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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q

(Mark One)

|    |  |                                                                                          | 
|--- |  | ---------------------------------------------------------------------------------------- | 
|[X] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) 
OF THE SECURITIES EXCHANGE ACT OF 1934 | 

For the quarterly period ended September 30, 2001
 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                                                       |  | 84-1524410                          
|(State or Other Jurisdiction of
Incorporation or Organization) |  | (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   [X]    No   [   ]

As of November 1, 2001, the number of shares of Class A Common Stock, $.01 par
value outstanding was 73,481,416, 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)                                                     
|                                                   |                                                                                               | PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS             
|                                                   | Managements Discussion and Analysis of Pro Forma Results of Operations                      
|                                                   |                                                                                               | CONSOLIDATED BALANCE SHEETS                                 
|                                                   |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
|                                                   |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS                       
|                                                   |                                                                                               | CONDENSED NOTES TO 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 2. Changes in Securities and Use of Proceeds                                            
|                                                   | ITEM 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                        
|INDEX TO EXHIBITS                                 
|EX-10.6 Second Amended/Restated Stockholders Agrmt
|EX-10.8 Employment Agreement - David Evans        
|EX-99 Press Releases of Crown Media Holdings, Inc.



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TABLE OF CONTENTS

|           |                                                                                                                                    |  |      |    | 
|---------- | ---------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|           |                                                                                                                                    |  | Page
|           |                                                                                                                                    |  |     
|Part I     | Financial Information                                                                                                              |  |      | 3  | 
|          
|Item 1     | Financial Statements (Unaudited)                                                                                                  
|          
|           | CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES                                                                                    | 
|          
|           | Introductory Comments                                                                                                              |  |      | 3  | 
|          
|           | Pro Forma Consolidated Statements of Operations (Unaudited)
 Three and Nine Months Ended September 30, 2000 and 2001              |  |      | 4  | 
|          
|           | Managements Discussion and Analysis of Pro Forma Results of Operations                                                            |  |      | 5  | 
|          
|           | Consolidated Balance Sheets  December 31, 2000 and September 30, 2001
(Unaudited)                                                 |  |      | 8  | 
|          
|           | Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
 Three and Nine Months Ended September 30, 2000 and 2001 |  |      | 8  | 
|          
|           | Consolidated Statements of Cash Flows (Unaudited)
 Nine Months Ended September 30, 2000 and 2001                                  |  |      | 10 | 
|          
|           | Condensed Notes to Consolidated Financial Statements                                                                               |  |      | 12 | 
|          
|Item 2     | Managements Discussion and Analysis of Financial Condition and Results of Operations                                              |  |      | 33 | 
|          
|           | Forward-Looking Statements and Risk Factors                                                                                        |  |      | 43 | 
|          
|Item 3     | Quantitative and Qualitative Disclosures About Market Risk                                                                         |  |      | 48 | 
|          
|Part II    | Other Information                                                                                                                  |  |      | 50 | 
|          
|Item 1     | Legal Proceedings                                                                                                                  |  |      | 50 | 
|          
|Item 2     | Changes in Securities and Use of Proceeds                                                                                          |  |      | 50 | 
|          
|Item 6     | Exhibits and Reports on Form 8-K                                                                                                   |  |      | 51 | 
|          
|Signatures |                                                                                                                                    |  |      | 53 | 



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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)
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 Item 2 of 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, 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), and H&H
Programming  Asia, L.L.C. (H&H Programming), 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 and other product or
service names are trademarks or registered trademarks of their owners.




PART I. FINANCIAL INFORMATION




ITEM 1. Financial Statements (Unaudited)

The Consolidated Financial Statements of Crown Media Holdings included
herein have been prepared by us, without audit, pursuant to the rules and
regulations of the United States Securities and Exchange Commission (SEC).
Certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to such rules and
regulations, although we believe that the disclosures are adequate to enable a
reasonable understanding of the information presented. These Consolidated
Financial Statements should be read in conjunction with the audited financial
statements and the notes thereto included in our Annual Report on Form 10-K
filed for the year ended December 31, 2000. Additionally, the Consolidated
Financial Statements should be read in conjunction with Item 2 Managements
Discussion and Analysis of Financial Condition and Results of Operations
included in this Form 10-Q.

The results of operations for the three and nine months ended September
30, 2001, are not necessarily indicative of the results to be expected for the
full year 2001.

The following unaudited pro forma consolidated statements of operations
for the three and nine months ended September 30, 2000 and 2001, have been
derived from the unaudited financial statements of Crown Media Holdings and its
subsidiaries. This unaudited pro forma financial information is qualified in
its entirety by reference to, and should be read in conjunction with, our
unaudited financial statements contained in this Form 10-Q and related notes
thereto for the three and nine months ended September 30, 2000 and 2001, as
well as our historical consolidated financial statements and related notes
thereto contained in our Annual Report on Form 10-K for the year ended December
31, 2000.

The consolidated financial statements of Crown Media Holdings include the
assets, liabilities and results of Crown Media International for all periods
presented. Crown Media Holdings considers Crown Media International as a
predecessor corporation for financial reporting purposes. The historical
consolidated financial statements of Crown Media Holdings also include the
results of operations for (i) 22.5% of the common interests in Crown Media
United States (formerly Odyssey Holdings, LLC) owned by Crown Media Holdings
for the entire year ended December 31, 2000, under the equity method, (ii) an
additional 55% of the common interests in Crown Media



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United States owned by us since May 9, 2000, when we completed our initial
public offering and acquired those additional interests, (iii) the 100%
interest in Crown Entertainment since May 9, 2000, (iv) the remaining 22.5%
common interests in Crown Media United States owned by us since March 15, 2001,
when we acquired those remaining common interests, (v) the 100% interest in H&H
Programming  Asia since March 15, 2001, when we acquired the remaining 50%
interest in that entity, and (vi) the 100% interest in Crown Media Distribution
since September 28, 2001, when we formed that entity.

The unaudited pro forma financial information stated below presents a
summary of consolidated results of operations of Crown Media Holdings, Crown
Media International, Crown Media United States, Crown Entertainment and H&H
Programming  Asia, as if each of these acquisitions listed above had occurred
on January 1 of the periods presented, along with certain pro forma adjustments
to give effect to the amortization of goodwill and other intangibles. Crown
Media Distribution commenced operations on September 28, 2001, in conjunction
with the purchase of our film assets. The unaudited pro forma financial
information stated below also excludes the activities of The Kermit Channel due
to the termination of contracts with The Jim Henson Company and EM.TV. The
unaudited pro forma financial information is not necessarily indicative of the
results of operations had the transactions been effected on the assumed dates.

The following summary of Crown Media Holdings unaudited pro forma
consolidated statements of operations and related Managements Discussion and
Analysis of Pro Forma Results of Operations have been included to provide a
comparative basis for users of Crown Media Holdings financial information.




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

|                                                                      |                                                       |                              |        |                    |         |                   |         |        |         |      |        |        |          |   |         |        |          |  
|--------------------------------------------------------------------- | ----------------------------------------------------- | ---------------------------- | ------ | ------------------ | ------- | ----------------- | ------- | ------ | ------- | ---- | ------ | ------ | -------- | - | ------- | ------ | -------- | -
|                                                                      |                                                       |                              |        | Three Months Ended |         | Nine Months Ended
|                                                                      |                                                       |                              |        | September 30,      |         | September 30,    
|                                                                      |                                                       |                              |        |                    |         |                  
|                                                                      |                                                       |                              |        | 2000               |         | 2001              |         | 2000   |         | 2001
|                                                                      |                                                       |                              |        |                    |         |                   |         |        |         |     
|                                                                      |                                                       |                              |        | (Unaudited)       
|Gross revenues:                                                       |                                                       |                              |        |                    |         |                   |         |        |         |      |        |        |          |   |         |       
|                                                                      | Subscriber fees                                       |                              | $      | 14,289             |         |                   | $       | 18,211 |         |      | $      | 36,757 |          |   | $       | 54,432 |         
|                                                                      | Advertising                                           |                              |        | 3,578              |         |                   |         | 4,733  |         |      |        | 9,428  |          |   |         | 18,457 |         
|                                                                      | Advertising by Hallmark Cards                         |                              |        | 681                |         |                   |         | 4,221  |         |      |        | 1,023  |          |   |         | 6,931  |         
|                                                                      | Other                                                 |                              |        | 666                |         |                   |         | 242    |         |      |        | 1,153  |          |   |         | 739    |         
|                                                                      |                                                       |                              |        |                    |         |                   |         |        |         |      |        |        |          |   |         |       
|                                                                      |                                                       | Gross revenues               |        |                    | 19,214  |                   |         |        | 27,407  |      |        |        | 48,361   |   |         |        | 80,559   |  
|                                                                      | Amortization of subscriber acquisition and other fees |                              |        | (387               | )       |                   |         | (1,072 | )       |      |        | (437   | )        |   |         | (4,619 | )       
|                                                                      |                                                       |                              |        |                    |         |                   |         |        |         |      |        |        |          |   |         |       
|                                                                      |                                                       | Total revenues               |        |                    | 18,827  |                   |         |        | 26,335  |      |        |        | 47,924   |   |         |        | 75,940   |  
|Cost of Services:                                                     |                                                       |                              |        |                    |         |                   |         |        |         |      |        |        |          |   |         |       
|                                                                      | Programming costs (1)                                 |                              |        | 16,504             |         |                   |         | 23,671 |         |      |        | 41,465 |          |   |         | 65,785 |         
|                                                                      | Operating costs                                       |                              |        | 14,573             |         |                   |         | 18,052 |         |      |        | 38,082 |          |   |         | 46,165 |         
|                                                                      |                                                       |                              |        |                    |         |                   |         |        |         |      |        |        |          |   |         |       
|                                                                      |                                                       | Total cost of services       |        |                    | 31,077  |                   |         |        | 41,723  |      |        |        | 79,547   |   |         |        | 111,950  |  
|Selling, general and administrative expenses                          |                                                       |                              | 14,050 |                    |         |                   | 19,107  |        |         |      | 48,132 |        |          |   | 59,654  |       
|Marketing expenses                                                    |                                                       |                              | 4,629  |                    |         |                   | 10,773  |        |         |      | 13,164 |        |          |   | 27,601  |       
|Amortization of goodwill and other intangibles                        |                                                       |                              | 5,524  |                    |         |                   | 5,524   |        |         |      | 16,462 |        |          |   | 16,462  |       
|                                                                      |                                                       |                              |        |                    |         |                   |         |        |         |      |        |        |          |   |         |       
|                                                                      |                                                       | Loss from operations         |        |                    | (36,453 | )                 |         |        | (50,792 | )    |        |        | (109,381 | ) |         |        | (139,727 | )
|Interest income (expense), net                                        |                                                       |                              | 519    |                    |         |                   | (2,322  | )      |         |      | 477    |        |          |   | (4,789  | )     
|                                                                      |                                                       |                              |        |                    |         |                   |         |        |         |      |        |        |          |   |         |       
|                                                                      |                                                       | Net loss before income taxes |        |                    | (35,934 | )                 |         |        | (53,114 | )    |        |        | (108,904 | ) |         |        | (144,516 | )
|Income tax provision                                                  |                                                       |                              | (468   | )                  |         |                   | (397    | )      |         |      | (1,020 | )      |          |   | (1,403  | )     
|                                                                      |                                                       |                              |        |                    |         |                   |         |        |         |      |        |        |          |   |         |       
|                                                                      |                                                       | Net loss                     |        | $                  | (36,402 | )                 |         | $      | (53,511 | )    |        | $      | (109,924 | ) |         | $      | (145,919 | )
|                                                                      |                                                       |                              |        |                    |         |                   |         |        |         |      |        |        |          |   |         |       
|Weighted average number of Class A and Class B shares
outstanding (2) |                                                       |                              | 65,377 |                    |         |                   | 104,149 |        |         |      | 65,377 |        |          |   | 104,122 |       
|                                                                      |                                                       |                              |        |                    |         |                   |         |        |         |      |        |        |          |   |         |       
|                                                                      |                                                       | Net loss per share           |        | $                  | (0.56   | )                 |         | $      | (0.51   | )    |        | $      | (1.68    | ) |         | $      | (1.40    | )
|                                                                      |                                                       |                              |        |                    |         |                   |         |        |         |      |        |        |          |   |         |       



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|(1) |  | Non-affiliate programming costs exclude third quarter termination charges
of $13.0 million and write-offs of program license fees totaling $15.2
million relating to two program agreements for the three and nine months
ended September 30, 2001.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Weighted average number of Class A and Class B shares outstanding
include 33.3 million shares issued in conjunction with the film assets
transaction as if the shares were issued on January 1, 2001.                                              



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Managements Discussion and Analysis of Pro Forma Results of Operations

Three and Nine Months Ended September 30, 2001, Compared to Three and Nine
Months Ended September 30, 2000

Revenues.Net revenues for the three and nine months ended September 30,
2001, increased to $26.3 million and $75.9 million, respectively, from $18.8
million and $47.9 million, which represent increases of $7.5 million, or 40%,
and $28.0 million, or 59%, respectively, over the comparable periods in 2000.
Gross subscriber fees revenue increased to $18.2 million and $54.4 million,
respectively, from $14.3 million and $36.8 million, for the three and nine
months ended September 30, 2001, which represent increases of $3.9 million, or
27%, and $17.6 million, or 48%, respectively, over the comparable periods in
2000. The increased subscriber fees revenue resulted from new market launches
in the first half of 2001 and expanded distribution in existing markets. The
number of subscribers to the Hallmark Channel, as of September 30, 2001,
increased to 82.9 million from 56.2 million as of September 30, 2000, which
represents an increase of 26.7 million, or 48%. Subscribers to our
international channel increased at a higher rate than international subscriber
fees revenue primarily because a number of new subscribers were added during
promotional periods in which fees were reduced or waived. Additionally, rates
for international subscriber fees decreased and may continue to decrease as we
renew distribution agreements, which may provide for lower rates than under
previous agreements. 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, and the economic
turbulence in certain of our markets. We also may experience a decrease in
subscriber fees revenue in our Italian market due to a potential renegotiation
of an existing distribution agreement with one of our pay television
distributors. Currently, the Italian market represents 9% of our international
subscriber fees revenue and 7% of our total subscriber fees revenue.
Seventy-two percent of gross subscriber fees revenue for both the three and
nine months ended September 30, 2001, and 75% and 79%, respectively, of gross
subscriber fees revenue for the three and nine months ended September 30, 2000,
were earned internationally. Subscribers to our domestic channel increased from
25.9 million as of September 30, 2000, to 39.7 million as of September 30,
2001, which represents an increase of 13.8 million, or 53%. During third
quarter 2001, we completed a distribution agreement with DIRECTV, which added
approximately five million new subscribers. Because of the amortization of
subscriber acquisition and other fees, we may experience a decline in net
subscriber revenues, as we net amortization of subscriber acquisition and other
fees against respective revenue in accordance with generally accepted
accounting principles in the United States.

Ratings on our domestic channel increased over the prior years quarter
due to the change in our programming content and increased advertising for the
channel re-brand. Our Adult 1854-audience composition in Primetime (Monday
through Sunday 811 p.m.) increased 36%. Our Total Day rating increased 50%
and our Primetime ratings increased 50% over the third quarter of 2000.

Advertising revenues increased to $9.0 million and $25.4 million from $4.3
million and $10.5 million, respectively, for the three and nine months ended
September 30, 2001, which represent increases of $4.7 million, or 110%, and
$14.9 million, or 143%, respectively, over the comparable periods in 2000. The
increases in advertising revenues reflect our growth in subscribers, higher
advertising rates in the domestic market, channel programming which became more
attractive to advertisers, and expanded sales of advertising time primarily in
the United States, the United Kingdom and Latin America. We are facing a
challenging advertising market due to its continuing softness and the decrease
in spending by many Fortune 500 companies, troubled by a declining market and a
drop in consumer confidence.

Crown Media Holdings will commence earning revenue through a new business
segment during fourth quarter 2001, via its purchase of certain film assets of
Hallmark Entertainment Distribution LLC (Hallmark Entertainment
Distribution). Notwithstanding our use of the film assets on our channels, we
intend to generate licensing fees revenue as we establish ourselves in the
market and expand our customer base. As part of the purchase, we are entitled
to all assets and liabilities generated by licensing the film assets to third
parties from January 1, 2001, to September 28, 2001. Such amounts will be
determined and adjusted, under the Purchase and Sale Agreement within 60 days
of the September 28, 2001, closing of the film transaction. These amounts are
not expected to be significant.



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Cost of services.Cost of services for the three and nine months ended
September 30, 2001, increased to $41.7 million and $112.0 million from $31.1
million and $79.5 million, which represent increases of $10.6 million, or 34%,
and $32.5 million, or 41%, respectively, over the comparable periods in 2000.
Cost of services as a percent of total revenue decreased to 158% and 147%,
respectively, for the three and nine months ended September 30, 2001, as
compared to 165% and 166%, respectively, for the three and nine months ended
2000. These decreases were primarily due to our employment of in-house
resources to produce interstitials (the promotional segments aired between
programs) and the utilization of our Network Operations Center to perform
certain playback functions previously provided by third-party vendors.
Programming costs for the three and nine months ended September 30, 2001, rose
43% and 59%, respectively, as we invested in additional and higher quality
programming, necessary to fulfill our programming strategy. We anticipate a
decline in affiliated programming amortization expense due to the completion of
the purchase of the film assets on September 28, 2001, but expect a significant
increase in amortization related to our new film assets. Generally, we will
amortize our film assets used internally over ten years and externally upon
revenue recognition. We also acquired and continue to amortize popular
programming from third-party suppliers to meet our strategy and the demands of
our customers. In order to attract and maintain viewers in our international
markets, who are not as familiar with the Hallmark brand name, we plan to
purchase additional series from third-party suppliers. To enhance the quality
of our new and existing subscribers pay television experience and support the
utilization of the Network Operations Center, we expanded the number of
employees in our broadcast operations, contributing to the rise in our
operating costs. Total 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 and nine months ended September 30, 2001,
increased to $19.1 million and $59.7 million from $14.1 million and $48.1
million, which represent increases of $5.0 million, or 36%, and $11.6 million,
or 24%, respectively, over the comparable periods in 2000. These increases
primarily reflect increased costs associated with supporting expanded
distribution in existing markets, supporting new markets and the continued
development of a corporate infrastructure to support increased distribution and
advertising, including expansion of the management team and increased staffing
levels. Due to a company-wide travel restriction in September 2001 and the
implementation of teleconferencing, travel and entertainment expenses declined
during the third quarter of 2001. Additionally, depreciation increased after
the launch of our Network Operations Center in the first quarter of 2001 and
the company-wide upgrade of our network infrastructure, computers and technical
equipment. Selling, general and administrative expenses as a percent of total
revenue decreased to 73% and 79%, respectively, for the three and nine months
ended September 30, 2001, as compared to 75% and 100%, respectively, for the
three and nine months ended September 30, 2000. These decreases are due to
increases in net revenues of 40% and 59%, respectively, noted above and
decreases in travel, entertainment, and other costs.

In October 2001, we implemented a reorganization, which resulted in the
termination of a number of employees, primarily from the marketing, finance and
administrative departments. None of these costs have been reflected in our
third quarter 2001 results, but will be included as a fourth quarter 2001
charge. For further information on this reorganization, see Recent
Developments  Reorganization in Note 1 to Condensed Notes to Consolidated
Financial Statements in this Report and Item 2 below.

Marketing expenses.Marketing expenses for the three and nine months
ended September 30, 2001, increased to $10.8 million and $27.6 million from
$4.6 million and $13.2 million, which represent increases of $6.2 million, or
133%, and $14.4 million, or 110%, respectively, over the comparable periods in
2000. Marketing expenses increased in the first, second and third quarters 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. Additionally, in an effort to strengthen our domestic brand
awareness, we incurred and will continue to incur expenses related to the
promotion and advertising campaigns supporting our August 5, 2001, re-branding
of the Odyssey Network as the Hallmark Channel.

