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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 June 30, 2003

or

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | 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 225,
Greenwood Village, Colorado 80111
(Address of Principal Executive Offices and Zip Code)

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

6430 S. Fiddlers Green Circle,
Suite 500,
Greenwood Village, Colorado 80111

(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 [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]

As of August 6, 2003, the number of shares of Class A Common Stock, $.01 par
value outstanding was 73,794,606, and the number of shares of Class B Common
Stock, $.01 par value, outstanding was 30,670,422.



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TABLE OF CONTENTS



|                                                  |                                                                                               |                                                                |  |  |  |  |  | 
|------------------------------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                    
|                                                  | Item 1. Financial Statements (Unaudited)                                                     
|                                                  |                                                                                               | CONSOLIDATED BALANCE SHEETS                                   
|                                                  |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS  
|                                                  |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS                         
|                                                  |                                                                                               | CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|                                                  | ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                  | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                                  | Item 4. Controls and Procedures.                                                             
|PART II. OTHER INFORMATION                       
|                                                  | Item 2. Changes in Securities and Use of Proceeds                                            
|                                                  | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                                  | Item 6. Exhibits and Reports on Form 8-K                                                     
|INDEX TO EXHIBITS                                
|INDEX TO EXHIBITS                                
|EX-10.4 Amendment to Federal Income Tax Agreement
|EX-31 Rule 13a-14(a) Certifications              
|EX-32 Section 1350 Certifications                



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TABLE OF CONTENTS

|           |  |                                                                                       |  |                                                                               |    |      |   | 
|---------- |  | ------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------- | -- | ---- | - | 
|           |  |                                                                                       |  |                                                                               |    | Page
|           |  |                                                                                       |  |                                                                               |    |     
|PART I     |  | Financial Information                                                                 |  |                                                                               |    |     
|Item 1     |  | Financial Statements (Unaudited)                                                      |  |                                                                               | 3  |     
|           |  |                                                                                       |  | CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES                                   |    |      |   | 
|           |  |                                                                                       |  | Consolidated Balance Sheets  December 31, 2002 and June 30, 2003 (Unaudited) |    |      | 3 | 
|           |  |                                                                                       |  | Consolidated Statements of Operations and Comprehensive Loss (Unaudited)      |    |      |   | 
|           |  |                                                                                       |  | - Three and Six Months Ended June 30, 2002 and 2003                           |    |      | 4 | 
|           |  |                                                                                       |  | Consolidated Statements of Cash Flows (Unaudited)                             |    |      |   | 
|           |  |                                                                                       |  | - Six Months Ended June 30, 2002 and 2003                                     |    |      | 5 | 
|           |  |                                                                                       |  | Condensed Notes to Unaudited Consolidated Financial Statements                |    |      | 6 | 
|Item 2     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |                                                                               | 22 |     
|Item 3     |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |                                                                               | 36 |     
|Item 4     |  | Controls and Procedures                                                               |  |                                                                               | 37 |     
|PART II    |  | Other Information                                                                     |  |                                                                               |    |     
|Item 2     |  | Changes in Securities and Use of Proceeds                                             |  |                                                                               | 38 |     
|Item 4     |  | Submission of Matters to a Vote of Security Holders                                   |  |                                                                               | 38 |     
|Item 6     |  | Exhibits and Reports on Form 8-K                                                      |  |                                                                               | 39 |     
|Signatures |  |                                                                                       |  |                                                                               | 40 |     

2



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The discussion set forth in this Form 10-Q contains statements concerning
potential future events. Such forward-looking statements are based on
assumptions by Crown Media Holdings, Inc.s (Crown Media Holdings or the
Company) management, as of the date of this Form 10-Q including assumptions
about risks and uncertainties faced by Crown Media Holdings. Readers can
identify these forward-looking statements by their use of such verbs as
expects, anticipates, believes, or similar verbs or conjugations of such
verbs. If any of managements assumptions prove incorrect or should
unanticipated circumstances arise, Crown Media Holdings actual results, levels
of activity, performance, or achievements could materially differ from those
anticipated by such forward-looking statements. Among the factors that could
cause actual results to differ materially are those discussed in this Form 10-Q
under the heading 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 Crown Media Holdings, we, us and our
refer to Crown Media Holdings, and, unless the context requires otherwise,
subsidiaries of Crown Media Holdings that operate our businesses, Crown Media
International, LLC (Crown Media International), Crown Media United States,
LLC (Crown Media United States), Crown Media Distribution, LLC (Crown Media
Distribution), Crown Entertainment Limited (Crown Entertainment), Crown
Media Trust (Crown Media Trust), and H&H Programming  Asia, L.L.C. (H&H
Programming  Asia) . 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, TOTAL CHOICE and other product
or service names are trademarks or registered trademarks of their owners.




PART I. FINANCIAL INFORMATION




Item 1.Financial Statements (Unaudited)




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

|                                                                                                                                                         |                                            |                                      |           |                    |  |                |           |             |  | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------ | --------- | ------------------ |  | -------------- | --------- | ----------- |  | 
|                                                                                                                                                         |                                            |                                      |           | As of December 31, |  | As of June 30,
|                                                                                                                                                         |                                            |                                      |           | 2002               |  | 2003          
|                                                                                                                                                         |                                            |                                      |           |                    |  |               
|                                                                                                                                                         |                                            |                                      |           |                    |  |                |           | (Unaudited)
|                                                                                                                                                         |                                            | ASSETS                               |           |                    |  |                |           |             |  | 
|Cash and cash equivalents                                                                                                                                |                                            | $                                    | 335       |                    |  | $              | 8,286     |            
|Accounts receivable, less allowance for doubtful accounts of $7,516 and $8,016,
respectively                                                             |                                            |                                      | 41,629    |                    |  |                | 45,895    |            
|Program license fees  affiliates, net of accumulated amortization                                                                                       |                                            |                                      | 12,632    |                    |  |                | 24,720    |            
|Program license fees  non-affiliates, net of accumulated amortization                                                                                   |                                            |                                      | 46,557    |                    |  |                | 52,838    |            
|Subtitling and dubbing, net of accumulated amortization                                                                                                  |                                            |                                      | 3,265     |                    |  |                | 2,830     |            
|Prepaids and other assets                                                                                                                                |                                            |                                      | 12,837    |                    |  |                | 12,067    |            
|                                                                                                                                                         |                                            |                                      |           |                    |  |                |           |            
|                                                                                                                                                         | Total current assets                       |                                      |           | 117,255            |  |                |           | 146,636     | 
|Restricted cash                                                                                                                                          |                                            |                                      | 340       |                    |  |                | 340       |            
|Program license fees  affiliates, net of current portion                                                                                                |                                            |                                      | 37,318    |                    |  |                | 32,416    |            
|Program license fees  non-affiliates, net of current portion                                                                                            |                                            |                                      | 51,470    |                    |  |                | 55,987    |            
|Subtitling and dubbing, net of current portion                                                                                                           |                                            |                                      | 1,051     |                    |  |                | 938       |            
|Film assets, net of accumulated amortization                                                                                                             |                                            |                                      | 786,826   |                    |  |                | 775,260   |            
|Subscriber acquisition fees, net of accumulated amortization                                                                                             |                                            |                                      | 140,265   |                    |  |                | 125,981   |            
|Property and equipment, net of accumulated depreciation                                                                                                  |                                            |                                      | 35,612    |                    |  |                | 31,733    |            
|Goodwill                                                                                                                                                 |                                            |                                      | 314,033   |                    |  |                | 314,033   |            
|Debt issuance costs, net of accumulated amortization                                                                                                     |                                            |                                      | 6,309     |                    |  |                | 5,555     |            
|Prepaids and other assets, net of current portion                                                                                                        |                                            |                                      | 1,783     |                    |  |                | 1,556     |            
|                                                                                                                                                         |                                            |                                      |           |                    |  |                |           |            
|                                                                                                                                                         | Total assets                               |                                      | $         | 1,492,262          |  |                | $         | 1,490,435   | 
|                                                                                                                                                         |                                            |                                      |           |                    |  |                |           |            
|                                                                                                                                                         |                                            | LIABILITIES AND STOCKHOLDERS EQUITY |           |                    |  |                |           |             |  | 
|LIABILITIES:                                                                                                                                             |                                            |                                      |           |                    |  |                |           |            
|Accounts payable and accrued liabilities                                                                                                                 |                                            | $                                    | 47,425    |                    |  | $              | 38,641    |            
|Subscriber acquisition fees payable                                                                                                                      |                                            |                                      | 45,930    |                    |  |                | 24,030    |            
|License fees payable to affiliates                                                                                                                       |                                            |                                      | 8,104     |                    |  |                | 28,053    |            
|License fees payable to non-affiliates                                                                                                                   |                                            |                                      | 50,652    |                    |  |                | 49,939    |            
|Payables to affiliates                                                                                                                                   |                                            |                                      | 6,680     |                    |  |                | 7,702     |            
|Interest payable to HC Crown                                                                                                                             |                                            |                                      | 10        |                    |  |                | 1,069     |            
|Credit facility and other interest payable                                                                                                               |                                            |                                      | 871       |                    |  |                | 592       |            
|Capital lease obligation                                                                                                                                 |                                            |                                      | 1,433     |                    |  |                | 1,495     |            
|Deferred film asset license fees                                                                                                                         |                                            |                                      | 599       |                    |  |                | 402       |            
|                                                                                                                                                         |                                            |                                      |           |                    |  |                |           |            
|                                                                                                                                                         | Total current liabilities                  |                                      |           | 161,704            |  |                |           | 151,923     | 
|Accrued liabilities, net of current portion                                                                                                              |                                            |                                      | 31,385    |                    |  |                | 24,311    |            
|Subscriber acquisition fees payable, net of current portion                                                                                              |                                            |                                      | 2,624     |                    |  |                | 1,500     |            
|License fees payable to affiliates, net of current portion                                                                                               |                                            |                                      | 60,229    |                    |  |                | 60,229    |            
|License fees payable to non-affiliates, net of current portion                                                                                           |                                            |                                      | 39,206    |                    |  |                | 41,465    |            
|Note payable to HC Crown                                                                                                                                 |                                            |                                      | 5,000     |                    |  |                | 75,000    |            
|Payable to Hallmark Entertainment Holdings, Inc.                                                                                                         |                                            |                                      | 52,052    |                    |  |                | 52,052    |            
|Payable to Hallmark Entertainment, Inc.                                                                                                                  |                                            |                                      | 47,948    |                    |  |                | 47,948    |            
|Credit facility                                                                                                                                          |                                            |                                      | 320,000   |                    |  |                | 320,000   |            
|Capital lease obligation, net of current portion                                                                                                         |                                            |                                      | 9,290     |                    |  |                | 8,526     |            
|Convertible debt                                                                                                                                         |                                            |                                      | 47,916    |                    |  |                | 50,816    |            
|Derivative liability                                                                                                                                     |                                            |                                      | 762       |                    |  |                | 1,962     |            
|                                                                                                                                                         |                                            |                                      |           |                    |  |                |           |            
|                                                                                                                                                         | Total liabilities                          |                                      |           | 778,116            |  |                |           | 835,732     | 
|COMMITMENTS AND CONTINGENCIES                                                                                                                            |                                            |                                      |           |                    |  |                |           |            
|GUARANTEED PREFERRED BENEFICIAL INTEREST IN CROWN MEDIA
TRUSTS DEBENTURES                                                                               |                                            |                                      | 221,551   |                    |  |                | 236,162   |            
|REDEEMABLE PREFERRED MINORITY INTEREST                                                                                                                   |                                            |                                      | 25,000    |                    |  |                | 25,000    |            
|STOCKHOLDERS EQUITY:                                                                                                                                    |                                            |                                      |           |                    |  |                |           |            
|Class A common stock, $.01 par value; 200,000,000 shares authorized; 73,794,606
shares issued and outstanding; as of December 31, 2002 and June 30, 2003 |                                            |                                      | 738       |                    |  |                | 738       |            
|Class B common stock, $.01 par value; 120,000,000 shares authorized; 30,670,422 shares
issued and outstanding as of December 31, 2002 and June 30, 2003  |                                            |                                      | 307       |                    |  |                | 307       |            
|Paid-in capital                                                                                                                                          |                                            |                                      | 1,259,242 |                    |  |                | 1,280,865 |            
|Accumulated other comprehensive income                                                                                                                   |                                            |                                      | 647       |                    |  |                | 1,057     |            
|Accumulated deficit                                                                                                                                      |                                            |                                      | (793,339  | )                  |  |                | (889,426  | )          
|                                                                                                                                                         |                                            |                                      |           |                    |  |                |           |            
|                                                                                                                                                         | Total stockholders equity                 |                                      |           | 467,595            |  |                |           | 393,541     | 
|                                                                                                                                                         |                                            |                                      |           |                    |  |                |           |            
|                                                                                                                                                         | Total liabilities and stockholders equity |                                      | $         | 1,492,262          |  |                | $         | 1,490,435   | 
|                                                                                                                                                         |                                            |                                      |           |                    |  |                |           |            

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

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

|                                                                                     |                                                       |                |                          |        |                             |         |                           |        |        |         |         |        |        |          |         |        |        |         |  
|------------------------------------------------------------------------------------ | ----------------------------------------------------- | -------------- | ------------------------ | ------ | --------------------------- | ------- | ------------------------- | ------ | ------ | ------- | ------- | ------ | ------ | -------- | ------- | ------ | ------ | ------- | -
|                                                                                     |                                                       |                |                          |        | Three Months Ended June 30, |         | Six Months Ended June 30,
|                                                                                     |                                                       |                |                          |        |                             |         |                          
|                                                                                     |                                                       |                |                          |        | 2002                        |         | 2003                      |        | 2002   |         | 2003   
|                                                                                     |                                                       |                |                          |        |                             |         |                           |        |        |         |        
|                                                                                     |                                                       |                |                          |        | (Unaudited)                
|Revenue:                                                                             |                                                       |                |                          |        |                             |         |                           |        |        |         |         |        |        |          |         |       
|                                                                                     | Subscriber fees                                       |                | $                        | 16,961 |                             |         | $                         | 17,864 |        |         | $       | 34,868 |        |          | $       | 33,890 |       
|                                                                                     | Advertising                                           |                |                          | 17,313 |                             |         |                           | 23,321 |        |         |         | 30,713 |        |          |         | 45,330 |       
|                                                                                     | Advertising by Hallmark Cards                         |                |                          | 1,540  |                             |         |                           | 350    |        |         |         | 2,710  |        |          |         | 700    |       
|                                                                                     | Film asset license fees                               |                |                          | 3,472  |                             |         |                           | 3,865  |        |         |         | 10,451 |        |          |         | 7,404  |       
|                                                                                     | Other revenue                                         |                |                          | 21     |                             |         |                           | 23     |        |         |         | 34     |        |          |         | 57     |       
|                                                                                     |                                                       |                |                          |        |                             |         |                           |        |        |         |         |        |        |          |         |        |       
|                                                                                     |                                                       |                | Total revenue            |        |                             | 39,307  |                           |        |        | 45,423  |         |        |        | 78,776   |         |        |        | 87,381  |  
|Cost of Services:                                                                    |                                                       |                |                          |        |                             |         |                           |        |        |         |         |        |        |          |         |       
|                                                                                     | Programming costs:                                    |                |                          |        |                             |         |                           |        |        |         |         |        |        |          |         |        |       
|                                                                                     |                                                       | Affiliates     |                          |        | 9,380                       |         |                           |        | 9,987  |         |         |        | 19,762 |          |         |        | 18,724 |        
|                                                                                     |                                                       | Non-affiliates |                          |        | 12,855                      |         |                           |        | 14,087 |         |         |        | 26,224 |          |         |        | 28,793 |        
|                                                                                     | Amortization of film assets                           |                |                          | 5,467  |                             |         |                           | 6,809  |        |         |         | 12,715 |        |          |         | 13,586 |       
|                                                                                     | Subscriber acquisition fee expense                    |                |                          | 5,265  |                             |         |                           | 6,610  |        |         |         | 9,512  |        |          |         | 12,606 |       
|                                                                                     | Depreciation and amortization of technical facilities |                |                          | 1,186  |                             |         |                           | 1,186  |        |         |         | 2,372  |        |          |         | 2,371  |       
|                                                                                     | Operating costs                                       |                |                          | 16,305 |                             |         |                           | 11,591 |        |         |         | 29,530 |        |          |         | 22,083 |       
|                                                                                     |                                                       |                |                          |        |                             |         |                           |        |        |         |         |        |        |          |         |        |       
|                                                                                     |                                                       |                | Total cost of services   |        |                             | 50,458  |                           |        |        | 50,270  |         |        |        | 100,115  |         |        |        | 98,163  |  
|Selling, general and administrative expense                                          |                                                       |                | 12,414                   |        |                             |         | 12,285                    |        |        |         | 28,981  |        |        |          | 26,450  |       
|Marketing expense                                                                    |                                                       |                | 10,569                   |        |                             |         | 8,732                     |        |        |         | 20,363  |        |        |          | 14,171  |       
|Depreciation and amortization expense                                                |                                                       |                | 2,421                    |        |                             |         | 2,648                     |        |        |         | 4,641   |        |        |          | 5,071   |       
|                                                                                     |                                                       |                |                          |        |                             |         |                           |        |        |         |         |        |        |          |         |        |       
|                                                                                     |                                                       |                | Loss from operations     |        |                             | (36,555 | )                         |        |        | (28,512 | )       |        |        | (75,324  | )       |        |        | (56,474 | )
|Guaranteed preferred beneficial interest accretion                                   |                                                       |                | (1,176                   | )      |                             |         | (12,171                   | )      |        |         | (11,778 | )      |        |          | (23,218 | )     
|Interest expense and other, net                                                      |                                                       |                | (5,673                   | )      |                             |         | (7,514                    | )      |        |         | (11,763 | )      |        |          | (14,856 | )     
|                                                                                     |                                                       |                |                          |        |                             |         |                           |        |        |         |         |        |        |          |         |        |       
|                                                                                     |                                                       |                | Loss before income taxes |        |                             | (43,404 | )                         |        |        | (48,197 | )       |        |        | (98,865  | )       |        |        | (94,548 | )
|Income tax provision                                                                 |                                                       |                | (643                     | )      |                             |         | (1,200                    | )      |        |         | (1,192  | )      |        |          | (1,539  | )     
|                                                                                     |                                                       |                |                          |        |                             |         |                           |        |        |         |         |        |        |          |         |        |       
|                                                                                     |                                                       |                | Net loss                 |        | $                           | (44,047 | )                         |        | $      | (49,397 | )       |        | $      | (100,057 | )       |        | $      | (96,087 | )
|                                                                                     |                                                       |                |                          |        |                             |         |                           |        |        |         |         |        |        |          |         |        |       
|Other comprehensive income (loss):                                                   |                                                       |                |                          |        |                             |         |                           |        |        |         |         |        |        |          |         |       
|                                                                                     | Gain (loss) on fair value of derivative asset         |                |                          | 920    |                             |         |                           |       |        |         |         | 863    |        |          |         |       |       
|                                                                                     | Foreign currency translation adjustment               |                |                          | 517    |                             |         |                           | 635    |        |         |         | 314    |        |          |         | 410    |       
|                                                                                     |                                                       |                |                          |        |                             |         |                           |        |        |         |         |        |        |          |         |        |       
|                                                                                     |                                                       |                | Comprehensive loss       |        | $                           | (42,610 | )                         |        | $      | (48,762 | )       |        | $      | (98,880  | )       |        | $      | (95,677 | )
|Weighted average number of Class A and Class B shares
outstanding, basic and diluted |                                                       |                | 104,328                  |        |                             |         | 104,465                   |        |        |         | 104,227 |        |        |          | 104,465 |       
|                                                                                     |                                                       |                |                          |        |                             |         |                           |        |        |         |         |        |        |          |         |        |       
|Net loss per share, basic and diluted                                                |                                                       | $              | (0.42                    | )      |                             | $       | (0.47                     | )      |        | $       | (0.96   | )      |        | $        | (0.92   | )     
|                                                                                     |                                                       |                |                          |        |                             |         |                           |        |        |         |         |        |        |          |         |        |       

