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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

| |  |                                                                                          | 
| |  | ---------------------------------------------------------------------------------------- | 
| |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934  | 
| |  |                                                                                          | 
| |  | For the quarterly period ended March 31, 2002                                            | 
| |  |                                                                                          | 
| |  | or                                                                                       | 
| |  |                                                                                          | 
| |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 | 

For the transition period from                      to                     .

Commission File Number: 000-30700

Crown Media Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)

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

6430 S. Fiddlers Green Circle,
Suite 500,
Greenwood Village, Colorado 80111
(Address of Principal Executive Offices and Zip Code)

(303) 220-7990
(Registrants Telephone Number, Including Area Code)

(Former Name, Former Address, and Former Fiscal Year,
if Changed Since Last Report.)

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

As of May 7, 2002, the number of shares of Class A Common Stock, $.01 par value
outstanding was 73,665,775, and the number of shares of Class B Common Stock,
$.01 par value, outstanding was 30,670,422.



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TABLE OF CONTENTS



|                                            |                                                                                               |                                                                |  |  |  |  |  | 
|------------------------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION              
|                                            | Item 1. Financial Statements (Unaudited)                                                     
|                                            |                                                                                               | CONSOLIDATED BALANCE SHEETS                                   
|                                            |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS  
|                                            |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS                         
|                                            |                                                                                               | CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|                                            | ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                            |                                                                                               | Forward-Looking Statements and Risk Factors                   
|                                            | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|PART II. OTHER INFORMATION                 
|                                            | Item 1. Legal Proceedings                                                                    
|                                            | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                 
|EX-10.1 Amendment No. 3 to Credit Agreement
|EX-10.2 Amendment No. 4 to Credit Agreement



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TABLE OF CONTENTS

|           |  |                                                                                       |  |  |    |      |    | 
|---------- |  | ------------------------------------------------------------------------------------- |  |  | -- | ---- | -- | 
|           |  |                                                                                       |  |  |    | Page
|           |  |                                                                                       |  |  |    |     
|PART I     |  | Financial Information                                                                 |  |  |    |     
|Item 1     |  | Financial Statements (Unaudited)                                                      |  |  | 4  |     
|           |  | CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES                                           |  |  |    |     
|           |  | Consolidated Balance Sheets -- December 31, 2001 and March 31, 2002 (Unaudited)       |  |  | 4  |     
|           |  | Consolidated Statements of Operations and Comprehensive Loss (Unaudited)              |  |  | 5  |     
|           |  | - Three Months Ended March 31, 2001 and 2002                                          |  |  |    |     
|           |  | Consolidated Statements of Cash Flows (Unaudited)                                     |  |  | 6  |     
|           |  | - Three Months Ended March 31, 2001 and 2002                                          |  |  |    |     
|           |  | Condensed Notes to Unaudited Consolidated Financial Statements                        |  |  | 7  |     
|Item 2     |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  |  | 23 |     
|           |  | Forward-Looking Statements and Risk Factors                                           |  |  | 29 |     
|Item 3     |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |  | 36 |     
|PART II    |  | Other Information                                                                     |  |  | 37 |     
|Item 1     |  | Legal Proceedings                                                                     |  |  | 37 |     
|Item 6     |  | Exhibits and Reports on Form 8-K                                                      |  |  | 38 |     
|Signatures |  |                                                                                       |  |  |    |      | 39 | 

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The discussion set forth in this Form 10-Q contains statements concerning
potential future events. Such forward-looking statements are based on
assumptions by Crown Media Holdings, Inc.s (Crown Media Holdings or the
Company) management, as of the date of this Form 10-Q, including assumptions
about risks and uncertainties faced by Crown Media Holdings. Readers can
identify these forward-looking statements by their use of such verbs as
expects, anticipates, believes, or similar verbs or conjugations of such
verbs. If any of managements assumptions prove incorrect or should
unanticipated circumstances arise, Crown Media Holdings actual results, levels
of activity, performance, or achievements could materially differ from those
anticipated by such forward-looking statements. Among the factors that could
cause actual results to differ materially are those discussed in this Form 10-Q
under the heading Forward-Looking Statements and Risk Factors. Crown Media
Holdings will not update any forward-looking statements contained in this Form
10-Q to reflect future events or developments.

In this Form 10-Q the terms we, us and our refer to Crown Media
Holdings, and, unless the context requires otherwise, Crown Media
International, LLC, formerly known as Crown Media International, Inc. (Crown
Media International), Crown Media United States, LLC (Crown Media United
States), Crown Media Distribution, LLC (Crown Media Distribution), Crown
Entertainment Limited (Crown Entertainment), Crown Media Trust (Crown Media
Trust), and H&H Programming  Asia, L.L.C. (H&H Programming  Asia),
subsidiaries of Crown Media Holdings that operate our businesses. The term
common stock refers to our Class A common stock and Class B common stock,
unless the context requires otherwise.

The names Hallmark, Hallmark Entertainment, Crayola, TOTAL CHOICE and
other product or service names are trademarks or registered trademarks of their
owners.

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PART I. FINANCIAL INFORMATION




Item 1.Financial Statements (Unaudited)




CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

|                                                                                                                                                                                                                                                                      |                                            |   |           |                    |  |                 |           |             |  | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | --------- | ------------------ |  | --------------- | --------- | ----------- |  | 
|                                                                                                                                                                                                                                                                      |                                            |   |           | As of December 31, |  | As of March 31,
|                                                                                                                                                                                                                                                                      |                                            |   |           | 2001               |  | 2002           
|                                                                                                                                                                                                                                                                      |                                            |   |           |                    |  |                
|                                                                                                                                                                                                                                                                      |                                            |   |           |                    |  |                 |           | (Unaudited)
|ASSETS                                                                                                                                                                                                                                                                |                                            |   |           |                    |  |                 |           |            
|Cash and cash equivalents                                                                                                                                                                                                                                             |                                            | $ | 13,859    |                    |  | $               | 8,611     |            
|Cash in escrow                                                                                                                                                                                                                                                        |                                            |   | 111,625   |                    |  |                 |          |            
|Accounts receivable, less allowance for doubtful accounts of $7,361 and $6,768,
respectively                                                                                                                                                                          |                                            |   | 29,911    |                    |  |                 | 41,954    |            
|Program license fees  affiliates, net of accumulated amortization                                                                                                                                                                                                    |                                            |   | 12,199    |                    |  |                 | 19,621    |            
|Program license fees  non-affiliates, net of accumulated amortization                                                                                                                                                                                                |                                            |   | 35,425    |                    |  |                 | 47,858    |            
|Subtitling and dubbing, net of accumulated amortization                                                                                                                                                                                                               |                                            |   | 2,584     |                    |  |                 | 3,109     |            
|Prepaids and other assets                                                                                                                                                                                                                                             |                                            |   | 11,364    |                    |  |                 | 12,648    |            
|                                                                                                                                                                                                                                                                      |                                            |   |           |                    |  |                 |           |            
|                                                                                                                                                                                                                                                                      | Total current assets                       |   |           | 216,967            |  |                 |           | 133,801     | 
|Restricted cash                                                                                                                                                                                                                                                       |                                            |   | 340       |                    |  |                 | 340       |            
|Accounts receivable, net of current portion                                                                                                                                                                                                                           |                                            |   | 6,253     |                    |  |                 | 6,799     |            
|Program license fees  affiliates, net of current portion                                                                                                                                                                                                             |                                            |   | 60,679    |                    |  |                 | 55,787    |            
|Program license fees  non-affiliates, net of current portion                                                                                                                                                                                                         |                                            |   | 33,219    |                    |  |                 | 38,395    |            
|Subtitling and dubbing, net of current portion                                                                                                                                                                                                                        |                                            |   | 4,795     |                    |  |                 | 4,525     |            
|Film assets, net of accumulated amortization                                                                                                                                                                                                                          |                                            |   | 808,138   |                    |  |                 | 801,964   |            
|Subscriber acquisition fees, net of accumulated amortization                                                                                                                                                                                                          |                                            |   | 126,965   |                    |  |                 | 123,714   |            
|Property and equipment, net of accumulated depreciation                                                                                                                                                                                                               |                                            |   | 43,882    |                    |  |                 | 42,444    |            
|Goodwill, net of accumulated amortization                                                                                                                                                                                                                             |                                            |   | 314,033   |                    |  |                 | 314,033   |            
|Debt issuance costs, net of accumulated amortization                                                                                                                                                                                                                  |                                            |   | 8,760     |                    |  |                 | 7,351     |            
|Prepaids and other assets, net of current portion                                                                                                                                                                                                                     |                                            |   | 2,327     |                    |  |                 | 1,815     |            
|                                                                                                                                                                                                                                                                      |                                            |   |           |                    |  |                 |           |            
|                                                                                                                                                                                                                                                                      | Total assets                               |   | $         | 1,626,358          |  |                 | $         | 1,530,968   | 
|                                                                                                                                                                                                                                                                      |                                            |   |           |                    |  |                 |           |            
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                                                  |                                            |   |           |                    |  |                 |           |            
|LIABILITIES:                                                                                                                                                                                                                                                          |                                            |   |           |                    |  |                 |           |            
|Accounts payable and accrued liabilities                                                                                                                                                                                                                              |                                            | $ | 38,842    |                    |  | $               | 36,009    |            
|Subscriber acquisition fees payable                                                                                                                                                                                                                                   |                                            |   | 23,020    |                    |  |                 | 12,059    |            
|License fees payable to affiliates                                                                                                                                                                                                                                    |                                            |   |          |                    |  |                 | 11,532    |            
|License fees payable to non-affiliates                                                                                                                                                                                                                                |                                            |   | 33,088    |                    |  |                 | 40,904    |            
|Payables to affiliates                                                                                                                                                                                                                                                |                                            |   | 5,952     |                    |  |                 | 6,203     |            
|JP Morgan Chase credit facility and interest payable                                                                                                                                                                                                                  |                                            |   | 111,905   |                    |  |                 | 943       |            
|Capital lease obligation                                                                                                                                                                                                                                              |                                            |   | 1,318     |                    |  |                 | 1,346     |            
|Deferred programming revenue                                                                                                                                                                                                                                          |                                            |   | 1,316     |                    |  |                 | 1,835     |            
|                                                                                                                                                                                                                                                                      |                                            |   |           |                    |  |                 |           |            
|                                                                                                                                                                                                                                                                      | Total current liabilities                  |   |           | 215,441            |  |                 |           | 110,831     | 
|Accrued liabilities, net of current portion                                                                                                                                                                                                                           |                                            |   | 934       |                    |  |                 | 2,064     |            
|Subscriber acquisition fees payable, net of current portion                                                                                                                                                                                                           |                                            |   | 5,262     |                    |  |                 | 5,031     |            
|License fees payable to affiliates, net of current portion                                                                                                                                                                                                            |                                            |   | 62,299    |                    |  |                 | 60,229    |            
|License fees payable to non-affiliates, net of current portion                                                                                                                                                                                                        |                                            |   | 23,127    |                    |  |                 | 26,050    |            
|JP Morgan Chase credit facility, net of current portion                                                                                                                                                                                                               |                                            |   | 151,438   |                    |  |                 | 206,542   |            
|Capital lease obligation, net of current portion                                                                                                                                                                                                                      |                                            |   | 10,723    |                    |  |                 | 10,376    |            
|Convertible debt                                                                                                                                                                                                                                                      |                                            |   | 43,733    |                    |  |                 | 44,591    |            
|Derivative liability                                                                                                                                                                                                                                                  |                                            |   | 12,495    |                    |  |                 | 14,722    |            
|Payable to Hallmark Entertainment Holdings, Inc.                                                                                                                                                                                                                      |                                            |   | 52,052    |                    |  |                 | 52,052    |            
|Payable to Hallmark Entertainment, Inc.                                                                                                                                                                                                                               |                                            |   | 47,948    |                    |  |                 | 47,948    |            
|                                                                                                                                                                                                                                                                      |                                            |   |           |                    |  |                 |           |            
|                                                                                                                                                                                                                                                                      | Total liabilities                          |   |           | 625,452            |  |                 |           | 580,436     | 
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                         |                                            |   |           |                    |  |                 |           |            
|GUARANTEED PREFERRED BENEFICIAL INTEREST IN CROWN MEDIA
TRUSTS DEBENTURES                                                                                                                                                                                            |                                            |   | 199,040   |                    |  |                 | 203,794   |            
|PREFERRED MINORITY INTEREST                                                                                                                                                                                                                                           |                                            |   | 25,000    |                    |  |                 | 25,000    |            
|STOCKHOLDERS EQUITY:                                                                                                                                                                                                                                                 |                                            |   |           |                    |  |                 |           |            
|Class A common stock, $.01 par value; 150,000,000 and 200,000,000 shares authorized,
respectively; issued shares of 73,913,395 and 74,040,730, respectively; outstanding shares
of 73,488,395 and 73,615,730 as of December 31, 2001 and March 31, 2002, respectively |                                            |   | 735       |                    |  |                 | 736       |            
|Class B common stock, $.01 par value; 120,000,000 shares authorized; issued and
outstanding shares of 30,670,422 as of December 31, 2001 and March 31, 2002                                                                                                           |                                            |   | 307       |                    |  |                 | 307       |            
|Paid-in capital                                                                                                                                                                                                                                                       |                                            |   | 1,256,754 |                    |  |                 | 1,257,895 |            
|Accumulated other comprehensive loss                                                                                                                                                                                                                                  |                                            |   | (620      | )                  |  |                 | (880      | )          
|Accumulated deficit                                                                                                                                                                                                                                                   |                                            |   | (480,310  | )                  |  |                 | (536,320  | )          
|                                                                                                                                                                                                                                                                      |                                            |   |           |                    |  |                 |           |            
|                                                                                                                                                                                                                                                                      | Total stockholders equity                 |   |           | 776,866            |  |                 |           | 721,738     | 
|                                                                                                                                                                                                                                                                      |                                            |   |           |                    |  |                 |           |            
|                                                                                                                                                                                                                                                                      | Total liabilities and stockholders equity |   | $         | 1,626,358          |  |                 | $         | 1,530,968   | 
|                                                                                                                                                                                                                                                                      |                                            |   |           |                    |  |                 |           |            

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

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CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)

|                                                                                     |                                         |                |                              |        |                              |         |         |        |        |         |  
|------------------------------------------------------------------------------------ | --------------------------------------- | -------------- | ---------------------------- | ------ | ---------------------------- | ------- | ------- | ------ | ------ | ------- | -
|                                                                                     |                                         |                |                              |        | Three Months Ended March 31,
|                                                                                     |                                         |                |                              |        |                             
|                                                                                     |                                         |                |                              |        | 2001                         |         | 2002   
|                                                                                     |                                         |                |                              |        |                              |         |        
|                                                                                     |                                         |                |                              |        | (Unaudited)                 
|Revenues:                                                                            |                                         |                |                              |        |                              |         |         |       
|                                                                                     | Subscriber fees                         |                | $                            | 15,883 |                              |         | $       | 17,907 |       
|                                                                                     | Advertising                             |                |                              | 6,052  |                              |         |         | 13,400 |       
|                                                                                     | Advertising by Hallmark Cards, Inc.     |                |                              | 1,093  |                              |         |         | 1,170  |       
|                                                                                     | Film licensing fees                     |                |                              |       |                              |         |         | 6,979  |       
|                                                                                     | Other fees                              |                |                              | 11     |                              |         |         | 13     |       
|                                                                                     |                                         |                |                              |        |                              |         |         |       
|                                                                                     |                                         |                | Total revenues               |        |                              | 23,039  |         |        |        | 39,469  |  
|Cost of Services:                                                                    |                                         |                |                              |        |                              |         |         |       
|                                                                                     | Programming costs:                      |                |                              |        |                              |         |         |        |       
|                                                                                     |                                         | Affiliates     |                              |        | 13,192                       |         |         |        | 10,382 |        
|                                                                                     |                                         | Non-affiliates |                              |        | 7,021                        |         |         |        | 13,369 |        
|                                                                                     | Amortization of film assets             |                |                              |       |                              |         |         | 7,248  |       
|                                                                                     | Operating costs                         |                |                              | 14,867 |                              |         |         | 18,658 |       
|                                                                                     |                                         |                |                              |        |                              |         |         |       
|                                                                                     |                                         |                | Total cost of services       |        |                              | 35,080  |         |        |        | 49,657  |  
|Selling, general and administrative expenses                                         |                                         |                | 17,344                       |        |                              |         | 18,787  |       
|Marketing expenses                                                                   |                                         |                | 10,455                       |        |                              |         | 9,794   |       
|Amortization of goodwill                                                             |                                         |                | 3,527                        |        |                              |         |        |       
|                                                                                     |                                         |                |                              |        |                              |         |         |       
|                                                                                     |                                         |                | Loss from operations         |        |                              | (43,367 | )       |        |        | (38,769 | )
|Equity in net losses of unconsolidated entities                                      |                                         |                | (655                         | )      |                              |         |        |       
|Loss on disposal of The Kermit Channel                                               |                                         |                |                             |        |                              |         | (366    | )     
|Guaranteed preferred beneficial accretion and interest
expense                       |                                         |                |                             |        |                              |         | (10,602 | )     
|Interest expense, net                                                                |                                         |                | (760                         | )      |                              |         | (5,724  | )     
|                                                                                     |                                         |                |                              |        |                              |         |         |       
|                                                                                     |                                         |                | Net loss before income taxes |        |                              | (44,782 | )       |        |        | (55,461 | )
|Income tax provision                                                                 |                                         |                | (385                         | )      |                              |         | (549    | )     
|                                                                                     |                                         |                |                              |        |                              |         |         |       
|                                                                                     |                                         |                | Net loss                     |        | $                            | (45,167 | )       |        | $      | (56,010 | )
|                                                                                     |                                         |                |                              |        |                              |         |         |       
|Other comprehensive loss:                                                            |                                         |                |                              |        |                              |         |         |       
|                                                                                     | Loss on fair value of derivative        |                |                              |       |                              |         |         | (57    | )     
|                                                                                     | Foreign currency translation adjustment |                |                              | (467   | )                            |         |         | (203   | )     
|                                                                                     |                                         |                |                              |        |                              |         |         |       
|                                                                                     |                                         |                | Comprehensive loss           |        | $                            | (45,634 | )       |        | $      | (56,270 | )
|                                                                                     |                                         |                |                              |        |                              |         |         |       
|Weighted average number of Class A and Class B shares
outstanding, basic and diluted |                                         |                | 60,993                       |        |                              |         | 104,212 |       
|                                                                                     |                                         |                |                              |        |                              |         |         |       
|Net loss per share, basic and diluted                                                |                                         | $              | (0.74                        | )      |                              | $       | (0.54   | )     
|                                                                                     |                                         |                |                              |        |                              |         |         |       

