Crown Media Holdings (CRWN)

Year Ended December 31, 2007 Compared to Year Ended December 31, 2008

        Revenue.    Our revenue from continuing operations, comprised primarily of subscriber fees and advertising, increased $47.4 million or 20% in 2008 over 2007. Our subscriber fee revenue increased $29.3 million or 105% as a result of (1) an increase in the number of paying subscribers, (2) significantly improved subscriber fee rates following renewal of all of our major distribution agreements in 2007 and 2008, and (3) a significant reduction in the amount of subscriber acquisition fees netted against gross subscriber revenue. The renewed distribution agreements also sharply reduced the subscriber acquisition fees we must pay our distributors for carriage of our channels. The amount of subscriber acquisition fees that was recorded as a reduction of subscriber fee revenue decline from $6.5 million in 2007 to $2.7 million in 2008, reflecting the system-by-system effect of increased subscriber fee rates and reduced subscriber acquisition fees. Subscriber revenue growth in 2009 compared to 2008 will be limited to the effects of contractual increases in subscriber fee rates and increases, if any, in our distribution.

        We understand that one of our distributors may file for bankruptcy in 2009. There is a risk that a sale of some of the systems under bankruptcy to other distributors may result in a decline of subscriber revenue. See the risk factor concerning Charter Communications in Item 1A, above.

        The $17.2 million or 8% increase in advertising revenue reflects an increase in advertising rates along with improved delivery of committed viewership ratings and increase in the number of available general rate ad spots, offset in part by a decrease in the effectiveness of direct response advertising. The Hallmark Movie Channel contributed $3.2 million of the increase.

        During the second, third and fourth quarters of 2008 we experienced a softening of advertising rates in the scatter and direct response markets. We believe this reflects deteriorating national economic conditions. We expect this softening to continue throughout 2009. The relative decrease in advertising revenue in the third quarter of 2008 compared to the second quarter of 2008 was greater than the seasonal decrease we would typically have expected. Advertising revenue for the fourth quarter of 2008 was $60.4 million compared to $63.0 million in the fourth quarter of 2007. We have not been significantly affected by cancellations under advertising contracts. In response to the lower advertising rates, starting in the third quarter of 2008, we have reduced the amount of time allotted to on-air self-promotion and increased the time available for paid advertising. The volume of advertising has not decreased.

        For 2008, Nielsen ranked the Hallmark Channel 11^th in total day viewership with a 0.695 household rating and 8^th in primetime with a 1.168 household rating among the 73 ad-supported cable channels in the United States market. Although we had an increase in distribution to the Nielsen Universe of approximately 2% in the fourth quarter of 2008 versus the fourth quarter of 2007, our household ratings were down 7% for the fourth quarter of 2008 compared to the fourth quarter of 2007. We believe that the reasons for this circumstance include significant sample adjustments to viewers in determining ratings, a shift of viewers to cable news channels during the unprecedented media coverage of the national elections and the economic crisis. Our year-to-date household ratings were also down slightly due to the 2008 Summer Olympics.

        Cost of services.    Cost of services as a percent of revenue decreased to 55% in 2008 as compared to 86% in 2007. This decrease results from the combined effects of the 20% increase in revenue, discussed above, and the 100% decrease in subscriber amortization fee amortization expense discussed below.

        Programming costs decreased $23.7 million or 14% from 2007 largely as a result of the December 31, 2007, expiration of our programming agreement with NICC and our efforts to manage costs. This was offset in part by our licensing of Hallmark Hall of Fame movies under a new 2008

33

Table of Contents

agreement with Hallmark Cards that provides 10-year exhibition windows for all licensed films. During the third quarter of 2008, we entered into amendments to significant programming agreements which added programming and deferred certain payments of for program content to periods beyond 2008.

        Subscriber acquisition fee amortization expense results from subscriber acquisition costs incurred previously by us and amortized over the remaining life of the relevant distribution agreement. Subscriber acquisition fee amortization expense decreased 100% as all of the expense was netted against revenue in 2008. The Company's three largest affiliation agreements became fully amortized during the fourth quarter of 2007 as they expired and renewal agreements were executed.

        Negative film amortization of $5.2 million and $745,000 in 2007 and 2008, respectively, resulted principally from the Company's periodic reassessment and eventual payment of its liabilities for residuals and participations associated with the Company's third-party licensing and self-use of it film library prior to the sale of its international film rights in April 2005 and its domestic film rights in December 2006. In 2007, such favorable adjustments amounted to $521,000 in the second quarter and $4.7 million in the third quarter. In 2008, such adjustment amounted to $1.1 million in the third quarter.

        Operating costs in 2008 increased $1.3 million over 2007 primarily due to a $540,000 increase in expenses associated with the distribution of the Hallmark Movie Channel HD in high definition format and the $716,000 increase in salaries and benefits expense related to cost of living adjustments.