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

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

|                                                         |                                                                           |                                                                             |                                                             |                                                         |          |                           |         |        |         |        |         |  
|-------------------------------------------------------- | ------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ----------------------------------------------------------- | ------------------------------------------------------- | -------- | ------------------------- | ------- | ------ | ------- | ------ | ------- | -
|                                                         |                                                                           |                                                                             |                                                             |                                                         |          | Six Months Ended June 30,
|                                                         |                                                                           |                                                                             |                                                             |                                                         |          |                          
|                                                         |                                                                           |                                                                             |                                                             |                                                         |          | 2002                      |         | 2003  
|                                                         |                                                                           |                                                                             |                                                             |                                                         |          |                           |         |       
|                                                         |                                                                           |                                                                             |                                                             |                                                         |          | (Unaudited)              
|CASH FLOWS FROM OPERATING ACTIVITIES:                    |                                                                           |                                                                             |                                                             |                                                         |          |                           |         |       
|                                                         |                                                                           | Net loss                                                                    |                                                             | $                                                       | (100,057 | )                         |         | $      | (96,087 | )     
|                                                         |                                                                           | Adjustments to reconcile net loss to net cash used in
operating activities: |                                                             |                                                         |          |                           |         |        |         |       
|                                                         |                                                                           |                                                                             | Depreciation and amortization                               |                                                         |          | 78,875                    |         |        |         | 84,795 |        
|                                                         |                                                                           |                                                                             | Accretion on guaranteed preferred beneficial interest       |                                                         |          | 17,186                    |         |        |         | 22,018 |        
|                                                         |                                                                           |                                                                             | (Gain) loss on change in fair value of derivative liability |                                                         |          | (5,408                    | )       |        |         | 1,200  |        
|                                                         |                                                                           |                                                                             | Accretion on convertible debt                               |                                                         |          | 4,023                     |         |        |         | 5,191  |        
|                                                         |                                                                           |                                                                             | Provision for allowance for doubtful accounts               |                                                         |          | 3,310                     |         |        |         | 1,566  |        
|                                                         |                                                                           |                                                                             | Gain on sale of property and equipment                      |                                                         |          | (7                        | )       |        |         | (15    | )      
|                                                         |                                                                           |                                                                             | Stock-based and restricted stock compensation               |                                                         |          | 12                        |         |        |         | 323    |        
|                                                         |                                                                           |                                                                             | Changes in operating assets and liabilities:                |                                                         |          |                           |         |        |         |        |        
|                                                         |                                                                           |                                                                             |                                                             | Increase in accounts receivable                         |          |                           | (14,893 | )      |         |        | (5,732  | )
|                                                         |                                                                           |                                                                             |                                                             | Additions to program license fees                       |          |                           | (59,328 | )      |         |        | (65,813 | )
|                                                         |                                                                           |                                                                             |                                                             | Increase in subtitling and dubbing                      |          |                           | (2,923  | )      |         |        | (1,767  | )
|                                                         |                                                                           |                                                                             |                                                             | Additions to subscriber acquisition fees                |          |                           | (5,848  | )      |         |        | (1,224  | )
|                                                         |                                                                           |                                                                             |                                                             | Increase in prepaids and other assets                   |          |                           | (1,479  | )      |         |        | (474    | )
|                                                         |                                                                           |                                                                             |                                                             | Decrease in accounts payable and accrued liabilities    |          |                           | (11,077 | )      |         |        | (11,710 | )
|                                                         |                                                                           |                                                                             |                                                             | Decrease in interest payable                            |          |                           | (1,832  | )      |         |        | (768    | )
|                                                         |                                                                           |                                                                             |                                                             | Decrease in subscriber acquisition fees payable         |          |                           | (14,617 | )      |         |        | (23,024 | )
|                                                         |                                                                           |                                                                             |                                                             | Increase in license fees payable to affiliates          |          |                           | 20,442  |        |         |        | 17,264  |  
|                                                         |                                                                           |                                                                             |                                                             | (Decrease) increase in payables to affiliates           |          |                           | (1,144  | )      |         |        | 1,007   |  
|                                                         |                                                                           |                                                                             |                                                             | Increase (decrease) in deferred film asset license fees |          |                           | 332     |        |         |        | (197    | )
|                                                         |                                                                           |                                                                             |                                                             |                                                         |          |                           |         |       
|                                                         |                                                                           |                                                                             |                                                             | Net cash used in operating activities                   |          |                           | (94,433 | )      |         |        | (73,447 | )
|                                                         |                                                                           |                                                                             |                                                             |                                                         |          |                           |         |       
|CASH FLOWS FROM INVESTING ACTIVITIES:                    |                                                                           |                                                                             |                                                             |                                                         |          |                           |         |       
|                                                         |                                                                           | Purchases of property and equipment                                         |                                                             |                                                         | (803     | )                         |         |        | (1,781  | )     
|                                                         |                                                                           | Proceeds from disposition of property and equipment                         |                                                             |                                                         | 43       |                           |         |        | 38      |       
|                                                         |                                                                           |                                                                             |                                                             |                                                         |          |                           |         |       
|                                                         |                                                                           |                                                                             |                                                             | Net cash used in investing activities                   |          |                           | (760    | )      |         |        | (1,743  | )
|                                                         |                                                                           |                                                                             |                                                             |                                                         |          |                           |         |       
|CASH FLOWS FROM FINANCING ACTIVITIES:                    |                                                                           |                                                                             |                                                             |                                                         |          |                           |         |       
|                                                         | Proceeds from the issuance of common stock upon exercise
of stock options |                                                                             |                                                             | 1,629                                                   |          |                           |         |       |        
|                                                         | Proceeds from tax sharing agreement with Hallmark Cards                   |                                                                             |                                                             |                                                        |          |                           |         | 21,300 |        
|                                                         | Borrowings under the HC Crown note payable                                |                                                                             |                                                             |                                                        |          |                           |         | 70,000 |        
|                                                         | Borrowings under the credit facility                                      |                                                                             |                                                             | 92,000                                                  |          |                           |         |       |        
|                                                         | Payments on the credit facility                                           |                                                                             |                                                             | (110,587                                                | )        |                           |         |       |        
|                                                         | Decrease in cash in escrow                                                |                                                                             |                                                             | 111,625                                                 |          |                           |         |       |        
|                                                         | Distribution to holders of guaranteed preferred beneficial interest       |                                                                             |                                                             | (7,324                                                  | )        |                           |         | (7,406 | )      
|                                                         | Principal payments under capital lease obligation                         |                                                                             |                                                             | (645                                                    | )        |                           |         | (702   | )      
|                                                         |                                                                           |                                                                             |                                                             |                                                         |          |                           |         |       
|                                                         |                                                                           |                                                                             |                                                             | Net cash provided by financing activities               |          |                           | 86,698  |        |         |        | 83,192  |  
|Effect of exchange rate changes on cash                  |                                                                           |                                                                             | (81                                                         | )                                                       |          |                           | (51     | )     
|                                                         |                                                                           |                                                                             |                                                             |                                                         |          |                           |         |       
|                                                         |                                                                           |                                                                             |                                                             | Net (decrease) increase in cash and cash equivalents    |          |                           | (8,576  | )      |         |        | 7,951   |  
|Cash and cash equivalents, beginning of period           |                                                                           |                                                                             | 13,859                                                      |                                                         |          |                           | 335     |       
|                                                         |                                                                           |                                                                             |                                                             |                                                         |          |                           |         |       
|Cash and cash equivalents, end of period                 |                                                                           | $                                                                           | 5,283                                                       |                                                         |          | $                         | 8,286   |       
|Supplemental disclosure of cash and non-cash activities: |                                                                           |                                                                             |                                                             |                                                         |          |                           |         |       
|                                                         | Interest paid                                                             |                                                                             | $                                                           | 5,909                                                   |          |                           | $       | 7,706  |        
|                                                         | Interest paid on preferred securities                                     |                                                                             | $                                                           | 8,844                                                   |          |                           | $       | 8,944  |        
|                                                         | Income taxes paid                                                         |                                                                             | $                                                           | 1,192                                                   |          |                           | $       | 1,539  |        
|                                                         | Change in fair value of derivative asset                                  |                                                                             | $                                                           | 863                                                     |          |                           | $       |       |        

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

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CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2002 and 2003

1. Business and Organization

Organization

Crown Media Holdings, Inc. (Crown Media Holdings or the Company),
which was incorporated in the state of Delaware in December 1999, through its
subsidiaries, owns and operates pay television channels dedicated to high
quality, entertainment programming for adults and families in the United States
and in various countries throughout the world. The international operations of
the Hallmark Channel are operated by Crown Media International LLC (Crown
Media International) and, in the United Kingdom, by Crown Entertainment
Limited (Crown Entertainment). Crown Media International commenced its
operations outside the United States in 1995. Domestically, the Hallmark
Channel is operated and distributed by Crown Media United States LLC (Crown
Media United States). Crown Media International acquired an interest in Crown
Media United States in 1998 and as a result of several transactions Crown Media
Holdings owned 100% of the common interests of Crown Media United States by
March 2001. Significant investors in Crown Media Holdings include: Hallmark
Entertainment Investments Co. (Hallmark Entertainment Investments); Hallmark
Entertainment Holdings, Inc., a subsidiary of Hallmark Cards, Incorporated
(Hallmark Cards); Liberty Media Corporation (Liberty Media) and J.P. Morgan
Partners (BHCA), LP (J.P. Morgan), each through their investments in Hallmark
Entertainment Investments; VISN Management Corporation, a for-profit subsidiary
of the National Interfaith Cable Coalition; and Hughes Electronics Corporation.

Liquidity

In connection with the Companys growth strategy, the Company expects to
continue making investments in programming and distribution during the
remainder of 2003. Programming expenditures for the remainder of 2003 are
expected to be in the range of $40.0 million to $50.0 million, and cash
payments for subscriber acquisition fees for the remainder of 2003 are expected
to be $25.0 million to $35.0 million. Through June 30, 2003 the Company has
expended $42.6 million for programming and $24.2 million for subscriber
acquisition fees. If necessary, the Company believes it has discretion to
reduce some of this anticipated spending. The Companys principal uses of funds
during the remainder of 2003 are expected to be the payment of operating
expenses, payments for licensing of programming from third parties and
subscriber acquisition fees, and interest payments under its bank credit
facility.

On August 5, 2003, Crown Media Holdings repurchased all of the preferred
securities of Crown Media Trust and related contingent appreciation
certificates issued by the Company. The securities were repurchased for
approximately $329.1 million, including approximately $2.4 million of cash
distributions on the preferred securities through August 5, 2003. Funds for
this repurchase were obtained from the proceeds of a $400.0 million 10.25%
senior unsecured discount note issued to HC Crown Corp., a subsidiary of
Hallmark Cards. After the payment of certain expenses for the issuance
including a fee of $3.0 million to HC Crown, the Company used the balance of
the proceeds of the note, approximately $67.4 million, to pay principal,
interest, and prepayment penalties on its bank revolving credit loans. The
Company will avoid approximately $72.0 million in cash interest payments over
the next 4 years due to this repurchase and refinancing.

Through June 30, 2003, Crown Media Holdings had borrowed $75.0 million
under the line of credit with HC Crown, which is the full amount available under that line of credit, to pay scheduled
subscriber acquisition fee payments, marketing costs and programming fees
accrued at the end of the previous year and to support the cash needs of its
current operations. Because of the pay down on the bank credit
facility on August 5, 2003, the Company has available funds under the bank credit facility of
approximately $67.3 million. Prior to the paydown, the Company had borrowed the full amount available
under the bank credit facility of $320.0 million.  The Companys principal sources of funds are
currently cash inflows from operations, cash on hand, periodic cash inflows
expected under the tax sharing agreement with Hallmark Cards and amounts
available for borrowing under its bank credit facility. In addition, as of
August 5, 2003, $32.0 million had been received under the tax sharing agreement
and the Company expects that the remaining payments under the tax sharing
agreement in 2003 will be approximately $15.0 million. The Company also
believes that since the tax sharing agreement is with the Companys largest
shareholder, there is a potential that future tax sharing payments could become
available to the Company at an earlier date.

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The
Company projects that advertising revenue and licensing fees will increase in
2003, and that certain operating expenses will continue to decrease as a result
of the reorganization begun in the fourth quarter of 2002. Considering these
projected revenues and reduced expenditures, the Company believes that cash
flow from its operations, cash on hand, remaining availability under its credit
facility and payments anticipated under the tax sharing agreement will be
sufficient to meet its liquidity needs through at least June 2004. However, any
decline in the popularity of the Hallmark Channel, any significant future
modifications to the Companys distribution agreements, an economic decline in
the advertising market, an unexpected increase in competition or other adverse
operating conditions will impact the Companys ability to achieve its projected
operating results. If the projected operating results are not achieved, the
Company may need to obtain additional funding. In any event, in order to
provide more liquidity, Crown Media Holdings may consider pursuing alternatives
to raise additional cash, which could include the issuance of additional equity
or debt securities. There can be no assurance, however, that additional funding
will be available, if at all, on terms acceptable to the Company. Any new debt
financing would require the agreement of existing lenders, including HC Crown.

2.     Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Crown Media
Holdings and those of its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

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

Restricted Cash

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

Subscriber Acquisition Fees

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

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

Subscriber acquisition fees are comprised of the following:

|                                     |                                  |   |                    |         |                |   |         |         | 
|------------------------------------ | -------------------------------- | - | ------------------ | ------- | -------------- | - | ------- | ------- | 
|                                     |                                  |   | As of December 31, |         | As of June 30,
|                                     |                                  |   | 2002               |         | 2003          
|                                     |                                  |   |                    |         |               
|                                     |                                  |   | (In thousands)    
|Subscriber acquisition fees, at cost |                                  | $ | 186,085            |         |                | $ | 187,309 |        
|Accumulated amortization             |                                  |   | (45,820            | )       |                |   | (61,328 | )      
|                                     |                                  |   |                    |         |                |   |         |        
|                                     | Subscriber acquisition fees, net |   | $                  | 140,265 |                |   | $       | 125,981 | 
|                                     |                                  |   |                    |         |                |   |         |        

As of December 31, 2002 and June 30, 2003, the consolidated balance sheets
also reflected subscriber acquisition fees payable of $48.6 million and $25.5
million, respectively. For the three months ended June 30, 2002 and 2003, Crown
Media United States made cash payments of $6.3 million and $12.8 million,
respectively, reducing subscriber acquisition fees payable. For the six months
ended June 30, 2002 and 2003, Crown Media United States made cash payments of
$20.4 million and $24.2 million, respectively, reducing subscriber acquisition
fees payable.

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On November 7, 2002, the Company entered into an amendment of a
distribution agreement with a large distributor in the United
States. The amendment extended the distribution agreement for two years
to December 31, 2007, and provided for the payment of a substantial cash amount
in settlement of the most favored nation clauses in regard to the terms of an
agreement with DirecTV in 2001 and for additional full-time subscribers to the
Hallmark Channel. The Company paid a portion of the amount upon execution and
will make monthly cash payments through December 2003 for the balance. The
Company may also be required to pay substantial marketing support payments, if
subscribers exceed the final commitment number, through December 31, 2004. In
addition, if the distributor achieves the final commitment level of
subscribers, subscriber fees will not apply to subscribers above a specified
number. The amendment also contains a most favored nation provision relating
to other distribution agreements.

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 generally deferred and then amortized on a
straight-line basis over their license periods (the airing windows) or
anticipated usage. At the inception of these contracts and periodically
thereafter, Crown Media Holdings evaluates the recoverability of these costs
compared to the estimated future 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.

Subtitling and Dubbing

Subtitling and dubbing 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 or the programs estimated life (in
the case of programming licensed from Hallmark Entertainment Distribution and
the Companys film assets). Beginning in 2003, subtitling and dubbing costs
related to programming licensed from Hallmark Entertainment Distribution are
being amortized over a maximum period of 3 years. Amortization expense for
subtitling and dubbing costs was $1.3 million and $1.2 million for the three
months ended June 30, 2002 and 2003, respectively. Amortization expense for
subtitling and dubbing costs was $2.4 million and $2.3 million for the six
months ended June 30, 2002 and 2003, respectively.

|                                       |                                    |   |                    |       |                |   |        |       | 
|-------------------------------------- | ---------------------------------- | - | ------------------ | ----- | -------------- | - | ------ | ----- | 
|                                       |                                    |   | As of December 31, |       | As of June 30,
|                                       |                                    |   | 2002               |       | 2003          
|                                       |                                    |   |                    |       |               
|                                       |                                    |   | (In thousands)    
|Subtitling and dubbing assets, at cost |                                    | $ | 8,343              |       |                | $ | 7,946  |      
|Accumulated amortization               |                                    |   | (4,027             | )     |                |   | (4,178 | )    
|                                       |                                    |   |                    |       |                |   |        |      
|                                       | Subtitling and dubbing assets, net |   | $                  | 4,316 |                |   | $      | 3,768 | 
|                                       |                                    |   |                    |       |                |   |        |      

Capitalized Leases

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

Property and Equipment

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

Accounting for Trust Preferred Securities

Crown Media Holdings formed a special-purpose entity, Crown Media Trust,
in December 2001. Crown Media Trust issued preferred securities in Crown Media
Trusts name to investors in a private placement and loaned the proceeds to
Crown Media Holdings. This loan was designed so that interest and principal
payments matched the dividend and any redemption requirements on the preferred
securities issued by Crown Media Trust. Interest received by Crown Media Trust
from Crown Media Holdings funded distributions to the holders of the preferred
securities.