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

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

|                                                         |                                                                             |                                                                             |                                                       |                                                                 |         |                              |         |          |         |        |         |  
|-------------------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ----------------------------------------------------- | --------------------------------------------------------------- | ------- | ---------------------------- | ------- | -------- | ------- | ------ | ------- | -
|                                                         |                                                                             |                                                                             |                                                       |                                                                 |         | Three Months Ended March 31,
|                                                         |                                                                             |                                                                             |                                                       |                                                                 |         |                             
|                                                         |                                                                             |                                                                             |                                                       |                                                                 |         | 2001                         |         | 2002    
|                                                         |                                                                             |                                                                             |                                                       |                                                                 |         |                              |         |         
|                                                         |                                                                             |                                                                             |                                                       |                                                                 |         | (Unaudited)                 
|CASH FLOWS FROM OPERATING ACTIVITIES:                    |                                                                             |                                                                             |                                                       |                                                                 |         |                              |         |         
|                                                         |                                                                             | Net loss                                                                    |                                                       | $                                                               | (45,167 | )                            |         | $        | (56,010 | )     
|                                                         |                                                                             | Adjustments to reconcile net loss to net cash used in
operating activities: |                                                       |                                                                 |         |                              |         |          |         |       
|                                                         |                                                                             |                                                                             | Gain on sale of property and equipment                |                                                                 |         | (4                           | )       |          |         | (5     | )      
|                                                         |                                                                             |                                                                             | Amortization and depreciation                         |                                                                 |         | 27,990                       |         |          |         | 41,052 |        
|                                                         |                                                                             |                                                                             | Accretion on guaranteed preferred beneficial interest |                                                                 |         |                             |         |          |         | 10,602 |        
|                                                         |                                                                             |                                                                             | Accretion on convertible debt                         |                                                                 |         |                             |         |          |         | 2,131  |        
|                                                         |                                                                             |                                                                             | Provision for allowance for doubtful accounts         |                                                                 |         | 818                          |         |          |         | 570    |        
|                                                         |                                                                             |                                                                             | Equity in net losses of unconsolidated subsidiaries   |                                                                 |         | 655                          |         |          |         |       |        
|                                                         |                                                                             |                                                                             | Stock-based compensation                              |                                                                 |         | 774                          |         |          |         | 6      |        
|                                                         |                                                                             |                                                                             | Changes in operating assets and liabilities:          |                                                                 |         |                              |         |          |         |        |        
|                                                         |                                                                             |                                                                             |                                                       | Increase in accounts receivable                                 |         |                              | (5,888  | )        |         |        | (13,199 | )
|                                                         |                                                                             |                                                                             |                                                       | Additions to program license fees                               |         |                              | (18,642 | )        |         |        | (44,609 | )
|                                                         |                                                                             |                                                                             |                                                       | Increase in subtitling and dubbing                              |         |                              | (1,088  | )        |         |        | (1,344  | )
|                                                         |                                                                             |                                                                             |                                                       | Additions to subscriber acquisition fees                        |         |                              | (892    | )        |         |        | (2,936  | )
|                                                         |                                                                             |                                                                             |                                                       | Increase in prepaids and other assets                           |         |                              | (305    | )        |         |        | (205    | )
|                                                         |                                                                             |                                                                             |                                                       | Increase (decrease) in accounts payable and accrued
liabilities |         |                              | (7,229  | )        |         |        | 2,427   |  
|                                                         |                                                                             |                                                                             |                                                       | Decrease in interest payable                                    |         |                              | (48     | )        |         |        | (1,018  | )
|                                                         |                                                                             |                                                                             |                                                       | Increase (decrease) in subscriber acquisition fees payable      |         |                              | 850     |          |         |        | (11,192 | )
|                                                         |                                                                             |                                                                             |                                                       | Increase in affiliate license fees payable                      |         |                              | 10,856  |          |         |        | 15,602  |  
|                                                         |                                                                             |                                                                             |                                                       | Increase (decrease) in payables to affiliates                   |         |                              | (4,024  | )        |         |        | 761     |  
|                                                         |                                                                             |                                                                             |                                                       | Increase (decrease) in deferred programming revenue             |         |                              | (262    | )        |         |        | 519     |  
|                                                         |                                                                             |                                                                             |                                                       |                                                                 |         |                              |         |         
|                                                         |                                                                             |                                                                             |                                                       | Net cash used in operating activities                           |         |                              | (41,606 | )        |         |        | (56,848 | )
|                                                         |                                                                             |                                                                             |                                                       |                                                                 |         |                              |         |         
|CASH FLOWS FROM INVESTING ACTIVITIES:                    |                                                                             |                                                                             |                                                       |                                                                 |         |                              |         |         
|                                                         |                                                                             | Purchases of property and equipment                                         |                                                       |                                                                 | (2,725  | )                            |         |          | (1,606  | )     
|                                                         |                                                                             | Proceeds from disposition of property and equipment                         |                                                       |                                                                 | 26      |                              |         |          | 23      |       
|                                                         |                                                                             | Acquisition of H&H Programming  Asia, net of cash acquired                 |                                                       |                                                                 | (690    | )                            |         |          |        |       
|                                                         |                                                                             |                                                                             |                                                       |                                                                 |         |                              |         |         
|                                                         |                                                                             |                                                                             |                                                       | Net cash used in investing activities                           |         |                              | (3,389  | )        |         |        | (1,583  | )
|                                                         |                                                                             |                                                                             |                                                       |                                                                 |         |                              |         |         
|CASH FLOWS FROM FINANCING ACTIVITIES:                    |                                                                             |                                                                             |                                                       |                                                                 |         |                              |         |         
|                                                         | Proceeds from the issuance of common stock due to exercise
of stock options |                                                                             |                                                       | 190                                                             |         |                              |         | 1,136    |        
|                                                         | Borrowings from HC Crown note payable                                       |                                                                             |                                                       | 22,500                                                          |         |                              |         |         |        
|                                                         | Borrowings from JP Morgan Chase credit facility                             |                                                                             |                                                       |                                                                |         |                              |         | 55,000   |        
|                                                         | Payments on borrowings from JP Morgan Chase credit facility                 |                                                                             |                                                       | (75                                                             | )       |                              |         | (110,587 | )      
|                                                         | Decrease in cash in escrow                                                  |                                                                             |                                                       |                                                                |         |                              |         | 111,625  |        
|                                                         | Distribution to holders of guaranteed preferred beneficial
interests        |                                                                             |                                                       |                                                                |         |                              |         | (3,621   | )      
|                                                         | Principal payments under capital lease obligation                           |                                                                             |                                                       | (293                                                            | )       |                              |         | (319     | )      
|                                                         |                                                                             |                                                                             |                                                       |                                                                 |         |                              |         |         
|                                                         |                                                                             |                                                                             |                                                       | Net cash provided by financing activities                       |         |                              | 22,322  |          |         |        | 53,234  |  
|                                                         | Effect of exchange rate changes on cash                                     |                                                                             |                                                       | (16                                                             | )       |                              |         | (51      | )      
|                                                         |                                                                             |                                                                             |                                                       |                                                                 |         |                              |         |         
|                                                         |                                                                             |                                                                             |                                                       | Net decrease in cash and cash equivalents                       |         |                              | (22,689 | )        |         |        | (5,248  | )
|Cash and cash equivalents, beginning of period           |                                                                             |                                                                             | 34,274                                                |                                                                 |         |                              | 13,859  |         
|                                                         |                                                                             |                                                                             |                                                       |                                                                 |         |                              |         |         
|Cash and cash equivalents, end of period                 |                                                                             | $                                                                           | 11,585                                                |                                                                 |         | $                            | 8,611   |         
|                                                         |                                                                             |                                                                             |                                                       |                                                                 |         |                              |         |         
|Supplemental disclosure of cash and non-cash activities: |                                                                             |                                                                             |                                                       |                                                                 |         |                              |         |         
|                                                         | Interest paid                                                               |                                                                             | $                                                     | 1,031                                                           |         |                              | $       | 2,863    |        
|                                                         | Interest paid on preferred securities                                       |                                                                             | $                                                     |                                                                |         |                              | $       | 4,373    |        
|                                                         | Income taxes paid                                                           |                                                                             | $                                                     | 385                                                             |         |                              | $       | 549      |        
|                                                         | Stock-based compensation                                                    |                                                                             | $                                                     | 774                                                             |         |                              | $       | 6        |        
|                                                         | Asset acquired through capital lease obligation                             |                                                                             | $                                                     | 13,252                                                          |         |                              | $       |         |        
|                                                         | Loss on fair value of derivative asset                                      |                                                                             | $                                                     |                                                                |         |                              | $       | 57       |        
|                                                         | Acquisition of H&H Programming  Asia, net of cash acquired:                |                                                                             |                                                       |                                                                 |         |                              |         |          |        
|                                                         |                                                                             |                                                                             | Accounts receivable and other assets                  |                                                                 | $       | 1,622                        |         |          | $       |       |        
|                                                         |                                                                             |                                                                             | Program license fees                                  |                                                                 |         | 2,678                        |         |          |         |       |        
|                                                         |                                                                             |                                                                             | Goodwill and other intangibles                        |                                                                 |         | 93,924                       |         |          |         |       |        
|                                                         |                                                                             |                                                                             | Accounts payable and other liabilities                |                                                                 |         | 3,227                        |         |          |         |       |        
|                                                         |                                                                             |                                                                             | JP Morgan Chase credit facility                       |                                                                 |         | 3,100                        |         |          |         |       |        
|                                                         |                                                                             |                                                                             | Affiliate license fees payable                        |                                                                 |         | 5,388                        |         |          |         |       |        
|                                                         |                                                                             |                                                                             | Issuance of Class A common stock                      |                                                                 |         | 85,819                       |         |          |         |       |        

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

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CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2001 and 2002

1. Business and Organization

Organization

Crown Media Holdings, Inc. (Crown Media Holdings or the Company),
through its subsidiaries, owns and operates pay television channels dedicated
to high quality, broad appeal, entertainment programming, in the United States
and in various countries throughout the world. Internationally, the Hallmark
Channel is operated and distributed in approximately 110 countries by Crown
Media International, which commenced operations as a Delaware corporation in
June 1995, and in the United Kingdom by Crown Entertainment. Domestically, the
Hallmark Channel is operated and distributed by Crown Media United States,
which commenced operations as a limited liability company in July 1995.
Significant investors in Crown Media Holdings include Hallmark Entertainment
Holdings, Inc. (Hallmark Entertainment Holdings), a subsidiary of Hallmark
Cards, Incorporated (Hallmark Cards), Liberty Media Corp. (Liberty Media),
the National Interfaith Cable Coalition (NICC), J.P. Morgan Partners (BHCA),
L. P. (J.P. Morgan), and DirecTV Enterprises, Inc. (DirecTV).

Crown Media Holdings was established as a holding company with no material
assets, liabilities, contingent liabilities or operations. On May 9, 2000,
Crown Media Holdings completed a reorganization in which all of Crown Media
Holdings outstanding shares were exchanged for 100% of Crown Media
International and 77.5% of the common interests in Crown Media United States,
consisting of 22.5% held by Crown Media International, 32.5% by Liberty Media
and 22.5% by NICC. The Companys consolidated financial statements include the
assets and liabilities of Crown Media International at their historical
carrying values since both Crown Media Holdings and Crown Media International
were entities under common control before and after the reorganization. The
accompanying consolidated financial statements also include the assets and
liabilities and results of operations of Crown Media Holdings other direct and
indirect, wholly and majority-owned subsidiaries. The interests in Crown Media
United States acquired from Liberty Media and NICC are included in the
Companys consolidated financial statements at their fair value using purchase
accounting as of the date of the reorganization.

Crown Media Internationals 50% interest in H&H Programming  Asia, which
operated The Kermit Channel until December 2000, was treated as an equity
investment until March 15, 2001, in Crown Media Holdings consolidated
financial statements. On March 15, 2001, Crown Media Holdings acquired from The
Jim Henson Company, Inc. (The Jim Henson Company) the remaining 22.5% common
interests in Crown Media United States and the remaining 50% interest in H&H
Programming  Asia that the Company did not previously own. In consideration
for these ownership interests, the Company issued approximately 5.4 million
shares of its Class A common stock, with a then market value of approximately
$85.8 million, to The Jim Henson Company. The acquisition was recorded at fair
value using purchase accounting as of March 15, 2001.

Liquidity

In connection with the Companys growth strategy, the Company expects that
it will continue to make significant investments in programming, distribution
and technology. The Companys principal sources of funds are expected to be
cash generated from operations (before interest), cash on hand and available
borrowings under the Companys credit facility and the HC Crown Corporation
(HC Crown) line of credit. Crown Media Holdings and/or its subsidiaries have
a limited ability to incur additional debt due to certain provisions contained
in the Companys credit agreement and indenture governing the Companys
preferred securities. The Companys principal uses of funds are expected to be
the payment of operating expenses (including but not limited to licensing
programming from third parties), working capital, capital expenditure
requirements, and debt service payments.

The Companys financial position and operations changed significantly
during 2001. Substantial revenue producing assets were acquired through the
issuance of debt and stock and funds available under the Companys credit
facility. In August 2001, the Company issued $80.1 million of common stock for
additional carriage on a pay television distributor. In September 2001, the
Company acquired approximately 700 films for $592.0 million in common stock and
assumption of $220.0 million of debt. The expectation is that these additional
assets will provide substantial revenue for the foreseeable future. These
acquisitions and the Companys continuing use of cash in operations resulted in
several new financings during 2001. In September 2001, the Company established
a bank credit facility of $285.0 million, which was subsequently increased in
December 2001, to $320.0 million. In

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December 2001, the Company also issued $265.0 million of preferred
securities in a private placement transaction. As of March 31, 2002, the
Company had an $8.6 million cash balance, $113.5 million undrawn balance under
the bank credit facility and $75.0 million available under the HC Crown line of
credit. The Company believes that this available credit, together with cash
generated from operations and cash on-hand, will be sufficient for its
liquidity needs through at least June 30, 2003.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the consolidated accounts of
Crown Media Holdings and those of its wholly owned and majority-owned and
controlled subsidiaries. Historically, the Company held investments in entities
that were not majority-owned and controlled by Crown Media Holdings, which were
accounted for under the equity method. All significant intercompany balances
and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

Crown Media Holdings considers all highly liquid instruments purchased
with an initial maturity of three months or less to be cash equivalents. The
carrying value of Crown Media Holdings cash equivalents approximates cost at
each balance sheet date.

Restricted Cash

Restricted cash includes amounts deposited to secure letters of credit in
accordance with certain lease agreements.

Subscriber Acquisition Fees

Crown Media United States has distribution agreements with eight of the
top nine largest (based on number of subscribers) United States pay television
distributors. These distributors carry the Hallmark Channel on some of their
cable, satellite, terrestrial television, or satellite master antenna
television systems. Crown Media United States is obligated to pay subscriber
acquisition fees if certain subscriber levels are met as defined in certain of
these agreements, or in order to obtain carriage of the Hallmark Channel by
those distributors.

Subscriber acquisition fees are amortized over the life of the
distribution agreements and such amortization is a reduction of subscriber fees
revenue. If the amortization expense exceeds the revenue recognized on a per
distributor basis, the amortization is included as a component of operating
expense. Crown Media Holdings assesses the recoverability of these costs
periodically and whenever events or changes in distributor relationships occur
or other indicators would suggest an impairment.

Subscriber acquisition are comprised of the following:

|                                         |                                 |   |                    |         |                 |   |         |         | 
|---------------------------------------- | ------------------------------- | - | ------------------ | ------- | --------------- | - | ------- | ------- | 
|                                         |                                 |   | As of December 31, |         | As of March 31,
|                                         |                                 |   | 2001               |         | 2002           
|                                         |                                 |   |                    |         |                
|                                         |                                 |   | (In thousands)    
|Balance at cost, January 1               |                                 | $ | 32,884             |         |                 | $ | 143,153 |        
|Additions due to distribution agreements |                                 |   | 110,269            |         |                 |   | 2,936   |        
|                                         |                                 |   |                    |         |                 |   |         |        
|                                         | Subscriber acquisition, at cost |   |                    | 143,153 |                 |   |         | 146,089 | 
|Accumulated amortization                 |                                 |   | (16,188            | )       |                 |   | (22,375 | )      
|                                         |                                 |   |                    |         |                 |   |         |        
|                                         | Subscriber acquisition, net     |   | $                  | 126,965 |                 |   | $       | 123,714 | 
|                                         |                                 |   |                    |         |                 |   |         |        

As of December 31, 2001, and March 31, 2002, the consolidated balance
sheets also reflected subscriber acquisition fees payable of $28.3 million and
$17.1 million, respectively. For the three months ended March 31, 2001, and
March 31, 2002, Crown Media United States made cash payments of $42,000 and
$14.1 million, respectively, reducing subscriber acquisition fees payable.
Additionally, $80.1 million of common stock was issued in exchange for
distribution rights during 2001 (see note 7). Currently, Crown Media United
States is committed to current payments of $12.1 million in second quarter
2002, a $1.0 million payment in 2005 and $4.0 million in 2007.

Program License Fees

Program license fees are payable in connection with the acquisition of the
rights to air programs acquired from others. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 63, Financial Reporting by
Broadcasters,program rights

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are deferred and then amortized on a straight-line basis over their
license periods (the airing windows) or anticipated usage, whichever is
shorter. At the inception of these contracts and periodically thereafter, Crown
Media Holdings evaluates the recoverability of these costs versus the revenues
directly associated with the programming and related expenses. Where an
evaluation indicates that a programming contract will ultimately result in a
loss, additional amortization is provided to currently recognize that loss.

SFAS No. 63 also requires an entity providing programming to report an
asset and liability for the rights licensed under a programming agreement only
when the license period begins and when certain other defined requirements are
met.

Subtitling and Dubbing

Subtitling and dubbing costs represent costs incurred to prepare
programming for airing in international markets. These costs are capitalized as
incurred and are amortized over the shorter of the programs airing window for
programming licensed from unaffiliated third-parties, the programs estimated
life (in the case of programming licensed from Hallmark Entertainment
Distribution) or 10 years. Accumulated amortization related to subtitling and
dubbing as of December 31, 2001, and March 31, 2002, was $4.9 million and $5.4
million, respectively.

Capitalized Leases

Noncancellable leases, which meet the criteria of capital leases, are
capitalized as assets and amortized over the lease term.

Property and Equipment

Property and equipment are recorded at cost. Depreciation of property and
equipment are provided by the straight-line method over the estimated useful
lives of the respective assets, ranging from three to eight years. Leasehold
improvements are amortized over the life of the lease. When property is sold or
otherwise disposed of, the cost and related accumulated depreciation and
amortization are removed from the accounts and any resulting gain or loss is
included in income. The costs of normal maintenance and repairs are charged to
expense when incurred.