        Selling, general and administrative expense.    Our selling, general and administrative expense decreased $14.6 million or 23%. Contributing to this favorable change were decreases of $3.5 million in RSU expense and $2.5 million in SAR expense. Also contributing was a $7.8 million decrease in legal expense, following our January 2008 settlement with NICC which was reflected in the 2007 year. See in Note 12 and Note 18 to the Notes to Consolidated Financial Statements contained in this Report.

        Marketing expense.    Our marketing expense decreased 1%. During 2007, we invested in five significant marketing promotions. The five marketing promotions were centered around the original movies: "Love is a Four Letter Word" in February 2007, "A Stranger's Heart" in May 2007, "Avenging Angel" in July 2007, "All I Want for Christmas" in December 2007 and "The Note" in December 2007. The Company also had five significant marketing promotions in 2008 centered around the original movies: "The Good Witch" in January 2008, "Bridal Fever" in February 2008, "A Gunfighter's Pledge" in July 2008, and both "Old Fashioned Thanksgiving" and "Moonlight and Mistletoe" in November 2008. Total amounts spent for the five significant marketing promotions were lower in 2008 as compared to 2007. In addition to the radio, television, print and online advertising included in the significant marketing promotions, we executed a multi-market event to drive press coverage, viewer awareness and tune-in to the movie. The Company also engaged in other smaller, promotional activities throughout 2007 and 2008, with lower expenditures for these activities in 2008 as compared to 2007.

        Interest expense.    Interest expense in 2008 decreased $8.0 million compared to 2007. The principal balance of our credit facility decreased from $87.6 million at December 31, 2006, to $69.6 million at December 31, 2007, to $28.6 million at December 31, 2008. The interest rate on our bank credit facility decreased from 5.6% at December 31, 2007, to 1.22% at December 31, 2008. The benefit of this rate decrease was offset in part by higher principal balances on four of the five notes payable to Hallmark affiliates. Additionally, on April 14, 2008, the Tax Note was credited $1.5 million for the Company's share of an IRS interest refund that Hallmark Cards received. This refund of interest reduced the balance of the Tax Note. During the year ended December 31, 2007, the Company recorded $7.9 million of interest expense related to the Tax Note. See information on the Tax Note in "Bank Credit Facility and Hallmark Notes—Note and Interest Payable to Hallmark Cards" below. Interest expense in 2008 also includes a $2.0 million reduction to give effect to our change in the estimate of our indemnification liability to the buyer of our international business as described in the next paragraph

34

Table of Contents

        Gain on sale of discontinued operations.    The terms of our April 2005 sale of the international business require that we reimburse the buyer for its cost of residuals and participations incurred in connection with the its exploitation of the related international film rights through April 25, 2015. At the time of the sale, we recorded an estimate of our liability for this obligation and considered the amount in our determination of our loss from the sale of discontinued operations as reported in 2005. During the fourth quarter of 2008, the buyer requested us to reimburse it for such obligations incurred in connection with its exploitation of these films through December 31, 2007. Using the historical information provided by the buyer, we have reduced the estimate of our remaining liability as of December 31, 2008, by $5.1 million. This change in estimate is reflected as a $3.1 million gain on sale of discontinued operations and a $2.0 million decrease in interest expense. Through December 31, 2008, aggregate loss on sale of the international business is $1.8 million.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2008

        Revenue.    Our revenue from continuing operations, comprised primarily of subscriber fees and advertising, increased $47.4 million or 20% in 2008 over 2007. Our subscriber fee revenue increased $29.3 million or 105% as a result of (1) an increase in the number of paying subscribers, (2) significantly improved subscriber fee rates following renewal of all of our major distribution agreements in 2007 and 2008, and (3) a significant reduction in the amount of subscriber acquisition fees netted against gross subscriber revenue. The renewed distribution agreements also sharply reduced the subscriber acquisition fees we must pay our distributors for carriage of our channels. The amount of subscriber acquisition fees that was recorded as a reduction of subscriber fee revenue decline from $6.5 million in 2007 to $2.7 million in 2008, reflecting the system-by-system effect of increased subscriber fee rates and reduced subscriber acquisition fees. Subscriber revenue growth in 2009 compared to 2008 will be limited to the effects of contractual increases in subscriber fee rates and increases, if any, in our distribution.

        We understand that one of our distributors may file for bankruptcy in 2009. There is a risk that a sale of some of the systems under bankruptcy to other distributors may result in a decline of subscriber revenue. See the risk factor concerning Charter Communications in Item 1A, above.

        The $17.2 million or 8% increase in advertising revenue reflects an increase in advertising rates along with improved delivery of committed viewership ratings and increase in the number of available general rate ad spots, offset in part by a decrease in the effectiveness of direct response advertising. The Hallmark Movie Channel contributed $3.2 million of the increase.