Amortization of goodwill and other intangibles.Amortization of goodwill
and other intangibles for both the three and nine months ended September 30,
2001 and 2000, were $5.5 million and $16.5 million, respectively. 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 is being amortized over 20 years. In conjunction



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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 $92.6 million, which are being amortized over 10
years subject to final appraisal. The amortization of goodwill and certain
other intangibles for which the lives are deemed indefinite arising from
past acquisitions will cease as of January 1, 2002, in accordance with revised
accounting standards issued by the Financial Accounting Standards Board in June
2001. We will no longer record amortization expense of $5.5 million per
quarter, or $22.0 million per year, which will significantly decrease our net
loss. However, goodwill and other intangible assets will be subject to periodic
(at least annual) tests for impairment and recognition of impairment losses in
the future could be required based on a new methodology for measuring
impairments prescribed by these pronouncements. The revised standards include
transition rules and requirements for identification, valuation and recognition
of a much broader list of intangibles as part of business combinations than
prior practice, most of which will continue to be amortized. We have not yet
fully assessed the impact of these new standards on our prospective financial
statements, but we expect that the amount and timing of non-cash charges
related to intangibles acquired in business combinations will change
significantly from prior practice.

Loss from operations.Loss from operations for the three and nine months
ended September 30, 2001, increased to $50.8 million and $139.7 million,
respectively, from $36.5 million and $109.4 million, respectively, which
represent increases of $14.3 million, or 39%, and $30.3 million, or 28%, over
the comparable periods in 2000. This increase was primarily due to aggressive
marketing campaigns for our domestic channel, the introduction of our new brand
package, and factors affecting the cost of services as described above. This
increase was partially offset by our increased utilization of in-house
resources to produce interstitial product and the employment of the Network
Operations Center to perform certain playback functions previously provided by
third-party vendors.

Interest income (expense), net.Net interest expense for the three and
nine months ended September 30, 2001, increased to $2.3 million and $4.8
million from net interest income of $519,000 and $477,000, which represent
increases of $2.8 million, and $5.3 million, respectively, over the comparable
periods in 2000. These increases were primarily due to increased borrowings to
fund operations.

Income tax provision.Income tax provision for the three and nine months
ended September 30, 2001, decreased to $397,000 and increased to $1.4 million
from $468,000 and $1.0 million, which represent a decrease of $71,000, or 15%,
and an increase of $383,000, or 38%, respectively, over the comparable periods
in 2000. 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 are considering the implementation of
taxation on advertising sales. If implemented, our foreign taxes would
increase as would our net loss.

Net loss.Net loss for the three and nine months ended September 30,
2001, increased to $53.5 million and $145.9 million from $36.4 million and
$109.9 million, which represent increases of $17.1 million, or 47%, and $36.0
million, or 33%, respectively, over the comparable periods in 2000. These
increases in net loss for the three and nine months ended September 30, 2001,
were attributable to a combination of the factors discussed above.



7



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##### Table of Contents






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

|                                                                                                                                                                                                                               |                           |                                            |          |              |         |               |           |           |           | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------- | ------------------------------------------ | -------- | ------------ | ------- | ------------- | --------- | --------- | --------- | 
|                                                                                                                                                                                                                               |                           |                                            |          | As of        |         | As of        
|                                                                                                                                                                                                                               |                           |                                            |          | December 31, |         | September 30,
|                                                                                                                                                                                                                               |                           |                                            |          | 2000         |         | 2001         
|                                                                                                                                                                                                                               |                           |                                            |          |              |         |              
|                                                                                                                                                                                                                               | (Unaudited)              
|ASSETS                                                                                                                                                                                                                        
|Cash and cash equivalents                                                                                                                                                                                                      |                           | $                                          | 34,274   |              |         | $             | 10,483    |          
|Accounts receivable, less allowance for doubtful accounts of $2,917 and
$6,435, respectively                                                                                                                                   |                           |                                            | 18,159   |              |         |               | 26,189    |          
|Program license fees  affiliates, net of accumulated amortization                                                                                                                                                             |                           |                                            | 20,107   |              |         |               | 27,043    |          
|Program license fees  non-affiliates, net of accumulated amortization                                                                                                                                                         |                           |                                            | 24,908   |              |         |               | 31,786    |          
|Subtitling and dubbing, net of accumulated amortization                                                                                                                                                                        |                           |                                            | 1,525    |              |         |               | 2,331     |          
|Debt issuance costs, net of accumulated amortization                                                                                                                                                                           |                           |                                            |         |              |         |               | 1,193     |          
|Deferred tax asset                                                                                                                                                                                                             |                           |                                            |         |              |         |               | 4,189     |          
|Prepaids and other assets                                                                                                                                                                                                      |                           |                                            | 3,181    |              |         |               | 4,846     |          
|                                                                                                                                                                                                                               |                           |                                            |          |              |         |               |           |          
|                                                                                                                                                                                                                               | Total current assets      |                                            |          | 102,154      |         |               |           | 108,060   |          
|Restricted cash                                                                                                                                                                                                                |                           |                                            | 340      |              |         |               | 340       |          
|Accounts receivable, net of current portion                                                                                                                                                                                    |                           |                                            | 3,074    |              |         |               | 5,508     |          
|Program license fees  affiliates, net of current portion                                                                                                                                                                      |                           |                                            | 73,654   |              |         |               | 51,501    |          
|Program license fees  non-affiliates, net of current portion                                                                                                                                                                  |                           |                                            | 41,736   |              |         |               | 24,038    |          
|Subtitling and dubbing, net of current portion                                                                                                                                                                                 |                           |                                            | 4,227    |              |         |               | 4,846     |          
|Film assets, net of accumulated amortization                                                                                                                                                                                   |                           |                                            |         |              |         |               | 812,443   |          
|Subscriber acquisition and other fees, net of accumulated amortization                                                                                                                                                         |                           |                                            | 29,670   |              |         |               | 119,899   |          
|Property and equipment, net of accumulated depreciation                                                                                                                                                                        |                           |                                            | 31,067   |              |         |               | 46,038    |          
|Investment in/advances to unconsolidated entity                                                                                                                                                                                |                           |                                            | 611      |              |         |               |          |          
|Goodwill and other intangibles, net of accumulated amortization                                                                                                                                                                |                           |                                            | 240,141  |              |         |               | 318,901   |          
|Debt issuance costs, net of current portion                                                                                                                                                                                    |                           |                                            |         |              |         |               | 4,274     |          
|Prepaids and other assets, net of current portion                                                                                                                                                                              |                           |                                            | 3,404    |              |         |               | 2,048     |          
|                                                                                                                                                                                                                               |                           |                                            |          |              |         |               |           |          
|                                                                                                                                                                                                                               | Total assets              |                                            | $        | 530,078      |         |               | $         | 1,497,896 |          
|                                                                                                                                                                                                                               |                           |                                            |          |              |         |               |           |          
|LIABILITIES                                                                                                                                                                                                                   
|Accounts payable and accrued liabilities                                                                                                                                                                                       |                           | $                                          | 26,027   |              |         | $             | 128,082   |          
|Subscriber acquisition fees payable                                                                                                                                                                                            |                           |                                            | 27,770   |              |         |               | 23,323    |          
|License fees payable to affiliates                                                                                                                                                                                             |                           |                                            | 82,571   |              |         |               | 103,628   |          
|License fees payable to non-affiliates                                                                                                                                                                                         |                           |                                            | 26,869   |              |         |               | 28,532    |          
|Payable to affiliates                                                                                                                                                                                                          |                           |                                            | 7,023    |              |         |               | 3,977     |          
|Notes and interest payable to HC Crown                                                                                                                                                                                         |                           |                                            | 37,549   |              |         |               | 70,730    |          
|Chase Manhattan credit facility  India                                                                                                                                                                                        |                           |                                            |         |              |         |               | 3,234     |          
|Capital lease obligation                                                                                                                                                                                                       |                           |                                            |         |              |         |               | 1,290     |          
|Deferred programming revenue                                                                                                                                                                                                   |                           |                                            | 713      |              |         |               | 256       |          
|                                                                                                                                                                                                                               |                           |                                            |          |              |         |               |           |          
|                                                                                                                                                                                                                               | Total current liabilities |                                            |          | 208,522      |         |               |           | 363,052   |          
|Accrued liabilities, net of current portion                                                                                                                                                                                    |                           |                                            | 18       |              |         |               | 334       |          
|Subscriber acquisition fees payable, net of current portion                                                                                                                                                                    |                           |                                            |         |              |         |               | 3,650     |          
|License fees payable to affiliates, net of current portion                                                                                                                                                                     |                           |                                            | 27,309   |              |         |               | 25,664    |          
|License fees payable to non-affiliates, net of current portion                                                                                                                                                                 |                           |                                            | 22,421   |              |         |               | 19,095    |          
|Chase Manhattan credit facility, net of current portion                                                                                                                                                                        |                           |                                            |         |              |         |               | 209,628   |          
|Deferred tax liability                                                                                                                                                                                                         |                           |                                            |         |              |         |               | 9,509     |          
|Capital lease obligation, net of current portion                                                                                                                                                                               |                           |                                            |         |              |         |               | 11,063    |          
|Preferred minority interest                                                                                                                                                                                                    |                           |                                            | 25,000   |              |         |               | 25,000    |          
|Commitments and contingencies                                                                                                                                                                                                  |                           |                                            |          |              |         |               |           |          
|STOCKHOLDERS EQUITY                                                                                                                                                                                                          
|Class A common stock, $.01 par value; 200,000,000 shares authorized; issued
shares of 34,730,505 and 73,906,416; outstanding shares of 29,352,784 and
73,481,416 as of December 31, 2000, and September 30, 2001, respectively |                           |                                            | 294      |              |         |               | 735       |          
|Class B common stock, $.01 par value; 120,000,000 shares authorized;
issued and outstanding shares of 30,670,422 as of December 31, 2000, and
September 30, 2001, respectively                                                 |                           |                                            | 307      |              |         |               | 307       |          
|Paid-in capital                                                                                                                                                                                                                |                           |                                            | 496,697  |              |         |               | 1,255,958 |          
|Accumulated other comprehensive loss                                                                                                                                                                                           |                           |                                            | (12      | )            |         |               | (272      | )        
|Accumulated deficit                                                                                                                                                                                                            |                           |                                            | (250,478 | )            |         |               | (425,827  | )        
|                                                                                                                                                                                                                               |                           |                                            |          |              |         |               |           |          
|                                                                                                                                                                                                                               |                           | Total stockholders equity                 |          |              | 246,808 |               |           |           | 830,901   | 
|                                                                                                                                                                                                                               |                           |                                            |          |              |         |               |           |          
|                                                                                                                                                                                                                               |                           | Total liabilities and stockholders equity |          | $            | 530,078 |               |           | $         | 1,497,896 | 
|                                                                                                                                                                                                                               |                           |                                            |          |              |         |               |           |          

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



8



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##### Table of Contents






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

|                                                                        |                                                      |                |                              |        |                    |         |                   |        |        |         |        |        |        |         |        |        |        |          |  
|----------------------------------------------------------------------- | ---------------------------------------------------- | -------------- | ---------------------------- | ------ | ------------------ | ------- | ----------------- | ------ | ------ | ------- | ------ | ------ | ------ | ------- | ------ | ------ | ------ | -------- | -
|                                                                        |                                                      |                |                              |        | Three Months Ended |         | Nine Months Ended
|                                                                        |                                                      |                |                              |        | September 30,      |         | September 30,    
|                                                                        |                                                      |                |                              |        |                    |         |                  
|                                                                        |                                                      |                |                              |        | 2000               |         | 2001              |        | 2000   |         | 2001  
|                                                                        |                                                      |                |                              |        |                    |         |                   |        |        |         |       
|                                                                        |                                                      |                |                              |        | (Unaudited)       
|Revenues:                                                               |                                                      |                |                              |        |                    |         |                   |        |        |         |        |        |        |         |        |       
|                                                                        | Subscriber fees                                      |                | $                            | 14,091 |                    |         | $                 | 17,139 |        |         | $      | 33,182 |        |         | $      | 49,734 |       
|                                                                        | Advertising                                          |                |                              | 3,577  |                    |         |                   | 4,733  |        |         |        | 5,723  |        |         |        | 18,457 |       
|                                                                        | Advertising by Hallmark Cards                        |                |                              | 681    |                    |         |                   | 4,221  |        |         |        | 1,023  |        |         |        | 6,931  |       
|                                                                        | Management fees from unconsolidated entity and other |                |                              | 1,017  |                    |         |                   | 242    |        |         |        | 2,244  |        |         |        | 728    |       
|                                                                        |                                                      |                |                              |        |                    |         |                   |        |        |         |        |        |        |         |        |       
|                                                                        |                                                      |                | Total revenues               |        |                    | 19,366  |                   |        |        | 26,335  |        |        |        | 42,172  |        |        |        | 75,850   |  
|Cost of Services:                                                       |                                                      |                |                              |        |                    |         |                   |        |        |         |        |        |        |         |        |       
|                                                                        | Programming costs:                                   |                |                              |        |                    |         |                   |        |        |         |        |        |        |         |        |        |       
|                                                                        |                                                      | Affiliates     |                              |        | 12,115             |         |                   |        | 16,387 |         |        |        | 20,946 |         |        |        | 44,081 |         
|                                                                        |                                                      | Non-affiliates |                              |        | 4,389              |         |                   |        | 36,236 |         |        |        | 10,556 |         |        |        | 51,639 |         
|                                                                        | Operating costs                                      |                |                              | 12,229 |                    |         |                   | 19,378 |        |         |        | 31,923 |        |         |        | 47,060 |       
|                                                                        |                                                      |                |                              |        |                    |         |                   |        |        |         |        |        |        |         |        |       
|                                                                        |                                                      |                | Total cost of services       |        |                    | 28,733  |                   |        |        | 72,001  |        |        |        | 63,425  |        |        |        | 142,780  |  
|Selling, general and administrative expenses                            |                                                      |                | 16,311                       |        |                    |         | 18,270            |        |        |         | 36,927 |        |        |         | 59,508 |       
|Marketing expenses                                                      |                                                      |                | 4,435                        |        |                    |         | 10,773            |        |        |         | 9,964  |        |        |         | 27,599 |       
|Amortization of goodwill and other intangibles                          |                                                      |                | 3,132                        |        |                    |         | 5,524             |        |        |         | 5,507  |        |        |         | 14,520 |       
|                                                                        |                                                      |                |                              |        |                    |         |                   |        |        |         |        |        |        |         |        |       
|                                                                        |                                                      |                | Loss from operations         |        |                    | (33,245 | )                 |        |        | (80,233 | )      |        |        | (73,651 | )      |        |        | (168,557 | )
|Equity in net losses of unconsolidated entities and investment
expenses |                                                      |                | (954                         | )      |                    |         |                  |        |        |         | (8,114 | )      |        |         | (655   | )     
|Interest income (expense), net                                          |                                                      |                | 626                          |        |                    |         | (2,322            | )      |        |         | 341    |        |        |         | (4,734 | )     
|                                                                        |                                                      |                |                              |        |                    |         |                   |        |        |         |        |        |        |         |        |       
|                                                                        |                                                      |                | Net loss before income taxes |        |                    | (33,573 | )                 |        |        | (82,555 | )      |        |        | (81,424 | )      |        |        | (173,946 | )
|Income tax provision                                                    |                                                      |                | (468                         | )      |                    |         | (397              | )      |        |         | (1,020 | )      |        |         | (1,403 | )     
|                                                                        |                                                      |                |                              |        |                    |         |                   |        |        |         |        |        |        |         |        |       
|                                                                        |                                                      |                | Net loss                     |        | $                  | (34,041 | )                 |        | $      | (82,952 | )      |        | $      | (82,444 | )      |        | $      | (175,349 | )
|                                                                        |                                                      |                |                              |        |                    |         |                   |        |        |         |        |        |        |         |        |       
|Other comprehensive loss:                                               |                                                      |                |                              |        |                    |         |                   |        |        |         |        |        |        |         |        |       
|                                                                        | Foreign currency translation adjustment              |                |                              | (76    | )                  |         |                   | 521    |        |         |        | (51    | )      |         |        | (260   | )     
|                                                                        |                                                      |                |                              |        |                    |         |                   |        |        |         |        |        |        |         |        |       
|                                                                        |                                                      |                | Comprehensive loss           |        | $                  | (34,117 | )                 |        | $      | (82,431 | )      |        | $      | (82,495 | )      |        | $      | (175,609 | )
|                                                                        |                                                      |                |                              |        |                    |         |                   |        |        |         |        |        |        |         |        |       
|Weighted average number of Class A and Class B shares outstanding       |                                                      |                | 60,006                       |        |                    |         | 68,115            |        |        |         | 47,707 |        |        |         | 64,871 |       
|                                                                        |                                                      |                |                              |        |                    |         |                   |        |        |         |        |        |        |         |        |       
|                                                                        |                                                      |                | Net loss per share           |        | $                  | (0.57   | )                 |        | $      | (1.22   | )      |        | $      | (1.76   | )      |        | $      | (2.70    | )
|                                                                        |                                                      |                |                              |        |                    |         |                   |        |        |         |        |        |        |         |        |       