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Crown Media Holdings owned 100% of the common equity in Crown Media Trust.
The preferred securities included terms that
allowed the holder to earn a return above the stated dividend rate on the
securities under certain conditions. Based on fair value calculations using
discounted cash flows and Black-Scholes models, a portion of the proceeds from
the preferred securities was allocated and classified in Crown Media Holdings
balance sheet as guaranteed preferred beneficial interest in Crown Media
Trusts debentures and a portion was classified as convertible debt. Issuance
costs related to the guaranteed preferred beneficial interest portion were
netted against the guaranteed preferred beneficial interest and accreted as
additional expense in earnings. Issuance costs related to the convertible debt
portion were recorded as a deferred debt issuance costs asset and were
amortized as additional interest expense, using the effective interest method.
See Note 6, Credit Facility and Private Placement, for additional discussion of
the terms for the preferred securities and Crown Media Holdings related
subordinated debentures and see Note 9, Subsequent Events, for information on
the August 5, 2003, repurchase of all of the preferred securities by Crown
Media Holdings.

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 of subscriber
acquisition costs in accordance with Emerging Issues Task Force (EITF) No.
01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendors Products). Subscriber acquisition fee expense is
recorded to the extent that the amortization of subscriber acquisition costs
exceed the related revenue earned from the pay television distributor.

Certain revenue from pay television distributors and film license
agreements is recognized in accordance with EITF No. 00-21, Revenue
Arrangements with Multiple Deliverables.Under EITF No. 00-21, revenue
arrangements with multiple deliverables are divided into separate units of
accounting if the deliverables in the arrangement meet the following criteria:
the delivered item has value to the customer on a standalone basis; there is
objective and reliable evidence of the fair value of the undelivered item; and
delivery or performance of the undelivered item is considered probable and
substantially in the control of the vendor.

Advertising revenues are recognized as earned in the period in which the
advertising is telecast. If uncertainty as to the collectibility of this
revenue exists, the revenue is recognized on a cash basis. 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 amounts paid in cash for similar advertisements from buyers
unrelated to the other party in the barter transaction. When the barter
advertising revenue does not meet the requirements of EITF No. 99-17,
Accounting for Advertising Barter Transactions,no revenue is recognized. For
the three months ended June 30, 2002, revenue from advertising barter
transactions of $207,000 and the corresponding barter expenses were included in
marketing expenses in the accompanying consolidated statements of operations.
No barter revenue or related expenses were recorded for the three months ended
June 30, 2003. For the six months ended June 30, 2002 and 2003, revenue from
advertising barter transactions of $320,000 and $94,000, respectively, and the
corresponding barter expenses were included in marketing expenses in the
accompanying consolidated statements of operations.

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

Revenues from foreign sources for the three months ended June 30, 2002 and
2003, represented 53% and 47% respectively, of total revenue. Revenues from
foreign sources for the six months ended June 30, 2002 and 2003, represented
49% and 46% respectively, of total revenue. Such revenues, generally
denominated in United States dollars, were primarily from sales to customers in
Australia, Malaysia, Mexico, Norway, Poland, Singapore, South Africa, South
Korea, Spain, Sweden, Taiwan, and the United Kingdom, during all periods
presented.

The Company is in discussions with a primary pay television distributor in
Spain who has attempted to terminate an existing distribution agreement with
the Hallmark Channel. The outcome can not be predicted.

Cost of Services

Cost of services includes signal distribution expenses, depreciation of
the Network Operations Center and amortization of the capital lease for uplink
and transponder space, amortization of program license fees, subtitling and
dubbing amortization and costs, subscriber acquisition amortization and costs,
and amortization of film assets.

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Film Assets

The Company amortizes its film assets using the
individual-film-forecast-computation method over a maximum period of 10 years,
which amortizes such assets in the same ratio that current period actual
revenue bears to estimated unrecognized ultimate revenues as of the beginning
of the current fiscal year for sales to third parties and internal usage. The
Companys projections regarding sales to third parties and anticipated internal
use are based on the history of each film and similar films, sales and
marketing plans, and other factors, all of which require significant judgment
by management. The 10-year period used for sales to third parties and internal
use commences on the date of acquisition and is the same time period used in
the initial, external valuation of the Companys film assets at the time of
acquisition. The Company also reviews the film assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. If the carrying value of the individual film
assets exceeds the fair value, the film assets are written-down to their fair
values. At least annually, the Company is required by the covenants in its
credit facility to have a outside valuation expert perform a valuation of the
film assets. These valuations supported the Companys determination that the
estimated fair value of the film assets as of December 31, 2002, exceeded the
carrying value. Amortization expense for the film library was $5.5 million and
$6.8 million for the three months ended June 30, 2002 and 2003, respectively.
Amortization expense for the film library was $12.7 million and $13.6 million
for the six months ended June 30, 2002 and 2003, respectively.

|                         |                                              |   |                    |         |                |   |         |         | 
|------------------------ | -------------------------------------------- | - | ------------------ | ------- | -------------- | - | ------- | ------- | 
|                         |                                              |   | As of December 31, |         | As of June 30,
|                         |                                              |   | 2002               |         | 2003          
|                         |                                              |   |                    |         |               
|                         |                                              |   | (In thousands)    
|Film assets              |                                              | $ | 816,172            |         |                | $ | 818,096 |        
|Accumulated amortization |                                              |   | (29,346            | )       |                |   | (42,836 | )      
|                         |                                              |   |                    |         |                |   |         |        
|                         | Film assets, net of accumulated amortization |   | $                  | 786,826 |                |   | $       | 775,260 | 
|                         |                                              |   |                    |         |                |   |         |        

Goodwill

In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, Business Combinations
(SFAS No. 141) and No. 142, Goodwill and Other Intangible Assets(SFAS No.
142), which were adopted by Crown Media Holdings on January 1, 2002. These
standards required companies to cease amortizing goodwill and certain
intangible assets with indefinite useful lives acquired or created through
business combinations accounted for using the purchase method of accounting.
Instead, goodwill and intangible assets deemed to have indefinite useful lives
are subject to an annual review for impairment. Crown Media Holdings ceased
amortizing goodwill effective January 1, 2002. Valuation experts evaluated the
carrying value of the Companys goodwill for impairment upon implementation of
SFAS No. 142 and at November 30, 2002, which the Company has selected as its
annual goodwill impairment review date. These evaluations support the Companys
determination that the estimated fair value of goodwill currently is not less
than its carrying value.

Taxes on Income

Income taxes are accounted for using an asset and liability method that
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax basis and net operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to be applied to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The Company reduces
deferred tax assets by a valuation allowance if it is more likely than not that
some portion or all of the deferred tax assets will not be realized.

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 accumulated other comprehensive income. Foreign currency
transaction gains and losses are included in determining net loss for the
period.

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Net Loss Per Share

Basic net loss per share is computed by dividing the net loss for the
period by the weighted average number of common shares
outstanding during the period. Diluted net loss per share is computed
based on the weighted average number of common shares and potentially dilutive
common shares outstanding. The calculation of diluted net loss per share
excludes potential common shares if the effect is antidilutive. Potential
common shares consist of incremental common shares issuable upon the exercise
of stock options and restricted stock units. Approximately 1.7 million stock
options for the three and six months ended June 30, 2003, approximately 8.1
million stock options for the three and six months ended June 30, 2002, and
approximately 2.1 million restricted stock units for the three and six months
ended June 30, 2003, have been excluded from the calculations of earnings per
share because their effect would have been antidilutive. Additionally, 10.1
million contingent appreciation certificates issued in conjunction with the
private placement have also been excluded from the calculations of earnings per
share for the three and six months ended June 30, 2002 and 2003, as their
effect would have been antidilutive.

Stock-Based Compensation, Employee Incentives and Retention

The Company accounts for its stock-based employee compensation plan using
the intrinsic value method under the recognition and measurement principles of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees,and related Interpretations. Accordingly, compensation cost for
stock options issued to employees is measured as the excess, if any, of the
quoted market price of the Companys stock at the date of the grant over the
amount an employee must pay to acquire the stock. In December 2002, the FASB
issued SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure  an amendment of SFAS No. 123.SFAS No. 148 requires certain
additional disclosures related to stock-based compensation plans. SFAS No. 123,
Accounting for Stock-Based Compensation,encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value.

The Companys Board of Directors approved in April 2003 actions to provide
additional incentives to and encourage retention of its employees. Crown Media
Holdings then outstanding stock options held by employees had exercise prices
significantly above the current market value of its Class A common stock. The
Company made an exchange offer in May 2003 to senior management and vice
presidents, totaling approximately 55 persons, to exchange their options for
restricted stock units (RSUs). The exchange ratio was one RSU for every 2.5
options for shares of the Companys Class A common stock. Each RSU, upon
vesting, represents the right to receive one share of Class A common stock or
the value of the share in cash at the time of vesting. The Companys Board may
determine at its discretion whether the payment is made in common stock or
cash. The RSUs vest annually over three years. In the exchange offer, a total
of 5,126,732 options were exchanged for 2,050,693 RSUs in May 2003. As a
result of the exchange offer, Crown Media Holdings is recording non-cash
compensation expense based on the fair value of its common stock on the date of
grant of the RSUs over the vesting period of the RSUs. As of June 30, 2003, the
Company had recorded $317,288 of compensation expense. Options for 279,254
shares of common stock that were not exchanged are subject to variable plan
accounting in which compensation is remeasured at each reporting date until the
options are exercised, expire unexercised or are forfeited. No compensation
expense was recorded related to the unexchanged options for the three and six
months ended June 30, 2003, as the price of the Companys Class A common stock
on June 30, 2003, was less than the strike price of the underlying unexchanged
options. It is currently believed that the Board of Directors will elect to
settle the RSU awards in common stock. If the Board of Directors ultimately
decides to settle the RSU awards in cash, variable plan accounting will be
required.

In addition, Crown Media Holdings Board of Directors vested the stock
options of all employees below the vice-president level who held options at the
end of May 2003 and granted them a right to receive a future cash payment of
$1.00 for each outstanding option held by the employee. The immediate vesting
of the employees stock options created a new measurement date which requires
the Company record stock compensation expense, if any, for the excess of the
Companys stock price on the measurement date over the underlying stock
options strike price. Since the price of the Companys Class A common stock
on the measurement date was less than the strike price of all of the stock
options owned by the employees, no compensation expense was recorded. The June
2004 cash payment is contingent upon employment through that period and is
based upon options for a total of 344,386 shares of our Class A common stock.
As a result, we are recording related compensation expense from June 2003
through May 2004 as compensation is earned. As of June 30, 2003, we had
recorded $29,000 of compensation expense related to this grant.

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Had compensation costs for these plans been determined consistent with
SFAS 123, Crown Media Holdings net loss and loss per share would have been
increased to the following pro forma amounts for the three and six months ended
June 30, 2002 and 2003:

Pro Forma Effects
(In thousands, except per share amounts)

|                                           |                                       |   |                             |         |                           |   |         |         |      |   |          |          |   |   |         |         |  
|------------------------------------------ | ------------------------------------- | - | --------------------------- | ------- | ------------------------- | - | ------- | ------- | ---- | - | -------- | -------- | - | - | ------- | ------- | -
|                                           |                                       |   | Three Months Ended June 30, |         | Six Months Ended June 30,
|                                           |                                       |   |                             |         |                          
|                                           |                                       |   | 2002                        |         | 2003                      |   | 2002    |         | 2003
|                                           |                                       |   |                             |         |                           |   |         |         |     
|Net loss before stock options expense      |                                       | $ | (44,047                     | )       |                           | $ | (49,397 | )       |      | $ | (100,057 | )        |   | $ | (96,087 | )      
|Stock options expense                      |                                       |   | (3,089                      | )       |                           |   | (1,654  | )       |      |   | (6,178   | )        |   |   | (3,308  | )      
|Stock options expense included in net loss |                                       |   | 6                           |         |                           |   | 3       |         |      |   | 12       |          |   |   | 6       |        
|                                           |                                       |   |                             |         |                           |   |         |         |      |   |          |          |   |   |         |        
|                                           | Net loss                              |   | $                           | (47,130 | )                         |   | $       | (51,048 | )    |   | $        | (106,223 | ) |   | $       | (99,389 | )
|                                           |                                       |   |                             |         |                           |   |         |         |      |   |          |          |   |   |         |        
|                                           | Weighted average shares               |   |                             | 104,328 |                           |   |         | 104,465 |      |   |          | 104,227  |   |   |         | 104,465 |  
|                                           |                                       |   |                             |         |                           |   |         |         |      |   |          |          |   |   |         |        
|                                           | Net loss per share, basic and diluted |   | $                           | (0.45   | )                         |   | $       | (0.49   | )    |   | $        | (1.02    | ) |   | $       | (0.95   | )
|                                           |                                       |   |                             |         |                           |   |         |         |      |   |          |          |   |   |         |        

For purposes of this pro forma presentation, the fair value of each option
grant was estimated at the date of grant using a Black-Scholes model with the
following weighted-average assumptions for grants during the three and six
months ended June 30, 2002. No options were granted during the three and six
months ended June 30, 2003.

|                          |  |                    |       |                  |  |  |       |  
|------------------------- |  | ------------------ | ----- | ---------------- |  |  | ----- | -
|                          |  | Three Months Ended |       | Six Months Ended
|                          |  | June 30, 2002      |       | June 30, 2002   
|                          |  |                    |       |                 
|Risk-free interest rate   |  |                    | 6.00  | %                |  |  | 6.00  | %
|Volatility factor         |  |                    | 35.21 | %                |  |  | 35.21 | %
|Dividend yield            |  |                    | 0     | %                |  |  | 0     | %
|Expected terms of options |  | 4 years            |       | 6 years         

Derivative Financial Instruments

The Company has adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities(SFAS No. 133), as amended. The standard
requires the recognition of all derivative instruments on the balance sheet as
either assets or liabilities measured at fair value. Changes in fair value are
recognized immediately in earnings unless the derivatives qualify as hedges of
future cash flows. The Company discontinues hedge accounting prospectively when
it is determined that the derivative is no longer effective in offsetting the
cash flows of the hedged item, the derivative expires or is sold, terminated or
exercised, or the derivative is no longer designated as a hedging instrument.
Changes in the fair value of the contingent appreciation certificates in the
private placement transaction are recognized immediately in earnings. See Note
6 for a discussion of the derivative liability related to the private placement
transaction.

For derivatives qualifying as hedges of future cash flows, the effective
portion of changes in fair value is recorded as a component of other
comprehensive income (loss) and recognized in earnings when the hedged
transaction is recognized in earnings. Any ineffective portion (representing
the extent that the change in fair value of the hedges does not completely
offset the change in the anticipated net payments being hedged) is recognized
in earnings as it occurs.

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

The Company was a party to a forward foreign exchange contract in 2002,
which was entered into to reduce the exposure to the adverse effects of
fluctuating foreign currency exchange rates. This contract, which was
designated as a cash flow hedge, was entered into to hedge a payable
denominated in a foreign currency, which had a maturity of less than one year.
The foreign exchange contract was settled at maturity and the net loss was
reclassified to earnings during 2002.

Use of Estimates

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

Concentration of Credit Risk

Financial instruments, which potentially subject Crown Media Holdings to a
concentration of credit risk, consist primarily of cash, restricted cash, cash
equivalents and accounts receivable. Generally, Crown Media Holdings does not
require collateral to secure receivables. Crown Media Holdings has no
significant off-balance sheet financial instruments with risk of accounting
losses.

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Fair Value

The carrying amounts of financial instruments, including amounts payable
and receivable, are reasonable estimates of their fair values because of their
short-term nature.

Interim Financial Statements

In the opinion of management, the accompanying balance sheets and related
interim statements of operations and cash flows, include all adjustments,
consisting only of normal recurring items, as well as the accounting changes to
adopt SFAS No. 133, SFAS No. 141, and SFAS No. 142, necessary for their fair
presentation in conformity with accounting principles generally accepted in the
United States. Interim results are not necessarily indicative of results for a
full year. The information included in this Form 10-Q should be read in
conjunction with Managements Discussion and Analysis and financial statements
and notes thereto included in the Crown Media Holdings, Inc. 2002 Annual Report
on Form 10-K.

Reclassifications

Certain reclassifications have been made to conform prior periods data to
the current presentation.

Recently Issued Accounting Pronouncements

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity and is effective at the beginning of the first interim period beginning
after June 15, 2003. For financial instruments created before the issuance
date, transition shall be achieved by reporting the cumulative effect of a
change in an accounting principle by initially measuring the financial
instruments at fair value. For mandatorily redeemable financial instruments,
dividends and other amounts paid or accrued prior to reclassification of the
instrument as a liability shall not be reclassified as interest cost upon
transition. Restatement of financial statements for earlier years presented is
not permitted.

In accordance with SFAS No. 150, Crown Media Holdings, Inc. reclassified
its guaranteed preferred interest in Crown Media Trusts debentures and its
preferred minority interest as liabilities as of July 1, 2003. On August 5,
2003, Crown Media Holdings repurchased all of the preferred securities of Crown
Media Trust and related contingent appreciation certificates issued by the
Company for approximately $329.1 million, including approximately $2.4 million
of cash distributions on the preferred securities through August 5, 2003. As
of June 30, 2003, the balances of the private placement components were $236.2
million of guaranteed preferred beneficial interests, $50.8 million of
convertible debt, $2.0 million of net derivative liability and $1.8 million of
debt issuance costs asset, respectively.

3.     Reorganization

On October 7, 2002, the Company announced its intention to reorganize its
operations in order to concentrate its efforts on the Hallmark Channel in the
U.S. and in its more successful international markets. The Company completed
decentralizing many oversight and non-technical support functions formerly
located in the Companys U.S. based offices and has transferred those
responsibilities to regional staff. In Latin America the Company entered into
an agreement with a local distribution partner, Pramer S.C.A., who is now
responsible for the day-to-day operations of the Hallmark Channel in this
region. By April 2003, the Companys workforce was reduced by approximately
30% or 130 positions.