        During the second, third and fourth quarters of 2008 we experienced a softening of advertising rates in the scatter and direct response markets. We believe this reflects deteriorating national economic conditions. We expect this softening to continue throughout 2009. The relative decrease in advertising revenue in the third quarter of 2008 compared to the second quarter of 2008 was greater than the seasonal decrease we would typically have expected. Advertising revenue for the fourth quarter of 2008 was $60.4 million compared to $63.0 million in the fourth quarter of 2007. We have not been significantly affected by cancellations under advertising contracts. In response to the lower advertising rates, starting in the third quarter of 2008, we have reduced the amount of time allotted to on-air self-promotion and increased the time available for paid advertising. The volume of advertising has not decreased.

        For 2008, Nielsen ranked the Hallmark Channel 11^th in total day viewership with a 0.695 household rating and 8^th in primetime with a 1.168 household rating among the 73 ad-supported cable channels in the United States market. Although we had an increase in distribution to the Nielsen Universe of approximately 2% in the fourth quarter of 2008 versus the fourth quarter of 2007, our household ratings were down 7% for the fourth quarter of 2008 compared to the fourth quarter of 2007. We believe that the reasons for this circumstance include significant sample adjustments to viewers in determining ratings, a shift of viewers to cable news channels during the unprecedented media coverage of the national elections and the economic crisis. Our year-to-date household ratings were also down slightly due to the 2008 Summer Olympics.

        Cost of services.    Cost of services as a percent of revenue decreased to 55% in 2008 as compared to 86% in 2007. This decrease results from the combined effects of the 20% increase in revenue, discussed above, and the 100% decrease in subscriber amortization fee amortization expense discussed below.

        Programming costs decreased $23.7 million or 14% from 2007 largely as a result of the December 31, 2007, expiration of our programming agreement with NICC and our efforts to manage costs. This was offset in part by our licensing of Hallmark Hall of Fame movies under a new 2008

33

Table of Contents

agreement with Hallmark Cards that provides 10-year exhibition windows for all licensed films. During the third quarter of 2008, we entered into amendments to significant programming agreements which added programming and deferred certain payments of for program content to periods beyond 2008.

        Subscriber acquisition fee amortization expense results from subscriber acquisition costs incurred previously by us and amortized over the remaining life of the relevant distribution agreement. Subscriber acquisition fee amortization expense decreased 100% as all of the expense was netted against revenue in 2008. The Company's three largest affiliation agreements became fully amortized during the fourth quarter of 2007 as they expired and renewal agreements were executed.

        Negative film amortization of $5.2 million and $745,000 in 2007 and 2008, respectively, resulted principally from the Company's periodic reassessment and eventual payment of its liabilities for residuals and participations associated with the Company's third-party licensing and self-use of it film library prior to the sale of its international film rights in April 2005 and its domestic film rights in December 2006. In 2007, such favorable adjustments amounted to $521,000 in the second quarter and $4.7 million in the third quarter. In 2008, such adjustment amounted to $1.1 million in the third quarter.

        Operating costs in 2008 increased $1.3 million over 2007 primarily due to a $540,000 increase in expenses associated with the distribution of the Hallmark Movie Channel HD in high definition format and the $716,000 increase in salaries and benefits expense related to cost of living adjustments.

        Selling, general and administrative expense.    Our selling, general and administrative expense decreased $14.6 million or 23%. Contributing to this favorable change were decreases of $3.5 million in RSU expense and $2.5 million in SAR expense. Also contributing was a $7.8 million decrease in legal expense, following our January 2008 settlement with NICC which was reflected in the 2007 year. See in Note 12 and Note 18 to the Notes to Consolidated Financial Statements contained in this Report.

        Marketing expense.    Our marketing expense decreased 1%. During 2007, we invested in five significant marketing promotions. The five marketing promotions were centered around the original movies: "Love is a Four Letter Word" in February 2007, "A Stranger's Heart" in May 2007, "Avenging Angel" in July 2007, "All I Want for Christmas" in December 2007 and "The Note" in December 2007. The Company also had five significant marketing promotions in 2008 centered around the original movies: "The Good Witch" in January 2008, "Bridal Fever" in February 2008, "A Gunfighter's Pledge" in July 2008, and both "Old Fashioned Thanksgiving" and "Moonlight and Mistletoe" in November 2008. Total amounts spent for the five significant marketing promotions were lower in 2008 as compared to 2007. In addition to the radio, television, print and online advertising included in the significant marketing promotions, we executed a multi-market event to drive press coverage, viewer awareness and tune-in to the movie. The Company also engaged in other smaller, promotional activities throughout 2007 and 2008, with lower expenditures for these activities in 2008 as compared to 2007.