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



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##### Table of Contents






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

|                                               |                                                                                                                                    |                                                       |                                                      |         |                   |         |        |          |         |          |  
|---------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------- | ---------------------------------------------------- | ------- | ----------------- | ------- | ------ | -------- | ------- | -------- | -
|                                               |                                                                                                                                    |                                                       |                                                      |         | Nine Months Ended
|                                               |                                                                                                                                    |                                                       |                                                      |         | September 30,    
|                                               |                                                                                                                                    |                                                       |                                                      |         |                  
|                                               |                                                                                                                                    |                                                       |                                                      |         | 2000              |         | 2001  
|                                               |                                                                                                                                    |                                                       |                                                      |         |                   |         |       
|                                               |                                                                                                                                    |                                                       |                                                      |         | (Unaudited)      
|CASH FLOWS FROM OPERATING ACTIVITIES:          |                                                                                                                                    |                                                       |                                                      |         |                   |         |        |         
|                                               | Net loss                                                                                                                           |                                                       | $                                                    | (82,444 | )                 |         | $      | (175,349 | )      
|                                               | Adjustments to reconcile net loss to net cash used in operating activities:                                                        |                                                       |                                                      |         |                   |         |        |          |        
|                                               | Amortization and depreciation                                                                                                      |                                                       |                                                      | 43,923  |                   |         |        | 112,910  |        
|                                               | Provision for losses on accounts receivable                                                                                        |                                                       |                                                      | 2,872   |                   |         |        | 4,765    |        
|                                               | Equity in net losses of unconsolidated subsidiaries                                                                                |                                                       |                                                      | 8,114   |                   |         |        | 655      |        
|                                               | Stock-based compensation                                                                                                           |                                                       |                                                      | 6,144   |                   |         |        | 1,230    |        
|                                               | Loss on sale of property and equipment                                                                                             |                                                       |                                                      | 5       |                   |         |        | 138      |        
|                                               | Changes in operating assets and liabilities net of effects from purchases of
Crown Media United States and H&H Programming  Asia: |                                                       |                                                      |         |                   |         |        |          |        
|                                               |                                                                                                                                    | Increase in accounts receivable                       |                                                      |         | (10,184           | )       |        |          | (13,802 | )       
|                                               |                                                                                                                                    | Additions to program license fees                     |                                                      |         | (65,006           | )       |        |          | (66,519 | )       
|                                               |                                                                                                                                    | Increase in subtitling and dubbing                    |                                                      |         | (2,389            | )       |        |          | (3,563  | )       
|                                               |                                                                                                                                    | (Increase) decrease in prepaids and other assets      |                                                      |         | 332               |         |        |          | (34     | )       
|                                               |                                                                                                                                    | Additions to subscriber acquisition and other fees    |                                                      |         | (2,795            | )       |        |          | (17,290 | )       
|                                               |                                                                                                                                    | Increase in accounts payable and accrued liabilities  |                                                      |         | 27,768            |         |        |          | 7,566   |         
|                                               |                                                                                                                                    | Increase (decrease) in interest payable               |                                                      |         | 779               |         |        |          | (40     | )       
|                                               |                                                                                                                                    | Decrease in subscriber acquisition fees payable       |                                                      |         |                  |         |        |          | (797    | )       
|                                               |                                                                                                                                    | Increase (decrease) in affiliate license fees payable |                                                      |         | (7,168            | )       |        |          | 23,738  |         
|                                               |                                                                                                                                    | Decrease in payable to affiliates                     |                                                      |         | (335              | )       |        |          | (3,045  | )       
|                                               |                                                                                                                                    | Decrease in deferred revenue                          |                                                      |         | (1,663            | )       |        |          | (457    | )       
|                                               |                                                                                                                                    |                                                       |                                                      |         |                   |         |        |         
|                                               |                                                                                                                                    |                                                       | Net cash used in operating activities                |         |                   | (82,047 | )      |          |         | (129,894 | )
|                                               |                                                                                                                                    |                                                       |                                                      |         |                   |         |        |         
|CASH FLOWS FROM INVESTING ACTIVITIES:          |                                                                                                                                    |                                                       |                                                      |         |                   |         |        |         
|                                               | Purchases of property and equipment                                                                                                |                                                       |                                                      | (18,719 | )                 |         |        | (11,116  | )      
|                                               | Proceeds from disposition of property and equipment                                                                                |                                                       |                                                      | 79      |                   |         |        | 128      |        
|                                               | Cash acquired from the purchase of Crown Media United States                                                                       |                                                       |                                                      | 13,055  |                   |         |        |         |        
|                                               | Acquisition of H&H Programming  Asia, net of cash                                                                                 |                                                       |                                                      |        |                   |         |        | (482     | )      
|                                               | Other investments in and issuance of note receivable                                                                               |                                                       |                                                      | (4,021  | )                 |         |        |         |        
|                                               |                                                                                                                                    |                                                       |                                                      |         |                   |         |        |         
|                                               |                                                                                                                                    |                                                       | Net cash used in investing activities                |         |                   | (9,606  | )      |          |         | (11,470  | )
|                                               |                                                                                                                                    |                                                       |                                                      |         |                   |         |        |         
|CASH FLOWS FROM FINANCING ACTIVITIES:          |                                                                                                                                    |                                                       |                                                      |         |                   |         |        |         
|                                               | Proceeds from the issuance of common stock, net of issuance costs                                                                  |                                                       |                                                      | 125,351 |                   |         |        | 54       |        
|                                               | Proceeds from the issuance of common stock due to exercise of stock options                                                        |                                                       |                                                      | 193     |                   |         |        | 744      |        
|                                               | Capital contributions                                                                                                              |                                                       |                                                      | 10,000  |                   |         |        |         |        
|                                               | Borrowings from HC Crown note payable                                                                                              |                                                       |                                                      | 24,090  |                   |         |        | 116,220  |        
|                                               | Borrowings from Chase Manhattan                                                                                                    |                                                       |                                                      |        |                   |         |        | 209,628  |        
|                                               | Repayment of borrowings on HC Crown notes payable                                                                                  |                                                       |                                                      |        |                   |         |        | (83,000  | )      
|                                               | Repayment of borrowings from Chase Manhattan                                                                                       |                                                       |                                                      |        |                   |         |        | (120,000 | )      
|                                               | Net borrowings from Chase Manhattan  India                                                                                        |                                                       |                                                      |        |                   |         |        | 343      |        
|                                               | Repayment of borrowings on Crown Media United States note payable                                                                  |                                                       |                                                      | (10,000 | )                 |         |        |         |        
|                                               | Debt issuance costs                                                                                                                |                                                       |                                                      |        |                   |         |        | (5,467   | )      
|                                               | Principal payments under capital lease obligation                                                                                  |                                                       |                                                      |        |                   |         |        | (899     | )      
|                                               |                                                                                                                                    |                                                       |                                                      |         |                   |         |        |         
|                                               |                                                                                                                                    |                                                       | Net cash provided by financing activities            |         |                   | 149,634 |        |          |         | 117,623  |  
|                                               | Effect of exchange rate changes on cash                                                                                            |                                                       |                                                      | (15     | )                 |         |        | (50      | )      
|                                               |                                                                                                                                    |                                                       |                                                      |         |                   |         |        |         
|                                               |                                                                                                                                    |                                                       | Net increase (decrease) in cash and cash equivalents |         |                   | 57,966  |        |          |         | (23,791  | )
|Cash and cash equivalents, beginning of period |                                                                                                                                    |                                                       | 3,866                                                |         |                   |         | 34,274 |         
|                                               |                                                                                                                                    |                                                       |                                                      |         |                   |         |        |         
|Cash and cash equivalents, end of period       |                                                                                                                                    | $                                                     | 61,832                                               |         |                   | $       | 10,483 |         
|                                               |                                                                                                                                    |                                                       |                                                      |         |                   |         |        |         

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



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##### Table of Contents



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

|                                                         |                                                                                                   |                                                  |   |                   |         |      |   |        |         | 
|-------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | ------------------------------------------------ | - | ----------------- | ------- | ---- | - | ------ | ------- | 
|                                                         |                                                                                                   |                                                  |   | Nine Months Ended
|                                                         |                                                                                                   |                                                  |   | September 30,    
|                                                         |                                                                                                   |                                                  |   |                  
|                                                         |                                                                                                   |                                                  |   | 2000              |         | 2001
|                                                         |                                                                                                   |                                                  |   |                   |         |     
|                                                         |                                                                                                   |                                                  |   | (Unaudited)      
|Supplemental disclosure of cash and non-cash activities: |                                                                                                   |                                                  |   |                   |         |      |   |       
|                                                         | Interest paid                                                                                     |                                                  | $ | 449               |         |      | $ | 4,738  |        
|                                                         | Income taxes paid                                                                                 |                                                  | $ | 1,020             |         |      | $ | 1,403  |        
|                                                         | Accretion related to predecessor Class B common
stock subject to put and call through May 9, 2000 |                                                  | $ | 1,484             |         |      | $ |       |        
|                                                         | Asset acquired through capital lease obligation                                                   |                                                  | $ |                  |         |      | $ | 13,252 |        
|                                                         | Purchase of Crown Media United States and H&H
Programming  Asia, net of cash acquired:           |                                                  |   |                   |         |      |   |        |        
|                                                         |                                                                                                   | Accounts receivable and other assets             |   | $                 | 12,571  |      |   | $      | 1,715   | 
|                                                         |                                                                                                   | Program license fees                             |   |                   | 84,079  |      |   |        | 2,678   | 
|                                                         |                                                                                                   | Subscriber acquisition and other fees            |   |                   | 24,422  |      |   |        |        | 
|                                                         |                                                                                                   | Goodwill and other intangibles                   |   |                   | 248,780 |      |   |        | 92,583  | 
|                                                         |                                                                                                   | Accounts payable and other liabilities           |   |                   | 18,951  |      |   |        | 2,089   | 
|                                                         |                                                                                                   | Subscriber acquisition fees payable              |   |                   | 27,210  |      |   |        |        | 
|                                                         |                                                                                                   | Note and interest payable to non-affiliate       |   |                   |        |      |   |        | 2,892   | 
|                                                         |                                                                                                   | License fees payable  affiliate                 |   |                   | 64,317  |      |   |        | 5,694   | 
|                                                         |                                                                                                   | Preferred minority interest                      |   |                   | 25,000  |      |   |        |        | 
|                                                         |                                                                                                   | Issuance of Class A common stock                 |   |                   | 216,901 |      |   |        | 85,819  | 
|                                                         | Purchase of Hallmark Entertainment film assets:                                                   |                                                  |   |                   |         |      |   |        |        
|                                                         |                                                                                                   | Film assets                                      |   |                   |         |      |   | $      | 812,443 | 
|                                                         |                                                                                                   | Accounts receivable                              |   |                   |         |      |   |        | 4,651   | 
|                                                         |                                                                                                   | Deferred
tax asset valuation allowance reduction |   |                   |         |      |   |        | 95,314  | 
|                                                         |                                                                                                   | Accrued liabilities                              |   |                   |         |      |   |        | 100,000 | 
|                                                         |                                                                                                   | Notes and interest payable to Chase Manhattan    |   |                   |         |      |   |        | 120,000 | 
|                                                         |                                                                                                   | Deferred tax liability                           |   |                   |         |      |   |        | 100,634 | 
|                                                         |                                                                                                   | Issuance of Class A common stock                 |   |                   |         |      |   |        | 591,774 | 
|                                                         | Subscriber acquisition and other fees:                                                            |                                                  |   |                   |         |      |   |        |        
|                                                         |                                                                                                   | Subscriber acquisition and other fees            |   |                   |         |      |   | $      | 80,081  | 
|                                                         |                                                                                                   | Issuance of Class A common stock                 |   |                   |         |      |   |        | 80,081  | 

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



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CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Business and Organization

Organization

Crown Media Holdings, 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 (formerly known as the Hallmark
Entertainment Network) is operated and distributed in more than 100
international 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 (formerly known as the
Odyssey 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,
Inc. (Hallmark Entertainment), 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 prior to the
completion of our reorganization and initial public offering on May 9, 2000.
Therefore, for the periods prior to May 9, 2000, for financial reporting
purposes, we are reporting the assets, liabilities and results of operations of
Crown Media International, as Crown Media Holdings and Crown Media
International were entities under common control before and after the
reorganization.

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. Our consolidated financial statements include the assets and
liabilities of Crown Media International at their historical carrying values
since both we and Crown Media International are 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. Additionally, on May 9, 2000, we acquired Liberty Medias 32.5%
interest in Crown Media United States and NICCs 22.5% interest in Crown Media
United States, and included these interests in our consolidated financial
statements at their fair value using purchase accounting as of the date of the
reorganization. In conjunction with the reorganization, Crown Media Holdings
completed its initial public offering of 10,000,000 shares of Class A common
stock at $14 per share. The net proceeds from this offering, after expenses and
underwriting discounts and commissions, were approximately $125.4 million.

The pay television channel now operated by Crown Media United States was
initially dedicated primarily to religious programming. In April 1999, Crown
Media United States relaunched the channel as one dedicated to high-quality
family programming.

Prior to the initial public offering and reorganization, Crown Media
International held a 22.5% common equity interest in Crown Media United States.
The assets and liabilities of Crown Media United States and its subsidiaries
relating to Crown Media Internationals original 22.5% interest in Crown Media
United States are included in Crown Media Holdings consolidated financial
statements based on their historical carrying values. 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 which we
did not previously own, for approximately $85.8 million. In consideration for
these ownership interests, we issued approximately 5.4 million shares of our
Class A common stock to The Jim Henson Company. The acquisition was recorded at
fair value using purchase accounting as of March 15, 2001.



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Recent Developments

Purchase of Film Assets

On September 28, 2001, Crown Media Holdings completed the acquisition 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. Under the
terms of the acquisition, we have assumed $220.0 million of Hallmark
Entertainment debt and payables and issued 33,744,528 shares of our Class A
common stock. The number of shares of common stock was determined by a formula
based on the average closing price of the common stock from November 6, 2000,
(the date we announced that we were contemplating the transaction) to September
27, 2001 (the day prior to closing), which average price was $17.78 per share.
The purchase price was agreed to by the Board of Hallmark Entertainment after
receiving a fairness opinion from their financial advisor, and by the
independent Board members of Crown Media Holdings after receiving a fairness
opinion from their financial advisor. Additionally, the shareholders of Crown
Media Holdings, other than Hallmark Cards and its affiliates, approved the
transaction at a meeting on July 17, 2001. Of the shares issued in the
transaction, 425,000 shares were issued to an escrow and will be returned to us
if a previously announced, proposed settlement of a shareholder lawsuit
relating to the Purchase and Sale transaction becomes final.

Crown Media Holdings recorded the film assets at carrying cost for
financial reporting purposes, which was less than the fair value at the closing
date, as the transaction with the parent company is considered a transaction
between entities under common control. In accordance with the Purchase and Sale
Agreement with Hallmark Entertainment, Hallmark Entertainment Distribution has
60 days from the close of the transaction to provide Crown Media Holdings with
any adjustments to the carrying cost of the film assets, which adjustments are
not expected to be significant.

Hallmark Entertainment Distribution intends to generate revenue from the
film assets transaction by granting licenses to use the film assets to third
parties. We intend to use the films as programming for our television channels
and interactive uses and also to continue granting licenses to use the film
assets to third parties.

Reorganization

In order to utilize the synergies between Crown Media International, our
international operating subsidiary, and Crown Media United States, our domestic
operating subsidiary, approximately 15% of the Companys employees were
involuntarily terminated during October 2001. Employees affected by this
reorganization were primarily members of our marketing, finance and
administrative departments. We will incur costs related to this
reorganization, which will be accounted for under Emerging Issues Task Force
(EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring),and SEC Staff Accounting Bulletin (SAB) No. 100,
Restructuring and Impairment Charges.These costs will be comprised primarily
of the termination benefits of severance salary and outplacement service for
all affected employees. During fourth quarter 2001, we plan to incur
restructuring charges of approximately $4.0 to $6.0 million related to these
initiatives.

Liquidity

In connection with our growth strategy, we expect that we will continue to
make significant investments in programming, distribution and technology, as
well as additional investments in infrastructure and facilities. We are
currently committed to spend more than $45.3 million for non-affiliate
programming over the next 12 months. We are committed to payments for
subscriber acquisition fees of $13.5 million in the fourth quarter 2001, $8.8
million in the first quarter 2002, and $1.0 million in the second quarter 2002,
and a future payment of $3.7 million. We are also committed to pay severance
costs of approximately $4.0 to $6.0 million, which were incurred subsequent to
third quarter 2001. We also expect to report net losses for the foreseeable
future.

In connection with the completion of the acquisition of the film assets
from Hallmark Entertainment Distribution as described above on September 28,
2001, we entered into a credit agreement with a syndicate of banks, led by The
Chase Manhattan Bank as Administrative Agent and Issuing Bank, under which the
banks extended to us a five-year secured credit facility of up to $285.0
million. The loan is guaranteed by our subsidiaries and is secured by all



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tangible and intangible property of Crown Media Holdings and its
subsidiaries. A portion of the borrowings under the bank credit facility have
been used to pay $120.0 million of debt assumed as part of the consideration
for acquiring the film assets and to repay the outstanding amount under a
$150.0 million line of credit with HC Crown of $84.2 million. As of November 1,
2001, there were $65.4 million of borrowings available under the credit
facility for general working capital purposes.

Upon repayment of the outstanding borrowings under our existing $150.0
million line of credit, HC Crown also provided a new $150.0 million line of
credit to us, with a final maturity no later than February 27, 2007. This line
of credit is subordinate to the bank credit facility, and, to the extent
permitted by the bank credit facility, its availability will be reduced dollar
for dollar in an amount equal to Net Cash Proceeds received by us in exchange
for the issuance of any debt or equity security. We will pay interest on any
borrowings under the line of credit at a rate equal to LIBOR plus three
percent, or, after December 31, 2002, three and one-half percent, payable
quarterly. HC Crowns obligation to make loans under this line of credit is
supported by a letter of credit issued by Credit Suisse First Boston.

The bank credit facility encompasses a term loan of $100.0 million and a
revolving line of credit of $185.0 million, which includes up to $20.0 million
of letters of credit issued at our request. 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 film assets, based upon the net present value of cash
flows. Currently the Library Credit is in excess of the maximum amount of the
bank loans.

Each loan (which includes the term loans and any revolving credit loans)
bears interest at a Eurodollar rate or an alternate base rate as we may request
at the time of borrowing 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 The
Chase Manhattan Bank, a certificate of deposits rate or the Federal Funds
effective rate, which is adjusted whenever the rate changes. We are 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.
For additional information regarding the bank credit facility, see Note 9
below.

We believe that 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 December 31, 2002. We also
intend to raise additional funds to support and expand our businesses. Any
additional equity financings could result in dilution to our existing
investors. There can be no assurance that we will be able to consummate any
additional equity or debt financing.

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 majority-owned and controlled
subsidiaries. Historically, we 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.

Interim Financial Statements

The consolidated financial statements of Crown Media Holdings included
herein have been prepared by us, without audit, pursuant to the rules and
regulations of the United States Securities and Exchange Commission (SEC).
Certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to such rules and
regulations, although we believe that the disclosures are adequate to enable a
reasonable understanding of the information presented. These consolidated
financial statements should be read in conjunction with the audited financial
statements and the notes thereto included in our Annual Report on Form 10-K.



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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 and Other Fees

Crown Media United States has distribution agreements with the top nine
United States pay television distributors, which carry the Hallmark Channel on
some of their cable, satellite, DTT, or SMATV 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.

During the nine months ended September 30, 2001, Crown Media Holdings
recorded an additional $97.4 million in subscriber acquisition and other fees
and recorded amortization of $7.2 million for such fees, resulting in an asset
balance of $119.9 million. As of September 30, 2001, the consolidated balance
sheet also reflected subscriber acquisition fees payable of $27.0 million.
Subscriber acquisition fees are capitalized and amortized on a straight-line
basis over the terms of the distribution agreements. Currently, Crown Media
United States is committed to current payments of $13.5 million in fourth
quarter 2001, $8.8 million in first quarter 2002, and $1.0 million in second
quarter 2002, and a future payment of $3.7 million.

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 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, 2000, and September 30, 2001, was $2.9 million and
$4.3 million, respectively.

Property and Equipment

Property and equipment are recorded at cost. Depreciation of property and
equipment are provided for 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.



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Revenue Recognition

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

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 Emerging Issues Tax Force (EITF) No. 99-17, Accounting for
Advertising Barter Transactions, no revenue is recognized. For
the three and nine months ended September 30, 2001, revenue from
advertising barter transactions equaled the corresponding barter
expenses and were $364,000 and $1.3 million, respectively, and were included as a
component of both advertising revenue and marketing expenses in the
accompanying consolidated statements of operations. No barter revenue or
related barter expense was recorded for the three and nine months ended
September 30, 2000.

Revenues from foreign sources for the three and nine months ended
September 30, 2000, represented 61% and 72%, respectively, of total revenue.
Revenues from foreign sources for both the three and nine months ended
September 30, 2001, represented 63% of total revenue. Such revenues, generally
denominated in United States dollars, were primarily from sales to customers in
Australia, New Zealand, the Benelux countries, Italy, South Africa, Spain and
certain countries in Asia, the Middle East and Latin America, during both
periods presented, and the United States for the nine months ended September
30, 2001.

Cost of Services

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

Minority Interest

The minority interest in the net income or loss of Crown Media Holdings
non wholly owned, consolidated subsidiaries is insignificant and therefore not
separately reflected in the accompanying consolidated financial statements. To
the extent the minority interest in the net losses of Crown Media Holdings
consolidated subsidiaries exceeds the minority investment in those
subsidiaries, such excess losses are charged to Crown Media Holdings. See note
5 for a discussion of minority interest related to the preferential interest in
Crown Media United States.

Comprehensive Loss

Crown Media Holdings reports all changes in equity that result from
transactions and other economic events other than transactions with 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.



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Net Loss Per Share

Basic net loss per share is computed by dividing the net loss available to
common stockholders 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 anti-dilutive. Potential
common shares consist of incremental common shares issuable upon the exercise
of stock options. Approximately 4.1 million for the three and nine months ended
September 30, 2000, and approximately 6.7 million for the three and nine months
ended September 30, 2001, of stock options have been excluded from the
calculations below because their effect would have been anti-dilutive.
Accordingly, diluted loss per share equals basic loss per share.