The Company recorded a reorganization charge of $28.8 million during the
fourth quarter of 2002. This charge was comprised of a charge of $5.5 million
for severance costs and charges of $23.3 million related to exit costs for
satellite, transponder and facility leases.

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The following table displays the activity and balances of the
reorganization accrual account from October 7, 2002, to June 30, 2003, which
has been included in accounts payable and accrued liabilities in the
accompanying consolidated balance sheets.

|                                       |  |                |        |            |  |             |       |       |  |               |        |   |  |   |        |  
|-------------------------------------- |  | -------------- | ------ | ---------- |  | ----------- | ----- | ----- |  | ------------- | ------ | - |  | - | ------ | -
|                                       |  |                |        |            |  |             |       |       |  | Satellite and |        |   |  |  
|                                       |  | Severance      |        | Facilities |  | Transponder |       | Total
|                                       |  |                |        |            |  |             |       |      
|                                       |  | (In thousands)
|Balance at October 7, 2002             |  | $              | 5,492  |            |  | $           | 1,651 |       |  | $             | 21,658 |   |  | $ | 28,801 |  
|Deductions due to payments             |  |                | (2,097 | )          |  |             |      |       |  |               | (545   | ) |  |   | (2,642 | )
|                                       |  |                |        |            |  |             |       |       |  |               |        |   |  |   |        |  
|Balance at December 31, 2002           |  |                | 3,395  |            |  |             | 1,651 |       |  |               | 21,113 |   |  |   | 26,159 |  
|Additions due to accretion of discount |  |                |       |            |  |             | 61    |       |  |               | 211    |   |  |   | 272    |  
|Deductions due to payments             |  |                | (3,146 | )          |  |             | (5    | )     |  |               | (1,243 | ) |  |   | (4,394 | )
|                                       |  |                |        |            |  |             |       |       |  |               |        |   |  |   |        |  
|Balance at March 31, 2003              |  |                | 249    |            |  |             | 1,707 |       |  |               | 20,081 |   |  |   | 22,037 |  
|Additions due to accretion of discount |  |                |       |            |  |             |      |       |  |               | 148    |   |  |   | 148    |  
|Deductions due to payments             |  |                | (236   | )          |  |             | (55   | )     |  |               | (1,217 | ) |  |   | (1,508 | )
|                                       |  |                |        |            |  |             |       |       |  |               |        |   |  |   |        |  
|Balance at June 30, 2003               |  | $              | 13     |            |  | $           | 1,652 |       |  | $             | 19,012 |   |  | $ | 20,677 |  
|                                       |  |                |        |            |  |             |       |       |  |               |        |   |  |   |        |  

Deductions reflect total cash payments of $8.5 million through June 30,
2003, representing termination benefits and satellite and transponder
contractual obligations. Additions reflect accretion through June 30, 2003, of
$420,000 representing accretion on our satellite, transponder and facility
lease obligations.

4.     Program license fees

Program license fees are comprised of the following:

|                                                           |                                                       |   |                    |         |                |   |          |         | 
|---------------------------------------------------------- | ----------------------------------------------------- | - | ------------------ | ------- | -------------- | - | -------- | ------- | 
|                                                           |                                                       |   | As of December 31, |         | As of June 30,
|                                                           |                                                       |   | 2002               |         | 2003          
|                                                           |                                                       |   |                    |         |               
|                                                           |                                                       |   | (In thousands)    
|Program license fees  Hallmark Entertainment
Distribution |                                                       | $ | 82,910             |         |                | $ | 94,045   |        
|Program license fees  NICC                                |                                                       |   |                   |         |                |   | 6,215    |        
|Program license fees  other affiliates                    |                                                       |   | 8,341              |         |                |   | 8,341    |        
|Program license fees  non-affiliates                      |                                                       |   | 130,656            |         |                |   | 160,950  |        
|Prepaid program license fees                               |                                                       |   | 9,500              |         |                |   | 8,950    |        
|                                                           |                                                       |   |                    |         |                |   |          |        
|                                                           | Program license fees, at cost                         |   |                    | 231,407 |                |   |          | 278,501 | 
|Accumulated amortization                                   |                                                       |   | (83,430            | )       |                |   | (112,540 | )      
|                                                           |                                                       |   |                    |         |                |   |          |        
|                                                           | Program license fees, net of
accumulated amortization |   | $                  | 147,977 |                |   | $        | 165,961 | 
|                                                           |                                                       |   |                    |         |                |   |          |        

Programming costs for the three months ended June 30, 2002 and 2003, were
$22.2 million and $24.1 million, respectively. Programming costs for the six
months ended June 30, 2002 and 2003, were $46.0 million and $47.5 million,
respectively. Amortization of program license fees, included as a component of
programming cost, was $22.0 million and $22.5 million for the three months
ended June 30, 2002 and 2003. Amortization of program license fees, included as
a component of programming cost, was $45.3 million and $46.3 million for the
six months ended June 30, 2002 and 2003.

License fees payable are comprised of the following:

|                                                           |                                              |   |                    |         |                |   |         |         | 
|---------------------------------------------------------- | -------------------------------------------- | - | ------------------ | ------- | -------------- | - | ------- | ------- | 
|                                                           |                                              |   | As of December 31, |         | As of June 30,
|                                                           |                                              |   | 2002               |         | 2003          
|                                                           |                                              |   |                    |         |               
|                                                           |                                              |   | (In thousands)    
|License fees payable  Hallmark Entertainment
Distribution |                                              | $ | 68,243             |         |                | $ | 85,501  |        
|License fees payable  NICC                                |                                              |   |                   |         |                |   | 2,781   |        
|License fees payable  other affiliates                    |                                              |   | 90                 |         |                |   |        |        
|License fees payable  non-affiliates                      |                                              |   | 89,858             |         |                |   | 91,404  |        
|                                                           |                                              |   |                    |         |                |   |         |        
|                                                           | Total license fees payable                   |   |                    | 158,191 |                |   |         | 179,686 | 
|Less current maturies                                      |                                              |   | (58,756            | )       |                |   | (77,992 | )      
|                                                           |                                              |   |                    |         |                |   |         |        
|                                                           | License fees payable, net of current portion |   | $                  | 99,435  |                |   | $       | 101,694 | 
|                                                           |                                              |   |                    |         |                |   |         |        

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5.     Property and Equipment

Property and equipment are comprised of the following:

|                                          |                                                         |   |                    |        |                |   |             |        |  |  |     |  | 
|----------------------------------------- | ------------------------------------------------------- | - | ------------------ | ------ | -------------- | - | ----------- | ------ |  |  | --- |  | 
|                                          |                                                         |   | As of December 31, |        | As of June 30, |   | Depreciable
|                                          |                                                         |   | 2002               |        | 2003           |   | Lives      
|                                          |                                                         |   |                    |        |                |   |            
|                                          |                                                         |   | (In thousands)     |        | (In years)    
|Technical equipment and computers         |                                                         | $ | 38,584             |        |                | $ | 39,862      |        |  |  | 3-5 | 
|Leased asset                              |                                                         |   | 13,252             |        |                |   | 13,252      |        |  |  | 8   | 
|Furniture, fixtures and equipment         |                                                         |   | 2,162              |        |                |   | 2,136       |        |  |  | 5   | 
|Leasehold improvements                    |                                                         |   | 8,215              |        |                |   | 9,320       |        |  |  | 3-7 | 
|Construction-in-progress                  |                                                         |   | 1,520              |        |                |   | 931         |        |  |  |     | 
|                                          |                                                         |   |                    |        |                |   |             |        |  |  |     | 
|                                          | Property and equipment, at cost                         |   |                    | 63,733 |                |   |             | 65,501 |  |  |     |  | 
|Accumulated depreciation and
amortization |                                                         |   | (28,121            | )      |                |   | (33,768     | )      |  |  |     | 
|                                          |                                                         |   |                    |        |                |   |             |        |  |  |     | 
|                                          | Property and equipment, net of
accumulated depreciation |   | $                  | 35,612 |                |   | $           | 31,733 |  |  |     |  | 
|                                          |                                                         |   |                    |        |                |   |             |        |  |  |     | 

Depreciation and amortization expense related to property and equipment
totaled $3.0 million and $2.9 million for the three months ended June 30, 2002
and 2003, respectively. Depreciation and amortization expense related to
property and equipment totaled $5.2 million and $5.7 million for the six months
ended June 30, 2002 and 2003, respectively. Software and other intangible
assets have been included in prepaids and other in the accompanying
consolidated balance sheets. Amortization expense related to software and other
intangibles was $200,000 and $600,000, respectively, for the three months ended
June 30, 2002 and 2003. Amortization expense related to software and other
intangibles was $600,000 and $1.4 million, respectively, for the six months
ended June 30, 2002 and 2003.

6.     Credit Facility and Private Placement

Credit Facility

In connection with the completion of the purchase of the film assets,
Crown Media Holdings entered into a credit agreement with a syndicate of banks,
led by JP Morgan Chase Bank, under which the banks have extended to Crown Media
Holdings, a five-year $320.0 million secured credit facility. At June 30, 2003,
Crown Media Holdings had borrowed all funds available under the credit
facility. The entire balance is due in 2006 and, therefore, is classified as a
long-term liability in the accompanying consolidated balance sheets. This loan
is guaranteed by Crown Media Holdings subsidiaries and is secured by all
tangible and intangible property of Crown Media Holdings and its subsidiaries.

The bank credit facility encompasses a term loan of $100.0 million and a
revolving line of credit of $220.0 million, up to $20.0 million of which can be
letters of credit issued at the request of Crown Media Holdings. Each loan
(which includes the term loans and any revolving credit loans) bears interest
at a Eurodollar rate or an alternate base rate as Crown Media Holdings may
request in accordance with the credit agreement. The Eurodollar rate is based
on the London interbank market for Eurodollars, and remains in effect for the
time period of the loan ranging from one, two, three, six or twelve months. The
alternate rate is based upon the prime rate of JP Morgan Chase Bank, a
certificate of deposit rate or the federal funds effective rate, which is
adjusted whenever the rate changes.

Amounts under the revolver have accrued interest at rates from 4.73% to
5.14% and amounts under the term loan have accrued interest at rates from 4.84%
to 5.11% for the six months ended June 30, 2002. Interest expense for the three
and six months ended June 30, 2002, was $2.8 million and $5.1 million,
respectively. Amounts under the revolver have accrued interest at rates from
4.06% to 4.44% and amounts under the term loan have accrued interest at rates
from 4.06% to 4.42% for the six months ended June 30, 2003. Interest expense
for the three and six months ended June 30, 2003, was $3.5 million and $7.0
million, respectively. At December 31, 2002, and June 30, 2003, accrued
interest of $596,000 and $308,000, respectively, was reflected in the
current portion of the credit facility in the accompanying consolidated balance
sheets.

See Note 9, Subsequent Events, below for information on the August 5,
2003, repayment of approximately $67.4 million of bank revolving credit loans,
interest and prepayment penalties.

Private Placement

On December 17, 2001, Crown Media Holdings completed a $265.0 million
private placement to a group of institutional investors. Under the terms of the
private placement, Crown Media Holdings issued units to the investors, each
unit consisted of one preferred security of Crown Media Trust, and one
contingent appreciation certificate, issued by Crown Media Holdings. The
financing was recorded at $265.0 million and required the allocation of fair
value to the various components based on the terms of the private placement
agreement. Crown Media Holdings calculated the guaranteed preferred beneficial
interest portion of the preferred securities using an internal rate of return
analysis (cumulative present value of expected future cash flows) on the
preferred securities. The carrying value of the guaranteed preferred beneficial
interest was $221.6 million on December 31, 2002, and was $236.2 million on
June 30, 2003, net of unamortized offering costs.

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##### Table of Contents



Crown Media Holdings calculated the initial value of the contingent
appreciation certificate portion of the preferred securities by
using Black-Scholes models and by using a combination of put and call
options that would provide the same future payout as the convertible debt
portion. The resulting value of the contingent appreciation certificates, net
of embedded derivatives, was $47.9 million as of December 31, 2002, and $50.8
million as of June 30, 2003, which has been classified as convertible debt on
the accompanying consolidated balance sheets. The transaction also resulted in
a net derivative liability of $762,000 as of December 31, 2002, and $2.0
million as of June 30, 2003.

The following table summarizes the transaction as of the transaction date,
as of December 31, 2002, and as of June 30, 2003. The summary also reflects the
allocation of transaction costs between the various components of the
financing.

|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |          |         |   |         |         |         | 
|-------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ------- | -------------- | ------- | ------------ | ------- | -------- | ------- | - | ------- | ------- | ------- | 
|                                                                           |                                                                                                       |                                                                        |         | Initial        |         | As of        |         | As of   
|                                                                           |                                                                                                       |                                                                        |         | Fair Value     |         | December 31, |         | June 30,
|                                                                           |                                                                                                       |                                                                        |         | Allocation     |         | 2002         |         | 2003    
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |         
|                                                                           |                                                                                                       |                                                                        |         | (In thousands)
|Convertible debt
Value of contingent appreciation certificates             |                                                                                                       | $                                                                      | 93,682  |                |         |              |         |          |         |   |         |        
|                                                                           | Value of embedded derivative                                                                          |                                                                        |         | (50,212        | )       |              |         |          |         |   |         |         |        
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |          |         |   |         |        
|                                                                           |                                                                                                       | Total carrying amount of convertible debt(a)(b)                        |         | $              | 43,470  |              |         | $        | 47,916  |   |         | $       | 50,816  | 
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |          |         |   |         |        
|Derivative liability(c)                                                    |                                                                                                       | $                                                                      | 12,083  |                |         | $            | 762     |          |         | $ | 1,962   |        
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |          |         |   |         |        
|Allocable offering costs included in debt issuance
costs(d)                |                                                                                                       | $                                                                      | (2,444  | )              |         | $            | (2,020  | )        |         | $ | (1,815  | )      
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |          |         |   |         |        
|Guaranteed preferred beneficial interest in Crown Media
Trusts debentures |                                                                                                       | $                                                                      | 209,447 |                |         | $            | 245,241 |          |         | $ | 266,363 |        
|                                                                           | Distribution to holders of guaranteed preferred beneficial
interest in Crown Media Trusts debentures |                                                                        |         |               |         |              |         | (14,730  | )       |   |         | (22,137 | )      
|                                                                           | Allocable offering costs(e)                                                                           |                                                                        |         | (11,771        | )       |              |         | (8,960   | )       |   |         | (8,064  | )      
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |          |         |   |         |        
|                                                                           |                                                                                                       | Total carrying value of guaranteed preferred beneficial
interest(b)(f) |         | $              | 197,676 |              |         | $        | 221,551 |   |         | $       | 236,162 | 
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |          |         |   |         |        
|                                                                           | Net proceeds allocated to securities sold                                                             |                                                                        | $       | 250,785        |         |              |         |          |         |   |         |         |        
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |          |         |   |         |        
|Gross proceeds from private placement                                      |                                                                                                       | $                                                                      | 265,000 |                |         |              |         |          |         |   |         |        
|Offering costs                                                             |                                                                                                       |                                                                        | (14,215 | )              |         |              |         |          |         |   |         |        
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |          |         |   |         |        
|                                                                           | Net proceeds allocated to securities sold                                                             |                                                                        | $       | 250,785        |         |              |         |          |         |   |         |         |        
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |          |         |   |         |        



---

|(a) |  | Accreting principal to $45.6 million plus additional 11.25% interest to meet minimum return requirements over six years. 
|--- |  | -------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Interest payable at 6.75% per annum in cash each quarter. Balance due at anticipated redemption on December 17, 2007.    
|   
|(c) |  | Marked to fair value through income (loss) at each reporting date.                                                       
|   
|(d) |  | Amortizing to interest expense over six years.                                                                           
|   
|(e) |  | Accreting to guaranteed preferred beneficial interest over six years.                                                    
|   
|(f) |  | Accreting principal to $219.4 million plus additional 11.25% interest to meet minimum return requirements over six years.

See Note 9, Subsequent Events, below for information on the August 5,
2003, repurchase of all of the preferred securities by Crown Media Holdings.

7.     Related Party Transactions

Demand Notes

On December 14, 2001, the Company executed a promissory note, in the
amount of $75.0 million payable to HC Crown in replacement of the promissory
note with HC Crown dated September 28, 2001. This note may be borrowed against
or prepaid without penalty and has a final maturity date no later than December
21, 2007. The line of credit is subordinate to the bank credit facility, and
its availability may be reduced dollar for dollar in an amount equal to
additional capital raised by Crown Media Holdings. The rate of interest under
the line of credit is equal to LIBOR plus three percent, payable quarterly. HC
Crowns obligation to make loans under this line of credit is supported by an
irrevocable letter of credit from Credit Suisse First Boston. As of December
31, 2002, and June 30, 2003, principal borrowings under the note were $5.0
million and $75.0 million included in notes payable to HC Crown
on the accompanying consolidated balance sheets, respectively, with accrued interest of $10,000 and
$1.1 million, respectively, included in interest
payable to HC Crown on the accompanying consolidated balance sheets. Under the
$75.0 million note, the Company is obligated to pay a commitment fee of 1.5% of
the initial maximum amount of the note through December 31, 2002, which may be
paid in cash or by issuing common stock valued at the average closing price of
the common stock for the 15 trading days prior to the date the fee is due. The
commitment fee is payable in arrears in four equal installments on the last
business day of each calendar quarter during 2002. At both December 31, 2002,
and June 30, 2003, the $281,000 commitment fee was included in payable to
affiliates in the accompanying consolidated balance sheets. In December 2002,
we issued 123,831 shares as payment for $844,000 of fees.

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Tax Sharing Agreement

On March 11, 2003, Hallmark Entertainment Holdings, Inc. (Hallmark
Entertainment Holdings, a subsidiary wholly owned indirectly by Hallmark
Cards) contributed 100% of the Crown Media Holdings shares owned by it to
Hallmark Entertainment Investments. Two of Crown Media Holdings investors,
Liberty Crown, Inc. (Liberty), a subsidiary of Liberty Media, and JP Morgan,
also contributed 100% of their Crown Media Holdings shares to Hallmark
Entertainment Investments, and VISN contributed 10% of its Crown Media Holdings
shares to Hallmark Entertainment Investments, all in return for Hallmark
Entertainment Investments shares. Crown Media Holdings understands that
Hallmark Entertainment Investments intends to hold the Crown Media Holdings
Shares and to evaluate media investment opportunities in which Crown Media
Holdings does not have an interest. Hallmark Entertainment Holdings, as the
more than 80% owner of Hallmark Entertainment Investments, has voting power
over all of the Crown Media Holdings shares owned by Hallmark Entertainment
Investments.