        Interest expense.    Interest expense in 2008 decreased $8.0 million compared to 2007. The principal balance of our credit facility decreased from $87.6 million at December 31, 2006, to $69.6 million at December 31, 2007, to $28.6 million at December 31, 2008. The interest rate on our bank credit facility decreased from 5.6% at December 31, 2007, to 1.22% at December 31, 2008. The benefit of this rate decrease was offset in part by higher principal balances on four of the five notes payable to Hallmark affiliates. Additionally, on April 14, 2008, the Tax Note was credited $1.5 million for the Company's share of an IRS interest refund that Hallmark Cards received. This refund of interest reduced the balance of the Tax Note. During the year ended December 31, 2007, the Company recorded $7.9 million of interest expense related to the Tax Note. See information on the Tax Note in "Bank Credit Facility and Hallmark Notes—Note and Interest Payable to Hallmark Cards" below. Interest expense in 2008 also includes a $2.0 million reduction to give effect to our change in the estimate of our indemnification liability to the buyer of our international business as described in the next paragraph

34

Table of Contents

        Gain on sale of discontinued operations.    The terms of our April 2005 sale of the international business require that we reimburse the buyer for its cost of residuals and participations incurred in connection with the its exploitation of the related international film rights through April 25, 2015. At the time of the sale, we recorded an estimate of our liability for this obligation and considered the amount in our determination of our loss from the sale of discontinued operations as reported in 2005. During the fourth quarter of 2008, the buyer requested us to reimburse it for such obligations incurred in connection with its exploitation of these films through December 31, 2007. Using the historical information provided by the buyer, we have reduced the estimate of our remaining liability as of December 31, 2008, by $5.1 million. This change in estimate is reflected as a $3.1 million gain on sale of discontinued operations and a $2.0 million decrease in interest expense. Through December 31, 2008, aggregate loss on sale of the international business is $1.8 million.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2008

        Revenue.    Our revenue from continuing operations, comprised primarily of subscriber fees and advertising, increased $47.4 million or
20% in
2008 over 2007. Our subscriber fee revenue increased $29.3 million or 105% as a result of (1) an increase in the number of paying subscribers, (2) significantly improved
subscriber fee rates following renewal of all of our major distribution agreements in 2007 and 2008, and (3) a significant reduction in the amount of subscriber acquisition fees netted against
gross subscriber revenue. The renewed distribution agreements also sharply reduced the subscriber acquisition fees we must pay our distributors for carriage of our channels. The amount of subscriber
acquisition fees that was recorded as a reduction of subscriber fee revenue decline from $6.5 million in 2007 to $2.7 million in 2008, reflecting the
system-by-system effect of increased subscriber fee rates and reduced subscriber acquisition fees. Subscriber revenue growth in 2009 compared to 2008 will be limited to the
effects of contractual increases in subscriber fee rates and increases, if any, in our distribution.

        We
understand that one of our distributors may file for bankruptcy in 2009. There is a risk that a sale of some of the systems under bankruptcy to other distributors may result in a
decline of subscriber revenue. See the risk factor concerning Charter Communications in Item 1A, above.

        The
$17.2 million or 8% increase in advertising revenue reflects an increase in advertising rates along with improved delivery of committed viewership ratings and increase in the
number of available general rate ad spots, offset in part by a decrease in the effectiveness of direct response advertising. The Hallmark Movie Channel contributed $3.2 million of the increase.

        During
the second, third and fourth quarters of 2008 we experienced a softening of advertising rates in the scatter and direct response markets. We believe this reflects deteriorating
national economic conditions. We expect this softening to continue throughout 2009. The relative decrease in advertising revenue in the third quarter of 2008 compared to the second quarter of 2008 was
greater than the seasonal decrease we would typically have expected. Advertising revenue for the fourth quarter of 2008 was $60.4 million compared to $63.0 million in the fourth quarter
of 2007. We have not been significantly affected by cancellations under advertising contracts. In response to the lower advertising rates, starting in the third quarter of 2008, we have reduced the
amount of time allotted to on-air self-promotion and increased the time available for paid advertising. The volume of advertising has not decreased.

        For
2008, Nielsen ranked the Hallmark Channel 11^th in total day viewership with a 0.695 household rating and 8^th in primetime with a 1.168
household rating among the 73 ad-supported cable channels in the United States market. Although we had an increase in distribution to the Nielsen Universe of approximately 2% in the fourth
quarter of 2008 versus the fourth quarter of 2007, our household ratings were down 7% for the fourth quarter of 2008 compared to the fourth quarter of 2007. We believe that the reasons for this
circumstance include significant sample adjustments to viewers in determining ratings, a shift of viewers to cable news channels during the unprecedented media coverage of the national elections and
the economic crisis. Our year-to-date household ratings were also down slightly due to the 2008 Summer Olympics.

        Cost of services.    Cost of services as a percent of revenue decreased to 55% in 2008 as compared to 86% in 2007. This decrease results
from the
combined effects of the 20% increase in revenue, discussed above, and the 100% decrease in subscriber amortization fee amortization expense discussed below.

        Programming
costs decreased $23.7 million or 14% from 2007 largely as a result of the December 31, 2007, expiration of our programming agreement with NICC and our efforts
to manage costs. This was offset in part by our licensing of Hallmark Hall of Fame movies under a new 2008

33

HREF="#bg75701a_main_toc">Table of Contents

agreement
with Hallmark Cards that provides 10-year exhibition windows for all licensed films. During the third quarter of 2008, we entered into amendments to significant programming
agreements which added programming and deferred certain payments of for program content to periods beyond 2008.