The computation of basic and diluted net loss per share consists of the
following:

|                                                                                                  |                                                |   |                                          |        |                   |   |         |        |      |   |         |        |   |   |          |        |  
|------------------------------------------------------------------------------------------------- | ---------------------------------------------- | - | ---------------------------------------- | ------ | ----------------- | - | ------- | ------ | ---- | - | ------- | ------ | - | - | -------- | ------ | -
|                                                                                                  |                                                |   | Three Months Ended                       |        | Nine Months Ended
|                                                                                                  |                                                |   | September 30,                            |        | September 30,    
|                                                                                                  |                                                |   |                                          |        |                  
|                                                                                                  |                                                |   | 2000                                     |        | 2001              |   | 2000    |        | 2001
|                                                                                                  |                                                |   |                                          |        |                   |   |         |        |     
|                                                                                                  |                                                |   | (In thousands, except per share amounts)
|Net loss                                                                                          |                                                | $ | (34,041                                  | )      |                   | $ | (82,952 | )      |      | $ | (82,444 | )      |   | $ | (175,349 | )     
|Accretion related to predecessor Class B common stock
subject to put and call through May 9, 2000 |                                                |   |                                         |        |                   |   |        |        |      |   | (1,484  | )      |   |   |         |       
|                                                                                                  |                                                |   |                                          |        |                   |   |         |        |      |   |         |        |   |   |          |       
|                                                                                                  |                                                | $ | (34,041                                  | )      |                   | $ | (82,952 | )      |      | $ | (83,928 | )      |   | $ | (175,349 | )     
|                                                                                                  |                                                |   |                                          |        |                   |   |         |        |      |   |         |        |   |   |          |       
|Denominator:                                                                                      |                                                |   |                                          |        |                   |   |         |        |      |   |         |        |   |   |          |       
|                                                                                                  | Weighted average common shares outstanding (1) |   |                                          | 60,006 |                   |   |         | 68,115 |      |   |         | 47,070 |   |   |          | 64,871 |  
|                                                                                                  |                                                |   |                                          |        |                   |   |         |        |      |   |         |        |   |   |          |       
|Net loss per share:                                                                               |                                                |   |                                          |        |                   |   |         |        |      |   |         |        |   |   |          |       
|                                                                                                  | Basic and diluted net loss per share           |   | $                                        | (0.57  | )                 |   | $       | (1.22  | )    |   | $       | (1.76  | ) |   | $        | (2.70  | )
|                                                                                                  |                                                |   |                                          |        |                   |   |         |        |      |   |         |        |   |   |          |       

(1) Number of shares recalculated to include initial public offering shares.

Stock-Based Compensation

Crown Media Holdings accounts for stock-based awards to employees using
the intrinsic value method in accordance with APB Opinion No. 25, Accounting
For Stock Issued to Employees.

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 financial instruments with off-balance sheet 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



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companies and partnerships are recorded at fair value 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.

Recently Issued Accounting Pronouncements

In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities was issued. This statement was subsequently amended by SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities 
Deferral of the Effective Date of FASB Statement No. 133, which changed the
effective date to fiscal years beginning after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. Crown Media Holdings has not used derivative instruments
nor does it engage in hedging activities except for a derivative contract
assumed in connection with the purchase of film assets as described in Note 9.

In September 2000, FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities  a
Replacement of SFAS No. 125. SFAS No. 140 revises the criteria for accounting
for securitizations and other transfers of financial assets and collateral. In
addition, SFAS No. 140 requires certain additional disclosures. Except for the
new disclosure provisions, which were effective for the year ended December 31,
2000, SFAS No. 140 is effective for the transfer of financial assets occurring
after March 31, 2001. The adoption of SFAS No. 140 did not have a material
effect on Crown Media Holdings financial statements.

In third quarter 2001, Crown Media Holdings adopted Statement of Position
00-2, Accounting by Producers and Distributors of Films (SOP 00-2). SOP
00-2 established new film accounting standards, including changes in revenue
recognition and accounting for advertising, development and overhead costs.
Specifically, SOP 00-2 requires advertising costs for theatrical and television
product to be expensed as incurred. In addition, SOP 00-2 requires development
costs for abandoned projects and certain indirect overhead costs to be charged
directly to expense, instead of those costs being capitalized to film costs,
which was required under the previous accounting model. SOP 00-2 also requires
all film costs to be classified in the balance sheet as noncurrent assets.
Crown Media Holdings adopted this accounting policy on September 28, 2001, in
conjunction with the purchase of the film assets.

In April 2001, the FASBs EITF reached a final consensus EITF Issue No.
00-25, Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendors Products (EITF 00-25). EITF 00-25 will be effective
for Crown Media Holdings in the first quarter of 2002. EITF 00-25 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. While Crown Media Holdings is in the process of
evaluating the overall impact of EITF 00-25 on its consolidated financial
statements, it is not expected that EITF 00-25 will have a significant impact
on Crown Media Holdings consolidated financial statements.

EITF Issue Nos. 00-22, Accounting for Points and Certain Other
Time-Based or Volume-Based Sales and Incentive Offers, and Offers for Free
Products or Services to be Delivered in the Future and 01-9, Accounting for
Consideration Given by a Vendor to a Customer or a Reseller of the Vendors
Products become effective for Crown Media Holdings beginning in the first
quarter of 2002. These issues address the appropriate accounting for certain
vendor contracts and loyalty programs. Crown Media Holdings continues to assess
the effect these new standards will have on the financial statements. Crown
Media Holdings expects the adoption of these standards will not have a material
effect on our financial statements.

In July 2001, the FASB issued Statements of Financial Accounting Standards
No. 141, Business Combinations (FAS 141) and No. 142, Goodwill and Other
Intangible Assets (FAS 142). These standards change the accounting for
business combinations by, among other things, prohibiting the prospective use
of pooling-of-interests accounting and requiring 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 will be subject to an annual review for impairment. The new standards
generally will be effective for Crown Media Holdings in the first quarter of
2002 and for purchase business combinations consummated after June 30, 2001.
Crown Media Holdings is in the process of quantifying the anticipated impact of
adopting the provisions of FAS 142, which is expected to be significant.



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Upon adoption, Crown Media Holdings will stop amortizing goodwill,
including goodwill included in the carrying value of certain investments
accounted for under the equity method of accounting. Based on the current
levels of goodwill, this would reduce annual goodwill amortization expense by
approximately $22.0 million. The impact of stopping the amortization of
goodwill would decrease Crown Media Holdings annual pretax net loss by
approximately $22.0 million, although any future impairments would result in a
write-down in the period such impairment becomes evident.

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

The asset portion of program license fees is comprised of the following:

|                                                           |                               |   |                    |         |                     |   |         |         | 
|---------------------------------------------------------- | ----------------------------- | - | ------------------ | ------- | ------------------- | - | ------- | ------- | 
|                                                           |                               |   | As of December 31, |         | As of September 30,
|                                                           |                               |   | 2000               |         | 2001               
|                                                           |                               |   |                    |         |                    
|                                                           |                               |   | (In thousands)    
|Program license fees  Hallmark Entertainment Distribution |                               | $ | 107,028            |         |                     | $ | 106,282 |        
|Program license fees  NICC                                |                               |   |                   |         |                     |   | 5,306   |        
|Program license fees  other affiliates                    |                               |   | 10,622             |         |                     |   | 13,985  |        
|Program license fees  non-affiliates                      |                               |   | 73,994             |         |                     |   | 93,850  |        
|Prepaid program license fees                               |                               |   | 6,870              |         |                     |   | 6,922   |        
|                                                           |                               |   |                    |         |                     |   |         |        
|                                                           | Program license fees, at cost |   |                    | 198,514 |                     |   |         | 226,345 | 
|Accumulated amortization                                   |                               |   | (38,109            | )       |                     |   | (91,977 | )      
|                                                           |                               |   |                    |         |                     |   |         |        
|                                                           | Program license fees, net     |   | $                  | 160,405 |                     |   | $       | 134,368 | 
|                                                           |                               |   |                    |         |                     |   |         |        

License fees payable are comprised of the following:

|                                                           |                      |   |                    |         |                     |   |         |         | 
|---------------------------------------------------------- | -------------------- | - | ------------------ | ------- | ------------------- | - | ------- | ------- | 
|                                                           |                      |   | As of December 31, |         | As of September 30,
|                                                           |                      |   | 2000               |         | 2001               
|                                                           |                      |   |                    |         |                    
|                                                           |                      |   | (In thousands)    
|License fees payable  Hallmark Entertainment Distribution |                      | $ | 109,859            |         |                     | $ | 127,600 |        
|License fees payable  NICC                                |                      |   |                   |         |                     |   | 1,324   |        
|License fees payable  other affiliates                    |                      |   | 21                 |         |                     |   | 368     |        
|License fees payable  non-affiliates                      |                      |   | 49,290             |         |                     |   | 47,627  |        
|                                                           |                      |   |                    |         |                     |   |         |        
|                                                           | License fees payable |   | $                  | 159,170 |                     |   | $       | 176,919 | 
|                                                           |                      |   |                    |         |                     |   |         |        

Program license fees of $15.1 million and license fees payable of $19.7
million to Hallmark Entertainment Distribution were eliminated due to the
acquisition of film assets from Hallmark Entertainment Distribution on
September 28, 2001. Additionally, program license fees and license fees payable
to The Jim Henson Company, a previously significant investor, were reclassified
as non-affiliates due to Hallmark Entertainments purchase of The Jim Henson
Companys interests in Crown Media Holdings on July 27, 2001.

Crown Media United States licensed programming for distribution in the
United States from The Jim Henson Company under a program license agreement,
dated November 13, 1998. Under this program agreement, Crown Media United
States generally licensed made-for-television movies and miniseries owned or
controlled by The Jim Henson Company, as well as all programming produced by or
on behalf of The Jim Henson Company for Crown Media United States. Crown Media
United States substantially revised its two program agreements with The Jim
Henson Company and EM.TV on July 27, 2001, under which Crown Media United
States was obligated to purchase both pre-existing and original programming.
The revisions replace all prior obligations. Crown Media United States will now
license only one series from the EM.TV library and two new series from The Jim
Henson Company. For



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revisions of the agreements, Crown Media United States paid to The Jim
Henson Company and EM.TV $13.0 million. Additionally, Crown Media United States
and Crown Media International wrote-off $15.2 million of program license fees.
The entire $28.2 million is included in non-affiliate programming costs in the
accompanying consolidated statements of operations and comprehensive loss for
the three and nine months ended September 30, 2001.

4. Property and Equipment

Property and equipment are comprised of the following:

|                                          |                                 |   |                    |        |                     |   |         |        | 
|----------------------------------------- | ------------------------------- | - | ------------------ | ------ | ------------------- | - | ------- | ------ | 
|                                          |                                 |   | As of December 31, |        | As of September 30,
|                                          |                                 |   | 2000               |        | 2001               
|                                          |                                 |   |                    |        |                    
|                                          |                                 |   | (In thousands)    
|Technical equipment and computers         |                                 | $ | 19,702             |        |                     | $ | 38,126  |       
|Transponder                               |                                 |   |                   |        |                     |   | 13,252  |       
|Leasehold improvements                    |                                 |   | 2,485              |        |                     |   | 8,164   |       
|Furniture, fixtures and equipment         |                                 |   | 1,765              |        |                     |   | 2,005   |       
|Construction-in-progress                  |                                 |   | 15,109             |        |                     |   | 208     |       
|                                          |                                 |   |                    |        |                     |   |         |       
|                                          | Property and equipment, at cost |   |                    | 39,061 |                     |   |         | 61,755 | 
|Accumulated depreciation and amortization |                                 |   | (7,994             | )      |                     |   | (15,717 | )     
|                                          |                                 |   |                    |        |                     |   |         |       
|                                          | Property and equipment, net     |   | $                  | 31,067 |                     |   | $       | 46,038 | 
|                                          |                                 |   |                    |        |                     |   |         |       

Construction-in-progress as of December 31, 2000 consisted primarily of
costs incurred for an advanced global Network Operations Center at our
Greenwood Village, Colorado, headquarters, which 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 2001 in conjunction with the launch of our
Network Operations Center. Depreciation and amortization expense totaled $1.4
million and $3.1 million, respectively, for the three months ended September
30, 2000 and 2001, and $3.8 million and $9.2 million, respectively, for the
nine months ended September 30, 2000 and 2001.

5. Investments in and Advances to Unconsolidated Entities

Investment in H&H Programming  Asia

In May 1998, Crown Media International formed H&H Programming  Asia, a
New York limited liability company, with The Jim Henson Company, a New York
corporation, for the purpose of developing, owning and operating a pay
television channel called The Kermit Channel in Latin America and Asia. In
October 2000, we ceased operating The Kermit Channel in Asia, and in lieu of a
separate channel, we introduced a nine-hour programming block dedicated to the
childrens market on the Hallmark Channel in our Asian feed. As of January 1,
2001, we ceased operating The Kermit Channel in India and introduced a block of
childrens programming on the Hallmark Channel in India.

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 (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 approximately $1.0 million and $3.3 million for
the three and nine months ended September 30, 2000, and $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 are being amortized over 10 years.

Crown Media Holdings provided services to H&H Programming  Asia in
exchange for a management fee as provided in an agreement between Crown Media
International and H&H Programming  Asia. This fee, which was approximately
$1.0 million and $2.2 million, respectively, for the three and nine months
ended September 30, 2000,



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included direct and indirect costs incurred on behalf of H&H Programming 
Asia, as provided by the agreements. No fees were recorded for the three and
nine months ended September 30, 2001.

Crown Media International made capital contributions, through cash
advances and/or conversion of receivables in H&H Programming  Asia, of $2.5
million during 2000. For the two and one half months ended March 15, 2001,
Crown Media International made contributions of $707,000, which was recorded
net of cash acquired from the acquisition of the remaining 50% interest in H&H
Programming  Asia.

Investment in Crown Media United States

In November 1998, Crown Media International entered into an agreement with
NICC to acquire a 22.5% common equity interest in Crown Media United States.
Crown Media United States (then known as Odyssey Holdings, LLC) has been formed
to develop, own and operate the Odyssey Channel (which has now been renamed the
Hallmark Channel). The purchase price for Crown Media Internationals interest
in Crown Media United States was $50.0 million. Pursuant to the terms of the
agreement, Crown Media International paid $20.0 million of this purchase price
in November 1998, an additional $20.0 million in May 1999 and the final payment
of $10.0 million in February 2000.

Crown Media International funded its 1998 capital contribution to Crown
Media United States with the proceeds of additional investments of $17.8
million and $2.2 million in Crown Media International by its stockholders,
Hallmark Entertainment and J.P. Morgan, respectively. Hallmark Entertainment
and J.P. Morgan were issued 44.444 shares of predecessor Class A common stock
and 5.555 shares of predecessor Class B common stock, respectively, related to
the additional funding. In May 1999, Hallmark Entertainment and J.P. Morgan
provided Crown Media International with additional funding of $17.8 million and
$2.2 million, respectively, to fund Crown Media Internationals additional
capital contribution to Crown Media United States. In connection with this
funding, Crown Media International issued 44.444 shares of predecessor Class A
common stock to Hallmark Entertainment and 5.555 shares of predecessor Class B
common stock to J.P. Morgan. The predecessor Class B shares issued in
connection with this funding provided by J.P. Morgan were subject to a put and
call arrangement.

In connection with the November 1998 investments by Crown Media
International and The Jim Henson Company, VISN Management Corp. (a subsidiary
of NICC) received a redeemable preferred interest of $25.0 million, which ranks
senior to the common equity interests of Crown Media United States. Crown Media
United States has the right to redeem the preferred interest in whole (but not
in part) for cash at 100% of the Preferred Liquidation Preference, as defined
by the agreement. This amount is classified as preferred minority interest in
the accompanying consolidated balance sheets. If during any fiscal
year ending after January 1, 2005, and on or prior to December 31, 2009, Crown Media
United States has net profits in excess of $10.0 million and the preferred
interest has not been redeemed, Crown Media United States will redeem the
preferred interest in an amount equal to the lesser of such excess, or $5.0
million, or the Preferred Liquidation Preference. Crown Media United States is
required to redeem the entire preferred interest at the Preferred Liquidation
Preference on the redemption date of December 31, 2010.

Crown Media International funded its February 2000 capital contribution to
Crown Media United States with the proceeds of additional investments of $8.9
million and $1.1 million in Crown Media International by its stockholders,
Hallmark Entertainment and JP Morgan, respectively. Hallmark Entertainment and
J.P. Morgan were issued 22.222 shares of predecessor Class A common stock and
2.7775 shares of predecessor Class B common stock, respectively, related to the
additional funding.

Crown Media Holdings investment in Crown Media United States was
reflected in the consolidated financial statements using the equity method of
accounting until May 9, 2000, the date of the reorganization (see note 1), at
which time it became a consolidated subsidiary. This amount is included in the
consolidated statements of operations as a component of equity in net losses of
unconsolidated entities. Crown Media Holdings investment in Crown Media United
States, through the date of the reorganization, exceeded the underlying equity
in the net assets of Crown Media United States as of the date of the
investment. This goodwill is being amortized over 20 years.

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.



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6. Acquisition and Summarized Financial Information of Crown Media United
States and H&H Programming  Asia

The following unaudited pro forma consolidated statements of operations
for the three and nine months ended September 30, 2000 and 2001, have been
derived from the unaudited financial statements of Crown Media Holdings and its
subsidiaries. This unaudited pro forma financial information is qualified in
its entirety by reference to, and should be read in conjunction with, our
unaudited financial statements contained in this Form 10-Q and related notes
thereto for the three and nine months ended September 30, 2000 and 2001, as
well as our historical consolidated financial statements and related notes
thereto contained in our Annual Report on Form 10-K for the year ended December
31, 2000.

The unaudited pro forma financial information stated below presents a
summary of consolidated results of operations of Crown Media Holdings, Crown
Media International, Crown Media United States, Crown Entertainment and H&H
Programming  Asia, as if each of these acquisitions listed above had occurred
on January 1 of the periods presented, along with certain pro forma adjustments
to give effect to the amortization of goodwill and other intangibles and other
adjustments. Crown Media Distribution's operations are only reflected
since September 28,
2001, in conjunction with the purchase of our film assets. The unaudited pro
forma financial information is not necessarily indicative of the results of
operations had the transactions been effected on the assumed dates.

