity.

Competitioncontinues to intensify as the industry shifts from analog distribution to digitaldistribution. Many pay television distributors have upgraded their physicalinfrastructures to accommodate digital delivery, which provides significantlymore channel capacity. We believe that it will take several years for themajority of current subscribers to convert to, and begin paying for, upgradedservices. In an effort to accelerate the conversion, pay televisiondistributors are attempting to place new channels on their digital tier asopposed to their limited, yet more widely-distributed, analog tiers. Although 

8

----

competition for the remaining analog channel space isstill intense, as more and more subscribers are converted, the digital tier isexpected to become the dominant platform.

**CompetitiveStrengths**

We have established a track record of providing highquality programming. We believe that our primary competitive strengths includethe following:

***Pay Television Channels Branded with the Well-KnownHallmark Name***

Our Channels are brandedwith the Hallmark name. We believe that viewers and distributors associate theHallmark brand with family values and high quality content. Our associationwith this brand facilitates our efforts to achieve increased distribution andto attract additional viewers, which in turn leads to higher ratings and advertisingrevenue.

***Distribution Contracts that Call for IncreasingSubscriber Counts and Fees***

At December 31, 2006,we had distribution agreements with Cablevision, Charter, Comcast, Cox,DirecTV, EchoStar, and Time Warner in the United States, as well as a number ofother distributors. The terms of our major distribution agreements generallyprovide for subscriber fee increases over time, although some provide for loweror no subscriber fees if certain levels of subscribers are achieved. See “RiskFactors Relating to Our Business” below.

***Experienced Management***

Members of our seniormanagement team have experience promoting and operating channels. They haveheld senior positions at such companies as Court TV, ABC, CBS Sports, FoxFamily, Discovery Channel, AMC and USA Networks.

**Competitive Risks**

***One Primary Channel Distributed Domestically***

We operate one primaryChannel in the United States. Many of our competitors have more than onechannel and are also diversified entertainment companies, giving them an advantagein dealing with distributors and advertisers. These companies are also able toleverage costs across multiple channels. Until the Hallmark Movie Channel ismore widely distributed, it will not provide significant leverage innegotiations with distributors and advertisers.

***Entertainment Programming***

Our programming isentertainment designed for adults and families and is intended to meet qualitystandards that are associated with the Hallmark trademark. Our competitors mayhave more flexibility in programming.

***Ratings Which Affect Advertising***

Our ratings have improvedsubstantially over the last three years. Nevertheless, our competitors includechannels with more subscribers and higher ratings, which affects rates that wecan charge for advertising.

**Research**

The research department at the Company providesstrategic and tactical guidance to decision-makers within the Company, as wellas supplying information about the Channels to our potential advertisers and 

9

----

affiliates. This department provides data on the size anddemographics of our audience and information about our audiences, competitors,markets and industry.

Currently, our Channel’s research departmenttranslates our overall business strategy into a cohesive research program. Thisinformation assists our executives to more effectively target, brand, promote,program, and better understand where opportunities lie, in order to increaseour Channel’s market share.

The research department has sophisticated researchtools and competitive tracking database hardware and software. Trends andchanges from these ratings systems are reported to top management for short andlong-term strategic planning.

Our Channel’s performanceis tracked through an internal tracking study established in July 2001,which is a monthly telephone surveyconducted among a national probability sample of approximately 1,000 adults.The research department also subscribes to a number of other services, whichare useful in obtaining information about viewers of our Channel.

**Employees**

Wehad 186 employees at December 31, 2005, and 158 employees at December 31,2006. Neither we nor any of our subsidiaries are parties to collectivebargaining agreements. We believe that our relations with our employees aregood. Most of our Channels’ employees work at our offices in Studio City,California and New York, New York.

**FinancialInformation about Geographic Areas**

Information concerningrevenue and long-lived assets attributable to external customers may be foundin Note 21 of our Notes to Consolidated Financial Statements in this Report.

**AvailableInformation**

**We will make available free of charge through our website,www.hallmarkchannel.com, the Annual Report, our quarterly reports on Form 10-Q,our current reports on Form 8-K, and amendments to such reports, assoon as reasonably practicable after we electronically file or furnish suchmaterial with the Securities and Exchange Commission.**

**Additionally, we will makeavailable, free of charge upon request, a copy of our Code of Business Conductand Ethics, which is applicable to all of our employees, including our seniorfinancial officers. Requests for a copy of this code should be addressed to theGeneral Counsel at Crown Media Holdings, Inc., 12700 Ventura Boulevard,Studio City, California  91604.**

**ITEM 1A.**        Risk Factors

**Risk Factors andForward-Looking Statements**

The discussion set forth in this Form 10-Kcontains statements concerning potential future events. Such forward-lookingstatements are based on assumptions by Crown Media Holdings management, as ofthe date of this Form 10-K including assumptions about risks anduncertainties faced by Crown Media Holdings. Readers can identify theseforward-looking statements by their use of such verbs as “expects,” “anticipates,”“believes,” or similar verbs or conjugations of such verbs. If any ofmanagement’s assumptions prove incorrect or should unanticipated circumstancesarise, Crown Media Holdings’ actual results, levels of activity, performance,or achievements could materially differ from those anticipated by suchforward-looking statements. Among the factors that could cause actual resultsto differ materially are those discussed below in this Form 10-K.Crown Media Holdings will not update any forward-looking statements containedin this Form 10-K to reflect future events or developments.

10

----

If we do not successfullyaddress the risks described below, our business, prospects, financialcondition, results of operations or cash flow could be materially adverselyaffected. The trading price of our Class A common stock could declinebecause of any of these risks.

**Risks Relating to Our Business**

***Our business has incurred netlosses since inception and may continue to incur losses.***

Both our channels have a historyof net losses and we expect to continue to report net losses for theforeseeable future. As of December 31, 2006, we had an accumulated deficitof approximately $1.9 billion, total stockholders’ deficit of approximately$478.9 million, and goodwill of approximately $314.0 million.

We cannot assure you that wewill achieve or sustain profitability. If we are not able to achieve or sustainprofitability, the trading price of our Class A common stock may fallsignificantly. To diminish our losses and become profitable, we will need tosubstantially increase our advertising and subscriber revenue. This willrequire, among other things, maintaining the distribution of our channels,attracting more viewers to our channels, attracting more advertisers, andincreasing our subscriber and advertising rates. Risks associated with theseareas of our business are described below.

Inaddition, in order to accomplish these goals, the management of Crown MediaHoldings continues to believe that it is necessary to maintain subscriberlevels and enhance our programming, which may result in increased subscriberacquisition fees and will result in increased costs for programming. Over thelast four years, these actions have contributed to increased net losses forCrown Media Holdings.

***Our substantial indebtedness could adversely affect our financial health,and the restrictions imposed by the terms of our debt instruments may severelylimit our ability to plan for or respond to changes in our business.***

We have a substantial amount ofindebtedness. As of December 31, 2006, our total debt was $975.7 millionand we had $14.0 million of cash and cash equivalents and $42.4 millionavailable under our bank credit facility subject to the approval of our Boardof Directors to cover the negative cash flow resulting from our current operations.Subject to restrictions under our debt agreements, we may also seek equity ordebt financing from time to time to cover our operating losses, to financeacquisitions or capital expenditures or for other purposes.

As a result of our level of debt and the terms of our debt instruments:

·       our vulnerability to adverse general economic conditions is heightened;

·       we will be required to dedicate a portion of our cash flow fromoperations to repayment of debt, limiting the availability of cash for otherpurposes;

·       we are and will continue to be limited by financial and other restrictivecovenants in our ability to borrow additional funds, consummate asset sales,enter into transactions with affiliates or conduct mergers and acquisitions;

·       our flexibility in planning for, or reacting to, changes in our businessand industry will be limited;

·       we are sensitive to fluctuations in interest rates; and

·       our ability to obtain additional financing in the future for workingcapital, capital expenditures, acquisitions, general corporate purposes orother purposes may be impaired.

Our ability to meet our debt andother obligations and to reduce our total debt depends on our future operatingperformances and on economic, financial, competitive and other factors. Therecan be no assurance that our leverage and such restrictions will not materiallyand adversely affect our ability to finance our future operations or capitalneeds or to engage in other business activities.

11

----

Information concerning ourliquidity may be found in Note 1 of our Notes to Consolidated FinancialStatements in this Report.

***We have increasing interestexpense, which may impact our future operations.***

High levels of interestexpense could have negative effects on our future operations. Interest expense,which is net of interest income and includes amortization of debt issuancecosts and interest expense on borrowings under our senior and demand notes andbank credit facility, increased substantially over the past year. The increasein interest expense in the past twelve months resulted from an increase in theaverage borrowings outstanding, due to cash generated from operations beinginsufficient to cover operating expenses and capital expenditures. Asubstantial portion of our cash flow from operations must be used to pay ourinterest expense and will not be available for other business purposes. Inaddition, we may need to incur additional indebtedness in the future. We cannotassure you that our business will generate sufficient cash flow or that futurefinancings will be available to provide sufficient proceeds to meet ourobligations or to service our total debt.

***Our liquidity is dependent onexternal funds.***

Because we currently operate ata loss, we may have a negative cash flow and any unanticipated significantexpense or any development that hampers our growth in revenue or decreases anyof our revenue, would result in the need for additional external funds in orderto continue operations. Further, as discussed in this report under “Liquidityand Capital Resources” below, we need to extend, refinance or replace our bankline of credit on or prior to May 31, 2008, or to extend or replaceborrowings from Hallmark Cards by May 31, 2008, that would result from thebanks drawing upon the irrevocable letter of credit supporting the bank creditfacility or from Hallmark Cards’ purchasing the loans under that facility (seenote 11 to our Consolidated Financial Statements), and extend or refinanceoutstanding notes payables to Hallmark Cards and its subsidiaries on or priorto May 31, 2008.

Upon maturity of thecredit facility on May 31, 2008, the lending group led by JP Morgan Chasehas the right to elect to forego the receipt of cash to pay the principalamount of the credit facility in full, which is provided for under the terms ofan irrevocable letter of credit provided by Hallmark Cards described in note 11but instead can elect to initiate a process to foreclose on the Company’sassets. Such foreclosure proceedings, which we view as a remote possibility,would affect our ability to continue our operations. Prior to any such possibleforeclosure proceedings, however, the Company would consider variousalternatives as indicated above. In the alternative, the Company would causeHallmark Cards, pursuant to the terms of the waiver and standby purchaseagreement, to exercise its option to purchase the banks interest in the creditfacility and the credit facility would then be subject to Hallmark Cardsagreement not to demand payment prior to May 31, 2008.

***We need to renew distribution agreementscovering more than a majority of our subscribers, which expire prior to December 31,2007.***

Our distribution agreements with four of the major distributors in theUnited States, accounting for approximately 70% of our subscriber base as of December 31,2006, will terminate on or prior to December 31, 2007 pursuant to theterms of the agreements. If we are unable to renew these distributionagreements, we could lose substantial numbers of subscribers. Although webelieve we will be able to negotiate new agreements on favorable terms, it isdifficult to predict what the level of subscriber fees will be or whether thedistributors will request marketing or “launch” support payments as a conditionfor renewal. Any significant loss of subscribers, reduction in subscriber feesor obligation to pay launch support or marketing payments could materiallyaffect our subscriber and advertising revenues and affect materially our cashflow and ability to achieve profitability.

12

----

***“Most Favored Nations” provisions may require modification of existingdistribution agreements which could adversely affect subscriber revenues.***

Anumber of our existing distribution agreements contain “most favored nations”or “MFN” clauses. These clauses typically provide that, in the event we enterinto an agreement with another distributor on more favorable terms, these termsmust be offered to the distributor holding the MFN right, subject to certainexceptions and conditions. Distribution agreements which we may enter into inthe future may also contain similar MFN clauses. In the past, afterentering into new distribution agreements, we have been asked by some of thedistributors holding MFN rights to modify their distribution agreements toincorporate financial terms similar to those in the new agreements. Any claimsof this type in the future could result in lower overall subscriber revenues orincreased cash outlays; however, if our subscription base is increased as aresult of such modifications, it could result in higher advertising revenue.

***If we are unable to obtainprogramming from third parties, we may be unable to increase our subscriberbase.***

Wecompete with other pay television channel providers to acquire programming. Ifwe fail to continue to obtain programming on reasonable terms for any reason,including as a result of competition, we could be forced to incur additionalcosts to acquire such programming or look for alternative programming, whichmay hinder the growth of our subscriber base.

***If our programming declines inpopularity, our subscriber fees and advertising revenue could fall.***

Oursuccess depends partly upon unpredictable and volatile factors beyond ourcontrol, such as viewer preferences, competing programming and the availabilityof other entertainment activities. We may not be able to anticipate and reacteffectively to shifts in tastes and interests in our markets. Our competitorsmay have greater numbers of original productions, better distribution, andgreater capital resources, and may be able to react more quickly to shifts intastes and interests. As a result, we may be unable to maintain the commercialsuccess of any of our current programming, or to generate sufficient demand andmarket acceptance for our new programming. A shift in viewer preferences inprogramming or alternative entertainment activities could also cause a declinein both advertising and subscriber fees revenue. The decline in revenue couldhinder or prevent us from achieving profitability and could adversely affect themarket price of our Class A common stock.

***If we are unable to increase ouradvertising revenue, we may be unable to achieve profitability.***

Although it is expectedover time that our advertising revenue will increase, if we fail tosignificantly increase our advertising revenue, we may be unable to achieve orsustain profitability or to expand our business. A failure to increaseadvertising revenue may be a result of any or all of the following: (i) we have a limited history of marketing andselling advertising time; (ii) we may be unable to identify, attract andretain experienced sales and marketing personnel with relevant experience; (iii) oursales and marketing organization may be unable to successfully compete againstthe significantly more extensive and well-funded sales and marketing operationsof our current or potential competitors; (iv) the advancement oftechnologies such as Digital Video Recording which may cause advertisers toshift their expenditures to media in which their commercial messages are notcircumvented by the technology; and/or (v) we will not be able toincrease our advertising sales rate-card or may be required to run additionaladvertising spots which affect the availability of advertising inventory forfuture sales. Success in increasing ouradvertising revenue also depends upon the number and coverage of thedistributors who carry our channels, our number of subscribers, and theviewership ratings for our programming.

13

----

***Hallmark EntertainmentInvestments controls us and this control could create conflicts of interest orinhibit potential changes of control.***

HallmarkEntertainment Investments controls all of our outstanding shares of Class Bcommon stock and owns shares of our Class A common stock, representing inthe aggregate approximately 95.8% of the outstanding voting power on allmatters submitted to our stockholders. Hallmark Entertainment Holdings,a subsidiary of Hallmark Cards, controls the voting of all our shares held byHallmark Entertainment Investments. HallmarkEntertainment Investments’ control could discourage others from initiatingpotential merger, takeover or other change of control transactions that mayotherwise be beneficial to our business or holders of Class A commonstock. As a result, the market price of our Class A common stock couldsuffer, and our business could suffer. Hallmark Entertainment Investments’control relationship with us also could give rise to conflicts of interest incertain situations.

***We could lose the right to use the name “Hallmark” because we havelimited-duration license agreements, which could harm our business.***

Welicense the name “Hallmark” from Hallmark Licensing, Inc., a subsidiary ofHallmark Cards, for use in the names of our channels. This license will expireon September 1, 2007. If Hallmark Cards determines not to renew thetrademark license agreements for any reason, including failure to comply withHallmark Cards’ programming standards, we would be forced to significantlyrevise our business plan and operations, and could experience a significanterosion of our subscriber base and advertising revenue.

***If our third-party suppliers fail to provide us with networkinfrastructure services on a timely basis, our costs could increase and ourgrowth could be hindered.***

Wecurrently rely on third parties to supply key network infrastructure services,including uplink, playback, transmission and satellite services to our market,which are available only from limited sources. We have occasionally experienceddelays and other problems in receiving communications equipment, services andfacilities and may, in the future, be unable to obtain such services, equipmentor facilities on the scale and within the time frames required by us on termswe find acceptable, or at all. If we are unable to obtain, or if we experiencea delay in the delivery of, such services, we may be forced to incursignificant unanticipated expenses to secure alternative third party suppliersor adjust our operations, which could hinder our growth and reduce our revenueand potential profitability.

***If we are unable to retain key executives and other personnel, our growthcould be inhibited and our business harmed.***

Oursuccess depends on the expertise and continued service of our executiveofficers and key employees of our subsidiaries. If we fail to attract, hire orretain the necessary personnel, or if we lose the services of our keyexecutives, we may be unable to implement our business plan or keep pace withdeveloping trends in our industry.

***The amount of our goodwill mayhinder our ability to achieve profitability.***

As aresult of our acquisitions of all the common interests in Crown Media UnitedStates, we have recorded a significant amount of goodwill. We are required toperiodically review whether the value of our goodwill has been impaired. If weare required to write down our goodwill, our results of operations,stockholders’ equity (deficit) could be materially adversely affected.

14

----

***Our stock price may be volatileand could decline substantially.***

The stock market has, from time to time, experienced extreme price andvolume fluctuations. Many factors may cause the market price for our Class Acommon stock to decline, including:

·       our operating results failing to meet the expectations of securitiesanalysts or investors in any quarter;

·       material announcements by us or our competitors;

·       governmental regulatory action;

·       technological innovations by competitors or competing technologies;

·       investor perceptions of our industry or prospects, or those of ourcustomers;

·       changes in general market conditions or economic trends; and

·       failure to renew major distribution agreements.

Additionally, of theapproximately 74.1 million shares of the Company’s outstanding Class Acommon stock, only 9.6 million shares (approximately 13%) are not held byaffiliates of the Company. This stock ownership structure may also be a causeof volatility in the market price of the Company’s Class A common stock.

**Risks Relating to Our Industry**

***The proposed change in television ratings in the United States couldreduce our Channel revenue and our ability to achieve profitability.***

Our domestic advertisingrevenues are partially dependent on television ratings provided by NielsenMedia Research. Nielsen has modified its ratings system by increasing itshousehold sample size and plans to institute other changes in its audiencemeasurement systems  Although thesemodifications have not negatively impacted our ratings to date, as the impactof the changes continue to take effect our ratings could either be positivelyor negatively affected by these changes, depending on the demographiccharacteristics of the households added to the Nielsen sample and the naturesof the changes in the measurement systems. Nielsen is continually in theprocess of modifying its ratings system to accommodate emerging technologies.

***Competition could reduce ourChannel revenue and our ability to achieve profitability.***

We operate in the pay televisionbusiness, which is highly competitive. If we are unable to compete effectively withlarge diversified entertainment companies that have substantially greaterresources than we have, our operating margins and market share could bereduced, and the growth of our business inhibited. In particular, we competefor distribution with other pay television channels and, when distribution isobtained, for viewers and advertisers with pay television channels, broadcasttelevision networks, radio, the Internet and other media. We also compete, tovarying degrees, with other leisure-time activities such as movie theaters, theInternet, radio, print media, electronic games and other alternative sources ofentertainment and information. Future technological developments may affectcompetition within this business.

A continuing trend towardsbusiness combinations and alliances in the communications industries may createsignificant new competitors for us or intensify existing competition. Many ofthese combined entities have more than one channel and resources far greaterthan ours. These combined entities may provide bundled packages of programming,delivery and other services that compete directly with the products we offer.

15

----

We may need to reduce our pricesor license additional programming to remain competitive, and we may be unableto sustain future pricing levels as competition increases. Our failure toachieve or sustain market acceptance of our programming at desired pricinglevels could impair our ability to achieve profitability or positive cash flow,which would harm our business.

Distributorsin the United States may attempt to pressure pay TV channels with lowerviewership, such as our Channel, to accept decreasing amounts for subscriberfees, to pay higher subscriber acquisition fees or to allow carriage of theChannel without the payment of subscriber fees. Factors that may lead to thispressure include the number of competing pay TV channels, the limited spaceavailable on services of distributors in the United States and the desire ofdistributors to maintain or reduce costs. Any reduction in subscriber feesrevenue now or in the future could have a material impact on our ability toachieve profitability and cash flow.

***New distribution technologies may fundamentally change the way wedistribute our Channels and could significantly decrease our revenue or requireus to incur significant capital expenditures.***

Our future success will depend, in part, on our ability to anticipate andadapt to technological changes and to offer, on a timely basis, services thatmeet customer demands and evolving industry standards. The pay televisionindustry has been, and is likely to continue to be, subject to:

·       rapid and significant technological change, including continuingdevelopments in technology which do not presently have widely acceptedstandards; and

·       frequent introductions of new services and alternative technologies,including new technologies for providing video services.

For example, the advent ofdigital technology is likely to accelerate the convergence of broadcast,telecommunications, Internet and other media and could result in materialchanges in the economics, regulations, intellectual property usage andtechnical platforms on which our business relies, including lower retail ratesfor video services. These changes could fundamentally affect the scale, source,and volatility of our revenue streams, cost structures, and profitability, andmay require us to significantly change our operations.

We also rely in part on thirdparties for the development of, and access to, communications and networktechnology. As a result, we may be unable to obtain access to new technology ona timely basis or on satisfactory terms, which could harm our business andprospects.

Moreover,the increased capacity of digital distribution platforms, including the introductionof digital terrestrial television, may reduce the competition for the right tocarry channels and allow development of extra services at low incremental cost.These lower incremental costs could lower barriers to entry for competingchannels, and place pressure on our operating margins and market position.

***Changes in laws or regulationscould adversely affect our distribution and thus our revenues.***

TheFederal Communications Commission or Congress may enact requirements that cableprogram services be offered to subscribers on an “a la carte” basis, i.e. bemade available for purchase separately and not as part of a package of servicesor that the services be offered in specific packages such as a so-called “familytier.” Such requirements could result in a reduction in the total number ofsubscribers to our program services and adversely affect advertising revenue.

***If we fail to comply withapplicable government regulations, our business could be harmed.***

If, we as a provider oftelevision channels, fail to comply with applicable present or futuregovernment regulations, we could be prohibited from distributing our programservices and could be subject to 

16

----

monetaryfines or directives, which would increase our operating costs, and, therefore,affect our ability to achieve profitability.

Moreover,broadcasting regulations are generally subject to periodic and on-goinggovernmental review and legislative initiatives, which may, in the future,affect the nature of programming we are able to offer and the means by which itis distributed. The timing, scope or outcome of these reviews could beunfavorable to us, and any changes to current broadcasting legislation orregulations could require adjustments to our operations.

**ITEM 1B.**       Unresolved Staff Comments

Notapplicable.

**ITEM 2.**                Properties

The following table provides certain summary informationwith respect to the principal real properties leased by the Company. We do notown any real property. The leases for these offices and facilities expirebetween 2007 and 2010. The Company believes the facilities, office space andother real properties leased are adequate for its current operations.

| Location                      | ** ** | ** **                                   | ** ** | **Use** | ** ** | **Approximate  Area in  Square Feet** | ** ** |
|-------------------------------|------------|----------------------------------------------|------------|---------|------------|-------------------------------------------------|------------|
| 12700 Ventura Blvd.           |       | Executive and administrative office and post |       |    | 49,637     |                                            |       |
| Studio City, California       |       | production and editing facilities            |       |    |       |                                            |       |
| 1325 Avenue of the Americas   |       | Advertising sales and administrative office  |       |    | 13,145     |                                            |       |
| New York, New York            |       | And advertising traffic                      |       |    |       |                                            |       |
| 6430 S. Fiddlers Green Circle |       | Administrative office                        |       |    | 4,500      |                                            |       |
| Greenwood Village, Colorado   |       |                                         |       |    |       |                                            |       |
| 205 N. Michigan Ave.          |       | Advertising sales office                     |       |    | 3,048      |                                            |       |
| Chicago, Illinois             |       |                                         |       |    |       |                                            |       |
| 1170 Peachtree Street         |       | Advertising sales office                     |       |    | 180        |                                            |       |
| Atlanta, Georgia              |       |                                         |       |    |       |                                            |       |

 

Weown most of the equipment and furnishings used in our businesses, except forsatellite transponders, which are leased. See Note 9 of Notes to ConsolidatedFinancial Statements for information on our leasing of property and equipment.

**ITEM 3.**                Legal Proceedings

We are subject toincidental litigation risks in the ordinary course of our business. We are notcurrently the subject of any material, pending legal proceeding.

**ITEM 4.**                Submission of Matters to a Vote of SecurityHolders

Not applicable.

17

----

**PART II**

**ITEM 5.**                Marketfor Our Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities

***Market Information***

Our Class A common stock is listed on the NasdaqNational Market System under the ticker symbol “CRWN.” Set forth below are thehigh and low sales prices for our Class A common stock for each quarterlyperiod in 2005 and 2006, as reported on the Nasdaq National Market System.

| ** **            | ** ** | **Price Range** | ** ** |
|-----------------------|------------|----------------------|------------|
| **Common Stock** | ** ** | ** **           | ** ** | **High** | ** ** | **Low** | ** ** |
| **2005**              |       |                 |       |   |   |
| First Quarter         |       | $                    | 9.600      |   | $ | 8.000 |   |
| Second Quarter        |       | $                    | 10.110     |   | $ | 7.970 |   |
| Third Quarter         |       | $                    | 11.500     |   | $ | 8.600 |   |
| Fourth Quarter        |       | $                    | 10.970     |   | $ | 8.470 |   |
| **2006**              |       |                 |       |   |   |
| First Quarter         |       | $                    | 9.680      |   | $ | 5.591 |   |
| Second Quarter        |       | $                    | 6.410      |   | $ | 3.490 |   |
| Third Quarter         |       | $                    | 4.700      |   | $ | 3.460 |   |
| Fourth  Quarter       |       | $                    | 4.750      |   | $ | 2.940 |   |
|                       |            |                      |            |  |  |  |  |  |  |

 

There is no establishedpublic trading market for our Class B common stock, of which 100% is ownedby Hallmark Entertainment Investments.

***Holders***

Asof February 28, 2007, there were 60 record holders of our Class Acommon stock and one record holder of our Class B common stock.

***Dividends***

Wehave not paid any cash dividends on our common stock since inception. Excludingour commitments to NICC as described below in Item 13, we anticipate that wewill retain all of our earnings, if any, in the foreseeable future to financethe continued growth and expansion of our business, and we have no currentintention to pay cash dividends. Our bank credit facility also prohibitsour declaring or paying any cash dividends.

***SecuritiesAuthorized for Issuance under Equity Compensation Plans***

The following tableprovides as of December 31, 2006, information for our only equitycompensation plan, which is the Amended and Restated 2000 Long Term IncentivePlan.

**Equity Compensation Plan Information**

| **Plan Category**                                  | ** ** | ** **              | ** ** | **Number of Securities  to be Issued  Upon Exercise of  Outstanding Options,  Warrants and Rights** | ** ** | **Weighted-Average  Exercise Price of  Outstanding Options,  Warrants and Rights** | ** ** | **Number of Securities  Remaining Available  for Future Issuance  Under Equity  Compensation Plans  (Excluding Securities  Reflected in Column (a))** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **(In thousands)** | ** ** | ** **                                                                                                                                       | ** ** | **(In thousands)**                                                                                     | ** ** |
| Equity  compensation plans approved by security holders |       |                    | 810        |                                                                                                                                             |       |                                                                                                        | $          | 10.24                                                                                                                                                                                                        |       |   |   | 9,190 |   |   |
|                                                         |            |                         |            |                                                                                                                                                  |            |                                                                                                             |            |                                                                                                                                                                                                              |            |  |  |  |  |  |  |  |

 

18

----

***Stock Purchases***

Wedid not make any repurchases of our outstanding shares during the fourthquarter of 2006. Two of our executive officers purchased shares of our Class ACommon Stock in open market transactions during the fourth quarter of 2006.

**Performance Graph**

The following graphcompares total stockholder return on our Class A Common Stock since December 31,2001 through December 29, 2006, to the Nasdaq Composite Index and a PeerGroup Index consisting of EW Scripps Co., Paxson Communications Corp. and WaltDisney Co. The graph assumes that $100 was invested in our stock on December 31,2001 and that the same amount was invested in the Nasdaq Composite Index andthe Peer Group Index. Historical results are not necessarily indicative offuture performance. The following graph is deemed furnished and not filed withthe SEC.

Theclosing sale price for our stock on December 31, 2001 was $11.29. Ourclosing stock price on December 29, 2006, the last trading day of our 2006fiscal year, was $3.63.

****

**ITEM 6.**                Selected Financial Data

***Selected Historical Consolidated Financial Data ofCrown Media Holdings***

In the table below, we provideyou with selected historical consolidated financial and other data of CrownMedia Holdings and its subsidiaries. The following selected consolidatedstatement of operations data for the years ended December 31, 2002, 2003,2004, 2005 and 2006, and the consolidated balance sheet data as of December 31,2002, 2003, 2004, 2005 and 2006, are derived from the audited financialstatements of Crown Media Holdings and its subsidiaries. This data should beread together with “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and the consolidated financial statements andrelated notes included elsewhere in this Annual Report on Form 10-K.

19

----

In April 2005, the Companycompleted the sale of its international business and classified the operatingresults of the international business as discontinued operations in theaccompanying statements of operations for all periods presented. The Company’sdiscontinued operations consisted of the international channel operations andthe international rights to the film library assets.

In December 2006, the Company completed the sale ofits film assets.

| ** **                                                                                                                  | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                  | ** ** | **2002**                                    | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                                                                                  | ** ** | **(In thousands, except per share data)**   | ** ** |
| Revenue:                                                                                                                    |       |                                        |       |   |   |   |   |   |   |   |   |
| Subscriber fees                                                                                                             |       | $                                           | 8,463      |   | $ | 4,329 |   | $ | 9,874 |   | $ | 18,746 |   | $ | 24,869 |   |
| Advertising                                                                                                                 |       | 40,991                                      |       | 76,153 |   | 104,481 |   | 143,780 |   | 172,950 |   |
| Advertising by Hallmark Cards                                                                                               |       | 5,021                                       |       | 1,397 |   | 1,846 |   | 2,335 |   | 1,240 |   |
| Film asset license fees                                                                                                     |       | 15,603                                      |       | 17,548 |   | 22,035 |   | 21,693 |   | 1,815 |   |
| Sublicense fees and other  revenue                                                                                          |       | 1                                           |       | 6 |   | — |   | 10,830 |   | 305 |   |
| Total revenue, net                                                                                                          |       | 70,079                                      |       | 99,433 |   | 138,236 |   | 197,384 |   | 201,179 |   |
| Cost of Services:                                                                                                           |       |                                        |       |   |   |   |   |   |   |   |   |
| Programming costs                                                                                                           |       |                                        |       |   |   |   |   |   |   |   |   |
| Affiliates                                                                                                                  |       | 13,456                                      |       | 9,785 |   | 11,820 |   | 14,924 |   | 27,080 |   |
| Non-affiliates                                                                                                              |       | 86,727                                      |       | 58,490 |   | 78,058 |   | 105,653 |   | 125,113 |   |
| Amortization of film assets                                                                                                 |       | 13,131                                      |       | 12,965 |   | 28,905 |   | 51,619 |   | 14,739 |   |
| Impairment of film assets                                                                                                   |       | —                                      |       | — |   | 22,003 |   | 25,542 |   | 225,832 |   |
| Subscriber acquisition fee  amortization expense                                                                            |       | 39,133                                      |       | 22,961 |   | 26,020 |   | 35,928 |   | 31,044 |   |
| Amortization of capital lease                                                                                               |       | —                                      |       | — |   | 96 |   | 1,158 |   | 1,157 |   |
| Other costs of services                                                                                                     |       | 15,956                                      |       | 13,351 |   | 10,939 |   | 20,448 |   | 11,273 |   |
| Total cost of services                                                                                                      |       | 168,403                                     |       | 117,552 |   | 177,841 |   | 255,272 |   | 436,238 |   |
| Selling, general and  administrative expense                                                                                |       | 39,394                                      |       | 41,811 |   | 52,209 |   | 55,162 |   | 43,761 |   |
| Marketing expense                                                                                                           |       | 34,004                                      |       | 16,619 |   | 16,477 |   | 24,160 |   | 16,021 |   |
| Reorganization expense                                                                                                      |       | 6,798                                       |       | 993 |   | — |   | — |   | — |   |
| Depreciation and amortization  expense                                                                                      |       | 5,230                                       |       | 6,245 |   | 6,306 |   | 4,471 |   | 2,865 |   |
| Gain from sale of film assets                                                                                               |       | —                                      |       | — |   | — |   | — |   | (8,238 | ) |
| Loss from operations before  interest expense                                                                               |       | (183,750                                    | )          | (83,787 | ) | (114,597 | ) | (141,681 | ) | (289,468 | ) |
| Loss on early extinguishment of  debt                                                                                       |       | —                                      |       | (39,812 | ) | — |   | — |   | — |   |
| Guaranteed preferred beneficial  interest accretion                                                                         |       | (25,508                                     | )          | (23,218 | ) | — |   | — |   | — |   |
| Interest expense                                                                                                            |       | (17,124                                     | )          | (39,758 | ) | (60,179 | ) | (73,856 | ) | (98,935 | ) |
| Loss before discontinued  operations and cumulative effect of change in accounting principle                                |       | (226,382                                    | )          | (186,575 | ) | (174,776 | ) | (215,537 | ) | (388,403 | ) |
| Loss from discontinued  operations, net of tax                                                                              |       | (86,647                                     | )          | (35,574 | ) | (142,030 | ) | (10,683 | ) | — |   |
| (Loss) gain from sale of  discontinued operations, net of tax                                                               |       | —                                      |       | — |   | — |   | (6,538 | ) | 1,530 |   |
| Loss before cumulative effect  of change in accounting principle                                                            |       | (313,029                                    | )          | (222,149 | ) | (316,806 | ) | (232,758 | ) | (386,873 | ) |
| Cumulative effect of change in  accounting principle                                                                        |       | —                                      |       | 17,000 |   | — |   | — |   | (2,099 | ) |
| Net loss                                                                                                                    |       | $                                           | (313,029   | ) | $ | (205,149 | ) | $ | (316,806 | ) | $ | (232,758 | ) | $ | (388,972 | ) |
| Other comprehensive income (loss):                                                                                          |       |                                        |       |   |   |   |   |   |   |   |   |
| (Loss) gain on fair value of  derivative asset                                                                              |       | 204                                         |       | — |   | — |   | — |   | — |   |
| Foreign currency translation  adjustment                                                                                    |       | 1,063                                       |       | 1,366 |   | 1,421 |   | (3,434 | ) | — |   |
| Comprehensive loss                                                                                                          |       | $                                           | (311,762   | ) | $ | (203,783 | ) | $ | (315,385 | ) | $ | (236,192 | ) | $ | (388,972 | ) |
| Weighted average number of  Class A and Class B shares  outstanding,  basic and diluted                           |       | 104,306                                     |       | 104,484 |   | 104,533 |   | 104,619 |   | 104,788 |   |
| Loss per share before  discontinued operations and cumulative  effect of change  in accounting principle, basic and diluted |       | $                                           | (2.17      | ) | $ | (1.78 | ) | $ | (1.67 | ) | $ | (2.06 | ) | $ | (3.71 | ) |
| (Loss) gain per share from  discontinued operations,  basic and diluted                                                     |       | (0.83                                       | )          | (0.34 | ) | (1.36 | ) | (0.16 | ) | 0.02 |   |
| Cumulative effect of change in  accounting principle,  basic and diluted                                                    |       | —                                      |       | 0.16 |   | — |   | — |   | (0.02 | ) |
| Net loss per share, basic and diluted                                                                                       |       | $                                           | (3.00      | ) | $ | (1.96 | ) | $ | (3.03 | ) | $ | (2.22 | ) | $ | (3.71 | ) |

 

20

----

 

| ** **                                          | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                          | ** ** | **2002**                              | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                          | ** ** | **(In thousands)**               | ** ** |
| **Balance  Sheet Data:**                            |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                           |       | $                                     | 335        |   | $ | 4,306 |   | $ | 12,102 |   | $ | 15,926 |   | $ | 13,965 |   |
| Goodwill                                            |       | 314,033                               |       | 314,033 |   | 314,033 |   | 314,033 |   | 314,033 |   |
| Total assets                                        |       | 1,497,930                             |       | 1,565,747 |   | 1,512,768 |   | 1,273,826 |   | 767,783 |   |
| Total long-term debt, excluding current  Maturities |       | 382,206                               |       | 808,892 |   | 886,302 |   | 971,589 |   | 975,007 |   |
| Stockholders’ equity (deficit)                 |       | 467,595                               |       | 313,451 |   | 54,636 |   | (123,189 | ) | (478,944 | ) |
| **Other  Data:**                                    |       |                                  |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                |       | $                                     | 3,627      |   | $ | 2,544 |   | $ | 878 |   | $ | 504 |   | $ | 713 |   |
| Total  subscribers at year end                      |       | 48,815                                |       | 56,010 |   | 64,565 |   | 70,666 |   | 74,641 |   |

 

**ITEM 7.**                Management’s Discussion and Analysis of FinancialCondition and Results of Operations

**Overview**

*Current Business*

Crown Media Holdings, Inc.(“Crown Media Holdings,” “Crown Media” or the “Company”), through itssubsidiary, owns and operates pay television channels (collectively the“Hallmark Channel,” the “Hallmark Movie Channel,” the “channel” or collectivelythe “channels”) dedicated to high-quality entertainment programming for adultsand families, in the United States.

With 74.6 million subscribers (as provided by NielsenResearch) in the United States at December 31, 2006, Crown Media Holdingsis the 39th most widely distributed advertising-supportedcable channel in the United States. For the fourth quarter of 2006, we finishedthe quarter as the 9th highest rated advertising-supported cablechannel for total day ratings and the6th highest rated advertising-supported cablechannel in prime time as measured by Nielsen Research.

We launched our second 24-hour linear channel,the Hallmark Movie Channel, during the first quarter of 2005. The HallmarkMovie Channel focuses on movies and mini-series. It will generate advertisingrevenue in 2007 and as distribution continues to expand, the financialcontribution of the Hallmark Movie Channel may grow. The Hallmark Movie Channelis operated through Crown Media Holdings existing infrastructure at a smallincremental cost, which will increase since we have completed the sale of ourdomestic film library.

For information regardingthe sale of the domestic film library, through the sale of the Company’smembership interest in Crown Media Distribution, see Note 1 and Note 3 of Notesto the Consolidated Financial Statements in this Report.

*Current Challenges*

The Hallmark Channel faces challenges on thedistribution front. The distribution agreements are important because theyaffect our number of subscribers, which in turn has a major impact on oursubscriber fees, the number of persons viewing our programming, and thus ratescharged for advertising. We have an ongoing focus on growing our subscriberbase. The current and long-term distribution challenges will be renewing our distributionarrangements with the multiple system operators as they expire. Our majordistribution agreements have terms which expire at various times throughFebruary 2012. Of these distribution agreements, agreements accounting forapproximately 70% of our subscriber base at December 31, 2006, will expireand be the subject of renewal negotiations on or prior to December 31,2007.****While the economics of therenewals and potential cash incentive payments are unknown and could have asignificant impact on our business, we believe that the ratings success of the 

21

----

Hallmark Channel and thepositive family-friendly environment we have created with our programmingschedule has assisted in our renewal discussions. Any renewals of thesedistribution agreements may also be significant as to whether we are able tomaintain or increase our subscriber fees. The Company has recently renewed itsagreements with two major distributors.

Domestic telephone companies are entering into thebusiness of distributing television channels to households through theirwire-lines. We have reached agreements with several telephone companies andcooperatives of telephone companies, which permit the carriage of the HallmarkChannel and the Hallmark Movie Channel, and are negotiating with others. Weexpect that subscribers to these telephone services will in large part becustomers previously served by existing cable television companies andsatellite television companies. To date, subscribers and revenues throughtelephone companies have been insignificant.

Three factors have contributed to the ratingsimprovements of the Hallmark Channel: acquired series and movies, originalproductions and marketing. Acquired series such as *Little Houseon the Prairie*, *Walker, Texas Ranger*and *M*A*S*H* have consistently deliveredstrong ratings across all day-parts. Original productions are our most highprofile programs and generate the channel’s highest ratings. Originalproductions are significant in helping our distribution and advertising salesteams sell the channel. Substantially all of our original programming has beenprovided by RHI Entertainment. The Company typically incurs additionalmarketing expenses surrounding original productions and certain acquiredmovies.

We have extended our program license for *M*A*S*H*; however, commencing January 1, 2007, ourrights became non-exclusive in cable television and we may only broadcast theseries from 8 a.m. to 8 p.m. Previously, *M*A*S*H*has been aired on the Hallmark Channel during primetime on an exclusive basis. Thischange was made for cost savings. Beginning in the fourth quarter of 2006, wefilled the late night programming position previously occupied by *M*A*S*H*with two hour movies. To date, the ratings from thisday part have not been significantly different from the ratings received when *M*A*S*H*filled this programming position.

To continue the ratings growth and enhance thedemographics of our viewers, including attracting a younger audience, theHallmark Channel must continue to invest in programming and marketing.

Delivering strong ratings growth to larger audienceshas made it possible for our advertising sales to grow rapidly over the lastfew years. To advertisers, the Hallmark Channel offers a strong brand, positiveenvironment and family friendly programming with a successful growth pattern. Thesecharacteristics have enabled the channel to sell to a broader range ofadvertisers, including those in the packaged goods and pharmaceuticalindustries.

We sold approximately 46%of our inventory for advertising on our Channels in the upfront market(generally sales in June, July and August for the last quarter of2006 and the first three quarters of 2007), compared to 50% to 55% sold in the2005 upfront market. We were able to achieve significant increases in our CPM’sin the upfront market for next year compared to the upfront market for thisyear. The balance of advertising inventory will be made available in thescatter market, which in the past has yielded higher advertising rates than theupfront market.

*InternationalBusiness*

Please see Note 1 in ourConsolidated Financial Statements—Sale of the International Business of Notesto the Consolidated Financial Statements in this Report.

22

----

*Sale of MembershipInterests in Crown Media Distribution*

Please see Note 1 in ourConsolidated Financial Statements—Sale of Membership Interests in Crown MediaDistribution of Notes to the Consolidated Financial Statements in this Report.

*Impairment ofAssets*

Please see Note 3 of Notesto the Consolidated Financial Statements in this Report for information onimpairment charges for 2004, 2005 and 2006.

**Revenue fromContinuing Operations**

Our revenue consistsprimarily of subscriber fees and advertising fees, and included until December 2006,film asset license fees.

*Subscriber Fees*

Subscriber fees are generally payable to us on a persubscriber basis by pay television distributors for the right to carry ourchannels. In the past, we have paid certain television distributors up-frontsubscriber acquisition fees to carry our channel. Subscriber acquisition feesthat we pay are capitalized and amortized over the contractual term of theapplicable distribution agreement as a reduction in subscriber fee revenue. Ifthe amortization expense exceeds the revenue recognized on a per distributorbasis, the excess amortization is included as a component of cost of services.At the time we sign a distribution agreement, we evaluate the recoverability ofthe costs we incur against the incremental revenue directly and indirectlyassociated with each agreement.

Rates we receiveper subscriber vary according to:

·       thelevel of sophistication and degree of competition in the market;

·       therelative position in the market of the distributor and the popularity of thechannel;

·       thepackaging arrangements for the channel; and

·       othercommercial terms and length of the contract term.

We are in continuous negotiations with our existingdistributors to increase our subscriber base in order to enhance ouradvertising results. We have been subject to requests by major distributors topay subscriber acquisition fees for additional subscribers or to waive oraccept lower subscriber fees if certain numbers of additional subscribers areprovided. We also may help fund the distributors’ efforts to market ourchannels or we may permit distributors to offer limited promotional periodswithout payment of subscriber fees. As we continue our efforts to addsubscribers, our subscriber revenue may continue to be negatively affected bysubscriber acquisition fee amortization, waiver of subscriber fees and bulkdiscounts resulting from the attainment of certain subscriber levels; however,we believe these measures, if necessary, will help us increase our subscriberbase more quickly, which in turn will allow us to attract additionaladvertisers and command higher advertising rates.

Our channel is usually offered as one of a number ofchannels on either a basic tier or part of other program packages and is notgenerally offered on a stand-alone basis. Thus, while a cable orsatellite customer may subscribe and unsubscribe to the tiers and programpackages in which our channel is placed, these customers do not subscribe andunsubscribe to our channel alone. We are not provided with information from thedistributors on their overall subscriber churn and in what manner their churnrates affect our subscriber counts; instead, we are provided information on thetotal number of subscribers who receive the Hallmark Channel.