        Subscriber
acquisition fee amortization expense results from subscriber acquisition costs incurred previously by us and amortized over the remaining life of the relevant distribution
agreement. Subscriber acquisition fee amortization expense decreased 100% as all of the expense was netted
against revenue in 2008. The Company's three largest affiliation agreements became fully amortized during the fourth quarter of 2007 as they expired and renewal agreements were executed.

        Negative
film amortization of $5.2 million and $745,000 in 2007 and 2008, respectively, resulted principally from the Company's periodic reassessment and eventual payment of its
liabilities for residuals and participations associated with the Company's third-party licensing and self-use of it film library prior to the sale of its international film rights in April
2005 and its domestic film rights in December 2006. In 2007, such favorable adjustments amounted to $521,000 in the second quarter and $4.7 million in the third quarter. In 2008, such
adjustment amounted to $1.1 million in the third quarter.

        Operating
costs in 2008 increased $1.3 million over 2007 primarily due to a $540,000 increase in expenses associated with the distribution of the Hallmark Movie Channel HD in high
definition format and the $716,000 increase in salaries and benefits expense related to cost of living adjustments.

        Selling, general and administrative expense.    Our selling, general and administrative expense decreased $14.6 million or 23%.
Contributing to
this favorable change were decreases of $3.5 million in RSU expense and $2.5 million in SAR expense. Also contributing was a $7.8 million decrease in legal expense, following our
January 2008 settlement with NICC which was reflected in the 2007 year. See in Note 12 and Note 18 to the Notes to Consolidated Financial Statements contained in this Report.

        Marketing expense.    Our marketing expense decreased 1%. During 2007, we invested in five significant marketing promotions. The five
marketing
promotions were centered around the original movies: "Love is a Four Letter Word" in February 2007, "A Stranger's Heart" in May 2007, "Avenging Angel" in July 2007, "All I Want for Christmas" in
December 2007 and "The Note" in December 2007. The Company also had five significant marketing promotions in 2008 centered around the original movies: "The Good Witch" in January 2008, "Bridal Fever"
in February 2008, "A Gunfighter's Pledge" in July 2008, and both "Old Fashioned Thanksgiving" and "Moonlight and Mistletoe" in November 2008. Total amounts spent for the five significant marketing
promotions were lower in 2008 as compared to 2007. In addition to the radio, television, print and online advertising included in the significant marketing promotions, we executed a multi-market event
to drive press coverage, viewer awareness and tune-in to the movie. The Company also engaged in other smaller, promotional activities throughout 2007 and 2008, with lower expenditures for
these activities in 2008 as compared to 2007.

        Interest expense.    Interest expense in 2008 decreased $8.0 million compared to 2007. The principal balance of our credit facility
decreased
from $87.6 million at December 31, 2006, to $69.6 million at December 31, 2007, to $28.6 million at December 31, 2008. The interest rate on our bank credit
facility decreased from 5.6% at December 31, 2007, to 1.22% at December 31, 2008. The benefit of this rate decrease was offset
in part by higher principal balances on four of the five notes payable to Hallmark affiliates. Additionally, on April 14, 2008, the Tax Note was credited $1.5 million for the Company's
share of an IRS interest refund that Hallmark Cards received. This refund of interest reduced the balance of the Tax Note. During the year ended December 31, 2007, the Company recorded
$7.9 million of interest expense related to the Tax Note. See information on the Tax Note in "Bank Credit Facility and Hallmark Notes—Note and Interest Payable to Hallmark Cards"
below. Interest expense in 2008 also includes a $2.0 million reduction to give effect to our change in the estimate of our indemnification liability to the buyer of our international business
as described in the next paragraph

34

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Table of Contents

        Gain on sale of discontinued operations.    The terms of our April 2005 sale of the international business require that we reimburse the
buyer for its
cost of residuals and participations incurred in connection with the its exploitation of the related international film rights through April 25, 2015. At the time of the sale, we recorded an
estimate of our liability for this obligation and considered the amount in our determination of our loss from the sale of discontinued operations as reported in 2005. During the fourth quarter of
2008, the buyer requested us to reimburse it for such obligations incurred in connection with its exploitation of these films through December 31, 2007. Using the historical information
provided by the buyer, we have reduced the estimate of our remaining liability as of December 31, 2008, by $5.1 million. This change in estimate is reflected as a $3.1 million
gain on sale of discontinued operations and a $2.0 million decrease in interest expense. Through December 31, 2008, aggregate loss on sale of the international business is
$1.8 million.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2008

        Revenue.    Our revenue from continuing operations, comprised primarily of subscriber fees and advertising, increased $47.4 million or
20% in
2008 over 2007. Our subscriber fee revenue increased $29.3 million or 105% as a result of (1) an increase in the number of paying subscribers, (2) significantly improved
subscriber fee rates following renewal of all of our major distribution agreements in 2007 and 2008, and (3) a significant reduction in the amount of subscriber acquisition fees netted against
gross subscriber revenue. The renewed distribution agreements also sharply reduced the subscriber acquisition fees we must pay our distributors for carriage of our channels. The amount of subscriber
acquisition fees that was recorded as a reduction of subscriber fee revenue decline from $6.5 million in 2007 to $2.7 million in 2008, reflecting the
system-by-system effect of increased subscriber fee rates and reduced subscriber acquisition fees. Subscriber revenue growth in 2009 compared to 2008 will be limited to the
effects of contractual increases in subscriber fee rates and increases, if any, in our distribution.

