Lynette Rice
March 02, 2007 AT 05:00 AM EST

The sudden appearance of the very popular (and very dead) Denny Duquette in a dream sequence wasn’t Grey’s Anatomy‘s only February-sweeps surprise. On Feb. 21, ABC confirmed it will air a two-hour episode in May that could pave the way for a spin-off featuring Kate Walsh’s Dr. Addison Montgomery. ”I am so excited!” Walsh tells EW, though she also cautions that there is no script (or concept) yet. What we do know: Taye Diggs — who starred in ABC’s swiftly canceled Day Break last fall — will appear in the May episode, and Grey’s creator Shonda Rhimes has again tabled her pilot about female journalists to focus on the potential Addison series. ”There’s no harm in doing this,” says ABC Entertainment president Steve McPherson. ”Creatively, it can stand alone or as a spin-off. There’s a huge upside.”

While ABC is hardly in dire straits, the network has fallen from first to third in the 18-49 demographic this season. Marquee series like Desperate Housewives and Lost are losing viewers, and none of its new half-hour comedies have clicked. But McPherson insists ABC’s situation is far more solid than the numbers suggest. ”Because our shows are so talked about, people want to find some negative angle,” he says. ”It’s not fair. We’ve got Sunday and Thursday locked up. And we’ve got the best fall development.” (See sidebar.) But given that the spin-off news comes on the heels of the ratings dip, it’s left us with questions about the state of ABC and its plans for the future:

Spin-offs without CSI or Law & Order in the title haven’t worked in years. Why take the risk with Grey’s? For every Boston Legal, there’s a Joey, a Time of Your Life, an AfterMASH. But even suits at two competing networks say the pros of spinning off a character from a proven series outweigh the cons. Adds Shari Anne Brill, vice president for the media-buying firm Carat USA: ”It’s less expensive because you already have the writers who are familiar with characters. Since so many new shows fail, the more you can reduce your financial risk, the better off you are.”

Was the network caught off guard by its ratings slip? Not exactly. Without the Super Bowl and its long-running Monday Night Football franchise, ABC was expecting to take a hit this season, and it currently trails CBS and Fox among young adults. Remove those sporting events from the equation, however, and it’s down only 3 percent in viewers 18 — 49. On the plus side, Grey’s lured its second-largest audience yet — 27.4 million — on Feb. 22, and the network is hoping for more big numbers from Dancing With the Stars, which returns March 19. ”Putting Grey’s on Thursday was smart,” says a rival network exec. ”It kept them from a total freefall.” So did new series Ugly Betty and Brothers & Sisters, says McPherson: ”The idea that we haven’t used our hits to launch new shows is absurd.”

Is our favorite castaway drama a Lost cause? While the series has posted the lowest numbers in its three-year history since returning last month in a new 10 p.m. time slot, ABC isn’t issuing an SOS just yet. ”Anyone who thinks we would have done better against American Idol is crazy,” says ABC scheduling chief Jeff Bader. Meanwhile, exec producers Damon Lindelof and Carlton Cuse — whose contracts are up in May — would like to end Lost after season 5, but EW has learned that ABC wants it to go through season 6. Why? Because Lost earns millions in yearly profits and is the network’s third-highest-rated drama.

How about the women of Wisteria Lane? Desperate Housewives‘ quality has certainly improved this season, but the series — which remains in the top 10 — has dropped 19 percent in the 18-49 demographic. Still, ABC clearly believes in the power of TV’s craziest cul-de-sac: Creator Marc Cherry just signed an eight-figure deal with ABC Television Studio that keeps him anchored to the show — and the network — through 2011. (Contracts with the main cast are locked until then, too.) So if ABC needs another spin-off in a few years, here’s a free suggestion: Scarecrow and Mrs. McCluskey!

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