23

----

Our subscriber countdepends on the number of distributors carrying the Hallmark Channel and thesize of such distributors as well as the program tiers on which our channel iscarried by these distributors. From time to time, we experience decreases inthe number of subscribers as promotional periods end, or as a distributorarrangement is amended or terminated by us or the distributor. Changes todistribution arrangements during the year ended December 31, 2006, havenot been significant. Management analyzes the estimated effect each new oramended distribution agreement will have on revenues and costs. Based uponthese analyses, management endeavors to achieve a fair combination ofsubscriber commitments and subscriber acquisition fees with each of ourdomestic distributors.

*Advertising*

Our advertising rates aregenerally calculated on the basis of an agreed upon price per unit of audiencemeasurement in return for a guaranteed commitment by the advertiser. We committo provide advertisers certain rating levels in connection with theiradvertising. Revenue is recorded net of estimated delivery shortfalls, whichare usually settled by providing the advertiser additional advertising time.Advertising rates also vary by time of year due to seasonal changes intelevision viewership.

*Film Asset LicenseFees*

Crown Media Distributiongenerated revenue from the film assets by granting licenses to third parties toexhibit the films in the United States. We also used the films as programmingfor the Hallmark Channel and the Hallmark Movie Channel. Customers for our filmassets consisted of other television channels, home video distributors andbrokers who resold rights to our film assets. License fees for our film assetswere generally negotiated based upon, among other things, the size of thepotential audience who were to be viewing the programming and the term of thelicense. The market for our filmlibrary was typically seasonal, with over half of the annual sales occurring inthe fourth quarter in past years. This seasonality was generally due to thetiming of our customers’ program scheduling activities. In 2006, film licensingactivities and revenues were negatively affected by the sale process of theCompany’s film library, which sale closed in December 2006. Due tothe sale of the Company’s film library, we will not have film licensingactivities in the future.

**Cost of Services**

Our cost of services consists primarily of programlicense fees; subscriber acquisition fee expense; the cost of signaldistribution; administration, distribution and, until we sold our film assets,amortization of and other exploitation of our film assets; and the cost ofpromotional segments that are aired between programs. We expect cost ofservices to continue to increase in the future as we expand our existingmarkets and third party programming to support our advertising strategy.

**Critical AccountingPolicies, Judgments and Estimates**

We have identified the policies and estimates below ascritical to our business operations and the understanding of our results ofoperations, either past or present. Forfurther information regarding our critical accounting policies, judgments andestimates, please see the Notes to Consolidated Financial Statements containedin this Report. These policies and estimates are considered criticalbecause they either had a material impact or they have the potential to have amaterial impact on our financial statements, and because they requiresignificant judgments, assumptions or estimates. Our preparation of this annualreport on Form 10-K requires us to make estimates, disclosure ofcontingent assets and liabilities at the date of our consolidated financialstatements, and the reported amounts of revenue and expenses during thereporting period. We believe that the estimates, judgments and assumptions madewhen accounting for the items described below are reasonable, based oninformation available at the time 

24

----

they were made. However,there can be no assurance that actual results will not differ from thoseestimates.

Thefollowing discussion concerns certain accounting estimates and assumptions thatare considered to be material due to the levels of subjectivity and judgmentnecessary to account for uncertain matters and the susceptibility of suchmatters to changes.

***Residual and Participation Liabilities***

The Company accounts for the future costs for residualand participation liabilities to the various guilds associated with the sales,licensing and internal use of the domestic and international film assets. Followingthe December 15, 2006 sale of the film library, the Company will not incurnew obligations of this nature.

Pursuant to Amendment No. 1 to the PurchaseAgreement dated December 15, 2006, the Company shall indemnify RHI forsuch liabilities that arise through December 14, 2016 up to a maximum amountof $22.5 million. The Company’s actual cost for this obligation will depend onthe level of RHI’s domestic library sales during this period. Any revision tothis estimated liability will be reflected as gain (loss) from the sale of filmassets

Also, the Company estimated a liability ofapproximately $4.5 million to pay the estimated residual and participationcosts that the buyer would otherwise be obligated to pay to third partiesthrough April 2015 in connection with international film library sales. TheCompany’s actual cost for this obligation will depend on the buyer’s actualusage or sales of these films. Any revisions to this estimated liability willbe reflected as gain (loss) from the sale of discontinued operations in futureperiods. The liability the Company will owe is not subject to any contractuallimitation.

We consider our estimatesof future domestic and international sales of the film assets by the respectivebuyers to be critical because determining the extent and timing of future filmsales requires significant judgment and is subject to refinement as facts andcircumstances change. To the extent these estimates are more or less than theactual liability resulting from the resolution of these matters, our earningswill be increased or decreased accordingly. If the differences are material,our consolidated financial statements could be materially impacted.

***Film Asset Amortization and Film Library Impairment***

The Company amortized its film assets using theindividual-film-forecast-computation method over a maximum period of 9.25 yearsfrom the date of acquisition. The individual-film-forecast-computation methodamortized such assets in the same ratio that period revenue bore to estimatedultimate future revenues.

The Company reviewed its estimates of ultimate futurerevenues and participation costs on a quarterly basis to reflect currentlyavailable information. Estimated ultimate future revenues were based on thehistory of each film and similar films, sales and marketing plans, and other factors,all of which required significant judgment and estimation by management.Differences between amortization expense determined using the new estimates andany amounts previously expensed during that current fiscal year were charged orcredited to the statement of operations in the period in which the estimateswere revised.

For use of the film assets on the Hallmark Channel andthe Hallmark Movie Channel, the Company estimated the fair value of theinternal usage based upon the portion of the film’s ultimate revenuesattributable to the term of the license window. The Company first calculatedthe amount of cost attributable to the internal use using theindividual-film-forecast-computation method described above and then expensedsuch amounts ratably over the term of the license window.

25

----

On a quarterly basis, the Company assessed whetherevents or circumstances had changed indicating that the fair value of a filmwas lower than its unamortized cost or carrying value. If the carrying value ofany individual film asset exceeded its fair value, the film asset waswritten-down to its estimated fair value. The Company considered the followingfactors, among others, in estimating cash flows and fair values for each film:(*a*) the operating environmentexpected for the next several years, (*b*) thesize of the library as a whole, (*c*) historicallicense fee revenue per film, (*d*) eachtitle’s age, quality, and marketability, (*e*) existingsales plans including the amount of product desired to be sold each year, (*f*) future performance estimates, (*g*) assumptionsand estimates underlying past and future estimates, (*h*) riskfactors that could effect future operations of the Library and *(i) *offers from potential buyers of the film assets. Inestimating a film’s fair value, the Company considered those cash outflowsnecessary to generate the film’s cash inflows such as exploitation, residualand participation costs and taxes. The discount rate used in the Company’sdiscounted cash flow model was based upon management’s estimate of the rate apurchaser would require related to the risks and uncertainties surrounding thetiming and probability of the cash flow estimates.

We believe that ourestimation of the fair value of film assets, future ultimate revenues andestimated sales to third parties and internal usage of our film assets prior totheir sale were critical accounting estimate, because the estimates of salesand fair value involve a significant degree of judgment and were subject torefinement as facts and circumstances change.

***Program License Fees***

Programlicense fees are paid in connection with the acquisition of the rights to airprograms acquired from others. The cost of program rights are deferred and thenamortized on a straight-line basis over the shorter of their contractuallicense periods or anticipated usage. On a quarterly basis, the Companyevaluates the recoverability of these deferred license fees in relation to theestimated future revenues. This analysis is based upon the critical managementestimates of net realizable value for program license fees that are determinedusing future estimated advertising revenues and anticipated patterns ofprogramming usage on a day part basis as it pertains to programming licensed tothe channel. The estimate of usage and advertising revenues involve asignificant degree of judgment and are subject to refinement as facts andcircumstances change. Accordingly, this is considered a critical accountingestimate. These estimates of expected annual future estimated revenues are comparedto net book value of the program license fee assets to determine if theprogramming assets are expected to be recovered. Where the analysis indicatesthe costs are in excess of the estimated net realizable value, additionalprogramming costs are recognized for the difference. Any changes to theseestimates could materially impact our financial statements or results ofoperations.

***Long-Lived Assets***

The Company reviews long-lived assets, other thangoodwill and other intangible assets with indefinite lives, for impairmentwhenever facts and circumstances indicate that the carrying amounts of theassets may not be recoverable. An impairment loss is recognized if the carryingamount of the asset is not recoverable and exceeds its fair value. Recoverabilityof assets to be held and used is measured by comparing the carrying amount ofan asset to the estimated undiscounted future net cash flows expected to begenerated by the asset. If the asset’s carrying value is not recoverable, animpairment charge is recognized for the amount by which the carrying amount ofthe asset exceeds its fair value. The Company determines fair values by using acombination of comparable market values and discounted cash flows, asappropriate.

Goodwill is reviewed for impairment annually onNovember 30 or whenever an event occurs or there is a change incircumstances that indicates fair value might be less than carrying value.Goodwill is carried at historical cost if the estimated fair value is greaterthan the carrying amounts. However, if estimated fair 

26

----

value is less than thecarrying amount, goodwill would be reduced to the estimated fair value throughan impairment charge to the Company’s consolidated statements of operations.

Cash flow projectionsinclude long-term forecasts of revenue growth, gross margins and capitalexpenditures. All of these items require significant judgment and assumptions.If estimates of future cash flows are different from our assumptions, we mayconclude that some of our long-lived assets are not recoverable, which wouldlikely cause us to record a material impairment charge. Also, if future cashflows are significantly lower than the projections we may determine at somefuture date that some of our long-lived assets are not recoverable.

**Effects of Transactionswith Related and Certain Other Parties**

**HallmarkTransactions**

In 2007 to date and inprior years, we entered into a number of significant transactions with HallmarkCards and its subsidiaries. These transactions include, among other things,trademark licenses, administrative services, a Tax Sharing Agreement, theissuance of a $400.0 million senior unsecured note, notes payable and adebt waiver agreement.

*Bank CreditFacility*

In March 2005, aspart of an amendment to our bank credit facility, Hallmark Cards has provided aletter of credit to the lenders for an amount equal to the maximum amount whichmay be borrowed under the bank credit facility. Under Amendment No. 9 tothe bank credit agreement dated March 21, 2006, Hallmark Cards acquiredthe right to purchase all of the bank lender’s interest in the bank creditfacility. Under a waiver and standby purchase agreement entered into byHallmark Cards on the same day, as last amended on March 2, 2007, HallmarkCards and its subsidiaries have agreed not to demand payments of variousobligations owed by us to them until May 31, 2008, including draws underthe above mentioned letter of credit. In the same waiver and standby purchaseagreement, Hallmark Cards has provided us with the right to cause HallmarkCards to purchase all of the bank lenders’ interest in loans. See “Bank CreditFacility” below.

*Tax SharingAgreement*

In March 2003, theCompany became a member of Hallmark Cards consolidated federal tax group andentered into a Tax Sharing Agreement with Hallmark Cards, which was amended atthe time the Company issued the senior unsecured note to HC Crown. We accountfor income taxes as if Crown Media Holdings were a separate taxpayer.Accordingly, Hallmark Cards’ ability to use our tax losses does not impact ourassessment of the need for a valuation allowance on deferred tax assets,including future tax losses. Any payments received from Hallmark Cards underthe Tax Sharing Agreement are recorded as an increase in paid-in capital. Forinformation regarding the Tax Sharing Agreement, please see Notes 12 and16 to the Notes to Consolidated Financial Statements contained in this Report.

*Senior UnsecuredNote*

On August 5, 2003,Crown Media Holdings repurchased all of the outstanding trust preferred securitiesof Crown Media Trust and related contingent appreciation certificates issued bythe Company. The securities were repurchased for approximately $329.1 million.Funds for this repurchase were obtained from the proceeds from the issuance ofa senior unsecured note issued to HC Crown in the amount of $400.0 million. For information regarding our senior unsecurednote, please see Note 11 to the Notes to Consolidated Financial Statementscontained in this Report.

27

----

*Promissory Noteswith Hallmark Entertainment Holdings*

In October 2005, the Company converted a portionof its license fees payable to Hallmark affiliates, which were approximately$132.8 million, to a promissory note bearing interest at LIBOR plus 3% per annum.The term of the promissory note began on October 1, 2005 and is payable infull on May 31, 2008 per an extension under the waiver and standbypurchase agreement. This note was transferred to a subsidiary of Hallmark Cardsprior to the sale by Hallmark Cards of its interests in Hallmark EntertainmentLLC, now called RHI Entertainment LLC.

In March 2006, theCompany converted its payable to a Hallmark Cards affiliate, which wasapproximately $70.4 million, to a promissory note bearing interest at LIBOR plus3% per annum. The term of the promissory note began on March 21, 2006,and, as a result of the waiver and standby purchase agreement discussedabove,  principal and interest arepayable on May 31, 2008.

*NICC LicenseAgreement*

For information regarding the amendment to our licenseagreement with NICC, please see Item 13 “Certain Relationships and RelatedTransactions” contained in this Report.

28

----

***Selected Historical Consolidated Financial Data ofCrown Media Holdings***

In the table below, we provide selected historical consolidated financialand other data of Crown Media Holdings and its subsidiaries. The followingselected consolidated statement of operations data for the years ended December 31,2004, 2005 and 2006, are derived from the audited financial statements of CrownMedia Holdings and its subsidiaries. This data should be read together with theconsolidated financial statements and related notes included elsewhere in thisAnnual Report on Form 10-K.

| ** **                                               | ** ** | ** **                                  | ** ** | ** **        | ** ** | ** **        | ** ** | **Percent Change** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------|------------|-------------------|------------|-------------------|------------|-------------------------|------------|
| ** **                                               | ** ** | **Years ended December 31,** | ** ** | **2005 vs.** | ** ** | **2006 vs.** | ** ** |
| ** **                                               | ** ** | **2004**                                    | ** ** | **2005**          | ** ** | **2006**          | ** ** | **2004**                | ** ** | **2005** | ** ** |
| ** **                                               | ** ** | **(In thousands)**                     | ** ** | ** **        | ** ** | ** **        | ** ** |
| Revenues:                                                |       |                                        |       |              |       |              |       |                    |       |   |   |   |   |   |   |
| Subscriber fees                                          |       | $                                           | 9,874      |              | $          | 18,746            |       | $                       | 24,869     |   |   | 90 | % |   |   | 33 | % |   |
| Advertising                                              |       | 106,327                                     |       | 146,115           |       | 174,190           |       |                    | 37         | % |   |   | 19 | % |   |
| Film asset license fees                                  |       | 22,035                                      |       | 21,693            |       | 1,815             |       |                    | -2         | % |   |   | -92 | % |   |
| Sublicense fees and  other revenue                       |       | —                                      |       | 10,830            |       | 305               |       |                    | 100        | % |   |   | -97 | % |   |
| Total revenues                                           |       | 138,236                                     |       | 197,384           |       | 201,179           |       |                    | 43         | % |   |   | 2 | % |   |
| Cost of Services:                                        |       |                                        |       |              |       |              |       |                    |       |   |   |   |   |   |   |
| Programming costs                                        |       | 89,878                                      |       | 120,577           |       | 152,193           |       |                    | 34         | % |   |   | 26 | % |   |
| Amortization of film  assets                             |       | 28,905                                      |       | 51,619            |       | 14,739            |       |                    | 79         | % |   |   | -71 | % |   |
| Impairment of film  assets                               |       | 22,003                                      |       | 25,542            |       | 225,832           |       |                    | 16         | % |   |   | 784 | % |   |
| Subscriber acquisition  fee amortization                 |       | 26,020                                      |       | 35,928            |       | 31,044            |       |                    | 38         | % |   |   | -14 | % |   |
| Operating costs                                          |       | 11,035                                      |       | 21,606            |       | 12,430            |       |                    | 96         | % |   |   | -42 | % |   |
| Total cost of services                                   |       | 177,841                                     |       | 255,272           |       | 436,238           |       |                    | 44         | % |   |   | 71 | % |   |
| Selling, general and  administrative expense             |       | 58,515                                      |       | 59,633            |       | 46,626            |       |                    | 2          | % |   |   | -22 | % |   |
| Marketing expense                                        |       | 16,477                                      |       | 24,160            |       | 16,021            |       |                    | 47         | % |   |   | -34 | % |   |
| Gain on sale of film assets                              |       | —                                      |       | —            |       | (8,238            | )          |                    |       |   |   |   | 100 | % |   |
| Loss from continuing  operations before interest expense |       | (114,597                                    | )          | (141,681          | )          | (289,468          | )          |                    | 24         | % |   |   | 104 | % |   |
| Interest expense                                         |       | (60,179                                     | )          | (73,856           | )          | (98,935           | )          |                    | 23         | % |   |   | 34 | % |   |
| Loss from continuing  operations                         |       | (174,776                                    | )          | (215,537          | )          | (388,403          | )          |                    | 23         | % |   |   | 80 | % |   |
| Loss from discontinued  operations                       |       | (142,030                                    | )          | (10,683           | )          | —            |       |                    | -92        | % |   |   | -100 | % |   |
| Gain (loss) on sale of  discontinued operations          |       | —                                      |       | (6,538            | )          | 1,530             |       |                    | 100        | % |   |   | -123 | % |   |
| Cumulative effect of  change in accounting principle     |       | —                                      |       | —            |       | (2,099            | )          |                    |       |   |   |   | 100 | % |   |
| Net loss                                                 |       | $                                           | (316,806   | )                 | $          | (232,758          | )          | $                       | (388,972   | ) |   | -27 | % |   |   | 67 | % |   |
| **Other Data:**                                          |       |                                        |       |              |       |              |       |                    |       |   |   |   |   |   |   |
| Net cash used in  operating activities                   |       | $                                           | (15,198    | )                 | $          | (121,926          | )          | $                       | (34,061    | ) |   | 702 | % |   |   | -72 | % |   |
| Capital expenditures                                     |       | $                                           | (878       | )                 | $          | (504              | )          | $                       | (713       | ) |   | -43 | % |   |   | 41 | % |   |
| Proceeds from  disposition of international business     |       | $                                           | —     |              | $          | 221,979           |       | $                       | —     |   |   | 100 | % |   |   | -100 | % |   |
| Proceeds from  disposition of film assets                |       | $                                           | —     |              | $          | —            |       | $                       | 152,116    |   |   |   |   |   |   | 100 | % |   |
| Net cash provided by  (used in) financing activities     |       | $                                           | 66,565     |              | $          | (72,329           | )          | $                       | (110,883   | ) |   | -209 | % |   |   | 53 | % |   |
| Net cash used in  discontinued operations                |       | $                                           | (42,693    | )                 | $          | (15,063           | )          | $                       | —     |   |   | -65 | % |   |   | -100 | % |   |
| Total domestic day  household ratings (1)(3)             |       | 0.600                                       |       | 0.707             |       | 0.755             |       |                    | 18         | % |   |   | 7 | % |   |
| Total domestic primetime  household ratings (2)(3)  |       | 0.871                                       |       | 1.033             |       | 1.216             |       |                    | 19         | % |   |   | 18 | % |   |
| Subscribers at year end                                  |       | 64,565                                      |       | 70,666            |       | 74,641            |       |                    | 9          | % |   |   | 6 | % |   |

----

(1)          Total day is the timeperiod measured from the time each day the broadcast of commercially sponsoredprogramming commences to the time such commercially sponsored programming ends.

29

----

(2)          Primetime is defined as8:00 - 11:00 P.M. in the United States.

(3)          TheseNielsen ratings are for the time period January 1 through December 31.

***Results of Operations***

*Year Ended December 31,2005 Compared to Year Ended December 31, 2006*

*Revenue.*

Ourrevenue increased 2% for the year ended December 31, 2006. Our 33% increase in subscriber fee revenue forthe year ended December 31, 2006, was the result of the expiration of freecarriage periods during 2006 for certain of our domestic distributors and anincrease in subscribers. Subscriber acquisition fee expense recorded as areduction of revenue was $8.7 million for the year ended December 31, 2006, and $12.1 million for thecomparable period in 2005, as a result of fees required under distributionagreements negotiated in prior years and a renewal of a major distributionagreement negotiated in 2005. Subscriber counts have increased as a result ofpreviously amended distribution agreements in the United States, which providefor financial incentives to the distributors for distribution growth, as wellas the ratings success of the Hallmark Channel.

The 19% increase in advertisingrevenue reflects the following during 2006: the 6% growth in subscribers;higher household ratings; and higher advertising rates resulting from theincrease in distribution and viewership. Additionally, the number ofadvertisers on our channel rose from 414 at December 31, 2005, to 418 at December 31,2006.

Revenue from the licensing of our film assets totaled$1.8 million for theyear ended December 31, 2006, compared with $21.7 million for thecomparable period in 2005. The Company sold its film assets in December 2006.Until that time, sales decreased due to the uncertainty of the completion ofthe sale. Sublicense fees and other revenue for the year ended December 31,2005, was $10.8 million primarily due to the sub-licensing of *Little House on the Prairie* to a third party. The Companyrecorded $305,000 of sublicense fees and other revenue for the year ended December 31,2006.

*Costof services.**  *Cost ofservices as a percent of revenue increased to 217% for the year ended December 31, 2006, as compared to 129% inthe prior year’s period. This increase was primarily related to the $225.8million impairment of our film assets explained below.

Total programming costs for the year ended December 31, 2006, increased26% due to our focus on retaining andacquiring higher quality series programming, our acquisition of originalprogramming such as Mystery Movies and the related amortizations and awrite-down of $20.9 million of certain program license fees to their estimatednet realizable values.

Non-cash impairment charges in a total amount of $25.5million and $225.8 million related to our film assets for the years ended December 31,2005 and 2006, respectively. As a result of non-binding bids received in thesecond quarter of 2006 and terms of a then proposed agreement for the sale ofthe library, management deemed it necessary to review its film assets forimpairment as of both June 30, 2006 and September 30, 2006, andimpairment charges were recognized in both of these quarters based on thesereviews.The impairment charges for the film assets were recognized in the thirdand fourth quarters of 2005 based upon then current projections for the salesand internal use of the film assets.

Amortization of film assets decreased 71% for the year ended December 31, 2006, comparedto the same periods in 2005 primarily as a result of a significant decrease inthe licensing of our film assets as noted above because of the sale of our filmassets in December 2006 and related uncertainty surrounding the sale untilit was completed. Our subscriber acquisition fee amortization expense for theyear ended December 31, 2006, as compared to the 2005 year, decreased 14%because we fully amortized certain of our agreements with our domesticdistributors.

30

----

Generally, our major distribution agreements haverequired the Company to pay subscriber acquisition fees to distributors foradditional subscribers. Our subscribers increased from 70.7 million at December 31,2005, to 74.6 million at December 31, 2006, however, the Company incurredno additional subscriber acquisition fees for this increase in subscribers. TheCompany amortizes previously incurred subscriber acquisition costs over theremaining life of the relevant distribution agreement.

Operating costs for the year ended December 31, 2006, decreased $9.2 millionprimarily due to a $9.2 million decrease in bad debt expense.

*Selling,general and administrative expense.**  *Our selling, general and administrative expensedecreased for the year ended December 31,2006, due primarily to an $11.7 million decrease in compensation expenseassociated with our restricted stock units and a $1.6 million decrease indepreciation and amortization expense offset in part by an accrual related tocertain claims made against the Company by the buyer of the internationalbusiness.

*Marketingexpense.**  *For theyear ended December 31, 2006, our marketing expense decreased 34%primarily due to the elimination in 2006 of the Mystery Movie marketingcampaign for the Hallmark Channel. In order to build upon the success of our2004 Holiday promotion and to assist with the sale of our advertising inventoryin the upfront market, the Company commenced the Mystery Movie franchise in thefirst quarter of 2005.

*Interestexpense.**  *Interestexpense increased 34% for the year ended December 31, 2006, due to: higherinterest expenses explained below; interest on our $400.0 million seniorunsecured note payable, which increased by $5.0 million for the year ended December 31,2006, as compared to the prior year; and interest on our $75.0 millionpromissory note, which increased by $2.0 million for the year ended December 31,2006, as compared to the prior year. Interest on our senior unsecured notepayable increased as accrued interest was added to the principal. Interestincreased related to our promissory note due to a higher interest rate and ahigher principal balance. In October 2005, we converted $132.8 million oflicense fees payable into a note payable to a Hallmark Cards affiliate and therelated interest expense was $2.4 million for the year ended December 31,2005. Interest related to the $132.8 million note payable to a Hallmark Cardsaffiliate was $11.2 million for the year ended December 31, 2006. In March 2006,we converted $70.0 million of payables to affiliates into a note payable to aHallmark Cards affiliate and the related interest expense was $4.1 million forthe year ended December 31, 2006. Interest on our credit facilityincreased $4.0 million due to a higher principal balance and interest rate.Interest payable to Hallmark Cards with respect to our credit facilityincreased $1.4 million due to a higher principal balance and interest rate.

*Lossfrom Continuing Operations.**  *Loss from continuing operations for the year ended December 31,2005 and 2006, was $215.5 million and $388.4 million, respectively. Ourloss from continuing operations increased primarily due to our $225.8 millionimpairment of our film assets discussed above.

*Lossfrom Discontinued Operations.**  *Loss from discontinued operationsfor the years ended December 31, 2005 and 2006, was $10.7 million and $0,respectively. The Company sold its international business on April 26,2005.

*Cumulative effect ofchange in accounting principle.**  *On January 1, 2006, we adoptedSFAS 123R. The total compensation costrelated to performance RSUs granted under the Plan net of estimated forfeitureswas $2.1 million, which was recorded as a cumulative catch-up adjustment duringthe year ended December 31, 2006. Under prior accounting treatment, theperformance RSUs were not classified as a liability as it was deemed improbablethat these RSUs would settle based upon the performance of our Class Acommon stock.

31

----

*Year Ended December 31,2004 Compared to Year Ended December 31, 2005*

*Revenue.*

Ourrevenue increased 43% for the year ended December 31, 2005. Our 90% increase in subscriber fee revenue forthe year ended December 31, 2005, was the result of the expiration ofwaived subscriber fees for certain of our domestic distributors and an increasein subscribers. Subscriber acquisition fee amortization recorded as a reductionof revenue was $12.1 million for theyear ended December 31, 2005, and $12.2 million for the comparableperiod in 2004, as a result of fees required under distribution agreementsnegotiated in prior years and a renewal of a major distribution agreementnegotiated in 2005. Subscriber counts increased as a result of previouslyamended distribution agreements in the United States, which provide forfinancial incentives for distribution growth, as well as the ratings success ofthe Hallmark Channel. The ability to increase our subscriber base is importantboth in terms of growing our subscriber and advertising revenues.

The 37% increase in advertisingrevenue reflects the following during 2005: the 9% growth in subscribers;higher household ratings; and higher advertising rates resulting from theincrease in distribution and viewership. Additionally, the number of advertiserson our channel rose from 403 at December 31, 2004, to 414 at December 31,2005.

Revenue from the sale of our film assets totaled $21.7million for theyear ended December 31, 2005, compared with $22.0 million for thecomparable period in 2004. Sublicense fees and other revenue for the year endedDecember 31, 2005, was $10.8 million primarily due to the sub-licensing of*Little House on the Prairie* to a thirdparty.

*Costof services.**  *Cost ofservices as a percent of revenue remained relatively flat at 129% for the year ended December 31, 2005, ascompared to 129% in the prior year’s period.

Total programming costs for the year ended December 31, 2005, increased34% due to our focus on higher qualityseries programming such as *M*A*S*H*, *JudgingAmy,*and *J.A.G*.and the related amortization. Inaddition, the Hallmark Channel introduced the Mystery Movies in the firstquarter of 2005, which also involve higher costs and related amortization.

Non-cash impairment charges in a total amount of $22.0million and $25.5 million related to our film assets for the years ended December 31,2004 and 2005, respectively. The impairment charges for the film assets wererecognized in the third and fourth quarters of 2005 and the third and fourthquarters of 2004 based upon then current projections for the sales and internaluse of the film assets.

Amortization of film assets increased 79% for the year ended December 31,2005, compared to the same periods in 2004 primarily as a result of theimpairment of our film assets and related recalculation of amortization and theuse of the film assets by our Movie Channel.

In the past some of our major distribution agreementshave required the Company to pay subscriber acquisition fees to distributorsfor additional subscribers. Our subscribers increased from 64.6 million at December 31,2004, to 70.7 million at December 31, 2005, and the Company incurredadditional subscriber acquisition fees for this increase in subscribers. TheCompany amortizes these costs over the remaining life of the relevantdistribution agreement, which resulted in a 38% increase in our subscriberacquisition fee amortization expense for the year ended December 31, 2005,as compared to the prior year.

Operating costs for the year ended December 31, 2005, increased $10.6 millionprimarily due to a $8.8 million increase in bad debt expense, a $565,000increase in equipment expense, $536,000 increase in playback, transponder anduplink expense, and a $1.1 million increase in amortization expense related toour capital lease placed into service during fourth quarter 2004.

32

----

*Selling,general and administrative expense.**  *Our selling, general and administrative expenseincreased for the year ended December 31,2005, due to an increase in consulting expense and audit fees associatedwith complying with our regulatory requirements under the Sarbanes-Oxley Actand offset by a decrease in compensation expense associated with our restrictedstock units.

*Marketingexpense.**  *For theyear ended December 31, 2005, our marketing expense increased 47%primarily due to the 2005 Mystery Movie marketing campaign for the HallmarkChannel. In order to build upon the success of our 2004 Holiday promotion andto assist with the sale of our advertising inventory in the upfront market, theCompany commenced the Mystery Movie franchise in the first quarter of 2005. Theprior year’s marketing activity was significantly less as there were not asmany special programming events in the first half of 2004.

*Interestexpense.**  *Interestexpense increased 23% for the year ended December 31, 2005, due tointerest on our $400.0 million senior unsecured note payable, which increasedby $4.6 million for the year ended December 31, 2005, as compared to theprior year, and interest on our $75.0 million promissory note, which increasedby $1.8 million for the year ended December 31, 2005, as compared to theprior year. Interest on our senior unsecured note payable increased as accruedinterest was added to the principal. Interest increased related to ourpromissory note due to a higher interest rate. Interest expense also increased$1.5 million related to our interest expense on our capital lease for atransponder. Additionally, a portion of interest expense, which was formerlypayable to our bank syndicate and is now payable to HC Crown as a result ofAmendment No. 8 of our credit facility was $3.2 million. In October 2005,we converted $132.8 million of license fees payable into a note payable to aHallmark Cards affiliate and the related interest expense was $2.4 million forthe year ended December 31, 2005.

*Lossfrom Continuing Operations.**  *Loss from continuing operations for the year ended December 31,2004 and 2005, was $174.8 million and $215.5 million, respectively. Ourloss from continuing operations increased primarily due to (1) a $7.7million increase in marketing expense to continue to drive ratings; (2) increasein loss generated from library sales and the internal use of the libraryproduct on the Channel; (3) increase in selling, general andadministrative expense described above; and (4) an increase in interestexpense of $13.7 million as explained above due to relatively higher borrowingsduring 2005 as compared to the prior year period. These increases are partiallyoffset by subscriber and advertising revenue increases, which were greater thanthe increases in programming costs.

*Loss from DiscontinuedOperations.**  *Lossfrom discontinued operations for the years ended December 31, 2004 and2005, was $142.0 million and $10.7 million, respectively. Loss fromdiscontinued operations was less for the year ended December 31, 2005, ascompared to the comparable period for 2004, as a result of the Company’s saleof its  international business on April 26,2005.

***Liquidity and Capital Resources***

Cash used in operatingactivities from continuing operations was $121.9 million and $34.1 million forthe years ended December 31, 2005 and 2006, respectively. Cash was usedprimarily to fund operating expenditures and the acquisition of programming.The decrease in cash flow used in operations was primarily due to a $93.4million decrease of acquisitions of program license fees during 2006.

Cash provided by investingactivities was $213.1 million for the year ended December 31, 2005.Proceeds from the sale of our international business were $222.0 million in2005. Cash provided by investing activities was $143.0 million for the yearended December 31, 2006. Proceeds from the sale of our film assets were$152.1 million in 2006.

Cash used in financingactivities was $72.3 million for the year ended December 31, 2005. Duringthe year ended December 31, 2005, we repaid $195.0 million under our bankcredit facility. Additionally, we borrowed $95.0 million under our bank creditfacility to repay certain programming obligations to 

33

----

HallmarkCards affiliates, pay severance and RSU settlements for certain employees ofthe international business and to meet our operating demands during the yearended December 31, 2005. We received $56.1 million (including the$30.0 million offset to intercompany debt during the third quarter of 2005) and$30.0 million (including the $18.0 million offset to intercompany debt duringthe third quarter of 2006) under the Tax Sharing Agreement during 2005 and2006, respectively. Cash used in financingactivities was $110.9 million for the year ended December 31, 2006. Duringthe year ended December 31, 2006, we repaid $137.4 million under our bankcredit facility. Additionally, we borrowed $15.0 million under our bank creditfacility.

Cash used in discontinuedoperations was $15.1 million and $0 for the years ended December 31, 2005and 2006, respectively. Cash used in discontinued operations decreased as thesale of the Company’s international business was completed in April 2005.

Cash used in operatingactivities from continuing operations was $15.2 million and $121.9 million forthe years ended December 31, 2004 and 2005, respectively. Cash was usedprimarily to fund operating expenditures and the acquisition of programming.The increase in cash flow used in operations was primarily due to an increaseof payments to RHI Entertainment Distribution for programming of $88.4 million($26.6 million of which is included in the increase of prepaid and otherassets) and an increase of $12.8 million in subscriber acquisition feepayments.

Cash used in investingactivities was $878,000 for the year ended December 31, 2004. Cashprovided by investing activities was $213.1 million for the year ended December 31,2005. This increase is primarily due to proceeds from the sale of ourinternational business of $222.0 million.

Cash provided by financing activitieswas $66.6 million for the year ended December 31, 2004. Cash used infinancing activities was $72.3 million for the year ended December 31,2005. During the year ended December 31, 2005, we repaid $195.0 millionunder our bank credit facility. Additionally, we borrowed $95.0 million underour bank credit facility to repay certain programming obligations to HallmarkCards affiliates, pay severance and RSU settlements for certain employees ofthe international business and to meet our operating demands during the yearended December 31, 2005. We received $56.6 million and $56.1million (including the $30.0 million offset to intercompany debt during thethird quarter of 2005) under the Tax Sharing Agreement during 2004 and 2005,respectively.

Cash used in discontinuedoperations was $42.7 million and $15.1 million for the years ended December 31,2004 and 2005, respectively. Cash used in discontinued operations decreased asthe sale of the Company’s international business was completed in April 2005.

34

----

The following table aggregates all of our contractual commitments as of December 31,2006.

| ** **                                                                                                           | ** ** | **Scheduled Payments by Period** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **Contractual Obligations**                                                                                     | ** ** | ** **                                      | ** ** | **Total** | ** ** | **Less than  1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After  5 Years** | ** ** |
| Credit facility and  interest payable                                                                                |       | $                                               | 87.7       |   |   | $ | — |   |   |   | $ | 87.7 |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Company obligated  mandatorily redeemable preferred interest, including accretion(1)                                 |       | 25.0                                            |       |   | — |   |   |   | 10.0 |   |   |   | 15.0 |   |   |   | — |   |   |
| HC Crown line of credit  and interest payable                                                                        |       | 93.5                                            |       |   | — |   |   |   | 93.5 |   |   |   | — |   |   |   | — |   |   |
| Senior unsecured note to  HC Crown, including accretion                                                              |       | 562.2                                           |       |   | — |   |   |   | — |   |   |   | 562.2 |   |   |   | — |   |   |
| Note payable to Hallmark  Cards affiliate                                                                            |       | 146.4                                           |       |   | — |   |   |   | 146.4 |   |   |   | — |   |   |   | — |   |   |
| Note payable to Hallmark  Cards affiliate                                                                            |       | 53.4                                            |       |   | — |   |   |   | 53.4 |   |   |   | — |   |   |   | — |   |   |
| Capital lease  obligations                                                                                           |       | 16.2                                            |       |   | 0.7 |   |   |   | 1.5 |   |   |   | 1.9 |   |   |   | 12.1 |   |   |
| Operating leases  (off-balance sheet commitments)                                                                    |       | 10.3                                            |       |   | 4.0 |   |   |   | 4.7 |   |   |   | 1.5 |   |   |   | 0.1 |   |   |
| Other obligations                                                                                                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Program license fees  payable for non-affiliate current and future windows (includes off-balance  sheet commitments) |       | 391.0                                           |       |   | 115.9 |   |   |   | 176.5 |   |   |   | 70.1 |   |   |   | 28.5 |   |   |
| Program license fees  payable for affiliate current and future windows (includes off-balance sheet  commitments)(2)  |       | 22.4                                            |       |   | 22.4 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Subscriber acquisition  fees                                                                                         |       | 2.1                                             |       |   | 2.1 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Deferred compensation  and interest                                                                                  |       | 3.9                                             |       |   | 1.3 |   |   |   | 2.6 |   |   |   | — |   |   |   | — |   |   |
| Payable to buyer of  international business                                                                          |       | 9.7                                             |       |   | 4.9 |   |   |   | 4.8 |   |   |   | — |   |   |   | — |   |   |
| Other payables to buyer  of international business                                                                   |       | 7.4                                             |       |   | 1.0 |   |   |   | 2.1 |   |   |   | 1.7 |   |   |   | 2.6 |   |   |
| Other payables to buyer  of film assets                                                                              |       | 22.5                                            |       |   | — |   |   |   | 3.8 |   |   |   | 4.3 |   |   |   | 14.4 |   |   |
| Total Contractual Cash Obligations                                                                                   |       | $                                               | 1,453.7    |   |   | $ | 152.3 |   |   |   | $ | 587.0 |   |   |   | $ | 656.7 |   |   |   | $ | 57.7 |   |   |
|                                                                                                                      |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          Payments are due within 60 days of the end of each fiscal year in whichCrown Media United States reports pretax profits exceeding $10.0 million. IfCrown Media United States does not earn pretax profits, the company obligatedmandatorily redeemable preferred interest is to be redeemed within 60 days offiscal year ending December 31, 2010.

(2)          The amounts and timing for certain of these commitments are contingentupon the future delivery date and type of programming produced, and, as such,the estimated amount and timing may change.

Forinformation on a contingent obligation to purchase NICC’s common stock of ours,please see “Crown Media United States Programming Agreement with NICC” in Item13 Certain Relationships and Related Transactions and Director Independence.

*CashFlows*

As of December 31,2006, the Company had $14.0 million in cash and cash equivalents on hand. As ofDecember 31, 2006, the Company had borrowed $87.6 million from a $130.0million revolving bank credit, which matures May 31, 2008.

The Company’s principalsources of funds are cash on hand, cash generated by operations, tax sharingpayments from Hallmark Cards and amounts available under the Company’srevolving bank credit facility. Payments under the tax sharing agreement areaffected by Hallmark Cards’ tax position and its ability to utilize the Company’stax losses. The Company received $12.0 million in tax sharing payments in 2006and does not currently expect to receive tax sharing payments during 2007. TheCompany currently has $42.4 million of unused revolving credit capacity. TheCompany’s ability to borrow additional amounts under the credit facility is notlimited or restricted as long as no covenants have been violated.

35

----

The ability of the existing sources of liquidity to besufficient to fund the Company’s operations depends upon continued growth insubscriber revenue and advertising revenue. Any decline in the popularity ofthe Hallmark Channel, any significant future modifications to the Company’sdistribution agreements, an economic decline in the advertising market, anincrease in program acquisition costs, an increase in competition or otheradverse operating conditions would impact the Company’s liquidity and its abilityto fund the current level of operations

The Company expects to continue making investments inprogramming, marketing and distribution. However, the Company’s recurring losssituation has demanded that all areas of expenses, including programming, marketingand distribution be closely monitored and controlled.

The Company anticipates that its principal uses offunds for 2007 will continue to include the payment of operating expenses,accounts payable and accrued expenses, license fees for programming, andinterest under its bank credit facility.

As part of efforts to improve the capital structure,in 2006 the Company sold its membership interests in Crown Media Distributionas described in “Sale of Membership Interests in Crown Media Distribution”above.

The Company currently believes that cash on hand, cashgenerated by operations and availability on its bank credit facility, whencombined with the deferral of any required payments on related-party debt andrelated interest mentioned below, will be sufficient to fund the Company’soperations and meet its liquidity needs through May 31, 2008.

The Company’s bank credit facility matures on May 31,2008.  The Company significantly reducedthe amounts outstanding under the credit facility with the proceeds of the saleof its membership interests in Crown Media Distribution. In conjunction withthese repayments on the credit facility, the Company reduced the borrowingcapacity under the credit facility to $130.0 million. The Company intends toextend or refinance the Bank credit facility prior to or upon its maturity. Anysuch extension or refinancing might require a continuation of a letter ofcredit from Hallmark Cards or other steps by the Company and is not assured.

If the Company is not able to arrange for theextension, refinancing or replacement of the bank credit facility prior to itsmaturity and the bank draws down on the irrevocable letter of credit providedby Hallmark Cards in support of the bank credit facility, or alternativelyHallmark Cards purchases the interests of the lending banks, Hallmark Cardswould have all obligations and the rights of the lending banks under the bankcredit facility. In that event, Hallmark Cards could demand payment ofoutstanding amounts at any time after May 31, 2008, under the terms of thewaiver and standby purchase agreement (“Waiver Agreement”) described below.

Uponmaturity of the credit facility on May 31, 2008, the lending group led byJP Morgan Chase has the right to elect to forego the receipt of cash to pay theprincipal amount of the credit facility in full, which is provided for underthe terms of an irrevocable letter of credit provided by Hallmark Cards,but instead canelect to initiate a process to foreclose on the Company’s assets. Suchforeclosure proceedings, would adversely affect our ability to continue ouroperations. Prior to any such possible foreclosure proceedings, however, theCompany, if it has not secured an extension of the credit facility oralternative financing, would cause Hallmark Cards pursuant to the terms of theWaiver Agreement to exercise its option to purchase all of the outstandingindebtedness under the credit facility and the credit facility would then besubject to terms of the Waiver Agreement.

Due to the Company’spossible inability to meet its obligations when they come due on May 31,2008, the Company anticipates that prior to May 31, 2008, it will benecessary to either extend or refinance (i) the bank credit facility and (ii) thepromissory notes payable to affiliates of Hallmark Cards described in the Notesbelow. As part of a combination of actions and in order to obtain additionalfunding, the 

36

----

Companymay consider various alternatives, including refinancing the bank creditfacility, raising additional capital through the issuance of equity or debtsecurities, a sale of certain assets or other strategic alternatives.

***Bank Credit Facility andHallmark Notes***

*Bank CreditFacility*

In 2001, we entered into a credit agreement (whichagreement has been amended subsequently, with the most recent amendment dated March 2,2007) with a syndicate of banks, led by JP Morgan Chase Bank, N.A. asAdministrative Agent and Issuing Bank. The facility is guaranteed by oursubsidiaries and is secured by all tangible and intangible property of CrownMedia Holdings and its subsidiaries. As a result of Amendment No. 11 in December 2006,the bank credit facility is a revolving line of credit in the amount of $130.0million. The credit agreement for the bank credit facility, including all ofits amendments, are exhibits to this Report and are incorporated herein byreference.

Each loan under the bank credit facility bearsinterest at a Eurodollar rate or an alternate base rate as we may request atthe time of borrowing in accordance with the credit agreement. The Eurodollarrate is based on the London interbank market for Eurodollars, and remains ineffect for the time period of the loan ranging from one, two, three, six ortwelve months. The alternate rate is based upon the prime rate of JP MorganChase Bank, a certificate of deposit rate or the Federal Funds effective rate,which is adjusted whenever the rates change. We are required to pay acommitment fee of 0.15% per annum (0.2% from March 1, 2005, to April 27,2006) of the committed, but not outstanding, amounts under the revolving creditfacility, payable in quarterly installments.

Hallmark Cards has provided since March, 2005, anirrevocable letter of credit as credit support for our obligations under ourcredit facility. The amounts resulting from rate and fee reductions for thebank credit facility since that time are paid by us to Hallmark Cards ascompensation for providing the support letter of credit to the bank lenders.

By an Amendment No. 12 to the credit agreement,dated as of March 2, 2007, the maturity date of the credit facility wasextended for one year to May 31, 2008 and the existing Hallmark Cardssupport letter of credit was reissued by JPMorgan Chase Bank, N.A. This newletter of credit is in the face amount of $130.0 million and will expire on June 10,2008.