        We
understand that one of our distributors may file for bankruptcy in 2009. There is a risk that a sale of some of the systems under bankruptcy to other distributors may result in a
decline of subscriber revenue. See the risk factor concerning Charter Communications in Item 1A, above.

        The
$17.2 million or 8% increase in advertising revenue reflects an increase in advertising rates along with improved delivery of committed viewership ratings and increase in the
number of available general rate ad spots, offset in part by a decrease in the effectiveness of direct response advertising. The Hallmark Movie Channel contributed $3.2 million of the increase.

        During
the second, third and fourth quarters of 2008 we experienced a softening of advertising rates in the scatter and direct response markets. We believe this reflects deteriorating
national economic conditions. We expect this softening to continue throughout 2009. The relative decrease in advertising revenue in the third quarter of 2008 compared to the second quarter of 2008 was
greater than the seasonal decrease we would typically have expected. Advertising revenue for the fourth quarter of 2008 was $60.4 million compared to $63.0 million in the fourth quarter
of 2007. We have not been significantly affected by cancellations under advertising contracts. In response to the lower advertising rates, starting in the third quarter of 2008, we have reduced the
amount of time allotted to on-air self-promotion and increased the time available for paid advertising. The volume of advertising has not decreased.

        For
2008, Nielsen ranked the Hallmark Channel 11^th in total day viewership with a 0.695 household rating and 8^th in primetime with a 1.168
household rating among the 73 ad-supported cable channels in the United States market. Although we had an increase in distribution to the Nielsen Universe of approximately 2% in the fourth
quarter of 2008 versus the fourth quarter of 2007, our household ratings were down 7% for the fourth quarter of 2008 compared to the fourth quarter of 2007. We believe that the reasons for this
circumstance include significant sample adjustments to viewers in determining ratings, a shift of viewers to cable news channels during the unprecedented media coverage of the national elections and
the economic crisis. Our year-to-date household ratings were also down slightly due to the 2008 Summer Olympics.

        Cost of services.    Cost of services as a percent of revenue decreased to 55% in 2008 as compared to 86% in 2007. This decrease results
from the
combined effects of the 20% increase in revenue, discussed above, and the 100% decrease in subscriber amortization fee amortization expense discussed below.

        Programming
costs decreased $23.7 million or 14% from 2007 largely as a result of the December 31, 2007, expiration of our programming agreement with NICC and our efforts
to manage costs. This was offset in part by our licensing of Hallmark Hall of Fame movies under a new 2008

33

HREF="#bg75701a_main_toc">Table of Contents

agreement
with Hallmark Cards that provides 10-year exhibition windows for all licensed films. During the third quarter of 2008, we entered into amendments to significant programming
agreements which added programming and deferred certain payments of for program content to periods beyond 2008.

        Subscriber
acquisition fee amortization expense results from subscriber acquisition costs incurred previously by us and amortized over the remaining life of the relevant distribution
agreement. Subscriber acquisition fee amortization expense decreased 100% as all of the expense was netted
against revenue in 2008. The Company's three largest affiliation agreements became fully amortized during the fourth quarter of 2007 as they expired and renewal agreements were executed.

        Negative
film amortization of $5.2 million and $745,000 in 2007 and 2008, respectively, resulted principally from the Company's periodic reassessment and eventual payment of its
liabilities for residuals and participations associated with the Company's third-party licensing and self-use of it film library prior to the sale of its international film rights in April
2005 and its domestic film rights in December 2006. In 2007, such favorable adjustments amounted to $521,000 in the second quarter and $4.7 million in the third quarter. In 2008, such
adjustment amounted to $1.1 million in the third quarter.

        Operating
costs in 2008 increased $1.3 million over 2007 primarily due to a $540,000 increase in expenses associated with the distribution of the Hallmark Movie Channel HD in high
definition format and the $716,000 increase in salaries and benefits expense related to cost of living adjustments.

        Selling, general and administrative expense.    Our selling, general and administrative expense decreased $14.6 million or 23%.
Contributing to
this favorable change were decreases of $3.5 million in RSU expense and $2.5 million in SAR expense. Also contributing was a $7.8 million decrease in legal expense, following our
January 2008 settlement with NICC which was reflected in the 2007 year. See in Note 12 and Note 18 to the Notes to Consolidated Financial Statements contained in this Report.