Accounting for Trust Preferred Securities

Crown Media Holdings formed a special-purpose entity, Crown Media Trust,
in December 2001. Crown Media Trust issued units of preferred securities and
loaned the proceeds from its sales to Crown Media Holdings. This loan was
designed so that interest and principal payments match the dividend and any
redemption requirements on the preferred securities issued by Crown Media
Trust. Interest received by Crown Media Trust from Crown Media Holdings funds
distributions to the investors of the preferred securities.

Crown Media Holdings owns 100% of the common equity in Crown Media Trust.
The preferred securities include terms that allow the holder to earn a return
above the stated dividend rate on the securities under certain conditions.
Based on fair value calculations using cash flows and Black-Scholes models, a
portion of the preferred securities have been allocated and classified in Crown
Media Holdings balance sheet as guaranteed preferred beneficial interests in
Crown Media Trusts debentures (mezzanine minority interest) and a portion has
been classified as convertible debt. Issuance costs related to the guaranteed
preferred beneficial interests portion were netted against the guaranteed
preferred beneficial interests and accreted as additional minority interest in
earnings. Issuance costs related to the convertible debt portion were recorded
as a deferred debt issuance costs asset and amortized as additional interest
expense, using the effective interest method. See Note 6 for additional
discussion of the terms and related accounting for the preferred securities and
Crown Media Holdings related subordinated debentures.

Crown Media Holdings is aware of recent accounting exposure drafts, which
may cause the Company to reclassify its guaranteed preferred beneficial
interests in Crown Media Trusts debentures as convertible debt if these drafts
are adopted. Changing the classification of the Companys preferred securities
from guaranteed preferred beneficial interests to convertible debt could
significantly impact the presentation of the Companys financial statements,
although the Company does not expect this change to significantly impact its
financial position.

Revenue Recognition

Subscriber fees from pay television distributors are recognized as revenue
when an agreement is executed, programming is provided, price is determinable,
and collectibility is reasonably assured. Subscriber fees from pay television
distributors are recorded net of amortization of subscriber acquisition costs.

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Crown Media Holdings adopted Emerging Issues Task Force (EITF) Issue No.
00-25, Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendors Products(EITF 00-25) on January 1, 2001, which was
codified in EITF Issue No. 01-9 (EITF 01-9), Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of the Vendors
Products). EITF 01-9 clarifies the income statement classification of costs
incurred by a vendor in connection with the resellers purchase or promotion of
the vendors products, resulting in certain cooperative advertising and product
placement costs previously classified as selling expenses to be reflected as a
reduction of revenues earned from that activity.

Advertising revenues are recognized as earned in the period in which the
advertising commercials or infomercials are telecast. Advertising revenues are
recorded net of agency commissions and estimated advertising deficiency
reserves.

Advertising revenue and expenses in barter transactions are recorded at
the fair value of the advertising to be provided. The fair value is determined
based upon Crown Media Holdings historical practice of receiving cash for
similar advertisements from buyers unrelated to the other party in the current
barter transaction. When the barter advertising revenue does not meet the
requirements of EITF No. 99-17, Accounting for Advertising Barter Transactions,
no revenue is recognized. For the three months ended March 31, 2001 and 2002,
revenue from advertising barter transactions equaled the corresponding barter
expenses and were $497,000 and $113,000, respectively, and were included as a
component of both advertising revenue and marketing expenses in the
accompanying consolidated statements of operations.

Revenue from television and distribution licensing agreements is
recognized when the film is available for exhibition by the licensee, the
license fee is known, collectibility is reasonably assured and the cost of each
film is known or reasonably determinable. Payments received from licensees
prior to the availability of a film are recorded as deferred revenue.

Revenues from foreign sources for the three months ended March 31, 2001
and 2002, represented 63% and 45% respectively, of total revenue. Such
revenues, generally denominated in United States dollars, were primarily from
sales to customers in Argentina, Australia, India, Malaysia, Mexico,
Philippines, Poland, Singapore, South Africa, South Korea, Taiwan, and the
United Kingdom, during all periods presented.

Cost of Services

Cost of services includes programming distribution expenses and
amortization of program license fees, subtitling and dubbing.

Film Assets

The Company amortizes its film assets based on recognized revenue in the
case of sales to third parties, using projections of sales to third parties for
10 years in determining the amortization amount for any sale to a third party,
and based on a 10-year amortization for anticipated internal use of the film
assets. The Companys projections regarding sales to third parties and
anticipated internal use are based on the history of each film and similar
films, sales and marketing plans, and other factors, all of which require
significant judgment by management. The 10-year period used for sales to third
parties and internal use commences on the date of acquisition and is the same
time period used in an initial, external valuation of the Companys film assets
at the time of purchase. The film assets are also reviewed by the Company for
impairment whenever events or changes in circumstances indicate that the
carrying amount of any such asset may not be recoverable and at least annually.
At least annually, the Company is also required by its debt covenants to have
an external review of the film assets valuation.

Crown Media Holdings adopted Statement of Position 00-2, Accounting by
Producers and Distributors of Films(SOP 00-2) on September 28, 2001, in
conjunction with the purchase of the film assets. SOP 00-2 requires advertising
costs for theatrical and television product to be expensed as incurred and all
film costs to be classified in the balance sheet as non-current assets.

Goodwill and Other Intangibles

In July 2001, the FASB issued SFAS No. 141, Business Combinations(SFAS
141) and No. 142, Goodwill and Other Intangible Assets(SFAS 142), which
were adopted by Crown Media Holdings on January 1, 2002. These standards
prohibit the prospective use of pooling-of-interests accounting and require
companies to stop amortizing goodwill and certain intangible assets with an
indefinite useful life created by business combinations accounted for using the
purchase method of accounting. Instead, goodwill and intangible assets deemed
to have an indefinite useful life are subject to an annual review for
impairment. Crown Media Holdings stopped

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amortizing $22.0 million per year of goodwill, including goodwill included
in the carrying value of certain investments accounted for under the equity
method of accounting. Additionally, Crown Media Holdings goodwill and certain
intangible assets were externally reviewed during first quarter of 2002, which
resulted in no impairments.

If the Company had not recorded the amortization of its goodwill in prior
periods, the results of operations would have changed. These changes are
reflected in the following table:

|                                                                                     |  |                                      |         |      |  |   |         |  
|------------------------------------------------------------------------------------ |  | ------------------------------------ | ------- | ---- |  | - | ------- | -
|                                                                                     |  | Three Months Ended March 31,        
|                                                                                     |  |                                     
|                                                                                     |  | 2001                                 |         | 2002
|                                                                                     |  |                                      |         |     
|                                                                                     |  | (In thousands, except share amounts)
|Net Loss                                                                             |  | $                                    | (45,167 | )    |  | $ | (56,010 | )
|Amortization of goodwill                                                             |  |                                      | 3,527   |      |  |   |         |  
|                                                                                     |  |                                      |         |      |  |   |         |  
|Adjusted net loss                                                                    |  | $                                    | (41,640 | )    |  | $ | (56,010 | )
|                                                                                     |  |                                      |         |      |  |   |         |  
|Net loss per share, basic and diluted                                                |  | $                                    | (0.74   | )    |  | $ | (0.54   | )
|Amortization of goodwill                                                             |  |                                      | 0.06    |      |  |   |         |  
|                                                                                     |  |                                      |         |      |  |   |         |  
|Adjusted net loss per share                                                          |  | $                                    | (0.68   | )    |  | $ | (0.54   | )
|                                                                                     |  |                                      |         |      |  |   |         |  
|Weighted average number of Class A
and Class B shares outstanding,
basic and diluted |  |                                      | 60,993  |      |  |   | 104,212 |  
|                                                                                     |  |                                      |         |      |  |   |         |  

Taxes on Income

Income taxes are accounted for using an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in Crown
Media Holdings consolidated financial statements or tax returns. In estimating
future tax consequences, Crown Media Holdings generally considers all expected
future events other than changes in the tax law or rates.

Comprehensive Loss

Crown Media Holdings reports all changes in equity that result from
transactions and other economic events other than transactions with owners in
their capacity as owners as comprehensive income (loss). No tax benefit has
been provided on the foreign currency translation loss component for any
period.

Translation of Foreign Currency

The balance sheets and statements of operations of certain Crown Media
Holdings foreign subsidiaries are measured using local currency as the
functional currency. Revenues, expenses and cash flows of such subsidiaries are
translated into United States dollars at the average exchange rates prevailing
during the period. Assets and liabilities are translated at the rates of
exchange at the balance sheet date. Translation gains and losses are deferred
as a component of stockholders equity. Aggregate foreign currency transaction
gains and losses are included in determining net income.

Net Loss Per Share

Basic net loss per share is computed by dividing the net loss for the
period by the weighted average number of common shares outstanding during the
period. Diluted net loss per share is computed based on the weighted average
number of common shares and potentially dilutive common shares outstanding. The
calculation of diluted net loss per share excludes potential common shares if
the effect is antidilutive. Potential common shares consist of incremental
common shares issuable upon the exercise of stock options. Approximately 5.7
million and 8.3 million stock options for the three months ended March 31, 2001
and 2002, respectively, have been excluded from the calculations on the
statement of operations because their effect would have been antidilutive.
Additionally, 10.1 million contingent appreciation certificates have also been
excluded for the three months ended March 31, 2002, as their effect would have
been antidilutive. Accordingly, diluted loss per share equals basic loss per
share.

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Stock-Based Compensation

SFAS No. 123, Accounting for Stock-Based Compensation,encourages, but
does not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to account for
stock-based compensation plans using the intrinsic value method prescribed in
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees,and related interpretations including Financial Accounting
Standards Board (FASB) Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of APB No. 25,
issued in March 2000. Accordingly, compensation cost for stock options issued
to employees is measured as the excess, if any, of the quoted market price of
the Companys stock at the date of the grant over the amount an employee must
pay to acquire the stock.

Derivative Financial Instruments

On January 1, 2001, the Company adopted SFAS 133, Accounting for
Derivative Instruments and Hedging Activities,as amended. The standard
requires the recognition of all derivative instruments on the balance sheet as
either assets or liabilities measured at fair value. Changes in fair value are
recognized immediately in earnings unless the derivatives qualify as hedges of
future cash flows. Changes in the fair value of the derivatives components of
the private placement transaction are recognized immediately in earnings.

For derivatives qualifying as hedges of future cash flows, the effective
portion of changes in fair value is recorded as a component of other
comprehensive income (loss) and recognized in earnings when the hedged
transaction is recognized in earnings. Any ineffective portion (representing
the extent that the change in fair value of the hedges does not completely
offset the change in the anticipated net payments being hedged) is recognized
in earnings as it occurs. There was no cumulative effect recognized for
adopting this accounting change.

The Company formally designates and documents each financial instrument as
a hedge of a specific underlying exposure as well as the risk management
objectives and strategies for entering into the hedge transaction upon
inception. The Company also formally assesses upon inception, and quarterly
thereafter, whether the financial instruments used in hedging transactions are
effective in offsetting changes in the fair value or cash flows of the hedged
items.

The Company uses derivative financial instruments, primarily forward
foreign exchange contracts, to reduce the exposure of adverse effects of
fluctuating foreign currency exchange rates. These contracts, which have been
designated as cash flow hedges, were entered into primarily to hedge certain
intercompany payments denominated in foreign currencies, which have maturities
of less than one year. The unrecognized income (loss) on the revaluation of
forward currency contracts will be recognized in cost of sales upon expiration
of the contract. Throughout 2001, the Company entered into these contracts with
a counterparty that is a major financial institution, and accordingly, the
Company believes that the risk of counterparty nonperformance is remote. The
amount of the hedges ineffectiveness as of March 31, 2002, recorded in the
consolidated statement of operations, was not significant.

See note 6 for a discussion of the derivative liability related to the
private placement transaction.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires Crown Media
Holdings to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

Concentration of Credit Risk

Financial instruments, which potentially subject Crown Media Holdings to a
concentration of credit risk, consist primarily of cash, restricted cash, cash
equivalents and accounts receivable. Generally, Crown Media Holdings does not
require collateral to secure receivables. Crown Media Holdings has no
significant off-balance sheet financial instruments with risk of accounting
losses, such as foreign exchange contracts, options contracts, or other foreign
currency hedging arrangements.

Fair Value

The carrying amounts of financial instruments, including amounts payable
and receivable, are reasonable estimates of their fair value because of their
short-term nature. The fair values were estimated using the current rates at
which loans would be made to Crown Media Holdings for similar remaining
maturities. Investments in private companies and partnerships are recorded at
fair value

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as of the date of investment. Crown Media Holdings periodically reviews
the fair value of its investments. If a review indicates that the carrying
value of an asset is not recoverable, the carrying value is reduced to its
estimated fair value.

Interim Financial Statements

The unaudited consolidated financial statements should be read in
conjunction with the Crown Media Holdings, Inc. Annual Report on Form 10-K for
the year ended December 31, 2001, including the financial statements and notes
thereto. The results of operations for any interim period are not necessarily
indicative of the results of operations to be expected for the entire year.

Recently Issued Accounting Pronouncements

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets,which provides clarifications of
certain implementation issues within SFAS No. 121 along with additional
guidance on the accounting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes SFAS No. 121 and applies to all long-lived assets
(including discontinued operations) and consequently amends APB No. 30,
Reporting the Effects of Disposal of a Segment of Business.SFAS No. 144
develops one accounting model for long-lived assets that are to be disposed of
by sale, as well as addresses the principal implementation issues. SFAS No. 144
requires that entities measure long-lived assets that are to be disposed of by
sale at the lower of book value or fair value less cost to sell. That
requirement eliminates APB No. 30s requirement that discontinued operations be
measured at net realizable value or that entities include under discontinued
operations in the financial statements amounts for operating losses that have
not yet occurred. Crown Media Holdings adopted SFAS No. 144 on January 1, 2002,
and its adoption did not have a significant impact on the Companys
consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections,which is effective for transactions occurring after May 15, 2002.
This statement amends FASB No. 13 to eliminate an inconsistency between the
required accounting for sales-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sales-leaseback transactions and amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. Crown Media Holdings
plans to adopt this statement in the second quarter of 2002 and is in the
process of determining the impact that its adoption will have on the Companys
consolidated financial statements.

Reclassifications

Certain reclassifications have been made to conform prior periods data to
the current presentation. These reclassifications have no effect on reported
net loss.

3. Program license fees

Program license fees are comprised of the following:

|                                                           |                               |   |                    |         |                 |   |         |         | 
|---------------------------------------------------------- | ----------------------------- | - | ------------------ | ------- | --------------- | - | ------- | ------- | 
|                                                           |                               |   | As of December 31, |         | As of March 31,
|                                                           |                               |   | 2001               |         | 2002           
|                                                           |                               |   |                    |         |                
|                                                           |                               |   | (In thousands)    
|Program license fees  Hallmark Entertainment
Distribution |                               | $ | 103,539            |         |                 | $ | 103,266 |        
|Program license fees  NICC                                |                               |   | 287                |         |                 |   | 6,041   |        
|Program license fees  other affiliates                    |                               |   | 13,821             |         |                 |   | 12,475  |        
|Program license fees  non-affiliates                      |                               |   | 93,795             |         |                 |   | 118,108 |        
|Prepaid program license fees                               |                               |   | 6,750              |         |                 |   | 10,250  |        
|                                                           |                               |   |                    |         |                 |   |         |        
|                                                           | Program license fees, at cost |   |                    | 218,192 |                 |   |         | 250,140 | 
|Accumulated amortization                                   |                               |   | (76,670            | )       |                 |   | (88,479 | )      
|                                                           |                               |   |                    |         |                 |   |         |        
|                                                           | Program license fees, net     |   | $                  | 141,522 |                 |   | $       | 161,661 | 
|                                                           |                               |   |                    |         |                 |   |         |        

License fees payable are comprised of the following:

|                                                           |                      |   |                    |         |                 |   |        |         | 
|---------------------------------------------------------- | -------------------- | - | ------------------ | ------- | --------------- | - | ------ | ------- | 
|                                                           |                      |   | As of December 31, |         | As of March 31,
|                                                           |                      |   | 2001               |         | 2002           
|                                                           |                      |   |                    |         |                
|                                                           |                      |   | (In thousands)    
|License fees payable  Hallmark Entertainment
Distribution |                      | $ | 62,299             |         |                 | $ | 69,063 |        
|License fees payable  NICC                                |                      |   |                   |         |                 |   | 2,698  |        
|License fees payable  non-affiliates                      |                      |   | 56,215             |         |                 |   | 66,954 |        
|                                                           |                      |   |                    |         |                 |   |        |        
|                                                           | License fees payable |   | $                  | 118,514 |                 |   | $      | 138,715 | 
|                                                           |                      |   |                    |         |                 |   |        |        

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4. Property and Equipment

Property and equipment are comprised of the following:

|                                          |                                 |   |                    |        |                 |   |         |        | 
|----------------------------------------- | ------------------------------- | - | ------------------ | ------ | --------------- | - | ------- | ------ | 
|                                          |                                 |   | As of December 31, |        | As of March 31,
|                                          |                                 |   | 2001               |        | 2002           
|                                          |                                 |   |                    |        |                
|                                          |                                 |   | (In thousands)    
|Technical equipment and computers         |                                 | $ | 37,745             |        |                 | $ | 38,390  |       
|Leased assets                             |                                 |   | 13,252             |        |                 |   | 13,252  |       
|Furniture, fixtures and equipment         |                                 |   | 2,025              |        |                 |   | 2,043   |       
|Leasehold improvements                    |                                 |   | 8,604              |        |                 |   | 9,002   |       
|Construction-in-progress                  |                                 |   | 424                |        |                 |   | 912     |       
|                                          |                                 |   |                    |        |                 |   |         |       
|                                          | Property and equipment, at cost |   |                    | 62,050 |                 |   |         | 63,599 | 
|Accumulated depreciation and amortization |                                 |   | (18,168            | )      |                 |   | (21,155 | )     
|                                          |                                 |   |                    |        |                 |   |         |       
|                                          | Property and equipment, net     |   | $                  | 43,882 |                 |   | $       | 42,444 | 
|                                          |                                 |   |                    |        |                 |   |         |       

The Companys Network Operations Center was placed in service in the first
quarter of 2001. Technical equipment, computers and leasehold improvements were
reclassified from construction-in-progress to their related captions during the
first quarter of 2001 in conjunction with the launch of our Network Operations
Center. Depreciation and amortization expense totaled $2.4 million and $3.4
million, respectively, for the three months ended March 31, 2001 and 2002.