The credit agreement, as amended, contains a number ofaffirmative and negative covenants. Negative covenants include, among otherthings: Limitations on indebtedness; liens; investments; “Restricted Payments;”changes in our business activities; and not amending the promissory note withHC Crown, a related letter of credit issued for our benefit or certain of ourother material agreements. Restricted Payments include any distribution on ourequity, any redemption or other acquisition of our equity including redemptionof the company obligated mandatorily redeemable preferred interest, any paymenton debt of Crown Media Holdings which is subordinated to the bank loans, anyreduction of the HC Crown line of credit for Crown Media Holdings, any paymenton certain obligations assumed by Crown Media Holdings under the purchaseagreement for the film assets and any other payment to Hallmark Cards or any ofits affiliates. The credit agreement, however, permits Crown Media Holdings tomake payments to Hallmark Cards or an affiliate in payment of a validoutstanding obligation or in an aggregate amount equal to the financialbenefits received by us as a result of the reduction of interest charges underthe bank credit facility in Amendment No. 8 plus any fees and costsincurred by Hallmark Cards in connection with the support letter of creditprovided in accordance with Amendment No. 8. For more information onaffirmative and negative covenants in the credit agreement, see Note 10 to ourConsolidated Financial Statements.

37

----

Events of default underthe amended credit agreement include, among other things:  The failure to pay principal or interest,with the default continuing unremedied for five days after receipt of aremittance advice; a failure to observe covenants; a change in control; or atermination by Hallmark Cards or any of its affiliates of the right of CrownMedia Holdings or its subsidiaries to use the names “Hallmark” or “Crown” intheir television services or any Channels owned or operated by them. Forpurposes of the credit facility, a change in control means that (a) HallmarkCards ceases to own directly or indirectly at least 80% of the equity interestof Hallmark Entertainment Investment (b) Hallmark Entertainment Holdingsceases to have sufficient voting power to elect a majority of Crown MediaHoldings’ board of directors or beneficial ownership of over a majority of theoutstanding equity interest of Crown Media Holdings having voting power (c) themajority of the Board is not comprised of individuals who were either in officeor who were nominated by a two-third’s vote of individuals in office or sonominated as at December 17, 2001, or (d) the consummation by theCompany of a Rule 13e-3 transaction (or a “going-private” transaction)as defined in the Securities Exchange Act.

*Waiver and StandbyPurchase Agreement*

Under the Waiverand Standby Purchase Agreement dated March 21, 2006, as last amended on March 2,2007, Hallmark Cards agreed to defer all payments due on any of the followingobligations and, except where noted, payment of interest thereon until May 31,2008, or an earlier date as described below as the waiver termination date,whereupon all of these amounts become immediately due and payable (the “WaiverPeriod”):

·       Lineof credit and interest payable to HC Crown, dated December 14, 2001, inthe original principal amount of $75.0 million, payable to HC Crown. (Totalamount outstanding at December 31, 2006, including accrued interest was$93.5 million. See *Line of Credit andInterest Payable to HC Crown*below.)

·       $70.0 million line of credit and interest toHallmark Cards affiliate arising out of thesale to Crown Media Holdings of the Hallmark Entertainment film library. (Totalamount outstanding at December 31, 2006, including accrued interest was$53.4 million. See *Line of Credit andInterest Payable to Hallmark Cards Affiliate*below.)

·       10.25% senior unsecured note, dated August 5,2003, in the initial accreted value of $400.0 million, payable to HCCrown. (Total amount outstanding at December 31, 2006, including accruedinterest was $562.2 million. See *Senior Unsecured Note*below.)

·       Note andinterest payable to Hallmark Cards affiliate, dated as of October 1, 2005,in the principal amount of $132.8 million, payable to HallmarkEntertainment Holdings. (Total amount outstanding at December 31, 2006,including accrued interest was $146.4 million. See *Note andInterest Payable to Hallmark Cards Affiliate*below.)

·       Allobligations of the Company under the bank credit facility by virtue of HallmarkCards’ deemed purchase of participations in all of the obligations under aletter of credit which Hallmark Cards has given in support of the facility orthe purchase by Hallmark Cards of all these obligations pursuant to Amendment No. 9to the bank credit facility.

Hallmark Cards has agreed that it will not acceleratethe maturity of any of the foregoing obligations or initiate collectionproceedings during the Waiver Period. Interest will continue to accrue on theseobligations during the Waiver Period. The Company will continue to pay intereston the credit facility during the Waiver Period.

The waiver termination date is on May 31, 2008,or earlier upon occurrence of any of the following events:  (a) the Company fails to pay anyprincipal or interest, regardless of amount, due on any indebtedness with anaggregate principal amount in excess of $5.0 million or any other event orcondition 

38

----

occurs that results in anysuch indebtedness becoming due prior to its scheduled maturity, provided thatthe waiver will not terminate if the Company reduces the principal amount ofsuch indebtedness to $5.0 million or less within five business days of awritten notice of termination from Hallmark Cards; (b) certain bankruptcyevents occur; (c) the Company defaults in its payment of licensing feesunder the Second Amended and Restated Program License Agreement with RHIEntertainment Distribution (formerly known as Hallmark EntertainmentDistribution at which time it was a wholly-owned subsidiary of Hallmark Cards);(d) a representation and warranty of the Company in the Waiver Agreementis false or misleading in any material respect; or (e) the Company failsto pay interest on the bank credit facility described above to the extent thatHallmark Cards has purchased all or a portion of the indebtedness thereunder orto perform any covenants in the Waiver Agreement.

Under the Waiver Agreement, if the bank’s lendersunder the bank credit facility accelerate any of the indebtedness under thebank credit facility or seek to collect any indebtedness under it, then theCompany may elect to exercise its right to require that Hallmark Cards or itsdesignated subsidiary exercise an option to purchase all the outstandingindebtedness under the bank credit facility as provided in the bank creditfacility. All expenses and fees in connection with this purchase would be addedto the principal amount of the credit facility obligations.

The Waiver Agreement does not limit any existingrights of Hallmark Cards or its affiliates to offset amounts owed to us underthe Hallmark Tax Sharing Agreement and Hallmark Cards’ share of the amountspayable under the December 1, 2005, agreement with NICC (described in Note13) against these obligations. On September 1, 2006, Hallmark Cardselected to apply its $3.1 million share of the NICC obligations against theamounts due under the $70.0 million Promissory Note to Hallmark Entertainment Holdings (described below), thereby reducingthe principal amount of that Note by $3.1 million. Additionally, during thethird quarter of 2006, Hallmark Cards applied $18.0 million of benefit from theTax Sharing Agreement against the principal amount due under the March 21,2006, promissory note with Hallmark Entertainment Holdings. Pursuant to theWaiver Agreement, the Company must make prepayments on the outstanding debtfrom 100% of any “Excess Cash Flow” during the Waiver Period.  “Excess Cash Flow” is defined as 1) the netproceeds of any debt or equity financings or sale of assets; 2) the netcash proceeds from the incurrence by the Company of indebtedness; 3) the netcash proceeds from the sale, transfer or release by the Company of assetsoutside the ordinary course of business; and 4) if positive, the consolidated net cash flow from operations ofCrown Holdings for any calendar quarter as shown in an SEC report, less cashfunds used to pay current operating expenses and to pay or establish reasonablereserves for future expenses, indebtedness payments, and capital improvementsand replacements as determined by the Board of Directors of the Company.

In connection withthe Waiver Agreement in March 2006, we converted the $70.0million account payable to Hallmark Entertainment Holdings arising outof our purchase of the Hallmark Entertainment film library to apromissory note described below, bearing interest at LIBOR plus 3% per annum. Thisnote is payable in full on May 31, 2008, per an extension under the waiverand accrued but unpaid interest is added to the outstanding principal amount onan annual basis.  We also agreed in March 2006 to:

·       amendthe 2001 and 2005 notes described above to add the accrued but unpaid interest,currently and annually, to the outstanding principal amounts ;

·       use  our commercially reasonable efforts to refinance all of  our obligations to Hallmark Cards and affiliates noted above;  and

·       complywith  our  covenants and obligations under the bank creditfacility .

In addition, we have provided a release to HallmarkCards and related parties for any matters prior to the date of the lastamendment to the Waiver Agreement.

39

----

*Hallmark Letter of Credit*

Pursuant to Amendment No. 8 to the bank creditfacility, Hallmark Cards provided an irrevocable letter of credit issued byCitibank, N.A. to JP Morgan Chase Bank in the original amount of $320.0million, as credit support for our obligations under the Company’s creditfacility (the “credit facility”). The support letter of credit was reduced to$220.0 million upon the consummation of the sale of the Company’s internationalbusiness and the reduction of the aggregate outstanding credit exposure of itslenders to $220.0 million. Drawdowns under the letter of credit may be made foramounts due and payable under the credit facility and upon the occurrence ofcertain other events. Any proceeds received by JP Morgan Chase Bank fromdrawing under this support letter of credit will be used to purchase from thebank lenders, on behalf of Hallmark Cards, subordinated participations in ourobligations under the bank credit facility. As consideration, we agreed to payHallmark Cards the amounts resulting from the 2.0% reduction in the interestrate and the 0.3% reduction in the commitment fee payable by the Company underthe bank credit facility as provided in Amendment No. 8. In addition, weagreed to pay the fee charged by Citigroup for the letter of credit which was0.625% of the amount of the letter of credit.

In conjunction with Amendment No. 10, HallmarkCards extended its letter of credit to correlate to the maturity date of thecredit facility and also increased the size of the letter of credit from $220.0million to $240.0 million. In consideration of this extension and increase inthe size of the letter of credit, the Company agreed to continue to payHallmark Cards the difference between the interest rate formerly charged theCompany before the letter of credit was available and the rate now charged withthe backing of the letter of credit. Since the interest rate was furtherreduced in Amendment No. 10 to LIBOR plus 0.75%, the interest differentialnow payable to Hallmark Cards is 2.25% of the outstanding indebtedness underthe credit facility. In addition, the Company agreed to continue to pay the feecharged by Citigroup for the letter of credit which was increased to 0.875% ofthe amount of the letter of credit.

The Hallmark Cards letter ofcredit was reduced to $130.0 million in connection with Amendment No. 11to the bank credit facility.

Pursuant to Amendment No. 12to the bank credit facility, Hallmark Cards has provided an irrevocable letterof credit issued by JP Morgan Chase Bank in the amount of $130.0 million, ascredit support for our obligations under the credit facility with an expirationdate of June 10, 2008.

*Senior Unsecured Note*

In August 2003, the Company issued a seniorunsecured note to HC Crown for $400.0 million. A portion of the proceeds wasused to repurchase the Company’s outstanding trust preferred securities, andthe balance of the proceeds, after expenses, was used to reduce amounts outstandingunder its bank credit facility.

The senior unsecured notepayable to HC Crown does not require cash payments until August 2007. Inaccordance with the waiver agreement, these payments are not required until May 31,2008. The principal amount of the senior unsecured note accretes at 10.25% perannum, compounding semi-annually, to $596.6 million at August 5, 2007. Fromthat date, interest at 10.25% per annum was scheduled to be payablesemi-annually on the accreted value of the senior unsecured note to HC Crown,but now will be payable subsequent to May 31, 2008. The note matures on August 5,2011, and is pre-payable without penalty. At December 31, 2005 and 2006,$509.4 million and $562.2 million, respectively, of principal and accretedinterest were included in the senior unsecured note payable in the accompanyingconsolidated balance sheets. The note purchase agreement for the seniorunsecured note contains certain covenants which restrict the Company, amongother matters, from the incurrence of any additional indebtedness, therepurchase or other acquisitions of the Company’s stock, investments in otherparties and the incurrence of liens on the Company’s assets. As a fee for theissuance of the notes, the Company paid $3.0 million to 

40

----

HCCrown, which was initially capitalized and is being amortized as additionalinterest expense over the term of the note payable.

*Line of Credit andInterest Payable to HC Crown*

On December 14, 2001,the Company executed a $75.0 million promissory note with HC Crown maturing onthe earlier of six months from the termination of the bank credit facility or December 21,2007. Due to the waiver agreement, the line of credit and related interest arenot due until May 31, 2008. This line of credit is subordinate to the bankcredit facility. The rate of interest under this line of credit is equal toLIBOR plus three percent. At December 31, 2005, and 2006, borrowings underthe note were $75.0 million and $87.7 million, respectively. Accrued intereston the note of $11.3 million and $5.8 million are included in line of creditand interest payable to HC Crown as of December 31, 2005, and 2006,respectively, on the accompanying consolidated balance sheets. At December 31,2005, $75.0 million of the outstanding balance bore interest at the Eurodollarrates of 7.08%. At December 31, 2006, $87.7 million of the outstandingbalance bore interest at the Eurodollar rates of 8.37%. At December 31,2005 and 2006, $86.3 million and $93.5 million were included in the line ofcredit and interest payable to HC Crown on the accompanying consolidatedbalance sheets, respectively.

*Note and InterestPayable to Hallmark Cards Affiliate*

In 2005, the Companyconverted a portion of its license fees payable to Hallmark affiliates, whichwere approximately $132.8 million, to a promissory note bearing interest atLIBOR plus 3% per annum. The term of the promissory note began on October 1,2005 and is payable in full on May 31, 2008, due to an extension under thewaiver agreement. Accrued interest on the note of $2.4 million and $9.0 millionis included in note and interest payable to Hallmark Cards affiliate as of December 31,2005, and 2006, respectively, on the accompanying consolidated balance sheets.At December 31, 2005, $132.8 million of the outstanding balance boreinterest at the Eurodollar rates of 7.08%. At December 31, 2006, $137.4million of the outstanding balance bore interest at the Eurodollar rates of8.37%. At December 31, 2005 and 2006, $135.2 million and $146.4 millionwere included in the note and interest payable to Hallmark Cards affiliate inthe accompanying consolidated balance sheets, respectively.

*Line of Credit andInterest Payable to Hallmark Cards Affiliate*

In March 2006, the Company converted its payableto a Hallmark Cards affiliate, which was approximately $70.4 million, to apromissory note bearing interest at LIBOR plus 3% per annum. The term of thepromissory note began on March 21, 2006, and is payable in full, pursuantto the waiver agreement, on May 31, 2008. Accrued interest on the note of$4.1 million is included in note and interest payable to Hallmark Cardsaffiliate as of December 31, 2006, on the accompanying consolidatedbalance sheet. At December 31, 2006, $49.3 million of the outstandingbalance bore interest at the Eurodollar rates of 8.37%. At December 31,2006, $53.4 million was included in the line of credit and interest payable toHallmark Cards affiliate in the accompanying consolidated balance sheet.

During the third quarterof 2006, Hallmark Cards used $18.0 million of the 25% in the federal taxbenefits from losses the Company generated to reduce the $70.4 million balanceon the line of credit and interest payable to Hallmark Cards affiliate. On September 1, 2006, Hallmark Cards alsoreduced the balance of line of credit by $3.1 million, which was related to theDecember 1, 2005, agreement with NICC.

*Interest Paid to HC Crown*

Interest expense paid toHC Crown, which formerly was payable to the Company’s bank syndicate andresulted from a reduction in the interest rate and commitment fee payable tothe Company’s bank 

41

----

syndicatein Amendment No. 8 and Amendment No. 10 to the Company’s creditfacility, was $3.2 million for the year ended December 31, 2005, and $4.4million for the year ended December 31, 2006.

***Tax Sharing Agreement***

On March 11, 2003,Crown Media Holdings became a member of Hallmark Cards consolidated federal taxgroup and entered into the Tax Sharing Agreement with Hallmark Cards. HallmarkCards includes Crown Media Holdings in its consolidated federal income taxreturn. Accordingly, Hallmark Cards has benefited from past tax losses and maybenefit from future tax losses, which may be generated by Crown Media Holdings.Based on the Tax Sharing Agreement, Hallmark Cards pays Crown Media Holdingsall of the benefits realized by Hallmark Cards as a result of consolidation,75% in cash on a quarterly basis and the balance when Crown Media Holdingsbecomes a taxpayer. Under the Tax Sharing Agreement, at Hallmark Cards’ option,this 25% balance may also be applied as an offset against any amounts owed byCrown Media Holdings to any member of the Hallmark Cards consolidation groupunder any loan, line of credit or other payable, subject to any limitationsunder any loan indentures or contracts restricting such offsets. The Companydoes not expect to receive any amounts under the agreement in 2007. For furtherinformation regarding the Tax Sharing Agreement, see Part III—Item 13.Certain Relationships and Related Transactions—Tax Sharing Agreement.

**ITEM 7A.**        Quantitative and Qualitative Disclosures aboutMarket Risk

We only invest in instrumentsthat meet high credit and quality standards, as specified in our investmentpolicy guidelines. These instruments, like all fixed income instruments, aresubject to interest rate risk. The fixed income portfolio will decline in valueif there is an increase in interest rates. If market interest rates were toincrease immediately and uniformly by 10% from levels as of December 31,2006, the decline of the fair value of the fixed income portfolio would not bematerial.

As of December 31, 2006,our cash, cash equivalents and short-term investments had a fair value of $14.0million, which was invested in cash and short-term commercial paper. Theprimary purpose of these investing activities has been to preserve principaluntil the cash is required to fund operations. Consequently, the size of thisportfolio fluctuates significantly as cash is provided by and used in ourbusiness.

The value of certain investmentsin this portfolio can be impacted by the risk of adverse changes in securitiesand economic markets and interest rate fluctuations. At December 31, 2006,all of our investments in this category were in fixed rate instruments or moneymarket type accounts. A decrease in interest rates has the effect of reducingour future annual interest income from this portfolio, since funds would bereinvested at lower rates as the instruments mature. Over time, any netpercentage decrease in our interest rates could be reflected in a correspondingnet percentage decrease in our interest income. For the year ended December 31,2006, the impact of interest rate fluctuations, changed business prospects andall other factors did not have a material impact on the fair value of thisportfolio, or on our income derived from this portfolio.

Wehave not used derivative financial instruments for speculative purposes. As of December 31,2006, we are not hedged or otherwise protected against risks associated withany of our investing or financing activities.

***We are exposed to market risk.***

We are exposed to market risk,including changes to interest rates. To reduce the volatility relating to theseexposures, we may enter into various derivative investment transactions in thenear term pursuant to our investment and risk management policies andprocedures in areas such as hedging and counterparty exposure practices. Wehave not and will not use derivatives for speculative purposes.

42

----

Though we intend to use riskmanagement control policies, there will be inherent risks that may only bepartially offset by our hedging programs should there be any unfavorablemovements in interest rates or equity investment prices.

Theestimated exposure discussed below is intended to measure the maximum amount wecould lose from adverse market movements in interest rates and equityinvestment prices, given a specified confidence level, over a given period oftime. Loss is defined in the value at risk estimation as fair market valueloss.

***Our interest income and expenseis subject to fluctuations in interest rates.***

Our material interest bearingassets consisted of cash equivalents and short-term investments. The balance ofour interest bearing assets was $14.0 million, or approximately 2% of totalassets, as of December 31, 2006. Our material liabilities subject tointerest rate risk consisted of our bank credit facility, our line of creditand interest payable to HC Crown, our line of credit and interest payable toHallmark Cards affiliate, and our note and interest payable to Hallmark Cardsaffiliate. The balance of those liabilities was $380.9 million, or 31% of totalliabilities, as of December 31, 2006. Net interest expense for the yearended December 31, 2006, was $98.9 million, 49%, of our total revenue. Ournet interest expense of these liabilities is sensitive to changes in thegeneral level of interest rates, primarily U.S. and LIBOR interest rates. Inthis regard, changes in U.S. and LIBOR interest rates affect the fair value ofinterest bearing liabilities.

Ifmarket interest rates were to increase or decrease by 1% from levels as of December 31,2006, our interest expense would increase or decrease by $4.9 million,respectively.

**ITEM 8.**                Financial Statements and Supplementary Data

OurConsolidated Financial Statements begin at page F-1 of this AnnualReport on Form 10-K.

**ITEM 9.**                Changes in and Disagreements with Accountants onAccounting and Financial Disclosure

None.

**ITEM 9A.**        Controlsand Procedures

***a.***   Disclosure Controlsand Procedures

As of the end of theperiod covered by this report, the Company, under the supervision and with theparticipation of the Company’s management, including its Chief ExecutiveOfficer and Chief Financial Officer, carried out an evaluation of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934) as of December 31, 2006. Inperforming its assessment of the Company’s internal control over financialreporting, management used the criteria set forth in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based upon this evaluation, theCompany’s Chief Executive Officer and Chief Financial Officer concluded thatthe Company’s disclosure controls and procedures were effective as of that datefor purposes of recording, processing, summarizing and timely reportingmaterial information required to be disclosed in reports that the Company filesunder the Securities Exchange Act of 1934.

43

----

***b.   Management’s Report on Internal Control overFinancial Reporting***

Management is responsible for establishing andmaintaining adequate internal control over financial reporting. A company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. Because of its inherent limitations,internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

Management, including the Chief Executive Officer andChief Financial Officer, has conducted an evaluation of the effectiveness ofthe Company’s internal control over financial reporting as of December 31,2006, based on the criteria for effective internal control described in“Internal Control—Integrated Framework” issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on its assessment, managementconcluded that the Company’s internal control over financial reporting waseffective as of December 31, 2006.

The Company’s independentregistered public accounting firm, KPMG LLP, has issued an audit report onmanagement’s assessment of the Company’s internal control over financialreporting, and such audit report is included herein.

***c.   Changes in Internal Control over Financial Reporting***

There were no changes in the Company’s internalcontrol over financial reporting that occurred during the quarter endedDecember 31, 2006, that materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting,except as described below.

As discussed in the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2005,management concluded that at December 31, 2005, the Company did notmaintain effective internal control over financial reporting because ofmaterial weaknesses related to (i) the review of the Company’s annual andinterim consolidated financial statements, and (ii) controls over accessto the general ledger and certain accounting application systems were notdesigned effectively to provide adequate segregation of duties.

During 2006,management, with the oversight of the Audit Committee, devoted considerableeffort and took the following steps to remediate these material weaknesses:

·       Wedesigned and implemented controls to ensure the proper review of theconsolidated statement of cash flows.

·       Wedesigned and implemented controls to ensure the proper review of the underlyinginformation supporting the amounts included in the Company’s annual and interimconsolidated financial statements.

·       Wedesigned and implemented controls to ensure the proper review of theinformation available subsequent to the financial reporting close process forappropriate recognition and disclosure in the Company’s annual and interimconsolidated financial statements.

·       Wedesigned and implemented controls to ensure that no personnel of the Companycan both initiate and approve journal entries.

·       Wedesigned and implemented controls to ensure that no personnel of the Companycan both initiate and approve the payment of invoices and sign checks.

44

----

·       Wedesigned and implemented controls to ensure that no personnel of the Companycan make changes to accounting applications without appropriate review andapproval.

Management has concluded that these remediation steps,which were completed by the end of the fourth quarter of 2006, remediated thematerial weaknesses in the Company’s disclosure controls and procedures relatedto (i) the review of the Company’s annual and interim consolidatedfinancial statements, and (ii) controls over access to the general ledgerand certain accounting application systems that were previously not designedeffectively to provide adequate segregation of duties.

Because of the inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any, willbe or have been detected. These inherent limitations include the realities thatjudgments in decision-making can be faulty, and that breakdowns can occurbecause of simple error or mistake. Additionally, controls can be circumventedby the individual acts of some persons, by collusion of two or more people, orby management override of the control. The design of any system of controlsalso is based in part upon certain assumptions about the likelihood of futureevents, and there can be no assurance that any design will succeed in achievingits stated goals under all potential future conditions; over time, control maybecome inadequate because of changes in conditions, or the degree of compliancewith the policies or procedures may deteriorate. Because of the inherentlimitation in a cost-effective control system, misstatements due to error orfraud may occur and not be detected.

**ITEM 9B.**       Other Information

Notapplicable.

**PART III**

Theinformation required by this Part III is incorporated by reference toinformation in the definitive proxy statement for our 2007 annual meeting ofstockholders under the headings “Election of Directors,” “Board Information,” “Compensationof Directors and Executive Officers,” “Section 16(a) BeneficialOwnership Reporting Compliance,” “Security Ownership of Certain BeneficialOwners and Management,” and “Principal Accountant Fees and Services.” We intendto file the definitive proxy statement with the Securities and ExchangeCommission on or prior to April 30, 2007.

**ITEM 10.**         Directors, Executive Officers and CorporateGovernance

Theinformation required by this Item 10 is set forth in the Proxy Statement to bedelivered to stockholders in connection with our Annual Meeting of Stockholders to be held on or about June 28, 2007 (“the Proxy Statement”) underthe headings “Election of Directors,” “Board Information,” and “Compensation ofDirectors and Executive Officers,” and is incorporated by reference herein.

**ITEM 11.**         Executive Compensation

Theinformation required by this Item 11 is set forth in the Proxy Statement underthe headings “Board Information,” and “Compensation of Directors and ExecutiveOfficers,” and is incorporated by reference herein.

**ITEM 12.**         Security Ownership of Certain Beneficial Ownersand Management and Related Stockholder Matters

Theinformation required by this Item 12 is set forth in the Proxy Statement underthe heading “Security Ownership of Certain Beneficial Owners and Management,”and is incorporated by reference herein.

45

----

**ITEM 13.**         CertainRelationships and Related Transactions and Director Independence

The information required by this Item 13 is set forthin the Proxy Statement under the headings “Certain Relationships and RelatedTransactions” and is incorporated by reference herein. The descriptions ofrelated party transactions below are stated in this Report because thetransactions are referenced in other Items of this Report.

*The followingsummary descriptions of agreements to which we are a party are qualified intheir entirety by reference to the agreement to which each summary descriptionrelates, each of which we have filed with the SEC.*

Crown Media United Stateshas agreements with RHI Entertainment Distribution (successor of HallmarkEntertainment Distribution), which are described below, for services inconnection with the operation of the Crown film library and the licensing ofprogramming produced or distributed by RHI Entertainment Distribution. Since1995, Hallmark Entertainment Distribution had been a subsidiary of HallmarkEntertainment, LLC, which in turn was a wholly-owned subsidiary of HallmarkCards. On January 12, 2006, Hallmark Cards sold the equity interests inHallmark Entertainment, LLC, and, thus indirectly, Hallmark EntertainmentDistribution to the management of RHI Entertainment and affiliates of Kelso &Company. The name of Hallmark Entertainment, LLC was changed to RHIEntertainment, LLC and Hallmark Entertainment Distribution LLC was changed toRHI Entertainment Distribution LLC. Crown Media United States’ agreements withHallmark Entertainment Distribution  areunaffected by the change in name and ownership, except that the agreements arenow with a party that is unrelated to the Company.

***Agreements Concerning the Film Assets***

In connection with the acquisition of the film assetsin 2001, we entered into the following agreements:

*Services Agreement with Hallmark Entertainment, nowRHI Entertainment*

·       RHIEntertainment provided services related to the administration, distribution andother exploitation of the film assets. We paid RHI Entertainment $750,000 peryear for these services. Prior to the sale of our international business in April 2005,we paid $1.5 million per year for these services.

·       Wepaid RHI Entertainment approximately $473,000 for these services from January 1,2005 through April 25, 2005, when they were providing the services forboth our domestic and international film library operations. Following the saleof our international businesses on April 25, 2005, we paid RHIEntertainment a fee of $500,000 for the remainder of 2005, during which timethey provided services only for our domestic library sales. We paid RHIEntertainment a fee of $750,000 for 2006.

·       RHIEntertainment was required to use commercially reasonable efforts to maximizethe licensing revenue from the film assets consistent with its past efforts forcomparable products among the film library assets.

·       Wehad sole discretion to determine which of the purchased films will be licensedby RHI Entertainment to third parties, as well as the distribution territories,time periods and other licensing terms.

This services agreementwith RHI Entertainment terminated on December 15, 2006, upon completion ofthe sale of the Company’s film library to RHI Entertainment.

46

----

*Registration RightsAgreement*

We agreed to grantHallmark Entertainment Distribution four demand registration rights andunlimited piggyback registration rights with respect to the shares of Class Acommon stock that were issued with the purchase of the film assets. Theseregistration rights were later assigned to and are currently held by HEIC.

**RHI EntertainmentDistribution Programming Agreement**

Crown Media United States haslicensed programming for distribution in the United States from RHIEntertainment Distribution, since 1998. It currently licenses this programmingunder a Second Amended and Restated Program License Agreement dated asof January 1, 2005 (“Second Restated Agreement”). A special committee ofthe Board of Directors and the entire Board of Directors (with directorsaffiliated with Hallmark Cards and J.P. Morgan Partners abstaining from thevote) approved the Second Restated Agreement. This Second Restated Agreementexpires on December 31, 2008.

Under the Second Restated Agreement, RHI EntertainmentDistribution is required to produce and deliver to Crown Media United States,and Crown Media United States is required to order and license from RHIEntertainment Distribution, 13 original movies and 3 original mini-series in2005, 31 original movies and 6 original mini-series in 2006 and 18 originalmovies and 3 original mini-series in 2007.  Crown Media United States may, however,completely cancel the 2007 commitment to order 18 original movies and 3original mini-series or it may reduce the number of original movies it isrequired to license in each of 2006 and 2007 by up to six movies per year. CrownMedia United States has exercised this option to reduce by six the number oforiginal movies produced in 2006 and has advised RHI Entertainment Distributionthat it will not exercise its right to cancel the 2007 original productions.Crown Media United States has exclusive rights to these original movies andmini-series during a three year exhibition window (the window is five years forcertain holiday-themed movies and movies produced in 2005). Crown Media UnitedStates may exhibit the original movies and mini-series in any television mediain the United States, its territories and possessions (together with PuertoRico), including pay per view and high definition television. Crown MediaUnited States may also sublicense its exhibition rights in any television mediaregarding the original and other movies and mini-series covered by theagreement to third parties, subject to the reasonable consent of RHIEntertainment Distribution. To the extent that the license fees received fromsuch sublicenses exceed the license fees that Crown Media United States paid toRHI Entertainment Distribution for the same programming, Crown Media UnitedStates must pay half of such excess amounts to RHI Entertainment Distribution.The license fee payable for the original movies produced in 2005 is $1,600,000per movie; in 2006 is $1,680,000 per movie and in 2007 is $1,764,000 per movie.If the movies are produced for the Hallmark Channel’s “Mystery Movie” series,the license fees are increased by $200,000 and if they are holiday-themedmovies, the license fees are increased by $100,000. The license fees formini-series produced in 2005 are $800,000 per hour; in 2006 are $840,000 perhour; and in 2007 are $882,000 per hour. Crown Media United States must alsoshare any revenues from video on demand or pay per view exploitation with RHIEntertainment Distribution.

In addition to the original movies and mini-Series,Crown Media United States has agreed to license from RHI EntertainmentDistribution 22 “off-network” movies and mini-series in 2005 and a maximum of15 such movies and mini-series in 2006 through 2013. These programs generallywill not have been seen on cable television in the United States prior to theirexhibition on the Hallmark Channel. The license fees payable for theoff-network movies are $268,029 per movie in 2005; $281,420 per movie in 2006;$295,491 per movie in 2007 and $310,266 per movie in 2008 and subsequent years.The license fees payable for the off-network mini-series are $335,024 per hourin 2005; $351,775 per hour in 2006; $369,364 per hour in 2007 and $387,832 perhour in 2008 and subsequent years. Crown Media United States’ initialexhibition period for these off-network movies and mini-series is three yearsand Crown Media United States’ exhibition rights are exclusive in alltelevision media in the United States, including Puerto Rico. Crown 

47

----

Media United States’exhibition rights to these off-network movies and mini-series do not, however,include pay per view or video on demand. RHI Entertainment Distribution has anoption to require Crown Media United States to license these off-network moviesand mini-series for an additional, consecutive three year period at a cost of50% of the initial license fee.

Crown Media United States has also agreed to licenseup to 143 older movies and mini-series from the RHI Entertainment DistributionLibrary for a three year exclusive exhibition window, at an approximate totalcost of $57.5 million. Most of these movies and mini-series have previouslybeen exhibited on the Hallmark Channel or Hallmark Movie Channel.

Historically, the original movies and mini-seriesproduced by RHI Entertainment Distribution have been an essential element ofthe Hallmark Channel’s programming schedule and have been the highest-ratedprogramming on the Channel. The Second Restated Agreement assures the HallmarkChannel continued access to these original productions through 2007. CrownMedia United States is free, however, to acquire original programming fromother suppliers. The off-network programming and older library programmingacquired from RHI Entertainment Distribution have also been a critical part ofthe Hallmark Channel and Hallmark Movie Channel programming lineups.

During the years ended December 31, 2005 and2006, Crown Media United States paid RHI Entertainment Distribution $93.4million and $51.1 million, respectively under the First and Second Amended andRestated Program License Agreements. During the year ended December 31,2005, Crown Media United States also prepaid RHI Entertainment Distribution$26.6 million. As of December 31, 2005 and 2006, Crown Media United Stateshad $22.7 million and $18.4 million in accrued and unpaid program license feesunder the program agreement, respectively.

RHI Entertainment and RHIEntertainment Distribution were our related parties as a result of them beingowned by Hallmark Cards. In January 2006, Hallmark Cards sold itsownership interests in RHI Entertainment, and thus also RHI EntertainmentDistribution, to its President and certain new investors.

***VISN Preferred Interest***

VISN, a subsidiaryof the National Interfaith Cable Coalition, Inc. (“NICC”), owns a $25.0million preferred interest in Crown Media United States. Under the Crown MediaUnited States Amended and Restated Company Agreement, originally dated November 13,1998, the members agreed that if during any year ending after January 1,2005 and prior to December 31, 2009, Crown Media United States has netprofits in excess of $10.0 million, and the preferred interest has not beenredeemed, Crown Media United States will redeem the preferred interest in anamount equal to the lesser of:

·       suchexcess;

·       $5.0million; or

·       theamount equal to the preferred liquidation preference on the date of redemption.

The members also agreed that Crown Media United Stateswill redeem the preferred interest at the preferred interest liquidationpreference on the date of redemption of December 31, 2010.

Crown Media United Statesmay voluntarily redeem the preferred interest at any time, however, it isobligated to do so on the date of redemption (December 31, 2010). Thepreferred interest has a liquidation preference of $25.0 million.

***Crown Media United States Programming Agreement withNICC***

On November 13, 1998,the Company, Vision Group, VISN and Henson Cable Networks, Inc. signed anamended and restated agreement governing the operation of Crown Media UnitedStates, as amended 

48

----

atvarious times through December 1, 2005 (the “company agreement”). TheCompany agreement includes the provisions regarding the redemption of the preferredinterest held by VISN as described above.

A December 2005agreement between Crown Media Holdings and NICC replaced a prior programproduction agreement and settled various disputes which had arisen under theprior agreement. In the new agreement, the Company agreed to fund and licensethe following programming produced by NICC through the end of 2007:

·       A Sunday Morning one-hour series entitled “NewMorning with Naomi Judd” at a cost of $3.5 million in 2005, $4.6 million in2006 and $5.6 million in 2007. The 2006 and 2007 amounts are payable quarterlyin those years.

·       A weekday one-hour daily series entitled “NewMorning” at a cost of $1.9 million in 2005, $4.2 million in 2006 and $5.1million in 2007. The 2005 amount includes a deferred amount of $535,000 to bepaid as indicated below for deferred payments. The 2006 and 2007 amounts arepayable quarterly in those years.

·       A Sunday morning programming block, broadcastfrom 6 a.m. to 12 noon, at a cost of approximately $485,000 in 2005, $5.8million in 2006 and $5.8 million, increased by a percentage equal to theincrease in the Consumer Price Index, in 2007. These amounts include deferredpayments of $125,000 for 2005 and $1.5 million for each of 2006 and 2007. The2006 and 2007 amounts not deferred are payable quarterly in those years.

In addition, Crown MediaHoldings agreed to finish funding four specials, the production of which hadbeen commenced prior to the amendment, at a total additional cost of $1.4million in 2005 and 2006, and to fund an additional two non-dramatic specials,to be produced in 2006 and 2007, at a total cost of $1.3 million. A quarter ofthe amounts for the additional two specials was paid in January 2006,another quarter was paid in June 2006 and the remaining one-half is payablein June 2007, or upon a change in control (that is, a sale or merger wherethe aggregate ownership of Crown Media Holdings by the current owners becomesless than 50%). The Hallmark Channel is not obligated to broadcast the lattertwo specials. Crown Media Holdings will also provide or has provided $2.0million in each of 2005, 2006 and 2007 to fund the development by NICC of “madefor television” movies and will pay NICC an additional $1.0 million if themovie “A Reason to Believe,” which was to be produced under the prioragreement, is not ultimately produced. The 2005 amount includes a deferredpayment of $1.8 million; the 2006 amount was paid semi-annually in 2006; andthe 2007 amount is payable in January 2007. The Hallmark Channel will havea right of first negotiation to acquire broadcast rights to the moviesresulting from this development and, if it elects not to acquire these rights,may still recover a portion of its funding if the movies are produced forothers. In addition, NICC has received $45,000 in consulting fees from a serieswhich RHI Entertainment has produced, and will receive a deferred payment of$750,000 as the last payment for certain terminated obligations.

The deferred paymentsmentioned above are payable to NICC on December 31, 2007 or upon a changein control, whichever comes first. Added to the deferred amounts will be (1) interestat the rate charged by NICC’s prime lender or (2) if NICC sells CrownMedia Holdings common stock to finance any deficit, the increase in the saleprice of the common stock between the time NICC sells the stock to fund adeferred amount and a market price of the Crown Media Holdings common stock onthe date the deferred amounts are paid by Crown Media Holdings.

In the event there is achange of control of Crown Media Holdings prior to the expiration of theagreement (i.e., December 31, 2007), NICC will immediately receive a $15.0million “termination payment,” any remaining portions of the payments for thenon-dramatic specials and the “made for television” movie development describedabove and the deferred payments described above. The Hallmark Channel will beobligated to continue to broadcast and pay for the Sunday “New Morning withNaomi Judd” and weekday “New Morning” series and the Sunday morning programmingblock for an additional 

49

----

sixmonths following the change in control, after which all funding and broadcastobligations to NICC will cease. Also, under existing obligations, Crown MediaHoldings would be required to redeem the $25.0 million preferred interest ofNICC in Crown Media United States, LLC, for that amount plus accrued interestat LIBOR from November 27, 2005.

If there has not been achange of control of the Company by June 30, 2007, Crown Media Holdings isrequired to negotiate with NICC for a period of 60 days regarding continuationof the programming commitments. If at the end of the negotiating period theparties have not reached agreement and Crown Media Holdings is not willing tocontinue the programming commitments at the same levels, NICC may compel CrownMedia Holdings to buy all NICC’s outstanding shares of Crown Media Holdingscommon stock at the then current market value by a written notice given nolater than November 1, 2007 (“Put Right”). If NICC sells more than 50% ofthe shares of Crown Media Holdings common stock which it owned as of February 22,2001, except as part of a sale of Crown Media Holdings, most of the commitmentsand obligations related to programming as described above cease (at the optionof Crown Media United States) at the end of the then current broadcast season(approximately August 31).

The Company has, at NICC’srequest, started negotiations with NICC regarding the continuation of theprogramming commitments. In the event a new agreement is not reached or otherresolution is not reached and NICC seeks to exercise its Put Right, the Companywill endeavor to finance the purchase of the NICC stock through outside sourcesrather than from funds from operations. In the alternative, the Company can, ifnecessary, extinguish NICC’s Put Right completely by offering to continue theprogramming commitments to NICC at the same level as in the current agreement.

During the years ended December 31,2005 and 2006, Crown Media United States paid the National Interfaith CableCoalition $12.5 million and $18.4 million, respectively, related to thisagreement.

***DIRECTV AffiliationAgreement***

On August 20, 2001,Crown Media United States entered into an Affiliation Agreement with DIRECTV, Inc.,a wholly owned subsidiary of DIRECTV Enterprises, Inc. Pursuant to theAffiliation Agreement, DirecTV distributes the Hallmark Channel on the TOTALCHOICE® tier of its DBS distribution system in theUnited States and pay us license fees for such distribution. At the same timewe entered into a Stock Purchase Agreement with DIRECTV Enterprises whereby weissued 5,360,202 shares of our Class A common stock, which shares weresubsequently transferred to its parent company, Hughes Electronics Corporation.As of December 31, 2006, DIRECTV accounted for 15.6 million of oursubscribers.

***HallmarkAdvertising***

Hallmark Cards purchased$2.3 million and $1.2 million of advertising on the Hallmark Channel in theUnited States at negotiated market rates, respectively, during the years ended December 31,2005 and 2006.

***Senior UnsecuredNote to HC Crown***

On August 5, 2003,Crown Media Holdings repurchased all of the trust preferred securities of CrownMedia Trust and related contingent appreciation certificates issued by theCompany. Funds for this repurchase were obtained from the proceeds of a $400.0million 10.25% senior unsecured note issued to HC Crown. After the payment ofcertain expenses for the issuance including a fee of $3.0 million to HC Crown,the Company used the balance of the proceeds of the senior unsecured note,amounting to approximately $67.3 million, to pay principal, interest, andprepayment penalties on its bank revolving credit loans. See Note 11 of ourNotes to Consolidated Financial Statements in this Report and “Bank CreditFacility and Hallmark Notes” in Item 7 Management’s Discussion and Analysis ofFinancial Condition and Results of Operations of this Report for information onthis senior unsecured note.

50

----

***Hallmark Demand Notes and Line of Credit***

OnDecember 14, 2001, the Company executed a promissory note in the amount of$75.0 million payable to HC Crown in replacement of the promissory note with HCCrown dated September 28, 2001. This note may be borrowed against orprepaid without penalty and has a final maturity date no later thanMay 31, 2008. The line of credit is subordinate to the bank creditfacility and its availability may be reduced dollar for dollar in an amountequal to additional capital raised by Crown Media Holdings. The rate ofinterest under the line of credit is equal to LIBOR plus three percent, payablequarterly. At December 31, 2005 and 2006, the Company had borrowed $75.0million and $87.7 million, respectively, under this note. Under this note, theCompany was obligated to pay a commitment fee of 1.5% of the initial maximumamount of the note, which may be paid by issuing common stock valued at theaverage closing price of the common stock for the 15 trading days prior to thedate the fee is due. The commitment fee was payable in arrears in four equalinstallments on the last business day of each calendar quarter during 2002. Weissued 192,262 shares as payment for the commitment fee in the amount of $1.1million. The line of credit was required by the credit facility.

***Interest Paid to HC Crown***

Interest expense paid toHC Crown, which formerly was payable to the Company’s bank syndicate andresulted from a reduction in the interest rate and commitment fee payable tothe Company’s bank syndicate in Amendment No. 8 and Amendment No. 10to the Company’s credit facility, was $3.2 million for the year endedDecember 31, 2005, and $4.4 million for the year ended December 31,2006.

***Hallmark Agreements Related to Bank Credit Facility***

See “Bank Credit Facilityand Hallmark Notes” in Item 7 Management’s Discussion and Analysis of FinancialCondition and Results of Operations above and Notes 10 and 11 to ourConsolidated Financial Statements for information regarding our bank creditfacility and related agreements with Hallmark Cards.

***Waiver and Standby Purchase Agreement and RelatedAmendments***

For information onagreement of Hallmark Cards regarding amounts payable to Hallmark Cards and itsaffiliates, including any amounts resulting from a drawdown of the letter ofcredit that supports the credit facility with JP Morgan Chase Bank, see “BankCredit Facility and Hallmark Notes—Waiver and Standby Purchase Agreement” inItem 7 Management’s Discussion and Analysis of Financial Condition and Resultsof Operations above.

***Stockholders Agreement and Registration Rights***

*General*

We are a party to a stockholders agreement, amendedand restated as of August 30, 2001, as amended with VISN, HughesElectronics Corporation (“Hughes”), and Hallmark Entertainment Investments. Thestockholders agreement provides that our Board will consist of not less than 15directors, with 12 nominated by Hallmark Entertainment Investments, onenominated by VISN and two independent directors, who must not be officers,directors or employees of any of the parties or their affiliates, and who willbe nominated by the Board. The rights of the parties to nominate a directorwill terminate on the later of (1) such party owning less than 5% of ourcommon stock then outstanding or (2) such party ceasing to own at least75% of the number of shares of our common stock held by them immediately afterour initial public offering in May 2000. Hughes is entitled to appoint anobserver to the board of directors of Crown Media Holdings until Hughes and itsaffiliates cease to own beneficially in the aggregate at least 75% of theshares of our common stock acquired by DirecTV, the predecessor holder of theshares now held by Hughes, in the August 2001 transaction.

51

----

The stockholders agreement also provides that we willnot enter into any material transaction, except for specified transactions,with any of the other parties or their affiliates involving an aggregate valueof (1) $35.0 million or less, unless such transaction is approved by amajority of our independent directors and (2) more than $35.0 million,unless such transaction is approved by a majority of the members of our Boardnot nominated by the interested party.

