Crown Media Holdings (CRWN)

Federal Income Tax and Other Consequences

Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public corporations for compensation over $1,000,000 paid for any fiscal year to the corporation’s chief executive officer and four other most highly compensated executive officers as of the end of any fiscal year. However, the statute exempts qualifying performance-based compensation from the deduction limit if certain requirements are met.

The Compensation Committee believes that it is generally in the Company’s best interest to attempt to structure performance-based compensation, including stock awards and annual bonuses, to executive officers who may be subject to Section 162(m) in a manner that satisfies the statute’s requirements.  However, the Committee also recognizes the need to retain flexibility to make compensation decisions that may not meet Section 162(m) standards when necessary to enable the Company to meet its overall objectives, even if the Company may not deduct all of the compensation.  Accordingly, the Company has expressly reserved the authority to award non-deductible compensation in appropriate circumstances.  Further, because of ambiguities and uncertainties as to the application and interpretation of Section 162(m) and the regulations issued thereunder, no assurance can be given, notwithstanding the Company’s efforts, that compensation intended by the Company to satisfy the requirements for deductibility under Section 162(m) does in fact do so.

The Performance Compensation Provisions have been designed to qualify as performance-based compensation under Section 162(m).  In order to satisfy the requirements of Section 162(m), stockholder approval must be obtained by the Company for Performance Compensation Provisions contained in the Schleiff Employment Agreement and the Schleiff RSU Agreement, as described above.  Additionally, the provisions governing (1) Performance RSUs between the Company and the executive officers and persons who may become Covered Executives in the future and (2) performance bonus payments in the Executive Employment Agreements, require stockholder approval in order to satisfy the requirements of Section 162(m) for performance-based compensation.

If the stockholders do not approve the Performance Compensation Provisions, we will continue to perform under these Performance Compensation Provisions under existing agreements, which have been approved by the Board or the Compensation Committee and signed by us, and we would be unable, beginning with Federal income tax filings in 2007, to deduct compensation payments in excess of $1,000,000 to Mr. Schleiff and other Covered Executives. At this time, our ability to deduct compensation can affect our ability to receive potential cash payments in the future under our tax sharing agreement with Hallmark Cards, Incorporated.

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