As a result of this transaction, Crown Media Holdings became a member of
Hallmark Cards consolidated federal tax group and entered into a federal tax
sharing agreement with Hallmark Cards. Hallmark Cards will include Crown Media
Holdings in its consolidated federal income tax return. Accordingly, Hallmark
Cards will benefit from future tax losses, which may be generated by Crown
Media Holdings. Based on the tax sharing agreement, Hallmark Cards will pay
Crown Media Holdings all of the benefits realized by Hallmark Cards as a result
of consolidation, 75% in cash on a quarterly basis and the balance when Crown
Media Holdings becomes a taxpayer. Under this federal tax sharing agreement,
at Hallmark Cards option, this 25% balance may also be applied as an offset
against any amounts owed by Crown Media Holdings to any member of the Hallmark
Cards consolidation group under any loan, line of credit or other payable,
subject to limitations under any loan indentures or contracts restricting such
offsets.

Through June 30, 2003, the Company received $21.3 million under the tax
sharing agreement. These receipts have been recorded as a component of
additional paid in capital.

Costs Incurred on Crown Media Holdings Behalf

Since inception, Hallmark Entertainment has at times paid certain costs
related to payroll and benefits, insurance, operational and financing
expenditures and capital expenditures on behalf of Crown Media Holdings. These
transactions are recorded in the books and records of Crown Media Holdings. For
the three and six months ended June 30, 2002, $1.0 million and $1.4 million,
respectively, were paid to Hallmark Entertainment. No payments were made during
the three months ending June 30, 2003, but $445,000 of intercompany payables
were recorded during this period. For the six months ended June 30, 2003,
$845,000 was paid to Hallmark Entertainment. Unreimbursed costs and other
intercompany payables of $1.1 million and $700,000 are included in payable to
affiliates in the accompanying consolidated balance sheets as of December 31,
2002, and June 30, 2003, respectively.

Services Agreement with Hallmark Cards

Crown Media Holdings has an intercompany services agreement with Hallmark
Cards, which was effective January 1, 2003, under which Hallmark Cards has
agreed for a term of three years, subject to cancellation by either party after
the first or second year, to provide us with tax, risk management, health
safety, environmental, insurance, legal, treasury and cash management services
and real estate consulting services. This agreement replaces an intercompany
services agreement, which expired on January 1, 2003. Under the new agreement,
the Company has agreed to pay Hallmark Cards $515,000 per year for these
services, plus out-of-pocket expenses and third party fees, payable in arrears
on the last business day of each quarter. Additionally, Hallmark Cards made a
payment on Crown Media Holdings behalf for certain expenses in the amount of
$500,000 during first quarter 2002. For the six months ended June 30, 2002 and
2003, Crown Media Holdings had accrued $250,000 and $258,000, respectively,
under the agreement. At December 31, 2002, and June 30, 2003, unpaid accrued
service fees and other intercompany payables of $5.0 million and $6.4 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 the Companys
film assets. This service agreement has a term of three years, commencing
January 1, 2001, with the right of either party to terminate the agreement
after the first year upon 60 days written notice. In consideration for the
services provided by Hallmark Entertainment, Crown Media Holdings is obligated
to pay a service fee of $1.5 million per year, paid in quarterly installments
of $375,000. Crown Media Holdings paid $1.9 million to Hallmark Entertainment
for these services in April 2002. Crown Media Holdings paid $375,000 to
Hallmark Entertainment during both the first and second quarters of 2003. At

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##### Table of Contents



December 31, 2002, and June 30, 2003, unpaid accrued service fees of
$375,000 were included in payable to affiliates in the accompanying
consolidated balance sheets.

Program License Agreements with Hallmark Entertainment Distribution

Crown Media International has a program license agreement with Hallmark
Entertainment Distribution dated January 1, 2001. The agreement expires on
December 31, 2005, subject to a renewal through December 31, 2010. Under the
terms of the agreement, Crown Media International has the exclusive right to
exhibit Hallmark Entertainment Distributions programming in the territories in
which Crown Media International operates during three 18-month windows. Crown
Media International also has the exclusive right to exhibit programming in
markets where it does not currently operate, if it elects to distribute its
channel in those markets 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 a 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, owns an interest of 35% or more of Crown Media
Holdings. If, at any time, Hallmark Entertainment Distribution ceases to own a
35% interest in Crown Media Holdings, and if, at that time, the remaining term
of the program agreement is less than two years, then the remaining term of the
program agreement will be extended to the date two years after the date on
which Hallmark Entertainment Distribution ceased to own a 35% interest in Crown
Media Holdings.

As part of the program license agreements with Hallmark Entertainment
Distribution, in the event that either Crown Media United States or Crown Media
International sub-licenses any licensed program to a third party, they must
equally share with Hallmark Entertainment Distribution the excess, if any, of
the sublicensing fee over the initial program license fee paid by the Company.
For the three and six months ended June 30, 2002, Crown Media United States
entered into sublicensing arrangements which resulted in $148,000 being payable
to Hallmark Entertainment Distribution under this sharing arrangement and which
has been included in the accompanying consolidated balance sheet as payable to
affiliates. The Company did not enter into such sublicensing agreements during
the period from January 1, 2003, through June 30, 2003. In addition, pursuant
to an amendment to the program license agreements, dated as of May 15, 2002,
Crown Media United States and Crown Media International authorized Hallmark
Entertainment Distribution to solicit and enter into third party license
agreements for titles held by them under the program license agreements. In
the event that the length of the license sold to such third party exceeds the
length of the license held by Crown Media United States or Crown Media
International, the fees related to such excess period are to be paid to
Hallmark Entertainment Distribution.

Programming costs related to the Hallmark program agreements were $7.3
million and $6.3 million, respectively, for the three months ended June 30,
2002 and 2003. Programming costs related to the Hallmark program agreements
were $15.2 million and $12.1 million, respectively, for the six months ended
June 30, 2002 and 2003. As of December 31, 2002, and June 30, 2003, $68.2
million and $85.5 million, respectively, are included in license fees payable
to affiliates in the accompanying consolidated balance sheets. In fourth
quarter 2002, Crown Media Holdings paid $25.0 million to Hallmark Entertainment
Distribution for license fees.

NICC License Agreements

In connection with an investment by Crown Media International in Crown
Media United States on November 13, 1998, HEN Domestic Holdings, Inc., a wholly
owned subsidiary of Crown Media International, and Vision Group, VISN
Management Corporation (VISN) and Henson Cable Networks, Inc. signed an
amended and restated company agreement governing the operation of Crown Media
United States. As of February 22, 2001 and January 1, 2002 the parties agreed
to certain amendments to the amended and restated company agreement, as more
fully described below. The company agreement was negotiated at arms length
with the other party or parties to the agreement.

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##### Table of Contents



VISN owns a $25.0 million preferred interest in Crown Media United States.
Under the amended and restated company agreement, the members agreed that if
during any year ending after January 1, 2005 and 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;                                                                       
| | - |  | -----------------------------------------------------------------------------------
|
| |  |  | $5.0 million; or                                                                   
|
| |  |  | the amount equal to the preferred liquidation preference on the date of redemption.

The members also agreed that Crown Media United States will redeem the
preferred interest at the preferred interest liquidation preference on the date
of redemption of December 31, 2010.

Under the amended and restated company agreement, Crown Media United
States may be required to make certain payments to the National Interfaith
Cable Coalition (NICC) in relation to the provision of programming by NICC.
Prior to the February 2001 amendment, these payments were $3.5 million annually
and, so long as VISN owned the preferred interest, $1.5 million multiplied by
the quotient of the preferred liquidation preference divided by $25.0 million.
Pursuant to the amendment adopted in 2001, Crown Media United States may be
required to pay to NICC a total license fee comprised of:



| |  |  | $5.3 million per year, with Consumer Price Index escalations, for two recurring programming blocks;         
| | - |  | ------------------------------------------------------------------------------------------------------------
|
| |  |  | up to $10 million per year for production costs of an additional recurring signature series program block;
|
| |  |  | up to $600,000 per non-dramatic holiday special produced by NICC; and                                     
|
| |  |  | $1 million per dramatic holiday special co-produced by NICC and Hallmark Entertainment.                   

Pursuant to the February 2001 amendment, Crown Media United States is
required to broadcast 15 1/2 hours per week of faith and values programming.
In addition, NICC may produce or co-produce for Crown Media United States up to
six dramatic or non-dramatic holiday specials per year and a signature series.
Crown Media United States funds a portion of the production costs of this new
programming as described above. In addition, pursuant to the February 2001
amendment, Crown Media United States is required to assist NICC in launching
and operating a new channel, which will be distributed by digital satellite and
cable. This assistance will include the provision to NICC of management and
operation services, with some services at no cost and some services for fees.

In a further amendment to the amended and restated company agreement,
which was effective as of January 1, 2002, Crown Media United States agreed to
advance NICC $3,000,000 in each of 2002 and 2003 to help fund NICCs cost of
expanding its production operations to produce the above-described programming.
This advance will be recovered from the license fees payable for this
programming.

The term of the obligations contained in the February 2001 amendment
expire on March 26, 2006, but may be terminated earlier if NICC sells more than
50% of the Crown Media Holdings shares it owned on February 22, 2001. In
addition, six months prior to the expiration of the agreement, Crown Media
United States must negotiate in good faith with NICC regarding a continuation
of the programming and funding commitment to NICC. If agreement is not reached
and Crown Media United States does not continue the NICC programming and
funding commitments at the same levels, NICC is entitled to compel Crown Media
Holdings to buy all of NICCs Crown Media Holdings shares at their then-current
market value no later than 60 days following the expiration of the amendment.
Crown Media United States, however, can nullify this put by electing to
continue the NICC programming and funding commitments at the same levels.
During the three months ended June 30, 2002 and 2003, Crown Media United States
paid NICC $3.9 million and $674,000, respectively, related to this agreement.
During the six months ended June 30, 2002 and 2003, Crown Media United States
paid NICC $7.0 million and $5.0 million, respectively, related to this
agreement.

Under the amended and restated company agreement, Crown Media
International may not transfer its interests in Crown Media United States until
the fifth anniversary of the agreement, except to one of our affiliates or to
another member of Crown Media United States or one of its affiliates. In
addition, any transaction between us or any of our affiliates and Crown Media
United States must be approved by the Crown Media United States governance
committee.

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##### Table of Contents



8. Operations in Different Geographic Areas

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; depreciation
and amortization expenses; and marketing expenses).

|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |       |         | 
|----------------------------------------- | ------------------------- | ------------------------- | ---- | ------------ |  | ------------ | --- | ------------- |  | ------------ | ----- | ----- | - |  | ------- | ----- | ------- | 
|                                          |                           |                           |      | Revenue from |  | Revenue from |     | Loss          |  |              |       |      
|                                          |                           |                           |      | Unrelated    |  | Related      |     | from          |  | Identifiable
|                                          |                           |                           |      | Entities     |  | Entities     |     | Operations    |  | Assets      
|                                          |                           |                           |      |              |  |              |     |               |  |             
|                                          |                           |                           |      |              |  |              |     | (In millions) |  |              |       |      
|Three months ended June 30, 2002:         |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|                                          | Domestic                  |                           | $    | 13.6         |  |              | $   | 1.5           |  |              | $     | (24.9 | ) |  | $       | 573.7 |        
|                                          | International             |                           |      | 20.7         |  |              |     |              |  |              |       | 8.0   | ) |  |         | 81.6  |        
|                                          | Film Distribution         |                           |      | 3.5          |  |              |     |              |  |              |       | (3.6  | ) |  |         | 801.4 |        
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|                                          |                           | $                         | 37.8 |              |  | $            | 1.5 |               |  |              | (36.5 | )     |   |  | 1,456.7 |      
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|Guaranteed preferred beneficial accretion |                           |                           |      |              |  |              |     |               |  |              | (1.2  | )     |   |  |         |      
|Interest expense and other, net           |                           |                           |      |              |  |              |     |               |  |              | (5.7  | )     |   |  |         |      
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|Loss before income taxes                  |                           |                           |      |              |  |              |     |               |  | $            | (43.4 | )     |   |  |         |      
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|Assets not allocated to segments:         |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|                                          | Cash and cash equivalents |                           |      |              |  |              |     |               |  |              |       |       |   |  |         | 5.3   |        
|                                          | Accounts receivable       |                           |      |              |  |              |     |               |  |              |       |       |   |  |         | 47.9  |        
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|                                          |                           | Consolidated total assets |      |              |  |              |     |               |  |              |       |       |   |  |         | $     | 1,509.9 | 
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|Three months ended June 30, 2003:         |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|                                          | Domestic                  |                           | $    | 19.9         |  |              | $   | 0.3           |  |              | $     | (23.1 | ) |  | $       | 586.5 |        
|                                          | International             |                           |      | 21.3         |  |              |     |              |  |              |       | (1.3  | ) |  |         | 72.3  |        
|                                          | Film Distribution         |                           |      | 3.9          |  |              |     |              |  |              |       | (4.1  | ) |  |         | 777.4 |        
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|                                          |                           | $                         | 45.1 |              |  | $            | 0.3 |               |  |              | (28.5 | )     |   |  | 1,436.2 |      
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|Guaranteed preferred beneficial accretion |                           |                           |      |              |  |              |     |               |  |              | (12.2 | )     |   |  |         |      
|Interest expense and other, net           |                           |                           |      |              |  |              |     |               |  |              | (7.5  | )     |   |  |         |      
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|Loss before income taxes                  |                           |                           |      |              |  |              |     |               |  | $            | (48.2 | )     |   |  |         |      
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|Assets not allocated to segments:         |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|                                          | Cash and cash equivalents |                           |      |              |  |              |     |               |  |              |       |       |   |  |         | 8.3   |        
|                                          | Accounts receivable       |                           |      |              |  |              |     |               |  |              |       |       |   |  |         | 45.9  |        
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|                                          |                           | Consolidated total assets |      |              |  |              |     |               |  |              |       |       |   |  |         | $     | 1,490.4 | 
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|Six Months Ended June 30, 2002:           |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|                                          | Domestic                  |                           | $    | 27.0         |  |              | $   | 2.7           |  |              | $     | (47.4 | ) |  | $       | 573.7 |        
|                                          | International             |                           |      | 38.6         |  |              |     |              |  |              |       | (22.6 | ) |  |         | 81.6  |        
|                                          | Film Distribution         |                           |      | 10.5         |  |              |     |              |  |              |       | (5.3  | ) |  |         | 801.4 |        
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|                                          |                           | $                         | 76.1 |              |  | $            | 2.7 |               |  |              | (75.3 | )     |   |  | 1,456.7 |      
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|Guaranteed preferred beneficial accretion |                           |                           |      |              |  |              |     |               |  |              | (11.8 | )     |   |  |         |      
|Interest expense and other, net           |                           |                           |      |              |  |              |     |               |  |              | (11.8 | )     |   |  |         |      
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|Loss before income taxes                  |                           |                           |      |              |  |              |     |               |  | $            | (98.9 | )     |   |  |         |      
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|Assets not allocated to segments:         |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|                                          | Cash and cash equivalents |                           |      |              |  |              |     |               |  |              |       |       |   |  |         | 5.3   |        
|                                          | Accounts receivable       |                           |      |              |  |              |     |               |  |              |       |       |   |  |         | 47.9  |        
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|                                          |                           | Consolidated total assets |      |              |  |              |     |               |  |              |       |       |   |  |         | $     | 1,509.9 | 
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|Six Months Ended June 30, 2003:           |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|                                          | Domestic                  |                           | $    | 39.3         |  |              | $   | 0.7           |  |              | $     | (38.0 | ) |  | $       | 586.5 |        
|                                          | International             |                           |      | 40.0         |  |              |     |              |  |              |       | (9.7  | ) |  |         | 72.3  |        
|                                          | Film Distribution         |                           |      | 7.4          |  |              |     |              |  |              |       | (8.7  | ) |  |         | 777.4 |        
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|                                          |                           | $                         | 86.7 |              |  | $            | 0.7 |               |  |              | (56.4 | )     |   |  | 1,436.2 |      
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|Guaranteed preferred beneficial accretion |                           |                           |      |              |  |              |     |               |  |              | (23.2 | )     |   |  |         |      
|Interest expense and other, net           |                           |                           |      |              |  |              |     |               |  |              | (14.9 | )     |   |  |         |      
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|Loss before income taxes                  |                           |                           |      |              |  |              |     |               |  | $            | (94.5 | )     |   |  |         |      
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|Assets not allocated to segments:         |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|                                          | Cash and cash equivalents |                           |      |              |  |              |     |               |  |              |       |       |   |  |         | 8.3   |        
|                                          | Accounts receivable       |                           |      |              |  |              |     |               |  |              |       |       |   |  |         | 45.9  |        
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|                                          |                           | Consolidated total assets |      |              |  |              |     |               |  |              |       |       |   |  |         | $     | 1,490.4 | 
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      

Some of the markets in which the Company operates, including the Asian
market, the South American market, Turkey and Russia, have experienced some or
all of the following conditions: volatile currency exchange rates, volatile
political conditions, and reduced or volatile economic activity. Crown Media
Holdings operations have and will continue to be affected in the foreseeable
future by economic conditions in these regions.

British Sky Broadcasting accounted for 14% of our consolidated revenues
for both the three and six months ended June 30, 2003. David J. Evans, the
Companys President and Chief Executive Officer, currently serves as a director
on British Sky Broadcastings Board. No individual pay television distributor
accounted for 10% of our consolidated subscribers for the three and six months
ended June 30, 2003.

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9. Subsequent Events

Senior Unsecured Note

On August 5, 2003, Crown Media Holdings repurchased all of the preferred
securities of Crown Media Trust and related contingent appreciation
certificates issued by the Company. The securities were repurchased for
approximately $329.1 million, including approximately $2.4 million of cash
distributions on the preferred securities through August 5, 2003, and a call
premium of approximately $30.5 million. Funds for this repurchase were obtained
from the proceeds of a $400.0 million 10.25% senior unsecured discount note
issued to HC Crown. After repayment of certain expenses for the issuance
including a fee of $3.0 million to HC Crown, the Company used the balance of
the proceeds of the note, approximately $67.4 million, to pay principal,
interest and prepayment penalties on its bank revolving credit loans.