In addition, thestockholders agreement provides that, in the event that Hallmark EntertainmentInvestments proposes to transfer 20% or more of our outstanding common stock toan unaffiliated third party, each other party to the stockholders agreementwill have the right to participate on the same terms in that transaction withrespect to a proportionate number of such other party’s shares, except forHughes.

*HallmarkEntertainment Investments Co. Stockholders Agreement*

On March 11,2003, Hallmark Entertainment Holdings contributed 100% of the Crown MediaHoldings shares owned by it to Hallmark Entertainment Investments. Two of CrownMedia Holdings investors, Liberty Crown, Inc. (“Liberty”), a subsidiary ofLiberty Media, and J.P. Morgan, also contributed 100% of their Crown MediaHoldings Shares to Hallmark Entertainment Investments and VISN contributed 10%of its Crown Media Holdings shares to Hallmark Entertainment Investments, allin return for Hallmark Entertainment Investments shares. Prior to the HallmarkEntertainment Investments transaction, J.P. Morgan and Liberty were parties tothe Crown Media Holdings stockholders agreement described above. As a result ofthe Hallmark Entertainment Investments transaction, J.P. Morgan and Liberty nolonger have any rights pursuant to such stockholders agreement. However,Hallmark Entertainment Investments has advised Crown Media Holdings that J.P.Morgan and Liberty will retain similar rights with respect to Crown MediaHoldings pursuant to the Hallmark Entertainment Investments stockholdersagreement dated March 11, 2003, among Hallmark Entertainment Investments,Hallmark Entertainment Holdings, Liberty, VISN, and J.P. Morgan, including thefollowing:

·       Libertyhas the right to designate one person as one of the directors to the CrownMedia Holdings Board that Hallmark Entertainment Investments is entitled tonominate under the Crown Media Holdings stockholders agreement described above.J.P. Morgan had the right to designate one person as one of the directors tothe Crown Media Holdings Board but has surrendered such right.

·       HallmarkEntertainment Investments will not permit Crown Media Holdings or itssubsidiaries to enter into any material transaction, except for specifiedtransactions, with any affiliates involving an aggregate value of (a) $35.0million or less, unless such transaction is approved by a majority of CrownMedia Holdings’ independent directors and (b) more than $35.0 million,unless such transaction is approved by a majority of the members of Crown MediaHoldings’ Board not nominated by any affiliate of Hallmark Entertainment Holdings(provided that directors designated by Liberty and J.P. Morgan will not betreated as being nominated by any affiliate of Hallmark EntertainmentHoldings);

·       registrationrights as provided for minority stockholders in the Crown Media Holdingsstockholders agreement;

·       HallmarkEntertainment Investments may not take certain actions as specified in theHallmark Entertainment Investments stockholder agreement without the consent ofJ.P. Morgan and Liberty; and

·       if Hallmark EntertainmentHoldings proposes to transfer 20% or more of Hallmark Entertainment Investmentscommon stock to an unaffiliated third party, each of J.P. Morgan, Liberty andVISN will have the right to participate on the same terms in the transaction ona proportional basis.

52

----

*Registration Rights*

Under the stockholders agreement, HallmarkEntertainment Investments has the right to require us on four occasions, andthe other parties, as a group, have the right to require us on two occasions,to register for sale their shares of our common stock, so long as the number ofshares they require us to register in each case is at least 7% of our commonstock then outstanding. The other parties also have an unlimited number of “piggyback”registration rights. This means that any time we register our common stock forsale, they will have the right to include their common stock in that offeringand sale.

We are obligated to payall expenses that result from the registration of the other parties’ commonstock under the stockholders agreement, other than registration and filingfees, attorneys’ fees, underwriter fees or expenses and underwriting discountsand commissions. We have also indemnified the other parties against anyliabilities that may result from their sale of common stock, includingSecurities Act liabilities.

*Rights Relating ToCrown Media United States Amended and Restated Company Agreement*

Under thestockholders agreement, so long as we or any of our affiliates are entitled tohave a representative on the Crown Media United States governance committee,and VISN and its affiliates either are entitled to nominate to, or designate amember of, our Board, or beneficially own any preferred interests in CrownMedia United States, neither we nor any of our affiliates will, without theconsent of the member of our Board nominated by VISN or a representative ofNICC, vote in favor of:

·       anyspecified change in, or action described in, the Crown Media United Statesamended and restated company agreement that relates to VISN’s preferredinterest in Crown Media United States or that relates to VISN’s rights toprogramming on the Hallmark Channel in the U.S. or its programming budget;

·       anyrepayment or redemption of specified equity interests in Crown Media UnitedStates;

·       anytransfer of all of Crown Media United States’ assets or any businesscombination involving Crown Media United States where Crown Media United Statesis not the surviving entity, unless the transferee assumes specifiedobligations under the Crown Media United States amended and restated companyagreement until the later of the fifth anniversary of these offerings or thesecond anniversary of the transfer or business combination;

·       thedissolution of Crown Media United States, except in connection with a completeliquidation;

·       anytransfer of all of Crown Media United States’ assets to, or any businesscombination involving Crown Media United States’ with, us or any of ouraffiliates, or any other material transaction with us or any of our affiliates,unless we comply with specified restrictions relating to any financial benefitwe receive from the transaction that is more than what we would have receivedhad the transaction been on an arm’s-length basis or on commercially reasonableterms;

·       anytransfer of all of Crown Media United States’ assets or any businesscombination involving Crown Media United States where Crown Media United Statesis not the surviving entity, prior to the second anniversary of the initialpublic offering; or

·       anyamendment to the Crown Media United States’ amended and restated companyagreement that would result in none of us or our affiliates having the right toconsent to take any of the actions listed in the above bullet points.

In addition, we haveagreed not to transfer any of our interests in Crown Media United States afterthe second anniversary of our initial public offering unless the transfer isconditioned on the requirement that the transferee assume our obligationsdescribed above. Under the terms of the stockholders agreement, the transferee’sobligations will generally expire on the later of (1) the fifthanniversary of the 

53

----

initialpublic offering, (2) the second anniversary of the transfer or (3) therepayment of VISN’s preferred interest in Crown Media United States, exceptthat the obligations of the transferee will expire upon dissolution of CrownMedia United States.

***Intercompany Services Agreement***

The Company has anintercompany services agreement with Hallmark Cards, which was entered into in2003 for a term of three years and then extended for an additional one-yearterm through January 1, 2008. Under the agreement, Hallmark Cards providesus with the following services:

·       taxservices;

·       riskmanagement, health, safety and environmental services and insurance;

·       legalservices;

·       treasuryand cash management services; and

·       realestate consulting services.

We have agreed to payHallmark Cards $515,000 in 2005 and $530,000 in 2006 and 2007 per year forthese services, plus out-of-pocket expenses and third party fees, payable inarrears on the last business day of each quarter. The balance of the payablefor services, expenses and fees under this and the previous services agreementas of December 31, 2005 and 2006, was approximately $4.0 million and $4.5million, respectively. We believe that the services being provided under theagreement have a value at least equal to the annual fee.

***Hallmark Trademark License Agreements***

Crown Media United States operates under the benefitof a limited trademark license agreement with Hallmark Licensing, Inc.,dated March 27, 2001, which has been extended through September 1,2007. The amended and restated Crown Media United States trademark agreementpermits Crown Media United States to name its network service as the “HallmarkChannel.”  The agreement contains usagestandards, which limit certain types of programming and programming contentaired on Crown Media United States’ network. Crown Media United States also hasa similar trademark license agreement with Hallmark Licensing, Inc., whichis effective January 1, 2004, and expires September 1, 2007, topermit the use of the Hallmark trademark in the name of the “Hallmark MovieChannel”.

Under the agreement, if Hallmark Cards notifies us inwriting that it has determined that we have failed to comply with the usagestandards set forth in the agreement or have otherwise breached our obligationsunder the agreement, we are required to stop any non-complying activity within10 days of that notice or we may be in default of the agreement. We also may bein default if Hallmark Cards delivers such a written notice to us with respectto its standards three or more times in any 12-month period. In addition,there may be a default under the agreement if we fail to cure any breach of theprogram agreement with RHI Entertainment Distribution, if we fail to make anypayments due under loan agreements within five days of the due date, or if wereceive an opinion from our auditors that shows that we no longer are a goingconcern.

The license agreements canbe terminated immediately and without notice if we transfer in any way ourrights under the license agreements, if we have an event of default under theagreement or in events of bankruptcy, insolvency or similar proceedings.

54

----

***Tax Sharing Agreement***

On March 11, 2003, Crown Media Holdings became amember of Hallmark Cards consolidated federal tax group and entered into theTax Sharing Agreement with Hallmark Cards. Hallmark Cards includes Crown MediaHoldings in its consolidated federal income tax returns. Accordingly, HallmarkCards has benefited from past tax losses and may benefit from future taxlosses, which may be generated by Crown Media Holdings. Based on the TaxSharing Agreement, Hallmark Cards pays Crown Media Holdings all of the benefitsrealized by Hallmark Cards as a result of consolidation, 75% in cash on aquarterly basis and the balance when Crown Media Holdings becomes a taxpayer.Under the Tax Sharing Agreement, at Hallmark Cards’ option, this 25% balancemay also be applied as an offset against any amounts owed by Crown MediaHoldings to any member of the Hallmark Cards consolidation group under anyloan, line of credit or other payable, subject to any limitations under anyloan indentures or contracts restricting such offsets.

An independent member of the Board of Directors ofCrown Media Holdings, with advice of independent counsel approved Crown MediaHoldings’ entering into the Tax Sharing Agreement.

The Company received $56.1million (including the $30.0 million offset to intercompany debt during thethird quarter of 2005) and $30.0 million (including the $18.0 million offset tointercompany debt during the third quarter of 2006) under the Tax SharingAgreement during 2005 and 2006, respectively.

***Certain Business Relationships and Conflicts ofInterest***

Hallmark Entertainment Investments controls a majorityof our outstanding shares of Class A Common Stock and all of ouroutstanding shares of Class B common stock, representing approximately95.8% of the voting power on all matters submitted to our stockholders.Hallmark Entertainment Investments’ control could discourage others frominitiating potential merger, takeover or other change of control transactionsthat may otherwise be beneficial to our businesses or holders of Class Acommon stock. As a result, the market price of our Class A common stock orour business could suffer.

HallmarkEntertainment Investments’ control relationship with us also could give rise toconflicts of interest, including:

·       conflictsbetween Hallmark Entertainment Investments, as our controlling stockholder, andour other stockholders, whose interests may differ with respect to, among otherthings, our strategic direction or significant corporate transactions;

·       conflictsrelated to corporate opportunities that could be pursued by us, on the onehand, or by Hallmark Entertainment Investments or its other affiliates, on theother hand; or

·       conflictsrelated to existing or new contractual relationships between us, on the onehand, and Hallmark Entertainment Investments and its affiliates, on the otherhand.

In addition, our directors, who are also officers ordirectors of Hallmark Entertainment Investments or its affiliates, will havefiduciary duties, including duties of loyalty, to both companies and may haveconflicts of interest with respect to matters potentially involving oraffecting us.

Our certificate of incorporation provides thatHallmark Cards will have no duty to refrain from engaging in activities orlines of business that are the same as or similar to the activities or lines ofbusiness in which we engage, and neither Hallmark Cards nor any officer ordirector of Hallmark Cards, except as provided below, will be liable to us orto our stockholders for breach of any fiduciary duty by reason of any suchactivities of Hallmark Cards. In the event that Hallmark Cards acquiresknowledge of a potential transaction or matter which may be a corporateopportunity for both Hallmark Cards and us, Hallmark Cards will have no duty tocommunicate or offer that corporate opportunity to us and will not be liable tous or our stockholders for breach of any fiduciary duty as a stockholder byreason of the fact that Hallmark 

55

----

Cards pursues or acquiresthat corporate opportunity for itself, directs that corporate opportunity toanother person, or does not communicate information regarding that corporateopportunity to us.

In the event thatone of our directors or officers who is also a director or officer of HallmarkCards acquires knowledge of a potential transaction or matter which may be acorporate opportunity for both us and Hallmark Cards, that director or officerwill have fully satisfied his or her fiduciary duty to us and our stockholderswith respect to that corporate opportunity if that director or officer acts ina manner consistent with the following policy:

·       acorporate opportunity offered to any person who is one of our officers, and whois also a director but not an officer of Hallmark Cards, will belong to us;

·       acorporate opportunity offered to any person who is one of our directors but notone of our officers, and who is also a director or officer of Hallmark Cards,will belong to us if that opportunity is expressly offered to that person inhis or her capacity as one of our directors, and otherwise will belong toHallmark Cards; and

·       acorporate opportunity offered to any person who is one of our officers and anofficer of Hallmark Cards will belong to us if that opportunity is expresslyoffered to that person in his or her capacity as one of our officers, andotherwise will belong to Hallmark Cards.

For purposes of thepolicy:

·       adirector who is our Chairman of the Board or Chairman of a committee of theBoard will not be deemed to be one of our officers by reason of holding thatposition, unless that person is one of our full-time employees;

·       referencesto us shall mean us and all corporations, partnerships, joint ventures,associations and other entities in which we beneficially own, directly orindirectly, 50% or more of the outstanding voting stock, voting power,partnership interests or similar voting interests; and

·       theterm “Hallmark Cards” means Hallmark Cards and all corporations, partnerships,joint ventures, associations and other entities, other than us, as we are definedin this paragraph, in which Hallmark Cards beneficially owns, directly orindirectly, 50% or more of the outstanding voting stock, voting power,partnership interests or similar voting interests.

The foregoing provisions of our certificate ofincorporation will expire on the date that Hallmark Cards ceases to ownbeneficially common stock representing at least 20% of the total voting powerof all of our classes of outstanding capital stock and no person who is one ofour directors or officers is also a director or officer of Hallmark Cards orany of its subsidiaries.

Other than as disclosedabove and under “—Stockholders Agreement and Registration Rights,” there are nospecific policies in place with respect to any conflicts that may arise. Weexpect conflicts to be resolved on a case-by-case basis, and in a mannerconsistent with applicable law.

***Transactions with JP Morgan Chase Bank***

We have a credit agreement with a syndicate of bankslead by JP Morgan Chase Bank providing a secured line of credit and term loanof up to a total of $130.0 million due May 31, 2008. For informationregarding the terms of the bank credit agreement, please see Item 7Management’s Discussion and Analysis of Financial Condition and Results ofOperation under “Bank Credit Facility and HC Crown Loans.” As part of thiscredit facility, JP Morgan Chase Bank originally committed to lend to us up to$45.0 million, which was first reduced to $31.0 million and subsequentlyreduced to $29.0 million. At December 31, 2005 and 2006, JP Morgan ChaseBank had outstanding loans to us under the line of credit of $29.6 million and$24.6 million, respectively. Each loan under the credit facility bears interestat a 

56

----

Eurodollar rate or analternate base rate as we may request at the time of borrowing in accordancewith the credit agreement. We are required to pay a commitment fee of 0.2% perannum of the committed, but not outstanding, amounts under the revolving creditfacility, payable in quarterly installments. This commitment fee was 0.5% per annumprior to an amendment effective March 2005. We paid a total of $10.3million in interest and $125,000 in fees to JP Morgan Chase Bank under thecredit facility for the year ended December 31, 2005. We paid a total of$12.8 million in interest and $125,000 in fees to JP Morgan Chase Bank underthe credit facility for the year ended December 31, 2006.

JP Morgan Chase Bank wasour related party as a result of an executive officer being on the Board of theCompany. This director resigned from the Company’s board in August 2006.The JP Morgan Chase Bank may also be considered a related party because of theinterest of JP Morgan in Hallmark Entertainment Investments.

**ITEM 14.**         Principal Accounting Fees and Services

Theinformation required by this Item 14 is set forth in the Proxy Statement underthe heading “Principal Accountant Fees and Services,” and is incorporated byreference herein.

**PART IV**

**ITEM 15.**         Exhibits, Financial Statement Schedules

(A)       List ofDocuments Filed as Part of This Report

(1)         ConsolidatedFinancial Statements

Reports of KPMG LLP, Independent Registered Public Accounting FirmConsolidated Balance Sheets as of December 31,2005 and 2006Consolidated Statements of Operations andComprehensive Loss for theYears Ended December 31, 2004, 2005, and2006Consolidated Statements of Stockholders’Equity (Deficit) for the YearsEnded December 31, 2004, 2005, and2006Consolidated Statements of Cash Flows forthe Years Ended December 31,2004, 2005, and 2006Notes to Consolidated Financial Statements

(2)         Exhibits
| Exhibit Number | ** ** | **Exhibit Title** | ** ** |
|---------------------|------------|------------------------|------------|
|                | 2          | .1                     |       | Purchase and Sale Agreement, dated as of February 23, 2005, by and  among CM Intermediary, LLC, Bagbridge Limited and, solely with respect to  Section 10.14 of the Agreement, Crown Media Holdings, Inc.  (previously filed as Exhibit 2.1 to our Current Report on Form 8-K,  filed on February 23, 2005 and incorporated herein by reference). |   |
|                | 2          | .2                     |       | Asset Purchase and Sale Agreement, dated as of February 23, 2005,  by and among Crown Media Distribution, LLC, Bagbridge Limited and, solely  with respect to Section 10.14 of the Agreement, Crown Media  Holdings, Inc. (previously filed as Exhibit 2.2 to our Current  Report on Form 8-K, filed on February 23, 2005 and incorporated  herein by reference). |   |
|                | 3          | .1                     |       | Amended and Restated Certificate of Incorporation (previously filed as  Exhibit 3.1 to our Registration Statement on Form S-1/A  (Amendment No. 2), Commission File No. 333-95573, and  incorporated herein by reference). |   |

57

----

 
|        | 3  | .2 |   | Certificate of Amendment to the Amended and Restated Certificate of  Incorporation (previously filed as Exhibit 3.2 to our Quarterly Report  on Form 10-Q filed on July 31, 2001 (File Number 000-30700;  Film Number 1693331) and incorporated herein by reference).                                  |   |
|--------|----|----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | 3  | .3 |   | Amended and Restated By-Laws (previously filed as Exhibit 3.2 to  our Registration Statement on Form S-1/A (Amendment No. 3),  Commission File No. 333-95573, and incorporated herein by  reference).                                                                                                       |   |
|   | 4  | .1 |   | Form of Specimen Certificate for our Class A Common Stock  (previously filed as Exhibit 4.1 to our Registration Statement on  Form S-1/A (Amendment No. 1), Commission File No. 333-95573,  and incorporated herein by reference).                                                                |   |
|   | 10 | .1 |   | Second Amended and Restated Stockholders Agreement, dated August 30,  2001 (previously filed as Exhibit 10.6 to our Quarterly Report on  Form 10-Q filed on November 13, 2001 (File Number 000-30700; Film  Number 1784987) and incorporated herein by reference).                                          |   |
|   | 10 | .2 |   | Acknowledgment and Agreement to the Second Amended and Restated  Stockholders Agreement, dated as of December 31, 2001, by Hallmark  Entertainment Holdings, Inc. (previously filed as Exhibit 10.2 to  our Annual Report on Form 10-K filed on March 29, 2002 and  incorporated herein by reference). |   |
|   | 10 | .3 |   | Acknowledgment and Agreement to the Second Amended and Restated  Stockholders Agreement, dated as of March 11, 2003, by Hallmark  Entertainment Investments Co. (previously filed as Exhibit 10.3 to our  Annual Report on Form 10-K filed on March 28, 2003 and incorporated  herein by reference).        |   |
|   | 10 | .4 |   | Acknowledgement to the Second Amended and Restated Stockholders  Agreement, dated March 11, 2003, by JP Morgan Partners (BHCA), L.P.  (previously filed as Exhibit 10.4 to our Annual Report on Form 10-K  filed on March 28, 2003 and incorporated herein by reference).                                   |   |
|   | 10 | .5 |   | Acknowledgement to the Second Amended and Restated Stockholders  Agreement, dated March 11, 2003, by Liberty Crown, Inc. and Liberty  Media Corporation. (previously filed as Exhibit 10.5 to our Annual Report  on Form 10-K filed on March 28, 2003 and incorporated herein  by reference).          |   |
|   | 10 | .6 |   | Consent and Waiver to Second Amended and Restated Stockholders  Agreement, dated March 11, 2003, by DirecTV Enterprises, Inc.  (previously filed as Exhibit 10.6 to our Annual Report on Form 10-K  filed on March 28, 2003 and incorporated herein by reference).                                     |   |
|   | 10 | .7 |   | Consent and Waiver to Second Amended and Restated Stockholders  Agreement, dated March 11, 2003, by VISN Management Corp. (previously  filed as Exhibit 10.7 to our Annual Report on Form 10-K filed  on March 28, 2003 and incorporated herein by reference).                                              |   |
|   | 10 | .8 |   | Consent and Waiver to Second Amended and Restated Stockholders  Agreement, dated March 11, 2003, by Crown Media Holdings, Inc.  (previously filed as Exhibit 10.8 to our Annual Report on Form 10-K  filed on March 28, 2003 and incorporated herein by reference).                                    |   |

58

----

 
|        | 10 | .9  |   | Acknowledgment and Agreement to the Second Amended and Restated  Stockholders Agreement, dated as of February 28, 2003, by Hughes  Electronics Corporation (previously filed as Exhibit 10.9 to our Annual  Report on Form 10-K filed on March 28, 2003 and incorporated  herein by reference).                                                                                                                                                                                                                              |   |
|--------|----|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | 10 | .10 |   | Credit, Security, Guaranty and Pledge Agreement, dated August 31,  2001, by and among Crown Media Holdings, Inc., its Subsidiaries named  therein, the Lenders named therein and The Chase Manhattan Bank (now known as  JPMorgan Chase Bank) as Administrative Agent and Issuing Bank (previously  filed as Exhibit 10.1 to our Current Report on Form 8-K,  filed on October 3, 2001 and incorporated herein by reference).                                                                                           |   |
|   | 10 | .11 |   | Amendment No. 1, dated as of December 14, 2001, to the  Credit, Security, Guaranty and Pledge Agreement, dated as of August 31,  2001, among Crown Media Holdings, Inc. as Borrower, the Guarantors named  therein, the Lenders named therein and JPMorgan Chase Bank as Administrative  Agent and as Issuing Bank (previously filed as Exhibit 10.1 to our  Current Report on Form 8-K, filed on December 18, 2001 (File Number  000-30700; Film Number 1816385) and incorporated herein by reference). |   |
|   | 10 | .12 |   | Amendment No. 2, dated as of December 31, 2001, to the  Credit, Security, Guaranty and Pledge Agreement, dated as of August 31,  2001, among Crown Media Holdings, Inc. as Borrower, the Guarantors named  therein, the Lenders named therein and JPMorgan Chase Bank as Administrative  Agent and as Issuing Bank (previously filed as Exhibit 10.5 to our  Annual Report on Form 10-K, filed on March 29, 2002 and  incorporated herein by reference).                                                      |   |
|   | 10 | .13 |   | Amendment No. 3, dated as of March 29, 2002, to the Credit,  Security, Guaranty and Pledge Agreement, dated as of August 31, 2001,  among Crown Media Holdings, Inc. as Borrower, the Guarantors named  therein, the Lenders named therein and JPMorgan Chase Bank as Administrative Agent  and as Issuing Bank (previously filed as Exhibit 10.1 to our Quarterly  Report on Form 10-Q, filed on May 15, 2002 and incorporated  herein by reference).                                                        |   |
|   | 10 | .14 |   | Amendment No. 4, dated as of May 15, 2002, to the Credit,  Security, Guaranty and Pledge Agreement, dated as of August 31, 2001,  among Crown Media Holdings, Inc. as Borrower, the Guarantors named  therein, the Lenders named therein and JPMorgan Chase Bank as Administrative  Agent and as Issuing Bank (previously filed as Exhibit 10.2 to our Quarterly  Report on Form 10-Q, filed on May 15, 2002 and incorporated  herein by reference).                                                          |   |
|   | 10 | .15 |   | Amendment No. 5, dated as of February 5, 2003, to the Credit,  Security, Guaranty and Pledge Agreement, dated as of August 31, 2001,  among Crown Media Holdings, Inc. as Borrower, the Guarantors named  therein, the Lenders named therein and JPMorgan Chase Bank as Administrative  Agent and as Issuing Bank (previously filed as Exhibit 10.15 to our  Annual Report on Form 10-K, filed on March 28, 2003 and  incorporated herein by reference).                                                      |   |
|   | 10 | .16 |   | Amendment No. 6, dated as of August 4, 2003, to the Credit,  Security, Guaranty and Pledge Agreement, dated as of August 31, 2001,  among Crown Media Holdings, Inc. as Borrower, the Guarantors named  therein, the Lenders named therein and JPMorgan Chase Bank as Administrative  Agent and as Issuing Bank (previously filed as Exhibit 10.3 to our  Current Report on Form 8-K, filed on August 6, 2003 and  incorporated herein by reference).                                                         |   |

59

----

 
|        | 10  | .17 |   | Amendment No. 7, dated as of October 28, 2004, to the Credit,  Security, Guaranty and Pledge Agreement, dated as of August 31, 2001,  among Crown Media Holdings, Inc. as Borrower, the Guarantors named  therein, the Lenders named therein and JPMorgan Chase Bank as Administrative  Agent and as Issuing Bank (previously filed as Exhibit 10.3 to our  Quarterly Report on Form 10-Q, filed on November 15, 2004 and  incorporated herein by reference). |   |
|--------|-----|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | 10. | 18  |   | Amendment No. 8, dated as of March 2, 2005, to the Credit,  Security, Guaranty and Pledge Agreement, dated as of August 31, 2001,  among Crown Media Holdings, Inc. as Borrower, the Guarantors named  therein, the Lenders named therein and JPMorgan Chase Bank as Administrative  Agent and as Issuing Bank (previously filed as Exhibit 10.1 to our  Current Report on Form 8-K, filed on March 11, 2005 and  incorporated herein by reference).          |   |
|   | 10  | .19 |   | Second Amended and Restated Program License Agreement, dated as of  January 1, 2005, by and between Hallmark Entertainment Distribution, LLC  (now RHI Entertainment Distribution, LLC) and Crown Media United States, LLC  (previously filed as Exhibit 99.1 to our Current Report on Form 8-K,  filed on October 11, 2005, and incorporated herein by reference).                                                                                                          |   |
|   | 10  | .20 |   | Amended and Restated Trademark License Agreement, dated as of  March 27, 2001, by and between Hallmark Licensing, Inc. and Odyssey  Holdings, LLC (now known as Crown Media United States, LLC) (previously filed  as Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on  May 7, 2001, and incorporated herein by reference).                                                                                                                                   |   |
|   | 10  | .21 |   | Trademark License Extension Agreement, dated as of November 30,  2002, by and between Hallmark Licensing, Inc. and Crown Media United  States, LLC (previously filed as Exhibit 10.32 to our Annual Report on  Form 10-K filed on March 28, 2003 and incorporated by  reference herein).                                                                                                                                                                                |   |
|   | 10  | .22 |   | Trademark License Amendment and Extension Agreement, dated as of  August 28, 2003, by and between Hallmark Licensing, Inc. and Crown  Media United States, LLC (previously filed as Exhibit 10.6 to our  Quarterly Report on Form 10-Q filed on November 10, 2003 and  incorporated by reference herein).                                                                                                                                                               |   |
|   | 10  | .23 |   | Trademark License Extension Agreement, dated as of August 1, 2004,  by and between Hallmark Licensing, Inc. and Crown Media United States,  LLC (previously filed as Exhibit 10.5 to our Quarterly Report on  Form 10-Q filed on November 15, 2004 and incorporated by  reference herein).                                                                                                                                                                              |   |
|   | 10  | .24 |   | Trademark License Extension Agreement (Hallmark Channel), dated as of  August 1, 2005, by and between Hallmark Licensing, Inc. and Crown  Media United States, LLC (previously filed as Exhibit 10.3 to our  Quarterly Report on Form 10-Q filed on November 7, 2005 and  incorporated by reference herein).                                                                                                                                                            |   |
|   | 10  | .25 |   | Trademark License Extension Agreement (Hallmark Movie Channel), dated as  of August 1, 2005, by and between Hallmark Licensing, Inc. and  Crown Media United States, LLC (previously filed as Exhibit 10.4 to our  Quarterly Report on Form 10-Q filed on November 7, 2005 and  incorporated by reference herein).                                                                                                                                                      |   |

60

----

 
|        | 10 | .26 |   | Security Agreement, dated as of August 1, 1999, by and between  Hallmark Entertainment Networks, Inc. (now known as Crown Media  International, Inc.) and Hallmark Cards, Incorporated (previously filed  as Exhibit 10.10 to our Registration Statement on Form S-1/A  (Amendment No. 1), Commission File No. 333-95573, and  incorporated herein by reference). |   |
|--------|----|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | 10 | .27 |   | Security Agreement, dated as of March 27, 2001, by and between  Odyssey Holdings, LLC (now known as Crown Media United States, LLC) and  Hallmark Licensing, Inc. (previously filed as Exhibit 10.20 to our  Annual Report on Form 10-K, filed on March 29, 2002 and  incorporated herein by reference).                                                                    |   |
|   | 10 | .28 |   | Amended and Restated Company Agreement of Odyssey Holdings, L.L.C. (now  known as Crown Media United States, LLC) (previously filed as  Exhibit 10.11 to our Registration Statement on Form S-1/A  (Amendment No. 1), Commission File No. 333-95573, and  incorporated herein by reference).                                                                                     |   |
|   | 10 | .29 |   | Amendment to the Amended and Restated Company Agreement of Odyssey  Holdings, LLC, dated March 15, 2001 (previously filed as  Exhibit 10.22 to our Annual Report on Form 10-K, filed on  March 29, 2002 and incorporated herein by reference).                                                                                                                                   |   |
|   | 10 | .30 |   | Agreement, dated as of February 22, 2001, by and among Odyssey  Holdings, LLC, National Interfaith Cable Coalition, Inc. and VISN  Management Corp (previously filed as Exhibit 10.2 to our Quarterly  Report on Form 10-Q filed on May 7, 2001 (File  Number 000-30700; Film Number 1623520) and incorporated herein by  reference).                                  |   |
|   | 10 | .31 |   | Agreement, dated as of March 5, 2003, by and among Odyssey  Holdings, LLC, National Interfaith Cable Coalition, Inc. and VISN  Management Corp. (previously filed as Exhibit 10.5 to our Quarterly  Report on Form 10-Q filed on May 15, 2003, and incorporated  herein by reference).                                                                                      |   |
|   | 10 | .32 |   | Settlement Agreement dated as of December 1, 2005 between National  Interfaith Cable Coalition, Inc., VISN Management Corp. and Crown Media  Holdings, Inc. (previously filed as Exhibit 10.1 to our Current  Report on Form 8-K filed on December 13, 2005 and  incorporated herein by reference).                                                                    |   |
|   | 10 | .33 |   | Intercompany Services Agreement, made as of December 23, 2002, by  and between Hallmark Cards, Incorporated and Crown Media Holdings, Inc.  (previously filed as Exhibit 10.38 to our Annual Report on Form 10-K  filed on March 28, 2003 and incorporated herein by reference).                                                                                            |   |
|   | 10 | .34 |   | Intercompany Services Extension Agreement, dated as of January 1,  2006, by and between Hallmark Cards, Incorporated and Crown Media  Holdings, Inc. (previously filed as Exhibit 10.42 to our Annual  Report on Form 10-K filed on March 29, 2006, and incorporated  herein by reference.)                                                                                 |   |
|   | 10 | .35 |   | $50,000,000 Promissory Note, dated July 10, 2001, made by Crown  Media, Inc. in favor of HC Crown Corporation (previously filed as  Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on  July 31, 2001 and incorporated herein by reference).                                                                                                                        |   |
|   | 10 | .36 |   | $75,000,000 Promissory Note, dated December 14, 2001, made by  Crown Media Holdings, Inc., Crown Media International, Inc. and  Crown Media United States, LLC in favor of HC Crown Corp. (previously filed  as Exhibit 10.2 to our Current Report on Form 8-K, filed on  December 18, 2001, and incorporated herein by reference).                                    |   |

61

----

 
|        | 10 | .37 |   | Note Purchase Agreement, dated as of August 1, 2003 between Crown  Media Holdings, Inc. and HC Crown Corp. (previously filed as  Exhibit 10.1 to our Current Report on Form 8-K filed on  August 6, 2003 and incorporated by reference herein).                                                                                                                                                   |   |
|--------|----|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | 10 | .38 |   | 10.25% Senior Unsecured Discount Note dated August 5, 2003 issued  by Crown Media Holdings, Inc. (previously filed as Exhibit 10.2 to  our Current Report on Form 8-K filed on August 6, 2003 and  incorporated by reference herein).                                                                                                                                                             |   |
|   | 10 | .39 |   | Program License Agreement, dated as of November 13, 1998, between  National Interfaith Cable Coalition, Inc. and Odyssey Holdings, L.L.C.  (previously filed as Exhibit 10.17 to our Registration Statement on  Form S-1/A (Amendment No. 1), Commission File No. 333-95573,  and incorporated herein by reference).                                                                         |   |
|   | 10 | .40 |   | Service Agreement, dated September 28, 2001, by and between  Hallmark Entertainment, Inc. (now RHI Entertainment LLC) and Crown Media  Holdings, Inc., as assigned to Crown Media Distribution, LLC, pursuant  to letter dated December 14, 2001 (previously filed as Exhibit 10.28  to our Annual Report on Form 10-K, filed on March 29, 2002  and incorporated herein by reference). |   |
|   | 10 | .41 |   | Amendment to Library Services Agreement, dated as of April 26,  2005, by and between Hallmark Entertainment and Crown Media Distribution,  LLC. (previously filed as Exhibit 10.52 to our Annual Report on  Form 10-K, filed March 29, 2006, and incorporated herein by  reference.)                                                                                                                   |   |
|   | 10 | .42 |   | Registration Rights Agreement, dated as of September 28, 2001, by  and between Crown Media Holdings, Inc. and Hallmark Entertainment Distribution,  as amended by assignments dated September 28, 2001 and December 31,  2001 (previously filed as Exhibit 10.29 to our Annual Report on  Form 10-K, filed on March 29, 2002 and incorporated herein by  reference).                    |   |
|   | 10 | .43 |   | Extension Agreement, dated as of March 1, 2002, by and between  Crown Media Holdings, Inc., Crown Media Distribution, LLC and Hallmark  Entertainment Distribution, LLC (previously filed as Exhibit 10.44 to  our Annual Report on Form 10-K filed on March 28, 2003 and  incorporated by reference herein).                                                                                     |   |
|   | 10 | .44 |   | Federal Income Tax Sharing Agreement, dated March 11, 2003, by and  between Hallmark Cards, Incorporated and Crown Media Holdings, Inc.  (previously filed as Exhibit 10.45 to our Annual Report on Form 10-K  filed on March 28, 2003 and incorporated by reference herein).                                                                                                                     |   |
|   | 10 | .45 |   | Amendment No. 1 to Federal Income Tax Sharing Agreement, dated  August 5, 2003, by and between Hallmark Cards, Incorporated and Crown  Media Holdings, Inc. (previously filed as Exhibit 10.4 to our  Quarterly Report on Form 10-Q filed on August 14, 2003 and  incorporated by reference herein).                                                                                         |   |
|   | 10 | .46 |   | Stock Purchase Agreement, dated as of August 20, 2001, by and  between Crown Media Holdings, Inc. and DIRECTV Enterprises, Inc.  (previously filed as Exhibit 10.7.1 to our Amendment No. 1 to our  Quarterly Report on Form 10-Q/A filed on January 10, 2002 (File  Number 000-30700; Film Number 2506612) and incorporated herein by  reference).                           |   |

62

----

 
|        | 10 | .47  |   | Affiliation Agreement for DBS Satellite Exhibition of Cable Network  Programming, dated as of August 20, 2001, by and between Crown Media  United States, LLC, and DIRECTV, Inc. (previously filed as  Exhibit 10.7.2 to our Amendment No. 1 to our Quarterly Report on  Form 10-Q/A filed on January 10, 2002 (File Number 000-30700;  Film Number 2506612) and incorporated herein by reference) |   |
|--------|----|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | 10 | .48  |   | Affiliation Agreement for DBS Satellite Exhibition of Cable Network  Programming, dated as of March 6, 2000, by and between Crown Media  United States, LLC, and DIRECTV, Inc. (previously filed as  Exhibit 10.7.3 to our Amendment No. 1 to our Quarterly Report on  Form 10-Q/A filed on January 10, 2002 (File Number 000-30700;  Film Number 2506612) and incorporated herein by reference)   |   |
|   | 10 | .49  |   | Letter, dated August 30, 2001, by and between DIRECTV, Inc.  and Crown Media Holdings, Inc. (previously filed as Exhibit 10.7.4  to our Amendment No. 1 to our Quarterly Report on Form 10-Q/A filed  on January 10, 2002 (File Number 000-30700; Film  Number 2506612) and incorporated herein by reference)                                                                                 |   |
|   | 10 | .50* |   | Amended and Restated Crown Media Holdings, Inc. 2000 Long Term  Incentive Plan (previously filed as Exhibit 10.13 to Our Annual Report  on Form 10-K filed on March 27, 2001 (File Number 000-30700;  Film Number 1520885) and incorporated herein by reference).                                                                                                                                            |   |
|   | 10 | .51* |   | Form of Amended and Restated Crown Media Holdings, Inc.  Restricted Stock Unit Agreement (previously filed as Exhibit 10.3 to our  Quarterly Report on Form 10-Q filed on August 9, 2004, and  incorporated herein by reference).                                                                                                                                                                                 |   |
|   | 10 | .52* |   | Form of Crown Media Holdings, Inc. 2004 Restricted Stock Unit  Agreement (previously filed as Exhibit 10.4 to our Quarterly Report on  Form 10-Q filed on August 9, 2004, and incorporated herein by  reference).                                                                                                                                                                                                 |   |
|   | 10 | .53* |   | Form of Crown Media Holdings, Inc. 2005 Restricted Stock Unit  Agreement. (previously filed as Exhibit 10.72 to our Annual Report on  Form 10-K, filed March 29, 2006, and incorporated herein by  reference.)                                                                                                                                                                                                    |   |
|   | 10 | .54* |   | Employment Agreement, dated as of September 18, 2001, between  Crown Media Holdings, Inc. and David Evans (previously filed as  Exhibit 10.8 to our Quarterly Report on Form 10-Q filed on November 13,  2001 (File Number 000-30700; Film Number 1784987) and incorporated  herein by reference).                                                                                                      |   |
|   | 10 | .55* |   | Amendment No. 1 to Employment Agreement, dated as of May 28,  2004, between Crown Media Holdings, Inc. and David Evans (previously  filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q  filed on August 9, 2004 and incorporated herein by reference).                                                                                                                                               |   |
|   | 10 | .56* |   | Employment Agreement Amendment No. 2, dated as of August 17,  2005, by and between David Evans and Crown Media Holdings, Inc.  (previously filed as Exhibit 10.75 to our Annual Report on Form 10-K,  filed March 29, 2006, and incorporated herein by reference.)                                                                                                                                           |   |
|   | 10 | .57* |   | Crown Media Holdings, Inc. 2004 Restricted Stock Unit Agreement,  dated as of May 28, 2004, by and between Crown Media Holdings, Inc.  and David Evans (previously filed as Exhibit 10.5 to our Quarterly  Report on Form 10-Q filed on August 9, 2004 and incorporated  herein by reference).                                                                                                               |   |

63

----

 
|        | 10 | .58* |   | Amended and Restated Crown Media Holdings, Inc. Restricted Stock  Unit Agreement, dated as of May 25, 2004, by and between Crown Media  Holdings, Inc. and David Evans (previously filed as Exhibit 10.6 to  our Quarterly Report on Form 10-Q filed on August 9, 2004 and  incorporated herein by reference). |   |
|--------|----|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | 10 | .59* |   | Crown Media Holdings, Inc. 2005 Restricted Stock Unit Agreement,  dated as of August 17, 2005, by and between Crown Media  Holdings, Inc. and David Evans. (previously filed as Exhibit 10.78  to our Annual Report on Form 10-K, filed March 29, 2006, and  incorporated herein by reference.)                |   |
|   | 10 | .60* |   | Amendment to Crown Media Holdings, Inc. 2005 Restricted Stock Unit  Agreement, dated as of August 17, 2005, by and between Crown Media  Holdings, Inc. and David Evans. (previously filed as Exhibit 10.79  to our Annual Report on Form 10-K, filed March 29, 2006, and  incorporated herein by reference.)   |   |
|   | 10 | .61* |   | Employment Agreement, effective as of January 1, 2004, by and  between Crown Media Holdings, Inc. and William Aliber (previously filed  as Exhibit 10.86 to our Annual Report on Form 10-K, filed on  May 27, 2005 and incorporated herein by reference).                                                           |   |
|   | 10 | .62* |   | Employment Agreement, dated as of September 15, 2003, by and  between Crown Media Holdings, Inc. and Paul FitzPatrick (previously  filed as Exhibit 10.8 to our Quarterly Report on Form 10-Q,  filed on November 10, 2003 and incorporated herein by reference).                                                   |   |
|   | 10 | .63* |   | Employment Agreement, dated as of December 20, 2001, by and  between Crown Media United States, LLC and David Kenin (previously filed as  Exhibit 10.6 to our Quarterly Report on Form 10-Q, filed on  May 15, 2003 and incorporated herein by reference).                                                               |   |
|   | 10 | .64* |   | Amendment to Employment Agreement dated December 6, 2004, by and  between Crown Media United States, LLC and David Kenin (previously filed as  Exhibit 10.1 to our Current Report on Form 8-K, filed on  December 8, 2004 and incorporated herein by reference)                                                          |   |
|   | 10 | .65* |   | 2005 Deferred Compensation Plan of Crown Media Holdings, Inc.  (previously filed as Exhibit 10.98 to our Annual Report on Form 10-K,  filed on May 27, 2005 and incorporated herein by reference).                                                                                                                       |   |
|   | 10 | .66  |   | Technical Services Agreement, dated as of April 26, 2005, by and  between Crown Media United States LLC and Crown Media International LLC  (previously filed as Exhibit 10.99 to our Annual Report on Form 10-K,  filed on May 27, 2005 and incorporated herein by reference).                                           |   |
|   | 10 | .67* |   | Compromise Agreement, dated as of April 22, 2005, by and between  Jeffrey Henry and Crown Media International, LLC. (previously filed as  Exhibit 10.100 to our Annual Report on Form 10-K, filed on  May 27, 2005 and incorporated herein by reference).                                                                |   |
|   | 10 | .68  |   | $132,785,424 Promissory Note, dated October 1, 2005, made by Crown  Media United States, LLC in favor of Hallmark Entertainment Distribution,  LLC. (previously filed as Exhibit 10.97 to our Annual Report on  Form 10-K, filed March 29, 2006, and incorporated herein by  reference.)                                 |   |

64

----

 
|        | 10 | .69  |   | Waiver and Standby Purchase Agreement, dated as of March 21, 2006  among Hallmark Cards Incorporated, HC Crown Corp., Hallmark Entertainment  Holdings, Inc. and Crown Media Holdings, Inc., Crown Media  United States LLC and subsidiaries of Crown Media Holdings, Inc.  (previously filed as Exhibit 10.98 to our Annual Report on Form 10-K,  filed March 29, 2006, and incorporated herein by reference.)                                                 |   |
|--------|----|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | 10 | .70  |   | Amendment No. 9, dated as of March 21, 2006 to the Credit,  Security, Guaranty and Pledge Agreement dated as of August 31, 2001  among Crown Media Holdings, Inc. as Borrower, the Guarantors named  therein, the Lenders named therein and JP Morgan Chase Bank  as Administrative Agent and Issuing Bank. (previously  filed as Exhibit 10.99 to our Annual Report on Form 10-K,  filed March 29, 2006, and incorporated herein by reference.)      |   |
|   | 10 | .71  |   | $70,414,087 Promissory Note, dated March 21, 2006, made by Crown  Media Holdings, Inc. in favor of Hallmark Entertainment  Holdings, Inc. (previously filed as Exhibit 10.1 to our Quarterly  Report on Form 10-Q, filed May 10, 2006, and incorporated  herein by reference.)                                                                                                                                                                                                 |   |
|   | 10 | .72  |   | Trademark License Extension Agreement (Hallmark Movie Channel), dated  as of April 10, 2006, by and between Hallmark Licensing, Inc. and  Crown Media United States, LLC. (previously filed as Exhibit 10.2 to our  Quarterly Report on Form 10-Q, filed May 10, 2006, and  incorporated herein by reference.)                                                                                                                                                                      |   |
|   | 10 | .73  |   | Trademark License Extension Agreement (Hallmark Channel), dated as of  April 10, 2006, by and between Hallmark Licensing, Inc. and Crown  Media United States, LLC. (previously filed as Exhibit 10.3 to our  Quarterly Report on Form 10-Q, filed May 10, 2006, and  incorporated herein by reference.)                                                                                                                                                                            |   |
|   | 10 | .74* |   | Letter Agreement, dated April 12, 2006, between Chris Moseley and  Crown Media Holdings, Inc. (previously filed as Exhibit 10.4 to our  Quarterly Report on Form 10-Q, filed May 10, 2006, and  incorporated herein by reference.)                                                                                                                                                                                                                                                  |   |
|   | 10 | .75  |   | Amendment No. 10, dated as of April 28, 2006 to the Credit,  Security, Guaranty and Pledge Agreement, dated as of August 31, 2001  among Crown Media Holdings, Inc. as Borrower, the Guarantors named  therein, the Lenders named therein and JP Morgan Chase Bank  as Administrative Agent and as Issuing Bank. (previously  filed as Exhibit 10.5 to our Quarterly Report on Form 10-Q,  filed May 10, 2006, and incorporated herein by reference.) |   |
|   | 10 | .76  |   | Letter Agreement, dated May 2, 2006, by and between Hallmark  Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as  Exhibit 10.6 to our Quarterly Report on Form 10-Q, filed  May 10, 2006, and incorporated herein by reference.)                                                                                                                                                                                                                               |   |
|   | 10 | .77* |   | Separation Agreement, dated May 10, 2006, between Crown Media  Holdings, Inc. and David Evans. (previously filed as Exhibit 99.2  to our Current Report on Form 8-K, filed on May 11, 2006, and  incorporated herein by reference).                                                                                                                                                                                                                                                 |   |
|   | 10 | .78* |   | Separation Agreement, dated July 21, 2006, between Crown Media  Holdings, Inc. and William Aliber. (previously filed as  Exhibit 99.1 to our Current Report on Form 8-K, filed on  July 24, 2006, and incorporated herein by reference).                                                                                                                                                                                                                                            |   |