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

|                                                                  |                               |                |                              |        |                    |         |                   |        |        |         |        |        |        |          |        |        |        |          |  
|----------------------------------------------------------------- | ----------------------------- | -------------- | ---------------------------- | ------ | ------------------ | ------- | ----------------- | ------ | ------ | ------- | ------ | ------ | ------ | -------- | ------ | ------ | ------ | -------- | -
|                                                                  |                               |                |                              |        | Three Months Ended |         | Nine Months Ended
|                                                                  |                               |                |                              |        | September 30,      |         | September 30,    
|                                                                  |                               |                |                              |        |                    |         |                  
|                                                                  |                               |                |                              |        | 2000               |         | 2001              |        | 2000   |         | 2001  
|                                                                  |                               |                |                              |        |                    |         |                   |        |        |         |       
|                                                                  |                               |                |                              |        | (Unaudited)       
|Revenues:                                                         |                               |                |                              |        |                    |         |                   |        |        |         |        |        |        |          |        |       
|                                                                  | Subscriber fees               |                | $                            | 14,345 |                    |         | $                 | 17,139 |        |         | $      | 37,065 |        |          | $      | 49,813 |       
|                                                                  | Advertising                   |                |                              | 3,578  |                    |         |                   | 4,733  |        |         |        | 9,430  |        |          |        | 18,457 |       
|                                                                  | Advertising by Hallmark Cards |                |                              | 681    |                    |         |                   | 4,221  |        |         |        | 1,023  |        |          |        | 6,931  |       
|                                                                  | Other                         |                |                              | 666    |                    |         |                   | 242    |        |         |        | 1,153  |        |          |        | 739    |       
|                                                                  |                               |                |                              |        |                    |         |                   |        |        |         |        |        |        |          |        |       
|                                                                  |                               |                | Total revenues               |        |                    | 19,270  |                   |        |        | 26,335  |        |        |        | 48,671   |        |        |        | 75,940   |  
|Cost of Services:                                                 |                               |                |                              |        |                    |         |                   |        |        |         |        |        |        |          |        |       
|                                                                  | Programming costs:            |                |                              |        |                    |         |                   |        |        |         |        |        |        |          |        |        |       
|                                                                  |                               | Affiliates     |                              |        | 12,514             |         |                   |        | 16,387 |         |        |        | 23,769 |          |        |        | 44,657 |         
|                                                                  |                               | Non-affiliates |                              |        | 4,724              |         |                   |        | 36,236 |         |        |        | 20,730 |          |        |        | 51,759 |         
|                                                                  | Operating costs               |                |                              | 15,025 |                    |         |                   | 19,378 |        |         |        | 38,869 |        |          |        | 47,660 |       
|                                                                  |                               |                |                              |        |                    |         |                   |        |        |         |        |        |        |          |        |       
|                                                                  |                               |                | Total cost of services       |        |                    | 32,263  |                   |        |        | 72,001  |        |        |        | 83,368   |        |        |        | 144,076  |  
|Selling, general and administrative expenses                      |                               |                | 14,561                       |        |                    |         | 18,270            |        |        |         | 49,670 |        |        |          | 59,678 |       
|Marketing expenses                                                |                               |                | 4,643                        |        |                    |         | 10,773            |        |        |         | 13,257 |        |        |          | 27,599 |       
|Amortization of goodwill and other intangibles                    |                               |                | 5,524                        |        |                    |         | 5,524             |        |        |         | 16,462 |        |        |          | 16,462 |       
|                                                                  |                               |                |                              |        |                    |         |                   |        |        |         |        |        |        |          |        |       
|                                                                  |                               |                | Loss from operations         |        |                    | (37,721 | )                 |        |        | (80,233 | )      |        |        | (114,086 | )      |        |        | (171,875 | )
|Interest income (expense), net                                    |                               |                | 519                          |        |                    |         | (2,322            | )      |        |         | 477    |        |        |          | (4,788 | )     
|                                                                  |                               |                |                              |        |                    |         |                   |        |        |         |        |        |        |          |        |       
|                                                                  |                               |                | Net loss before income taxes |        |                    | (37,202 | )                 |        |        | (82,555 | )      |        |        | (113,609 | )      |        |        | (176,663 | )
|Income tax provision                                              |                               |                | (468                         | )      |                    |         | (397              | )      |        |         | (1,020 | )      |        |          | (1,403 | )     
|                                                                  |                               |                |                              |        |                    |         |                   |        |        |         |        |        |        |          |        |       
|                                                                  |                               |                | Net loss                     |        | $                  | (37,670 | )                 |        | $      | (82,952 | )      |        | $      | (114,629 | )      |        | $      | (178,066 | )
|                                                                  |                               |                |                              |        |                    |         |                   |        |        |         |        |        |        |          |        |       
|Weighted average number of Class A and Class B shares outstanding |                               |                | 65,377                       |        |                    |         | 68,115            |        |        |         | 65,377 |        |        |          | 66,324 |       
|                                                                  |                               |                |                              |        |                    |         |                   |        |        |         |        |        |        |          |        |       
|                                                                  |                               |                | Net loss per share           |        | $                  | (0.58   | )                 |        | $      | 1.22    |        |        | $      | (1.75    | )      |        | $      | (2.68    | )
|                                                                  |                               |                |                              |        |                    |         |                   |        |        |         |        |        |        |          |        |       



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7. Capital Lease

Crown Media International leases a combined uplink and transponder space
segment under a long-term lease agreement. In accordance with SFAS No. 13,
Accounting for Leases, the lease was capitalized. Future minimum lease
payments under the agreement at September 30, 2001 are as follows:

|                                            |                              |   |                          |        | 
|------------------------------------------- | ---------------------------- | - | ------------------------ | ------ | 
|                                            |                              |   | As of September 30, 2001
|                                            |                              |   |                         
|                                            |                              |   | (in thousands)          
|2001                                        |                              | $ | 575                      |       
|2002                                        |                              |   | 2,300                    |       
|2003                                        |                              |   | 2,300                    |       
|2004                                        |                              |   | 2,300                    |       
|2005                                        |                              |   | 2,300                    |       
|Thereafter                                  |                              |   | 6,900                    |       
|                                            |                              |   |                          |       
|                                            | Total minimum lease payments |   |                          | 16,675 | 
|Less amount representing interest           |                              |   | (4,322                   | )     
|                                            |                              |   |                          |       
|Present value of net minimum lease payments |                              |   | 12,353                   |       
|Less current maturities                     |                              |   | (1,290                   | )     
|                                            |                              |   |                          |       
|Long-term obligation                        |                              | $ | 11,063                   |       
|                                            |                              |   |                          |       

8. Predecessor Class B Common Stock Subject to Put and Call

On May 28, 1998, Crown Media International obtained financing through the
sale and issuance of 125 shares of predecessor Class B Common Stock to J.P.
Morgan. The 125 shares of nonvoting predecessor Class B common stock,
comprising 100% of the total predecessor Class B common stock issued and
outstanding and representing an 11.11% equity interest in Crown Media
International, were sold to J.P. Morgan for $50.0 million. Prior to the
transaction, Hallmark Entertainment was the sole stockholder of Crown Media
International, and Hallmark Entertainment continued to hold 1,088.9 shares of
the total outstanding predecessor Class A common stock, representing an 88.89%
equity interest in Crown Media International.

J.P. Morgan had the option to put its predecessor Class B common stock to
Crown Media International within 120 days after December 31, 2001, at the then
fair market value of the shares or at a price to provide J.P. Morgan with a
defined rate of return. J.P. Morgan was able to also put the shares at any time
upon the occurrence of certain triggering events, as defined by the Securities
Purchase Agreement. At May 9, 2000, $1.5 million had been cumulatively accreted
related to this put.

Pursuant to the terms of the Securities Purchase Agreement, Crown Media
International had the right to call the securities held by J.P. Morgan at the
then fair market value. The put and call options expired upon the completion of
the initial public offering on May 9, 2000.

9. Related Party Transactions

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 International. These transactions
are recorded in the books and records of Crown Media International. For the
three and nine months ended September 30, 2000 and 2001, respectively, no
amounts were paid to Hallmark Entertainment. Unreimbursed costs of $5.4 million
and $1.5 million are included in the item payable to affiliates in the
accompanying consolidated balance sheets as of December 31, 2000, and September
30, 2001, respectively.



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Program License Agreement with Hallmark Entertainment Distribution

The primary supplier of programming to Crown Media Holdings has been
Hallmark Entertainment Distribution. Crown Media International has a program
agreement with Hallmark Entertainment Distribution through December 31, 2005,
which is renewable through December 31, 2010, which was amended and restated as
part of our Purchase and Sale Agreement. 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 and interest of 35% or more
of Crown Media Holdings. In the event that Hallmark Entertainment Distribution
ceases to own a 35% interest of Crown Media Holdings, the remaining term of the
applicable program agreement will be extended to two years from the date its
ownership reaches that level.

Programming costs related to the Hallmark program agreements were $7.5
million and $13.5 million for the three months ended September 30, 2000 and
2001, respectively, $15.5 million and $36.4 million, respectively, for the nine
months ended September 30, 2000 and 2001, respectively. As of December 31,
2000, and September 30, 2001, $109.9 million and $127.6 million, respectively,
are included in license fees payable to affiliates in the accompanying
consolidated balance sheets. We did not pay Hallmark Entertainment Distribution
in accordance with terms of our agreements through September 30, 2001, pursuant
to a waiver granted to us by Hallmark Entertainment Distribution.

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. For the year ended December 31, 2000, and the
nine months ended September 30, 2001, Crown Media Holdings has accrued $500,000
and $375,000, respectively, under the agreement. At both December 31, 2000, and
September 30, 2001, unpaid accrued service fees of $1.6 million and $2.5
million, respectively, were included in payable to affiliates in the
accompanying consolidated balance sheets.

Services Agreement with Hallmark Entertainment

Hallmark Entertainment provides Crown Media Holdings with services related
to the administration, distribution and other exploitation of our film assets.
This service agreement has a term of three years, 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 will pay a service fee of $1.5 million per year, paid in
quarterly installments of $375,000.

Demand Notes

From November 1999 through July 2001, Crown Media Holdings entered into a
series of agreements with HC Crown, under which HC Crown agreed to lend Crown
Media Holdings up to $90.0 million. Amounts borrowed under this agreement bear
interest at 7.96% and 4.97% as of December 31, 2000, and September 30, 2001,
respectively (130% of the Applicable Federal Rate as set forth in the Internal
Revenue Code), with the interest compounding on an annual basis. Amounts
outstanding are due on demand. At December 31, 2000, and September
30, 2001, principal borrowings under the note were approximately $36.8
million and $70.0 million, respectively,



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excluding accrued interest of $749,000 and $709,000.

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. Crown Media Holdings terminated this agreement on September 28, 2001.
HC Crowns obligation to make loans under this agreement was supported by an
irrevocable letter of credit from Bank of America, which was terminated by
Crown Media Holdings on September 28, 2001. The line of credit bore an interest
rate equal to the London Interbank Offered Rate published on the first day of
each quarter in The Wall Street Journal, plus 1.2% to 2.2% depending on the
ratio of Crown Media Holdings total debt to EBITDA. The interest rate
increased by 0.25% if the note has not been fully repaid by September 1, 2001
and by 0.5% if the note has not been paid by December 31, 2001. Interest was
payable quarterly, and the principal amount with any accrued interest was due
April 1, 2002. The line of credit contained a covenant regarding financial
information and limitations on additional indebtedness in excess of $10.0
million, liens for amounts in excess of $5.0 million, sales or other
disposition of assets other than in the ordinary course of business and a
merger or consolidation with a third party. The covenants also provided that
Crown Media Holdings was to obtain minimum quarterly levels of subscribers,
revenues and EBITDA. Crown Media Holdings believes it is in compliance at
September 30, 2001.

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 The Chase Manhattan Bank, under which the banks have extended to Crown
Media Holdings a five-year $285.0 million secured credit facility. At September
30, 2001, $209.6 million was included in Chase Manhattan credit facility on the
accompanying balance sheet. The 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 have been used to pay $120.0 million of debt assumed as part of
the consideration for acquiring the film assets and to repay $84.2 million
outstanding under a $150.0 million line of credit provided by H C Crown. The
remaining balance of the credit facility is available to Crown Media Holdings
for general working capital purposes. The Chase Manhattan Bank and J.P.
Morgan, a significant stockholder of Crown Media Holdings, are both affiliates
of J.P. Morgan Chase & Co.

Upon repayment of the outstanding borrowings under the Crown Media
Holdings existing $150.0 million line of credit, H C Crown has also provided a
new $150.0 million line of credit to Crown Media Holdings, with a final
maturity no later than February 28, 2007. This line of credit is subordinate to
the bank facility, and its availability will be reduced dollar for dollar in an
amount equal to Net Cash Proceeds raised by Crown Media Holdings. Crown Media
Holdings will pay interest on any borrowings under the line of credit at a rate
equal to LIBOR plus three percent, or, after December 31, 2002, three and
one-half percent, payable quarterly. H C Crowns obligation to make loans under
this line of credit is supported by a letter of credit issued by Credit Suisse
First Boston.

The bank credit facility encompasses a term loan of $100.0 million and a
revolving line of credit of $185.0 million, up to $20.0 million of letters of
credit issued at the request of Crown Media Holdings. 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 film assets, 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.

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 The Chase
Manhattan 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. The affirmative covenants include: Crown Media Holdings furnishing
financial reports to the lenders; and Crown Media Holdings observing in all
material respects all material agreements with respect to the distribution or
exploitation of film assets. Negative



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covenants include: Limitations on indebtedness, liens, investments, Restricted
Payments, capital expenditures, changes in business activities of Crown Media
Holdings, and other matters; not amending the promissory note with H C Crown,
the related letter of credit issued for the benefit of Crown Media Holdings or
certain other material agreements of Crown Media Holdings; a requirement that
EBITDA not be less than specified amounts for each quarter through December 31,
2003 and specified amounts for each fiscal year, starting December 31, 2004,
which include -$86.0 million and -$56.0 million for the quarters ended
September 30, 2001 and December 31, 2001; maintaining net worth of not less
than amounts specified in the credit facility including $646.0 million at
September 30, 2001 and $592.0 million at December 31, 2001; not permitting the
Leverage Ratio (that is, the ratio of aggregate principal amount of
indebtedness at the date of determination excluding any preferred stock and
non-interest bearing obligations to EBITDA for the 12-month period ending on
the date of determination) to exceed maximum leverage ratios from December 31,
2004 through June 30, 2006; and not permitting the Interest Coverage Ratio (the
ratio of EBITDA to interest expense) at any time during the twelve-month
periods ending at the end of each calendar quarter commencing December 31, 2004
to be less than specified ratios.

Restricted Payments include any distribution of equity of Crown Media
Holdings, any redemption or other acquisition of equity of Crown Media
Holdings, any payment on debt of Crown Media Holdings which is subordinated to
the bank loans, any reduction of the H C Crown line of credit for Crown Media
Holdings, any payment on certain obligations assumed by Crown Media Holdings
under the purchase agreement for the film assets and any other payment to
Hallmark Cards, HEI or any of their affiliates. The bank credit agreement
permits Crown Media Holdings to use Net Cash Proceeds for the following
Restricted Payments: (a) to repay the H C Crown line of credit; (b) to reduce
the funding commitment under the H C Crown line of credit (by use of the
proceeds to fund general working capital requirements); (c) to repay other
indebtedness to H C Crown or Hallmark Cards up to $30.0 million if the H C
Crown line of credit has been repaid and terminated and (d) with the consent of
the bank lenders, to reimburse Hallmark Entertainment or Hallmark Cards for
payments which they make on the $100.0 million of liabilities of Hallmark
Entertainment Distribution assumed by Crown Media Holdings under the purchase
agreement for the film assets. Net Cash Proceeds are the cash payments
received by Crown Media Holdings or its subsidiaries for the issuance of any
debt or equity, net of any commissions, other reasonable fees and expenses and
any reasonably estimated income taxes as a consequence of any repatriation of
such cash payments. The bank credit agreement also permits, among other things,
payments by Crown Media Holdings to Hallmark Entertainment Distribution under
program license agreements and to Hallmark Entertainment, Hallmark Cards or
their affiliates under the terms of service agreements up to certain dollar
amounts.

Events of default under the bank credit agreement include: The failure to
pay principal or interest, with the default continuing unremedied for five days
after receipt of an invoice; a failure to observe covenants; a change in
control; a change in management; or a termination by Hallmark Cards or any of
its affiliates of the right of Crown Media Holdings or its subsidiaries to use
the names Hallmark or Crown in their television services or any channels
owned or operated by them. For purposes of the credit facility, a change in
control means that (a) Hallmark Cards ceases to own directly or indirectly at
least 80% of the equity interest of Hallmark Entertainment or (b) Hallmark
Entertainment ceases to have sufficient voting power to elect a majority of
Crown Media Holdings board of directors or beneficial ownership of over a
majority of the outstanding equity interest of Crown Media Holdings having
voting power. A change in management means Robert Halmi, Jr. ceases for any
reason to perform his functions and serve as chairman of Crown Media Holdings
and Crown Media Holdings fails for a period of 90 consecutive days to propose a
replacement acceptable to the lenders in their discretion.

Hallmark Cards and Hallmark Entertainment also entered into certain
agreements in order to induce the banks to enter into the 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) the H C Crown line of credit for Crown Media Holdings, 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 Restricted Payments permitted by the bank credit agreement. In the
subordination and support agreement, Hallmark Cards also agrees to cause H C
Crown to advance up to $150.0 million under the H C Crown line of credit to
Crown Media Holdings (less the amount of any reduction on the H C Crown line of
credit because of the application of Net Cash Proceeds 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 has borrowed the full



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amount then available under the bank credit agreement. Further, Hallmark Cards
agrees that the H C Crown line of credit will not be declared due and payable
if any obligations to the banks remain outstanding.

Under a limited guarantee agreement and acknowledgement dated August 31,
2001, with the banks, Hallmark Cards guarantees up to a maximum amount Crown
Media Holdings performance of obligations under the bank credit agreement when
due. The maximum amount is $150.0 million, less the aggregate principal amount
outstanding under the H C Crown line of credit and less Net Cash Proceeds used
to make payments on the H C Crown line of credit as permitted by the bank
credit agreement.

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 film
assets (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.

The above summary descriptions of agreements involving Crown Media
Holdings are qualified in their entirety by reference to the agreements to
which each summary description relates, each of which agreements has been filed
with the Securities and Exchange Commission.

Class B Common Stock

Hallmark Entertainment controls all of our outstanding shares of Class B
common stock, representing approximately 90% of the voting power on all matters
submitted to our 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, who receive one vote per share
of Class A common stock. With the exception of the voting and conversion
rights, share of Class A common stock and shares of Class B common stock are
identical.

Purchase of Film Assets

In accordance with our Purchase and Sale Agreement with Hallmark
Entertainment Distribution, Hallmark Entertainment Distribution has 60 days
from the close of the transaction to provide us with detailed information and
any necessary adjustments related to the transaction. Certain items may be
reclassified from account groups upon receipt of the necessary information. We
are treating the transaction as a reorganization of assets under common
control. Assets and liabilities will be recorded at historical cost in
accordance with accounting standards generally accepted in the United States.
The film assets will be tested for impairment at year-end in accordance with
the covenants of our bank credit facility and FASB No. 142.

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.



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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, nine 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 and Other Fees Agreement

On August 27, 2001, we issued 5,360,202 shares of our Class A common stock
worth $80.1 million as consideration for entering into a distribution agreement
for carriage of the Hallmark Channel. At September 30, 2001, remaining
unamortized subscriber acquisition and other fees of $78.7 million were
included in the accompanying consolidated balance sheets.

10. Income Taxes

Crown Media Holdings accounts for income taxes using the liability method.
Under this method, Crown Media Holdings recognizes deferred tax assets and
liabilities for future tax consequences attributable to the difference between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.

Since its inception and through May 9, 2000, Crown Media Holdings and its
predecessor were included in the consolidated federal income tax return of
Hallmark Cards (Hallmark). Crown Media Holdings and its predecessor were also
included in combined state income tax returns of Hallmark or Hallmark
Entertainment. Crown Media Holdings and its predecessor did not have a tax
sharing agreement with Hallmark or Hallmark Entertainment. Hallmark has used
all federal tax losses and foreign tax credits relating to Crown Media Holdings
and its predecessor. Hallmark and Hallmark Entertainment have used state tax
losses relating to Crown Media Holdings and its predecessor in combined state
income tax returns. Hallmark and Hallmark Entertainment will not reimburse
Crown Media Holdings for the use of such tax benefits.

Effective May 10, 2000, Crown Media Holdings is no longer included in the
consolidated federal income tax return of Hallmark. Crown Media Holdings may be
included in certain combined state income tax returns of Hallmark or Hallmark
Entertainment. Consequently, Hallmark Entertainment and Crown Media Holdings
entered into a tax sharing agreement. Under the tax sharing agreement, where
Hallmark Entertainment and Crown Media Holdings do file consolidated, combined
or unitary tax returns, Crown Media Holdings will make tax sharing payments to
(or receive payments from) Hallmark Entertainment equal to the taxes (or tax
refunds) that Crown Media Holdings would have paid (or received) if it filed on
a stand-alone basis. Such payments will be computed based on Crown Media
Holdings income (loss) and other tax items beginning the day following the May
9, 2000 reorganization.

Prior to the purchase of film assets on September 28, 2001, Crown Media
Holdings has not recorded a tax benefit for federal or state tax losses. Crown
Media Holdings has recorded a tax provision related to foreign taxes. Crown
Media Holdings has established a deferred tax asset, consisting primarily of
the tax effect of net operating losses generated after May 9, 2000, and a
deferred tax liability as required for certain temporary differences. Through
the date of the purchase of the film assets, Crown Media Holdings had provided
a full valuation allowance on the net deferred tax asset because of uncertainty
regarding its realizability.