The senior unsecured note provides for no cash interest payments for four
years; instead, the principal amount of the note accretes at 10.25% per annum,
compounding semi-annually, to $596.6 million at August 5, 2007. From that
date, interest at 10.25% per annum will be payable semi-annually on the
accreted value of the note. The note matures on August 5, 2011, and is
callable by Crown Media Holdings at any time after August 5, 2004, without
penalty.

A special independent committee of the Board of Directors of Crown Media
Holdings negotiated and approved the terms of the senior unsecured note and
related documents. The special committee also considered alternative financing
options to raise funds for the same purposes.

Amendment No. 6 to the bank credit facility of Crown Media Holdings
permits the sale of the 10.25% note, permits the repurchase of the preferred
securities and amends certain financial covenants of Crown Media Holdings,
including levels of EBITDA, the base amount used in the calculation of the
required minimum net worth and a maximum leverage ratio. The Company also
amended its tax sharing agreement with Hallmark Cards to provide that no
interest expense or income related to the 10.25% note will be used in
calculating taxes under the agreement until (and to the extent) payments on the
10.25% note are made to HC Crown in cash. This amendment defers payments by
Hallmark Cards to Crown Media Holdings under the tax sharing agreement related
to the 10.25% note until Crown Media Holdings makes cash payments of interest
on the note.

Dissolution of Crown Media Trust

On August 5, 2003, Crown Media Holdings filed a Certificate of
Cancellation with the Delaware Secretary of State to dissolve its Crown Media
Trust subsidiary.

Lease and Sublease Agreements

On July 9, 2003, Crown Media International entered into an agreement to
sublease 24,434 square feet of its Greenwood Village office space. The sublease
commences on September 1, 2003, and ends on September 10, 2008. On June 26,
2003, Crown Media International also entered into an agreement to lease an
additional 7,855 square feet of office space in the same building. The lease
commences on August 1, 2003, and ends on October 1, 2008.

In July 2003, Hallmark Entertainment and Crown Media International entered
into a 5-year sublease agreement to provide space to Crown Media International
in Hallmark Entertainments New York office on the same general terms and
conditions Hallmark Entertainment has on its underlying lease. This sublease
is subject to approval by Crown Media Holdings Board of Directors.

Italy

On August 1, 2003, the Company did not renew its contract with its
existing customer in Italy. The Company had $138,000 and $277,000 of revenue
during the three and six months ended June 30, 2003, from this customer. The
Company has $3.9 million of programming and other assets related to the Italian
market. Crown Media Holdings is exploring the sale of these assets, but there
is no assurance that any recovery will be made.

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

Revenue

Our revenue consists of subscriber fees, advertising and film license
fees. Subscriber fees are generally payable to us on a per subscriber basis by
pay television distributors for the right to carry our channels. In the United
States, we pay certain television distributors up-front subscriber acquisition
fees to carry our channel. However, such payments are not common in the
international cable television markets. Subscriber acquisition fees incurred
are capitalized and amortized over the term of the applicable distribution
agreement as a reduction in subscriber fee revenue. If the amortization expense
exceeds the revenue recognized on a per distributor basis, the excess
amortization is included as a component of cost of services. At the time we
sign a distribution agreement, and periodically thereafter, we evaluate the
recoverability of the costs we incur against the revenue directly associated
with each agreement.

Subscriber fees vary according to:



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

In some circumstances, international distributors provide minimum revenue
guarantees.

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

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

On November 7, 2002, we entered into an amendment of a distribution
agreement with a large distributor in the United States. The amendment
extended the distribution agreement for two years to December 31, 2007, and
provided for the payment of a substantial cash amount in settlement of the
most favored nation clauses in regard to the DirecTV terms and significantly
increases the distributors commitment to add full-time subscribers to our
Channel. We paid a portion of the amount upon execution and will make monthly
cash payments through December 1, 2003, for the balance. We are also required
to pay a substantial market support payment, based on subscribers exceeding a
final commitment number, through December 31, 2004. In addition, if the final
commitment level of subscribers is achieved by the distributor, subscriber fees
will not apply to subscribers above a specified number. The amendment also
contains a most favored nation provision relating to other distribution
agreements.

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The Company is in discussions with a primary pay television distributor in
Spain who has attempted to terminate an existing distribution agreement with
the Hallmark Channel. The outcome can not be predicted.

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 generally 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.

Crown Media Distribution generates revenue from the film assets by
granting licenses to exhibit the films to third parties. We are also using the
films as programming for our television channels.

Cost of Services

Our cost of services consists primarily of program license fees,
amortization of our film assets, subscriber acquisition fee expense, the cost
of signal distribution, dubbing and subtitling, and the cost of promotional
segments that are aired between programs. We expect cost of services to
continue to increase in the future as we expand our existing markets and third
party 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 is providing services to us
to assist in the administration, distribution and other exploitation of the
film assets, and we pay Hallmark Entertainment approximately $1.5 million per
year for the three-year term of the agreement ending on December 31, 2003.

Discussion of Critical Accounting Policies

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

In the ordinary course of business, our management has made a number of
judgments, estimates and assumptions relating to the reporting of results of
operations and financial condition in the preparation of our financial
statements in conformity with accounting principles generally accepted in the
United States. Actual results could differ significantly from those estimates
under different assumptions and conditions. The following discussion addresses
certain accounting policies involving changes since December 31, 2002.

2002 Reorganization and Other Charges

On October 7, 2002, the Company announced its intention to reorganize its
operations to localize and concentrate its efforts on the Hallmark Channel in
the U.S. and in its most successful international markets. The Company
completed localizing its operating and non-technical support functions formerly
located in the Companys U.S. based offices and has transferred those
responsibilities to regional staff and/or outsourced them. The Company has
entered into an agreement with a local distribution partner, Pramer, who is now
responsible for the day-to-day operations of the Hallmark Channel in Latin
America (Mexico, Central America and South America). By April 2003, our
workforce was reduced by approximately 30% or 130 positions.

We recorded a charge of $28.8 million during the fourth quarter of 2002
reflecting the reorganization. This charge was comprised of a charge of $5.5
million for severance costs and charges of $23.3 million related to satellite
and facility exit costs.

For information on other critical accounting policies including revenue
recognition, program license fees paid by us, film assets, property and
equipment, subscriber acquisition fees, private placement and goodwill, please
see Note 2 to the Condensed Notes to Unaudited Consolidated Financial
Statements included in this Report and Discussion of Critical Accounting
Policies in Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations in our Annual Report on Form 10-K for the
year ended December 31, 2002.

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Tax Sharing Agreement

On March 11, 2003, Crown Media Holdings became a member of Hallmark Cards
consolidated federal tax group and entered into a federal tax sharing agreement
with Hallmark Cards. Hallmark Cards will include Crown Media Holdings in its
consolidated federal income tax return. Accordingly, Hallmark Cards will
benefit from future tax losses, which may be generated by Crown Media Holdings.
Based on the tax sharing agreement, Hallmark Cards will pay Crown Media
Holdings all of the benefits realized by Hallmark Cards as a result of
consolidation, 75% in cash on a quarterly basis and the balance as Crown Media
Holdings becomes a taxpayer. Under this federal tax sharing agreement, at
Hallmark Cards option, this 25% balance may also be applied as an offset
against any amounts owed by Crown Media Holdings to any member of the Hallmark
Cards consolidation group under any loan, line of credit or other payable,
subject to any limitations under any loan indentures or contracts restricting
such offsets. The Company amended its tax sharing agreement with Hallmark Cards
to provide that no interest expense or income related to the 10.25% note will
be used in calculating taxes under the agreement until (and to the extent)
payments on the 10.25% note are made to HC Crown in cash. This amendment defers
payments by Hallmark Cards to Crown Media Holdings under the tax sharing
agreement related to the 10.25% note until Crown Media Holdings makes cash
payments of interest on the note.

We account for income taxes as if Crown Media Holdings were a separate
taxpayer. Accordingly, Hallmark Cards ability to use our tax losses does not
impact our assessment of the need for a valuation allowance on deferred tax
assets, including future tax losses. Any payments received from Hallmark Cards
under the tax sharing agreement are recorded as an increase in paid-in capital.
Through August 5, 2003, the Company received $32.0 million under the tax
sharing agreement. These receipts have been recorded as a component of paid-in
capital.

Effects of Transactions with Related and Certain Other Parties

Tax Sharing Agreement

Please refer to above Discussion of Critical Accounting Policies.

Employee Incentives and Retention

Please see Employees Incentives and Retention in Note 2 to the Condensed
Notes to the Unconsolidated Financial Statements included in this Report for
information regarding an exchange of stock options for restricted stock units
with senior management and vice presidents and regarding a cash payment award
of $1.00 for each share subject to outstanding options held by other employees.

NICC License Agreement

In the first quarter of 2003, we signed an amendment to the arrangement
with NICC effective as of January 1, 2002. Under this amendment, Crown Media
United States agreed to advance NICC $3,000,000 in each of 2002 and 2003 to
help fund NICCs cost of expanding its production operations to produce the
programming. This advance is recoverable from the license fees payable for
this programming.

Pramer Agreement

On January 30, 2003, Crown Media International entered into an agreement
with Pramer S.C.A., a wholly-owned subsidiary of Liberty Media Corporation,
under which Pramer provides affiliate and advertising sales representation
services, as well as programming, production and technical services in
connection with the distribution of the Hallmark Channel in Central and South
America. Pramer receives a 35% commission on advertising sales and a 20%
commission on affiliate sales and is reimbursed for its costs of providing
production and technical services. The agreement with Pramer will terminate on
December 31, 2005, unless certain early termination rights arise and are
exercised. One of our Board members, David Koff, has been the Senior Vice
President of Liberty Media Corporation, one of our significant investors, since
1998.

Senior Unsecured Note

On August 5, 2003, Crown Media Holdings repurchased all of the preferred
securities of Crown Media Trust and related contingent appreciation
certificates issued by the Company. The securities were repurchased for
approximately $329.1 million,

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including approximately $2.4 million of cash distributions on the
preferred securities through August 5, 2003. Funds for this repurchase were
obtained from the proceeds of a $400.0 million 10.25% senior unsecured discount
note issued to HC Crown. After repayment of certain expenses for the issuance
including a fee of $3.0 million to HC Crown, the Company used the balance of
the proceeds of the note, approximately $67.4 million, to pay principal,
interest and prepayment penalties on its bank revolving credit loans.

The senior unsecured note provides for no cash interest payments for four
years; instead, the principal amount of the note accretes at 10.25% per annum,
compounding semi-annually, to $596.6 million at August 5, 2007. From that
date, interest at 10.25% per annum will be payable semi-annually on the
accreted value of the note. The note matures on August 5, 2011, and is
callable by Crown Media Holdings at any time after August 5, 2004, without
penalty.

A special independent committee of the Board of Directors of Crown Media
Holdings negotiated and approved the terms of the senior unsecured note and
related documents. The special committee also considered alternative financing
options to raise funds for the same purposes.

See Related Party Transactions in Note 7 to Condensed Notes of Unaudited
Consolidated Financial Statements in this Report. Transactions with related
parties are also described in Item 13 Certain Relationships and Related
Transactions in our Annual Report on Form 10-K for the year ended December 31,
2002. Other than as described above, there have not been any new transactions
with related parties during the quarter ended June 30, 2003.

Results of Operations

Three and Six Months Ended June 30, 2003 Compared to Three and Six Months Ended
June 30, 2002

Revenue.Total revenue for the three and six months ended June 30, 2003,
increased to $45.4 million and $87.4 million from $39.3 million and $78.8
million, which represent increases of $6.1 million, or 16%, and $8.6 million,
or 11%, respectively, over the comparable periods in 2002. Subscriber fee
revenue increased to $17.9 million for the three months ended June 30, 2003,
from $17.0 million, which represents an increase of $903,000, or 5%, over the
comparable period in 2002. Subscriber fee revenue decreased to $33.9 million
for the six months ended June 30, 2003, from $34.9 million, which represents a
decrease of $978,000, or 3%, over the comparable period in 2002. The increased
subscriber fee revenue for the three months ended June 30, 2003, resulted
primarily from increased distribution of our channel internationally. The
decreased subscriber fee revenue for the six months ended June 30, 2003,
resulted from reduced subscriber fee rates in the United States due to
amendments in prior periods to long-term distribution agreements and cash-basis
accounting treatment of certain countries in Latin America. This decrease in
revenue is offset in part by an increase in subscriber fee revenue resulting
from expanded distribution internationally. Subscriber acquisition fee expense
recorded as a reduction of revenue were $1.5 million and $2.9 million for the
three and six months ended June 30, 2003, and $1.9 million and $3.8 million for
the comparable periods in 2002. Although the number of subscribers to the
Hallmark Channel increased as of June 30, 2003, compared to June 30, 2002,
subscriber revenue was also affected by a number of other, offsetting factors,
including concessions for new subscribers, and the waiver of subscriber fees
and bulk discounts resulting from the attainment of certain subscriber levels.
The number of subscribers to the Hallmark Channel worldwide, as of June 30,
2003, was 108.6 million compared to 94.4 million as of June 30, 2002, which
represents an increase of 14.2 million, or 15%. Subscribers to our domestic
channel increased from 46.7 million as of June 30, 2002, to 51.8 million as of
June 30, 2003, which represents an increase of 5.1 million, or 11%. Ninety-one
percent of subscriber fees revenue for both the three and six months ended June
30, 2003, and 79% and 77% of subscriber fee revenue for the three and six
months ended June 30, 2002, respectively, were earned internationally. The
amount of net subscriber fee revenue was $1.6 million and $3.0 million for the
domestic Hallmark Channel for the three and six months ended June 30, 2003,
respectively, and $3.5 million and $7.9 for the international Hallmark Channel
for the three and six months ended June 30, 2002, respectively. Increased
subscriber acquisition costs and other factors described above are expected to
continue to result in a decline in net domestic subscriber revenue. Certain of
our international subscriber fee rates have and will continue to decrease as we
renew distribution agreements, which may provide for lower per subscriber rates
than under previous agreements. International fees per subscriber are also
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 in certain more developed countries from subscriber fees revenue
to advertising revenue, foreign currency devaluation associated with global
economies and the economic turbulence in certain of our markets.

Advertising revenue increased to $23.7 million and $46.0 million for the
three and six months ended June 30, 2003, respectively, from $18.9 million and
$33.4 million, which represent increases of $4.8 million, or 26%, and $12.6
million, or 38%, respectively, over the comparable periods in 2002. The
increase in advertising revenue reflects the following during 2003: the growth
of both domestic and international subscribers; higher ratings in the United
States and in the United Kingdom; higher advertising rates resulting from

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the increase in distribution and viewership; and expanded sales of
advertising time primarily in the United States and the United Kingdom.
Advertising revenue from our domestic channel was $18.6 million and $36.9
million for the three and six months ended June 30, 2003, respectively,
compared to $11.7 million and $21.9 million for the three and six months ended
June 30, 2002, respectively. Additionally, the number of advertisers on our
domestic channel rose from 164 at June 30, 2002, to 195 at June 30, 2003.

Among the 50 ad-supported cable channels in the United States market, the
Hallmark Channel ranked 13th in total day with a 0.5 household rating for the
second quarter of 2003 and 21st for primetime with a 0.7 household rating for
the same time period.

During the fourth quarter of 2001, we began earning film licensing fees
revenue from our purchased film assets. In addition to our use of these film
assets on our channels, we are generating film licensing fee revenue as we
establish ourselves in the program distribution market. For the three and six
months ended June 30, 2003, we earned film licensing fee revenue of $3.9
million and $7.4 million, respectively, as compared to $3.5 million and $10.5
million for the three and six months ended June 30, 2002, respectively. This
decrease in licensing fees earned during the six months ended June 30, 2003, is
due to the timing of license period start dates. We expect our licensing fees
to increase in third quarter 2003 as compared to the third quarter of 2002, due
to certain existing agreements.

Cost of services.Cost of services for the three months ended June 30,
2003, were $50.3 million and for the three months ended June 30, 2002, were
$50.5 million . Cost of services for the six months ended June 30, 2003,
decreased to $98.2 million from $100.1 million, which represents a decrease of
$1.9 million, or 2%, over the comparable period in 2002. Cost of services as a
percent of net revenue decreased to 111% and 112% for the three and six months
ended June 30, 2003, as compared to 128% and 127% for the three and six months
ended June 30, 2002. These decreases were primarily due to our increases in
total revenue discussed above and the changes in operating expenses explained
below.

Total programming costs for the three and six months ended June 30, 2003,
increased 8% and 3%, respectively, due to acquisitions of programming for our
domestic and United Kingdom channels. For the three and six months ended June
30, 2003, amortization of our film assets was $6.8 million and $13.6 million,
as compared to $5.5 million and $12.7 million in 2002, respectively. The
increase in amortization of film assets was primarily due to our use of a
higher amortization rate for our film assets.

Subscriber acquisition fee expense was $6.6 million and $12.6 million for
the three and six months ended June 30, 2003, as compared to $5.3 million and
$9.5 million for the three and six months ended June 30, 2002, respectively.
Expanded distribution agreements from prior periods in the U.S. resulted in the
increases in subscriber acquisition fee expense experienced during the three
and six months ended June 30, 2003. Operating costs for the three and six
months ended June 30, 2003, which include playback, dubbing and subtitling,
transponder and interstitial expenses, decreased 29% and 25%, respectively,
primarily as a result of lower salary, benefit, satellite and transponder
expenses resulting from our 2002 reorganization.

Selling, general and administrative expense.Selling, general and
administrative expense for the three and six months ended June 30, 2003,
decreased to $12.3 million and $26.5 million, respectively, from $12.4 million
and $29.0 million, for the three and six months ended June 30, 2002, respectively,
which represent decreases of $129,000, or 1%, and $2.5 million, or 9%, for the
three and six months periods, respectively. These decreases resulted from a
reduction in salary, benefit, consulting and travel expenses. Salary and
benefit expenses declined as a result of the termination of certain high-level
positions during 2002 in conjunction with our 2002 reorganization. Our
continuing use of teleconferencing resulted in lower travel expenses. Selling,
general and administrative expense as a percentage of total revenue decreased
to 27% and 30% for the three and six months ended June 30, 2003, respectively,
as compared to 32% and 37% for the three and six months ended June 30, 2002,
respectively. These decreases were also due to the increases in total revenue
noted above.

Marketing expense.Marketing expense for the three and six months ended
June 30, 2003, decreased to $8.7 million and $14.2 million, respectively, from
$10.5 million and $20.4 million for the three and six months ended June 30,
2002, respectively, which represent decreases of $1.8 million, or 17%, and $6.2
million, or 30%, for the three and six month periods, respectively. Marketing
expense declined during the three and six months ended June 30, 2003, primarily
due to more efficient media buys for our domestic channel in 2003 as compared
to 2002. Additionally, marketing expenses were higher in 2002 due to the
amplified efforts to promote the premieres of Adoptionand Strandedon our
domestic channel.