65

----

 
|        | 10 | .79  |   | Amendment No. 1 to Waiver  and Standby Purchase Agreement dated August 8, 2006 by and between  Hallmark Cards Incorporated and Crown Media Holdings, Inc. (previously  filed as Exhibit 10.6 to our Quarterly Report on Form 10-Q,  filed August 9, 2006, and incorporated herein by reference.)                                                |   |
|--------|----|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | 10 | .80* |   | Employment Agreement dated August 8, 2006, between Crown Media  Holdings, Inc. and Paul FitzPatrick. (previously filed as  Exhibit 10.8 to our Quarterly Report on Form 10-Q, filed  August 9, 2006, and incorporated herein by reference.)                                                                                                          |   |
|   | 10 | .81* |   | Employment Agreement dated August 8, 2006, between Crown Media  Holdings, Inc. and William Abbott. (previously filed as  Exhibit 10.9 to our Quarterly Report on Form 10-Q, filed  August 9, 2006, and incorporated herein by reference.)                                                                                                            |   |
|   | 10 | .82* |   | Employment Agreement dated August 8, 2006, between Crown Media  Holdings, Inc. and Charles Stanford. (previously filed as  Exhibit 10.10 to our Quarterly Report on Form 10-Q, filed  August 9, 2006, and incorporated herein by reference.)                                                                                                         |   |
|   | 10 | .83* |   | Employment Agreement dated August 8, 2006, between Crown Media  Holdings, Inc. and Laura Masse. (previously filed as Exhibit 10.11  to our Quarterly Report on Form 10-Q, filed August 9, 2006,  and incorporated herein by reference.)                                                                                                              |   |
|   | 10 | .84* |   | Employment Agreement dated August 8, 2006, between Crown Media  Holdings, Inc. and Brian Stewart. (previously filed as  Exhibit 10.12 to our Quarterly Report on Form 10-Q, filed  August 9, 2006, and incorporated herein by reference.)                                                                                                            |   |
|   | 10 | .85  |   | Purchase Agreement, dated as of October 3, 2006, by and among  Crown Media Holdings, Inc., CM Intermediary, LLC, Crown Media  Distribution, LLC and RHI Enterprises, LLC. (previously filed as  Exhibit 10.1 to our Current Report on Form 8-K, filed on  October 6, 2006, and incorporated herein by reference).                                    |   |
|   | 10 | .86  |   | Intercreditor Agreement, dated as of October 3, 2006, by and among  Hallmark Cards, Incorporated, Crown Media Holdings, Inc., CM  Intermediary, LLC, Crown Media Distribution, LLC and RHI Enterprises, LLC.  (previously filed as Exhibit 10.2 to our Current Report on Form 8-K,  filed on October 6, 2006, and incorporated herein by reference). |   |
|   | 10 | .87* |   | Employment Agreement dated October 3, 2006 between Crown Media  Holdings, Inc. and Henry Schleiff (previously filed as Exhibit 10.1  to our Quarterly Report on Form 10-Q, filed November 9, 2006,  and incorporated herein by reference.)                                                                                                           |   |
|   | 10 | .88* |   | Restricted Stock Unit Agreement dated October 3, 2006 between  Crown Media Holdings, Inc. and Henry Schleiff. (previously filed as  Exhibit 10.2 to our Quarterly Report on Form 10-Q, filed  November 9, 2006, and incorporated herein by reference.)                                                                                               |   |
|   | 10 | .89* |   | Stock Appreciation Rights Agreement dated October 3, 2006 between  Crown Media Holdings, Inc. and Henry Schleiff. (previously filed as  Exhibit 10.3 to our Quarterly Report on Form 10-Q, filed  November 9, 2006, and incorporated herein by reference.)                                                                                           |   |
|   | 10 | .90* |   | Letter Agreement dated November 8, 2006 between Crown Media  Holdings, Inc. and Brian Stewart. (previously filed as Exhibit 10.5  to our Quarterly Report on Form 10-Q, filed November 9, 2006,  and incorporated herein by reference.)                                                                                                              |   |

66

----

 
|        | 10 | .91  |   | Amendment No. 2 to Waiver  and Standby Purchase Agreement dated November 6, 2006 by and between  Hallmark Cards Incorporated and Crown Media Holdings, Inc. (previously  filed as Exhibit 10.6 to our Quarterly Report on Form 10-Q,  filed November 9, 2006, and incorporated herein by reference.)                                    |   |
|--------|----|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | 10 | .92  |   | Amendment No. 3 to Waiver and Standby Purchase Agreement dated  March 2, 2007 by and between Hallmark Cards Incorporated and Crown Media  Holdings, Inc.                                                                                                                                                                                               |   |
|   | 10 | .93* |   | Letter Agreement, dated February 9, 2007, between Crown Media  Holdings, Inc. and Paul FitzPatrick.                                                                                                                                                                                                                                                         |   |
|   | 10 | .94  |   | Amendment No. 1 to Purchase Agreement, dated as of  December 15, 2006, by and among Crown Media Holdings, Inc., CM  Intermediary, LLC, Crown Media Distribution, LLC and RHI Enterprises, LLC  (previously filed as Exhibit 10.1 to our Current Report on Form 8-K,  filed on December 21, 2006, and incorporated herein by reference). |   |
|   | 10 | .95  |   | Amendment No. 11, dated as of December 8, 2006 to the Credit,  Security, Guaranty and Pledge Agreement, dated as of August 31, 2001  among Crown Media Holdings, Inc. as Borrower, the Guarantors named  therein, the Lenders named therein and JP Morgan Chase Bank  as Administrative Agent and as Issuing Bank.            |   |
|   | 10 | .96  |   | Amendment No. 12, dated as of March 2, 2007, to the Credit,  Security, Guaranty and Pledge Agreement, dated as of August 31, 2001  among Crown Media Holdings, Inc. as Borrower, the Guarantors named therein,  the Lenders named therein and JP Morgan Chase Bank  as Administrative Agent and as Issuing Bank.              |   |
|   | 10 | .97  |   | Trademark License Extension Agreement (Hallmark Channel), dated as of  April 10, 2006, by and between Hallmark Licensing, Inc. and Crown  Media United States, LLC.                                                                                                                                                                                         |   |
|   | 10 | .98  |   | Trademark License Extension Agreement (Hallmark Movie Channel), dated  as of April 10, 2006, by and between Hallmark Licensing, Inc. and  Crown Media United States, LLC.                                                                                                                                                                                   |   |
|   | 10 | .99  |   | Intercompany Services Extension Agreement, dated as of January 1,  2007, by and between Hallmark Cards, Incorporated and Crown Media  Holdings, Inc.                                                                                                                                                                                                        |   |
|   | 21 | .1   |   | List of Subsidiaries.                                                                                                                                                                                                                                                                                                                                                 |   |
|   | 23 | .2   |   | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                                                                                  |   |
|   | 31 | .1   |   | Rule 13a-14(a) Certification executed by the Company’s  President and Chief Executive Officer.                                                                                                                                                                                                                                                         |   |
|   | 31 | .2   |   | Rule 13a-14(a) Certification executed by the Company’s  Executive Vice President and Chief Financial Officer.                                                                                                                                                                                                                                          |   |
|   | 32 | .1   |   | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                    |   |
|   | 32 | .2   |   | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                    |   |

----

*               Management contractor compensating plan or arrangement.

67

----

**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

|          | CROWN MEDIA HOLDINGS, INC. |
|----------|----------------------------|
|     | By:                        | /s/ HENRY S.  SCHLEIFF |
|     |                       | Henry S. Schleiff |
| * * |                       | *President and Chief Executive Officer* |

 

March 8, 2007

Pursuant to the requirements of the Securities ExchangeAct of 1934, this report has been signed below by the following persons on behalfof the registrant and in the capacities and on the dates indicated.

|                               | **Signature** | ** **               |   | ** **         | **Title** | ** ** |   | ** ** | **Date** | ** ** |
|-------------------------------|---------------|--------------------------|--------|--------------------|-----------|------------|--------|------------|----------|------------|
| /s/ HENRY S. SCHLESIFF        |          | Director and  Principal  |   | March 8, 2007 |
| Henry  S. Schleiff            |          | Executive Officer        |   |               |
| /s/ BRIAN C. STEWART          |          | Principal  Financial and |   | March 8, 2007 |
| Brian  C. Stewart             |          | Accounting Officer       |   |               |
| /s/ WILFORD V.  BANE, JR.     |          | Director                 |   | March 8, 2007 |
| Wilford  V. Bane, Jr.    |          |                     |   |               |
| /s/ GLENN CURTIS              |          | Director                 |   | March 8, 2007 |
| Glenn  Curtis                 |          |                     |   |               |
| /s/ BRIAN GARDNER             |          | Director                 |   | March 8, 2007 |
| Brian  Gardner                |          |                     |   |               |
| /s/ HERBERT GRANATH           |          | Director                 |   | March 8, 2007 |
| Herbert  Granath              |          |                     |   |               |
| /s/ DAVID E. HALL             |          | Director                 |   | March 8, 2007 |
| David  E. Hall                |          |                     |   |               |
| /s/ DONALD J.  HALL, JR.      |          | Director                 |   | March 8, 2007 |
| Donald  J. Hall, Jr.     |          |                     |   |               |
| /s/ IRVINE O.  HOCKADAY, JR.  |          | Director                 |   | March 8, 2007 |
| Irvine  O. Hockaday, Jr. |          |                     |   |               |
| /s/ ANIL JAGTIANI             |          | Director                 |   | March 8, 2007 |
| Anil  Jagtiani                |          |                     |   |               |
| /s/ A. DRUE JENNINGS          |          | Director                 |   | March 8, 2007 |
| A.  Drue Jennings             |          |                     |   |               |
| /s/ PETER A. LUND             |          | Director                 |   | March 8, 2007 |
| Peter  A. Lund                |          |                     |   |               |
| /s/ DEANNE R.  STEDEM         |          | Director                 |   | March 8, 2007 |
| Deanne R. Stedem              |          |                     |   |               |

 

68

----

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**
|                                                                                                                                                               | ** ** | **Page** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Reports of Independent Registered Public Accounting  Firm                                                                                                     |       | F-3      |       |
| Consolidated Balance Sheets as of December 31,  2005 and2006                                                                                             |       | F-6      |       |
| Consolidated Statements of Operations and  Comprehensive Lossfor the Years  Ended December 31, 2004, 2005 and 2006                                       |       | F-8      |       |
| Consolidated Statements of Stockholders’ Equity  (Deficit)for the Years Ended  December 31, 2004, 2005 and 2006       |       | F-9      |       |
| Consolidated Statements of Cash Flows for the Years  EndedDecember 31, 2004, 2005  and 2006                                                              |       | F-10     |       |
| Notes to Consolidated Financial Statements                                                                                                                    |       | F-12     |       |

 

F-1

----

(This page intentionallyleft blank)

F-2

----

**Report ofIndependent Registered Public Accounting Firm**

The Board of Directors and StockholdersCrown Media Holdings, Inc.:

We have audited the accompanying consolidated balancesheets of Crown Media Holdings, Inc. and subsidiaries (the Company) as of December 31, 2006 and2005, and the related consolidatedstatements of operations and comprehensive loss, stockholders’ equity(deficit), and cash flows for each of the years in the three-year periodended December 31, 2006. These consolidatedfinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Crown Media Holdings, Inc. and subsidiaries as of December 31,2006 and 2005, and the results of their operations and their cash flows foreach of the years in the three-year period ended December 31, 2006,in conformity with U.S. generally accepted accounting principles.

As discussed in note 2 to the accompanying consolidatedfinancial statements, the Company adopted Statement of Financial AccountingStandards No. 123(R), *Share-Based Payment*,effective January 1, 2006.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2006, based on criteria establishedin Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report dated March 7,2007 expressed an unqualified opinion on management’s assessment of, and theeffective operation of, internal control over financial reporting.

**KPMG LLP**

Denver, ColoradoMarch 7, 2007

F-3

----

**Report of IndependentRegistered Public Accounting Firm**

The Board of Directors and StockholdersCrown Media Holdings, Inc.:

We have audited management’s assessment, included inthe accompanying “Management’s Report on Internal Control over FinancialReporting” (Item 9A.b), that Crown Media Holdings, Inc. (the Company)maintained effective internal control over financial reporting as of December 31,2006, based on criteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). Crown Media Holdings, Inc.’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

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

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

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

In our opinion, management’s assessment that CrownMedia Holdings, Inc. maintained effective internal control over financialreporting as of December 31, 2006, is fairly stated, in all materialrespects, based on criteria established in Internal Control—IntegratedFramework issued by COSO. Also, in our opinion, Crown Media Holdings, Inc.maintained, in all material respects, effective internal control over financialreporting as of December 31, 2006, based on criteria established in *Internal Control—Integrated Framework* issued by COSO.

F-4

----

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofCrown Media Holdings, Inc. as of December 31, 2006 and 2005, and therelated consolidated statements of operations and comprehensive loss,stockholders’ equity (deficit), and cash flows for each of the years in thethree-year period ended December 31, 2006, and our report dated March 7,2007 expressed an unqualified opinion on those consolidated financialstatements.

**KPMG LLP**

Denver, ColoradoMarch 7, 2007

F-5

----

**CROWN MEDIA HOLDINGS, INC. ANDSUBSIDIARIESCONSOLIDATED BALANCE SHEETS(In thousands, except par value and numberof shares)**

| ** **                                                                                  | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                  | ** ** | **2005**                              | ** ** | **2006** | ** ** |
| ASSETS                                                                                      |       |                                  |       |   |   |
| Cash and cash equivalents                                                                   |       | $                                     | 15,926     |   | $ | 13,965 |   |
| Accounts receivable, less allowance for doubtful accounts of  $1,565 and $246, respectively |       | 65,935                                |       | 57,079 |   |
| Program license fees—affiliates                                                        |       | 2,656                                 |       | 115 |   |
| Program license fees—non-affiliates                                                    |       | 106,542                               |       | 111,909 |   |
| Receivable from RHI and related companies                                                   |       | 1,815                                 |       | — |   |
| Receivable from buyer of international business                                             |       | 422                                   |       | 24 |   |
| Prepaid and other assets                                                                    |       | 6,051                                 |       | 4,202 |   |
| Prepaid program license fee assets                                                          |       | 30,377                                |       | 10,271 |   |
| Total current assets                                                                        |       | 229,724                               |       | 197,565 |   |
| Accounts receivable                                                                         |       | 9,101                                 |       | 850 |   |
| Program license fees—affiliates                                                        |       | 5,036                                 |       | 274 |   |
| Program license fees—non-affiliates                                                    |       | 222,861                               |       | 185,620 |   |
| Film assets, net                                                                            |       | 380,322                               |       | — |   |
| Subscriber acquisition fees, net                                                            |       | 80,594                                |       | 41,665 |   |
| Property and equipment, net                                                                 |       | 18,560                                |       | 16,313 |   |
| Goodwill                                                                                    |       | 314,033                               |       | 314,033 |   |
| Prepaid and other assets                                                                    |       | 13,595                                |       | 11,463 |   |
| Total assets                                                                                |       | $                                     | 1,273,826  |   | $ | 767,783 |   |

 

The accompanying notes are an integral part of these consolidated balance sheets

F-6

----

**CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS (Continued)(In thousands, except par value and numberof shares)**

| ** **                                                                                                                                                 | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                                                 | ** ** | **2005**                              | ** ** | **2006** | ** ** |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                                 |       |                                  |       |   |   |
| LIABILITIES:                                                                                                                                               |       |                                  |       |   |   |
| Accounts payable and accrued liabilities                                                                                                                   |       | $                                     | 29,876     |   | $ | 26,588 |   |
| Accrued restricted stock units                                                                                                                             |       | 9,299                                 |       | 1,513 |   |
| Subscriber acquisition fees payable                                                                                                                        |       | 12,238                                |       | 2,071 |   |
| License fees payable to affiliates                                                                                                                         |       | 2,730                                 |       | 2,275 |   |
| License fees payable to non-affiliates                                                                                                                     |       | 50,460                                |       | 96,085 |   |
| Payables to RHI and related companies                                                                                                                      |       | 755                                   |       | 168 |   |
| Payables to affiliates                                                                                                                                     |       | 12,071                                |       | 13,777 |   |
| Payable to buyer of international business                                                                                                                 |       | 10,050                                |       | 5,098 |   |
| Interest payable                                                                                                                                           |       | 169                                   |       | 59 |   |
| Capital lease obligations                                                                                                                                  |       | 612                                   |       | 672 |   |
| Deferred revenue                                                                                                                                           |       | 1,149                                 |       | — |   |
| Deferred credit from technical services agreement                                                                                                          |       | 1,323                                 |       | 1,213 |   |
| Total current liabilities                                                                                                                                  |       | 130,732                               |       | 149,519 |   |
| Accrued liabilities                                                                                                                                        |       | 24,427                                |       | 25,291 |   |
| License fees payable to affiliates                                                                                                                         |       | 586                                   |       | — |   |
| License fees payable to non-affiliates                                                                                                                     |       | 186,268                               |       | 88,951 |   |
| Line of credit and interest payable to HC Crown                                                                                                            |       | 86,309                                |       | 93,465 |   |
| Line of credit and interest payable to Hallmark Cards affiliate                                                                                            |       | 70,000                                |       | 53,364 |   |
| Payable to buyer of international business                                                                                                                 |       | 8,395                                 |       | 4,771 |   |
| Senior unsecured note to HC Crown, including accrued interest                                                                                              |       | 509,386                               |       | 562,167 |   |
| Credit facility                                                                                                                                            |       | 210,000                               |       | 87,633 |   |
| Note and interest payable to Hallmark Cards affiliate                                                                                                      |       | 135,187                               |       | 146,397 |   |
| Capital lease obligations                                                                                                                                  |       | 16,170                                |       | 15,498 |   |
| Company obligated mandatorily redeemable preferred  interest                                                                                               |       | 14,537                                |       | 16,483 |   |
| Deferred credit from technical services agreement                                                                                                          |       | 5,018                                 |       | 3,188 |   |
| Total liabilities                                                                                                                                          |       | 1,397,015                             |       | 1,246,727 |   |
| COMMITMENTS  AND CONTINGENCIES                                                                                                                             |       |                                  |       |   |   |
| STOCKHOLDERS’  DEFICIT:                                                                                                                               |       |                                  |       |   |   |
| Class A common stock, $.01 par value; 200,000,000 shares authorized;  74,117,654 shares issued and outstanding as of December 31, 2005 and  2006 |       | 741                                   |       | 741 |   |
| Class B common stock, $.01 par value; 120,000,000 shares  authorized; 30,670,422 shares issued and  outstanding as of December 31, 2005 and 2006 |       | 307                                   |       | 307 |   |
| Paid-in capital                                                                                                                                            |       | 1,423,815                             |       | 1,457,032 |   |
| Accumulated deficit                                                                                                                                        |       | (1,548,052                            | )          | (1,937,024 | ) |
| Total stockholders’ deficit                                                                                                                           |       | (123,189                              | )          | (478,944 | ) |
| Total liabilities and stockholders’ deficit                                                                                                           |       | $                                     | 1,273,826  |   | $ | 767,783 |   |

 

The accompanying notes are an integral part of these consolidated balance sheets.

F-7

----

**CROWN MEDIA HOLDINGS, INC. ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE LOSS(In thousands, except per share data)**

| ** **                                                                                                                  | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                  | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
| Revenue:                                                                                                                    |       |                                        |       |   |   |   |   |
| Subscriber  fees                                                                                                            |       | $                                           | 9,874      |   | $ | 18,746 |   | $ | 24,869 |   |
| Advertising                                                                                                                 |       | 104,481                                     |       | 143,780 |   | 172,950 |   |
| Advertising  by Hallmark Cards                                                                                              |       | 1,846                                       |       | 2,335 |   | 1,240 |   |
| Film  asset license fees                                                                                                    |       | 22,035                                      |       | 21,693 |   | 1,815 |   |
| Sublicense  fees and other revenue                                                                                          |       | —                                      |       | 10,830 |   | 305 |   |
| Total  revenue, net                                                                                                         |       | 138,236                                     |       | 197,384 |   | 201,179 |   |
| Cost of Services:                                                                                                           |       |                                        |       |   |   |   |   |
| Programming costs                                                                                                           |       |                                        |       |   |   |   |   |
| Affiliates                                                                                                                  |       | 11,820                                      |       | 14,924 |   | 27,080 |   |
| Non-affiliates                                                                                                              |       | 78,058                                      |       | 105,653 |   | 125,113 |   |
| Amortization  of film assets                                                                                                |       | 28,905                                      |       | 51,619 |   | 14,739 |   |
| Impairment  of film assets                                                                                                  |       | 22,003                                      |       | 25,542 |   | 225,832 |   |
| Subscriber  acquisition fee amortization expense                                                                            |       | 26,020                                      |       | 35,928 |   | 31,044 |   |
| Amortization  of capital lease                                                                                              |       | 96                                          |       | 1,158 |   | 1,157 |   |
| Other  costs of services                                                                                                    |       | 10,939                                      |       | 20,448 |   | 11,273 |   |
| Total  cost of services                                                                                                     |       | 177,841                                     |       | 255,272 |   | 436,238 |   |
| Selling,  general and administrative expense                                                                                |       | 52,209                                      |       | 55,162 |   | 43,761 |   |
| Marketing  expense                                                                                                          |       | 16,477                                      |       | 24,160 |   | 16,021 |   |
| Depreciation  and amortization expense                                                                                      |       | 6,306                                       |       | 4,471 |   | 2,865 |   |
| Gain  from sale of film assets                                                                                              |       | —                                      |       | — |   | (8,238 | ) |
| Loss  from operations before interest expense                                                                               |       | (114,597                                    | )          | (141,681 | ) | (289,468 | ) |
| Interest  income                                                                                                            |       | 1,513                                       |       | 2,883 |   | 2,352 |   |
| Interest  expense                                                                                                           |       | (61,692                                     | )          | (76,739 | ) | (101,287 | ) |
| Loss  before discontinued operations and cumulative effect of change in accounting  principle                               |       | (174,776                                    | )          | (215,537 | ) | (388,403 | ) |
| Loss  from discontinued operations, net of tax                                                                              |       | (142,030                                    | )          | (10,683 | ) | — |   |
| (Loss)  gain from sale of discontinued operations, net of tax                                                               |       | —                                      |       | (6,538 | ) | 1,530 |   |
| Loss  before cumulative effect of change in accounting principle                                                            |       | (316,806                                    | )          | (232,758 | ) | (386,873 | ) |
| Cumulative  effect of change in accounting principle                                                                        |       | —                                      |       | — |   | (2,099 | ) |
| Net  loss                                                                                                                   |       | $                                           | (316,806   | ) | $ | (232,758 | ) | $ | (388,972 | ) |
| Other comprehensive income  (loss):                                                                                         |       |                                        |       |   |   |   |   |
| Foreign  currency translation adjustment                                                                                    |       | 1,421                                       |       | (3,434 | ) | — |   |
| Comprehensive  loss                                                                                                         |       | $                                           | (315,385   | ) | $ | (236,192 | ) | $ | (388,972 | ) |
| Weighted  average number of Class A and Class B shares  outstanding, basic and diluted                            |       | 104,533                                     |       | 104,619 |   | 104,788 |   |
| Loss  per share before discontinued operations and cumulative  effect of change in accounting principle, basic  and diluted |       | $                                           | (1.67      | ) | $ | (2.06 | ) | $ | (3.71 | ) |
| (Loss)  gain per share from discontinued operations,  basic and diluted                                                     |       | (1.36                                       | )          | (0.16 | ) | 0.02 |   |
| Cumulative  effect of change in accounting principle,  basic and diluted                                                    |       | —                                      |       | — |   | (0.02 | ) |
| Net loss per share, basic and  diluted                                                                                      |       | $                                           | (3.03      | ) | $ | (2.22 | ) | $ | (3.71 | ) |

 

The accompanying notes are an integral part of these consolidated statements of operations and comprehensive loss.

F-8

----

**CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (In thousands)**

| ** **                                                                | ** ** | **Class A**  Shares | ** ** | **Class A**  Common  Stock | ** ** | **Class B**  Shares | ** ** | **Class B**  Common  Stock | ** ** | **Paid-in**  Capital | ** ** | **Accumulated**  Other  Comprehensive  Income (Loss) | ** ** | **Accumulated**  Deficit | ** ** | **Total**  Stockholders’  Equity (Deficit) | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------|------------|---------------------------------|------------|--------------------------|------------|---------------------------------|------------|----------------------|------------|-----------------------------------------------------------|------------|--------------------------|------------|------------------------------------------------------|------------|
| Balances, December 31,  2003                                         |       |                     | 73,863     |                            |       |                     | $          | 739                             |       |                 |       | 30,670                                                    |       |                     |       | $                                                    | 307        |   |   | $ | 1,308,880 |   |   | $ | 2,013 |   |   |   | $ | (998,488 | ) |   |   | $ | 313,451 |   |   |
| Stock-based compensation                                                  |       |                     | —     |                            |       |                     | —     |                            |       |                 | —     |                                                      |       |                     | —     |                                                 |       | 5 |   |   | — |   |   |   | — |   |   |   | 5 |   |   |
| Foreign currency translation  adjustment                                  |       |                     | —     |                            |       |                     | —     |                            |       |                 | —     |                                                      |       |                     | —     |                                                 |       | — |   |   | 1,421 |   |   |   | — |   |   |   | 1,421 |   |   |
| Contributions under affiliate  tax  sharing agreement                     |       |                     | —     |                            |       |                     | —     |                            |       |                 | —     |                                                      |       |                     | —     |                                                 |       | 56,565 |   |   | — |   |   |   | — |   |   |   | 56,565 |   |   |
| Net loss                                                                  |       |                     | —     |                            |       |                     | —     |                            |       |                 | —     |                                                      |       |                     | —     |                                                 |       | — |   |   | — |   |   |   | (316,806 | ) |   |   | (316,806 | ) |   |
| Balances, December 31,  2004                                         |       |                     | 73,863     |                            |       |                     | 739        |                            |       |                 | 30,670     |                                                      |       |                     | 307        |                                                 |       | 1,365,450 |   |   | 3,434 |   |   |   | (1,315,294 | ) |   |   | 54,636 |   |   |
| Issuance of stock for exercise  of  options                               |       |                     | 255        |                            |       |                     | 2          |                            |       |                 | —     |                                                      |       |                     | —     |                                                 |       | 2,149 |   |   | — |   |   |   | — |   |   |   | 2,151 |   |   |
| Stock-based compensation                                                  |       |                     | —     |                            |       |                     | —     |                            |       |                 | —     |                                                      |       |                     | —     |                                                 |       | 116 |   |   | — |   |   |   | — |   |   |   | 116 |   |   |
| Foreign currency translation  adjustment                                  |       |                     | —     |                            |       |                     | —     |                            |       |                 | —     |                                                      |       |                     | —     |                                                 |       | — |   |   | (3,434 | ) |   |   | — |   |   |   | (3,434 | ) |   |
| Contributions under affiliate  tax  sharing agreement                     |       |                     | —     |                            |       |                     | —     |                            |       |                 | —     |                                                      |       |                     | —     |                                                 |       | 56,100 |   |   | — |   |   |   | — |   |   |   | 56,100 |   |   |
| Net loss                                                                  |       |                     | —     |                            |       |                     | —     |                            |       |                 | —     |                                                      |       |                     | —     |                                                 |       | — |   |   | — |   |   |   | (232,758 | ) |   |   | (232,758 | ) |   |
| Balances, December 31,  2005                                         |       |                     | 74,118     |                            |       |                     | 741        |                            |       |                 | 30,670     |                                                      |       |                     | 307        |                                                 |       | 1,423,815 |   |   | $ | — |   |   |   | (1,548,052 | ) |   |   | (123,189 | ) |   |
| Payment by Hallmark Cards  on  note payable  to Hallmark Cards  affiliate |       |                     | —     |                            |       |                     | —     |                            |       |                 | -—    |                                                      |       |                     | -—    |                                                 |       | 3,111 |   |   | -— |   |   |   | -— |   |   |   | 3,111 |   |   |
| Proceeds from the 2005 issuance  of  stock for exercise of options        |       |                     | —     |                            |       |                     | —     |                            |       |                 | —     |                                                      |       |                     | —     |                                                 |       | 114 |   |   | — |   |   |   | — |   |   |   | 114 |   |   |
| Stock-based compensation                                                  |       |                     | —     |                            |       |                     | —     |                            |       |                 | —     |                                                      |       |                     | —     |                                                 |       | 11 |   |   | — |   |   |   | — |   |   |   | 11 |   |   |
| Contributions under affiliate  tax  sharing agreement                     |       |                     | —     |                            |       |                     | —     |                            |       |                 | —     |                                                      |       |                     | —     |                                                 |       | 29,981 |   |   | — |   |   |   | — |   |   |   | 29,981 |   |   |
| Net loss                                                                  |       |                     | —     |                            |       |                     | —     |                            |       |                 | —     |                                                      |       |                     | —     |                                                 |       | — |   |   | — |   |   |   | (388,972 | ) |   |   | (388,972 | ) |   |
| Balances, December 31, 2006                                          |       |                     | 74,118     |                            |       |                     | $          | 741                             |       |                 |       | 30,670                                                    |       |                     |       | $                                                    | 307        |   |   | $ | 1,457,032 |   |   | $ | — |   |   |   | $ | (1,937,024 | ) |   |   | $ | (478,944 | ) |   |

 

The accompanying notes are an integral part of these consolidated statements of stockholders’ equity (deficit).

F-9

----

**CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)**

| ** **                                                                      | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                      | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                          | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                                                        |       | $                                           | (316,806   | ) | $ | (232,758 | ) | $ | (388,972 | ) |
| Adjustments to reconcile net loss to net cash used in  operating activities:    |       |                                        |       |   |   |   |   |
| Loss from discontinued operations                                               |       | 142,030                                     |       | 10,683 |   | — |   |
| Loss (gain) from sale of  discontinued operations                               |       | —                                      |       | 6,538 |   | (1,530 | ) |
| Gain from sale of film assets                                                   |       | —                                      |       | — |   | (8,238 | ) |
| Depreciation and amortization                                                   |       | 166,008                                     |       | 225,565 |   | 209,589 |   |
| Accretion on company obligated  mandatorily redeemable preferred interest       |       | 2,409                                       |       | 3,049 |   | 1,946 |   |
| Provision for allowance for  doubtful accounts                                  |       | 171                                         |       | 8,972 |   | (261 | ) |
| Cumulative effect of change in  accounting principle                            |       | —                                      |       | — |   | 2,099 |   |
| Impairment of film assets                                                       |       | 22,003                                      |       | 25,543 |   | 225,832 |   |
| (Gain) loss on sale of property  and equipment                                  |       | —                                      |       | (24 | ) | 207 |   |
| Stock-based compensation                                                        |       | 11,488                                      |       | 8,571 |   | (3,071 | ) |
| Changes in operating assets and liabilities:                                    |       |                                        |       |   |   |   |   |
| (Increase) decrease in accounts  receivable                                     |       | (11,311                                     | )          | (18,727 | ) | 8,354 |   |
| (Increase) decrease in receivable  from buyer of international business         |       | —                                      |       | (1,308 | ) | 398 |   |
| Additions to program license  fees                                              |       | (160,593                                    | )          | (189,607 | ) | (96,197 | ) |
| Additions to subscriber  acquisition fees                                       |       | (45,070                                     | )          | (8,554 | ) | (850 | ) |
| (Increase) decrease in prepaid  and other assets                                |       | (3,991                                      | )          | (40,771 | ) | 21,640 |   |
| Increase (decrease) in accounts  payable, accrued and other liabilities         |       | 106,348                                     |       | 41,169 |   | (70,292 | ) |
| Increase in interest payable                                                    |       | 47,283                                      |       | 56,090 |   | 75,098 |   |
| Increase (decrease) in  subscriber acquisition fees payable                     |       | 25,908                                      |       | (23,662 | ) | (10,167 | ) |
| Increase (decrease) in license  fees payable to affiliates                      |       | (291                                        | )          | 3,316 |   | (1,041 | ) |
| Increase (decrease) in payables  to affiliates                                  |       | (932                                        | )          | 3,447 |   | 1,705 |   |
| Increase (decrease) in deferred  revenues                                       |       | 148                                         |       | 542 |   | (310 | ) |
| Net cash used in operating activities                                           |       | (15,198                                     | )          | (121,926 | ) | (34,061 | ) |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                          |       |                                        |       |   |   |   |   |
| Purchases of property and  equipment                                            |       | (878                                        | )          | (504 | ) | (713 | ) |
| Payments to buyer of  international business                                    |       | —                                      |       | (8,358 | ) | (8,420 | ) |
| Proceeds from disposition of  international business, net of funds transfer fee |       | —                                      |       | 221,979 |   | — |   |
| Proceeds from disposition of  film assets, net                                  |       | —                                      |       | — |   | 152,116 |   |
| Proceeds from disposition of  property and equipment                            |       | —                                      |       | 25 |   | — |   |
| Net cash provided by (used in)  investing activities.                           |       | (878                                        | )          | 213,142 |   | 142,983 |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                          |       |                                        |       |   |   |   |   |
| Proceeds from the issuance of  common stock upon exercise of stock options      |       | —                                      |       | 2,151 |   | 114 |   |
| Proceeds from tax sharing  agreement with Hallmark Cards                        |       | 56,565                                      |       | 26,100 |   | 11,982 |   |
| Borrowings under the credit  facility                                           |       | 15,000                                      |       | 95,000 |   | 15,000 |   |
| Payments on the credit facility                                                 |       | (5,000                                      | )          | (195,000 | ) | (137,367 | ) |
| Principal payments on capital  lease obligations                                |       | —                                      |       | (580 | ) | (612 | ) |
| Net cash provided by (used in)  financing activities                            |       | 66,565                                      |       | (72,329 | ) | (110,883 | ) |
| CASH  FLOWS FROM DISCONTINUED OPERATIONS:                                       |       |                                        |       |   |   |   |   |
| Net cash used in discontinued  operating activities                             |       | (40,376                                     | )          | (15,326 | ) | — |   |
| Net cash used in discontinued  investing activities                             |       | (811                                        | )          | (60 | ) | — |   |
| Net cash used in discontinued  financing activities                             |       | (1,559                                      | )          | (411 | ) | — |   |
| Effect of exchange rate changes  on cash                                        |       | 53                                          |       | 734 |   | — |   |
| Net cash used in discontinued  operations                                       |       | (42,693                                     | )          | (15,063 | ) | — |   |
| Net (decrease) increase in cash  and cash equivalents                           |       | 7,796                                       |       | 3,824 |   | (1,961 | ) |
| Cash and cash equivalents,  beginning of year                                   |       | 4,306                                       |       | 12,102 |   | 15,926 |   |
| Cash and cash equivalents, end of year                                          |       | $                                           | 12,102     |   | $ | 15,926 |   | $ | 13,965 |   |

 

The accompanying notes are an integral part of these consolidated statements of cash flows.

F-10

----

**CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (In thousands)**

 

| ** **                                                                                   | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Supplemental disclosure of cash and non-cash activities:                                     |       |     |       |     |       |     |       |
| Interest paid                                                                                |       | $        | 14,621     |     | $          | 15,311   |       | $ | 18,704 |   |
| Income taxes paid                                                                            |       | $        | 2,288      |     | $          | 857      |       | $ | 4 |   |
| Asset acquired through capital  lease obligation                                             |       | $        | 17,363     |     | $          | —   |       | $ | — |   |
| License fees payable converted  into note payable to Hallmark Cards affiliate                |       | $        | —     |     | $          | 132,785  |       | $ | — |   |
| Tax sharing payment from  Hallmark Cards applied to note payable to Hallmark Cards affiliate |       | $        | —     |     | $          | 30,000   |       | $ | 17,999 |   |
| Payment by Hallmark Cards on  note payable to Hallmark Cards affiliate                       |       | $        | —     |     | $          | —   |       | $ | 3,111 |   |
| Interest payable converted to  principal on line of credit to HC Crown                       |       | $        | —     |     | $          | —   |       | $ | 12,712 |   |
| Interest payable converted to  principal on note payable to Hallmark Cards affiliate         |       | $        | —     |     | $          | —   |       | $ | 4,628 |   |
| Payable to buyer of  international business                                                  |       | $        | —     |     | $          | 26,803   |       | $ | — |   |
| Deferred credit from technical services agreement                                            |       | $        | —     |     | $          | 7,644    |       | $ | — |   |

 

The accompanying notes are an integral part of these consolidated statements of cash flows.

F-11

----

**CROWN MEDIA HOLDINGS, INC. ANDSUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the Years Ended December 31, 2004,2005 and 2006**

**1.**                 Business and Organization

***Organization***

CrownMedia Holdings, Inc. (“Crown Media Holdings,” “Crown Media” or the “Company”),through its wholly-owned subsidiary, Crown Media United States, LLC (“CrownMedia United States”), owns and operates pay television channels (collectivelythe “Hallmark Channel” or the “channel”) dedicated to high quality,entertainment programming for adults and families, in the United States.Significant investors in Crown Media Holdings include Hallmark EntertainmentInvestments Co. (“Hallmark Entertainment Investments”), a subsidiary ofHallmark Cards, Incorporated (“Hallmark Cards”), the National Interfaith CableCoalition, Inc. (“NICC”), and, indirectly through their investments inHallmark Entertainment Investments, Liberty Media Corporation (“Liberty Media”)and J.P. Morgan Partners (BHCA), L. P. (“J.P. Morgan”).

***Sale of Membership Interests in Crown MediaDistribution***

On December 15, 2006, the Company completed thesale of its domestic rights and certain international ancillary rights to itslibrary of approximately 620 television movies, mini-series and series (the “CrownLibrary”) to RHI Entertainment LLC (“RHI”) pursuant to a Purchase and SaleAgreement dated October 4, 2006 (the “Purchase Agreement”). (The originalparty to the Purchase Agreement, RHI Enterprises, LLC, assigned its rights andobligations to RHI Entertainment, LLC, prior to the closing.) As part of thetransaction, the Company sold to RHI its membership interests in Crown MediaDistribution, LLC (“Crown Media Distribution”), the entity which owns the CrownLibrary. The sale price of $160.0 million provided for in the PurchaseAgreement was subject to reduction by the amount by which Crown MediaDistribution accounts receivable at April 30, 2006 exceeded accountsreceivable at the closing date. This closing adjustment yielded a net purchaseprice of $152.1 million. Proceeds from this sale were used by the Company inpart to reduce outstanding indebtedness under its bank credit facility with JPMorgan Chase by the amount of $133.9 million.

The assets sold to RHI include all accounts receivableand rights and obligations under existing domestic and international licensesto which Crown Media Distribution is a party, as well as the copyrightinterests in the Crown Library films, interests in the underlying productionagreements and physical film materials. The Company has retained the obligationto pay residuals and profit participations based on the domestic exploitationof the Crown Library by RHI for a period of ten years following the closing ofthe sale. Pursuant to Amendment No. 1 to the Purchase Agreement dated December 15,2006, the parties agreed that RHI will assume any liabilities associated withsuch residuals and participations in excess of $22.5 million in the aggregate. Thecost to the Company of paying these residuals will depend on the level of RHI’slibrary sales during this period. The Company estimated the fair value of the$22.5 million maximum liability to be approximately $10.6 million, which isincluded in long-term accrued liabilities on the accompanying consolidatedbalance sheet, to pay the estimated residual and participation costs that RHIwould otherwise be obligated to pay to third parties. The amount of thisliability could fluctuate based upon the amount and timing of the sales ofthese films by the buyer. Any revisions to these estimated liabilities will bereflected as gain (loss) from the sale of the film assets and reflected incontinuing operations in future periods. During 2006, the Company recorded an$8.2 million gain related to the sale of the membership interests in CrownMedia Distribution, which is recorded as a component of loss from continuingoperations in the accompanying statement of operations.

F-12

----

As a closing condition, the Company terminated a CrownLibrary license agreement of May 2006 with a major studio. Under the termsof that license agreement, the Company refunded a $6.0 milliondistribution advance upon termination of the license agreement.

The agreement provided the Company with non-exclusivelicenses for 83 film titles back from RHI, substantially all of which expire inDecember 2008. Management ascribed a fair value of $10.9 million to theinternal usage of these titles and recorded the $10.9 million as programlicense fees—non-affiliates. In order to ascribe a fair value to the specifictitles, management applied an hourly rate based on the Company’s film ratecard, which has been utilized throughout the current year for the pricing oflicenses to third parties.

The Company has otherexisting agreements with RHI and one of its subsidiaries. One of theseagreements is a film asset service agreement under which RHI provided servicesto Crown Media Distribution related to the administration, distribution andother exploitation of the Crown Library. This agreement was terminated uponclosing of the transaction. The Company also licenses programming fordistribution in the United States from RHI Entertainment Distribution LLC andhas done so since 1998.

***Sale of the International Business***

In April 2005, the Company completed the saleof  its international business to a group of investors comprised of EquityPartners, 3i and U.K. executive David Elstein (collectively, “Sparrowhawk,” the“buyer” or the “buyer of  international business”). The sale included theinternational versions of the Hallmark Channel distributed outside the UnitedStates, the international rights to over 580 titles in the Crown Media filmlibrary, and the Network Operations Center based in Denver, Colorado. TheCompany received cash proceeds of $209.3 million, net of the prepaymentdescribed below, and recognized an accounting loss of $6.5 million from thesale. Approximately $4.7 million of transaction costs were incurred by theCompany in connection with the sale.

In accordance with the conditions of the sale, theCompany accrued $26.8 million which represented the estimated present value atthe time of the sale of the cash that was expected to be paid by the Company toor on behalf of the buyer at various times through December 31, 2015. Includedin this amount was $16.7 million of estimated payments, which were determinedusing the contractual payments due on certain lease arrangements that wereassumed by the buyer. The Company is obligated to reimburse the buyer for theselease payments at or about the same time the buyer is obligated to pay thelessor. Also, the Company estimated a liability of approximately $4.5 millionto pay the estimated residual and participation costs that the buyer wouldotherwise be obligated to pay to third parties through April 2015 inconnection with film library sales. The amount of this liability couldfluctuate based upon the actual internal usage or sales of these films by thebuyer. Any revisions to these estimated liabilities will be reflected as gain(loss) from the sale of discontinued operations in future periods.

In the fourth quarter of 2005, the Company recordedcharges of $4.6 million to recognize additional costs for the settlement ofcertain disputed items and claims of the buyer. These charges included $3.4million related to the interpretation of working capital representations usedin determining the original sales price and $0.9 million related to disputedoperating costs incurred at the time of the closing date of the sale. During2006, the Company recorded a $1.5 million gain related to the sale of theinternational business. The Company adjusted its estimated residual andparticipation costs based upon current information and reversed charges for anaccrual for certain tax liabilities.