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On September 28, 2001, Crown Media Holdings completed the purchase of film
assets from Hallmark Entertainment Distribution, a wholly owned subsidiary of
Hallmark Entertainment. The recorded book value of the film assets of
approximately $812.4 million exceeds the tax basis by $251.6 million. The
difference between the cost for financial reporting purposes and tax purposes
is a temporary difference under the liability method. Crown Media Holdings
recorded a deferred tax liability of approximately $100.6 million related to
this difference.

The deferred tax liability related to the film assets is expected to
reverse within 10 years, which is prior to the expiration of Crown Media
Holdings net tax operating losses. Therefore, Crown Media Holdings no longer
requires a valuation allowance for any of its deferred taxes, and, as part of
the film assets transaction, has reduced its valuation allowance by $95.3 million. This amount includes the
release of $7.9 million related to the valuation allowance provided on state
tax net operating losses during the first nine months of 2001. These changes in
the valuation allowance did not affect the provision for income taxes.

The income tax provision is comprised of the following:

|          |                 |                |   |                    |     |                   |   |      |     |      |   |       |       |  |   |       |       | 
|--------- | --------------- | -------------- | - | ------------------ | --- | ----------------- | - | ---- | --- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|          |                 |                |   | Three Months Ended |     | Nine Months Ended
|          |                 |                |   | September 30,      |     | September 30,    
|          |                 |                |   |                    |     |                  
|          |                 |                |   | 2000               |     | 2001              |   | 2000 |     | 2001
|          |                 |                |   |                    |     |                   |   |      |     |     
|          |                 |                |   | (In thousands)    
|Current:  |                 |                |   |                    |     |                   |   |      |     |      |   |       |       |  |   |      
|          | Federal         |                | $ |                   |     |                   | $ |     |     |      | $ |      |       |  | $ |      |      
|          | Foreign         |                |   | 468                |     |                   |   | 397  |     |      |   | 1,020 |       |  |   | 1,403 |      
|          | State and local |                |   |                   |     |                   |   |     |     |      |   |      |       |  |   |      |      
|          |                 |                |   |                    |     |                   |   |      |     |      |   |       |       |  |   |      
|          |                 | Total current  |   |                    | 468 |                   |   |      | 397 |      |   |       | 1,020 |  |   |       | 1,403 | 
|Deferred: |                 |                |   |                    |     |                   |   |      |     |      |   |       |       |  |   |      
|          | Federal         |                |   |                   |     |                   |   |     |     |      |   |      |       |  |   |      |      
|          | State and local |                |   |                   |     |                   |   |     |     |      |   |      |       |  |   |      |      
|          |                 |                |   |                    |     |                   |   |      |     |      |   |       |       |  |   |      
|          |                 | Total deferred |   |                    |    |                   |   |      |    |      |   |       |      |  |   |       |      | 
|          |                 |                |   |                    |     |                   |   |      |     |      |   |       |       |  |   |      
|          |                 | Total          |   | $                  | 468 |                   |   | $    | 397 |      |   | $     | 1,020 |  |   | $     | 1,403 | 
|          |                 |                |   |                    |     |                   |   |      |     |      |   |       |       |  |   |      

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

|                                                                                                       |                      |   |                    |     |                   |   |         |     |      |   |         |       |  |   |         |       | 
|------------------------------------------------------------------------------------------------------ | -------------------- | - | ------------------ | --- | ----------------- | - | ------- | --- | ---- | - | ------- | ----- |  | - | ------- | ----- | 
|                                                                                                       |                      |   | Three Months Ended |     | Nine Months Ended
|                                                                                                       |                      |   | September 30,      |     | September 30,    
|                                                                                                       |                      |   |                    |     |                  
|                                                                                                       |                      |   | 2000               |     | 2001              |   | 2000    |     | 2001
|                                                                                                       |                      |   |                    |     |                   |   |         |     |     
|                                                                                                       |                      |   | (In thousands)    
|Taxes computed at 35%                                                                                  |                      | $ | (11,659            | )   |                   | $ | (28,895 | )   |      | $ | (28,406 | )     |  | $ | (60,881 | )    
|Net operating losses not benefiting
Crown Media Holdings                                               |                      |   | 11,659             |     |                   |   |        |     |      |   | 28,406  |       |  |   |        |      
|Goodwill                                                                                               |                      |   |                   |     |                   |   | 1,933   |     |      |   |        |       |  |   | 5,081   |      
|Increase to the valuation allowance,
exclusive of reduction as a result
of the transfer of film assets |                      |   |                   |     |                   |   | 26,962  |     |      |   |        |       |  |   | 55,800  |      
|Additional tax on foreign income                                                                       |                      |   | 468                |     |                   |   | 397     |     |      |   | 1,020   |       |  |   | 1,403   |      
|                                                                                                       |                      |   |                    |     |                   |   |         |     |      |   |         |       |  |   |         |      
|                                                                                                       | Income tax provision |   | $                  | 468 |                   |   | $       | 397 |      |   | $       | 1,020 |  |   | $       | 1,403 | 
|                                                                                                       |                      |   |                    |     |                   |   |         |     |      |   |         |       |  |   |         |      



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The components of Crown Media Holdings deferred tax assets and
liabilities are comprised of the following:

|                          |                              |                                |   |                |      |               |   |          |          |  
|------------------------- | ---------------------------- | ------------------------------ | - | -------------- | ---- | ------------- | - | -------- | -------- | -
|                          |                              |                                |   | As of          |      | As of        
|                          |                              |                                |   | December 31,   |      | September 30,
|                          |                              |                                |   | 2000           |      | 2001         
|                          |                              |                                |   |                |      |              
|                          |                              |                                |   | (In thousands)
|Deferred tax assets:      |                              |                                |   |                |      |               |   |         
|                          | Deferred revenue             |                                | $ | 285            |      |               | $ | 102      |         
|                          | Bad debt reserve             |                                |   | 941            |      |               |   | 2,574    |         
|                          | Accrued compensation         |                                |   | 2,314          |      |               |   | 1,114    |         
|                          | Net operating loss           |                                |   | 25,463         |      |               |   | 85,608   |         
|                          | Unconsolidated entity losses |                                |   | 2,699          |      |               |   | 6,025    |         
|                          | Other                        |                                |   | 399            |      |               |   | 399      |         
|                          | Valuation allowance          |                                |   | (31,593        | )    |               |   |         |         
|                          |                              |                                |   |                |      |               |   |         
|                          |                              | Total deferred tax assets      |   |                | 508  |               |   |          | 95,822   |  
|Deferred tax liabilities: |                              |                                |   |                |      |               |   |         
|                          | Depreciation                 |                                |   | (508           | )    |               |   | (508     | )       
|                          | Film assets                  |                                |   |               |      |               |   | (100,634 | )       
|                          |                              |                                |   |                |      |               |   |         
|                          |                              | Total deferred tax liabilities |   |                | (508 | )             |   |          | (101,142 | )
|                          |                              |                                |   |                |      |               |   |         
|                          |                              | Net deferred taxes             |   | $              |     |               |   | $        | (5,320   | )
|                          |                              |                                |   |                |      |               |   |         

As of December 31, 2000, and September 30, 2001, cumulative net tax
operating losses are approximately $63.7 million and $214.0 million and expire
in 2020 and 2021.

11. Commitments and Contingencies

On June 6, 2001, Crown Media Holdings received a complaint filed by a
stockholder regarding Crown Media Holdings proposed purchase of approximately
700 film titles and related property and rights from Hallmark Entertainment
Distribution. The complaint, filed as a class action on behalf of holders of
Crown Media Holdings Class A common stock, was brought against Crown Media
Holdings, its directors, Hallmark Cards, Hallmark Entertainment Distribution,
and Hallmark Entertainment for damages, rescission or other relief. The
complaint alleges that the proposed acquisition of the films is the product of
an unfair process designed to be advantageous to Hallmark Cards as the
controlling stockholder, that the price being paid to Hallmark Entertainment
Distribution is not entirely fair and that the proxy statement failed to make
certain disclosures.

The parties have agreed in principle to settle the lawsuit. The proposed
settlement provides that the purchase price for the films and related assets
will be reduced by 425,000 shares of Crown Media Holdings Class A common stock.
The proposed settlement is subject to a number of requirements, including
entering into a definitive settlement stipulation, certification of a class
consisting of all owners of Crown Media common stock (excluding the
defendants), and final court approval of the settlement. While it will likely
take a number of months to obtain final court approval of the settlement, the
proposed settlement specifically permitted the films transaction to be
completed in the interim.

12. 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



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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; and
amortization of goodwill and other intangibles. 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 September 30, 2000: |                                |                           |      |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       | Domestic                       |                           | $    | 5.9           |  |              | $   | 1.7       |  |              | $      | (30.5  | ) |  | $       | 140.3 |        
|                                       | International                  |                           |      | 11.8          |  |              |     |          |  |              |        | (2.8   | ) |  |         | 60.8  |        
|                                       |                                |                           |      |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       |                                | $                         | 17.7 |               |  | $            | 1.7 |           |  | $            | (33.3  | )      |   |  | 201.1   |      
|                                       |                                |                           |      |               |  |              |     |           |  |              |        |        |   |  |         |      
|Assets not allocated to segments:      |                                |                           |      |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       | Cash and cash equivalents      |                           |      |               |  |              |     |           |  |              |        |        |   |  |         | 61.8  |        
|                                       | Accounts receivable            |                           |      |               |  |              |     |           |  |              |        |        |   |  |         | 18.8  |        
|                                       | Goodwill and other intangibles |                           |      |               |  |              |     |           |  |              |        |        |   |  |         | 243.3 |        
|                                       |                                |                           |      |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       |                                | Consolidated total assets |      |               |  |              |     |           |  |              |        |        |   |  |         | $     | 525.0   | 
|                                       |                                |                           |      |               |  |              |     |           |  |              |        |        |   |  |         |      
|Three Months Ended September 30, 2001: |                                |                           |      |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       | Domestic                       |                           | $    | 5.7           |  |              | $   | 4.2       |  |              | $      | (69.1  | ) |  | $       | 239.6 |        
|                                       | International                  |                           |      | 16.5          |  |              |     |          |  |              |        | (10.9  | ) |  |         | 80.6  |        
|                                       | Film Distribution              |                           |      |              |  |              |     |          |  |              |        | (0.2   | ) |  |         | 812.4 |        
|                                       |                                |                           |      |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       |                                | $                         | 22.2 |               |  | $            | 4.2 |           |  | $            | (80.2  | )      |   |  | 1,132.6 |      
|                                       |                                |                           |      |               |  |              |     |           |  |              |        |        |   |  |         |      
|Assets not allocated to segments:      |                                |                           |      |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       | Cash and cash equivalents      |                           |      |               |  |              |     |           |  |              |        |        |   |  |         | 10.5  |        
|                                       | Accounts receivable            |                           |      |               |  |              |     |           |  |              |        |        |   |  |         | 26.2  |        
|                                       | Debt issuance costs            |                           |      |               |  |              |     |           |  |              |        |        |   |  |         | 5.5   |        
|                                       | Deferred tax asset             |                           |      |               |  |              |     |           |  |              |        |        |   |  |         | 4.2   |        
|                                       | Goodwill and other intangibles |                           |      |               |  |              |     |           |  |              |        |        |   |  |         | 318.9 |        
|                                       |                                |                           |      |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       |                                | Consolidated total assets |      |               |  |              |     |           |  |              |        |        |   |  |         | $     | 1,497.9 | 
|                                       |                                |                           |      |               |  |              |     |           |  |              |        |        |   |  |         |      
|Nine Months Ended September 30, 2000:  |                                |                           |      |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       | Domestic                       |                           | $    | 8.5           |  |              | $   | 3.3       |  |              | $      | (65.9  | ) |  | $       | 140.3 |        
|                                       | International                  |                           |      | 30.4          |  |              |     |          |  |              |        | (7.8   | ) |  |         | 60.8  |        
|                                       |                                |                           |      |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       |                                | $                         | 38.9 |               |  | $            | 3.3 |           |  | $            | (73.7  | )      |   |  | 201.1   |      
|                                       |                                |                           |      |               |  |              |     |           |  |              |        |        |   |  |         |      
|Assets not allocated to segments:      |                                |                           |      |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       | Cash and cash equivalents      |                           |      |               |  |              |     |           |  |              |        |        |   |  |         | 61.8  |        
|                                       | Accounts receivable            |                           |      |               |  |              |     |           |  |              |        |        |   |  |         | 18.8  |        
|                                       | Goodwill and other intangibles |                           |      |               |  |              |     |           |  |              |        |        |   |  |         | 243.3 |        
|                                       |                                |                           |      |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       |                                | Consolidated total assets |      |               |  |              |     |           |  |              |        |        |   |  |         | $     | 525.0   | 
|                                       |                                |                           |      |               |  |              |     |           |  |              |        |        |   |  |         |      
|Nine Months Ended September 30, 2001:  |                                |                           |      |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       | Domestic                       |                           | $    | 21.3          |  |              | $   | 6.9       |  |              | $      | (142.7 | ) |  | $       | 239.6 |        
|                                       | International                  |                           |      | 47.7          |  |              |     |          |  |              |        | (25.6  | ) |  |         | 80.6  |        
|                                       | Film Distribution              |                           |      |              |  |              |     |          |  |              |        | (0.2   | ) |  |         | 812.4 |        
|                                       |                                |                           |      |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       |                                | $                         | 69.0 |               |  | $            | 6.9 |           |  | $            | (168.5 | )      |   |  | 1,132.6 |      
|                                       |                                |                           |      |               |  |              |     |           |  |              |        |        |   |  |         |      
|Assets not allocated to segments:      |                                |                           |      |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       | Cash and cash equivalents      |                           |      |               |  |              |     |           |  |              |        |        |   |  |         | 10.5  |        
|                                       | Accounts receivable            |                           |      |               |  |              |     |           |  |              |        |        |   |  |         | 26.2  |        
|                                       | Debt issuance costs            |                           |      |               |  |              |     |           |  |              |        |        |   |  |         | 5.5   |        
|                                       | Deferred tax asset             |                           |      |               |  |              |     |           |  |              |        |        |   |  |         | 4.2   |        
|                                       | Goodwill and other intangibles |                           |      |               |  |              |     |           |  |              |        |        |   |  |         | 318.9 |        
|                                       |                                |                           |      |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       |                                | Consolidated total assets |      |               |  |              |     |           |  |              |        |        |   |  |         | $     | 1,497.9 | 
|                                       |                                |                           |      |               |  |              |     |           |  |              |        |        |   |  |         |      



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The Asia Pacific market, Latin America market, 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 and nine months ended September 30, 2000 and 2001.



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

Overview

Crown Media Holdings, 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 (formerly known as the Hallmark
Entertainment Network) is operated and distributed in more than 100
international 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 (formerly known as the
Odyssey 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,
Inc. (Hallmark Entertainment), 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 prior to the
completion of our reorganization and initial public offering on May 9, 2000.
Therefore, for the periods prior to May 9, 2000, for financial reporting
purposes, we are reporting the assets, liabilities and results of operations of
Crown Media International, as Crown Media Holdings and Crown Media
International were entities under common control before and after the
reorganization.

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. Our consolidated financial statements include the assets and
liabilities of Crown Media International at their historical carrying values
since both we and Crown Media International are 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. Additionally, on May 9, 2000, we acquired Liberty Medias 32.5%
interest in Crown Media United States and NICCs 22.5% interest in Crown Media
United States, and included these interests in our consolidated financial
statements at their fair market value using purchase accounting as of the date
of the reorganization. In conjunction with the reorganization, Crown Media
Holdings completed its initial public offering of 10,000,000 shares of Class A
common stock at $14 per share. The net proceeds from this offering, after
expenses and underwriting discounts and commissions, were approximately $125.4
million.

The pay television channel now operated by Crown Media United States was
initially dedicated primarily to religious programming. In April 1999, Crown
Media United States relaunched the channel as one dedicated to high-quality
family programming.

Prior to the initial public offering and reorganization, Crown Media
International held a 22.5% common equity interest in Crown Media United States.
The assets and liabilities of Crown Media United States and its subsidiaries
relating to Crown Media Internationals original 22.5% interest in Crown Media
United States are included in Crown Media Holdings consolidated financial
statements based on their historical carrying values. 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 which we
did not previously own, for approximately $85.8 million. In consideration for
these ownership interests, we issued approximately 5.4 million shares of our
Class A common stock to The Jim Henson Company. The acquisition was recorded at
fair market value using purchase accounting as of March 15, 2001.



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Recent Developments

Purchase of Film Assets

On September 28, 2001, Crown Media Holdings completed the acquisition 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. Under the
terms of the acquisition, we have assumed $220.0 million of Hallmark
Entertainment debt and payables and issued 33,744,528 shares of our Class A
common stock. The number of shares of common stock was determined by a formula
based on the average closing price of the common stock from November 6, 2000,
(the date we announced that we were contemplating the transaction) to September
27, 2001 (the day prior to closing), which average price was $17.78 per share.
The purchase price was agreed to by the Board of Hallmark Entertainment after
receiving a fairness opinion from their financial advisor, and by the
independent Board members of Crown Media Holdings after receiving a fairness
opinion from their financial advisor. Additionally, the shareholders of Crown
Media Holdings, other than Hallmark Cards and its affiliates, approved the
transaction at a meeting on July 17, 2001. Of the shares issued in the
transaction, 425,000 shares were issued to an escrow and will be returned to us
if a previously announced, proposed settlement of a shareholder lawsuit
relating to the Purchase and Sale transaction becomes final.

Crown Media Holdings recorded the film assets at carrying cost for
financial reporting purposes, which was less than the fair value at the closing
date, as the transaction with the parent company is considered a transaction
between entities under common control. In accordance with the Purchase and Sale
Agreement with Hallmark Entertainment, Hallmark Entertainment Distribution has
60 days from the close of the transaction to provide Crown Media Holdings with
any adjustments to the carrying cost of the film assets, which adjustments are
not expected to be significant.

Hallmark Entertainment Distribution intends to generate revenue from the
film assets transaction by granting licenses to use the film assets to third
parties. We intend to use the films as programming for our television channels
and interactive uses and also to continue granting licenses to use the film
assets to third parties.

No Shelf Registration

We previously stated that we planned to file with the SEC in the second
half of 2001 a shelf registration statement for public offerings of up to
$500.0 million of our securities. We have determined not to file at this time a
shelf registration statement for any public offering of securities in 2001. We
will later consider whether a shelf registration or any possible public
offering should be filed in 2002; a decision about such filings depends upon
market conditions, our other financing activities, projected cash needs and
other factors.

Reorganization

In order to utilize the synergies between Crown Media International, our
international operating subsidiary, and Crown Media United States, our domestic
operating subsidiary, approximately 15% of the Companys employees were
involuntarily terminated during October 2001. Employees affected by this
reorganization were primarily members of our marketing, finance and
administrative departments. We will incur costs related to this
reorganization, which will be accounted for under Emerging Issues Task Force
(EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring),and SEC Staff Accounting Bulletin (SAB) No. 100,
Restructuring and Impairment Charges.These costs will be comprised primarily
of the termination benefits of severance salary and outplacement service for
all affected employees. During fourth quarter 2001, we plan to incur
restructuring charges of approximately $4.0 to $6.0 million related to these
initiatives.

Re-Branding of International and U.S. Channels

In August 2001, we completed the re-branding our international channel,
formerly the Hallmark Entertainment Network, and our U.S. channel, formerly the
Odyssey Network, as the Hallmark Channel. We believe that this re-branding will
enable us to capitalize on the popularity of the Hallmark brand. We believe
that viewers and distributors will associate the Hallmark brand with family
values and high quality content, and we expect that our
association with this brand will facilitate our efforts to achieve
increased distribution and to attract additional viewers that will lead to
higher ratings and advertising revenues.



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DIRECTV

In August 2001, Crown Media Holdings and DIRECTV, Inc. entered into a
strategic relationship under which the domestic Hallmark Channel will be
repositioned to DIRECTVs TOTAL CHOICE ®Package.