Depreciation and amortization expense.Depreciation and amortization
expense for the three and six months ended June 30, 2003, increased to $2.6
million and $5.1 million, respectively, from $2.4 million and $4.6 million for
the three and six months ended June 30, 2002, respectively, which represent
increases of $227,000, or 9%, and $430,000, or 9%, for the three and six month
periods, respectively. Depreciation and amortization expense was higher for the
three and six months ended June 30, 2003, primarily due to expenditures for our
Network Operations Center to accommodate the launch of our domestic channel in
the first quarter 2003, and our
new domestic and international channel websites being placed into service
during that period.

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Guaranteed preferred beneficial interest accretion.Guaranteed preferred
beneficial interest accretion for the three and six months ended June 30, 2003,
was $12.2 million and $23.2 million, respectively, as compared to $1.2 million
and $11.8 million for the three and six months ended June 30, 2002,
respectively. This expense related to future obligations on our debentures
issued on December 17, 2001, in connection with the preferred securities of
Crown Media Trust. We recorded losses of $944,000 and $1.2 million due to the
revaluing of our derivative liabilities to fair value for the three and six
months ended June 30, 2003, respectively, which have been included as a
component of the accretion of guaranteed preferred beneficial interest. We
recorded gains of $7.6 million and $5.4 million, due to the revaluing of our
derivative liabilities to fair value for the three and six months ended June
30, 2002, respectively. We will no longer record guaranteed preferred
beneficial interest accretion due to the repurchase of our preferred securities
on August 5, 2003, and the accounting treatment of our private placement
securities under SFAS No. 150 for the period July 1, 2003, through August 5,
2003.

Interest income (expense) and other, net.Net interest and other expense
for the three and six months ended June 30, 2003, increased to $7.5 million and
$14.9 million, respectively, from $5.7 million and $11.8 million for the three
and six months ended June 30, 2002, which represent increases of $1.8 million
and $3.1 million for the three and six month periods, respectively. These
increases were primarily due to increased borrowings under our credit facility
and the HC Crown line of credit and interest on our convertible debt.

We expect our interest expense to significantly increase due to the
factors listed above, a loss associated with the above-described repurchase of
the preferred securities and contingent appreciation certificates on August 5,
2003, and the accounting treatment of our preferred securities under SFAS No.
150 for the period July 1, 2003, through August 5, 2003.

Income tax provision.Income tax provision for the three and six months
ended June 30, 2003, increased to $1.2 million and $1.5 million, respectively,
from $643,000 and $1.2 million for the three and six months ended June 30,
2002, which represent increases of $557,000, or 87%, and $347,000, or 29%, for
the three and six months ended June 30, 2002, respectively. These increases
were due to an increase in taxes on the foreign income resulting from higher
international film licensing fee revenue.

Liquidity and Capital Resources

Cash used in operating activities was $73.4 million and $94.4 million for
the six months ended June 30, 2003 and 2002, respectively. Cash was used
primarily to fund operating expenditures related to net losses of $96.1 million
and $100.1 million for the six months ended June 30, 2003 and 2002,
respectively. The decrease from 2002 to 2003 was primarily due to substantially
higher domestic and UK advertising revenue and resulting cash receipts, and
lower salaries in 2003. This decrease was partially offset by increased
programming purchased in our U.S. and UK markets to meet our strategy and the
demands of our customers and higher subscriber acquisition fee payments as a
result of our expanded distribution in domestic markets.

Cash used in investing activities was $1.7 million and $760,000 for the
six months ended June 30, 2003 and 2002, respectively. Cash used increased
primarily due to expenditures for our Network Operations Center to accommodate
the launch of our domestic channel in the first quarter 2003 and our new
domestic and international channel websites being placed into service during
that period.

Cash provided by financing activities was $83.2 million and $86.7 million
for the six months ended June 30, 2003 and 2002, respectively. In the six month
period ending June 30, 2003, we have received proceeds of $21.3 million from
our tax sharing agreement with Hallmark Cards and borrowed $70.0 million on our
line with HC Crown to meet our operating demands. In 2002, we borrowed funds
under the credit facility and the HC Crown note to meet our operating demands.

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The following table aggregates all of our contractual commitments as of
June 30, 2003, and incorporates the events subsequent to June 30, 2003,
described in footnote 9 to the Condensed Notes to Unconsolidated Financial
Statements.

|                                                                                    |                                                                     |       |                              |        |     |       |       |       |     |       |       |      |   |   |       |      |       |   |       |      | 
|----------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ----- | ---------------------------- | ------ | --- | ----- | ----- | ----- | --- | ----- | ----- | ---- | - | - | ----- | ---- | ----- | - | ----- | ---- | 
|                                                                                    |                                                                     |       | Scheduled Payments by Period
|                                                                                    |                                                                     |       |                             
|                                                                                    |                                                                     |       |                              |        |     |       | Less  |       |     |       |       |      |   |   |       |      | After
|                                                                                    |                                                                     |       |                              |        |     |       | Than  |       | 2-3 |       | 4-5   |      | 5
|Contractual Obligations                                                             |                                                                     | Total |                              | 1 Year |     | Years |       | Years |     | Years
|                                                                                    |                                                                     |       |                              |        |     |       |       |       |     |      
|Long-Term Debt                                                                      |                                                                     | $     | 253.0                        |        |     | $     | 0.3   |       |     | $     |      |      |   | $ | 252.7 |      |       | $ |      |     
|HC Crown Line of Credit                                                             |                                                                     |       | 75.0                         |        |     |       |      |       |     |       |      |      |   |   | 75.0  |      |       |   |      |     
|HC Crown 10.25% Note Principal                                                      |                                                                     |       | 400.0                        |        |     |       |      |       |     |       |      |      |   |   |      |      |       |   | 400.0 |     
|HC Crown 10.25% Note Accretion                                                      |                                                                     |       | 196.6                        |        |     |       |      |       |     |       |      |      |   |   |      |      |       |   | 196.6 |     
|Interest Payments                                                                   |                                                                     |       | 4.0                          |        |     |       | 1.1   |       |     |       | 1.2   |      |   |   | 1.7   |      |       |   |      |     
|Capital Lease Obligations                                                           |                                                                     |       | 10.0                         |        |     |       | 1.5   |       |     |       | 3.4   |      |   |   | 4.0   |      |       |   | 1.1   |     
|Operating Leases                                                                    |                                                                     |       | 89.5                         |        |     |       | 16.8  |       |     |       | 33.3  |      |   |   | 22.8  |      |       |   | 16.6  |     
|Other Long-Term Obligations
Program license fees payable to
non-affiliates and NICC |                                                                     |       | 94.2                         |        |     |       | 52.7  |       |     |       | 41.5  |      |   |   |      |      |       |   |      |     
|                                                                                    | Program license fees payable to
Hallmark Entertainment Distribution |       |                              | 85.5   | (a) |       |       | 25.3  |     |       |       |     |   |   |       | 60.2 |       |   |       |     | 
|                                                                                    | Program license fees payable for future
windows                     |       |                              | 155.7  |     |       |       | 34.8  |     |       |       | 98.1 |   |   |       | 12.1 |       |   |       | 10.7 | 
|                                                                                    | Subscriber acquisition fees (b)                                     |       |                              | 25.5   |     |       |       | 24.0  |     |       |       | 1.5  |   |   |       |     |       |   |       |     | 
|                                                                                    | Payable to Hallmark Entertainment
Holdings                          |       |                              | 52.1   | (c) |       |       |      |     |       |       |     |   |   |       | 52.1 |       |   |       |     | 
|                                                                                    | Payable to Hallmark Entertainment                                   |       |                              | 47.9   | (c) |       |       |      |     |       |       |     |   |   |       | 47.9 |       |   |       |     | 
|                                                                                    | Redeemable Preferred Minority Interest                              |       |                              | 25.0   |     |       |       |      |     |       |       | 25.0 |   |   |       |     |       |   |       |     | 
|                                                                                    |                                                                     |       |                              |        |     |       |       |       |     |       |       |      |   |   |       |      |       |   |       |     
|Total Contractual Cash Obligations                                                  |                                                                     | $     | 1,514.0                      |        |     | $     | 156.5 |       |     | $     | 204.0 |      |   | $ | 528.5 |      |       | $ | 625.0 |     
|                                                                                    |                                                                     |       |                              |        |     |       |       |       |     |       |       |      |   |   |       |      |       |   |       |     



---

|(a) |  | Can only be paid with certain prescribed sources of funds as defined in the private placement agreement, assuming such funds are available.                                                                                                                            
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | We executed in early November 2002 an amendment to a distribution agreement with one of our domestic distributors. This agreement and any other amendments to current domestic distribution
agreements will significantly increase subscriber acquisition fees payable.
|   
|(c) |  | Can only be paid subsequent to repayment of credit facility per agreement.                                                                                                                                                                                             

In connection with the Companys growth strategy, the Company expects to
continue making investments in programming and distribution during the
remainder of 2003. Programming expenditures for the remainder of 2003 are
expected to be in the range of $40.0 million to $50.0 million, and cash
payments for subscriber acquisition fees for the remainder of 2003 are expected
to be $25.0 million to $35.0 million. Through June 30, 2003 the Company has
expended $42.6 million for programming and $24.2 million for subscriber
acquisition fees. If necessary, the Company believes it has discretion to
reduce some of this anticipated spending. The Companys principal uses of funds
during the remainder of 2003 are expected to be the payment of operating
expenses, payments for licensing of programming from third parties and
subscriber acquisition fees, and interest payments under its bank credit
facility.

On August 5, 2003, Crown Media Holdings repurchased all of the preferred
securities of Crown Media Trust and related contingent appreciation
certificates issued by the Company. The securities were repurchased for
approximately $329.1 million, including approximately $2.4 million of cash
distributions on the preferred securities through August 5, 2003. Funds for
this repurchase were obtained from the proceeds of a $400.0 million 10.25%
senior unsecured discount note issued to HC Crown Corp., a subsidiary of
Hallmark Cards. After the payment of certain expenses for the issuance
including a fee of $3.0 million to HC Crown, the Company used the balance of
the proceeds of the note, approximately $67.4 million, to pay principal,
interest, and prepayment penalties on its bank revolving credit loans. The
Company will avoid approximately $72.0 million in cash interest payments over
the next 4 years due to this repurchase and refinancing.

Through June 30, 2003, Crown Media Holdings had borrowed $75.0 million
under the line of credit with HC Crown, which is the full amount available under that line of credit, to pay scheduled
subscriber acquisition fee payments, marketing costs and programming fees
accrued at the end of the previous year and to support the cash needs of its
current operations. Because of the pay down on the bank credit facility
on August 5, 2003, the Company has available funds under the bank credit facility of
approximately $67.3 million. Prior to the pay down, the Company
had borrowed the
full amount available under the bank credit facility of $320.0 million.  The Companys principal sources of funds are
currently cash inflows from operations, cash on hand, periodic cash inflows
expected under the tax sharing agreement with Hallmark Cards and amounts
available for borrowing under its bank credit facility. In addition, as of
August 5, 2003, $32.0 million had been received under the tax sharing agreement
and the Company expects that the remaining payments under the tax sharing
agreement in 2003 will be approximately $15.0 million. The Company also
believes that since the tax sharing agreement is with the Companys largest
shareholder, there is a potential that future tax sharing payments could become
available to the Company at an earlier date.

The Company projects that advertising revenue and licensing fees will
increase in 2003, and that certain operating expenses will continue to decrease
as a result of the reorganization begun in the fourth quarter of 2002.
Considering these projected revenues and reduced expenditures, the Company
believes that cash flow from its operations, cash on hand, remaining
availability under its credit facility and payments anticipated under the tax
sharing agreement will be sufficient to meet its liquidity needs through at
least June 2004. However, any decline in the popularity of the Hallmark
Channel, any significant future modifications to the Companys distribution
agreements, an economic decline in the advertising market, an unexpected
increase in competition or other adverse operating conditions will impact the
Companys ability to achieve its projected operating results. If the projected
operating results are not achieved, the Company may need to obtain additional
funding. In any event, in order to provide more liquidity, Crown Media Holdings
may consider pursuing alternatives to raise additional cash, which could
include the issuance of additional equity or debt securities. There can be no
assurance, however, that additional funding will be available, if at all, on
terms acceptable to the Company. Any new debt financing would require the
agreement of existing lenders, including HC Crown.

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Bank Credit Facility; HC Crown Line of Credit and Senior Unsecured Note

Our bank credit facility, the HC Crown line of credit and our 10.25%
senior unsecured discount note sold to HC Crown are described in Item 7 of
Managements Discussion and Analysis of Historical Financial Condition and
Results of Operation in our Annual Report on Form 10-K for the year ended
December 31, 2002, and earlier in this Report. As a result of these
agreements, we are subject to a number of affirmative and negative covenants.
The covenants in our bank credit facility were revised at the time of the sale
of our senior unsecured note in August 2003. A summary of certain of those
covenants as revised is stated below.

The bank credit facility contains a number of affirmative and negative
covenants. Negative covenants include: Limitations on indebtedness, liens,
investments, Restricted Payments, capital expenditures, changes in our
business activities, and other matters; not amending the promissory note with
HC Crown, the related letter of credit issued for our benefit, the $400.0
million senior unsecured note of August 2003 sold to HC Crown, or certain of
our other material agreements; a requirement that EBITDA not be less than
specified amounts for each quarter through December 31, 2003 and specified
amounts for any consecutive rolling four-quarter period starting with the
fiscal quarter ending March 31, 2004, maintaining net worth, as defined, of not
less than specified base amounts plus income and 50% of equity investments
after December 17, 2001, which includes a base amount of $250.0 million at
December 31, 2003 decreasing to a base amount of $150.0 million as of the end
of each quarter in 2004 and $100.0 million as of the end of each quarter in
2005; 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 on our equity, any redemption or other acquisition of
our equity, any cash payment with respect to the $400.0 million senior
unsecured note of August 2003 sold to HC Crown, any payment on debt of Crown
Media Holdings which is subordinated to the bank loans, any reduction of the HC
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, Hallmark Entertainment
or any of their affiliates. The bank credit agreement permits Crown Media
Holdings to use net cash proceeds from the issuance of debt or equity to be
used for certain Restricted 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.

The Note Purchase Agreement for the 10.25% senior unsecured discount notes
issued to HC Crown contains certain covenants which restrict on the part of
Crown Media Holdings and its subsidiaries, among other matters, the incurrence
of any additional indebtedness, the repurchase or other acquisition of Crown
Media Holdings stock, investments in other parties and the incurrence of liens.

Tax Sharing Agreement

For further information regarding the tax sharing agreement, please see
Tax Sharing Agreement in Note 7 to the Condensed Notes to Consolidated
Financial Statements in this Report.

Risk Factors

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 June 30, 2003, we had an accumulated deficit of approximately $889.4
million, goodwill of approximately $314.0 million, and film assets of $775.3
million.

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

In addition, in order to accomplish these goals, the management of Crown
Media Holdings continues to believe that it is necessary to increase
subscribers and enhance our programming, which results in increased subscriber
acquisition fees and higher costs for programming. Over the last three years,
these actions have resulted in increased net losses for Crown Media Holdings.

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

We have a substantial amount of indebtedness. As of August 5, 2003, our
total debt was $763.0 million. This amount included our $400.0 million senior
unsecured note, our $253.0 million credit facility, our $75.0 million line of
credit with HC Crown, our $10.0 million of capital lease obligations and our
$25.0 million of redeemable preferred minority interest. In addition, subject
to the restrictions under our various debt agreements, we may incur additional
indebtedness from time to time to cover our operating losses, to finance
acquisitions or capital expenditures or for other purposes.

As a result of our level of debt and the terms of our debt instruments:



| |  |  | our vulnerability to adverse general economic conditions is
heightened;                                                                                                                                                            
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we will be required to dedicate a portion of our cash flow from
operations to repayment of debt, limiting the availability of cash for
other purposes;                                                                             
|
| |  |  | we are and will continue to be limited by financial and other
restrictive covenants in our ability to borrow additional funds,
consummate asset sales, enter into transactions with affiliates or
conduct mergers and acquisitions;
|
| |  |  | our flexibility in planning for, or reacting to, changes in our
business and industry will be limited;                                                                                                                             
|
| |  |  | we are sensitive to fluctuations in interest rates; and                                                                                                                                                                            
|
| |  |  | our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate purposes
or other purposes may be impaired.                                                    

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

Our interest expense may impact our future operations.

High levels of interest expense could have negative effects on our future
operations. Interest expense, which is net of interest income and has included
amortization of debt issuance costs and interest expense on borrowings under
our demand notes, credit facility and private placement, increased $1.8 million
to $7.5 million for the three months ended June 30, 2003, from $5.7 for the
three months ended June 30, 2002, and increased $3.1 million to $14.9 million
for the six months ended June 30, 2003, from $11.8 for the six months ended
June 30, 2002. Our interest expense will increase as a result of the issuance
of the $400.0 million senior secured note on August 5, 2003, and in accordance
with the new accounting treatment of our preferred securities under SFAS No.
150 for the period July 1, 2003, through August 5, 2003. This note accretes at
10.25% per annum to August 5, 2007, and from that date interest at 10.25% per
annum on the note will be payable semi-annually until maturity in 2011. A
substantial portion of our cash flow from operations must be used to pay our
interest expense and will not be available for other business purposes. In
addition, we may need to incur additional indebtedness in the future. We cannot
assure you that our business will generate sufficient cash flow or that future
financings will be available to provide sufficient proceeds to meet our
obligations or to service our total debt.

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Our liquidity is dependent on external funds.

We believe based on projected revenue and expenditures that our tax
sharing agreement, any amounts available under our bank
credit facility, together with cash generated from operations and cash on
hand, will be sufficient for our liquidity needs through at least June 30,
2004. However, because we currently operate at a loss and have a negative cash
flow, any unanticipated significant expense or any development that hampers our
growth in revenue or decreases any of our revenue, may result in the need for
additional external funds in order to continue operations. We have no
arrangements for any external financings, whether debt or equity, and are not
certain whether any such new external financing would be available on
acceptable terms. Any new debt financing would require the cooperation and
agreement of existing lenders and HC Crown.