5. Investments in and Advances to Unconsolidated Entities

Investment in H&H Programming  Asia

Each of Crown Media International and The Jim Henson Company held a 50%
interest in H&H Programming  Asia through March 15, 2001. Crown Media
Holdings investment in H&H Programming  Asia was reflected in the
consolidated financial statements using the equity method of accounting until
March 15, 2001, the date of the acquisition of the remaining 50% interest (see
note 1), at which time it became a consolidated subsidiary. Crown Media
Holdings equity in the net loss of H&H Programming  Asia was $655,000 for the
two and one half months ended March 15, 2001.

Crown Media Holdings investment in H&H Programming  Asia, through the
date of the acquisition, exceeded the underlying equity in the net assets of
H&H Programming  Asia as of the date of the investment. The goodwill and other
intangibles were amortized over 10 years through December 31, 2001.

For the two and one half months ended March 15, 2001, Crown Media
International made contributions of $707,000, which were recorded net of cash
acquired from the acquisition of the remaining 50% interest in H&H Programming
- Asia.

Investment in Crown Media United States

Crown Media Holdings investment in Crown Media United States, through the
date of the reorganization (see note 1), exceeded the underlying equity in the
net assets of Crown Media United States as of the date of the investment. This
goodwill was amortized over 20 years through December 31, 2001.

On March 15, 2001, Crown Media Holdings acquired the remaining 22.5%
common interests in Crown Media United States and 50% interest in H&H
Programming  Asia for $85.8 million (see note 1).

6. Credit Facility and Private Placement

Credit Facility

In connection with the completion of the purchase of the film assets,
Crown Media Holdings entered into a credit agreement with a syndicate of banks,
led by JP Morgan Chase Bank, under which the banks have extended to Crown Media
Holdings, as amended in December 2001, a five-year $320.0 million secured
credit facility. On the accompanying consolidated balance sheet at December 31,
2001, outstanding amounts of $111.9 million were included as a current
liability (including interest of approximately $936,000), because this amount
was required to be paid on January 7, 2002, from the proceeds of the issuance
of the preferred securities, and $151.4 million was included as a long-term
liability. At March 31, 2002, an outstanding amount of $206.5 million was
included as a

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long-term liability. This loan is guaranteed by Crown Media Holdings
subsidiaries and is secured by all tangible and intangible property of Crown
Media Holdings and its subsidiaries. A portion of the borrowings under the
credit facility were used to pay $120.0 million of debt assumed as part of the
consideration for acquiring the Crown Media Library and to repay $84.2 million
outstanding under a $150.0 million line of credit provided by HC Crown. The
remaining balance of the credit facility is available to Crown Media Holdings
for general working capital purposes. JP Morgan Chase Bank and J.P. Morgan
Partners (BHCA) L.P., a significant stockholder of Crown Media Holdings, are
both affiliates of J.P. Morgan Chase & Co.

The bank credit facility encompasses a term loan of $100.0 million and a
revolving line of credit of $220.0 million, up to $20.0 million of which can be
letters of credit issued at the request of Crown Media Holdings. Each loan
(which includes the term loans and any revolving credit loans) bears interest
at a Eurodollar rate or an alternate base rate as Crown Media Holdings may
request in accordance with the credit agreement. The Eurodollar rate is based
on the London interbank market for Eurodollars, and remains 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 JP Morgan Chase Bank, a
certificate of deposit rate or the Federal Funds effective rate, which is
adjusted whenever the rate changes. Crown Media Holdings is required to pay a
commitment fee of 0.5% per annum of the committed, but not outstanding, amounts
under the revolving credit facility, payable in quarterly installments. The
credit facility contains a number of affirmative and negative covenants. In
addition, the aggregate principal amount of all outstanding revolving credit
loans and term loans as well as letters of credit available under the credit
facility must not exceed the amount of the library credit then in effect. The
library credit means 50% of the most recent valuation of the Crown Media
Library, which valuation Crown Media Holdings is required to deliver after the
end of each quarter; this valuation is based upon the net present value of cash
flows. Currently, the library credit is in excess of the maximum amount of the
bank loans.

Since the inception of the credit facility, Crown Media Holdings has
elected the monthly Eurodollar rate. Amounts under the revolver had accrued
interest at rates from 5.0% to 5.59% and amounts under the term loan had
accrued interest at rates from 5.11% to 5.59% during 2001. Amounts under the
revolver have accrued interest at rates from 4.73% to 5.14% and amounts under
the term loan have accrued interest at rates from 4.84% to 5.11% for the three
months ended March 31, 2002. Interest expense for the year ended December 31,
2001, was $3.1 million. Interest expense for the three months ended March 31,
2002, was $2.3 million. At December 31, 2001, and March 31, 2002, accrued
interest of $936,000 and $669,000, respectively, was reflected in the current
portion of the credit facility on the accompanying balance sheet.

Future contractual maturities (excluding interest) are as follows:

|           |  |                |         | 
|---------- |  | -------------- | ------- | 
|           |  | Years Ended   
|           |  | December 31,  
|           |  |               
|           |  | (In thousands)
|2002       |  | $              |        | 
|2003       |  |                |        | 
|2004       |  |                |        | 
|2005       |  |                |        | 
|2006       |  |                | 206,542 | 
|Thereafter |  |                |        | 
|           |  |                |         | 
|           |  | $              | 206,542 | 
|           |  |                |         | 

Private Placement

On December 17, 2001, Crown Media Holdings completed a $265.0 million
private placement to a group of institutional investors. Under the terms of the
private placement, Crown Media Holdings issued to the investors units, each
unit comprised of one preferred security of Crown Media Trust, and one
contingent appreciation certificate, issued by Crown Media Holdings.

The additional financing allowed Crown Media Holdings to reduce the amount
outstanding under its syndicated bank credit facility by $111.6 million. The
$111.6 million was placed into an escrow account until an allowed payment date
of January 7, 2002. Additionally, the Company used a portion of the proceeds of
the private placement to repay $70.6 million under lines of credit provided by
HC Crown and $69.4 million of amounts payable to Hallmark Entertainment
Distribution pursuant to certain program license agreements held by
subsidiaries of Crown Media Holdings in December 2001.

Each preferred security has a stated liquidation amount of $1,000, and
each contingent appreciation certificate entitles the holder to receive cash,
or at the holders option, purchase approximately 38.3 shares of the Companys
Class A common stock at a price of $13.07 per share, subject to adjustment.
Crown Media Trust issued the preferred securities to Crown Media Holdings in
exchange for 6.75% Subordinated Debentures from Crown Media Holdings due 2007.
Crown Media Holdings has and will continue to pay interest

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on the debentures at the same rate and at the same time as Crown Media
Trust is required to make distributions on the preferred securities. Crown
Media Holdings has guaranteed on a subordinated basis Crown Media Trusts
obligations under the preferred securities.

Distributions on the preferred securities are cumulative, payable
quarterly in arrears, and accumulate from the date of issuance at the annual
rate of 6.75% of the $1,000 liquidation amount. In the event of a liquidation,
the holders of the preferred securities are entitled to receive, together with
any prior distributions, an amount equal to their initial investment of $1,000
plus any accumulated and unpaid distributions.

The contingent appreciation certificates issued by Crown Media Holdings
will expire on March 15, 2008. On or after the occurrence of certain defined
purchase or liquidation events, the holders will be entitled, at their option,
(i) to a cash payment for a minimum return amount on the original cost of the
units, or (ii) to purchase approximately 38.3 shares of Class A common stock at
a price initially equal to $13.07, subject to adjustment, calculated on the
date Crown Media Trust redeems or purchases the preferred securities. The
minimum return amount means the amount, when added to the liquidation amount
and all cash distributions on the preferred securities, which yields an
internal rate of return of 14.0% to 18.0%, depending on the date of redemption
or purchase. The maximum return amount means the amount, when added to the
liquidation amount and all cash distribution on the preferred securities, which
yields an internal rate of return of 25%. The contingent appreciation
certificates, if fully exercised for stock, would represent approximately 10.1
million shares of the Companys Class A common stock.

On or after December 15, 2003, Crown Media Holdings will have the right to
redeem any and all of the outstanding debentures at a redemption price equal to
100% of the aggregate principal amount of the debentures, together with any
accrued and unpaid interest thereon. Currently, the Company expects to redeem
the debentures during 2004 and is accreting its convertible debt and guaranteed
preferred beneficial interests at an internal rate of return of 14% assuming a
redemption date of December 15, 2004. In the event of a change of control, the
Company must either exercise its right to redeem all or offer to purchase any
and all of the outstanding debentures at a price equal to 110% of the aggregate
principal amount of the debentures, together with any accrued and unpaid
interest thereon.

The financing was recorded at $265.0 million and required fair value
allocations to the various components based on the terms of the private
placement agreement. Crown Media Holdings calculated the guaranteed preferred
beneficial interest portion of the preferred securities using an internal rate
of return analysis (cumulative present value of cash flows) on the preferred
securities. The carrying value of the guaranteed preferred beneficial interest
as determined on December 17, 2001, was $197.7 million, on December 31, 2001,
was $199.0 million, and on March 31, 2002, was $203.8 million, net of offering
costs.

Crown Media Holdings calculated the contingent appreciation certificate or
convertible debt portion of the preferred securities by using Black-Scholes
models and by using a combination of put and call options that would provide
the same future payout as the convertible debt portion. The resulting value of
the contingent appreciation certificates, net of an embedded derivative, was
$43.5 million on December 17, 2001, $43.7 million as of December 31, 2001, and
$44.6 million as of March 31, 2002. The transaction also resulted in a net
derivative liability on December 17, 2001, of $12.1 million, on December 31,
2001, of $12.5 million, and on March 31, 2002, of $14.8 million.

The following table summarizes the transaction at the transaction date, as
of year-end, and as of March 31, 2002. The summary also reflects the allocation
of transaction costs between the various components of the financing.

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|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |           |         |   |         |         |         | 
|-------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ------- | -------------- | ------- | ------------ | ------- | --------- | ------- | - | ------- | ------- | ------- | 
|                                                                           |                                                                                                       |                                                                        |         | Initial        |         | As of        |         | As of    
|                                                                           |                                                                                                       |                                                                        |         | Fair Value     |         | December 31, |         | March 31,
|                                                                           |                                                                                                       |                                                                        |         | Allocation     |         | 2001         |         | 2002     
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |          
|                                                                           |                                                                                                       |                                                                        |         | (In thousands)
|Convertible debt                                                           |                                                                                                       |                                                                        |         |                |         |              |         |           |         |   |         |        
|                                                                           | Value
of contingent appreciation certificates                                                         |                                                                        | $       | 93,682         |         |              |         |           |         |   |         |         |        
|                                                                           | Value of embedded derivative                                                                          |                                                                        |         | (50,212        | )       |              |         |           |         |   |         |         |        
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |           |         |   |         |        
|                                                                           |                                                                                                       | Total carrying amount of convertible debt(a)(b)                        |         |                | 43,470  |              |         | $         | 43,733  |   |         | $       | 44,591  | 
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |           |         |   |         |        
|Derivative liability(c)                                                    |                                                                                                       |                                                                        | 12,083  |                |         | $            | 12,495  |           |         | $ | 14,722  |        
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |           |         |   |         |        
|Allocable offering costs included in debt issuance
costs(d)                |                                                                                                       |                                                                        | (2,444  | )              |         | $            | (2,427  | )         |         | $ | (2,206  | )      
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |           |         |   |         |        
|Guaranteed preferred beneficial interest in Crown Media
Trusts debentures |                                                                                                       |                                                                        | 209,447 |                |         | $            | 210,699 |           |         | $ | 218,376 |        
|                                                                           | Distribution to holders of guaranteed preferred beneficial
interest in Crown Media Trusts debentures |                                                                        |         |               |         |              |         |          |         |   |         | (3,621  | )      
|                                                                           | Allocable offering costs(e)                                                                           |                                                                        |         | (11,771        | )       |              |         | (11,659   | )       |   |         | (10,961 | )      
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |           |         |   |         |        
|                                                                           |                                                                                                       | Total carrying value of guaranteed preferred beneficial
interest(b)(f) |         |                | 197,676 |              |         | $         | 199,040 |   |         | $       | 203,794 | 
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |           |         |   |         |        
|                                                                           | Net proceeds allocated to securities sold                                                             |                                                                        | $       | 250,785        |         |              |         |           |         |   |         |         |        
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |           |         |   |         |        
|Gross proceeds from private placement                                      |                                                                                                       | $                                                                      | 265,000 |                |         |              |         |           |         |   |         |        
|Offering costs                                                             |                                                                                                       |                                                                        | (14,215 | )              |         |              |         |           |         |   |         |        
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |           |         |   |         |        
|                                                                           | Net proceeds allocated to securities sold                                                             |                                                                        | $       | 250,785        |         |              |         |           |         |   |         |         |        
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |           |         |   |         |        



---

|(a) |  | Accreted to $45.6 million over three years.                                                                          
|--- |  | ---------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Interest payable at 6.75% per annum in cash each quarter. Balance due at anticipated redemption of December 15, 2004.
|   
|(c) |  | Marked-to-model through income (loss) at each reporting date.                                                        
|   
|(d) |  | Amortized to interest expense over three years.                                                                      
|   
|(e) |  | Accreted to guaranteed preferred interest expense over three years.                                                  
|   
|(f) |  | Accreted to $219.4 million over three years.                                                                         

7. Related Party Transactions

Demand Notes

From November 1999 through April 2000, Crown Media Holdings entered into a
series of agreements with HC Crown, under which HC Crown agreed to lend Crown
Media Holdings up to $40.0 million. On December 17, 2001, the Company paid HC
Crown $37.1 million, in satisfaction of the aggregate balance outstanding as of
that date, including accrued interest, under the notes. The notes were
cancelled on December 17, 2001.

On February 12, 2001, Crown Media Holdings entered into an agreement with
HC Crown under which HC Crown agreed to lend Crown Media Holdings up to $150.0
million. On September 28, 2001, the Company paid HC Crown $70.0 million, in
satisfaction of the aggregate balance outstanding as of that date, including
accrued interest, under the line of credit. This line of credit was cancelled
on September 28, 2001.

On July 10, 2001, Crown Media Holdings entered into a promissory note with
HC Crown representing a line of credit for up to $50.0 million. On December 17,
2001, the Company paid HC Crown $33.5 million, in satisfaction of the aggregate
balance outstanding as of that date, including accrued interest, under the
note. This note was cancelled on December 17, 2001.

On September 28, 2001, the Company executed a promissory note, in the
amount of $150.0 million payable to HC Crown in replacement of the promissory
note with HC Crown dated February 12, 2001. HC Crowns obligation to make loans
under this agreement was supported by an irrevocable letter of credit from
Credit Suisse First Boston. On December 14, 2001, the Company cancelled this
unused promissory note.

On December 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 HC Crown dated September 28, 2001. The line of credit has a final
maturity date no later than December 21, 2007. The line of credit is
subordinate to both the bank facility and the units, and its availability may
be reduced dollar for dollar in an amount equal to additional capital raised by
Crown Media Holdings. The rate of interest under the line of credit is equal to
LIBOR plus three percent, payable quarterly. HC Crowns obligation to make
loans under this line of credit is supported by an irrevocable letter of credit
from Credit Suisse First Boston. As of both December 31, 2001, and March 31,
2002, the Company had no borrowings under this note to HC Crown. In addition,
until the termination of the subordination and support agreement entered into

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by Hallmark Cards in connection with the private placement and until such
time as the debentures and contingent appreciation certificates are paid in
full, Hallmark Cards has agreed to loan Crown Media Holdings an amount
necessary to pay, when due, the $100.0 million in obligations owed to Hallmark
Entertainment Holdings and Hallmark Entertainment Distribution, LLC (Hallmark
Entertainment Distribution), which were incurred by Crown Media Holdings in
connection with its acquisition of the film assets. Lastly, Hallmark
Entertainment, Inc. (Hallmark Entertainment) agreed to subordinate
approximately $60.0 million in obligations owed by subsidiaries of Crown Media
Holdings to it pursuant to certain program license agreements.

Under this note, the Company is obligated to pay a commitment fee of 1.5%
of the initial maximum amount of the note, which may be paid at the Companys
option in common stock valued at the average closing price of the common stock
for the 15 trading days prior to the date the fee is due. The commitment fee is
payable in arrears in four equal installments on the last business day of each
calendar quarter during 2002. At both December 31, 2001, and March 31, 2002,
the $1.1 million commitment fee was included in payable to affiliates in the
accompanying consolidated balance sheets. The line of credit represented by
this note was required by the bank credit facility and was amended to its
present form in accordance with requirements of the private placement of
preferred securities of the Crown Media Trust.

Hallmark Agreements Related to Bank Credit Facility and Preferred Securities

Hallmark Cards and Hallmark Entertainment entered into certain agreements
in order to induce the banks to enter into the Companys bank credit agreement.
Hallmark Cards, Crown Media Holdings and the banks are parties to a
subordination and support agreement dated August 31, 2001. Under the
subordination and support agreement, the obligations of Crown Media Holdings to
pay (a) any borrowings under the HC Crown line of credit, and (b) approximately
$100.0 million in accounts payable of Hallmark Entertainment Distribution as
provided by the purchase agreement for the film assets, are subordinated in
right of payment to Crown Media Holdings obligations to the banks. Crown Media
Holdings is not permitted to pay subordinated obligations except for certain
restricted payments permitted by the bank credit agreement. In the
subordination and support agreement, Hallmark Cards also agrees to cause HC
Crown to advance up to $75.0 million under the HC Crown line of credit to Crown
Media Holdings (less the amount of any reduction on the HC Crown line of credit
because of the application of net cash proceeds from issuing debt or equity as
permitted by the bank credit agreement), to the extent necessary to enable
Crown Media Holdings to meet its cash needs including the repayment of the bank
loans, provided that Crown Media Holdings has borrowed the full amount then
available under the bank credit agreement. Further, Hallmark Cards agrees that
the HC Crown line of credit will not be declared due and payable if any
obligations to the banks remain outstanding.

Hallmark Entertainment and the banks entered into an agreement called the
Hallmark Inducement Agreement, dated August 31, 2001. Under this agreement,
Hallmark Entertainment clarifies certain points in the purchase agreement for
the film assets. Hallmark Entertainment also agrees, among other things, (a)
not to return Class A Crown Media Holdings common stock to satisfy any portion
of its liability for the breach of any representations and warranties in the
purchase agreement for the film assets and (b) for a period of 24 months
following the closing of the purchase of the film assets, to indemnify the bank
lenders for any financial loss that Crown Media Holdings may suffer as a direct
result of defects in the rights transferred to Crown Media Holdings in the
Crown Media Library (a library loss). Hallmark Entertainment may satisfy this
indemnification obligation by purchasing pro rata a subordinated participation
in the bank loans or by providing a subordinated loan to Crown Media Holdings
in the amount of the library loss.