With this repositioning, the total distribution of the Hallmark Channel in
the United States expanded to approximately 40 million subscribers by the end
of September 2001. In addition to this agreement for expanded distribution, the
two companies will explore the distribution of additional programming services,
new interactive broadband applications and pay-per-view distribution of
programs from the film assets acquired by Crown Media Holdings and additional
programs of Hallmark Entertainment. As part of this relationship, DIRECTV
received approximately 5.4 million shares of Crown Media Holdings Class A
common stock.

As one of the conditions to the stock issuance, DIRECTV entered into Crown
Media Holdings stockholders agreement, with certain amendments. The
stockholders agreement is among Crown Media Holdings and its principal
stockholders. DIRECTV does not have the right under the stockholders agreement
to nominate a director to Crown Media Holdings board of directors. DIRECTV is
entitled under the stockholders agreement to appoint an observer to Crown Media
Holdings board of directors. DIRECTV has the same securities registration
rights as other parties to the stockholders agreement. The stockholders
agreement was also amended to include certain other provisions, including that
if Crown Media Holdings grants any person the rights provided to Liberty Media
Corporation pursuant to the stockholders agreement to maintain a minimum equity
interest in Crown Media Holdings in the event Crown Media Holdings sells common
stock for cash, then Crown Media Holdings will grant DIRECTV the same rights.

Distribution agreements, including those of Crown Media United States,
typically provide that in the event a programmer enters into subsequent
distribution agreements with terms more favorable to a distributor, such terms
must be offered to the previous distributor subject to certain exceptions and
conditions. It is possible that other distributors of Crown Media United States
will assert claims under such provisions in connection with the DIRECTV
transaction. Such claims could result in the payment of cash or the issuance
of additional stock by Crown Media Holdings.

EM.TV

On July 27, 2001, Hallmark Entertainment purchased 5,377,721 shares of the
outstanding Class A common stock of Crown Media Holdings from The Jim Henson
Company, a subsidiary of German Media Company EM.TV, for $90.0 million. The
shares were originally issued by us to The Jim Henson Company in March 2001 in
exchange for The Jim Henson Companys 22.5% common interest in Crown Media
United States and The Jim Henson Companys interest in H&H Programming-Asia. At
the same time in July 2001, Crown Media United States substantially revised its
two program agreements with The Jim Henson Company and EM.TV, under which Crown
Media United States was obligated to purchase both pre-existing and original
programming. The revisions replace all prior obligations. Crown Media United
States will now license only one series from the EM.TV library and two new
series from The Jim Henson Company. For revisions of the agreements, Crown
Media United States paid to The Jim Henson Company and EM.TV
$13.0 million and wrote-off program license fees totaling
$15.2 million.

Network Operations Center

In February 2001, we opened our advanced, fully digital 6,000 square foot
global Network Operations Center (NOC) at our headquarters in Greenwood
Village, Colorado. The NOC enables us to control signal operations for many of
our channels, thereby ensuring high on-air transmission quality, achieving
economies of scale in production and distribution, facilitating the roll-out of
new channels, allowing for distribution of programming in digital and other
formats as required in the rapidly evolving broadband environment and enabling
us to provide increased support to our advertisers. The NOC currently has
capacity to distribute thirty-two channels and is distributing our programming
to Europe, Latin America and the Middle East. We intend to distribute our
programming to additional countries (including the U.S.) through the NOC as our
existing arrangements with third party up-link providers expire.



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Crown Interactive

We are currently developing Crown Interactive, which is an interactive
television model designed to incorporate a wide array of products and services
from Crown Media Holdings, Hallmark Cards, Hallmark Entertainment and others.
We envision Crown Interactive as a graphic user interface, appearing on the
television screen that will allow consumers to use several features. These are
intended to include video-on-demand (VOD), which will allow consumers to
select and view films from our library, an interactive arts and crafts channel
for kids featuring Crayola®products, and a unique electronic messaging system
that will allow consumers to incorporate film clips from our library in their
message. We believe distributors are seeking features like these in order to
attract new subscribers and retain existing subscribers. We believe that Crown
Interactive will be a significant enhancement to our relationships with
distribution partners. We are currently testing Crown Interactive in Singapore
and Hong Kong.

Revenues

Our revenues consist primarily of subscriber fees and advertising
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 channels. However, distributors in international markets generally do not
require us to pay these fees. 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. Prices vary according to:



| |  |  | market;                                                                
| | - |  | -----------------------------------------------------------------------
|
| |  |  | the relative position in the market of the distributor and the channel;
|
| |  |  | the packaging arrangements for the channel; and                        
|
| |  |  | other commercial terms such as platform exclusivity and length of term.

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.                         

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 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.

We also intend to increase our revenues through the licensing to third
parties of the films we purchased from
Hallmark Entertainment Distribution as described above.



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Cost of Services

Our cost of services consists primarily of program license fees and the
cost of signal distribution, dubbing and subtitling, and creating the
promotional segments that are aired between programs. New market launches can
require significant up-front investments in program license fees, signal
distribution, dubbing and subtitling, marketing, and promotional segments and
creative production. Initial revenues from new market launches generally trail
expenses by three to nine months. We expect cost of services to continue to
increase in the future as we enter new markets and expand 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 Distribution will provide
services related to the administration, distribution and other exploitation of
the film assets, and we will pay Hallmark Entertainment Distribution
approximately $1.5 million per year for up to the three-year term of the
agreement.

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. We are amortizing 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
amortize is treated as a charge against earnings under accounting principles
generally accepted in the United States. In accordance with recent accounting
pronouncements, we will cease after January 1, 2002 the amortization of
goodwill, and we will be required to periodically review whether the value of
our goodwill has been impaired. If we are required to write off our goodwill,
our results of operations, stockholders equity or profitability could be
materially adversely affected. See Recently Issued Accounting Pronouncements
in Note 2 to our Financial Statements included elsewhere in this Report.

We will engage an independent firm to complete a valuation of Crown Media
United States and H&H Programming  Asia as a basis for the allocation of their
purchase prices. Our calculations of goodwill and other intangibles reflect
estimated fair values as of the acquisition dates; however, the calculations
are subject to further adjustments under the provisions of Accounting
Principles Board Opinion 16 and related accounting pronouncements. This
calculation will be impacted by SFAS 142 Goodwill and Other Intangibles.

Income Tax Provision

We account for income taxes using the liability method. Under this method,
we recognize deferred tax assets and liabilities for future tax consequences
attributable to the difference between the financial statement carrying amounts
of existing assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled.

Prior to the reorganization on May 9, 2000, we did not record a tax
benefit for federal or state tax losses because these losses were used by
Hallmark Entertainment as our parent and were not available to us. We have
recorded a tax provision related to foreign taxes and established a deferred
tax liability as required for certain timing items.

Subscriber fees are subject to withholding tax at rates ranging from 5% to
20% in many of the foreign jurisdictions in which we currently operate. We
attempt to take advantage of reduced withholding rates pursuant to any treaties
between the United States and foreign taxing jurisdictions to the extent
available.

Foreign withholding tax may be claimed as a credit against our United
States tax liability, subject to certain limitations. Any amounts not allowed
as a credit in the year generated may be carried back to the two preceding tax
years and then forward to the five succeeding tax years. Alternatively, if
taxes cannot be claimed as a credit during these carry back and carryover
periods, an election may be made to claim these taxes as a deduction, thus
resulting in a tax benefit to the extent of our tax rate and our ability to use
such deductions. Tax losses may only be used to



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offset taxable income. To the extent losses are limited, such excess
losses may be carried back to the two preceding tax years and then forward to
the 20 succeeding tax years.

Goodwill and other intangibles generated as a result of the acquisition of
Crown Media United States and the remaining 50% interest in H&H
Programming-Asia, and any amortization of such goodwill and other intangibles
for financial reporting purposes is not deductible for tax purposes.
Consequently, our effective tax rate in 2001 will be higher than the statutory
rate as a result of such non-deductible goodwill and other intangibles.

As result of the reorganization on May 9, 2000, Crown Media United States
was initially consolidated for financial reporting purposes but not for tax
purposes. Crown Media United States was treated as a partnership for tax
purposes, and members of Crown Media United States were allocated income and
losses pursuant to the amended and restated company agreement of Crown Media
United States. As a result of the acquisition of The Jim Henson Companys 22.5%
common interests in Crown Media United States on March 15, 2001, we now own all
the common interests in Crown Media United States and therefore consolidate
Crown Media United States with us for tax purposes for all periods subsequent
to that date.

For additional information on the income tax provision, please see Note 10
to Condensed Notes to Consolidated Financial Statements in this Report.

Foreign Currency Exchange and Inflation

We plan to enter into hedging transactions to reduce our exposure to
foreign currency exchange rate risks. However, we may continue to experience
economic loss and a negative effect on earnings and equity with respect to our
holdings solely as a result of foreign currency exchange rate fluctuations. See
Forward Looking Statements and Risk Factors  Risks Related to Our Business 
We are subject to the risks of doing business outside the United States. We
also assumed a hedging contract in connection with the purchase of the film
assets as described in Note 9 to Condensed Notes to Consolidated Financial
Statements under the heading Purchase of Film Assets in this Report.

The functional currency for our operations generally is the United States
dollar. Assets and liabilities of foreign subsidiaries are translated at the
exchange rates in effect at year-end, and the statements of operations are
translated at the average exchange rates during the period. Exchange rate
fluctuations in translating foreign currency financial statements into United
States dollars result in unrealized gains or losses that are not material.
Transactions denominated in currencies other than the local currency are
recorded based on exchange rates at the time such transactions arise.
Subsequent changes in exchange rates result in transaction gains and losses
which are reflected in income as realized upon settlement of the transactions.

We have not been materially affected by inflation.

Results of Operations

Three and Nine Months Ended September 30, 2001 Compared to Three and Nine
Months Ended September 30, 2000

Overview.Our actual results of operations reflect those of Crown Media
International, for the three and nine months ended September 30, 2000.
Therefore, significant variances exist as a result of the reorganization of
Crown Media United States as of May 9, 2000, as well as the acquisitions of
remaining common interests of Crown Media United States and H&H Programming 
Asia on March 15, 2001.

Revenues.Total revenues for the three and nine months ended September
30, 2001, increased to $26.3 million and $75.9 million, respectively, from
$19.4 million and $42.2 million, which represent increases of $6.9 million, or
36%, and $33.7 million, or 80%, respectively, over the comparable periods in
2000. Subscriber fees revenue increased to $17.1 million and $49.7 million,
respectively, from $14.1 million and $33.2 million, for the three and nine
months ended September 30, 2001, which represent increases of $3.0 million, or
22%, and $16.5 million, or 50%, respectively, over the comparable periods in
2000. The increased subscriber fees revenue resulted from new market launches
and expanded distribution in existing markets. The number of subscribers to the
Hallmark Channel,



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as of September 30, 2001, increased to 82.9 million from 56.2 million as
of September 30, 2000, which represents an increase of 26.7 million, or 48%.
Subscribers to our international channel increased at a higher rate than
international subscriber fees revenue primarily because a number of new
subscribers were added during promotional periods in which fees were reduced or
waived. Additionally, rates for international subscriber fees decreased and may
continue to decrease as we renew distribution agreements, which may provide for
lower rates. 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, and the economic turbulence in
certain of our markets. We also may experience a decrease in our Italian market
due to a potential renegotiation of an existing distribution agreement with one
of our pay television distributors. Currently, the Italian market represents 9%
of our international subscriber fees revenue and 7% of our total subscriber
fees revenue. Sixty-three percent of total revenues for both the three and nine
months ended September 30, 2001, and 61% and 72%, respectively, of total
revenues for the three and nine months ended September 30, 2000, were earned by
our international pay television segment. Subscribers to our domestic channel
increased from 25.9 million as of September 30, 2000, to 39.7 million as of
September 30, 2001, which represents an increase of 13.8 million, or 53%.
During third quarter 2001, we completed a distribution agreement with DirecTV,
which added approximately five million new subscribers. Because of the
amortization of subscriber acquisition and other fees, we may experience a
decline in net subscriber revenues, as we net amortization of subscriber
acquisition and other fees against respective revenue in accordance with
generally accepted accounting principles in the United States.

Ratings on our domestic channel increased over the prior years quarter
due to the change in our programming content and increased advertising for the
channel re-brand. Our Adult 1854-audience composition in Primetime (Monday
through Sunday 811 p.m.) increased 36%. Our Total Day rating increased 50%
and our Primetime ratings increased 50% over the third quarter of 2000

Advertising revenues increased to $9.0 million and $25.4 million from $4.3
million and $6.7 million, respectively, for the three and nine months ended
September 30, 2001, which represent increases of $4.7 million, or 109%, and
$18.7 million, or 276%, respectively, over the comparable periods in 2000. The
increases in advertising revenues reflect our growth in subscribers, higher
advertising rates in the domestic market, channel programming which became more
attractive to advertisers, and expanded sales of advertising time primarily in
the United States, the United Kingdom and Latin America. We are facing a
challenging advertising market due to its continuing softness and the decrease
in spending by many Fortune 500 companies, troubled by a declining market and a
drop in consumer confidence.

Crown Media Holdings will commence earning revenue through a new business
segment during fourth quarter 2001, via its purchase of certain film assets of
Hallmark Entertainment Distribution LLC (Hallmark Entertainment
Distribution). Notwithstanding our use of the film assets on our channels, we
intend to generate licensing fees revenue as we establish ourselves in the
market and expand our customer base. As part of the purchase, we are entitled
to all assets and liabilities generated by licensing the film assets to third
parties from January 1, 2001, to September 28, 2001. Such amounts will be
determined and adjusted, under the Purchase and Sale Agreement within 60 days
of the September 28, 2001, closing of the film transaction. These amounts are
not expected to be significant.

Cost of services.Cost of services for the three and nine months ended
September 30, 2001, increased to $72.0 million and $142.8 million from $28.7
million and $63.4 million, which represent increases of $43.3 million, or 151%,
and $79.4 million, or 125%, respectively, over the comparable periods in 2000.
Cost of services as a percent of total revenue increased to 273% and 188%,
respectively, for the three and nine months ended September 30, 2001, as
compared to 148% and 150%, respectively, for the three and nine months ended
2000. These increases were due to increased programming costs for the three and
nine months ended September 30, 2001, which rose 219% and 204%, respectively,
as we invested in additional and higher quality programming, necessary to
fulfill our programming strategy. These increases were also due to the $28.2
million of expenses incurred to write-off and exit certain programming
contracts with EM.TV during third quarter 2001. We anticipate a decline in
affiliated programming amortization expense due to the completion of the
purchase of the film assets on September 28, 2001, but expect an increase in
amortization related to our new film assets. We also acquired and continue to
amortize popular programming from third-party suppliers to meet our strategy
and the demands of our customers. In order to attract and maintain viewers in
our international markets, who are not as familiar with the Hallmark brand
name, we plan to purchase additional series from third-party suppliers. To
enhance the quality of our new and existing



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subscribers pay television experience and support the utilization of the
Network Operations Center, we expanded the number of employees in our broadcast
operations, contributing to the rise in our operating costs. Total cost of
services increased due to our amortizing additional licensed programming and
servicing our expanded markets. These increases were mitigated by increased
employment of in-house resources to produce interstitials and the utilization
of the Network Operations Center to perform certain playback functions
previously provided by third-party vendors. Total cost of services increased
due to our amortizing additional licensed programming, incurring cost related
to exiting programming contracts, and servicing our expanded markets.

In October 2001, we implemented a reorganization, which resulted in the
termination of a number of employees, primarily those in marketing, finance and
administrative departments. For further information on this reorganization, see
Recent Developments  Reorganization in Note 1 to Condensed Notes to
Consolidated Financial Statements in this Report and Item 2 below.

Selling, general and administrative expenses.Selling, general and
administrative expenses for the three and nine months ended September 30, 2001,
increased to $18.3 million and $59.5 million from $16.3 million and $36.9
million, which represent increases of $2.0 million, or 12%, and $22.6 million,
or 61%, respectively, over the comparable periods in 2000. These increases
primarily reflect increased costs associated with supporting expanded
distribution in existing markets, supporting new markets and the continued
development of a corporate infrastructure to support increased distribution and
advertising, including expansion of the management team and increased staffing
levels. Due to a company-wide travel restriction in September 2001 and the
implementation of teleconferencing, travel and entertainment expenses declined
during the third quarter of 2001. Additionally, depreciation increased after
the launch of our Network Operations Center in the first quarter of 2001 and
the company-wide upgrade of our network infrastructure, computers and technical
equipment. Selling, general and administrative expenses as a percent of total
revenue decreased to 69% and 79%, respectively, for the three and nine months
ended September 30, 2001, as compared to 84% and 88%, respectively, for the
three and nine months ended September 30, 2000. These decreases are due to
increases in total revenues of 36% and 80%, respectively, noted above and
decreases in travel, entertainment, and other costs.

Marketing expenses.Marketing expenses for the three and nine months
ended September 30, 2001, increased to $10.8 million and $27.6 million from
$4.4 million and $10.0 million, which represent increases of $6.4 million, or
143%, and $17.6 million, or 177%, respectively, over the comparable periods in
2000. Marketing expenses increased in the first, second and third quarters 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. Additionally, in an effort to strengthen our domestic brand
awareness, we incurred and will continue to incur expenses related to the
promotion and advertising campaigns supporting our August 5, 2001, re-branding
of the Odyssey Network as the Hallmark Channel.

Amortization of goodwill and other intangibles.Amortization of goodwill
and other intangibles for the three and nine months ended September 30, 2001,
increased to $5.5 million and $14.5 million from $3.1 million and $5.5 million,
which represent increases of $2.4 million, or 76%, and $9.0 million, or 164%,
respectively, over the comparable periods in 2000. In conjunction with the
acquisition of an additional 55% common interest in Crown Media United States
on May 9, 2000, and the acquisition of the remaining common interests in Crown
Media United States and H&H Programming  Asia on March 15, 2001, we recorded
goodwill in the amount of $248.8 million and $92.6 million, which are being
amortized over 20 years and 10 years, respectively. The amortization of
goodwill arising from past acquisitions will cease as of January 1, 2002, in
accordance with revised accounting standards issued by the Financial Accounting
Standards Board in September 2001. We will no longer record amortization
expense of $5.5 million per quarter, or $22.0 million per year, which will
significant decrease our net loss. However, goodwill and other intangible
assets will be subject to periodic (at least annual) tests for impairment and
recognition of impairment losses in the future could be required based on a new
methodology for measuring impairments prescribed by these pronouncements. The
revised standards include transition rules and requirements for identification,
valuation and recognition of a much broader list of intangibles as part of
business combinations than prior practice, most of which will continue to be
amortized. We have not yet fully assessed the impact of these new standards on
our prospective financial statements, but we expect that the amount and timing
of non-cash charges related to intangibles acquired in business combinations
will change significantly from prior practice.



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Loss from operations.Loss from operations for the three and nine months
ended September 30, 2001, increased to $80.2 million and $168.6 million from
$33.2 million and $73.7 million, which represent increases of $47.0 million, or
141%, and $94.9 million, or 129%, respectively, over the comparable periods in
2000. This increase was primarily due to aggressive marketing campaigns for our
domestic channel, the introduction of our new brand package, and write-down and
other costs incurred in connection with the exit of certain contracts with
EM.TV and its subsidiaries subsequent to Hallmark Entertainments purchase of
EM.TVs interest in us. These increases were partially offset by our increased
utilization of in-house resources to produce interstitial product and the
employment of our Network Operations Center to perform certain playback
functions previously provided by third-party vendors.

Equity in net losses of unconsolidated entities and investment expenses.
Equity in net losses of unconsolidated entities and investment expenses for the
three and nine months ended September 30, 2001, decreased to $0 and $655,000
from $954,000 and $8.1 million, which represent decreases of $954,000, or 100%,
and $7.4 million, or 92%, respectively, over the comparable periods in 2000.
These decreases were primarily due to the acquisition of a majority interest in Crown Media United
States on May 9, 2000, and the acquisition of the remaining common interests in
Crown Media United States and H&H Programming  Asia on March 15, 2001. We
commenced consolidation of Crown Media United States and H&H Programming  Asia
on the dates of the acquisition. Net losses derived from Crown Media United
States and H&H Programming  Asia were recorded under the equity method of
accounting through May 9, 2000, and March 15, 2001, respectively, and
consolidated thereafter.