        Marketing expense.    Our marketing expense decreased 1%. During 2007, we invested in five significant marketing promotions. The five
marketing
promotions were centered around the original movies: "Love is a Four Letter Word" in February 2007, "A Stranger's Heart" in May 2007, "Avenging Angel" in July 2007, "All I Want for Christmas" in
December 2007 and "The Note" in December 2007. The Company also had five significant marketing promotions in 2008 centered around the original movies: "The Good Witch" in January 2008, "Bridal Fever"
in February 2008, "A Gunfighter's Pledge" in July 2008, and both "Old Fashioned Thanksgiving" and "Moonlight and Mistletoe" in November 2008. Total amounts spent for the five significant marketing
promotions were lower in 2008 as compared to 2007. In addition to the radio, television, print and online advertising included in the significant marketing promotions, we executed a multi-market event
to drive press coverage, viewer awareness and tune-in to the movie. The Company also engaged in other smaller, promotional activities throughout 2007 and 2008, with lower expenditures for
these activities in 2008 as compared to 2007.

        Interest expense.    Interest expense in 2008 decreased $8.0 million compared to 2007. The principal balance of our credit facility
decreased
from $87.6 million at December 31, 2006, to $69.6 million at December 31, 2007, to $28.6 million at December 31, 2008. The interest rate on our bank credit
facility decreased from 5.6% at December 31, 2007, to 1.22% at December 31, 2008. The benefit of this rate decrease was offset
in part by higher principal balances on four of the five notes payable to Hallmark affiliates. Additionally, on April 14, 2008, the Tax Note was credited $1.5 million for the Company's
share of an IRS interest refund that Hallmark Cards received. This refund of interest reduced the balance of the Tax Note. During the year ended December 31, 2007, the Company recorded
$7.9 million of interest expense related to the Tax Note. See information on the Tax Note in "Bank Credit Facility and Hallmark Notes—Note and Interest Payable to Hallmark Cards"
below. Interest expense in 2008 also includes a $2.0 million reduction to give effect to our change in the estimate of our indemnification liability to the buyer of our international business
as described in the next paragraph

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        Gain on sale of discontinued operations.    The terms of our April 2005 sale of the international business require that we reimburse the
buyer for its
cost of residuals and participations incurred in connection with the its exploitation of the related international film rights through April 25, 2015. At the time of the sale, we recorded an
estimate of our liability for this obligation and considered the amount in our determination of our loss from the sale of discontinued operations as reported in 2005. During the fourth quarter of
2008, the buyer requested us to reimburse it for such obligations incurred in connection with its exploitation of these films through December 31, 2007. Using the historical information
provided by the buyer, we have reduced the estimate of our remaining liability as of December 31, 2008, by $5.1 million. This change in estimate is reflected as a $3.1 million
gain on sale of discontinued operations and a $2.0 million decrease in interest expense. Through December 31, 2008, aggregate loss on sale of the international business is
$1.8 million.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2008

        In 2007, our operating activities provided $14.6 million of cash compared to $48.1 million of in 2008. The most significant contribution to this favorable change of $33.5 million was the increase in operating cash receipts from $240.4 million to $282.6 million during the years ended December 31, 2007 and 2008, respectively. Additionally, the Company's net loss for the year ended December 31, 2008, decreased $121.8 million to $37.2 million from $159.0 million for the year ended December 31, 2007. Our depreciation and amortization expense for 2008 decreased $47.1 million to $145.2 million from $198.2 million in 2007. The Company had higher additions to program license fees in 2008 as compared to 2007 due to amendments to agreements with certain third party programming suppliers during 2008 to add programming content. On January 5, 2009, pursuant to the Waiver Agreement, the Company paid $3.9 million for interest on the 2001, 2005 and 2006 Notes that accrued from November 16, 2008, through December 31, 2008.

        Cash used in investing activities was $7.8 million and $5.4 million in 2007 and 2008, respectively. During 2007 and 2008, we purchased property and equipment of $1.7 million and $1.9 million, respectively. During 2007 and 2008, the Company paid $4.1 million and $3.6 million, respectively, to the buyer of the international business for amounts due under the terms of the sale agreement, primarily for reimbursement of transponder lease payments. The loss effect of these payments was previously considered in the loss we reported in 2005 with respect to the sale of our international business. In 2007, we purchased a film asset for $2.1 million.

        Cash used in financing activities was $18.8 million and $41.9 million in 2007 and 2008, respectively. We borrowed $18.1 million and $30.5 million under our credit facility to supplement the cash requirements of our operating and investing activities in 2007 and 2008, respectively. We repaid principal of $36.3 million and $71.5 million under our bank credit facility in2007 and 2008, respectively.

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Year Ended December 31, 2007 Compared to Year Ended December 31, 2008

        In 2007, our operating activities provided $14.6 million of cash compared to $48.1 million of in 2008. The most significant contribution to this favorable change of $33.5 million was the increase in operating cash receipts from $240.4 million to $282.6 million during the years ended December 31, 2007 and 2008, respectively. Additionally, the Company's net loss for the year ended December 31, 2008, decreased $121.8 million to $37.2 million from $159.0 million for the year ended December 31, 2007. Our depreciation and amortization expense for 2008 decreased $47.1 million to $145.2 million from $198.2 million in 2007. The Company had higher additions to program license fees in 2008 as compared to 2007 due to amendments to agreements with certain third party programming suppliers during 2008 to add programming content. On January 5, 2009, pursuant to the Waiver Agreement, the Company paid $3.9 million for interest on the 2001, 2005 and 2006 Notes that accrued from November 16, 2008, through December 31, 2008.