Costs Incurred on Crown Media Holdings Behalf

Since inception, Hallmark Entertainment has paid certain costs related to
payroll and benefits, insurance, operational and financing expenditures and
capital expenditures on behalf of Crown Media Holdings. These transactions are
recorded in the books and records of Crown Media Holdings. For the three months
ended March 31, 2001 and 2002, respectively, approximately $0 and $400,000 were
paid to Hallmark Entertainment. Unreimbursed costs of $1.8 million and $1.4
million are included in the item payable to affiliates in the accompanying
consolidated balance sheets as of December 31, 2001, and March 31, 2002,
respectively.

Services Agreement with Hallmark Cards

Hallmark Cards, its subsidiaries and various affiliates, provide Crown
Media Holdings with services that include payroll, legal, financial, tax and
other general corporate services. Additionally, Hallmark Cards made a payment
on Crown Media Holdings behalf for certain expenses in the amount of $500,000
during first quarter 2002. For each of the three months ended March 31, 2001
and 2002, Crown Media Holdings had accrued $125,000, respectively, under the
agreement. At December 31, 2001, and March 31, 2002, unpaid accrued service
fees of $3.1 million and $3.7 million, respectively, were included in payable
to affiliates in the accompanying consolidated balance sheets.

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Services Agreement with Hallmark Entertainment

Hallmark Entertainment provides Crown Media Holdings with services related
to the administration, distribution and other exploitation of the Companys
film assets. This service agreement has a term of three years, commencing
January 1, 2001, with the right of either party to terminate the agreement
after the first year upon 60 days written notice. In consideration for the
services provided by Hallmark Entertainment, Crown Media Holdings is obligated
to pay a service fee of $1.5 million per year, paid in quarterly installments
of $375,000. Crown Media Holdings paid $1.9 million to Hallmark Entertainment
for these services in April 2002.

Program License Agreement with Hallmark Entertainment Distribution

Crown Media International has a program agreement with Hallmark
Entertainment Distribution dated January 1, 2001. The agreement expires on
December 31, 2005, subject to a renewal through December 31, 2010. Under the
terms of the agreement, Crown Media International has the exclusive right to
exhibit Hallmark Entertainment Distributions programming in the territories in
which Crown Media International operates during three 18-month windows. Crown
Media International also has the exclusive right to exhibit programming in
markets where it does not currently operate, subject to any third party
agreement existing at the time Crown Media International launches in those
markets. In addition, under the agreement, Hallmark Entertainment Distribution
is generally obligated to sell to Crown Media International all of the
programming it produces and Crown Media International is obligated to purchase
up to 50 programs produced per year during the term of the agreement.

Crown Media United States also licenses programming for distribution in
the United States from Hallmark Entertainment Distribution under an amended and
restated program license agreement, dated January 1, 2001. Under the program
agreement, Crown Media United States generally licenses made-for-television
movies and miniseries owned or controlled by Hallmark Entertainment
Distribution, as well as all programming produced by or on behalf of Hallmark
Entertainment Distribution for Crown Media United States. The program agreement
has a term of five years and is automatically renewable for additional
three-year periods, subject to rate adjustments, so long as Hallmark
Entertainment Distribution, as applicable, or its affiliates, own an interest
of 35% or more of Crown Media Holdings. In the event that Hallmark
Entertainment Distribution ceases to own a 35% interest in Crown Media
Holdings, the remaining term of the applicable program agreement will be
extended to two years from the date its ownership falls below that level.

Programming costs related to the Hallmark program agreements were $11.0
million and $7.9 million, respectively, for the three months ended March 31,
2001 and 2002. As of December 31, 2001, and March 31, 2002, $62.3 million and
$69.1 million, respectively, are included in license fees payable to affiliates
in the accompanying consolidated balance sheets. In December 2001, Crown Media
Holdings paid $69.4 million to Hallmark Entertainment Distribution for license
fees with proceeds from its private placement transaction.

Class B Common Stock

Hallmark Entertainment Holdings controls all of the Companys outstanding
shares of Class B common stock, which, together with the shares of Class A
common stock it owns, represents approximately 91% of the voting power on all
matters submitted to the Companys stockholders. Each share of Class B common
stock is convertible at the option of the holder into one share of Class A
common stock. Shares of Class B common stock are generally automatically
convertible into Class A common stock upon sale or other transfer by the
selling stockholder. In addition, Class B common stockholders are entitled to
10 votes per share as compared to the holders of Class A common stock, which
receive one vote per share of Class A common stock. With the exception of the
voting and conversion rights, shares of Class A common stock and shares of
Class B common stock are identical.

Purchase of Film Assets

On September 28, 2001, Crown Media Holdings completed the acquisition of
film assets, comprised of approximately 700 film titles and related rights and
property, representing over 3,000 hours of programming, from the film assets of
Hallmark Entertainment Distribution, a wholly-owned subsidiary of Hallmark
Entertainment Holdings. Under the terms of the acquisition, the Company assumed
$220.0 million of Hallmark Entertainment Distribution debt and payables and
issued 33,744,528 shares of the Companys Class A common stock. Of the shares
issued in the transaction, 425,000 shares were issued into escrow and will be
returned to us upon the judgment entered by the court on April 18, 2002, in
relation to the previously announced stockholder lawsuit becoming final. The
number of shares of common stock was determined by a formula based on the
average closing price of the common stock from

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November 6, 2000 (the date the Company announced that it was contemplating
the transaction) to September 27, 2001 (the day prior to closing), which
average price was $17.78 per share. A committee of directors independent of
Hallmark Entertainment and its affiliates considered and negotiated this
transaction, including the purchase price, and received a fairness opinion from
its financial advisor. Additionally, the stockholders of Crown Media Holdings,
other than Hallmark Cards and its affiliates, approved the transaction at a
meeting on July 17, 2001.

The Company has treated the transaction as a reorganization of assets
under common control. Consequently, assets and liabilities acquired were
recorded at historical cost, which was less than the fair value at the
transaction date.

The film assets consist primarily of films, which were made or acquired
for initial exhibition on the domestic network television market in the United
States and Canada. Typically, films produced initially for network broadcast
are subsequently licensed for home video and international television as well
as cable and independent television in the United States and Canada.

NICC License Agreements

On November 13, 1998, Crown Media United States entered into an amended
and restated operating agreement (the Company Agreement) with its members and
also entered into a program license agreement with NICC (NICC Program License
Agreement) under which Crown Media United States licensed programming from
NICC for distribution within the United States. NICC was obligated to furnish a
minimum of 200 hours of programming each year under the NICC Program License
Agreement.

Under the NICC Program License Agreement and the Company Agreement, Crown
Media United States agreed to advance amounts to NICC for the production of
programming for Crown Media United States. The advance was treated as an
advance payment against the license fees which would be payable for this
programming. The advance was equal to the sum of $5.0 million with certain
annual escalations.

Pursuant to a February 2001 amendment, the foregoing advance will continue
to be paid and treated as a license fee for certain existing programming
provided by NICC to Crown Media United States. However, Crown Media United
States will additionally fund a portion of the costs of new programming
produced by or with NICC. Crown Media United States will also assist NICC in
launching and operating a new channel, which will be distributed by satellite
and cable. This assistance will include the provision to NICC of management and
operational services, with some services provided at no cost and some services
provided for a fee. The term of the obligations contained in the February 2001
amendment expire on March 26, 2006, but may be terminated earlier if NICC sells
more than 50% of the Crown Media Holdings shares it owned on February 22, 2001.
In addition, six months prior to the expiration of the agreement, Crown Media
United States must negotiate in good faith with NICC regarding a continuation
of the programming and funding commitment to NICC. If agreement is not reached
and Crown Media United States does not continue the NICC programming and
funding commitments at the same levels, NICC is entitled to compel Crown Media
Holdings to buy all of NICCs Crown Media Holdings shares at their then-current
market value no later than 60 days following the expiration of the amendment.
Crown Media United States, however, can nullify this put by electing to
continue the NICC programming and funding commitments at the same levels.

Subscriber Acquisition Fees Agreement

On August 27, 2001, the Company issued approximately 5.4 million shares of
its Class A common stock with a then market value of $80.1 million as
consideration for entering into a distribution agreement for carriage of the
Hallmark Channel by DirecTV.

8. Commitments and Contingencies

Shareholder Lawsuit

Legal action was brought against the Company in June 2001 in the Delaware
Chancery Court by a stockholder regarding the Companys purchase of the film
assets referred to as the films transaction. The lawsuit was commenced as a
purported class action, as well as a derivative action, and alleged, among
other things, that the films transaction was the product of an unfair process
designed to advantage Hallmark Cards as the controlling stockholder and that
the price being paid to Hallmark Entertainment Distribution was not entirely
fair. In June 2001, Crown Media Holdings, Hallmark Cards and the other
defendants and the plaintiff entered into a memorandum of understanding stating
an agreement in principle on a settlement of the lawsuit concerning the films
transaction. As of February 20, 2002, Crown Media Holdings and the other
parties to the lawsuit entered into a settlement agreement concerning the
lawsuit, with terms contemplated by the memorandum of understanding. The
settlement agreement provides, among other things, that

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the purchase price of the films transaction will be reduced by 425,000
shares of Class A Common Stock, that all claims against the Company and related
parties that arise out of the events alleged in the lawsuit will be released
and that the Company will pay the fees and disbursements of the plaintiffs
counsel, without interest. The Company anticipates that a portion of these fees
and disbursements will be covered by its insurers.

At the settlement hearing on April 18, 2002, the court determined, among
other things, that: (1) the settlement is fair and reasonable, and in the best
interest of a class consisting of all record owners and beneficial owners of
Crown Media Holdings common stock on any day from November 6, 2000 (the date
that the films transaction was publicly announced) to and including September
28, 2001, the effective date of closing the films transaction; (2) the lawsuit
be dismissed such that no plaintiff or class member could sue on their claims
again; (3) the lawsuit be certified as a class action; and (4) it should grant
the request of the plaintiffs counsel for attorneys fees and reimbursement of
expenses of $700,000 in connection with the lawsuit. The judgment and order
will become final on May 20, 2002, unless appealed prior to that
date and will negatively affect subscriber revenues.

Distribution Agreements

Several of Crown Media United States existing distribution agreements
contain most favored nations clauses. These clauses typically provide that,
in the event Crown Media United States enters into a subsequent agreement with
another distributor on more favorable terms, these terms must be offered to the
existing distributor, subject to certain exceptions and conditions. In August,
2001, Crown Media United States entered into a new distribution agreement with
DirecTV, Inc. under which the Hallmark Channel was repositioned to DirecTVs
TOTAL CHOICE® Package and the Companys subscribers increased significantly.
Several other distributors, whose agreements contain most favored nations
provisions, have indicated an interest in some or all of the DirecTV terms, and
Crown Media United States is currently in discussions with these distributors.
Any modification of these existing agreements to adopt the DirecTV terms, or
any other new terms could result in the payment of cash or the issuance of
stock by Crown Media Holdings and will negatively affect subscriber
revenues.

9. Operations in Different Geographic Areas

Crown Media Holdings adopted SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information,in 1998. This statement requires
companies to report in their financial statements certain information about
operating segments, their services, the geographic areas in which they operate
and their major customers.

Prior to September 28, 2001, all of Crown Media Holdings material
operations were part of the domestic and international pay television
programming service industry, and, therefore, Crown Media Holdings reported as
two industry segments. Beginning September 28, 2001, selected operating and
asset data of Crown Media Distribution is included as a third industry segment,
domestic and international film distribution. Selected operating and asset data
of H&H Programming  Asia are not included in the following table until March
16, 2001, as prior to that date Crown Media Holdings did not have a controlling
interest in H&H Programming  Asia.

Information relating to Crown Media Holdings continuing operations is set
forth in the following table (operating loss is defined as total revenues less
cost of services; selling, general and administrative expenses; marketing
expenses; and amortization of goodwill and other intangibles (through December
31, 2001). Home office costs are reflected in the domestic operating losses and
are not allocated internationally).

|                                   |                                |                           |      |               |  |              |     |           |  |              |       |       |   |  |         |       |         | 
|---------------------------------- | ------------------------------ | ------------------------- | ---- | ------------- |  | ------------ | --- | --------- |  | ------------ | ----- | ----- | - |  | ------- | ----- | ------- | 
|                                   |                                |                           |      | Revenue from  |  | Revenue from |     |           |  |              |       |       |   | 
|                                   |                                |                           |      | Unrelated     |  | Related      |     | Operating |  | Identifiable
|                                   |                                |                           |      | Entities      |  | Entities     |     | Loss      |  | Assets      
|                                   |                                |                           |      |               |  |              |     |           |  |             
|                                   |                                |                           |      | (In millions)
|Three Months Ended March 31, 2001: |                                |                           |      |               |  |              |     |           |  |              |       |       |   |  |         |      
|                                   | Domestic                       |                           | $    | 7.5           |  |              | $   | 1.1       |  |              | $     | (36.0 | ) |  | $       | 167.1 |        
|                                   | International                  |                           |      | 14.4          |  |              |     |          |  |              |       | (7.4  | ) |  |         | 82.0  |        
|                                   |                                |                           |      |               |  |              |     |           |  |              |       |       |   |  |         |      
|                                   |                                | $                         | 21.9 |               |  | $            | 1.1 |           |  | $            | (43.4 | )     |   |  | 249.1   |      
|                                   |                                |                           |      |               |  |              |     |           |  |              |       |       |   |  |         |      
|Assets not allocated to segments:  |                                |                           |      |               |  |              |     |           |  |              |       |       |   |  |         |      
|                                   | Cash and cash equivalents      |                           |      |               |  |              |     |           |  |              |       |       |   |  |         | 11.9  |        
|                                   | Accounts receivable            |                           |      |               |  |              |     |           |  |              |       |       |   |  |         | 27.7  |        
|                                   | Goodwill and other intangibles |                           |      |               |  |              |     |           |  |              |       |       |   |  |         | 328.3 |        
|                                   |                                |                           |      |               |  |              |     |           |  |              |       |       |   |  |         |      
|                                   |                                | Consolidated total assets |      |               |  |              |     |           |  |              |       |       |   |  |         | $     | 617.0   | 
|                                   |                                |                           |      |               |  |              |     |           |  |              |       |       |   |  |         |      
|Three Months Ended March 31, 2002: |                                |                           |      |               |  |              |     |           |  |              |       |       |   |  |         |      
|                                   | Domestic                       |                           | $    | 13.4          |  |              | $   | 1.2       |  |              | $     | (33.9 | ) |  | $       | 268.9 |        
|                                   | International                  |                           |      | 17.9          |  |              |     |          |  |              |       | (3.1  | ) |  |         | 84.9  |        
|                                   | Film Distribution              |                           |      | 7.0           |  |              |     |          |  |              |       | (1.8  | ) |  |         | 805.8 |        
|                                   |                                |                           |      |               |  |              |     |           |  |              |       |       |   |  |         |      
|                                   |                                | $                         | 38.3 |               |  | $            | 1.2 |           |  | $            | (38.8 | )     |   |  | 1,159.6 |      
|                                   |                                |                           |      |               |  |              |     |           |  |              |       |       |   |  |         |      
|Assets not allocated to segments:  |                                |                           |      |               |  |              |     |           |  |              |       |       |   |  |         |      
|                                   | Cash and cash equivalents      |                           |      |               |  |              |     |           |  |              |       |       |   |  |         | 8.6   |        
|                                   | Accounts receivable            |                           |      |               |  |              |     |           |  |              |       |       |   |  |         | 48.8  |        
|                                   | Goodwill and other intangibles |                           |      |               |  |              |     |           |  |              |       |       |   |  |         | 314.0 |        
|                                   |                                |                           |      |               |  |              |     |           |  |              |       |       |   |  |         |      
|                                   |                                | Consolidated total assets |      |               |  |              |     |           |  |              |       |       |   |  |         | $     | 1,531.0 | 
|                                   |                                |                           |      |               |  |              |     |           |  |              |       |       |   |  |         |      

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The Asia Pacific market, Latin America market (specifically Argentina),
Turkey and Russia have experienced illiquidity, volatile currency exchange
rates and interest rates, volatile political and economic conditions, and
reduced economic activity. Crown Media Holdings will be affected in the
foreseeable future by economic conditions in these regions, although it is not
possible to predict the extent of such impact. Additionally, on September 11,
2001, the United States encountered a terrorist attack, which increased
volatility in the economic markets since that date.

No customer accounted for more than 10% of Crown Media Holdings total
revenues for the three months ended March 31, 2001 and 2002.

10. Subsequent Event

On April 1, 2002, Crown Media United States entered into a satellite
transponder service agreement with SES Americom, Inc. Crown Media United
States has committed to lease a combined uplink and transponder space segment
under this long-term lease agreement, once the equipment is launched in 2004.
In accordance with SFAS No. 13, Accounting for Leases,the lease will be
capitalized upon launch, and an estimated $20.0 million asset and corresponding
liability will be recorded.

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ITEM 2.Managements Discussion and Analysis of Financial Condition and Results of Operations

Revenues

Our revenues consist of subscriber fees, advertising revenues and
license fees revenues. Subscriber fees are generally payable to us on a per
subscriber basis by pay television distributors for the right to carry our
channels. Subscriber fee revenue is recorded net of promotional subscribers and
amortization of subscriber acquisition and other fees. In the United States, we
pay certain television distributors up-front subscriber acquisition and other
fees to carry our channel. However, such payments are not common in the
international cable television markets. Subscriber acquisition and other fees
paid are capitalized and amortized over the term of the applicable distribution
agreement. At the time we sign a distribution agreement, and periodically
thereafter, we evaluate the recoverability of the costs we incur against the
revenues directly associated with each agreement.

Subscriber fees vary according to:



| |  |  | the level of sophistication and degree of competition in the market;                                                                                                    
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the relative position in the market of the distributor and the
popularity of the channel;                                                                               
|
| |  |  | the packaging arrangements for the channel; and                                                                                                                         
|
| |  |  | other commercial terms such as granting the distributor exclusivity
to carry our channel (generally in territories outside the U.S.) and length of term of the
contract.

In some circumstances, distributors provide minimum revenue guarantees.

Our channels growth in subscriber fees has been driven primarily by:



| |  |  | expansion of our channels into new markets;                          
| | - |  | ---------------------------------------------------------------------
|
| |  |  | new distribution agreements for our channels in existing markets; and
|
| |  |  | growth in the number of multi-channel homes.                         

We are in continuous negotiations both with our existing distributors and new
distributors to increase our subscriber base. In the United States, we are
sometimes subject to requests by distributors to pay subscriber acquisition fees
for these additional subscribers or to accept lower subscriber fees if certain
numbers of additional subscribers are provided. In both domestic and
international markets we also may help fund the distributors' efforts to market
our channels or we may permit distributors to offer limited promotional periods
without payment of subscriber fees. As we continue our efforts to add
subscribers, our subscriber revenues will continue to be negatively affected by
these subscriber acquisition fees, discounted subscriber fees and other
payments, however, we believe that the resulting increase in subscribers will
allow us to attract additional advertisers and command higher advertising rates.