Interest income (expense), net.Net interest expense for the three and
nine months ended September 30, 2001, was $2.3 million and $4.7 million,
respectively. Net interest income for the three and nine months ended September
30, 2000, was $626,000 and $341,000, respectively. The increases in net
interest expense were primarily due to increased borrowings to fund operations.

Income tax provision.Income tax provision for the three and nine months
ended September 30, 2001, decreased to $397,000 and increased to $1.4 million
from $468,000 and $1.0 million, which represent a decrease of $71,000, or 15%,
and an increase of $383,000, or 38%, respectively, over the comparable periods
in 2000. This increase was due to the tax on the foreign-based income resulting
from increased international subscriber fees revenue discussed above. The
Argentine and Brazilian governments are considering the implementation of
taxation on advertising sales. If implemented, our foreign taxes would increase
as would our net loss. Additionally, we anticipate receiving a tax benefit
from our film assets transaction during the fourth quarter 2001.

Net loss.Net loss for the three and nine months ended September 30,
2001, increased to $83.0 million and $175.3 million from $34.0 million and
$82.4 million, which represent increases of $49.0 million, or 144%, and $92.9
million, or 113%, respectively, over the comparable periods in 2000. These
increases in net loss for the three and nine months ended September 30, 2001,
were attributable to a combination of the factors discussed above.

Liquidity and Capital Resources

As of September 30, 2001, we had current obligations representing license
fees for programming payable to affiliates and non-affiliates of $103.6 million
and $28.5 million, respectively. Additionally, we also had obligations as of
September 30, 2001, representing a long-term bank credit facility with a group
of lenders represented by The Chase Manhattan Bank as Administrative Agent of
$209.6 million, current demand notes and interest payable to HC Crown of $70.7
million, subscriber acquisition fees payable of $27.0 million to a third-party
and capital lease obligation of $12.4 million to a third-party. As of September
30, 2001, receivables were $26.2 million, the current portion of program
license fees was $58.8 million and cash and cash equivalents were $10.5
million.

Cash used in operating activities was $129.9 million and $82.0 million for
the nine months ended September 30, 2001 and 2000, respectively. Net cash used
in operating activities was used primarily to fund operating expenditures
related to net losses of $175.3 million and $82.4 million for the nine months
ended September 30, 2001 and 2000, respectively. The increases in net losses
and cash used in operating activities were due to our additional investment in
higher quality programming to fulfill our programming strategy, payments to
exit programming contracts, increasing expenses associated with our expanding
management team and staffing levels, and marketing expenses relating to our
re-branding of the Odyssey Channel as the Hallmark Channel on August 5, 2001.

Cash used in investing activities was $11.5 million and $9.6 million for
the nine months ended September 30,



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2001 and 2000, respectively. During 2000 we acquired Crown Media United
States and obtained cash of $13.1 million in conjunction with the transaction.
Additionally in 2000, we commenced the construction of our Network Operations
Center and purchased $18.7 million of property and equipment. This
construction was completed during first quarter 2001. During 2001, we
commenced a company-wide upgrade of our network infrastructure, computers and
technical equipment, which were reflected in our capital expenditures of $11.1
million.

Cash provided by financing activities was $117.6 million and $149.6
million for the nine months ended September 30, 2001 and 2000, respectively.
The decrease in cash provided by financing activities was due to our May 9,
2000, initial public offering, which resulted in net proceeds of $125.4
million. This decrease was offset by our $209.6 million increase in borrowings
under the bank credit facility and $116.2 million increase in borrowings from
HC Crown to fund our operations.

In connection with our growth strategy, we expect that we will continue to
make significant investments in programming, distribution and technology, as
well as additional investments in infrastructure and facilities. We are
currently committed to spend more than $45.3 million for non-affiliate
programming over the next 12 months. We are committed to payments for
subscriber acquisition fees of $13.5 million in the fourth quarter 2001, $8.8
million in the first quarter 2002, and $1.0 million in the second quarter 2002,
and a future payment of $3.7 million. We are also committed to pay severance
costs of approximately $4.0 to $6.0 million, which were incurred subsequent to
third quarter 2001. We also expect to report net losses for the foreseeable
future.

In connection with the completion of the acquisition of the film assets
from Hallmark Entertainment Distribution as described above on September 28,
2001, we entered into a credit agreement with a syndicate of banks, led by The
Chase Manhattan Bank as Administrative Agent and Issuing Bank, under which the
banks extended to us a five-year secured credit facility of up to $285.0
million. The loan is guaranteed by our subsidiaries and is secured by all
tangible and intangible property of Crown Media Holdings and its subsidiaries.
A portion of the borrowings under the bank credit facility have been used to
pay $120.0 million of debt assumed as part of the consideration for acquiring
the film assets and to repay the outstanding amount under a $150.0 million line
of credit with HC Crown of $84.2 million. As of November 1, 2001, there were
$65.4 million of borrowings available under the credit facility for general
working capital purposes.

Upon repayment of the outstanding borrowings under our existing $150.0
million line of credit, HC Crown also provided a new $150.0 million line of
credit to us, with a final maturity no later than February 27, 2007. This line
of credit is subordinate to the bank credit facility, and, to the extent
permitted by the bank credit facility, its availability will be reduced dollar
for dollar in an amount equal to Net Cash Proceeds received by us in exchange
for the issuance of any debt or equity security. We will pay interest on any
borrowings under the line of credit at a rate equal to LIBOR plus three
percent, or, after December 31, 2002, three and one-half percent, payable
quarterly. HC Crowns obligation to make loans under this line of credit is
supported by a letter of credit issued by Credit Suisse First Boston.

The bank credit facility encompasses a term loan of $100.0 million and a
revolving line of credit of $185.0 million, which includes up to $20.0 million
of letters of credit issued at our request. 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 film assets, based upon the net present value of cash
flows. Currently the Library Credit is in excess of the maximum amount of the
bank loans.

Each loan (which includes the term loans and any revolving credit loans)
bears interest at a Eurodollar rate or an alternate base rate as we may request
at the time of borrowing 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 The
Chase Manhattan Bank, a certificate of deposits rate or the Federal Funds
effective rate, which is adjusted whenever the rate changes. We are 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.
For additional information regarding the bank credit facility, see Note 9
below.

We believe that the bank credit facility and the HC Crown line of credit,
together with cash generated from



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operations and cash on hand, will be sufficient for our liquidity needs
through at least December 31, 2002. We also intend to raise additional funds to
support and expand our businesses. Any additional equity financings could
result in dilution to our existing investors. There can be no assurance that we
will be able to consummate any additional equity or debt financing.




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.

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 September 30, 2001, we had an accumulated deficit of approximately $425.8
million and net goodwill and other intangibles of approximately $318.9 million.
Amortization of goodwill and other intangibles resulted in a $5.5 million and
$14.5 million charge to earnings for the three and nine months ended September
30, 2001, respectively.

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 revenues. This will require, among other things, increasing the
distribution of our channels, attracting more viewers to our channels and
attracting more advertisers. Risks associated with these areas of our business
are described below.

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 and
the National Interfaith Cable Coalition, each of which has standards that limit
the types of programming that they 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



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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 the film
assets we have acquired from Hallmark Entertainment Distribution 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. 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 substantial financial, operational and
management resources. We may not be able to hire the number of employees, or
employees who are 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. Our ability to achieve
advertising revenue growth in the future will depend in large part on our
ability to expand our sales and marketing organization. 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 controls us and this control could create conflicts
of interest or inhibit potential changes of control.

Hallmark Entertainment controls all of our outstanding shares of Class B
common stock and owns directly and indirectly shares of Class A common stock,
representing approximately 90% of the voting power on all matters submitted to
our stockholders. Hallmark Entertainments 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s control relationship
with us also could give rise to conflicts of interest, including:



| |  |  | conflicts between Hallmark Entertainment, 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                                                                                                                                    



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Hallmark Entertainment 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 and its affiliates, on the other hand.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, persons serving as directors, officers or employees of both
us and Hallmark Entertainment may have conflicting duties to each. For example,
Robert A. Halmi, Jr. is Chairman of our Board and is 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 than if none of our
officers or directors had any affiliation with Hallmark Entertainment.

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.

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.

In particular, under certain circumstances others may preempt our use of
our C-3 satellite transponder. Because our C-3 satellite transponder is
currently the only integrated domestic source for our domestic signal, it is
possible that our domestic signal could be disrupted from time to time. Any
such interruptions could materially affect viewership of our channels and thus
have a material adverse effect on our revenues.

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

We commenced operations at the NOC in February 2001. We are currently
using the NOC 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 NOC as existing contracts with third-party providers
expire. Like other single-point facilities, the NOC 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 NOCs services. We currently do not
have and are not planning a duplicate operations facility. Any significant
interruption at the NOC affecting the distribution of our channels could have
an adverse effect on our operating results and financial condition.



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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, and on our ability to
hire additional personnel to accommodate our anticipated growth. 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, which apply 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 are amortizing 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
amortize is treated as a charge against earnings under accounting principles
generally accepted in the United States. In accordance with recent accounting
pronouncements, we will cease after January 1, 2002, the amortization of this
acquired goodwill, and we will be 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. See Recently Issued Accounting
Pronouncements in Note 2 to our Financial Statements included elsewhere in
this Report. Commencing with the fourth quarter of 2001, we also now have a
film cost relating to the amortization of the purchase price for our film
assets that we use and license to others. This film cost will be significant
each quarter.

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



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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 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.

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



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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.

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 were an increase in interest
rates. If market interest rates were to increase immediately and uniformly by
10% from levels as of September 30, 2001, the decline of the fair value of the
fixed income portfolio would not be material.

As of September 30, 2001, our cash, restricted cash, cash equivalents and
short-term investments had a fair value of $10.5 million. Of that amount, all
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 September 30, 2001, 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 three months ended September 30, 2001, 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 September 30, 2001, we estimated the fair value of our debt and
other notes payable (including affiliates), excluding accrued interest, to be
approximately $295.9 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 $1.5 million. These calculations include the assumption that the
balance of our outstanding debt as of September 30, 2001, would not change
during the nine months 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.

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 plan to 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.

Our material interest bearing assets consisted of cash equivalents,
restricted cash, and short-term investments. The balance of our interest
bearing assets was $10.5 million, or 1% of total assets, as of September 30,
2001. Our material liabilities subject to interest rate risk consisted of notes
payable to HC Crown Corporation, a capital lease obligation and a credit
facility with The Chase Manhattan Bank. The balance of those liabilities was
$295.9 million, or 44% of total liabilities, as of September 30, 2001. Net
interest expense for the three and nine months ended September 30, 2001, was
$2.3 million, or 9%, and $4.7 million, or 6%, respectively, of our total
revenues. Our net interest expense is sensitive to changes in the general level
of interest rates, primarily U.S. interest rates. In this regard, changes in
U.S. interest rates affect the interest bearing assets and our borrowings.

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

We will evaluate our foreign currency exposure on a net basis. We receive
subscriber fees 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. Currently, our foreign expenses
exceed our revenues. As a result, our financial results could be significantly
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in the foreign markets in which our services are sold. We
are exposed to changes in exchange rates in Latin America, Europe, Asia, and
Africa. 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.



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PART II: OTHER INFORMATION




ITEM 1.Legal Proceedings

On June 6, 2001, we received a legal complaint from a stockholder filed on
that date in the court of Chancery in the State of Delaware for New Castle
County which names as defendants us, all of our directors (including one
director who had previously resigned on May 3, 2001, due to new employment
responsibilities), Hallmark Cards, Hallmark Entertainment Distribution and
Hallmark Entertainment. There have been no material developments in this
lawsuit since the matters were reported in our Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001.




ITEM 2.Changes in Securities and Use of Proceeds

DirecTV Transaction

On August 27, 2001, we issued 5,360,202 shares of our Class A common stock
to DIRECTV Enterprises, Inc. (DIRECTV). The shares were issued in exchange
for the sum of $53,602 cash consideration and on the basis that certain
obligations be entered into by DIRECTV, including a new distribution agreement
with Crown Media United States. We relied upon certain representations and
warranties made by DIRECTV regarding its knowledge and experience in financial
and business affairs and believed that it was capable through its directors and
officers of evaluating the merits and risks of the investments. The issuance of
the shares was exempt from registration under the Securities Act pursuant to
Section 4(2) and Rule 506 promulgated thereunder.

Purchase of Film Assets

On September 28, 2001, Crown Media Holdings completed the acquisition 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. Under the
terms of the acquisition, we have assumed $220.0 million of Hallmark
Entertainment debt and payables and issued 33,744,528 shares of our Class A
common stock. The number of shares of common stock was determined by a formula
based on the average closing price of the common stock from November 6, 2000,
(the date we announced that we were contemplating the transaction) to September
27, 2001 (the day prior to closing), which average price was $17.78 per share.
The purchase price was agreed to by the Board of Hallmark Entertainment after
receiving a fairness opinion from their financial advisor, and by the
independent Board members of Crown Media Holdings after receiving a fairness
opinion from their financial advisor. Additionally, the shareholders of Crown
Media Holdings, other than Hallmark Cards and its affiliates, approved the
transaction at a meeting on July 17, 2001. Of the shares issued in the
transaction, 425,000 shares were issued to an escrow and will be returned to us
if a previously announced, proposed settlement of a shareholder lawsuit
relating to the Purchase and Sale transaction becomes final. The issuance of
the shares in this transaction was exempt from registration under the
Securities Act pursuant to Section 4 (2).

Bank Credit Facility

The bank credit facility described elsewhere in this Report and
incorporated by reference as an exhibit to this Report contains various
covenants on our part, including limitations on dividends or other
distributions on our equity, a requirement for maintaining a certain net worth
and requirements for maintaining certain ratios. These covenants could affect
our outstanding stock.



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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    |  | Credit, Security, Guaranty and Pledge Agreement, dated August 31,
2001, among Crown Media Holdings, Inc., its Subsidiaries named
herein, the Lenders named herein and The Chase Manhattan Bank as
administrative agent (previously filed as Exhibit 10.1 to our
Current Report on Form 8-K, dated September 28, 2001, and
incorporated herein by reference).                  
|       
|10.2    |  | Promissory Note, dated August 31, 2001, among Crown Media Holdings,
Inc., Crown Media International, Inc., Crown Media United States,
LLC, and HC Crown Corp. (previously filed as Exhibit 10.2 to our
Current Report on Form 8-K, dated September 28, 2001, and
incorporated herein by reference).                                                                           
|       
|10.3    |  | Subordination and Support Agreement dated August 31, 2001, among
Crown Media Holdings, Inc., Hallmark Cards, Incorporated and The
Chase Manhattan Bank as agent for the Lenders and the Issuing Bank
referred to in the Credit Agreement (previously filed as Exhibit
10.3 to our Current Report on Form 8-K, dated September 28, 2001,
and incorporated herein by reference).
|       
|10.4    |  | Limited Guarantee Agreement and Acknowledgement, dated August 31,
2001, by Hallmark Cards, Incorporated in favor of The Chase
Manhattan Bank as agent on behalf of the Lenders and the Issuing
Bank (previously filed as Exhibit 10.4 to our Current Report on Form
8-K, dated September 28, 2001, and incorporated herein by
reference).                                     
|       
|10.5    |  | Hallmark Inducement Agreement dated August 31, 2001, between
Hallmark Entertainment, Inc. and The Chase Manhattan Bank in its
capacity as agent under the credit agreement (previously filed as
Exhibit 10.5 to our Current Report on Form 8-K, and incorporated
herein by reference).                                                                                        
|       
|10.6    |  | Second Amended and Restated Stockholders Agreement dated August 15,
2001, among Crown Media Holdings and certain stockholders.                                                                                                                                                                                                                                                



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|        |  |                                                                                                                                                                     
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                     
|Number  |  | Description                                                                                                                                                         
|        |  |                                                                                                                                                                     
|10.7    |  | DIRECTV agreements. *                                                                                                                                               
|       
|10.8    |  | Employment Agreement, dated September 18, 2001, between
Crown Media Holdings, Inc. and David Evans.                                                                 
|       
|99      |  |  Press Releases of Crown Media Holdings, Inc. dated August 21, 2001,
September 25, 2001, October 1, 2001, October 10, 2001, October 15,
2001,
and October 25, 2001.

*   To be filed by amendment.

(b)  Reports on Form 8-K

During the quarter ended September 30, 2001, we filed the following Form 8-K
reports:



| |  | Report filed July 18, 2001 (dated July 17, 2001) regarding Item 5 and;
|- |  | ----------------------------------------------------------------------
| 
| |  | Report filed August 21, 2001 (dated August 20, 2001) regarding Item 5.



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SIGNATURES

Pursuant to the requirements 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.



|Date: November 13, 2001 | CROWN MEDIA HOLDINGS, INC                                                                                                                
|----------------------- | -----------------------------------------------------------------------------------------------------------------------------------------
|                       
|                        | /s/ DAVID J. EVANS
David J. EvansPresident, Chief Executive Officer
and Director
Crown Media Holdings, Inc.
(Principal Executive Officer)



|Date: November 13, 2001 | /s/ WILLIAM J. ALIBER
William J. Aliber                                                                                     
|----------------------- | ----------------------------------------------------------------------------------------------------------------------------
|                        | Executive Vice President and
Chief Financial Officer
Crown Media Holdings, Inc.
(Principal Financial and
Accounting Officer)



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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    |  | Credit, Security, Guaranty and Pledge Agreement, dated August 31,
2001, among Crown Media Holdings, Inc., its Subsidiaries named
herein, the Lenders named herein and The Chase Manhattan Bank as
administrative agent (previously filed as Exhibit 10.1 to our
Current Report on Form 8-K, dated September 28, 2001, and
incorporated herein by reference).                  
|       
|10.2    |  | Promissory Note, dated August 31, 2001, among Crown Media Holdings,
Inc., Crown Media International, Inc., Crown Media United States,
LLC, and HC Crown Corp. (previously filed as Exhibit 10.2 to our
Current Report on Form 8-K, dated September 28, 2001, and
incorporated herein by reference).                                                                           
|       
|10.3    |  | Subordination and Support Agreement dated August 31, 2001, among
Crown Media Holdings, Inc., Hallmark Cards, Incorporated and The
Chase Manhattan Bank as agent for the Lenders and the Issuing Bank
referred to in the Credit Agreement (previously filed as Exhibit
10.3 to our Current Report on Form 8-K, dated September 28, 2001,
and incorporated herein by reference).
|       
|10.4    |  | Limited Guarantee Agreement and Acknowledgement, dated August 31,
2001, by Hallmark Cards, Incorporated in favor of The Chase
Manhattan Bank as agent on behalf of the Lenders and the Issuing
Bank (previously filed as Exhibit 10.4 to our Current Report on Form
8-K, dated September 28, 2001, and incorporated herein by
reference).                                     
|       
|10.5    |  | Hallmark Inducement Agreement dated August 31, 2001, between
Hallmark Entertainment, Inc. and The Chase Manhattan Bank in its
capacity as agent under the credit agreement (previously filed as
Exhibit 10.5 to our Current Report on Form 8-K, and incorporated
herein by reference).                                                                                        
|       
|10.6    |  | Second Amended and Restated Stockholders Agreement dated August 15,
2001, among Crown Media Holdings and certain stockholders.                                                                                                                                                                                                                                                



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|        |  |                                                                                                                                                                     
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                     
|Number  |  | Description                                                                                                                                                         
|        |  |                                                                                                                                                                     
|       
|10.7    |  | DIRECTV agreements. *                                                                                                                                               
|       
|10.8    |  | Employment Agreement, dated September 18, 2001, between
Crown Media Holdings, Inc. and David Evans.                                                                 
|       
|99      |  |  Press Releases of Crown Media Holdings, Inc. dated August 21, 2001,
September 25, 2001, October 1, 2001, October 10, 2001, October 15,
2001,
and October 25, 2001.

*To be filed by amendment.



55