The Company will continue to use the NetworkOperations Center sold to Sparrowhawk for the distribution of the domesticchannel pursuant to a $25.3 million, seven year technical services agreementwith the buyer. The Company made a prepayment under the technical servicesagreement to the buyer in the amount of $12.7 million upon closing of the saletransaction and the balance is payable monthly in equal installments throughthe expiration of the agreement. The unused portion of the prepayment is 

F-13

----

classified as Prepaid andOther Assets in the accompanying condensed consolidated balance sheet and willbe amortized to operating expense over the life of the contract. A deferredcredit of $7.6 million was recorded to reflect the amount by which the $25.3million contract exceeded the estimated fair value of the related services. Thedeferred credit will be amortized over the life of the contract, resulting in areduction of operating expenses in future periods.

Subsequent to the sale,the Company has no continuing economic involvement with the operations of theinternational business.

***Liquidity***

As of December 31, 2006, the Company had $14.0million in cash and cash equivalents on hand. As of December 31, 2006, theCompany had borrowed $87.6 million from a $130.0 million revolving bank credit,which matures May 31, 2008.

The Company’s principal sources of funds are cash onhand, cash generated by operations, tax sharing payments from Hallmark Cardsand amounts available under the Company’s revolving bank credit facility.Payments under the tax sharing agreement are affected by Hallmark Cards’ tax positionand its ability to utilize the Company’s tax losses. The Company received $12.0million in tax sharing payments in 2006 and does not currently expect toreceive tax sharing payments during 2007. The Company currently has $42.4million of unused revolving credit capacity. The Company’s ability to borrowadditional amounts under the credit facility is not limited or restricted aslong as no covenants have been violated.

The ability of the existing sources of liquidity to besufficient to fund the Company’s operations depends upon continued growth insubscriber revenue and advertising revenue. Any decline in the popularity ofthe Hallmark Channel, any significant future modifications to the Company’sdistribution agreements, an economic decline in the advertising market, anincrease in program acquisition costs, an increase in competition or otheradverse operating conditions would impact the Company’s liquidity and itsability to fund the current level of operations

The Company expects to continue making investments inprogramming, marketing and distribution. However, the Company’s recurring losssituation has demanded that all areas of expenses, including programming,marketing and distribution be closely monitored and controlled.

The Company anticipates that its principal uses offunds for 2007 will continue to include the payment of operating expenses,accounts payable and accrued expenses, license fees for programming, andinterest under its bank credit facility.

As part of efforts to improve the capital structure,in 2006 the Company sold its membership interests in Crown Media Distributionas described in “Sale of Membership Interests in Crown Media Distribution”above.

The Company currently believes that cash on hand, cashgenerated by operations and availability on its bank credit facility, whencombined with the deferral of any required payments on related-party debt andrelated interest mentioned below, will be sufficient to fund the Company’soperations and meet its liquidity needs through May 31, 2008.

The Company’s bank credit facility matures on May 31,2008.  The Company significantly reducedthe amounts outstanding under the credit facility with the proceeds of the saleof its membership interests in Crown Media Distribution. In conjunction withthese repayments on the credit facility, the Company reduced the borrowingcapacity under the credit facility to $130.0 million. The Company intends toextend or refinance the Bank credit facility prior to or upon its maturity. Anysuch extension or refinancing might require a continuation of a letter ofcredit from Hallmark Cards or other steps by the Company and is not assured.

F-14

----

If the Company is not able to arrange for theextension, refinancing or replacement of the bank credit facility prior to itsmaturity and the bank draws down on the irrevocable letter of credit providedby Hallmark Cards in support of the bank credit facility, or alternativelyHallmark Cards purchases the interests of the lending banks, Hallmark Cardswould have all obligations and the rights of the lending banks under the bankcredit facility. In that event, Hallmark Cards could demand payment ofoutstanding amounts at any time after May 31, 2008, under the terms of thewaiver and standby purchase agreement (“Waiver Agreement”) described below.

Uponmaturity of the credit facility on May 31, 2008, the lending group led byJP Morgan Chase has the right to elect to forego the receipt of cash to pay theprincipal amount of the credit facility in full, which is provided for under theterms of an irrevocable letter of credit provided by Hallmark Cards, but instead can elect toinitiate a process to foreclose on the Company’s assets. Suchforeclosure proceedings, would adversely affect our ability to continue ouroperations. Prior to any such possible foreclosure proceedings, however, theCompany, if it has not secured an extension of the credit facility oralternative financing, would cause Hallmark Cards pursuant to the terms of theWaiver Agreement to exercise its option to purchase all of the outstandingindebtedness under the credit facility and the credit facility would then besubject to terms of the Waiver Agreement.

Due to the Company’spossible inability to meet its obligations when they come due on May 31,2008, the Company anticipates that prior to May 31, 2008, it will benecessary to either extend or refinance (i) the bank credit facility and (ii) thepromissory notes payable to affiliates of Hallmark Cards described in the Notesbelow. As part of a combination of actions and in order to obtain additionalfunding, the Company may consider various alternatives, including refinancingthe bank credit facility, raising additional capital through the issuance ofequity or debt securities, a sale of certain assets or other strategicalternatives.

**2.**                Summary of Significant Accounting Policies andEstimates

***Basis of Presentation***

The consolidated financialstatements include the consolidated accounts of Crown Media Holdings, includingthose of its wholly owned subsidiaries. All significant intercompany balancesand transactions have been eliminated in consolidation.

In April 2005, the Companycompleted the sale of its international business and, accordingly, classifiedthe operating results of the international business as discontinued operationsin the accompanying statements of operations for all periods presented. TheCompany’s discontinued operations consisted of the international channeloperations and the international rights to the film library assets.

In December 2006,the Company completed the sale of the domestic rights to the film libraryassets. The accompanying statements of operations and cash flows do not reflectassociated revenue and expenses as discontinued operations because the portionsof advertising revenue and related cash collections that are derived from theCompany’s use of the film library assets to meet programming requirements ofthe Channel cannot be clearly distinguished from advertising revenue and cashcollections derived from the use of programming licensed from third parties.

***Use of Estimates***

The Company’s consolidatedfinancial statements are prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”). These accountingprinciples require the Company to make certain estimates, judgments andassumptions. The Company believes that the estimates, judgments and assumptionsmade when accounting for items and matters such as customer retention patterns,allowance for bad debts, useful lives of assets, ultimate revenue used in thefilm asset 

F-15

----

amortizationcalculations, cash flow projections used in various asset valuations, incometaxes, reserves and other provisions for contingencies are reasonable, based oninformation available at the time they are made. These estimates, judgments andassumptions can affect the reported amounts of assets and liabilities as of thedate of the consolidated financial statements, as well as the reported amountsof revenue and expenses during the periods presented. Actual results could differfrom these estimates.

***Film Asset Amortization and Film Library Impairment***

The Company amortized its film assets using theindividual-film-forecast-computation method over a maximum period of 9.25 yearsfrom the date of acquisition. The individual-film-forecast-computation methodamortizes such assets in the same ratio that current period actual revenuebears to estimated ultimate future revenues.

The Company reviewed its estimates of ultimate futurerevenues and participation costs on a quarterly basis to reflect currentlyavailable information. Estimated ultimate future revenues were based on thehistory of each film and similar films, sales and marketing plans, and otherfactors, all of which required significant judgment and estimation by management.Differences between amortization expense determined using the new estimates andany amounts previously expensed during that current fiscal year were charged orcredited to the statement of operations in the period in which the estimateswere revised.

For use of the film assets on the Hallmark Channel andthe Hallmark Movie Channel, the Company estimated the fair value of theinternal usage based upon the portion of the film’s ultimate revenuesattributable to the term of the license window. The Company first calculatedthe amount of cost attributable to the internal use using theindividual-film-forecast-computation method described above and then expensedsuch amounts ratably over the term of the license window.

On a quarterly basis, theCompany assessed whether events or circumstances had changed indicating thatthe fair value of a film was lower than its unamortized cost or carrying value.If the carrying value of any individual film asset exceeded its fair value, thefilm asset was written-down to its estimated fair value. The Company consideredthe following factors, among others, in estimating cash flows and fair valuesfor each film:  (a) the operatingenvironment expected for the next several years, (b) the size of thelibrary as a whole, (c) historical license fee revenue per film, (d) eachtitle’s age, quality, and marketability, (e) existing sales plansincluding the amount of product desired to be sold each year, (f) futureperformance estimates, (g) assumptions and estimates underlying past andfuture estimates, (h) risk factors that could effect future operations ofthe Library and *(i) *offers from potentialbuyers of the film assets. In estimating a film’s fair value, the Companyconsidered those cash outflows necessary to generate the film’s cash inflowssuch as exploitation, residual and participation costs and taxes. The discountrate used in the Company’s discounted cash flow model was based upon management’sestimate of the rate a purchaser would require related to the risks anduncertainties surrounding the timing and probability of the cash flowestimates.

***Cash and Cash Equivalents***

Cash and cash equivalentsinclude highly liquid investments with original maturities of three monthsor less that are readily convertible into cash and are not subject tosignificant risk from fluctuations in interest rates. As a result, the carryingamount of cash and cash equivalents approximates fair value.

***Allowance for Doubtful Accounts***

The allowance for doubtfulaccounts is based upon the Company’s assessment of probable loss related touncollectible accounts receivable. The Company uses a number of factors indetermining the allowance, including, among other things, collection trends.The Company’s bad debt expense was $171,000 and $9.0 million for the yearsended December 31, 2004 and 2005, respectively. The Company’s bad debtprovision was $261,000 for the year ended December 31, 2006.

F-16

----

The activity in the allowance for doubtful accounts foreach of the three years ending December 31, 2004, 2005, and 2006, is asfollows:

| ** **                             | ** ** | **Balance at**

**Beginning of**

**Year** | ** ** | **Additions**

**Charged to**

**Expense** | ** ** | **Deductions (including**

**transfers to buyers of**

**international business**

**and film assets)** | ** ** | **Balance at End**

**of Year** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ***Allowance  for doubtful accounts*** |       |                                                 |       |                                            |       |                                                                                                                                       |       |                                           |       |   |   |   |   |   |   |   |   |
| Year-ended  December 31, 2004     |       |                                                 | $          | 6,703                                           |       |                                                                                                                                       |       | $                                              | 1,297      | (1) |   |   | $ | (1,305 | ) |   |   | $ | 6,695 |   |   |
| Year-ended  December 31, 2005     |       |                                                 | $          | 6,695                                           |       |                                                                                                                                       |       | $                                              | 8,972      |   |   |   | $ | (14,102 | )(2) |   |   | $ | 1,565 |   |   |
| Year-ended  December 31, 2006     |       |                                                 | $          | 1,565                                           |       |                                                                                                                                       |       | $                                              | (261       | ) |   |   | $ | (1,058 | )(3) |   |   | $ | 246 |   |   |

 

----

(1)          Includes$1.1 million of bad debt expense now classified in discontinued operations.

(2)          Representsamounts written off of $9.7 million and $4.4 million transferred to buyer ofinternational business.

(3)          Represents amounts written off of $432,000 and $626,000 transferred tobuyer of film assets.

***Program License Fees***

Programlicense fees are paid in connection with the acquisition of the rights to airprograms acquired from others. The cost of program rights are deferred and thenamortized on a straight-line basis over the shorter of their contractuallicense periods or anticipated usage. On a quarterly basis, the Companyevaluates the realizability of these deferred license fees in relation to theestimated future revenues. Estimates of net realizable value for programlicense fees are determined using future estimated advertising revenues andanticipated patterns of programming usage on a day part basis as it pertains toprogramming licensed to the channel. These estimates of expected annual futureestimated revenues are compared to net book value of the program license feeassets to determine if the programming assets are expected to be recovered.Where the analysis indicates the costs are in excess of the estimated netrealizable value, additional programming costs are recognized for thedifference.

***Subscriber Acquisition Fees***

Subscriber acquisition fees aregenerally required to be paid to obtain carriage on major domestic paydistributors systems. Under certain of these agreements with major paydistributors, Crown Media United States is obligated to pay subscriberacquisition fees if defined subscriber levels are met or in order to obtainadditional carriage of the Hallmark Channel by those pay distributors. Suchcosts are accrued when Crown Media United States receives notice from thedistributors that they have met the contractual penetration percentage orsubscriber count.

Subscriberacquisition fees are amortized over the contractual life of the distributionagreements (ranging from 4 to 9 years) as a reduction of subscriber fee revenue. If the amortization expenseexceeds the cumulative subscriber fee revenue recognized, or to be recognized,on a per distributor basis, the excess amortization is included as a componentof cost of services. Crown Media Holdings assesses the recoverability of thesecosts periodically by comparing the net carrying amount to the estimates offuture subscriber fee and advertising revenues. It also assesses therecoverability when events such as changes in distributor relationships occuror other indicators suggest impairment.

***Property and Equipment***

Property and equipment arestated at historical cost. Equipment under capital leases are initiallyrecorded at the present value of the minimum lease payments.

F-17

----

Depreciation on equipment iscalculated using the straight-line method over the estimated useful lives ofthe assets. Equipment held under capital leases and leasehold improvements areamortized straight-line over the shorter of the lease term or estimated usefullife of the asset.

Whenproperty and equipment is sold or otherwise disposed of, the cost and relatedaccumulated depreciation or amortization are removed from the accounts and anyresulting gain or loss is included in income. The costs of normal maintenanceand repairs are charged to expense when incurred.

***Long-Lived Assets***

The Company reviews long-lived assets, other thangoodwill and other intangible assets with indefinite lives, for impairmentwhenever facts and circumstances indicate that the carrying amounts of the assetsmay not be recoverable. An impairment loss is recognized if the carrying amountof the asset is not recoverable and exceeds its fair value. Recoverability ofassets to be held and used is measured by comparing the carrying amount of anasset to the estimated undiscounted future net cash flows expected to begenerated by the asset. If the asset’s carrying value is not recoverable, animpairment charge is recognized for the amount by which the carrying amount ofthe asset exceeds its fair value. The Company determines fair values by using acombination of comparable market values and discounted cash flows, asappropriate.

Goodwill is reviewed forimpairment annually on November 30 or whenever an event occurs or there isa change in circumstances that indicates fair value might be below carryingvalue. Goodwill is carried at historical cost if the estimated fair value isgreater than the carrying amounts. However, if estimated fair value is lessthan the carrying amount, goodwill is reduced to estimated fair value throughan impairment charge to the Company’s consolidated statements of operations.

***Revenue Recognition***

Subscriber revenue from paytelevision distributors is recognized as revenue when an agreement is executed,programming is provided, the price is determinable, and collectibility isreasonably assured. Subscriber fees from pay television distributors arerecorded net of amortization of subscriber acquisition costs in accordance withEmerging Issues Task Force No. 01-9 (“EITF No. 01-9”), *Accounting for Consideration Given by a Vendor to a Customer (Includinga Reseller of the Vendor’s Products)*. If the amortization expenseexceeds the revenue recognized on a cumulative per distributor basis, theexcess amortization is included as a component of cost of services.

Advertising revenues arerecognized as earned in the period in which the advertising is telecast.Revenue is recognized as commercial spots or long form programming are airedand as ratings guarantees to advertisers are achieved. Advertising revenues arerecorded net of agency commissions. Agency commissions are calculatedbased on a stated percentage applied to gross billing revenue for the Company’sbroadcasting operations. Customers remit the gross billing amount to the agencyand the agency remits gross billings less their commission to the Company.Payments received in advance of being earned are recorded as deferred revenue.

Revenuefrom film asset licensing agreements is recognized in accordance with Statementof Position (“SOP”) 00-2,*Accountingby Producers or Distributors of Films*. Revenues are recognized whenall of the following have occurred:  anagreement is executed, the film is available for exhibition by the licensee,the license fee is fixed or determinable, collectibility is reasonably assuredand the cost of each film is known or reasonably determinable. Revenue fromfilm asset licensing agreements containing multiple film titles is allocatedamong the various film titles based on their relative estimated fair values.Payments received from licensees prior to the availability of a film arerecorded as deferred revenue. Fees payable with terms in excess of one year arediscounted for revenue recognition purposes at the customer’s estimated 

F-18

----

incremental borrowing rate in accordance with AccountingPrinciples Board (“APB”) Opinion No. 21, *Interest onReceivables and Payables.*

***Taxes on Income***

Pursuantto the tax sharing agreement entered into with Hallmark Cards in March 2003,the Company’s results of operations for tax purposes became a part of theHallmark Cards consolidated federal tax return as of and subsequent to March 2003.However, the Company continues to account for income taxes on a separate returnbasis. Accordingly, the Company accounts for income taxes using an asset andliability method which requires the recognition of deferred tax assets andliabilities for the expected future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases and net operating loss and taxcredit carryforwards. Deferred tax assets and liabilities are measured usingenacted tax rates expected to be applied to taxable income in the years inwhich those temporary differences are expected to be recovered or settled. TheCompany reduces deferred tax assets by a valuation allowance if it is morelikely than not that some portion or all of the deferred tax assets will not berealized. Any payments received from Hallmark Cards under the taxsharing agreement are recorded as  anincrease in additional paid-in capital. Basedon the tax sharing agreement, the Company may ultimately owe Hallmark Cards forits share of the consolidated federal tax liability caused by the inclusion ofthe Company in the consolidated group. Such payments would be treated as areduction to paid-in capital to the extent of amounts previously received underthe Tax Sharing Agreement.

***Stock-Based Compensation***

During the first quarter of fiscal 2006, we adoptedthe provisions of, and account for stock-based compensation in accordance with,the Financial Accounting Standards Board’s (“FASB”) Statement of FinancialAccounting Standards No. 123—revised 2004 (“SFAS 123R”), *Share-Based Payment,* which replaced Statement of FinancialAccounting Standards No. 123 (“SFAS 123”), *Accountingfor Stock-Based Compensation,* and supersedes APB Opinion No. 25(“APB 25”), *Accounting for Stock Issued to Employees*.Under the fair value recognition provisions of this statement, stock-basedcompensation cost is measured at the grant date based on the fair value of theaward and is recognized as expense on a straight-line basis over the periodduring which the holder is required to provide services in exchange for theaward, i.e., usually the vesting period. We elected the modified-prospectivemethod, under which prior periods are not revised for comparative purposes. Thevaluation provisions of SFAS 123R apply to new grants and to grants that wereoutstanding as of the effective date and are subsequently modified. Estimatedcompensation for grants that were outstanding as of the effective date isrecognized over the remaining service period using the compensation costestimated for the SFAS 123 pro forma disclosures.

In connection with the adoption of SFAS 123R, werecorded a cumulative catch-up adjustmentof $2.1 million related to restricted stock units (“RSUs”) granted under theAmended and Restated Crown Media Holdings, Inc. 2000 Long Term IncentivePlan (the “Plan”). See Note 18 for further information regarding ourstock-based compensation assumptions and expenses.

F-19

----

The following table setsforth the pro forma amounts of net loss and net loss per share, for the yearsended December 31, 2004 and 2005, that would have resulted if we hadaccounted for our employee stock options under the fair value recognitionprovisions of SFAS 123:

**ProForma Effects(In thousands, except per share amounts)**

| ** **                                                     | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                     | ** ** | **2004**                                    | ** ** | **2005** | ** ** |
| Net  loss                                                      |       | $                                           | (316,806   | ) | $ | (232,758 | ) |
| Pro  forma stock compensation expense at  estimated fair value |       | (2,644                                      | )          | (1,056 | ) |
| Stock  compensation expense included in net loss               |       | 5                                           |       | 116 |   |
| Pro  forma net loss                                            |       | $                                           | (319,445   | ) | $ | (233,698 | ) |
| Weighted  average shares                                       |       | 104,533                                     |       | 104,619 |   |
| Pro  forma net loss per share, basic and diluted               |       | $                                           | (3.06      | ) | $ | (2.23 | ) |

 

***Net Loss Per Share***

Basicnet loss per share is computed by dividing the net loss for the period by theweighted average number of common shares outstanding during the period. Dilutednet loss per share is computed based on the weighted average number of commonshares and potentially dilutive common shares outstanding. The calculation ofdiluted net loss per share excludes potential common shares if the effect wouldbe antidilutive. Potential common shares consist of incremental common shares issuableupon the exercise of stock options. Approximately 1.4 million, 867,000, and810,000 stock options for the years ended December 31, 2004, 2005, and2006, respectively, have been excluded from the calculations of loss per sharebecause their effect would have been antidilutive.

***Translation of Foreign Currency***

ThroughApril 26, 2005, the balance sheets and statements of operations andcomprehensive loss of certain Crown Media Holdings’ foreign subsidiaries weremeasured using local currency as the functional currency. Revenues, expensesand cash flows of such subsidiaries were translated into United States dollarsat the average exchange rates prevailing during the period. Assets andliabilities were translated at the rates of exchange at the balance sheet date.Translation gains and losses were deferred as a component of accumulated othercomprehensive income (loss). Foreign currency transaction gains and lossesrecorded upon the remeasurement of financial assets and liabilities denominatedin currencies other than the functional currency of the subsidiary wereincluded in determining net loss for the period. In conjunction with the saleof the international business, the cumulative foreign currency translation gainof approximately $3.4 million was realized as a component of the loss on saleof discontinued operations in the accompanying consolidated statement ofoperations.

***Concentration of Credit Risk***

Financial instruments, which potentially subject CrownMedia Holdings to a concentration of credit risk, consist primarily of cash,cash equivalents and accounts receivable. Generally, Crown Media Holdings doesnot require collateral to secure receivables. Crown Media Holdings has nosignificant off-balance sheet financial instruments with risk of accountinglosses.

F-20

----

***Reclassifications***

Certainreclassifications have been made to conform prior periods’ financialinformation to the current presentation.

***Recently Issued AccountingPronouncements***

In July 2006, the FASB issued FASB InterpretationNo. 48, *Accounting for Uncertainty in Income Taxes*(“FIN 48”). FIN 48 is an interpretation of FASB Statement No. 109,Accounting for Income Taxes, and it seeks to reduce the diversity in practiceassociated with certain aspects of measurement and recognition in accountingfor income taxes.  FIN 48 requires a newevaluation process for all tax position taken. If the probability forsustaining a tax position is greater than 50%, then the tax position iswarranted and recognition should be at the highest amount which would beexpected to be realized upon ultimate settlement. FIN 48 also requires expandeddisclosure at each annual reporting period unless a significant change occursin an interim period. Differences between the amounts recognized in thestatements of financial position before the adoption of FIN 48 and the amountsreported after adoption generally are to be accounted for as an adjustment tothe beginning balance of retained earnings. The Company has completed itsinitial evaluation of the impact of the January 1, 2007, adoption of FIN48 and determined that such adoption is not expected to result in anytransition adjustments.

In September 2006,the FASB issued SFAS No. 157, *Fair ValueMeasurements* (“SFAS No. 157”). SFAS No. 157 defines fairvalue, establishes a framework for measuring fair value and expands disclosuresabout fair value measurements. SFAS No. 157 is effective for the Companyas of January 1, 2008. The Company is currently evaluating the potentialimpact of adopting SFAS No. 157.

**3.**                 Impairment of Film Assets

In the second quarter of 2006 the Company retained aninvestment banking firm to solicit interest from third parties for thepotential purchase of the Crown Library. As a result of non-binding bidsreceived in the second quarter and the then proposed terms of an agreementdated October 5, 2006 for the sale of the Crown Library, management deemedit necessary to review its film assets for impairment as of both June 30,2006 and September 30, 2006. The fair values used in the impairmentanalyses were derived by management taking into account the following: (1)  theimplied fair value from bid parties and a contractual sales price at June 30,2006 and September 30, 2006, respectively, with adjustments to take intoaccount the terms of the proposed sale including the estimated future cost ofthe Company’s indemnification of the buyer for retention of residual andparticipation liabilities arising from the buyer’s use of the Crown Library fora 10-year period following the closing of the sale; (2) theestimated fair value of rights for the Company’s non-exclusive use of certainfilms for showing on its Hallmark Movie Channel for a limited period of time;and (3) the amount of accounts receivable related to the film library. Theresulting non-cash impairment charge of $225.8 million for the year ended December 31,2006, is included in impairment of film assets on the accompanying statement ofoperations.

The bids used in management’svaluation of the film assets at June 30, 2006 and the purchase price andrelated terms of the proposed sale of the film library at September 30,2006 involve lump sum amounts with no values applied to individual films orgroups of films. However, under applicable accounting requirements theimpairment analyses must be prepared on a film-by-film basis. Having concludedthat since August 31, 2005, the date of the most recent film-by-filmvaluation, each individual film has retained its relative value with respect tothe film library taken as a whole as of June 30 and September 30,2006, management allocated the total estimated fair value at those dates on thebasis of the estimated relative fair values of each film as of August 31,2005. Non-cash impairment charges were recorded at both June 30, 2006 and September 30,2006 to reflect the amounts by which the carrying values of individual filmsexceeded the respective estimated fair values.

F-21

----

In preparing the impairment analyses management reliedupon various estimates, including those made by consultants retained by theCompany, which were based on information known at the time of the analyses.

In the third and fourth quarters of 2005, the Companyreviewed its film asset titles for impairment. The Company computed the fairvalue of the rights to each of the evaluated film titles. The estimated fairvalue of the film assets was based upon the discounted cash flows attributableto estimated future third party sales and internal use at September 30,2005 and December 31, 2005. Non-cash impairment charges were recorded inboth the third and fourth quarters of 2005 for each film where the estimatedfair value was less than its carrying value. The resulting non-cash impairmentcharge of $25.5 million is included in impairment of film assets on theaccompanying statement of operations for the year ended December 31, 2005.

In the third and fourthquarters of 2004, the estimated fair value of the domestic rights of the filmassets was based upon the discounted cash flows attributable to estimatedfuture third party sales and internal use at September 30, 2004, and December 31,2004. A non-cash impairment charge was recorded in both the third and fourthquarters of 2004 for each film where the estimated fair value was less than itscarrying value. The resulting non-cash impairment charge of $22.0 million isincluded in impairment of film assets on the accompanying statement ofoperations for the year ended December 31, 2004.

**4.**                 Subscriber Acquisition Fees

Subscriber acquisition fees are comprised of thefollowing:

| ** **                           | ** ** | **As of December 31,** | ** ** | **As of December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                           | ** ** | **2005(1)**                           | ** ** | **2006**                              | ** ** |
| ** **                           | ** ** | **(In thousands)**               | ** ** |
| Subscriber acquisition fees, at cost |       |                                  | $          | 192,666                               |       |   |   | $ | 189,391 |   |   |
| Accumulated amortization             |       |                                  | (112,072   | )                                     |       |   | (147,726 | ) |   |
| Subscriber  acquisition fees, net    |       |                                  | $          | 80,594                                |       |   |   | $ | 41,665 |   |   |

 

----

(1)          The grossasset and accumulated amortization have each been adjusted by $28.9 million,which represents contracts that were fully amortized at December 31, 2005,but were not written off on that date.

Of thenet balance at December 31, 2006, in regard to existing agreements, theCompany expects $10.0 million will be recognized as a reduction of subscriberfee revenue and $31.7 million will be recognized as subscriber acquisition feeexpense in future periods. The Company expects to amortize the net balance at December 31,2006, as follows:

| **Years Ended December 31,** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** |
|---------------------------------------------|------------|------------|------------|-------------------------|------------|
| 2007                                        |       |       | $          | 38,617                  |       |   |
| 2008                                        |       |       | 1,150      |                    |       |
| 2009                                        |       |       | 949        |                    |       |
| 2010                                        |       |       | 949        |                    |       |
| Total amortization                          |       |       | $          | 41,665                  |       |   |

 

As of December 31, 2005 and 2006, theconsolidated balance sheets also reflect subscriber acquisition fees payable of$12.2 million and $2.1 million, respectively. For the years ended December 31,2004, 2005 and 2006, the Company made cash payments of $19.2 million, $32.0million, and $11.0 million, respectively, relating to current subscriberacquisition fee obligations.

F-22

----

**5.**                 Film Assets

Amortization expense for the film assets was $28.9million, $51.6 million, and $14.7 million for the years ended December 31,2004, 2005, and 2006, respectively. The Company recorded impairment charges of$22.0 million, $25.5 million, and $225.8 million for the years ended December 31,2004, 2005, and 2006, respectively.

Thefollowing table summarized the carrying amounts of the film assets as of December 31,2005.

| ** **                              | ** ** | **As of December 31, 2005** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------|------------|
| Film assets                             |       |                                            | $          | 533,742 |   |   |
| Accumulated amortization and impairment |       |                                            | (153,420   | ) |   |
| Film  assets, net                       |       |                                            | $          | 380,322 |   |   |

 

Nofilm assets were recorded as of December 31, 2006, as a result of the saleof the film assets in 2006.

**6.**                 Program License Fees

Program license fees are comprised of the following:

| ** **                                                | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                | ** ** | **2005**                              | ** ** | **2006** | ** ** |
| ** **                                                | ** ** | **(In thousands)**               | ** ** |
| Program license fees—RHI Entertainment  Distribution |       | $                                     | 164,752    |   | $ | 212,143 |   |
| Program license fees—NICC                            |       | 9,411                                 |       | 197 |   |
| Program license fees—other affiliates                |       | 368                                   |       | 368 |   |
| Program license fees—other non-affiliates            |       | 365,429                               |       | 326,552 |   |
| Program license fees, at cost                             |       | 539,960                               |       | 539,260 |   |
| Accumulated amortization                                  |       | (202,865                              | )          | (241,342 | ) |
| Program license fees, net                                 |       | $                                     | 337,095    |   | $ | 297,918 |   |

 

Programming costs for the years ended December 31,2004, 2005, and 2006 were $89.9 million, $120.6 million, and $152.2 million,respectively.

During the years ending December 31, 2004, 2005and 2006, certain program license fees were written-down to their netrealizable values, resulting in additional costs of $3.0 million, $585,000, and$20.9 million, respectively, which have been included as a component ofprogramming costs in the accompanying consolidated statements of operations.

At December 31, 2005 and 2006, $30.4 million and$10.3 million of program license fees were included in prepaid and other assetson the accompanying consolidated balance sheets as the Company made paymentsfor the program license fees prior to commencement of the license period.

License fees payable are comprised of the following:

| ** **                                                | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                | ** ** | **2005**                              | ** ** | **2006** | ** ** |
| ** **                                                | ** ** | **(In thousands)**               | ** ** |
| License fees payable—RHI Entertainment  Distribution |       | $                                     | 22,704     |   | $ | 18,439 |   |
| License fees payable—NICC                            |       | 3,315                                 |       | 2,275 |   |
| License fees payable—non-affiliates                  |       | 214,025                               |       | 166,597 |   |
| Total license fees payable                                |       | 240,044                               |       | 187,311 |   |
| Less current maturities                                   |       | (53,190                               | )          | (98,360 | ) |
| Long-term license fees payable                            |       | $                                     | 186,854    |   | $ | 88,951 |   |

 

F-23

----

**7.**                 Property and Equipment

Property and equipment are comprised of the following:

| ** **                        | ** ** | **As of December 31,** | ** ** | ** **          | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|---------------------|------------|
| ** **                        | ** ** | **2005**                              | ** ** | **2006**            | ** ** | **Depreciable Life** | ** ** |
| ** **                        | ** ** | **(In thousands)**               | ** ** | **(In years)** | ** ** |
| Technical equipment and computers |       | $                                     | 14,650     |                | $          | 15,083 |   |   | 3-5 |   |   |
| Leased assets                     |       | 17,363                                |       | 17,363              |       |   | 15 |   |   |
| Furniture, fixtures and equipment |       | 1,235                                 |       | 1,241               |       |   | 5 |   |   |
| Leasehold improvements            |       | 3,344                                 |       | 2,853               |       |   | 3-7 |   |   |
| Construction-in-progress          |       | 18                                    |       | 273                 |       |   |   |   |   |
| Property and equipment, at  cost  |       | 36,610                                |       | 36,813              |       |   |   |   |   |
| Accumulated depreciation          |       | (18,050                               | )          | (20,500             | )          |   |   |   |   |
| Property and equipment, net       |       | $                                     | 18,560     |                | $          | 16,313 |   |   |   |   |   |

 

Depreciation expense related toproperty and equipment was $3.4 million, $3.5 million, and $2.8 million, forthe years ended December 31, 2004, 2005 and 2006, respectively.

Softwareand other intangible assets of $2.0 million and $1.0 million as of December 31,2005 and 2006, respectively, have been included in prepaid and other assets inthe accompanying consolidated balance sheets.

**8.**                 Reorganization

In October 2002, the Company began reorganizingits operations in order to concentrate its efforts on the Hallmark Channel inthe U.S. and in its more successful international markets. The Companycompleted decentralizing many oversight and non-technical support functionsformerly located in the Company’s U.S.-based offices and transferred thoseresponsibilities to regional staff. In Latin America, the Company entered intoan agreement with a local distribution partner, Pramer S.C.A., who was maderesponsible for the day-to-day operations of the Hallmark Channel in thisregion. At the completion of the reorganization in April 2003, the Company’sworkforce was reduced by approximately 30% or 130 positions.

The Company recorded a reorganization charge of $28.8million during the fourth quarter of 2002. This charge was comprised of acharge of $5.5 million for severance costs and charges of $23.3 million relatedto exit costs for satellite, transponder and facility leases.

F-24

----

Thefollowing table displays the activity and balances of the reorganizationaccrual account from October 7, 2002, to December 31, 2005, which wasincluded in accounts payable and accrued liabilities in the accompanying consolidatedbalance sheets.

| ** **                                            | ** ** | ** **              | ** ** | ** **     | ** ** | **Satellite and** | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|----------------|------------|------------------------|------------|------------|------------|
| ** **                                            | ** ** | **Severance**           | ** ** | **Facilities** | ** ** | **Transponder**        | ** ** | **Total**  | ** ** |
| ** **                                            | ** ** | **(In thousands)** | ** ** |
| Balance at  October 7, 2002                      |       |                    | $          | 5,492          |       |                   |       | $          | 1,651      |   |   |   | $ | 21,658 |   |   | $ | 28,801 |   |
| Deductions due to  payments                           |       |                    | (2,097     | )              |       |                   | —     |       |       |   | (545 | ) |   | (2,642 | ) |
| Balance at  December 31, 2002                    |       |                    | 3,395      |           |       |                   | 1,651      |       |       |   | 21,113 |   |   | 26,159 |   |
| Additions due to  accretion                           |       |                    | —     |           |       |                   | 61         |       |       |   | 692 |   |   | 753 |   |
| Additions due to  adjustments to estimates            |       |                    | —     |           |       |                   | —     |       |       |   | 1,194 |   |   | 1,194 |   |
| Deductions due to  settlement of contract             |       |                    | —     |           |       |                   | —     |       |       |   | (2,951 | ) |   | (2,951 | ) |
| Deductions due to  payments                           |       |                    | (3,391     | )              |       |                   | (189       | )          |       |   | (6,537 | ) |   | (10,117 | ) |
| Balance at  December 31, 2003                    |       |                    | 4          |           |       |                   | 1,523      |       |       |   | 13,511 |   |   | 15,038 |   |
| Additions due to  accretion                           |       |                    | —     |           |       |                   | —     |       |       |   | 52 |   |   | 52 |   |
| Deductions due to  adjustments to estimates, net      |       |                    | (4         | )              |       |                   | (126       | )          |       |   | (353 | ) |   | (483 | ) |
| Deductions due to  payments                           |       |                    | —     |           |       |                   | (337       | )          |       |   | (3,550 | ) |   | (3,887 | ) |
| Balance at  December 31, 2004                    |       |                    | —     |           |       |                   | 1,060      |       |       |   | 9,660 |   |   | 10,720 |   |
| Deductions due to  payments                           |       |                    | —     |           |       |                   | (60        | )          |       |   | (989 | ) |   | (1,049 | ) |
| Contracts assumed  by buyer of international business |       |                    | —     |           |       |                   | (1,000     | )          |       |   | (8,671 | ) |   | (9,671 | ) |
| Balance at  December 31, 2005                    |       |                    | $          | —         |       |                   |       | $          | —     |   |   |   | $ | — |   |   | $ | — |   |

 

**9.**                 Leases

The Company leases uplink and certain transponder spaceunder a long-term lease agreement that is accounted for as a capital lease inaccordance with SFAS No. 13, *Accountingfor Leases*. In addition, the Company leases transponders, officefacilities and various office equipment under operating leases that aregenerally non-cancelable. These leases expire at various dates through June 2019,and some contain escalation clauses and renewal options. Future minimum leasepayments under the agreements at December 31, 2006, are as follows:

| **Years Ended December 31,**                                 | ** ** | ** **              | ** ** | **Capital Leases** | ** ** | **Operating Leases** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                                                                  | ** ** | **(in thousands)** | ** ** |
| 2007                                                                        |       |                    | $          | 2,160                   |       |                      |       | $ | 3,989 |   |   |   |
| 2008                                                                        |       |                    | 2,160      |                    |       |                      | 2,764      |   |   |   |
| 2009                                                                        |       |                    | 2,160      |                    |       |                      | 1,971      |   |   |   |
| 2010                                                                        |       |                    | 2,160      |                    |       |                      | 1,059      |   |   |   |
| 2011                                                                        |       |                    | 2,160      |                    |       |                      | 394        |   |   |   |
| Thereafter                                                                  |       |                    | 17,190     |                    |       |                      | 131        |   |   |   |
| Total minimum  lease payments                                               |       |                    | 27,990     |                    |       |                      | $          | 10,308 |   |   |   |
| Less amount  representing interest  (at implicit rates ranging from 9.375%) |       |                    | (11,820    | )                       |       |                      |       |   |   |   |
| Present value of  net minimum lease payments                                |       |                    | 16,170     |                    |       |                      |       |   |   |   |
| Less current  maturities                                                    |       |                    | (672       | )                       |       |                      |       |   |   |   |
| Long term obligation                                                        |       |                    | $          | 15,498                  |       |                      |       |   |   |   |   |

 

Rent expense under these agreements was $1.9 million,$2.0 million, and $2.0 million, respectively, for the years ended December 31,2004, 2005, and 2006. Amortization of assets held under capital leases isrecorded as amortization of capital lease in the accompanying statements ofoperations.

F-25

----

During 2005 and through November 30,2006, the buyer of the international business allowed Crown Media Holdings toinhabit office space without paying rent. Crown Media Holdings would have paid$115,000 and $103,000 in rent expense for this space during 2005 and 2006,respectively.

**10.**          Credit Facility

At December 31, 2006, the Company had an amendedcredit agreement with a syndicate of banks, led by JP Morgan Chase Bank, underwhich the banks have extended to the Company a secured revolving creditfacility with availability of up to $130.0 million. At December 31, 2006,the outstanding balance under the credit facility was $87.6 million. TheCompany currently has $42.4 million of unused revolving credit capacity. TheCompany’s availability to borrow additional amounts under the credit facilityis not limited or restricted. The Company and the lending banks originallyentered into the facility in 2001 and have subsequently amended the terms ofthis facility, with the most recent amendment dated as of March 2, 2007. Thefacility is guaranteed by the Company’s subsidiaries and is secured by alltangible and intangible property of Crown Media Holdings and its subsidiaries.

Each borrowing under the bank credit facility bearsinterest at a Eurodollar rate or an alternate base rate as the Company mayrequest at the time of borrowing in accordance with the credit agreement. TheEurodollar rate is based on the London interbank market for Eurodollars, andremains in effect for the time period of the loan ranging from one, two, three,six or twelve months. The alternate rate is based upon the prime rate of JPMorgan Chase Bank, a certificate of deposit rate or the Federal Funds effectiverate, which is adjusted whenever the rates change. The Company is required topay a commitment fee of 0.15% per annum (0.2% from March 1, 2005, to April 27, 2006) of thecommitted, but not outstanding, amounts under the revolving credit facility,payable in quarterly installments.

At December 31, 2005and 2006, the Company had outstanding borrowings of $210.0 million and $87.6million, respectively, under the credit facility and there were no letters ofcredit outstanding. At December 31, 2005, $210.0 million of theoutstanding balance bore interest at the Eurodollar rate (5.39% at December 31,2005) and $0 bore interest at the JP Morgan Chase Bank prime rate. At December 31,2006, $87.6 million of the outstanding balance bore interest at the Eurodollarrate (6.10% at December 31, 2006) and $0 bore interest at the JP MorganChase Bank prime rate. Interest expense onborrowings under the credit facility for each of the years ended December 31,2004, 2005 and 2006, was $13.9 million, $10.3 million, and $12.7 million,respectively.

***Covenants***

The credit facility, asamended, contains a number of affirmative and negative covenants. Affirmativecovenants include without limitation the following: (1) (a) within 90days after the end of each fiscal year, submit to the banks auditedconsolidated financial statements of the Company required to be submitted tothe S.E.C., and (b) within 45 days after the end of each of the firstthree fiscal quarters, submit to the banks unaudited consolidated financialstatements of the Company required to be submitted to the S.E.C.; (2) causethe Company’s corporate existence to be effective; (3) keep tangibleproperties material to the Company’s business in good condition; (4) providenotice of the following material events: (a) any event of default, (b) materialadverse change in the condition or operations of any credit party, (c) anyaction which could affect the performance of the credit parties’ obligationsunder the Credit Agreement, (d) any other event which could result in amaterial adverse effect, (e) opening or change of any executive office, (f) changein the name of the credit parties, (g) any event which affects thecollectibility of receivables or decrease the value of the collateral, (h) proposedmaterial amendment to any material agreement that are part of the collateraland (i) any notice which a credit party received with respect to a claimeddefault; (5) (a) insure its assets adequately, (b) insureagainst other hazards and risks, (c) maintain distributor’s “errors andomissions” insurance, (d) maintain broadcaster’s “errors and omissions”insurance, (e) cause all insurance to provide to the Lender a writtennotice of any termination or material change of coverage 

F-26

----

and (f) uponrequest, provide to the Lender a statement of insurance coverage; (6) maintaintrue and complete books and records of financial operations and provide theAgent access to such books and records; (7) observe and perform allmaterial agreements with respect to the distribution/exploitation of theProducts (as defined in the Credit Agreement); (8) pay all taxes and othergovernmental charges and indebtedness in the ordinary course of business of thecredit parties; (9) defend the collateral against all liens, other thanpermitted encumbrances; (10) upon receipt of any (a) payment from anyobligor which should be remitted to the Agent or (b) the proceeds of anysale of Product, remit such payment or proceeds to the Agent; (11) complywith all applicable environmental laws, notify the Agent of any materialviolation of any applicable environmental laws and indemnify the Agent and theIssuing Bank against any environmental law-related claims; and, (12) (a) uponrequest, execute and deliver all necessary documents to perfect the liens onthe collateral and to carry out the purpose of the Credit Agreement and itsancillary documents and (b) clarify, if necessary, the chain of title forany item of the Products.

Negative covenants includelimitations on (1) indebtedness, (2) liens, (3) guaranties, (4) investments,(5) making “Restricted Payments,” (Restricted Payments include anydistribution on our equity, any redemption or other acquisition of our equityincluding redemption of the company obligated mandatorily redeemable preferredinterest, any payment on debt of the Company which is subordinated to the bankloans, any reduction of the HC Crown line of credit for the Company, anypayment on certain obligations assumed by the Company under the purchaseagreement for the film assets and any other payment to Hallmark Cards or any ofits affiliates. The credit agreement, however, permits the Company to makepayments to Hallmark Cards or an affiliate in payment of a valid outstandingobligation (subject to any applicable subordination agreement) or in anaggregate amount equal to the financial benefits received by us as a result ofthe reduction of interest charges under the bank credit facility in Amendment No. 8plus any fees and costs incurred by Hallmark Cards in connection with thesupport letter of credit provided in accordance with Amendment No. 8, (6) saleof assets, (7) sale of receivables, (8) entering into any sale andleaseback transactions, (9) entering into transactions with affiliates, (10) amendingthe promissory note with HC Crown, a related letter of credit issued for ourbenefit or certain of our other material agreements, (11) creating negativepledge, (12) mergers or acquisitions, (13) production of any item of Product inany fiscal year having an aggregate budgeted negative cost in excess of $5.0million, (14) changing our business activities, (15) entering into certaintransactions that are prohibited under ERISA, (16) entering into anyinterest rate protection agreement or currency agreement, (17) acquiring orcreating any new subsidiary, (18) using or storing hazardous materials on ourpremises,  and (19) creating any firsttier subsidiary other than CM Intermediary or have any asset related to theChannel at a level above CM Intermediary.

The Company was incompliance with these covenants at December 31, 2006.

By an Amendment No. 12,dated as of March 2, 2007, to the credit agreement, the maturity date ofthe revolving credit facility has been extend to May 31, 2008. Additionally,the amendment provided for the Hallmark Cards letter of credit to be replacedby a JP Morgan Bank letter of credit for the $130.0 million, with an expirationdate of June 10, 2008.