Several of Crown Media United States existing distribution agreements
contain most favored nations clauses. These clauses typically provide that,
in the event Crown Media United States enters into an agreement with
another distributor on more favorable terms, these terms must be offered to the
existing distributor, subject to certain exceptions and conditions. In August,
2001, Crown Media United States entered into a new distribution agreement with
DirecTV, Inc. under which the Hallmark Channel was repositioned to DirecTVs
TOTAL CHOICE® Package and our subscribers increased significantly. Several
other distributors, whose agreements contain most favored nations provisions,
have indicated an interest in some or all of the DirecTV terms, and Crown Media
United States is currently in discussions with these distributors. Any
modification of these existing agreements to adopt the DirecTV terms, or any
other new terms could result in the payment of cash or the issuance of stock by
Crown Media Holdings and will negatively affect subscriber revenues.

Advertising sales generally are made on the basis of a price per
advertising spot or per unit of audience measurement (for example, a ratings
point). Prices vary on a market-by-market basis. Rates differ among markets
depending on audience demographics.

In markets where regular audience measurements are available, our
advertising rates are calculated on the basis of an agreed upon price per unit
of audience measurement in return for a guaranteed investment level by the
advertiser. In these countries, we commit to provide advertisers certain rating
levels in connection with their advertising. Revenue is recorded net of
estimated shortfalls, which are

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usually settled by providing the advertiser additional advertising time.
In other markets, our advertising rates are calculated on the basis of cost per
advertising spot or package of advertising spots, and the price varies by
audience level expected (but not measured) during a particular time slot. This
is the predominant arrangement in the countries outside the United States in
which we sell advertising time. Advertising rates also vary by time of year
based on seasonal changes in television viewership.

Crown Media Distribution generates revenue from the film assets in the
Crown Media Library by granting licenses to exhibit the films to third parties.
Hallmark Entertainment provides services to us to assist in the administration,
distribution and other exploitation of the Crown Media Library. We are also
using the films as programming for our television channels and interactive
uses.

Cost of Services

Our cost of services consists primarily of program license fees,
amortization of our film assets, amortization of subscriber acquisition fees,
the cost of signal distribution, dubbing and subtitling, and creating the
promotional segments that are aired between programs. We expect cost of
services to continue to increase in the future as we expand our existing
markets and programming to support our advertising strategy.

In connection with our purchase of film assets from Hallmark Entertainment
Distribution, we have signed a service agreement with Hallmark Entertainment.
Under the service agreement, Hallmark Entertainment will provide services to us
to assist in the administration, distribution and other exploitation of the
film assets, and we will pay Hallmark Entertainment approximately $1.5 million
per year for up to the three-year term of the agreement ending in September
2004.

Discussion of Critical Accounting Policies

Our financial statements are presented on the basis that Crown Media
Holdings is a going concern. Our accounting policies are also determined on
this basis.

In the ordinary course of business, our management has made a number of
judgments, estimates and assumptions relating to the reporting of results of
operations and financial condition in the preparation of our financial
statements in conformity with accounting principles generally accepted in the
United States. Actual results could differ significantly from those estimates
under different assumptions and conditions. The following discussion addresses
certain accounting policies involving significant judgments, estimates, or
assumptions.

Revenue Recognition

We recognize revenue when an agreement is executed, services are provided,
price is determinable, and collectibility is reasonably assured. Management
makes certain judgments concerning collectibility in foreign markets. As to
these markets, the Company evaluates collectibility on a customer-by-customer
basis. Prior to any revenue recognition in foreign markets from a new customer,
the Company must generally receive one cash payment for the initial services
provided. Once a payment is received, the Company reevaluates the customers
financial condition, and, if continued collectibility remains reasonably
assured, revenue recognition under normal terms occurs prospectively.

Program License Fees Paid by Us

Program rights acquired by us are deferred and then amortized on a
straight-line basis over their license periods (the airing windows) or
anticipated usage, whichever is shorter. At the inception of these contracts
and periodically thereafter, we evaluate the recoverability of these costs
versus the revenues directly associated with the programming and related
expenses. This evaluation is based upon factors such as ratings, changes in
programming content, and consumer demand. Where an evaluation indicates that a
programming contract will ultimately result in a loss, additional expense is
recorded.

Film Assets

The Company amortizes its film assets based on recognized revenue in the
case of sales to third parties, using projections of sales to third parties for
10 years in determining the amortization amount for any sale to a third party,
and based on a 10-year amortization for anticipated internal use of the film
assets. Our projections regarding sales to third parties and anticipated
internal use are based on the history of each film and similar films, sales and
marketing plans, and other factors, all of which require significant judgment
by management. The 10-year period used for sales to third parties and internal
use commences on the date of acquisition (September 28, 2001)

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and is the same time period used in an initial, external valuation
of our film assets at the time of purchase. The film assets are also reviewed
by the Company for impairment whenever events or changes in circumstances
indicate that the carrying amount of any such asset may not be recoverable and
at least annually. At least annually, the Company is also required by its debt
covenants to have an external review of the film assets valuation.

Property and Equipment

Property and equipment is recorded at cost and is depreciated on a
straight-line basis over the estimated useful lives of such assets. Changes in
circumstances such as technological advances, changes to the Companys business
model or changes in the Companys capital strategy can result in the actual
useful lives differing from the Companys estimates. In those cases where the
Company determines that the useful life of property and equipment should be
shortened, the Company would depreciate the net book value in excess of the
salvage value, over its revised remaining useful life thereby increasing
depreciation expense. Factors such as changes in the planned use of equipment,
software, or facilities could also result in shortened useful lives.

Subscriber Acquisition Fees

Subscriber acquisition fees are paid by the Company to increase the
carriage of the Hallmark Channel on cable television systems and ultimately to
enhance ratings and advertising rates. Subscriber acquisition fees are
amortized over the life of the distribution agreements and such amortization is
a reduction of subscriber fees revenue. The Company assesses the recoverability
of these costs periodically and whenever events or changes in distributor
relationships occur or other indicators would suggest an impairment.

Private Placement

In December 2001, Crown Media Holdings completed a $265.0 million private
placement by issuing trust preferred securities with contingent appreciation
certificates. The structure of the agreement allowed the Company to record the
trust preferred securities as guaranteed preferred beneficial interest in our
debentures held by Crown Media Trust while the contingent appreciation
certificates are recorded as debt. The agreement also included embedded
derivatives, which will be marked to model through income (expense) over the
term of the agreement or until settlement, if earlier. A fair value allocation
was performed by the Company to record the trust preferred securities, the debt
and the derivative. This calculation is discussed in Note 6 to Notes of
Unaudited Consolidated Financial Statements in this Report. The interest
component of the private placement is also being allocated between interest
expense and guaranteed preferred beneficial interest expense in the
consolidated statement of operations to correspond to the allocation of the
components on the consolidated balance sheets.

On or after December 15, 2003, Crown Media Holdings will have the right to
redeem any and all of the outstanding debentures at a redemption price equal to
100% of the aggregate principal amount of the debentures, together with any
accrued and unpaid interest thereon. Currently, the Company expects to redeem
the debentures during 2004, and the accounting treatment for the debentures and
preferred securities is based in part on this expectation.

Currently, there is an accounting exposure draft on long-term liabilities,
which could cause the Company to classify all the trust preferred
securities as convertible
debt and the corresponding amortization as interest expense, if the exposure
draft is adopted.

Goodwill and Other Intangibles

As a result of our acquisitions of all the common interests in Crown Media
United States and H&H Programming-Asia, we have generated a significant amount
of goodwill and other intangibles. In accordance with recent accounting
pronouncements, we ceased the amortization of goodwill after January 1, 2002,
and we are required to periodically review whether the value of our goodwill
has been impaired. If we are required to write off our goodwill, the results of
operations, stockholders equity or profitability could be materially adversely
affected. See Goodwill and Other Intangibles in Note 2 to Notes of Unaudited
Consolidated Financial Statements in this Report.

In connection with the issuance of SFAS 142 Goodwill and Other
Intangibles and our acquisition of the remaining interests in Crown Media
United States and H&H Programming  Asia, we engaged an independent firm to
complete a valuation of Crown Media United States and H&H Programming  Asia to
assist us in our annual analysis of impairment of goodwill and other
intangibles. Based on the firms review as of December 31, 2001, our goodwill
and other intangibles were not impaired.

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Deferred Tax Asset

Crown Media Holdings has provided a valuation allowance of $34.9 million
on its net deferred tax assets because of uncertainty regarding their
realizability. If we took the position that our deferred tax asset was
realizable, we would have recorded a tax benefit against our losses for the
first quarters of 2002 and 2001 and would have reduced our net losses by the
amount of that benefit.

Effects of Transactions with Related and Certain Other Parties

See Related Party Transactions in Note 7 to Notes of Unaudited
Consolidated Financial Statements in this Report. Transactions with related
parties are also described in Item 13 Certain Relationships and Related
Transactions in our Annual Report on Form 10-K for the year ended December 31,
2001, and there have not been any new transactions with related parties during
the quarter ended March 31, 2002.

Results of Operations

Three Months Ended March 31, 2002 Compared to Year Ended March 31, 2001

Revenues.Net revenues for the three months ended March 31, 2002,
increased to $39.5 million from $23.0 million, which represents an increase of
$16.5 million, or 71%, over the comparable period in 2001. Subscriber fees
revenue increased to $17.9 million for the three months ended March 31, 2002,
from $15.9 million, which represents an increase of $2.0 million, or 13%, over
the comparable period in 2001. The increased subscriber fees revenue resulted
from expanded distribution in existing markets. The number of subscribers to
the Hallmark Channel, as of March 31, 2002, increased to 91.5 million from 67.6
million as of March 31, 2001, which represents an increase of 23.9 million, or
35%. Subscribers of the Hallmark Channel increased at a higher rate than
subscriber fees revenue because a number of new subscribers were added with
promotion periods and the amount of subscriber acquisition fees netted against
revenue also increased. International fees per subscriber are expected to
experience continuing downward pressure in the future due to the competitive
nature of the industry, the growth of digital cable, the shift in the industry
from subscriber fees revenue to advertising revenue, foreign currency
devaluation associated with global economies and the economic turbulence in
certain of our markets. The actual international subscriber fee rates may
decrease as we renew distribution agreements, which may provide for lower rates
than under previous agreements. Seventy-five percent of subscriber fees revenue
for the three months ended March 31, 2002, and 78% of subscriber fees revenue
for the three months ended March 31, 2001, were earned internationally.
Subscribers to our domestic channel increased from 29.0 million as of March 31,
2001, to 44.9 million as of March 31, 2002, which represents an increase of
15.9 million, or 55%. The amortization of subscriber acquisition costs has and
will continue to result in a decline in net domestic subscriber revenues, as we
net amortization of subscriber acquisition costs against revenue in accordance
with generally accepted accounting principles in the United States. The
amortization of subscriber acquisition costs was $1.9 million for the quarter
ended March 31, 2002, compared to $1.7 million for the quarter ended March 31,
2001.

At December 31, 2001, we had 87.9 million subscribers to the Hallmark
Channel. The increase of 3.6 million subscribers in the quarter ended March 31,
2002, consisted of 2.2 million new subscribers from expanded distribution in
our international market and 1.4 million new subscribers from expanded
distribution in our domestic market.

Advertising revenues increased to $14.6 million for the three months ended
March 31, 2002, from $7.1 million, which represents an increase of $7.5
million, or 104%, over the comparable period in 2001. The increase in
advertising revenues reflects our growth in both domestic and international
subscribers, significantly higher ratings in the United States and in the
United Kingdom, higher advertising rates and expanded sales of advertising time
primarily in the United States and the United Kingdom. Advertising revenues
from our domestic channel were $10.2 million for the three months ended March
31, 2002, compared to $5.1 million for the three months ended March 31, 2001.
The number of advertisers on our domestic channel rose from approximately 80 in
the first quarter of 2001 to approximately 150 in the first quarter of 2002.

During the first quarter of 2002, our domestic channel achieved its
highest-rated quarter in our network history, according to Nielsen Media
Research, averaging a 0.6 primetime household rating. This represents a 50%
increase from the fourth quarter of 2001.

During fourth quarter 2001, Crown Media Holdings commenced earning revenue
through a new business segment, film distribution, via its purchase of film
assets from Hallmark Entertainment Distribution. Notwithstanding our use of
these film assets on our channels, we are generating film licensing fees
revenue as we establish ourselves in the program distribution market and expand
our customer base. For the three months ended March 31, 2002, we earned film
licensing fees revenue of $7.0 million.

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Cost of services.Cost of services for the three months ended March 31,
2002, increased to $49.7 million from $35.1 million, which represents an increase of $14.6 million, or 42%, over the comparable
period in 2001. Cost of services as a percent of net revenue decreased to 126%
for the three months ended March 31, 2002, as compared to 152% for the three
months ended 2001. This decrease was primarily due to our 71% increase in net
revenues mentioned above. Programming costs for the three months ended March
31, 2002, rose 18% as we invested in additional and higher quality programming,
particularly series-based programming necessary to fulfill our programming
strategy and meet the demands of our customers. For the three months ended
March 31, 2002, amortization of our film assets was $7.2 million. We had some decline in affiliate programming amortization expense due
to the completion of the purchase of the film assets on September 28, 2001, as
we now own a portion of the material previously licensed. Generally, we
amortize our film assets used internally over ten years (commencing September
28, 2001) and for external sales upon recognizing revenue. Operating costs for
the three months ended March 31, 2002, increased 26% as we expanded
distribution in our domestic markets, resulting in amortization expense related
to subscriber acquisition fees of $4.2 million compared to $0 for the first
quarter of 2001, offset in part by the use of public service announcements in
some of our international markets as a substitute for purchased interstitials.
Operating costs also increased as a result of depreciation of our Network
Operations Center, which was launched in February 2001. Cost of services
increased due to our amortizing additional licensed programming and servicing
our expanded markets.

Selling, general and administrative expenses.Selling, general and
administrative expenses for the three months ended March 31, 2002, increased to
$18.8 million from $17.3 million, which represents an increase of $1.5 million,
or 8%, over the comparable period in 2001. This increase primarily reflects
escalations in rent and salaries. Selling, general and administrative expenses
as a percent of total revenue decreased to 48% for the three months ended March
31, 2002, as compared to 75% for the three months ended March 31, 2001. This
decrease is due to the increase in net revenues of 71% noted above.

Marketing expenses.Marketing expenses for the three months ended March
31, 2002, decreased to $9.8 million from $10.5 million, which represents a
decrease of $661,000, or 6%, over the comparable period in 2001. Marketing
expenses were higher in the first quarter of 2001 due to aggressive marketing
campaigns to drive consumer awareness and the introduction of our new brand
package, which included branded theme blocks, a new positioning line, on-air
graphics and signature music. The newly redesigned brand began a worldwide
rollout on November 1, 2000, and was completed on August 5, 2001.

Amortization of goodwill and other intangibles.Amortization of goodwill
and other intangibles for the three months ended March 31, 2001, was $3.5
million. In conjunction with the acquisition of an additional 55% common
interest in Crown Media United States on May 9, 2000, we recorded goodwill in
the amount of $248.8 million, which was amortized over 20 years. In conjunction
with the acquisition of EM.TV & Merchandising AGs (EM.TV) 50% interest in
H&H Programming  Asia and the remaining 22.5% common interests in Crown Media
United States on March 15, 2001, we recorded goodwill and other intangibles in
the amount of $93.9 million, which were amortized over 10 years. The
amortization of goodwill arising from past acquisitions ceased as of January 1,
2002, in accordance with revised accounting standards issued by the Financial
Accounting Standards Board in June 2001. As a result of this cessation, we did
not record $5.5 million of amortization expense for the three months ended
March 31, 2002. However, goodwill and other intangible assets are subject to
periodic (at least annual) tests for impairment. No impairment was recorded for
the three months ended March 31, 2002, based on the results of valuations.

Loss from operations.Loss from operations for the three months ended
March 31, 2002, decreased to $38.8 million from $43.4 million, which represents
a decrease of $4.6 million, or 11%, over the comparable period in 2001. This
decrease was primarily due to our 71% increase in net revenues discussed above
and the cessation of amortization of goodwill on January 1, 2002, and was
partially offset by our expansion into existing markets and into a new business
segment.

Equity in net losses of unconsolidated entities and investment expenses.
Equity in net losses of unconsolidated entities and investment expenses for the
three months ended March 31, 2001, was $655,000. We acquired the remaining
common interests in Crown Media United States and H&H Programming  Asia on
March 15, 2001. We commenced consolidation of H&H Programming  Asia on the
date of the acquisition. Net losses derived from H&H Programming  Asia were
recorded under the equity method of accounting through March 15, 2001,
respectively, and consolidated thereafter.

Guaranteed preferred beneficial interest expense.Guaranteed preferred
beneficial interest expense for the three months ended March 31, 2002, was
$10.6 million. This expense relates to future payments on our debentures issued
on December 17, 2001, in connection with the preferred securities of Crown
Media Trust. We are aware of a recent accounting exposure draft issued by the
Financial Accounting Standards Board, which may cause us to reclassify our
guaranteed preferred beneficial interests in Crown Media Trusts debentures as
convertible debt if adopted. Changing the classification of our preferred
securities from guaranteed preferred beneficial interests to convertible debt
would also change the Companys treatment of its debt issuance costs and would
have had the effect of increasing our net loss by an estimated $284,000 for the
three months ended March 31, 2002, due to the timing of recognition
of costs related to the offering.

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Interest income (expense), net.Net interest expense for the three months
ended March 31, 2002, increased to $5.7 million from $760,000, which represents
an increase of $5.0 million, over the comparable period in 2001. This increase
was primarily due to the interest on our increased borrowings under our credit
facility with JP Morgan Chase Bank and interest on our convertible debt.

Income tax provision.Income tax provision for the three months ended
March 31, 2002, increased to $549,000 from $385,000, which represents an
increase of $164,000, or 43%, over the comparable period in 2001. This increase
was due to the tax on the foreign-based income resulting from increased
international subscriber fees revenue as discussed above. The Argentine and
Brazilian governments have implemented taxation on advertising sales. We have
and will continue to see an increase in our foreign taxes.

Net loss.Net loss for the three months ended March 31, 2002, increased
to $56.0 million from $45.2 million, which represents an increase of $10.8
million, or 24%, over the comparable period in 2001. This increase in net loss
for the three months ended March 31, 2002, was attributable to a combination of
the factors discussed above.