        Cash used in investing activities was $7.8 million and $5.4 million in 2007 and 2008, respectively. During 2007 and 2008, we purchased property and equipment of $1.7 million and $1.9 million, respectively. During 2007 and 2008, the Company paid $4.1 million and $3.6 million, respectively, to the buyer of the international business for amounts due under the terms of the sale agreement, primarily for reimbursement of transponder lease payments. The loss effect of these payments was previously considered in the loss we reported in 2005 with respect to the sale of our international business. In 2007, we purchased a film asset for $2.1 million.

        Cash used in financing activities was $18.8 million and $41.9 million in 2007 and 2008, respectively. We borrowed $18.1 million and $30.5 million under our credit facility to supplement the cash requirements of our operating and investing activities in 2007 and 2008, respectively. We repaid principal of $36.3 million and $71.5 million under our bank credit facility in2007 and 2008, respectively.

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Year Ended December 31, 2007 Compared to Year Ended December 31, 2008

        In 2007, our operating activities provided $14.6 million of cash compared to $48.1 million of in 2008. The most
significant contribution to this favorable change of $33.5 million was the increase in operating cash receipts from $240.4 million to $282.6 million during the years ended
December 31, 2007 and 2008, respectively. Additionally, the Company's net loss for the year ended December 31, 2008, decreased $121.8 million to $37.2 million from
$159.0 million for the year ended December 31, 2007. Our depreciation and amortization expense for 2008 decreased $47.1 million to $145.2 million from $198.2 million
in 2007. The Company had higher additions to program license fees in 2008 as compared to 2007 due to amendments to agreements with certain third party programming suppliers during 2008 to add
programming content. On January 5, 2009, pursuant to the Waiver Agreement, the Company paid $3.9 million for interest on the 2001, 2005 and 2006 Notes that accrued from
November 16, 2008, through December 31, 2008.

        Cash
used in investing activities was $7.8 million and $5.4 million in 2007 and 2008, respectively. During 2007 and 2008, we purchased property and equipment of
$1.7 million and $1.9 million, respectively. During 2007 and 2008, the Company paid $4.1 million and $3.6 million, respectively, to the buyer of the international business
for amounts due under the terms of the sale agreement, primarily for reimbursement of transponder lease payments. The loss effect of these payments was previously considered in the loss we reported in
2005 with respect to the sale of our international business. In 2007, we purchased a film asset for $2.1 million.

        Cash
used in financing activities was $18.8 million and $41.9 million in 2007 and 2008, respectively. We borrowed $18.1 million and $30.5 million under our
credit facility to supplement the cash requirements of our operating and investing activities in 2007 and 2008, respectively. We repaid principal of $36.3 million and $71.5 million under
our bank credit facility in2007 and 2008, respectively.

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Year Ended December 31, 2007 Compared to Year Ended December 31, 2008

        In 2007, our operating activities provided $14.6 million of cash compared to $48.1 million of in 2008. The most
significant contribution to this favorable change of $33.5 million was the increase in operating cash receipts from $240.4 million to $282.6 million during the years ended
December 31, 2007 and 2008, respectively. Additionally, the Company's net loss for the year ended December 31, 2008, decreased $121.8 million to $37.2 million from
$159.0 million for the year ended December 31, 2007. Our depreciation and amortization expense for 2008 decreased $47.1 million to $145.2 million from $198.2 million
in 2007. The Company had higher additions to program license fees in 2008 as compared to 2007 due to amendments to agreements with certain third party programming suppliers during 2008 to add
programming content. On January 5, 2009, pursuant to the Waiver Agreement, the Company paid $3.9 million for interest on the 2001, 2005 and 2006 Notes that accrued from
November 16, 2008, through December 31, 2008.

        Cash
used in investing activities was $7.8 million and $5.4 million in 2007 and 2008, respectively. During 2007 and 2008, we purchased property and equipment of
$1.7 million and $1.9 million, respectively. During 2007 and 2008, the Company paid $4.1 million and $3.6 million, respectively, to the buyer of the international business
for amounts due under the terms of the sale agreement, primarily for reimbursement of transponder lease payments. The loss effect of these payments was previously considered in the loss we reported in
2005 with respect to the sale of our international business. In 2007, we purchased a film asset for $2.1 million.

        Cash
used in financing activities was $18.8 million and $41.9 million in 2007 and 2008, respectively. We borrowed $18.1 million and $30.5 million under our
credit facility to supplement the cash requirements of our operating and investing activities in 2007 and 2008, respectively. We repaid principal of $36.3 million and $71.5 million under
our bank credit facility in2007 and 2008, respectively.

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