**11.**          Related Party Long-Term Obligations

***Waiver and StandbyPurchase Agreement***

Under the Waiver andStandby Purchase Agreement dated March 21, 2006, as last amended on March 2,2007, Hallmark Cards agreed to defer all payments due on any of the followingobligations and, except where noted, payment of interest thereon until May 31,2008, or an earlier date as described below as the waiver termination date,whereupon all of these amounts become immediately due and payable (the “WaiverPeriod”):

·       Lineof credit and interest payable to HC Crown, dated December 14, 2001, inthe original principal amount of $75.0 million, payable to HC Crown. (Totalamount outstanding at December 31, 2006, 

F-27

----

including accruedinterest was $93.5 million. See *Line of Credit andInterest Payable to HC Crown*below.)

·       $70.0 million line of credit and interestpayable to Hallmark Cards affiliate arising outof the sale to Crown Media Holdings of the Hallmark Entertainment film library.(Total amount outstanding at December 31, 2006, including accruedinterest was $53.4 million. See *Line of Credit andInterest Payable to Hallmark Cards Affiliate*below.)

·       10.25% senior unsecured note, dated August 5,2003, in the initial accreted value of $400.0 million, payable to HCCrown. (Total amount outstanding at December 31, 2006, including accruedinterest was $562.2 million. See *Senior Unsecured Note*below.)

·       Note andinterest payable to Hallmark Cards affiliate, dated as of October 1, 2005,in the principal amount of $132.8 million, payable to HallmarkEntertainment Holdings. (Total amount outstanding at December 31, 2006,including accrued interest was $146.4 million. See *Note andInterest Payable to Hallmark Cards Affiliate*below.)

·       Allobligations of the Company under the bank credit facility by virtue of HallmarkCards’ deemed purchase of participations in all of the obligations under aletter of credit which Hallmark Cards has given in support of the facility orthe purchase by Hallmark Cards of all these obligations pursuant to AmendmentNo. 9 to the bank credit facility.

Hallmark Cards has agreed that it will not acceleratethe maturity of any of the foregoing obligations or initiate collectionproceedings during the Waiver Period. Interest will continue to accrue on theseobligations during the Waiver Period. The Company will continue to pay intereston the credit facility during the Waiver Period.

The waiver termination date is on May 31, 2008,or earlier upon occurrence of any of the following events:  (a) the Company fails to pay anyprincipal or interest, regardless of amount, due on any indebtedness tounrelated parties with an aggregate principal amount in excess of $5.0 millionor any other event or condition occurs that results in any such indebtednessbecoming due prior to its scheduled maturity, provided that the waiver will notterminate if the Company reduces the principal amount of such indebtedness to$5.0 million or less within five business days of a written notice oftermination from Hallmark Cards; (b) certain bankruptcy events occur;(c) the Company defaults in its payment of licensing fees under the SecondAmended and Restated Program License Agreement with RHI EntertainmentDistribution (formerly known as Hallmark Entertainment Distribution at whichtime it was a wholly-owned subsidiary of Hallmark Cards); (d) arepresentation and warranty of the Company in the Waiver Agreement is false ormisleading in any material respect; or (e) the Company fails to payinterest on the bank credit facility described above to the extent thatHallmark Cards has purchased all or a portion of the indebtedness thereunder orto perform any covenants in the Waiver Agreement.

Under the Waiver Agreement, if the bank’s lendersunder the bank credit facility accelerate any of the indebtedness under thebank credit facility or seek to collect any indebtedness under it, then theCompany may elect to exercise its right to require that Hallmark Cards or itsdesignated subsidiary exercise an option to purchase all the outstandingindebtedness under the bank credit facility as provided in the bank creditfacility. All expenses and fees in connection with this purchase would be addedto the principal amount of the credit facility obligations.

The Waiver Agreement does not limit any existingrights of Hallmark Cards or its affiliates to offset amounts owed to us underthe Hallmark Tax Sharing Agreement and Hallmark Cards’ share of the amountspayable under the December 1, 2005, agreement with NICC (described in Note13) against these obligations. On September 1, 2006, Hallmark Cards electedto apply its $3.1 million share of the NICC obligations against the amounts dueunder the $70.0 million Promissory  Noteto Hallmark Entertainment Holdings (described below), thereby reducing theprincipal amount of that Note by $3.1 million. 

F-28

----

Additionally, during thethird quarter of 2006, Hallmark Cards applied $18.0 million of benefit from theTax Sharing Agreement against the principal amount due under the March 21,2006, promissory note with Hallmark Entertainment Holdings. Pursuant to the WaiverAgreement, the Company must make prepayments on the outstanding debt from 100%of any “Excess Cash Flow” during the Waiver Period.  “Excess Cash Flow” is defined as 1) the netproceeds of any debt or equity financings or sale of assets; 2) the netcash proceeds from the incurrence by the Company of indebtedness; 3) the netcash proceeds from the sale, transfer or release by the Company of assetsoutside the ordinary course of business; and 4) if positive, the consolidated net cash flow from operations of CrownHoldings for any calendar quarter as shown in an SEC report, less cash fundsused to pay current operating expenses and to pay or establish reasonablereserves for future expenses, indebtedness payments, and capital improvementsand replacements as determined by the Board of Directors of the Company.

In connection withthe Waiver Agreement in March 2006, we converted the $70.0million account payable to Hallmark Entertainment Holdings arising outof our purchase of the Hallmark Entertainment film library to apromissory note described below, bearing interest at LIBOR plus 3% per annum.This note is payable in full on May 31, 2008, and accrued but unpaidinterest is added to the outstanding principal amount on an annual basis. We also agreed in March 2006 to:

·       amendthe 2001 and 2005 notes described above to add the accrued but unpaid interest,currently and annually, to the outstanding principal amounts ;

·       use  our commercially reasonable efforts to refinance all of  our obligations to Hallmark Cards and affiliates noted above;  and

·       complywith  our  covenants and obligations under the bank creditfacility .

***Hallmark Letter of Credit***

Pursuant to Amendment No. 8 to the bank creditfacility, Hallmark Cards has provided an irrevocable letter of credit issued byCitibank, N.A. to JP Morgan Chase Bank in the original amount of $320.0million, as credit support for our obligations under the Company’s creditfacility (the “credit facility”). The support letter of credit was reduced to$220.0 million upon the consummation of the sale of the Company’s internationalbusiness and the reduction of the aggregate outstanding credit exposure of itslenders to $220.0 million. Drawdowns under the letter of credit may be made foramounts due and payable under the credit facility and upon the occurrence ofcertain other events. Any proceeds received by JP Morgan Chase Bank fromdrawing under this support letter of credit will be used to purchase from thebank lenders, on behalf of Hallmark Cards, subordinated participations in ourobligations under the bank credit facility. As consideration, we agreed to payHallmark Cards’ the amounts resulting from the 2.0% reduction in the interestrate and the 0.3% reduction in the commitment fee payable by the Company underthe bank credit facility as provided in Amendment No. 8. In addition, weagreed to pay the fee charged by Citigroup for the letter of credit which was0.625% of the amount of the letter of credit.

In conjunction with Amendment No. 10, HallmarkCards extended its letter of credit to correlate to the maturity date of thecredit facility and also increased the size of the letter of credit from $220.0million to $240.0 million. In consideration of this extension and increase inthe size of the letter of credit, the Company agreed to continue to payHallmark Cards the difference between the interest rate formerly charged theCompany before the letter of credit was available and the rate now charged withthe backing of the letter of credit. Since the interest rate was furtherreduced in Amendment No. 10 to LIBOR plus 0.75%, the interest differentialnow payable to Hallmark Cards is 2.25% of the outstanding indebtedness underthe credit facility. In addition, the Company agreed to continue to pay the feecharged by Citigroup for the letter of credit which was increased to 0.875% ofthe amount of the letter of credit.

F-29

----

The Hallmark Cards letter ofcredit was reduced to $130.0 million in connection with Amendment No. 11to the bank credit facility.

Pursuant to Amendment No. 12to the bank credit facility, Hallmark Cards has provided an irrevocable letterof credit issued by JP Morgan Chase Bank in the amount of $130.0 million, ascredit support for our obligations under the credit facility with an expirationdate of June 10, 2008.

***Senior Unsecured Note***

In August 2003, the Company issued a seniorunsecured note to HC Crown for $400.0 million. A portion of the proceeds wasused to repurchase the Company’s outstanding trust preferred securities, andthe balance of the proceeds, after expenses, was used to reduce amountsoutstanding under its bank credit facility.

The senior unsecured notepayable to HC Crown does not require cash payments until August 2007. Inaccordance with the waiver agreement, these payments are not required until May 31,2008. The principal amount of the senior unsecured note accretes at 10.25% perannum, compounding semi-annually, to $596.6 million at August 5, 2007. Fromthat date, interest at 10.25% per annum was scheduled to be payablesemi-annually on the accreted value of the senior unsecured note to HC Crown,but now will be payable subsequent to May 31, 2008. The note matures on August 5,2011, and is pre-payable without penalty. At December 31, 2005 and 2006,$509.4 million and $562.2 million, respectively, of principal and accretedinterest were included in the senior unsecured note payable in the accompanyingconsolidated balance sheets. The note purchase agreement for the seniorunsecured note contains certain covenants which restrict on the part of theCompany, among other matters, from the incurrence of any additionalindebtedness, the repurchase or other acquisitions of the Company’s stock,investments in other parties and the incurrence of liens on the Company’sassets. As a fee for the issuance of the notes, the Company paid $3.0 millionto HC Crown, which was initially capitalized and is being amortized asadditional interest expense over the term of the note payable.

***Line of Credit and Interest Payable to HC Crown***

On December 14, 2001,the Company executed a $75.0 million promissory note with HC Crown maturing onthe earlier of six months from the termination of the bank credit facility or December 21,2007. Due to the waiver agreement, the line of credit and related interest arenot due until May 31, 2008. This line of credit is subordinate to the bankcredit facility. The rate of interest under this line of credit is equal toLIBOR plus three percent. At December 31, 2005, and 2006, borrowings underthe note were $75.0 million and $87.7 million, respectively. Accrued intereston the note of $11.3 million and $5.8 million are included in line of creditand interest payable to HC Crown as of December 31, 2005, and 2006,respectively, on the accompanying consolidated balance sheets. At December 31,2005, $75.0 million of the outstanding balance bore interest at the Eurodollarrates of 7.08%. At December 31, 2006, $87.7 million of the outstandingbalance bore interest at the Eurodollar rates of 8.37%. At December 31,2005 and 2006, $86.3 million and $93.5 million were included in the line ofcredit and interest payable to HC Crown on the accompanying consolidatedbalance sheets, respectively.

***Note and Interest Payable to Hallmark Cards Affiliate***

In 2005, the Companyconverted a portion of its license fees payable to Hallmark affiliates, whichwere approximately $132.8 million, to a promissory note bearing interest atLIBOR plus 3% per annum. The term of the promissory note began on October 1,2005 and is payable in full on May 31, 2008, due to the waiver agreement. Accruedinterest on the note of $2.4 million and $9.0 million is included in note and interestpayable to Hallmark Cards affiliate as of December 31, 2005, and 2006,respectively, on the accompanying consolidated balance sheets. At December 31,2005, $132.8 million of the outstanding 

F-30

----

balancebore interest at the Eurodollar rates of 7.08%. At December 31, 2006,$137.4 million of the outstanding balance bore interest at the Eurodollar ratesof 8.37%. At December 31, 2005 and 2006, $135.2 million and $146.4 millionwere included in the note and interest payable to Hallmark Cards affiliate inthe accompanying consolidated balance sheets, respectively.

***Line of Credit and Interest Payable to Hallmark CardsAffiliate***

In March 2006, the Company converted its payableto a Hallmark Cards affiliate, which was approximately $70.4 million, to apromissory note bearing interest at LIBOR plus 3% per annum. The term of thepromissory note began on March 21, 2006, and is payable in full, pursuantto the waiver agreement, on May 31, 2008. Accrued interest on the note of$4.1 million is included in note and interest payable to Hallmark Cardsaffiliate as of December 31, 2006, on the accompanying consolidatedbalance sheet. At December 31, 2006, $49.3 million of the outstandingbalance bore interest at the Eurodollar rates of 8.37%. At December 31,2006, $53.4 million was included in the line of credit and interest payable toHallmark Cards affiliate in the accompanying consolidated balance sheet.

During the third quarterof 2006, Hallmark Cards used $18.0 million of the 25% in the federal taxbenefits from losses the Company generated to reduce the $70.4 million balanceon the line of credit and interest payable to Hallmark Cards affiliate. On September 1, 2006, Hallmark Cards alsoreduced the balance of line of credit by $3.1 million, which was related to theDecember 1, 2005, agreement with NICC.

***Interest Paid to HC Crown***

Interest expense paid toHC Crown, which formerly was payable to the Company’s bank syndicate andresulted from a reduction in the interest rate and commitment fee payable tothe Company’s bank syndicate in Amendment No. 8 and Amendment No. 10to the Company’s credit facility, was $3.2 million for the year ended December 31,2005, and $4.4 million for the year ended December 31, 2006.

***Related Party Long-TermObligations***

The aggregate maturies of related party long-term debtfor each of the five years subsequent to December 31, 2006, are asfollows:

| ** **                                                                                      | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                      | ** ** | **Total**                                 | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** |
| ** **                                                                                      | ** ** | **(In thousands)**                   | ** ** |
| Line of credit  and interest payable to HC Crown, with principal due May 31, 2008          |       | $                                         | 93,465     |   |   | $ | — |   |   | $ | 93,465 |   |   | $ | — |   |   |   | $ | — |   |   | $ | — |   |
| 10.25% Senior  unsecured note to HC Crown, including accrued interest, due August 5,  2011 |       | 562,167                                   |       |   | — |   |   | — |   |   | — |   |   |   | — |   |   | 562,167 |   |
| Note and interest  payable to Hallmark Entertainment Holdings due May 31, 2008             |       | 146,397                                   |       |   | — |   |   | 146,397 |   |   | — |   |   |   | — |   |   | — |   |
| Note and interest  payable to Hallmark Entertainment Holdings due May 31, 2008             |       | 53,364                                    |       |   | — |   |   | 53,364 |   |   | — |   |   |   | — |   |   | — |   |
|                                                                                            |       | $                                         | 855,393    |   |   | $ | — |   |   | $ | 293,226 |   |   | $ | — |   |   |   | $ | — |   |   | $ | 562,167 |   |

 

**12.**          Related Party Transactions

***Tax Sharing Agreement***

On March 11, 2003, Crown Media Holdings became amember of Hallmark Cards consolidated federal tax group and entered into afederal tax sharing agreement with Hallmark Cards (the “tax sharing agreement”).Hallmark Cards includes Crown Media Holdings in its consolidated federal incometax return. Accordingly, Hallmark Cards has benefited from past tax losses andmay benefit from future 

F-31

----

federal tax losses, whichmay be generated by Crown Media Holdings. Based on the tax sharing agreement,Hallmark Cards has agreed to pay Crown Media Holdings all of the benefitsrealized by Hallmark Cards as a result of including Crown Media Holdings in itsconsolidated income tax return. These benefits are estimated and paid 75% incash on a quarterly basis and the balance when Crown Media Holdings becomes afederal taxpayer. A final true-up calculation is completed within 15 days afterHallmark Cards files its consolidated federal income tax return for the year. Pursuantto the true-up calculation, Crown Media Holdings is obligated to reimburseHallmark Cards the amount that any estimated payments have exceeded the actualbenefit realized by Hallmark Cards and Hallmark Cards is obligated to pay CrownMedia Holdings the amount that any actual benefit exceeds the estimatedpayments. Under the tax sharing agreement, at Hallmark Cards’ option, thenon-interest bearing balance of the 25% in federal tax benefits may be appliedas an offset against any amounts owed by Crown Media Holdings to any member ofthe Hallmark Cards consolidated group under any loan, line of credit or otherpayable, subject to limitations under any loan indentures or contractsrestricting such offsets. During the third quarter of 2005, Hallmark Cards used$30.0 million of the approximately $45.7 million balance of this 25% balance tooffset intercompany debt. During the third quarter of 2006, Hallmark Cards used$18.0 million of the approximately $18.0 million balance of this 25% balance toreduce the principal amount due under the March 21, 2006, promissory notewith Hallmark Entertainment Holdings.

The Company received $56.6million, $56.1 million (including the $30.0 million offset to intercompany debtduring the third quarter of 2005), and $30.0 million (including the $18.0million offset to intercompany debt during the third quarter of 2006) under theTax Sharing Agreement during 2004, 2005 and 2006, respectively. Any paymentsreceived from Hallmark Cards or credited against amounts owed by Crown MediaHoldings to any member of the Hallmark Cards consolidated group under the taxsharing agreements are recorded as an addition to paid-in capital in theaccompanying consolidated statements of stockholders’ equity (deficit).

***Hallmark Entertainment Investments***

On March 11, 2003,Hallmark Entertainment Holdings, Inc. (“Hallmark EntertainmentHoldings”, a wholly-owned subsidiary of Hallmark Cards) contributed 100%of the Crown Media Holdings shares owned by it to Hallmark EntertainmentInvestments. Two of Crown Media Holdings’ investors, Liberty Crown, Inc.,a subsidiary of Liberty Media, and JP Morgan, also contributed 100% of theirCrown Media Holdings shares to Hallmark Entertainment Investments, and VISNcontributed 10% of its Crown Media Holdings shares to Hallmark EntertainmentInvestments, all in return for shares in Hallmark Entertainment Investments.Hallmark Entertainment Holdings, now an owner of more than 80% of HallmarkEntertainment Investments, has voting power over all of the Crown MediaHoldings shares owned by Hallmark Entertainment Investments. See note 15 forfurther information on the percentage of voting power.

***Services Agreement with HallmarkCards***

The Company has an intercompany services agreementwith Hallmark Cards, which was entered into in 2003 for a term of three years andthen extended for an additional year through January 1, 2008. Under theagreement, Hallmark Cards provides Crown Media Holdings with tax, riskmanagement, health safety, environmental, insurance, legal, treasury and cashmanagement services and real estate consulting services. Under the agreement,the Company agreed to pay Hallmark Cards $515,000 per year for these services,plus out-of-pocket expenses and third party fees, payable in arrears on thelast business day of each quarter. Thisamount was increased to $530,000 for each of 2006 and 2007. However, theCompany has not paid these amounts.

Foreach of the years ended December 31, 2004 and 2005, Crown Media Holdingshad accrued $515,000 under the agreement. For the year ended December 31,2006, Crown Media Holdings had 

F-32

----

accrued $530,000 under the agreement. At December 31,2005 and 2006 non-interest bearing unpaid accrued service fees and unreimbursedexpenses of $10.1 million and $11.5 million, respectively, were included inpayable to affiliates in the accompanying consolidated balance sheets. At December 31,2004, 2005 and 2006 out-of-pocket expenses and third party fees were $1.3million, $1.0 million, and $914,000, respectively.

***Trademark Agreement withHallmark Cards***

CrownMedia United States has a trademark license agreement with Hallmark Licensing, Inc.for use of the “Hallmark” mark for the Hallmark Channel and for the HallmarkMovie Channel. During the second quarter of 2006, Hallmark Cards extended thetrademark license agreements for the Hallmark Channel and the Hallmark MovieChannel to September 1, 2007. The Company is not required to pay any feesunder the trademark license agreements.

***Intercreditor Agreement***

The Company has anintercreditor agreement that deals with residual and participation liabilitiesfor the use of film assets by the buyer of the Company’s membership interest inCrown Media Distribution. Under the intercreditor agreement, Hallmark Cards hasagreed that any loan, debt or other amount payable by the Company to HallmarkCards will be subordinate and subject in right of payment to the payment infull of such residual and participation liabilities, but only to the extentthat any such residual and participation liabilities outstanding exceed $25.0million.

**13.**          Company Obligated Mandatorily Redeemable Preferred Interest and NICCLicense Agreements

VISN (a subsidiary of NICC) owns a $25.0 millioncompany obligated mandatorily redeemable preferred interest in Crown MediaUnited States (the “preferred interest”) issued in connection with an investmentby the Company in Crown Media United States. On November 13, 1998, theCompany, Vision Group, VISN and Henson Cable Networks, Inc. signed anamended and restated agreement governing the operation of Crown Media UnitedStates, as amended at various times through December 1, 2005 (the “companyagreement”).

Under the company agreement, the members agreed thatif during any year ending after January 1, 2005 and prior to December 31,2009, Crown Media United States has net profits in excess of $10.0 million, andthe preferred interest has not been redeemed, Crown Media United States willredeem the preferred interest in an amount equal to the lesser of (i) suchexcess net profits; (ii) $5.0 million; or (iii) the amount equal tothe preferred liquidation preference on the date of redemption. Crown MediaUnited States may voluntarily redeem the preferred interest at any time,however, it is obligated to do so on the date of redemption (December 31,2010). Due to the mandatory redemption provision of the preferred interest, on July 1,2003, the preferred interest was remeasured at fair value and reclassified tonon-current liabilities in accordance with the provisions of SFAS No. 150.The preferred interest has a liquidation preference of $25.0 million.

A December 2005agreement between Crown Media Holdings and NICC replaced a prior programproduction agreement and settled various disputes which had arisen under theprior agreement. In the new agreement, the Company agreed to fund and licensethe following programming produced by NICC through the end of 2007:

·       A Sunday Morning one-hourseries entitled “New Morning with Naomi Judd” at a cost of $3.5 million in2005, $4.6 million in 2006 and $5.6 million in 2007. The 2006 and 2007 amountsare payable quarterly in those years.

F-33

----

·       A weekday one-hour dailyseries entitled “New Morning” at a cost of $1.9 million in 2005, $4.2 millionin 2006 and $5.1 million in 2007. The 2005 amount includes a deferred amount of$535,000 to be paid as indicated below for deferred payments. The 2006 and 2007amounts are payable quarterly in those years.

·       A Sunday morningprogramming block, broadcast from 6 a.m. to 12 noon, at a cost ofapproximately $485,000 in 2005, $5.8 million in 2006 and $5.8 million in 2007,increased by a percentage equal to the increase in the Consumer Price Index, in2007. These amounts include deferred payments of $125,000 for 2005 and $1.5million for each of 2006 and 2007. The 2006 and 2007 amounts not deferred arepayable quarterly in those years.

In addition, Crown Media Holdings agreed to finishfunding four specials, the production of which had been commenced prior to theamendment, at a total additional cost of $1.4 million in 2005 and 2006, and tofund an additional two non-dramatic specials, to be produced in 2006 and 2007,at a total cost of $1.3 million. A quarter of the amounts for the additionaltwo specials was paid in January 2006, another quarter was paid inJune 2006 and the remaining one-half is payable in June 2007, or upona change in control (that is, a sale or merger where the aggregate ownership ofCrown Media Holdings by the current owners becomes less than 50%). The HallmarkChannel is not obligated to broadcast the latter two specials. Crown MediaHoldings will also provide or has provided $2.0 million in each of 2005, 2006and 2007 to fund the development by NICC of “made for television” movies andwill pay NICC an additional $1.0 million if the movie “A Reason to Believe,”which was to be produced under the prior agreement, is not ultimately produced.The 2005 amount includes a deferred payment of $1.8 million; the 2006 amountwas paid semi-annually in 2006; and the 2007 amount is payable inJanuary 2007. The Hallmark Channel will have a right of first negotiationto acquire broadcast rights to the movies resulting from this development and,if it elects not to acquire these rights, may still recover a portion of itsfunding if the movies are produced for others. In addition, NICC has received$45,000 in consulting fees from a series which RHI Entertainment has produced,and will receive a deferred payment of $750,000 as the last payment for certainterminated obligations.

The deferred payments mentioned above are payable toNICC on December 31, 2007 or upon a change in control, whichever comesfirst. Added to the deferred amounts will be (1) interest at the ratecharged by NICC’s prime lender or (2) if NICC sells Crown Media Holdingscommon stock to finance any deficit, the increase in the sale price of thecommon stock between the time NICC sells the stock to fund a deferred amountand a market price of the Crown Media Holdings common stock on the date thedeferred amounts are paid by Crown Media Holdings.

In the event there is a change of control of CrownMedia Holdings prior to the expiration of the agreement (i.e.,December 31, 2007), NICC will immediately receive a $15.0 million“termination payment,” any remaining portions of the payments for thenon-dramatic specials and the “made for television” movie development describedabove and the deferred payments described above. The Hallmark Channel will beobligated to continue to broadcast and pay for the Sunday “New Morning withNaomi Judd” and weekday “New Morning” series and the Sunday morning programmingblock for an additional six months following the change in control, after whichall funding and broadcast obligations to NICC will cease. Also, under existingobligations, Crown Media Holdings would be required to redeem the $25.0 millionpreferred interest of NICC in Crown Media United States, LLC, for that amountplus accrued interest at LIBOR from November 27, 2005.

If there has not been a change of control of theCompany by June 30, 2007, Crown Media Holdings is required to negotiatewith NICC for a period of 60 days regarding continuation of the programmingcommitments. If at the end of the negotiating period the parties have notreached agreement and Crown Media Holdings is not willing to continue theprogramming commitments at the same levels NICC may compel Crown Media Holdingsto buy all NICC’s outstanding shares of Crown Media Holdings common 

F-34

----

stock at the then currentmarket value by a written notice given no later than November 1, 2007(“Put Right”). If NICC sells more than 50% of the shares of Crown MediaHoldings common stock which it owned as of February 22, 2001, except aspart of a sale of Crown Media Holdings, most of the commitments and obligationsrelated to programming as described above cease (at the option of Crown MediaUnited States) at the end of the then current broadcast season (approximatelyAugust 31).

The Company has, at NICC’s request, startednegotiations with NICC regarding the continuation of the programmingcommitments. In the event a new agreement is not reached or other resolution isnot reached and NICC seeks to exercise its Put Right, the Company will endeavorto finance the purchase of the NICC stock through outside sources rather thanfrom funds from operations. In the alternative, the Company can, if necessary,extinguish NICC’s Put Right completely by offering to continue the programmingcommitments to NICC at the same level as in the current agreement.

During the year endedDecember 31, 2004, 2005, and 2006, Crown Media United States paid NICC$12.3 million, $12.5 million, and $18.4 million, respectively, related to thecompany agreement as amended.

**14.**          RHI Entertainment

***Film Asset Services Agreementwith RHI Entertainment***

TheCompany has a film asset services agreement with RHI Entertainment (formerlyHallmark Entertainment, LLC), under which RHI Entertainment provides CrownMedia Holdings with services related to the administration, distribution andother exploitation of the Company’s film assets. In consideration for theservices provided by RHI Entertainment, Crown Media Holdings was, prior to thesale of the Company’s international operations, obligated to pay a service feeof $1.5 million per year, payable in quarterly installments of $375,000.Following the sale of the Company’s international operations, the annual feefor these services was reduced to $750,000 per year. Crown Media Holdings paid$1.5 million to RHI Entertainment for these services during 2004, $1.0 millionduring 2005 and $719,000 during 2006. At December 31, 2005, and 2006,non-interest bearing unpaid accrued service fees of $188,000 and $0 wereincluded in payable to RHI and related companies in the accompanying condensedconsolidated balance sheets.

***Program License Agreements withRHI Entertainment Distribution***

Crown Media United States haslicensed programming for distribution in the United States from HallmarkEntertainment Distribution, now RHI Entertainment Distribution, since 1998. Itcurrently licenses this programming under a Second Amended and RestatedProgram License Agreement dated as of January 1, 2005 (“Second RestatedAgreement”). This Second Restated Agreement expires on December 31, 2008.

Under the Second Restated Agreement, RHI EntertainmentDistribution is required to produce and deliver to Crown Media United States,and Crown Media United States is required to order and license from RHIEntertainment Distribution, 13 original movies and 3 original mini-series in2005, 31 original movies and 6 original mini-series in 2006 and 18 originalmovies and 3 original mini-series in 2007. Crown Media United States may, however, completely cancel the 2007commitment to order 18 original movies and 3 original mini-series or it mayreduce the number of original movies it is required to license in each of 2006and 2007 by up to six movies per year. Crown Media United States has exercisedthis option to reduce by six the number of original movies produced in 2006 andhas advised RHI Entertainment Distribution that it will not exercise its rightto cancel the 2007 original productions. Crown Media United States hasexclusive rights to these original movies and mini-series during a three yearexhibition window (the window is five years for certain holiday-themed moviesand movies produced in 2005). Crown Media United States may exhibit theoriginal movies and mini-series in any television media in the United States,its territories and possessions (together with Puerto Rico), including pay perview and high definition television. Crown 

F-35

----

Media United States mayalso sublicense its exhibition rights in any television media regarding theoriginal and other movies and mini-series covered by the agreement to thirdparties, subject to the reasonable consent of RHI Entertainment Distribution.The license fee payable for the original movies produced in 2005 is $1,600,000per movie; in 2006 is $1,680,000 per movie and in 2007 is $1,764,000 per movie.If the movies are produced for the Hallmark Channel’s “Mystery Movie” series,the license fees are increased by $200,000 and if they are holiday-themedmovies, the license fees are increased by $100,000. The license fees formini-series produced in 2005 are $800,000 per hour; in 2006 are $840,000 perhour; and in 2007 are $882,000 per hour. Crown Media United States must also share any revenues from video ondemand or pay per view exploitation with RHI Entertainment Distribution.

In addition to the original movies and mini-Series,Crown Media United States has agreed to license from RHI EntertainmentDistribution 22 “off-network” movies and mini-series in 2005 and a maximum of15 such movies and mini-series in 2006 through 2013. These programs generallywill not have been seen on cable television in the United States prior to theirexhibition on the Hallmark Channel. The license fees payable for theoff-network movies are $268,029 per movie in 2005; $281,420 per movie in 2006;$295,491 per movie in 2007 and $310,266 per movie in 2008 and subsequent years.The license fees payable for the off-network mini-series are $335,024 per hourin 2005; $351,775 per hour in 2006; $369,364 per hour in 2007 and $387,832 perhour in 2008 and subsequent years. Crown Media United States’ initialexhibition period for these off-network movies and mini-series is three yearsand Crown Media United States’ exhibition rights are exclusive in alltelevision media in the United States, including Puerto Rico. Crown MediaUnited States’ exhibition rights to these off-network movies and mini-series donot, however, include pay per view or video on demand. RHI EntertainmentDistribution has an option to require Crown Media United States to licensethese off-network movies and mini-series for an additional, consecutive threeyear period at a cost of 50% of the initial license fee.

Crown Media United States has also agreed to licenseup to 143 older movies and mini-series from the RHI Entertainment DistributionLibrary for a three year exclusive exhibition window, at an approximate totalcost of $57.5 million. Most of these movies and mini-series have previouslybeen exhibited on the Hallmark Channel or Hallmark Movie Channel.

Both under the current and previous agreements withRHI Entertainment Distribution, if Crown Media United States sub-licenses anylicensed program to a third party, it must equally share with RHI EntertainmentDistribution the excess, if any, of the sublicensing fee over the initialprogram license fee paid by the Crown Media United States. Crown Media UnitedStates did not sub-license any licensed program to a third party during 2003.The Company sub-licensed $1.7 million during the year ended December 31,2004, which resulted in $330,000 owed to RHI Entertainment Distribution. CrownMedia United States  sub-licensed $1.5million during the year ended December 31, 2005, none of which was due toRHI Entertainment Distribution as there was no excess over the license fee.Crown Media United States  sub-licensed$409,000 during the year ended December 31, 2006, none of which was due toRHI Entertainment Distribution as there was no excess over the license fee.Amounts due to RHI Entertainment Distribution as a result of thesesub-licensing agreements have been included in license fees payable tonon-affiliates in the accompanying consolidated balance sheets as noted below.

Programming costs relatedto the RHI Entertainment Distribution program agreements were $20.0 million,$30.1 million, and $46.5 million for the years ended December 31, 2004,2005 and 2006, respectively. As of December 31, 2005 and 2006, $22.7million and $18.4 million, respectively, are included in license fees payableto non-affiliates in the accompanying consolidated balance sheets. Crown MediaHoldings paid RHI Entertainment Distribution $5.0 million, $93.4 million and$51.1 million for license fees in 2004, 2005 and 2006, respectively.

F-36

----

**15.**          Stockholders’Equity

The Company’s authorized capitalstock currently consists of 200,000,000 shares of Class A common stock,120,000,000 shares of Class B common stock, and 10,000,000 shares ofpreferred stock, all at $0.01 par value per share. The Company has not issuedany shares of preferred stock.

Hallmark EntertainmentInvestment Company controls all of the Company’s outstanding shares of Class Bcommon stock, which, together with the shares of Class A common stock itowns, represents approximately 95.8% as of December 31, 2006, of thevoting power on all matters submitted to the Company’s stockholders. Each shareof Class B common stock is convertible at the option of the holder intoone share of Class A common stock. Shares of Class B common stock aregenerally automatically convertible into Class A common stock upon sale orother transfer by the selling stockholder. In addition, the Class B commonstockholder is entitled to 10 votes per share as compared to one vote per shareof Class A common stock. With the exception of the voting and conversionrights, shares of Class A common stock and shares of Class B commonstock are identical.

TheCompany has not paid any cash dividends on its common stock since inception. Withthe exception of the NICC agreement in Note 13, the Company anticipates that itwill retain all of its earnings, if any, in the foreseeable future to financethe continued growth and expansion of its business, and the Company has nocurrent intention to pay cash dividends. The Company’s bank creditfacility also prohibits its declaring or paying any cash dividends.

**16.**          Income Taxes

Crown Media Holdings accountsfor income taxes using the asset and liability method. Under this method, CrownMedia Holdings recognizes deferred tax assets and liabilities for future taxconsequences attributable to the difference between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbasis. Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled.

On March 11, 2003, Crown Media Holdings became amember of Hallmark Cards consolidated federal tax group and entered into afederal tax sharing agreement with Hallmark Cards (the “tax sharing agreement”).Hallmark Cards includes Crown Media Holdings in its consolidated federal incometax return. Accordingly, Hallmark Cards has benefited from past tax losses andmay benefit from future federal tax losses, which may be generated by CrownMedia Holdings. Based on the tax sharing agreement, Hallmark Cards has agreedto pay Crown Media Holdings all of the benefits realized by Hallmark Cards as aresult of including Crown Media Holdings in its consolidated income tax return.These benefits are estimated and paid 75% in cash on a quarterly basis and thebalance when Crown Media Holdings becomes a federal taxpayer. A final true-upcalculation is completed within 15 days after Hallmark Cards files itsconsolidated federal income tax return for the year. Pursuant to the true-upcalculation, Crown Media Holdings is obligated to reimburse Hallmark Cards theamount that any estimated payments have exceeded the actual benefit realized byHallmark Cards and Hallmark Cards is obligated to pay Crown Media Holdings theamount that any actual benefit exceeds the estimated payments. Under the taxsharing agreement, at Hallmark Cards’ option, the non-interest bearing balanceof the 25% in federal tax benefits may be applied as an offset against anyamounts owed by Crown Media Holdings to any member of the Hallmark Cardsconsolidated group under any loan, line of credit or other payable, subject tolimitations under any loan indentures or contracts restricting such offsets.During the third quarter of 2005, Hallmark Cards used $30.0 million of theapproximately $45.7 million balance of this 25% balance to offset intercompanydebt. During the third quarter of 2006, Hallmark Cards used $18.0 million ofthe approximately $18.0 million balance of this 25% balance to reduce theprincipal amount due under the March 21, 2006, promissory note withHallmark Entertainment Holdings.

F-37

----

Hallmark Cards did not use any of the Company’s 2006tax losses in 2006 and has used approximately $671.4 million of Crown MediaHoldings tax losses since entering into the tax sharing agreement. Pursuant tothe tax sharing agreement, the Company received $56.6 million, $56.1 million(including the $30.0 million offset to intercompany debt during the thirdquarter of 2005), and $30.0 million (including the $18.0 million offset tointercompany debt during the third quarter of 2006) under the tax sharingagreement during 2004, 2005, and 2006, respectively. These receipts have beenrecorded as an addition to paid-in capital. The Company has recorded a deferredtax asset of $28.6 million related to the taxable loss generated during theyear ended December 31, 2006, which has been included in the net operatingloss component of deferred tax assets in the table below. The Company hasrecorded a deferred tax asset of $558.1 million related to the cumulativelosses generated. The entire amount of the Company’s net deferred tax assetshave been offset with a valuation allowance. During 2006, the valuationallowance changed by $151.6 million. The Company may ultimately reverse thevaluation allowance and record a tax benefit if it is determined, more likelythan not, that the Company could realize the tax benefit if it were treated asa stand-alone taxpayer.

Based on the Tax SharingAgreement, the Company may ultimately owe Hallmark Cards for its share of theconsolidated federal tax liability. Such payments would be treated as areduction to paid-in capital to the extent of amounts previously received underthe Tax Sharing Agreement.

Since May 9, 2000, theCompany has been included in certain combined state income tax returns ofHallmark or Hallmark Entertainment Holdings. Consequently, HallmarkEntertainment Holdings and the Company entered into a state tax sharingagreement. Under the state tax sharing agreement, Hallmark EntertainmentHoldings and Crown Media Holdings file consolidated, combined or unitary statetax returns. Crown Media Holdings makes tax-sharing payments to (or receivespayments from) Hallmark Entertainment Holdings equal to the taxes (or taxrefunds) that Crown Media Holdings would pay (or receive) if it filed on astand-alone basis. Such payments are computed based on Crown Media Holdings’taxable income (loss) and other tax items beginning the day following the May 9,2000, reorganization.

The following table reconciles the income tax provisionat the U.S. statutory rate to the provision per the financial statements:

| ** **                              | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------|------------|---------------------------------------------|------------|
| ** **                              | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                              | ** ** | **(In thousands)**                     | ** ** |
| Taxes computed at 35%                   |       | $                                           | (61,172    | ) | $ | (75,438 | ) | $ | (135,941 | ) |
| Other                                   |       | 265                                         |       | 2,222 |   | 219 |   |
| Increase in federal valuation allowance |       | 60,907                                      |       | 73,216 |   | 135,722 |   |
| Income tax provision                    |       | $                                           | —     |   | $ | — |   | $ | — |   |

 

F-38

----

The components of Crown Media Holdings’ deferred taxassets and liabilities are comprised of the following:

| ** **                     | ** ** | **As of December 31,** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|
| ** **                     | ** ** | **2005**                              | ** ** | **2006** | ** ** |
| ** **                     | ** ** | **(In thousands)**               | ** ** |
| Deferred  tax assets:          |       |                                  |       |   |   |
| Deferred revenue               |       | $                                     | 67         |   | $ | — |   |
| Bad debt reserve               |       | 610                                   |       | 96 |   |
| Accrued compensation           |       | 5,276                                 |       | 3,279 |   |
| Net operating loss             |       | 531,261                               |       | 558,108 |   |
| Depreciation                   |       | 7,981                                 |       | 7,246 |   |
| Other                          |       | 13,626                                |       | 18,293 |   |
| Valuation allowance            |       | (428,079                              | )          | (579,690 | ) |
| Total deferred tax assets      |       | 130,742                               |       | 7,332 |   |
| Deferred  tax liabilities:     |       |                                  |       |   |   |
| Film inventory                 |       | (126,661                              | )          | — |   |
| Program license fees           |       | —                                |       | (4,011 | ) |
| Other                          |       | (4,081                                | )          | (3,321 | ) |
| Total deferred tax liabilities |       | (130,742                              | )          | (7,332 | ) |
| Net deferred taxes             |       | $                                     | —     |   | $ | — |   |

 

Asof December 31, 2006, the Company’s cumulative federal and state net taxoperating losses were $1.4 billion. Of this amount, approximately $759.6million has not been utilized by Hallmark Cards in its consolidated tax returnsand will expire beginning in 2020 through 2026.

**17.**          Fair Value

The following table presents the carrying amounts andestimated fair values of the Company’s financial instruments at December 31,2005 and 2006. The estimated fair value of a financial instrument is the amountat which the instrument could be exchanged in a current transaction betweenwilling parties.

| ** **                                                     | ** ** | **2005**                | ** ** | **2006**  | ** ** |
|----------------------------------------------------------------|------------|-------------------------|------------|-----------|------------|
| ** **                                                     | ** ** | **Carrying**            | ** ** | **Fair**  | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                                                     | ** ** | **Amount**              | ** ** | **Value** | ** ** | **Amount** | ** ** | **Value** | ** ** |
| ** **                                                     | ** ** | **(In thousands)** | ** ** |
| Senior unsecured  note to HC Crown, including accrued interest |       | $                       | 509,386    |      | $          | 436,822 |   | $ | 562,167 |   | $ | 479,817 |   |
| Company obligated  mandatorily redeemable preferred interest   |       | 14,537                  |       | 19,300    |       | 16,483 |   | 16,888 |   |
|                                                                |            |                         |            |           |            |  |  |  |  |  |  |  |  |

 

The carrying amounts shown inthe table are included in the accompanying consolidated balance sheets underthe indicated captions. The Company estimates the fair value of the companyobligated mandatorily redeemable preferred interest on an annual basis as it isnot practicable to perform the valuation more frequently. The valuation isdependent upon the future pre-tax income of Crown Media United States since theCompany is only obligated to make payments on the instrument within 60 days ofthe fiscal year in which pre-tax income is generated by Crown Media UnitedStates or within 60 days of December 31, 2010.

The Company estimates the fairvalue of the senior unsecured note to HC Crown on a quarterly basis. TheCompany estimated the fair value of the senior unsecured note to HC Crown bydetermining the discounted value of future cash flows, based upon a borrowingrate of 14.5%, which is estimated to be the current market interest rate for adebt instrument with similar terms.

F-39

----

Accountspayable and receivable are carried at reasonable estimates of their fair valuesbecause of the short-term nature of these instruments. The interest rates onthe bank credit facility, the line of credit with HC Crown and the note payableto Hallmark Entertainment Holdings, LLC are variable, have relatively shortmaturity periods and/or reset periodically; therefore, the fair value of thisdebt is not significantly affected by fluctuations in interest rates.

**18.**          Share-Based Compensation

CrownMedia Holdings has one stock option plan, the Amended and Restated Crown MediaHoldings, Inc. 2000 Long Term Incentive Plan (the “Plan”). The Plan coversthree types of share-based compensation: Stock Options, Restricted Stock Units(“RSU”) and Share Appreciation Rights (“SAR”) that are subject to SFAS 123Rcommencing on January 1, 2006. Before implementation of SFAS 123R, CrownMedia Holdings accounted for the stock option component of the Plan under APB25, under which compensation cost approximated $5,000 and $116,000 for theyears ended December 31, 2004 and 2005, respectively. Compensation costfor stock options issued to employees represented the excess of the quotedmarket price of the Company’s stock at the measurement date of the grant overthe exercise price of the option.

***Stock-Based Compensation***

Beginning with our first quarter of fiscal 2006, weadopted SFAS 123R. We currently use the Black-Scholes option pricing model todetermine the fair value of stock options. The determination of the fair valueof stock-based payment awards on the date of grant using an option-pricingmodel is affected by our stock price as well as assumptions regarding a numberof complex and subjective variables. These variables include our expected stockprice volatility over the term of the awards, actual and projected employeestock option exercise behaviors, risk-free interest rate and expecteddividends.

We estimate the expected term of options granted bytaking the average of the vesting term and the contractual term of the option.We estimate the expected volatility of our common stock by using historical volatility.We base the risk-free interest rate that we use in the option valuation modelon U.S. Treasury zero-coupon issues with remaining terms similar to theexpected term on the options. We do not anticipate paying any cash dividends inthe foreseeable future and therefore use an expected dividend yield of zero inthe option valuation model. We are required to estimate forfeitures at the timeof grant and revise those estimates in subsequent periods if actual forfeituresdiffer from those estimates. We use historical data to estimate pre-vestingoption forfeitures and record stock-based compensation expense only for thoseawards that are expected to vest. The fair value of all stock-based paymentawards is amortized on a straight-line basis over the requisite service periodsof the awards, which are generally the vesting periods.

The Company recorded a $3.1 million compensationbenefit related to restricted stock units and $11,000 compensation expenserelated to stock options for the year ended December 31, 2006, on ourconsolidated statement of operations as a component of selling, general andadministrative expense.

The Company recorded $11.5 million and $8.5 million ofcompensation expense associated with the Employment and Performance RSUs duringthe years ended December 31, 2004 and 2005, respectively, which have beenincluded in selling, general and administrative expense in the accompanyingconsolidated statements of operations

As of December 31,2006, there was no unrecognized compensation cost, adjusted for estimatedforfeitures, related to non-vested stock options granted to our employees.Total unrecognized compensation cost will be adjusted for future changes inestimated forfeitures.