Liquidity and Capital Resources

Cash used in operating activities was $56.8 million and $41.6 million for
the three months ended March 31, 2002 and 2001, respectively. Cash was used
primarily to fund operating expenditures related to net losses of $56.0 million
and $45.2 million for the three months ended March 31, 2002, and 2001,
respectively. This increase was primarily due to our acquisition and continued
amortization of popular programming from third-party suppliers to meet our
strategy and the demands of our customers and higher subscriber acquisition fee
payments as a result of our expanded distribution in domestic markets.

Cash used in investing activities was $1.6 million and $3.4 million for
the three months ended March 31, 2002 and 2001, respectively. This decrease was
primarily due to our decrease in investments in capital expenditures in 2002.
During the first quarter 2001, we completed and launched of our Network
Operations Center.

Cash provided by financing activities was $53.2 million and $22.3 million
for the three months ended March 31, 2002 and 2001, respectively. This increase
was primarily due to increased borrowings on our credit facility with JP Morgan
Chase Bank to fund operations.

The following table aggregates all of our contractual commitments as of
March 31, 2002.

|                                                                                       |                                                                             |       |                              |        |     |       |       |       |     |       |       |       |   |   |       |      |       |   |      |     | 
|-------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ----- | ---------------------------- | ------ | --- | ----- | ----- | ----- | --- | ----- | ----- | ----- | - | - | ----- | ---- | ----- | - | ---- | --- | 
|                                                                                       |                                                                             |       | Scheduled Payments by Period
|                                                                                       |                                                                             |       |                             
|                                                                                       |                                                                             |       |                              |        |     |       | Less  |       |     |       |       |       |   |   |       |      | After
|                                                                                       |                                                                             |       |                              |        |     |       | Than  |       | 2-3 |       | 4-5   |       | 5
|Contractual Obligations                                                                |                                                                             | Total |                              | 1 Year |     | Years |       | Years |     | Years
|                                                                                       |                                                                             |       |                              |        |     |       |       |       |     |      
|Long-Term Debt                                                                         |                                                                             | $     | 251.4                        |        |     | $     | 0.3   |       |     | $     | 44.6  |       |   | $ | 206.5 |      |       | $ |     |    
|Capital Lease Obligations                                                              |                                                                             |       | 11.7                         |        |     |       | 1.3   |       |     |       | 3.1   |       |   |   | 3.6   |      |       |   | 3.7  |    
|Operating Leases                                                                       |                                                                             |       | 90.7                         |        |     |       | 17.3  |       |     |       | 28.9  |       |   |   | 21.2  |      |       |   | 23.3 |    
|Other
Long-Term Obligations
Program license fees payable to non-affiliates and    NICC |                                                                             |       | 69.7                         |        |     |       | 43.6  |       |     |       | 26.1  |       |   |   |      |      |       |   |     |    
|                                                                                       | Program license fees payable to
Hallmark Entertainment
Distribution         |       |                              | 69.1   | (a) |       |       | 8.9   |     |       |       | 60.2  |   |   |       |     |       |   |      |    | 
|                                                                                       | Program license fees payable for future
windows                             |       |                              | 70.0   |     |       |       | 33.9  |     |       |       | 22.9  |   |   |       | 10.0 |       |   |      | 3.2 | 
|                                                                                       | Subscriber acquisition fees (b)                                             |       |                              | 17.1   |     |       |       | 12.1  |     |       |       |      |   |   |       | 1.0  |       |   |      | 4.0 | 
|                                                                                       | Payable to Hallmark Entertainment
Holdings                                  |       |                              | 52.1   | (c) |       |       |      |     |       |       |      |   |   |       | 52.1 |       |   |      |    | 
|                                                                                       | Payable to Hallmark Entertainment,
Inc.                                     |       |                              | 47.9   | (c) |       |       |      |     |       |       |      |   |   |       | 47.9 |       |   |      |    | 
|                                                                                       | Guaranteed preferred beneficial
interests in Crown Media Trusts
debentures |       |                              | 203.8  | (d) |       |       |      |     |       |       | 203.8 |   |   |       |     |       |   |      |    | 
|                                                                                       | Preferred Minority Interest                                                 |       |                              | 25.0   |     |       |       |      |     |       |       |      |   |   |       | 25.0 |       |   |      |    | 
|                                                                                       |                                                                             |       |                              |        |     |       |       |       |     |       |       |       |   |   |       |      |       |   |      |    
|Total Contractual Cash Obligations                                                     |                                                                             | $     | 908.5                        |        |     | $     | 117.4 |       |     | $     | 389.6 |       |   | $ | 367.3 |      |       | $ | 34.2 |    
|                                                                                       |                                                                             |       |                              |        |     |       |       |       |     |       |       |       |   |   |       |      |       |   |      |    



---

|(a) |  | Can only be paid with
certain prescribed sources of funds as defined in the private
placement agreement, assuming such funds are available.     
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | May increase based on potential revisions to current distribution agreements.                                                                   
|(c) |  | Can only be paid subsequent
to repayment of credit facility per agreement.                                                                      
|(d) |  | Currently, the Company expects
to redeem the preferred securities in 2004, which is prior to the
maturity in 2007, assuming funds are available.
|   

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In connection with our growth strategy, we expect that we will continue to
make significant investments in programming, distribution and technology. We
anticipate cash capital expenditures of approximately $12.0 million for the
year ending December 31, 2002. In April 2002, we entered into a commitment to
lease satellite and transponder space, which will not be launched until 2004.
See Subsequent Event in Note 10 to Notes of Unaudited Consolidated Financial
Statements in this Report. Our principal uses of funds in 2002 are expected to
be the payment of operating expenses (including but not limited to licensing
programming from third parties), working capital, capital expenditure
requirements, and debt service payments. The Companys principal sources of
funds are expected to be cash generated from operations (before interest), cash
on hand and available borrowings under the bank credit facility and the HC
Crown line of credit. The credit facility and the preferred securities contain
certain provisions that by their terms limit Crown Media Holdings and/or its
subsidiaries ability to, among other things, incur additional debt.

At March 31, 2002, we had an available cash balance of $8.6 million,
$113.5 million undrawn balance under the bank credit facility, and $75.0
million available under the HC Crown line of credit. We believe that available
credit under the bank credit facility and the HC Crown line of credit, together
with cash generated from operations and cash on-hand, will be sufficient for
our liquidity needs through at least June 30, 2003.

Cash Flow Risks

Our dependence on operating cash flow, in addition to other cash
resources, means that risks involved in our businesses can significantly affect
our liquidity. Any unexpected decrease in subscriber revenues (whether as a
result of the termination of distributor relationships or changes in the terms
of carriage with a distributor), less growth of advertising revenues than
projected internally or unanticipated expenses could result in the need to
raise additional cash externally. Other risks described below could also affect
our operating cash flow. We have no arrangements for any additional external
financings of debt or equity, and we are not certain whether any such financing
would be available on acceptable terms. On the other hand, subject to these
risks, we expect our cash flow to improve significantly in mid-2003 as we
realize more revenues from our film assets and from increased advertising on
our channels.

Bank Credit Facility; Private Placement and HC Crown Line of Credit

Our credit agreement with a syndicate of banks led by JP Morgan Chase Bank
as administrative agent and issuing bank, our private placement of preferred
securities of Crown Media Trust and contingent appreciation certificates and a
line of credit with HC Crown is described in Item 7 Managements Discussion and
Analysis of Historical Financial Condition and Results of Operation in our
Annual Report on Form 10-K for the year ended December 31, 2001. The bank
credit facility contains a number of affirmative and negative covenants.

Forward-Looking Statements and Risk Factors

We have made some statements, which constitute forward-looking statements.
These statements involve known and unknown risks, uncertainties and other
factors that may cause our actual results, levels of activity, performance, or
achievements to be materially different from any results, levels of activity,
performance or achievements expressed or implied by any forward-looking
statements. In some cases, you can identify forward-looking statements by
terminology such as may, will, should, could, expects, intends,
plans, anticipates, believes, estimates, predicts, potential, or
continue or the negative of these terms or other comparable terminology.
Although we believe that the expectations reflected in forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Actual results could differ materially
from those in the forward-looking statements. Among the factors that could
cause actual results to differ materially are those discussed below and in
other parts of this report. We are under no duty to update any of the
forward-looking statements.

If we do not successfully address the risks described below, our business,
prospects, financial condition, results of operations or cash flow could be
materially adversely affected. The trading price of our Class A common stock
could decline because of any of these risks.

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Risks Relating to Our Business

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

Both our international and domestic channels have a history of net losses
and we expect to continue to report net losses for the foreseeable future. As
of March 31, 2002, we had an accumulated deficit of approximately $536.3
million, net goodwill and other intangibles of approximately $314.0 million,
and film assets of $802.0 million.

We cannot assure you that we will achieve or sustain profitability. If we
are not able to achieve or sustain profitability, the trading price of our
Class A common stock may fall significantly. To diminish our losses and become
profitable, we will need to substantially increase our revenues, particularly
advertising and licensing revenues. This will require, among other things,
increasing the distribution of our channels, attracting more viewers to our
channels, attracting more advertisers, and increasing our advertising rates.
Risks associated with these areas of our business are described below.

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

We have a substantial amount of indebtedness. As of March 31, 2002, our
total debt was $263.8 million and we had $8.6 million of cash and cash
equivalents. In addition, subject to the restrictions under our various debt
agreements, we may borrow additional amounts under our existing credit facility
to cover the negative cash flow resulting from our current operations, and
incur additional indebtedness from time to time to cover our operating losses,
to finance acquisitions or capital expenditures or for other purposes. We
expect that our principal sources of funds during 2002 will be cash generated
from operating activities and borrowings under our senior credit facility.

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 from
operations to repayment of debt, limiting the availability of cash for
other purposes;                                                                             
|
| |  |  | we are and will continue to be limited by financial and other
restrictive covenants 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
business and industry will be limited;                                                                                                                             
|
| |  |  | we are sensitive to fluctuations in interest rates; and                                                                                                                                                                            
|
| |  |  | our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate purposes
or other purposes may be impaired.                                                    

Our ability to meet our debt and other obligations and to reduce our total
debt depends on our future operating performances and on economic, financial,
competitive and other factors. There can be no assurance that our leverage and
such restrictions will not materially and adversely affect our ability to
finance our future operations or capital needs or to engage in other business
activities.

We have increasing interest expense, which may impact our future operations.

High levels of interest expense could have negative effects on our future
operations. Interest expense, which is net of interest income and includes
amortization of debt issuance costs and interest expense on borrowings under
our demand notes, credit facility and private placement, increased $15.5
million to $16.3 million for the three months ended March 31, 2002, from
$760,000 for the three months ended March 31, 2001. The increase in interest
expense in the past twelve months resulted from an increase in the average
borrowings outstanding, due to cash generated from operations being
insufficient to cover operating expenses and capital expenditures.
Consequently, we were required to make borrowings under our demand notes,
credit facility and a private placement during 2001 and the first quarter of
2002. A substantial portion of our cash flow from operations must be used to
pay our interest expense and will not be available for other business purposes.
In addition, we may need to incur additional indebtedness in the future. We
cannot assure you that our business will generate sufficient cash flow or that
future financings will be available to provide sufficient proceeds to meet our
obligations or to service our total debt.

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Our liquidity is dependent on external funds.

We believe that our current bank credit facility and line of credit with
HC Crown, together with cash generated from operations and cash on hand, will
be sufficient for our liquidity needs through at lease June 30, 2003. However,
because we currently operate at a loss and have a negative cash flow, any
significant expense not included in our internal budget or any development that
hampers our growth in revenues or decreases any of our revenues, would result
in the need for additional external funds in order to continue operations. We
have no arrangements for any external financings, whether debt or equity, and
are not certain whether any such new external financing would be available on
acceptable terms. Any new debt financing would require the cooperation and
agreement of existing lenders.

Modification of any existing agreements with United States distributors could decrease our subscriber fees revenue and, if our distribution is increased, also result in higher advertising revenues.

Several of the Crown Media United States existing distribution agreements
contain most favored nations clauses. These clauses typically provide that,
in the event the Crown Media United States enters into a subsequent agreement
with another distributor on more favorable terms, these terms must be offered
to the existing distributor, subject to certain exceptions and conditions. In
August 2001, Crown Media United States entered into a new distribution
agreement with DirecTV, Inc. under which the Hallmark Channel was repositioned
to DirecTVs TOTAL CHOICE Package and our subscribers increased significantly.
Several other distributors, whose agreements contain most favored nations
provisions, have indicated an interest in some or all of the DirecTV terms, and
Crown Media United States is currently in discussions with these distributors.
Any modification of these existing agreements to adopt the DirecTV terms, or
any other new terms could result in the payment of cash or the issuance of
stock by Crown Media Holdings and will negatively affect subscriber
revenues.

If we are unable to obtain programming from third parties, we may be unable to increase our subscriber base.

We compete with other pay television channel providers to acquire
programming. If we fail to continue to obtain programming on reasonable terms
for any reason, including as a result of competition, we could be forced to
incur additional costs to acquire alternative programming and the growth of our
subscriber base could be hindered.

If our programming declines in popularity, our subscriber fees and advertising revenue could fall and the additional revenue we expect as a result of the acquisition of film assets from Hallmark Entertainment Distribution may be lower than we anticipate.

Our success depends partly upon unpredictable and volatile factors beyond
our control, such as viewer preferences, competing programming and the
availability of other entertainment activities. We may not be able to
anticipate and react effectively to shifts in tastes and interests in our
markets. In particular, our ability to react effectively may be limited by our
obligation to license programming from Hallmark Entertainment Distribution,
which has standards that limit the types of programming that it will provide to
us. Our competitors may have more flexible programming arrangements, as well as
greater amounts of production, better distribution, and greater capital
resources, and may be able to react more quickly to shifts in tastes and
interests. As a result, we may be unable to maintain the commercial success of
any of our current programming, or to generate sufficient demand and market
acceptance for our new programming. A shift in viewer preferences in
programming or alternative entertainment activities could also reduce the
amount of revenues we anticipate receiving from licensing of our film assets
and cause a decline in both advertising and subscriber fees revenue. The
decline in revenues could hinder or prevent us from achieving profitability and
could adversely affect the market price of our Class A common stock.

We are currently dependent on Hallmark Entertainment to distribute and maximize licensing fees from the film assets.

Currently, we are dependent on Hallmark Entertainment to distribute and
license our film assets to third parties for us under the terms of a three-year
service agreement commencing as of January 1, 2001. This arrangement reduces
our control over the sales and distribution of the film assets and might delay
our realization of the full revenue stream from the film assets. We and
Hallmark Entertainment each have the right to terminate the service agreement
after the first year. If Hallmark Entertainment elects to terminate the
agreement before we have established our own distribution network, we may not
be able to establish our own or obtain alternative distribution services of
equivalent quality or on terms as favorable to us. This could hinder our
ability, at least in the short-term, to achieve the amount of additional
revenues anticipated from these activities and could adversely affect the
market price of our Class A common stock.

We anticipate that in due course we will develop our own
distribution/sales network and hire employees to perform the services currently
performed by Hallmark Entertainment under the service agreement. Our ability to
do so is unproven and will require financial, operational and management
resources. We may not be able to hire the number of employees, or employees who
are

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sufficiently qualified, to perform these services, or do so in a cost
efficient manner. If the cost to develop and maintain this employee base is
greater, or if this process takes longer than anticipated, it could have a
negative impact on the revenues we anticipate generating from the film assets.

If we are unable to increase our advertising revenue, we may be unable to achieve profitability.

If we fail to increase our advertising revenue, we may be unable to
achieve or sustain profitability, or expand our business. We expect that over
time the portion of our revenues derived from the sale of advertising time on
our channels will increase. We have a limited history of marketing and selling
advertising time, particularly internationally. We may be unable to identify,
attract and retain experienced sales and marketing personnel with relevant
experience, and our sales and marketing organization may be unable to
successfully compete against the significantly more extensive and well-funded
sales and marketing operations of our current or potential competitors. Success
in increasing our advertising revenue also depends upon the number and coverage
of the distributors who carry our channels, our number of subscribers, and the
viewership ratings for our programming.

Hallmark Entertainment Holdings controls us and this control could create conflicts of interest or inhibit potential changes of control.

Hallmark Entertainment Holdings controls all of our outstanding shares of
Class B common stock and owns shares of Class A common stock, representing
approximately 91% of the voting power on all matters submitted to our
stockholders. Hallmark Entertainment Holdings control could discourage others
from initiating potential merger, takeover or other change of control
transactions that may otherwise be beneficial to our business or holders of
Class A common stock. As a result, the market price of our Class A common stock
could suffer, and our business could suffer. Hallmark Entertainment Holdings
control relationship with us also could give rise to conflicts of interest,
including:



| |  |  | conflicts between Hallmark Entertainment Holdings, as our controlling
stockholder, and our other stockholders, whose interests may differ with
respect to, among other things, our strategic direction or significant
corporate transactions;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | conflicts related to corporate opportunities that could be pursued by
us, on the one hand, or by Hallmark Entertainment Holdings or its other
affiliates, on the other hand; or                                                              
|
| |  |  | conflicts related to existing or new contractual relationships
between us, on the one hand, and Hallmark Entertainment Holdings and its
affiliates, on the other hand.                                                                       

In addition, persons serving as directors, officers or employees of both
us and Hallmark Entertainment Holdings may have conflicting duties to each. For
example, Robert A. Halmi, Jr. is Chairman of our Board and is a Director and
the President of Hallmark Entertainment Holdings and the President and Chief
Executive Officer of Hallmark Entertainment, which could create potential
conflicts of interest. As a result, it is possible that we may receive less
favorable contractual terms from Hallmark Entertainment Holdings and its
affiliates than if none of our officers or directors had any affiliation with
Hallmark Entertainment Holdings.

We could lose the right to use the name Hallmark because we have limited-duration trademark license agreements, which could harm our business.

We license the name Hallmark from Hallmark Cards, for various uses,
including in the name of our international and domestic channels. The two-year
license agreement for our international channel, dated as of December 1, 2000,
permits the use of the Hallmark trademarks outside the United States and Canada
so long as Hallmark Cards and its wholly owned subsidiaries collectively own at
least 51% of our voting interest and at least 35% of our equity interest and
designate a majority of our board of directors, and so long as there is no
event of default under the agreement. The license agreement for our domestic
channel, dated as of March 27, 2001, permits the use of the Hallmark trademarks
in the United States through August 30, 2003, under terms substantially similar
to the terms applicable to the license of our international channel. If
Hallmark Cards determines not to renew the trademark license agreements for any
reason, including our failure to meet minimum programming thresholds dependent
on programming provided by affiliates of Hallmark Cards or to comply with
Hallmark Cards programming standards, we would be forced to significantly
revise our business plan and operations, and could experience a significant
erosion of our subscriber base and revenues.

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

We currently rely on third parties to supply key network infrastructure
services, including uplink, playback, transmission and satellite services to
certain of our markets, which are available only from limited sources. We have
occasionally experienced delays and other problems in receiving communications
equipment, services and facilities and may, in the future, be unable to obtain
such services, equipment or facilities on the scale and within the time frames
required by us on terms we find acceptable, or at all. If we are unable to
obtain, or if we experience a delay in the delivery of, such services, we may
be forced to incur significant unanticipated expenses to secure alternative
third party suppliers or adjust our operations, which could hinder our growth
and reduce our revenues and profitability.

If our Network Operations Center fails or its operations are disrupted, our costs could increase and our growth could be hindered.

We commenced operations at the Network Operations Center in February 2001.
We are currently using the Network Operations Center for the origination and
playback of signals for the Hallmark Channel internationally in Europe, Latin
America and the Middle East and intend to expand our use of the Network
Operations Center as existing contracts with third-party providers expire. Like
other single-point facilities, the Network Operations Center is subject to
interruption from fire, tornadoes, lightning and other unexpected natural
causes. Although we have redundant systems in place, equipment failure,
employee misconduct or outside interference could also disrupt the Network
Operations Centers services. We currently do not have and are not planning a
duplicate operations facility. Any significant interruption at the Network
Operations Center affecting the distribution of our channels could have an
adverse effect on our operating results and financial condition.

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

Our success depends on the expertise and continued service of our
executive officers and key employees of our subsidiaries. If we fail to
attract, hire or retain the necessary personnel, or if we lose the services of
our key executives, we may be unable to implement our business plan or keep
pace with developing trends in our industry.

We are subject to the risks of doing business outside the United States.

Historically, a significant portion of our revenues has been generated
from foreign operations. In order to maintain or expand our presence in foreign
markets, we have entered and may in the future enter into joint ventures or
other strategic relationships with local operators in those markets. Certain
foreign laws, regulations and judicial procedures may not be as protective of
programmer rights as those applicable in the United States. In addition, many
foreign countries have currency and exchange laws regulating the international
transfer of currencies. To the extent that significant currency fluctuations
result in materially higher costs to any of our foreign customers, those
customers may be unable or unwilling to make the required payments. We may be
subject to delays in access to courts and to the remedies local laws impose in
order to collect our payments and recover our assets. We also may experience
problems with collecting accounts due from foreign customers, which would
adversely affect our revenues and income. Our growth and profitability may also
suffer as a result of, among other matters, competitive pressures on video
delivery, labor stoppages, recessions and other political or economic events
adversely affecting world or regional trading markets or affecting a particular
customer.

Our current and future operations in emerging markets may be harmed by the increased political and economic risks associated with these markets.

We currently broadcast in several foreign markets where market economies
have only recently begun to develop, and we may expand these operations in the
future. If the governments in these markets adopt more restrictive economic
policies, we may not be able to continue operating, or to implement our
expansion plans, in those markets. More generally, we are exposed to certain
risks, many of which are beyond our control, inherent in operating in emerging
market countries. These risks include changes in laws and policies affecting
trade, investment and taxes (including laws and policies relating to the
repatriation of funds and to withholding taxes), differing degrees of
protection for intellectual property and the instability of emerging market
economies, currencies, and governments.

The amount of our goodwill and other intangibles, as well as our film costs, may hinder our ability to achieve profitability.

As a result of our acquisitions of all the common interests in Crown Media
United States and H&H Programming-Asia, we have generated a significant amount
of goodwill and other intangibles. We have amortized the goodwill and other
intangibles from these acquisitions on a straight-line basis over 20 years and
10 years, respectively. The amount of goodwill and other intangibles that we
amortized was treated as a charge against earnings under accounting principles
generally accepted in the United States. In accordance

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with recent accounting pronouncements, we have ceased after January 1,
2002, the amortization of this acquired goodwill, and we are required to
periodically review whether the value of our goodwill has been impaired. If we
are required to write down our goodwill, our results of operations,
stockholders equity or profitability could be materially adversely affected.

Commencing with the fourth quarter of 2001, we also have a film cost
relating to the amortization of the purchase price for the film assets that we
use and license to others. This film cost is, and will continue to be, a
significant component of our cost of services each quarter.

Our stock price may be volatile and could decline substantially.

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



| |  |  | our operating results failing to meet the expectations of securities
analysts or investors in any quarter;
| | - |  | ----------------------------------------------------------------------------------------------------------
|
| |  |  | downward revisions in securities analysts estimates;                                                     
|
| |  |  | 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 our
customers; and                         
|
| |  |  | changes in general market conditions or economic trends.                                                  

In the past, companies that have experienced volatility in the market
price of their securities have been the subject of securities class action
litigation. If we become involved in a securities class action litigation in
the future, it could result in substantial costs and diversion of management
attention and resources, harming our business.

Shares eligible for public sale in the future could adversely affect our stock price.

The market price of our Class A common stock could decline as a result of
sales, after applicable lock-up agreements have expired in May 2002, by our
existing stockholders in the future or the perception that these sales could
occur. These sales also might make it difficult for us to sell equity
securities in the future at a time and price that we deem appropriate. In
addition, some of our existing stockholders who hold restricted stock have the
ability to require us to register their shares for public sale. Similarly,
holders of contingent appreciation certificates issued in connection with
preferred securities of Crown Media Trust, have the ability to require us to
register for public sale shares of our Class A common stock that these holders
receive upon exercise of the contingent appreciation certificates.

Risks Relating to Our Industry

Competition could reduce our channel revenues and our ability to achieve profitability.

We operate in the pay television business, which is highly competitive. If
we are unable to compete effectively with large diversified entertainment
companies that have substantially greater resources than we have, our operating
margins and market share could be reduced, and the growth of our business
inhibited. In particular, we compete for distribution with other pay television
channels and, when distribution is obtained, for viewers and advertisers with
pay television channels, broadcast television networks, radio, the Internet and
other media. We also compete, to varying degrees, with other leisure-time
activities such as movie theaters, the Internet, radio, print media, personal
computers and other alternative sources of entertainment and information.
Future technological developments may affect competition within this business.

A continuing trend towards business combinations and alliances in both the
domestic and foreign communications industries may create significant new
competitors for us or intensify existing competition. Many of these combined
entities will have resources far greater than ours. These combined entities may
provide bundled packages of programming, delivery and other services that
compete

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directly with the products we offer. These entities may also offer
services sooner and at more competitive rates than we do. In addition, these
alliances may benefit from both localized content and the local political
climate.

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

Distributors in the United States may attempt to pressure smaller pay TV
channels in terms of viewership, such as our domestic Hallmark Channel, to
accept decreasing amounts for subscriber fees, to pay higher subscriber
acquisition fees or to allow carriage of the Channel without the payment of
subscriber fees. Factors that may lead to this pressure include the number of
competing pay TV channels, the limited space available on services of
distributors in the United States and the desire of distributors to maintain or
reduce costs. Any reduction in subscriber fees revenue now or in the future
could have a material impact on our ability to achieve profitability and cash
flow.

New distribution technologies may fundamentally change the way we distribute our channels and could significantly decrease our revenues or require us to incur significant capital expenditures.

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



| |  |  | rapid and significant technological change, including continuing
developments in technology which do not presently have widely accepted
standards; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | frequent introductions of new services and alternative technologies,
including new technologies for providing video services.                         

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

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

Moreover, the increased capacity of digital distribution platforms,
including the introduction of digital terrestrial television, may reduce the
competition for the right to carry channels and allow development of extra
services at low incremental cost. These lower incremental costs could lower
barriers to entry for competing channels, and place pressure on our operating
margins and market position. In addition, a greater number of channels would
likely increase competition among channels for viewers and advertisers, which
could affect our ability to attract advertising and new distribution at desired
pricing levels, and could therefore hinder or prevent the growth of our
subscriber base.

If we fail to comply with applicable government regulations, our business could be harmed.

If, as a provider of television channels, we fail to comply with
applicable present or future government regulations in any markets in which we
operate, we could be prohibited from operating in those markets and could be
subject to monetary fines, either of which would increase our operating costs,
reduce our revenues and limit our ability to achieve profitability. The scope
of regulation to which we are subject varies from country to country, although
in many significant respects a similar approach is taken to the regulation of
broadcasting across all of the markets in which we operate. Typically,
broadcasting regulation in each of the countries in which we operate requires
that domestic broadcasters and platform providers secure broadcasting licenses
from the domestic broadcasting authority. Additionally, most nations have
broadcasting legislation and regulations, which set minimum standards regarding
program content, and prescribe minimum standards for the content and scheduling
of television advertisements. Some countries require that a certain portion of
programming carried by broadcasters be produced domestically.

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




Item 3. Quantitative and Qualitative Disclosures About Market Risk

We do not use derivative financial instruments in our investment
portfolio. We only invest in instruments that meet high credit and quality
standards, as specified in our investment policy guidelines. These instruments,
like all fixed income instruments, are subject to interest rate risk. The fixed
income portfolio will fall in value if there is an increase in interest rates.
If market interest rates were to increase immediately and uniformly by 10% from
levels as of March 31, 2002, the decline of the fair value of the fixed income
portfolio would not be material.

As of March 31, 2002, our cash, restricted cash, cash equivalents and
short-term investments had a fair value of $9.0 million, which was invested in
cash and short-term commercial paper. The primary purpose of these investing
activities has been to preserve principal until the cash is required to fund
operations. Consequently, the size of this portfolio fluctuates significantly
as cash is raised and used in our business.

The value of certain investments in this portfolio can be impacted by the
risk of adverse changes in securities and economic markets and interest rate
fluctuations. At March 31, 2002, all of our investments in this category were
in fixed rate instruments or money market type accounts. A decrease in interest
rates has the effect of reducing our future annual interest income from this
portfolio, since funds would be reinvested at lower rates as the instruments
mature. Over time, any net percentage decrease in our interest rates could be
reflected in a corresponding net percentage decrease in our interest income.
For the year ended March 31, 2002, the impact of interest rate fluctuations,
changed business prospects and all other factors did not have a material impact
on the fair value of this portfolio, or on our income derived from this
portfolio.

We have not used derivative financial instruments for speculative
purposes. We have not hedged or otherwise protected against risks associated
with any of our investing or financing activities.

As of March 31, 2002, we estimated the fair value of our credit facility
with JP Morgan Chase, excluding accrued interest, to be approximately $206.5
million using quoted market prices where available, or discounted cash flow
analyses. The fair value of our debt is affected by fluctuations in interest
rates. A hypothetical 10% increase or decrease in assumed interest rates would
decrease or increase the fair value of our debt by approximately $1.0 million.
These calculations include the assumption that the balance of our outstanding
debt as of March 31, 2002, would not change during the year and that a yearly
interest rate was used. To the extent interest rates increase, our costs of
financing will also increase because of variable rates applicable to our
outstanding debt.

As of March 31, 2002, we estimated the value of our preferred securities
to be approximately $248.4 million and the value of our derivative liability to
be $14.7 million using quoted market prices where available, or discounted cash
flow analyses. The value of our derivative liability is affected by
fluctuations in our stock price and interest rates. A hypothetical
10% decrease
in our stock price would increase the value of our derivative liability by
approximately $1.6 million. A hypothetical 10% decrease in our stock price
would decrease the value of our derivative liability by approximately
$3.6
million. A hypothetical 10% increase in the interest rate would decrease the
value of our derivative liability by approximately $1.0. A hypothetical 10%
decrease in the interest rate would decrease the value of our derivative
liability by approximately $1.2. These calculations include the assumption
that the balance of our derivative liability as of March 31, 2002, would not
change during the year and that a yearly interest rate was used.

We are exposed to market risk.

We are exposed to market risk, including changes to interest rates,
foreign currency exchange rates and equity investment prices. To reduce the
volatility relating to these exposures, we may enter into various derivative
investment transactions in the near term pursuant to our investment and risk
management policies and procedures in areas such as hedging and counterparty
exposure practices. We did not and will not use derivatives for speculative
purposes.

Though we intend to use risk management control policies, there will be
inherent risks that may only be partially offset by our hedging programs should
there be any unfavorable movements in interest rates, foreign currency exchange
rates or equity investment prices.

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The estimated exposure discussed below is intended to measure the maximum
amount we could lose from adverse market movements in interest rates, foreign currency exchange rates and equity
investment prices, given a specified confidence level, over a given period of
time. Loss is defined in the value at risk estimation as fair market value
loss.

Our interest income and expense is subject to fluctuations in interest rates and the price of our Class A common stock.

Our material interest bearing assets consisted of cash equivalents,
restricted cash, and short-term investments. The balance of our interest
bearing assets was $9.0 million, or less than 1% of total assets, as of March
31, 2002. Our material liabilities subject to interest rate risk consisted of a
capital lease obligation, a credit facility with JP Morgan Chase Bank, and our
private placement. The balance of those liabilities was $263.8 million, or 45%
of total liabilities, as of March 31, 2002. The balance of our guaranteed
preferred beneficial interest in Crown Media Trusts debentures was $203.8
million. Net interest expense for the three months ended March 31, 2002, was
$5.7 million, or 15%, of our total revenues. Our guaranteed preferred
beneficial interest expense for the three months ended March 31, 2002, was
$10.6 million, or 27%, of our total revenues. Our net interest expense and
preferred beneficial interest expense is sensitive to changes in the general
level of interest rates, primarily U.S. interest rates, and the volatility of
our Class A common stock to the extent this volatility impacts the value of the
derivative liability in our preferred securities. In this regard, changes in
U.S. interest rates affect the interest bearing assets and our borrowings as do
changes in the price of our Class A common stock.

We are exposed to risks relating to foreign currency exchange rates and foreign economic conditions.

We evaluate our foreign currency exposure on a net basis. We receive
subscriber fees and advertising revenue from countries throughout the world.
Increasingly, however, these revenues are being offset by expenses arising from
our foreign facilities as well as non-U.S. dollar expenses. Generally, payments
required under our agreements are denominated in U.S. dollars and, therefore,
unaffected by foreign currency exchange rate fluctuations. We have some
exposure to changes in exchange rates in Latin America, Europe, Asia, and
Africa. However, our exposure to foreign exchange rates primarily exists with
the British pound. When the U.S. dollar strengthens against the currencies in
these countries, the U.S. dollar value of non-U.S. dollar-based revenues
decreases; when the U.S. dollar weakens, the U.S. dollar value of non-U.S.
dollar-based revenues increases. Accordingly, changes in exchange rates, and in
particular, a strengthening of the U.S. dollar, may adversely affect our
revenues as expressed in U.S. dollars.




PART II. OTHER INFORMATION




Item 1. Legal Proceedings

We have previously reported on a legal action brought in June 2001 in the
Delaware Chancery Court by a stockholder regarding our purchase of the Crown
Media Library referred to as the films transaction. The lawsuit was commenced
as a purported class action, as well as a derivative action, and alleged, among
other things, that the films transaction was the product of an unfair process
designed to advantage Hallmark Cards as the controlling stockholder and that
the price being paid to Hallmark Entertainment Distribution was not entirely
fair. In June 2001, we, Hallmark Cards and the other defendants and the
plaintiff entered into a memorandum of understanding stating an agreement in
principle on a settlement of the lawsuit concerning the films transaction. As
of February 20, 2002, we and the other parties to the lawsuit entered into a
settlement agreement concerning the lawsuit, with terms contemplated by the
memorandum of understanding. The settlement agreement provides, among other
things, that the purchase price of the films transaction will be reduced by
425,000 shares of Class A Common Stock, that all claims against us and related
parties that arise out of the events alleged in the lawsuit will be released
and that we will pay the fees and disbursements of the plaintiffs counsel,
without interest. We anticipate that a portion of these fees and disbursements
will be covered by our insurers.

At the settlement hearing on April 18, 2002, the court determined, among
other things, that: (1) the settlement is fair and reasonable, and in the best
interest of a class consisting of all record owners and beneficial owners of
Crown Media Holdings common stock on any day from November 6, 2000 (the date
that the films transaction was publicly announced) to and including September
28, 2001, the effective date of closing the films transaction; (2) the lawsuit
be dismissed such that no plaintiff or class member could sue on their claims
again; (3) the lawsuit be certified as a class action; and (4) it should grant
the request of the plaintiffs counsel for attorneys fees and reimbursement of
expenses of $700,000 in connection with the lawsuit. The judgment and order
will become final on May 20, 2002, unless appealed prior to that date and the
settlement will then be effective.

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Item 6. Exhibits and Reports on Form 8-K

(a)

INDEX TO EXHIBITS

|        |  |                                                                                                                                                                                                                                                                                                          
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                          
|Number  |  | Description                                                                                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                          
|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)                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                          
|3.2     |  | Amendment to the Amended and Restated Certificate of
Incorporation, as filed with the State of Delaware on June 7, 2001
(previously filed as Exhibit 3.2 to our Quarterly Report on Form
10-Q for the quarter ended June 30, 2001, and incorporated herein
by reference)                                 
|        |  |                                                                                                                                                                                                                                                                                                          
|3.3     |  | Amended and Restated Bylaws (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)                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                          
|10.1    |  | 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 Issuing Bank.
|        |  |                                                                                                                                                                                                                                                                                                          
|10.2    |  | 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 Issuing Bank.  



---

|(b) |  | Reports on Form 8-K
|--- |  | -------------------

During the quarter ended March 31, 2002, we filed the following Form 8-K
reports:

None

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SIGNATURES

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

|             |                            |                                                                       
|------------ | -------------------------- | ----------------------------------------------------------------------
|             | CROWN MEDIA HOLDINGS, INC.
|             |                            |                                                                       
|             | By:                        | /s/ DAVID J. EVANS
David J. EvansPresident and Chief Executive Officer
|May 15, 2002 |                            |                                                                       

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

|                                         |  |                                            |  |             
|---------------------------------------- |  | ------------------------------------------ |  | ------------
|Signature                                |  | Title                                      |  | Date        
|                                         |  |                                            |  |             
|/s/ DAVID J. EVANS

David J. Evans       |  | Director and Principal
Executive Officer   |  | May 15, 2002
|                                         |  |                                            |  |             
|/s/ WILLIAM J. ALIBER

William J. Aliber |  | Principal Financial and
Accounting Officer |  | May 15, 2002

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INDEX TO EXHIBITS

|        |  |                                                                                                                                                                                                                                                                                                          
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                          
|Number  |  | Description                                                                                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                          
|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)                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                          
|3.2     |  | Amendment to the Amended and Restated Certificate of
Incorporation, as filed with the State of Delaware on June 7, 2001
(previously filed as Exhibit 3.2 to our Quarterly Report on Form
10-Q for the quarter ended June 30, 2001, and incorporated herein
by reference)                                 
|        |  |                                                                                                                                                                                                                                                                                                          
|3.3     |  | Amended and Restated Bylaws (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)                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                          
|10.1    |  | 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 Issuing Bank.
|        |  |                                                                                                                                                                                                                                                                                                          
|10.2    |  | 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 Issuing Bank.