F-40

----

***General Stock Option Information***

Crown Media Holdings may grant optionsfor up to 10.0 million shares under the Plan. The stock options expire 10 yearsfrom the date of grant and generally vest over service periods that range fromdate of grant to four years. Certain option and share awards provide foraccelerated vesting if there is a change in control (as defined in the Plan).

The fair value of each option grant is estimated on thedate of grant using the Black-Scholes option pricing model that uses theassumptions noted in the following table. The Company uses historicaldata to estimate option exercise and employee termination with the valuationmodel; separate groups of employees that have similar historical exercisebehavior are considered separately for valuation purposes. The expected term ofoptions granted is derived from the output of the option valuation model andrepresents the period of time that options granted are expected to beoutstanding; the range given below results from certain groups of employeesexhibiting different behavior. The risk-free rate for periods within thecontractual life of the option is based on the U.S. Treasury yield curve.

| ** **                | ** ** | **2005** | ** ** |
|---------------------------|------------|----------|------------|
| Expected  volatility      |       | 38.8     | %          |
| Expected  dividends       |       | 0        |       |
| Expected Term (in  years) |       | 1.16     |       |
| Risk -free rate           |       | 4.38     | %          |

 

There were no stock optiongrants in 2004 and 2006. In December 2005, the Company modified astock option agreement covering vested stock options with a former employee.The modified terms included an extension of the expiration date from December 31,2005, to February 28, 2007, and an extension of the related stock optionexercise dates to January 1, 2007, through February 28, 2007.

A summary of the status of Crown’ Stock Option Plan at December 31,2006, and changes during the year then ended is presented below:

| ** **                       | ** ** | **Shares**              | ** ** | **Exercise  Price  Per Option** | ** ** | **Weighted-   Average  Exercise  Price  Per Option** | ** **             | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------|------------|-------------------------|------------|--------------------------------------|------------|----------------------------------------------------------------|------------------------|------------------------------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **(in thousands)** | ** ** | ** **                           | ** ** | ** **                                                     | ** **             | ** **                                           | ** ** | ** **                      | ** ** |
| Balance,  December 31, 2005 |       |                    | 867        |                                 |       |                                                           |                   |                                                 | $          | 10.42                           |       |   |   |   |   |   |   |   |   |   |
| Options forfeited                |       |                    | (57        | )                                    |       | $                                                              | 8.94 - 17.45 |                                                 |       | $                               | 12.89      |   |   |   |   |   |   |   |   |   |   |
| Balance,  December 31, 2006 |       |                    | 810        |                                 |       |                                                           |                   |                                                 | $          | 10.24                           |       |   |   | 2.09 |   |   |   | $ | 0.00 |   |   |
| Exercisable                      |       |                    | 810        |                                 |       |                                                           |                   |                                                 | $          | 10.24                           |       |   |   | 2.09 |   |   |   | $ | 0.006 |   |   |
|                                  |            |                         |            |                                      |            |                                                                |                        |                                                      |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                                                       | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                                | ** ** |
|------------------------------------------------------------------|------------|------------------------------|------------|-------------------------------------------------------------|------------|
| **Range of Exercise Prices Per Option** | ** ** | **Shares  Outstanding**      | ** ** | **Weighted Average  Remaining  Contractual Life** | ** ** | **Weighted Average  Exercise Price  Per Option** | ** ** | **Exercisable  Shares** | ** ** | **Weighted Average  Exercise Price  Per Option** | ** ** |
| ** **                                                       | ** ** | **(In thousands)**      | ** ** | **(In years)**                                         | ** ** | ** ** | ** ** | **(In thousands)** | ** ** | ** ** | ** ** |
| $  6.30 - 10.50                              |       |                         | 517        |                                                        |       |   | 0.5 |   |   |   | $ | 9.10 |   |   |   | 517 |   |   |   | $ | 9.10 |   |   |
| $10.51 - 12.60                                         |       |                         | 235        |                                                        |       |   | 5.0 |   |   |   | $ | 11.47 |   |   |   | 235 |   |   |   | $ | 11.47 |   |   |
| $12.61 - 14.70                                         |       |                         | 24         |                                                        |       |   | 3.3 |   |   |   | $ | 14.00 |   |   |   | 24 |   |   |   | $ | 14.00 |   |   |
| $14.71 - 21.00                                         |       |                         | 34         |                                                        |       |   | 4.3 |   |   |   | $ | 16.52 |   |   |   | 34 |   |   |   | $ | 16.52 |   |   |
|                                                             |       |                         | 810        |                                                        |       |   |   |   |   |   |   |   |   |   | 810 |   |   |   |   |   |   |

 

Thetotal intrinsic value of options exercised during the years ended December 31,2004, 2005 and 2006 was $0, $338,000, and $0, respectively.

F-41

----

***General Restricted Stock Unit Information***

The Company’s restricted stock units (“RSUs”) vestbased on employment, performance and market conditions. Certain RSUs vesteither in one-third increments on the anniversary of the grant date in each ofthe three years following the grant or all at one time on the third yearanniversary of the grant date, in both cases based on continuing employment(“Employment RSUs”). Other RSUs vest on the third anniversary date of the grantdate, provided that the price of the Company’s Class A common stock is atleast $14 or higher on that date (“Performance RSUs”).

The Company’s RSUs are settled in either common stockor cash as determined by the Company’s Board of Directors. The Company hashistorically settled the RSUs in cash, and considering such past practices, hasclassified its RSUs as liability awards for accounting purposes.

Prior to the adoption of SFAS 123R, we recognized theestimated compensation cost of employment restricted stock units over thevesting term, including changes in fair value at each reporting period. Theestimated compensation cost was and continues to be based on the fair value ofour stock price at the end of each reporting period. We will continue torecognize the compensation cost, net of estimated forfeitures, over the vestingterm and include changes in fair value at each reporting period.

The Company made an offer in May 2003 to seniormanagement and vice presidents to exchange their options for Employment RSUs,resulting in a total of 5,126,732 options exchanged for 2,050,693 EmploymentRSUs. The Employment RSUs vested over three years in one-third increments onthe anniversary of the grant date each year and the Company accrued expenserelated to the Employment RSUs ratably over each increment’s vesting periodusing the price of our Class A common stock on the last day of thereporting period.

In May 2004, the Company’s Board of Directorsapproved an additional grant to employees of 1,065,000 RSUs. The EmploymentRSUs, which constitute 70% of the award granted in 2004, vest in equalone-third installments over the next three years on the anniversary of thegrant date each year. The Performance RSUs, constituting 30% of the awardgranted in 2004, vest on the 3rd anniversary of the grant date, provided thatthe price of the Company’s common stock is $14 or higher on that date.

The Company settled certain Employment RSUs during thethree months ended March 31, 2005, for approximately $4.2 million in cash.Additionally, in conjunction with the close of the international transaction,the Company immediately vested and settled Employment RSUs held by individualsemployed by the international business in May 2005 for approximately $4.0million in cash. In June 2005, the Company settled vested Employment RSUsfor approximately $3.8 million in cash. In August 2005, the Companyimmediately vested and settled RSUs held by one employee of the Company forapproximately $139,000 in cash. In January 2006, the Company settled vested EmploymentRSUs to one executive for approximately $4.4 million. In June 2006, the Companysettled vested Employment RSUs for approximately $1.5 million in cash.

InJune 2005, the Company’s Board of Directors approved a grant to thoseDirectors who were not employees of the Company or of Hallmark Cards or itsaffiliated companies, of 70,884 RSUs. The RSUs vest in equal one-thirdinstallments over three years on the anniversary of the grant dates each year.In July 2005, the shareholders approved an amendment to our Plan, which ratifiedan amendment adopted by the Board of Directors in June 2005 to allow thegrant of RSUs to our Directors. Since the vesting dates were determined as ifthese grants were in May 2003 and May 2004 and some portions of thegrants had, therefore, vested, in August 2005, the Company settled thevested RSUs held by these Directors for approximately $353,000 in cash. InJune 2006, the Company settled vested RSUs for approximately$80,000 in cash.

In August 2005, the Company’s Board of Directorsapproved an additional grant of 828,000 Employment and Performance RSUs toemployees. The Employment RSUs, which constitute 50% of the 

F-42

----

award granted in 2005,vest in equal one-third installments over the next three years on theanniversary of the grant date each year. The Performance RSUs, constituting 50%of the award granted in 2005, vest on the 3rd anniversary of the grant date, provided thatthe price of the Crown common stock is $14 or higher on that date. InAugust 2006, the Company settled vested RSUs for approximately $442,000 incash.

In August 2005, the Company’s Board of Directorsapproved an additional grant to one executive of 115,000 RSUs (“CEO Grant”).The Employment RSUs, which constitute 50% of the award granted in 2005, vestedin equal one-third installments on dates which were three months, six monthsand nine months, respectively, after the grant date and the Company has settledthese RSUs for $203,000 in November 2005, $165,000 in February 2006and $76,000 in May 2006. The Performance RSUs, constituting the remaining50% of the award granted in 2005, have lapsed without vesting.

In August 2005, the Company’s Board ofDirectors approved a grant to those Directors who were not employees of theCompany or of Hallmark Cards or its affiliated companies, a total of 31,570RSUs. The RSUs vest in equal one-third installments over three years on theanniversary of the grant dates each year. In August 2006, the Companysettled vested RSUs for approximately $34,000 in cash.

In August 2006, the Company’s Board ofDirectors approved a grant to those Directors who were not employees of theCompany or of Hallmark Cards or its affiliated companies, a total of 71,979RSUs. The RSUs vest in equal one-third installments over three years on theanniversary of the grant dates each year.

Additionally,in August 2006, one executive retired, and the Company settled vested RSUsfor approximately $16,000 in cash.

In August 2006, the Company’s Board of Directorsapproved an additional grant of 1,298,000 Employment and Performance RSUs to theexecutive officers and other employees. The Employment RSUs and the PerformanceRSUs constitute 35% and 65% of the grant, respectively. The Employment RSUswill vest and be settled in stock or cash on August 17, 2009, the thirdanniversary of the grant date, provided the individual holding the RSUs isemployed by the Company on that date. Performance RSUs become eligible to vest(“Achieved Performance RSUs”), in the range of 150% (which results in an awardof additional Performance RSUs) to 0% of the Performance RSUs, depending uponthe successful renewal of specific distributor agreements within certain timeperiods. Sixty-five percent of the Achieved Performance RSUs will fully vestupon the signing of the renewal agreements, which the Company intends tocomplete by November 2007. In a second vesting, 65% to 135% (“theModifier”) of the Achieved Performance RSUs (less the Achieved Performance RSUspreviously vested) will vest on December 31, 2008, based upon a formulausing subscriber revenue achieved for a specified time period.

The Compensation Committee of the Board of Directorshas the discretion to increase or decrease the Modifier by 20% and also mayextend the deadlines for satisfaction of the vesting conditions in the eventthat a renewal of the distribution agreements is delayed for factors beyond thecontrol of the Company. In order to be eligible for vesting and settlement ofthe Achieved Performance RSUs, the individual holding them must either beemployed at the time of the first vesting or have been terminated without causewithin 90 days of a vesting date. The vesting of Employment RSUs acceleratesupon death or disability of an executive officer. Employment RSUs andPerformance RSUs have accelerated vesting if the executive is involuntarilyterminated without cause within 90 days before or after a change in control.

Under the 2006 Restricted Stock Units Agreement datedOctober 3, 2006, the Company granted 200,000 restricted stock units to theCompany’s CEO. The Employment RSUs constitute 50% of the grant and thePerformance RSUs 50%. Each RSU corresponds to a right to receive (at theCompany’s discretion) one share of Class A common stock or cash in anamount equivalent to the value of one share of Class A common stock at thetime of vesting. The Employment RSUs will vest and be settled on the fourthanniversary of the grant date, provided the CEO is employed by the Company onthat date, or upon death or disability. Performance RSUs become eligible tovest (“Achieved Performance RSUs”), in the 

F-43

----

range of 150% (whichresults in an award of additional Performance RSUs) to 0% of the PerformanceRSUs, depending upon the successful renewal of specific distributor agreementswithin certain time periods. Once the final renewal which determines the amountof the Achieved Performance RSUs has occurred, 65% of the Achieved PerformanceRSUs will vest and be settled. In a second vesting, 65% to 135% (the“Modifier”) of the Achieved Performance RSUs (less the Achieved PerformanceRSUs previously vested) will vest and be settled on December 31, 2008,based upon a formula using subscriber revenue achieved for a specified timeperiod.

The Company’s Compensation Committee has thediscretion to increase or decrease the Modifier by 20% and also may extend thedeadlines for satisfaction of the vesting conditions in the event that arenewal of the distribution agreements is delayed for factors beyond thecontrol of the Company. If the Company terminates the CEO’s employment withoutcause or the CEO terminates for good reason within 90 days prior to a vestingdate for Performance RSUs, the Performance RSUs will vest as though the CEOwere still employed by the Company on that vesting date.  All RSUs vestimmediately upon involuntary termination without cause or termination for goodreason if a change in control occurs 90 days prior to or 90 days after suchtermination.

The Company executed a Restricted Stock UnitsAgreement with the CFO, dated November 8, 2006, which provides for thegrant of 25,200 Employment RSUs and 46,800 Performance RSUs to the CFO. TheEmployment RSUs will vest and be settled in stock or cash on August 17,2009, provided that CFO is employed by the Company on that date and subject toaccelerated vesting in the event of a change of control of the Company.

UnderSFAS 123R, the fair value of the 2004 and 2005 Employment RSU grants areestimated using a Black-Scholes option pricing model. The fair value of the2004 and 2005 Performance RSU grants are estimated at each reporting date usinga Monte Carlo Lattice option pricing model. Beginning in 2006, the Company isapplying a forfeiture rate to the RSUs as required by SFAS No. 123R.

|                                            | ** ** | ** ** | ** ** | **Weighted-Average  Remaining** | ** ** |
|--------------------------------------------|------------|------------|------------|---------------------------------|------------|
| **Employment RSUs**                   | ** ** | ** ** | ** ** | **Units**                       | ** ** | **Contractual Term** | ** ** |
| Nonvested Balance,  December 31, 2005 |       | 1,477,343  |       |                            |       |   |   |
| Units issued                               |       | 579,500    |       |                            |       |   |   |
| Units settled in cash                      |       | (1,009,453 | )          |                            |       |   |   |
| Units forfeited                            |       | (232,423   | )          |                            |       |   |   |
| Nonvested Balance,  December 31, 2006 |       | 814,967    |       |                            | 2.27       |   |   |
|                                            |            |            |            |                                 |            |  |  |  |  |

 

The closing price of a share of our common stock was$9.17 on December 31, 2005, $6.34 on March 31, 2006 and $4.12 on June 30,2006, $4.49 on September 30, 2006, and was $3.63 on December 31,2006.

| ** **                                 | ** ** | ** ** | ** ** | **Weighted-Average  Remaining** | ** ** |
|--------------------------------------------|------------|------------|------------|---------------------------------|------------|
| **Performance RSUs**                  | ** ** | ** ** | ** ** | **Units**                       | ** ** | **Contractual Term** | ** ** |
| Nonvested  Balance, December 31, 2005 |       | 688,500    |       |                            |       |   |   |
| Units issued                               |       | 990,500    |       |                            |       |   |   |
| Units forfeited                            |       | (374,300   | )          |                            |       |   |   |
| Nonvested Balance,  December 31, 2006 |       | 1,304,700  |       |                            | 1.25       |   |   |
|                                            |            |            |            |                                 |            |  |  |  |  |

 

At December 31, 2005, the2004 Performance RSUs were valued at $1.61 per unit, the 2005 Performance RSUswere valued at $4.36 per unit, and the chief executive officer Performance RSUswere valued at $1.23 per unit. At December 31, 2006, the 2004 PerformanceRSUs were valued at $0.00 per unit 

F-44

----

andthe 2005 Performance RSUs were valued at $0.12 per unit. The chief executiveofficer Performance grant expired in May 2006. Valuation of thesePerformance RSU grants is based upon market conditions.

The following table includes assumptions used to valuethe Employment and Performance RSUs at December 31, 2006.

| ** **                | ** ** | **2004 Grant** | ** ** | **2005 Grant** | ** ** |
|---------------------------|------------|---------------------|------------|---------------------|------------|
| Expected  volatility      |       |                | 40.80      | %                   |       |   | 47.20 | % |   |
| Expected  dividends       |       |                | 0          |                |       |   | 0 |   |   |
| Expected Term (in  years) |       |                | 0.41       |                |       |   | 1.63 |   |   |
| Risk-free rate            |       |                | 5.09       | %                   |       |   | 4.82 | % |   |

 

The following table includes assumptions used to valuethe Performance RSUs at January 1, 2006.

| ** **                | ** ** | **2004 Grant** | ** ** | **2005 Grant** | ** ** | **Chief Executive  Officer Grant** | ** ** |
|---------------------------|------------|---------------------|------------|---------------------|------------|----------------------------------------------|------------|
| Expected  volatility      |       |                | 39.34      | %                   |       |                                         | 48.87      | % |   |   | 40.04 | % |   |
| Expected  dividends       |       |                | 0          |                |       |                                         | 0          |   |   |   | 0 |   |   |
| Expected Term (in  years) |       |                | 1.42       |                |       |                                         | 2.67       |   |   |   | 0.46 |   |   |
| Risk-free rate            |       |                | 4.38       | %                   |       |                                         | 4.37       | % |   |   | 4.37 | % |   |

 

Under SFAS 123R, the fair value of each 2006Employment and Performance RSU grant is estimated using the fair value of $3.63based upon the closing price of a share ofour common stock as of the December 31, 2006, reporting date. Valuation ofthe 2006 Employment RSUs is based solely on a service condition. Valuation ofthe 2006 Performance RSUs is based upon a service condition and a performancecondition.

Inconnection with the adoption of SFAS 123R, we recorded total compensation costs related to RSUs granted under the Plan of $2.1million as a cumulative catch-up adjustment during the year ended December 31,2006. Prior to January 1, 2006, the Performance RSUs were not recorded onthe Company’s financial statements as a liability, as it was not deemedprobable that these units would be settled based on the performance of theCompany’s common stock. Additionally, the Company did not account forforfeitures. Commencing in 2006, the Company established a liability for thefair market value of the Performance RSUs based on an option-pricing model.Further, the Performance RSUs are reviewed quarterly for changes in the fairmarket value.

| ** **                                 | ** ** | ** ** | ** ** | **Weighted-Average  Remaining** | ** ** |
|--------------------------------------------|------------|------------|------------|---------------------------------|------------|
| **Board of Directors RSUs** | ** ** | ** ** | ** ** | **Units**                       | ** ** | **Contractual Term** | ** ** |
| Nonvested  Balance, December 31, 2005 |       | 32,468     |       |                            |       |   |   |
| Units issued                               |       | 103,549    |       |                            |       |   |   |
| Units settled in cash                      |       | (28,710    | )          |                            |       |   |   |
| Units forfeited                            |       | (26,157    | )          |                            |       |   |   |
| Nonvested Balance,  December 31, 2006 |       | 81,150     |       |                            | 2.32       |   |   |
|                                            |            |            |            |                                 |            |  |  |  |  |

 

***Chief Executive Officer (“CEO”) Share AppreciationRights Agreement***

Under Share Appreciation Rights Agreement dated October 3,2006, the Company has agreed to grant stock appreciation rights (“SARs”) to theCEO upon occurrence of certain events. The value of each SAR corresponds to thevalue of one share of Class A common stock and will be settled at theCompany’s discretion in Class A common stock or cash. SARs will be grantedduring the term of employment the day after the fair market value of theCompany’s stock reaches the “threshold price” and stays at the threshold priceor higher for 60 consecutive calendar days. SARs will then be granted each timethat the fair market 

F-45

----

value of the Company’sstock increases another incremental five dollars over the previous price atwhich a SAR grant was triggered and stays at such price or higher for 60consecutive calendar days. Upon the occurrence of each event which triggers aSAR grant, the CEO will be granted that number of SARs with a value equal to 0.8%of the Enterprise Growth as of the grant date divided by the triggering Companystock price. “Enterprise Growth” equals the increase in market capitalization(compared to the market capitalization based on the Start Price or the lastprice triggering a grant of an SAR), adjusted upward or downward by the amountof debt incurred or paid down since the Start Date or last trigger date, asapplicable. “Threshold price” shall mean the average of the fair market valuefor the 5 business days prior to the date of announcement of the CEO’semployment (i.e., October 4, 2006) (“Start Price”) plus five dollars.

In the event of a change in control of the Company,then as of the change in control, (i) if there has been no prior SARtrigger and the change in control price (price of the Company’s stock lesstransaction costs and certain other amounts) exceeds the Start Price, then theCEO shall be granted that number of SARs equal to 0.8% of the Enterprise Growthdivided by the change in control price; or (ii) if there has been aprevious SAR trigger and the change in control price exceeds the previous SARtrigger, then the CEO shall be granted that number of SARs equal to 0.8% of theEnterprise Growth divided by the change in control price. If the CEO’semployment is terminated without cause by the Company or by him for good reasonor because of his death or disability, and if a change in control occurs within90 days after the termination of employment or an agreement that will result ina change of control is executed prior to the termination and the change ofcontrol occurs within 180 days after the termination, the CEO will receive agrant of SARs on the basis described above.

SARs will vest upon the earlier of (i) 3 years ofemployment after the grant date, (ii) termination of employment withoutcause by the Company, (iii) termination by the CEO for good reason or (iv) upona change in control of the Company. The Company at its discretion may settleSARs in cash or in stock.

The fair value of the CEO’s SAR grant is estimated ateach reporting date using a Monte Carlo Lattice option pricing model. At December 31, 2006, and the CEO’s SARswere valued at $872,616 using the closing price of a share of our common stockon December 31, 2006, of $3.63. Valuation of this SAR grant is based uponmarket and service conditions. The Company recorded $59,000 incompensation expense related to SARs for the year ended December 31, 2006,on our consolidated statement of operations as a component of selling, generaland administrative expense. The SARs have been recorded in accounts payable andaccrued liabilities in the accompanying consolidated balance sheet for the yearended December 31, 2006.

The following table includes assumptions used to valuethe SARs at December 31, 2006.

| Expected  volatility            |   | 46.91   | %      |
|---------------------------------|--------|---------|--------|
| Expected  dividends             |   | 0       |   |
| Expected Term (in  years)       |   | 3.56    |   |
| Risk-free rate                  |   | 4.72    | %      |
| Average Number of SARs  granted |   | 240,390 |   |

 

***Bonus***

In May 2003, theCompany’s Board immediately vested the stock options of all employees below thevice-president level who held options at that time and granted them a right toreceive a future cash payment of $1.00 for each outstanding option held by theemployee. The immediate vesting of the employees’ stock options created a newmeasurement date which required the Company to record stock compensationexpense, if any, for the excess of the Company’s stock price on the measurementdate over the underlying stock options’ exercise price. Since the price of theCompany’s Class A common stock on 

F-46

----

themeasurement date was less than the exercise price of all of the stock optionsowned by the employees, no compensation expense was recorded under APB 25.However, the June 2004 cash payments totaling $344,000 was contingent uponeach respective employees’ continuous employment through that date. As aresult, the Company recorded compensation expense from June 2003 through May 2004as the compensation was earned. For the year ended December 31, 2004,$140,000, of compensation expense was recorded related to this obligation.

**19.**          Employee Benefits

***Benefit Plans***

CrownMedia Holdings adopted a 401(k) retirement plan for all of its UnitedStates employees effective January 1, 2002. Under the provisions of theCrown Media Employee Savings Plan (“ESP”), any full-time or part-time employeemay join the ESP 90 days after his or her employment. Employees that qualifyfor participation can contribute up to 50% of their pre-tax salary, subject toa maximum contribution limit as determined by the Internal Revenue Service, andup to 16% of after-tax salary, not to exceed 50% total of combined and pre-taxand after-tax contributions. Additionally, for every dollar up to six percentof salary an employee contributes, Crown Media Holdings will contribute fiftycents. Crown Media Holdings contributed $345,000, $392,000 and $384,000 for theyears ended December 31, 2004, 2005, and 2006, respectively.

***Deferred Compensation Plans***

The Company sponsors a deferred compensation plan forits management. Participants in this plan earn interest on their deferredcompensation. Related liabilities of $3.2 million and $3.3 million at December 31,2005, and 2006, respectively, are included in the accompanying consolidatedbalance sheets among short and long-term accrued liabilities. The Company suspendedthis plan for 2006 and no deferrals of employee compensation earned wereallowed in 2006. The Company continued to pay interest on amounts deferred inprevious years and paid out these amounts in accordance with the terms of theplan. The Company reactivated the plan in 2007.

The Company also sponsorsa deferred compensation plan for its Board of Directors. Participants in thisplan earn interest on their deferred compensation. Related liabilities of$538,000 and $589,000 at December 31, 2005, and 2006, respectively, areincluded in the accompanying consolidated balance sheets among short andlong-term accrued liabilities. The Company suspended this plan for 2006 and nodeferrals of director compensation earned were allowed in 2006. The Companycontinued to pay interest on amounts deferred in previous years and paid outthese amounts in accordance with the terms of the plan. The Company reactivatedthis plan in 2007.

***Severance***

In April 2006, theCompany terminated approximately 20 employees in conjunction with its costsavings efforts. The Company’s severance costs related to these employees wereapproximately $2.3 million. All amounts were paid during 2006; therefore, noamounts are included in the accounts payable and accrued liabilities in theaccompanying consolidated balance sheet as of December 31, 2006.

***Retention Program***

In 2004, the Companyestablished a retention program for approximately 175 employees who wereaffected by the sale of Crown Media Holdings’ international business. Under theprogram, employees that remained with the Company through the earlier of thedate on which a sale of the international business became effective or December 31,2004, were entitled to a retention bonus totaling approximately $7.7 million.The Company recorded $7.7 million of expense for the year ended December 31,2004, in regard 

F-47

----

to thisretention program, of which $7.1 million was paid in 2005. Due to terminationsand management’s revised estimates, the Company did not pay the remaining$600,000.

**20.**          Commitments and Contingencies

In the normal course of business, the Company hasentered into agreements that commit it to make cash payments in future periodswith respect to non-cancelable leases and programming contracts.

SFAS No. 63 requires anentity providing licensed programming to report an asset and liability for therights licensed under a programming agreement only when the license period hasbegun and when certain other defined requirements are met. As such, theaccompanying consolidated balance sheets do not reflect both gross assets andliabilities of $263.9 million and $227.8 million as of December 31, 2005and 2006, respectively, related to committed program license fees payable toRHI Entertainment Distribution and various third parties with airing windowswhich begin subsequent to period-end.

Contractual maturities of long-term obligations(excluding future interest) over the next five years are as follows (inthousands):

| ** **                                                                   | ** ** | **Total** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** |
|------------------------------------------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|
| Credit facility and interest payable                                         |       | $         | 87,692     |     | $          | —   |       | $        | 87,692     |     | $          | —   |       | $              | —     |   | $ | — |   |   | $ | — |   |   |
| Company obligated mandatorily redeemable preferred  interest(1)              |       | 25,000    |       | —   |       | 5,000    |       | 5,000    |       | 15,000   |       | —   |       |           | —     |   |   |
| Line of credit and interest payable to HC Crown                              |       | 93,465    |       | —   |       | 93,465   |       | —   |       | —   |       | —   |       |           | —     |   |   |
| Senior unsecured note to HC Crown, including accrued  interest               |       | 562,167   |       | —   |       | —   |       | —   |       | —   |       | 562,167  |       |           | —     |   |   |
| Note and interest payable to Hallmark Cards affiliate                        |       | 146,397   |       | —   |       | 146,397  |       | —   |       | —   |       | —   |       |           | —     |   |   |
| Line of credit and interest payable to Hallmark Cards  affiliate             |       | 53,364    |       | —   |       | 53,364   |       | —   |       | —   |       | —   |       |           | —     |   |   |
| License fees payable to non-affiliates for current  and future windows(2)(3) |       | 391,026   |       | 115,877  |       | 91,781   |       | 84,713   |       | 44,574   |       | 25,528   |       |           | 28,553     |   |   |
| License fees payable to affiliates for current and  future windows(2)(3)     |       | 22,386    |       | 22,386   |       | —   |       | —   |       | —   |       | —   |       |           | —     |   |   |
| Total Contractual  Cash Obligations                                          |       | $         | 1,381,497  |     | $          | 138,263  |       | $        | 477,699    |     | $          | 89,713   |       | $              | 59,574     |   | $ | 587,695 |   |   | $ | 28,553 |   |   |

----

(1)    Payments are due within 60 days of the end of each fiscal year inwhich Crown Media United States reports pretax profits exceeding $10.0 million.If Crown Media United States does not earn pretax profits, the companyobligated mandatorily redeemable preferred interest is to be redeemed within 60days of fiscal year ending December 31, 2010.

(2)    Includes off-balance sheet commitments.

(3)    The amounts and timing for certain of these commitments arecontingent upon the future delivery date and type of programming produced, and,as such, the estimated amount and timing may change.

Inaccordance with the Purchase and Sale Agreement dated February 23, 2005,Sparrowhawk Media Limited has made several warranty and indemnity claimsagainst the Company of approximately $2.0 million. The Company has recorded anaccrual related to this claim, which is included in accounts payable andaccrued liabilities in the accompanying consolidated balance sheet. The Companyestimates that it may be liable with the range of $500,000 to $1.0 millionrelated to these claims.

F-48

----

**21.**          Segment Reporting

The Company’s continuing operations are currentlyorganized into two principal divisions representing operating segments:domestic channel and film distribution. Due to the sale of the film assets, theCompany no longer has a film distribution segment as of December 31, 2006.The Company evaluates performance and allocates resources based on the resultsof these segments. The key operating performance criteria used in thisevaluation include revenue, loss from continuing operations and total assets. Theresults of operations of our international channel operating segment are notincluded in the segment reporting as they are classified separately asdiscontinued operations in the Company’s consolidated financial statements (seenote 23).

The following tablespresent the Company’s segment information for the periods indicated (inthousands):

*2004*

| ** **                                               | ** ** | **Domestic** | ** ** | **Film  Distribution** | ** ** | **Adjustments** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------|------------|--------------|------------|------------------------|------------|-----------------|------------|------------------|------------|
| Total revenues                                           |       | $            | 116,201    |                   |       | $               | 74,493     |             |       |   | $ | (52,458 | )(1) |   |   | $ | 138,236 |   |   |
| Programming costs                                        |       | (101,811     | )          |                   | (1,651     | )               |       |             | 13,584     | (1) |   |   | (89,878 | ) |   |
| Amortization of  film assets                             |       | —       |       |                   | (47,326    | )               |       |             | 18,421     | (1) |   |   | (28,905 | ) |   |
| Impairment of  film assets                               |       | —       |       |                   | (22,003    | )               |       |             | —     |   |   |   | (22,003 | ) |   |
| Subscriber  acquisition fee amortization expense         |       | (29,405      | )          |                   | —     |            |       |             | 3,385      | (1) |   |   | (26,020 | ) |   |
| Operating costs                                          |       | (10,936      | )          |                   | (749       | )               |       |             | 650        | (1) |   |   | (11,035 | ) |   |
| Selling,  marketing, general and administrative expenses |       | (45,207      | )          |                   | (29,785    | )               |       |             | —     |   |   |   | (74,992 | ) |   |
| Loss from continuing operations                          |       | (71,158      | )          |                   | (27,021    | )               |       |             | (16,418    | ) |   |   | (114,597 | ) |   |
| Interest expense                                         |       | (2,495       | )          |                   | (57,684    | )               |       |             | —     |   |   |   | (60,179 | ) |   |
| Loss from  discontinued operations                       |       | —       |       |                   | (142,030   | )               |       |             | —     | (3) |   |   | (142,030 | ) |   |
| Net loss                                                 |       | $            | (73,653    | )                      |       | $               | (226,735   | )                |       |   | $ | (16,418 | ) |   |   | $ | (316,806 | ) |   |
| Total assets                                             |       | $            | 761,610    |                   |       | $               | 526,458    |             |       |   | $  | 224,700 | (2) |   |   | $ | 1,512,768 |   |   |

 

F-49

----

*2005*

| ** **                                               | ** ** | **Domestic** | ** ** | **Film  Distribution** | ** ** | **Adjustments** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------|------------|--------------|------------|------------------------|------------|-----------------|------------|------------------|------------|
| Total revenues                                           |       | $            | 175,090    |                   |       | $               | 75,926     |             |       |   | $ | (53,632 | )(1) |   |   | $ | 197,384 |   |   |
| Programming costs                                        |       | (148,565     | )          |                   | (3,708     | )               |       |             | 31,696     | (1) |   |   | (120,577 | ) |   |
| Amortization of  film assets                             |       | —       |       |                   | (82,398    | )               |       |             | 30,779     | (1) |   |   | (51,619 | ) |   |
| Impairment of  film assets                               |       | —       |       |                   | (25,542    | )               |       |             | —     |   |   |   | (25,542 | ) |   |
| Subscriber  acquisition fee amortization expense         |       | (39,314      | )          |                   | —     |            |       |             | 3,386      | (1) |   |   | (35,928 | ) |   |
| Operating costs                                          |       | (11,243      | )          |                   | (10,572    | )               |       |             | 209        | (1) |   |   | (21,606 | ) |   |
| Selling,  marketing, general and administrative expenses |       | (54,303      | )          |                   | (29,490    | )               |       |             | —     |   |   |   | (83,793 | ) |   |
| Loss from continuing operations                          |       | (78,335      | )          |                   | (75,784    | )               |       |             | 12,438     |   |   |   | (141,681 | ) |   |
| Interest expense                                         |       | (6,689       | )          |                   | (67,167    | )               |       |             | —     |   |   |   | (73,856 | ) |   |
| Loss from  discontinued operations                       |       | —       |       |                   | (10,683    | )               |       |             | —     | (3) |   |   | (10,683 | ) |   |
| Loss on sale of  discontinued operations                 |       | —       |       |                   | (6,538     | )               |       |             | —     | (3) |   |   | (6,538 | ) |   |
| Net loss                                                 |       | $            | (85,024    | )                      |       | $               | (160,172   | )                |       |   | $ | 12,438 |   |   |   | $ | (232,758 | ) |   |
| Total assets                                             |       | $            | 843,512    |                   |       | $               | 430,314    |             |       |   | $ | — |   |   |   | $ | 1,273,826 |   |   |

 

*2006*

| ** **                                               | ** ** | **Domestic** | ** ** | **Film  Distribution** | ** ** | **Adjustments** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------|------------|--------------|------------|------------------------|------------|-----------------|------------|------------------|------------|
| Total revenues                                           |       | $            | 199,362    |                   |       | $               | (12,896    | )                |       |   | $ | 14,713 | (1) |   |   | $ | 201,179 |   |   |
| Programming costs                                        |       | (178,689     | )          |                   | (1,890     | )               |       |             | 28,386     | (1) |   |   | (152,193 | ) |   |
| Amortization of  film assets                             |       | —       |       |                   | 5,872      |            |       |             | (20,611    | )(1) |   |   | (14,739 | ) |   |
| Impairment of  film assets                               |       | —       |       |                   | (206,216   | )               |       |             | (19,616    | )(1) |   |   | (225,832 | ) |   |
| Subscriber  acquisition fee amortization expense         |       | (34,430      | )          |                   | —     |            |       |             | 3,386      | (1) |   |   | (31,044 | ) |   |
| Operating costs                                          |       | (11,434      | )          |                   | (996       | )               |       |             | —     |   |   |   | (12,430 | ) |   |
| Selling,  marketing, general and administrative expenses |       | (45,769      | )          |                   | (16,878    | )               |       |             | —     |   |   |   | (62,647 | ) |   |
| Gain on sale of  film assets                             |       | —       |       |                   | 8,238      |            |       |             | —     |   |   |   | 8,238 |   |   |
| Loss from continuing operations                          |       | (70,960      | )          |                   | (224,766   | )               |       |             | 6,258      |   |   |   | (289,468 | ) |   |
| Interest expense                                         |       | (13,848      | )          |                   | (85,087    | )               |       |             | —     |   |   |   | (98,935 | ) |   |
| Gain on sale of  discontinued operations                 |       | —       |       |                   | 1,530      |            |       |             | —     | (3) |   |   | 1,530 |   |   |
| Cumulative effect  of change in accounting principle     |       | —       |       |                   | (2,099     | )               |       |             | —     |   |   |   | (2,099 | ) |   |
| Net loss                                                 |       | $            | (84,808    | )                      |       | $               | (310,422   | )                |       |   | $ | 6,258 |   |   |   | $ | (388,972 | ) |   |
| Total assets                                             |       | $            | 749,748    |                   |       | $               | 18,035     |             |       |   | $  | — | (4) |   |   | $ | 767,783 |   |   |

----

(1)          Represents eliminationof intersegment transactions.

(2)          Represents assets fromdiscontinued operations.

(3)          Represents losses from discontinuedoperations.

(4)          The film distributionsegment assets represent assets held by the holding company.

F-50

----

Five of our distributorseach accounted for more than 10% of our consolidated subscriber revenue for theyears ended December 31, 2005 and 2006, and together accounted for a totalof 87% and 91% of consolidated subscriber revenue during the years ended December 31,2005 and 2006, respectively. Three of our distributors each accounted for morethan 15% of our consolidated subscribers for the years ended December 31,2005 and 2006, and together accounted for 58% and 66% of our subscribers duringthe years ended December 31, 2005 and 2006, respectively.

**22.**          Quarterly Information (Unaudited)

The following tables contain unaudited quarterlyfinancial data (in thousands, except per share amounts) for the years ended December 31,2005 and 2006.

| ** **                                               | ** ** | **Quarters Ended** | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|
| **2005**                                                 | ** ** | ** **              | ** ** | **3/31** | ** ** | **6/30** | ** ** | **9/30** | ** ** | **12/31** | ** ** | **Full Year** | ** ** |
| Total revenues                                           |       | $                       | 40,569     |   | $ | 45,692 |   | $ | 50,670 |   | $ | 60,453 |   | $ | 197,384 |   |
| Programming costs                                        |       | (28,022                 | )          | (28,413 | ) | (29,196 | ) | (34,946 | ) | (120,577 | ) |
| Amortization of  film assets                             |       | (5,681                  | )          | (13,664 | ) | (13,830 | ) | (18,444 | ) | (51,619 | ) |
| Impairment of  film assets                               |       | —                  |       | — |   | (22,939 | ) | (2,603 | ) | (25,542 | ) |
| Subscriber  acquisition fee amortization expense         |       | (9,508                  | )          | (8,695 | ) | (8,688 | ) | (9,037 | ) | (35,928 | ) |
| Operating costs                                          |       | (1,796                  | )          | (4,730 | ) | (3,212 | ) | (11,868 | ) | (21,606 | ) |
| Selling,  marketing, general and administrative expenses |       | (23,332                 | )          | (23,221 | ) | (18,662 | ) | (18,578 | ) | (83,793 | ) |
| Loss from operations                                     |       | (27,770                 | )          | (33,031 | ) | (45,857 | ) | (35,023 | ) | (141,681 | ) |
| Interest expense                                         |       | (16,896                 | )          | (17,444 | ) | (19,346 | ) | (20,170 | ) | (73,856 | ) |
| Income tax  provision                                    |       | —                  |       | (6 | ) | (4 | ) | 10 |   | — |   |
| Loss from  discontinued operations                       |       | (6,241                  | )          | (4,425 | ) | — |   | (17 | ) | (10,683 | ) |
| Loss on sale of  discontinued operations                 |       | —                  |       | (1,349 | ) | (615 | ) | (4,574 | ) | (6,538 | ) |
| Net loss                                                 |       | $                       | (50,907    | ) | $ | (56,255 | ) | $ | (65,822 | ) | $ | (59,774 | ) | $ | (232,758 | ) |
| Net loss per  share                                      |       | $                       | (0.49      | ) | $ | (0.54 | ) | $ | (0.63 | ) | $ | (0.57 | ) | $ | (2.22 | ) |
|                                                          |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                                               | ** ** | **Quarters Ended** | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|
| **2006**                                                 | ** ** | ** **              | ** ** | **3/31** | ** ** | **6/30** | ** ** | **9/30** | ** ** | **12/31** | ** ** | **Full Year** | ** ** |
| Total revenues                                           |       | $                       | 44,973     |   | $ | 50,522 |   | $ | 47,318 |   | $ | 58,366 |   | $ | 201,179 |   |
| Programming costs                                        |       | (33,593                 | )          | (33,967 | ) | (35,056 | ) | (49,577 | ) | (152,193 | ) |
| Amortization of  film assets                             |       | (8,864                  | )          | (8,279 | ) | (4,560 | ) | 6,964 |   | (14,739 | ) |
| Impairment of  film assets                               |       | —                  |       | (184,886 | ) | (40,946 | ) | — |   | (225,832 | ) |
| Subscriber  acquisition fee amortization expense         |       | (7,790                  | )          | (7,723 | ) | (7,747 | ) | (7,784 | ) | (31,044 | ) |
| Operating costs                                          |       | (4,130                  | )          | (3,501 | ) | (2,075 | ) | (2,724 | ) | (12,430 | ) |
| Selling,  marketing, general and administrative expenses |       | (14,166                 | )          | (14,691 | ) | (14,800 | ) | (18,990 | ) | (62,647 | ) |
| Gain on sale of  film assets                             |       | —                  |       | — |   | — |   | 8,238 |   | 8,238 |   |
| Loss from operations                                     |       | (23,570                 | )          | (202,525 | ) | (57,866 | ) | (5,507 | ) | (289,468 | ) |
| Interest expense                                         |       | (21,703                 | )          | (24,913 | ) | (26,461 | ) | (25,858 | ) | (98,935 | ) |
| Gain (loss) on  sale of discontinued operations          |       | 162                     |       | (8 | ) | (1 | ) | 1,377 |   | 1,530 |   |
| Cumulative effect  of change in accounting principle     |       | (2,099                  | )          | — |   | — |   | — |   | (2,099 | ) |
| Net loss                                                 |       | $                       | (47,210    | ) | $ | (227,446 | ) | $ | (84,328 | ) | $ | (29,988 | ) | $ | (388,972 | ) |
| Net loss per  share                                      |       | $                       | (0.45      | ) | $ | (2.17 | ) | $ | (0.80 | ) | $ | (0.29 | ) | $ | (3.71 | ) |
|                                                          |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-51

----

 

**23.**          Discontinued Operations

On April 26, 2005, the Company closed the sale ofits international business. The accompanying consolidated statements ofoperations and cash flows for each of the years ended December 31, 2004and 2005 present the associated results of operations and cash flows of theinternational assets as “discontinued operations” pursuant to SFAS No. 144,*Accounting for the Impairment or Disposal of Long-Lived Assets*.

Thenet losses from discontinued operations during each of the years ended December 31,2004 and 2005, were comprised of the following:

| ** **                         | ** ** | **Years Ending  December 31,** | ** ** |
|------------------------------------|------------|------------------------------------------|------------|
| ** **                         | ** ** | **2004**                                 | ** ** | **2005** | ** ** |
| ** **                         | ** ** | **(In Thousands)**                  | ** ** |
| Revenue                            |       | $                                        | 102,131    |   | $ | 34,575 |   |
| Costs and  expenses                |       | (235,120                                 | )          | (42,358 | ) |
| Interest expense                   |       | (6,753                                   | )          | (2,081 | ) |
| Income tax  provision              |       | (2,288                                   | )          | (819 | ) |
| Loss from discontinued  operations |       | $                                        | (142,030   | ) | $ | (10,683 | ) |

 

Effective February 23, 2005, the Company ceaseddepreciating and amortizing certain of the international assets held for sale. Hadthe Company not ceased such depreciation and amortization, the loss fordiscontinued operations for the year ended December 31, 2005, would haveincluded an additional $1.8 million of depreciation and amortization expenseand an additional $3.8 million of amortization of film assets.

Interest expense includesan allocation of interest related to the Company’s bank credit facility thatwas required to be paid as a result of the sale. The allocation was required byEmerging Issues Task Force (“EITF”) Issue No. 87-24, *Allocation of Interest to Discontinued Operations.*Suchinterest expense amounted to $5.3 million and $1.6 million for the year ended December 31,2004 and 2005, respectively. Upon receipt of cash from the sale, the Companywas required to repay and retire the $100.0 million term loan under the Company’sbank credit facility.

**24.**          Subsequent Events

On March 2, 2007, the Company signed Amendment No. 12to the credit agreement, which extended the maturity date of the revolvingcredit facility to May 31, 2008. See Note 10 for further information.

In January 2007, the Company received notice fromSparrowhawk Media regarding claims on the Purchase and Sale agreement. See Note20 for further information.

F-52

----