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

Several of the Crown Media United States existing distribution agreements
contain most favored nations clauses. These clauses typically provide that,
in the event Crown Media United States enters into an agreement with another
distributor on more favorable terms, these terms must be offered to the
existing distributor, subject to certain exceptions and conditions. In August
2001, Crown Media United States entered into a new distribution agreement with
DirecTV, Inc. under which the Hallmark Channel was repositioned to DirecTVs
TOTAL CHOICE® Package and our subscribers increased significantly. Several
other distributors, whose agreements contain most favored nations provisions,
have indicated an interest in some or all of the DirecTV terms. Crown Media
United States is currently in discussions with several other of these
distributors and has already amended its agreement with one of the distributors
to incorporate some of the DirecTV terms. For information concerning this
amendment to an existing distribution agreement with a large domestic
distributor, please see Revenue under Item 2 above. Any further modification
of these existing agreements to adopt the DirecTV terms, or any other new
terms, could result in the payment of cash or the issuance of stock by us and
will negatively affect subscriber revenue.

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 such programming or look for alternative
programming, which may hinder the growth of our subscriber base.

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. Our ability to react effectively may also be limited by our obligation
to license programming from Hallmark Entertainment Distribution, which has
standards that limit the types of programming that it will provide to us. Our
competitors may have more flexible programming arrangements, as well as greater
amounts of production, better distribution, and greater capital resources, and
may be able to react more quickly to shifts in tastes and interests. As a
result, we may be unable to maintain the commercial success of any of our
current programming, or to generate sufficient demand and market acceptance for
our new programming. A shift in viewer preferences in programming or
alternative entertainment activities could cause a decline in revenues from
advertising, subscriber fees and licensing of our film assets. The decline in
revenue 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, which commenced January 1, 2001. This arrangement reduces
our control over the sales and distribution of the film assets and might delay
our realization of the full revenue stream from the film assets. We and
Hallmark Entertainment each have the right to terminate the service agreement
after the first year. If Hallmark Entertainment elects to terminate the
agreement, 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 revenue anticipated from these activities and could
adversely affect the market price of our Class A common stock.

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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 revenue derived from the sale of advertising time on
our channels will increase. We have a
limited history of marketing and selling advertising time, particularly
internationally. We may be unable to identify, attract and retain experienced
sales and marketing personnel with relevant experience for our U.S. channel,
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. In addition, if we fail to improve our
ratings, we will not be able to increase our advertising sales rate-card or may
be required to run additional advertising spots which detract from our
available advertising inventory for future sales.

The international cable advertising market is much less developed than in
the United States, the United Kingdom and Central Europe. We believe that only
certain international markets have the potential for growth in advertising
revenues and intend to emphasize those markets. Most of our international
advertising revenue is derived from operations in the United Kingdom, Poland
and South Africa.

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

Hallmark Entertainment Investments controls all of our outstanding shares
of Class B common stock and owns shares of Class A common stock, representing
approximately 96.1% of the outstanding voting power on all matters submitted to
our stockholders. Hallmark Entertainment Holdings, a subsidiary of Hallmark
Cards, controls the voting of all our shares held by Hallmark Entertainment
Investments. Hallmark Entertainment Investments 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
Investments control relationship with us also could give rise to conflicts of
interest, including:



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

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

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 and Hallmark Licensing,
Inc., for various uses, including in the name of our international and domestic
channels. The license agreement for our international channel permits the use
of the Hallmark trademarks outside the United States and Canada through
November 30, 2003, 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 permits the use of the Hallmark trademarks in the United
States through November 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 advertising revenue, particularly in the United States.

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

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

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

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

If our local distribution partner for the Latin American region fails to
perform, our operations could be disrupted and our business harmed.

In the first quarter of 2003, we moved the majority of our operations
concerning the distribution of the Hallmark Channel in Mexico, Central and
South America to a local distribution partner in Argentina, Pramer. One purpose
of the action is to substantially reduce our expenses for operations in this
region. If Pramer is unable to adequately perform the functions of selling our
Channel to local operators, to gain sufficient advertising sales and to
appropriately market the Channel, we may not improve our performance in the
region. In addition, Pramer performs the local origination and playback
services for our feeds to Latin America. All but one of these the feeds are
sent by Pramer back to Denver for uplink and distribution to affiliates over
our satellite capacity on the PAS-9 satellite. Any significant interruption of
Pramers services, which affects the Latin American feeds of our Channel, could
have an adverse effect on the results of our business in the region.

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

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

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

Historically, a significant portion of our revenue has been generated from
foreign operations. In order to maintain or expand our presence in foreign
markets, we have entered and may in the future enter into joint ventures or
other strategic relationships with local operators in those markets. Certain
foreign laws, regulations and judicial procedures may not be as protective of
programmer rights as those applicable in the United States. In addition, many
foreign countries have currency and exchange laws regulating the international
transfer of currencies. To the extent that significant currency fluctuations
result in materially higher costs to any of our foreign customers, those
customers may be unable or unwilling to make the required payments. We may be
subject to delays in access to courts and to the remedies local laws impose in
order to collect our payments and recover our assets. We also may experience
problems with collecting accounts due from foreign customers, which would
adversely affect our revenue 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.

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##### Table of Contents



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, 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. We have amortized the goodwill from these acquisitions on a
straight-line basis over 20 years and 10 years, respectively. The amount of
goodwill that we amortized was treated as a charge against earnings under
accounting principles generally accepted in the United States. In accordance
with recent accounting pronouncements, we ceased as of January 1, 2002, the
amortization of this acquired goodwill, and we are required to periodically
review whether the value of our goodwill has been impaired. If we are required
to write down our goodwill, our results of operations, stockholders equity or
profitability could be materially adversely affected.

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

Our stock price may be volatile and could decline substantially.

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



| |  |  | our operating results failing to meet the expectations of investors
in any quarter;
| | - |  | -----------------------------------------------------------------------------------
|
| |  |  | material announcements by us or our competitors;                                   
|
| |  |  | governmental regulatory action;                                                    
|
| |  |  | technological innovations by competitors or competing technologies;                
|
| |  |  | investor perceptions of our industry or prospects, or those of our
customers; and  
|
| |  |  | changes in general market conditions or economic trends.                           

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

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

The market price of our Class A common stock could decline as a result of
sales by our larger, existing stockholders in the future or the perception that
these sales could occur. These sales also might make it difficult for us to
sell equity securities in the future at a time and price that we deem
appropriate. In addition, some of our existing stockholders who hold restricted
stock have the ability to require us to register their shares for public sale.

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Risks Relating to Our Industry

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

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

A continuing trend towards business combinations and alliances in both the
domestic and foreign communications industries may create significant new
competitors for us or intensify existing competition. Many of these combined
entities have more than one channel and 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.

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

New distribution technologies may fundamentally change the way we distribute
our channels and could significantly decrease our revenue 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.

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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 revenue and limit our ability to achieve profitability. The scope of
regulation to which
we are subject varies from country to country, although in many
significant respects a similar approach is taken to the regulation of
broadcasting across all of the markets in which we operate. Typically,
broadcasting regulation in each of the countries in which we operate requires
that domestic broadcasters and platform providers secure broadcasting licenses
from the domestic broadcasting authority. Additionally, most nations have
broadcasting legislation and regulations, which set minimum standards regarding
program content, and prescribe minimum standards for the content and scheduling
of television advertisements. Some countries require that a certain portion of
programming carried by broadcasters be produced domestically.

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.

Available Reports

We will make available, free of charge, through our website,
www.hallmarkchannel.com, this Quarterly Report, our annual reports on Form
10-K, our current reports on Form 8-K, and amendments to such reports, as soon
as reasonably practicable after we electronically file or furnish such material
with the Securities and Exchange Commission.




Item 3.Quantitative and Qualitative Disclosures About Market Risk

We do not use derivative financial instruments in our investment
portfolio. We only invest in instruments that meet high credit and quality
standards, as specified in our investment policy guidelines. These instruments,
like all fixed income instruments, are subject to interest rate risk. The fixed
income portfolio will fall in value if there is an increase in interest rates.
If market interest rates were to increase immediately and uniformly by 10% from
levels as of June 30, 2003, the decline of the fair value of the fixed income
portfolio would not be material.

As of June 30, 2003, our cash, restricted cash, cash equivalents and
short-term investments had a fair value of $8.6 million, which was invested in
cash and short-term commercial paper. The primary purpose of these investing
activities has been to preserve principal until the cash is required to fund
operations. Consequently, the size of this portfolio fluctuates significantly
as cash is raised and used in our business.

The value of certain investments in this portfolio can be impacted by the
risk of adverse changes in securities and economic markets and interest rate
fluctuations. At June 30, 2003, 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 and six months ended June 30, 2003, 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. As of June 30, 2003, we are not hedged or otherwise protected against
risks associated with any of our investing or financing activities.

As of June 30, 2003, we estimated the fair value of borrowings under our
bank credit facility, excluding accrued interest, to be approximately $320.0
million and the fair value of borrowings under our line of credit with HC
Crown, excluding interest, to be approximately $75.0 million. Because the
interest rates on these facilities are variable and are reset periodically, the
fair value of our debt is not significantly 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
$1.6 million, assuming that the balance of and the interest rates on our debt
were fixed as of June 30, 2003. To the extent interest rates increase, our
costs of financing will also increase because of variable rates applicable to
our outstanding debt. A hypothetical increase in assumed interest rates of 10%
would have resulted in additional interest expense of $408,000 and $817,000
during the three and six months ended June 30, 2003.

Our senior unsecured note of August 2003 in the original amount of $400.0
million accretes until August 5, 2007, at the fixed rate of 10.25% per annum
and accrues interest thereafter at the fixed rate of 10.25% per annum.

36



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We are exposed to market risk.

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

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

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 $8.3 million, or less than 1% of total assets, as of June
30, 2003. Our material liabilities subject to interest rate risk consisted of a
capital lease obligation, our bank credit facility, and our line of credit with
HC Crown. The balance of those liabilities was $457.5 million, or 55% of total
liabilities, as of June 30, 2003. Net interest expense for the three and six
months ended June 30, 2003, was $7.5 million and $14.9 million, or 17%, of our
total revenue, respectively. Our net interest expense of these liabilities 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.

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

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




Item 4.Controls and Procedures.

Evaluation of disclosure controls and procedures.

The Companys management with the participation of the Companys principal
executive and financial officers, carried out an evaluation of the
effectiveness of the design and operation of the Companys disclosure controls
and procedures as of June 30, 2003. Based upon this evaluation, the Companys
principal executive and financial officers concluded that the Companys
disclosure controls and procedures were effective as of that date for purposes
of recording, processing, summarizing and timely reporting material information
required to be disclosed in reports that the Company files under the Securities
and Exchange Act of 1934.

Changes in internal controls.

There were not any changes in the Companys internal control over
financial reporting that occurred during the quarter ended June 30, 2003, that
has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.

37



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##### Table of Contents






PART II. OTHER INFORMATION




Item 2.Changes in Securities and Use of Proceeds

On August 5, 2003, Crown Media Holdings sold its $400.0 million 10.25%
senior unsecured discount note to HC Crown. For information regarding this note
and changes made at the time of the sale of this note to our bank credit
facility, please see Part I, Item 2, Managements Discussion and Analysis of
Financial Condition and Results of Operations under the headings Effects of
Transactions With Related and Certain Other Parties  Senior Unsecured Notes
and Bank Credit Facility; HC Crown Line of Credit and Senior Unsecured Notes,
which descriptions are incorporated herein by reference.

The senior unsecured note was sold pursuant to an exemption from a
registration available for non-public offerings. HC Crown is a subsidiary of
Hallmark Cards, which owns a substantial interest in Crown Media Holdings.

In May 2003, we issued restricted stock units as described in Note 2 to
the Condensed Notes to Unaudited Consolidated Financial Statements in Part I,
Item 1 of this Report under the heading Employee Incentives and Retention.
The restricted stock units were exchanged for stock options and were issued
pursuant to an exemption available under Section 3(a)(9) for an exchange with
existing security holders.




Item 4.Submission of Matters to a Vote of Security Holders

Our 2002 annual meeting of stockholders was held on June 12, 2003. The
following proposal was voted upon at the meeting, with the following number of
votes cast for, against or withheld:

Proposal One Elect 14 directors to our Board of Directors.

|                        |  |           |             |          |  |           |           |            |  |             |     | 
|----------------------- |  | --------- | ----------- | -------- |  | --------- | --------- | ---------- |  | ----------- | --- | 
|                        |  |           |             |          |  |           |           |            |  | Abstentions
|                        |  |           |             |          |  | Votes     |           | and Broker
|Name                    |  | Votes For |             | Withheld |  | Non-Votes
|                        |  |           |             |          |  |          
|Robert A. Halmi, Jr.    |  |           | 379,021,565 |          |  |           | 1,135,784 |            |  |             | -0- | 
|David J. Evans          |  |           | 379,021,601 |          |  |           | 1,135,748 |            |  |             | -0- | 
|Wilford V. Bane, Jr.    |  |           | 379,742,314 |          |  |           | 415,035   |            |  |             | -0- | 
|Arnold L. Chavkin       |  |           | 379,322,129 |          |  |           | 835,220   |            |  |             | -0- | 
|Robert J. Druten        |  |           | 378,868,174 |          |  |           | 1,289,175 |            |  |             | -0- | 
|Donald J. Hall, Jr.     |  |           | 379,021,681 |          |  |           | 1,135,668 |            |  |             | -0- | 
|Irvine O. Hockaday, Jr. |  |           | 379,489,218 |          |  |           | 668,131   |            |  |             | -0- | 
|David B. Koff           |  |           | 379,488,620 |          |  |           | 668,729   |            |  |             | -0- | 
|Peter A. Lund           |  |           | 379,784,714 |          |  |           | 372,635   |            |  |             | -0- | 
|John P. Mascotte        |  |           | 379,635,682 |          |  |           | 521,667   |            |  |             | -0- | 
|Judith C. Whittaker     |  |           | 379,080,992 |          |  |           | 1,076,357 |            |  |             | -0- | 
|David E. Hall           |  |           | 379,021,681 |          |  |           | 1,135,668 |            |  |             | -0- | 
|Deanne R. Stedem        |  |           | 379,035,263 |          |  |           | 1,122,086 |            |  |             | -0- | 
|Anil Jagtiani           |  |           | 379,637,216 |          |  |           | 520,133   |            |  |             | -0- | 

All 14 persons listed above were existing directors and were re-elected as
our directors at that meeting.

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##### Table of Contents






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 |  |  | Note Purchase Agreement, dated August 5, 2003 between Crown
Media Holdings, Inc. and HC Crown Corp. (previously filed as
Exhibit 10.1 to our Current Report on Form 8-K filed on August
6, 2003 and incorporated by reference herein).                                                                                                                                                                           
|        |  |             |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                  
|        |  |             | 10.2 |  |  | 10.25% senior unsecured discount note dated August 5, 2003
issued by Crown Media Holdings, Inc. (previously filed as
Exhibit 10.2 to our Current Report on Form 8-K filed on August
6, 2003 and incorporated by reference herein).                                                                                                                                                                               
|        |  |             |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                  
|        |  |             | 10.3 |  |  | Amendment No. 6, dated August 5, 2003 to the Credit, Security,
Guaranty and Pledge Agreement, dated as of August 31, 2001, as
amended, among Crown Media Holdings, Inc., Guarantors, Lenders
and JP Morgan Chase Bank as Administrative Agent and Issuing
Bank for the Lenders (previously filed as Exhibit 10.3 to our
Current Report on Form 8-K filed on August 6, 2003 and
incorporated by reference herein).
|        |  |             |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                  
|        |  |             | 10.4 |  |  | Amendment No. 1 dated as of August 5, 2003 to the Federal
Income Tax Sharing Agreement between Hallmark Cards
Incorporated and Crown Media Holdings, Inc.                                                                                                                                                                                                                                                        
|        |  |             |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                  
|        |  |             | 31   |  |  | Rule 13a-14(a) Certifications.                                                                                                                                                                                                                                                                                                                                                                                   
|        |  |             |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                  
|        |  |             | 32   |  |  | Section 1350 Certifications.                                                                                                                                                                                                                                                                                                                                                                                     



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

During the quarter ended June 30, 2003, we filed the following Form 8-K report:



| |  |  | Report filed on May 6, 2003, regarding Item 12.
| | - |  | -----------------------------------------------

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##### Table of Contents



SIGNATURES

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

|                           |  |                                          |  |                                            |  |                
|-------------------------- |  | ---------------------------------------- |  | ------------------------------------------ |  | ---------------
|CROWN MEDIA HOLDINGS, INC. |  |                                          |  |                                           
|                           |  |                                          |  |                                           
|                           |  |                                          |  |                                           
|Signature                  |  | Title                                    |  | Date                                      
|                           |  |                                          |  |                                           
|                           |  |                                          |  |                                            |  |                
|By:                        |  | /s/ DAVID J. EVANS

David J. Evans       |  | Director and Principal
Executive Officer   |  | August 14, 2003
|                           |  |                                          |  |                                            |  |                
|By:                        |  | /s/ WILLIAM J. ALIBER

William J. Aliber |  | Principal Financial and
Accounting Officer |  | August 14, 2003

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##### Table of Contents






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 |             |  | Note Purchase Agreement, dated August 5, 2003 between Crown
Media Holdings, Inc. and HC Crown Corp. (previously filed as
Exhibit 10.1 to our Current Report on Form 8-K filed on August
6, 2003 and incorporated by reference herein).                                                                                                                                                                           
|        |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 10.2 |             |  | 10.25% senior unsecured discount note dated August 5, 2003
issued by Crown Media Holdings, Inc. (previously filed as
Exhibit 10.2 to our Current Report on Form 8-K filed on August
6, 2003 and incorporated by reference herein).                                                                                                                                                                               
|        |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 10.3 |             |  | Amendment No. 6, dated August 5, 2003 to the Credit, Security,
Guaranty and Pledge Agreement, dated as of August 31, 2001, as
amended, among Crown Media Holdings, Inc., Guarantors, Lenders
and JP Morgan Chase Bank as Administrative Agent and Issuing
Bank for the Lenders (previously filed as Exhibit 10.3 to our
Current Report on Form 8-K filed on August 6, 2003 and
incorporated by reference herein).
|        |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 10.4 |             |  | Amendment No. 1 dated as of August 5, 2003 to the Federal
Income Tax Sharing Agreement between Hallmark Cards
Incorporated and Crown Media Holdings, Inc.                                                                                                                                                                                                                                                        
|        |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 31   |             |  | Rule 13a-14(a) Certifications.                                                                                                                                                                                                                                                                                                                                                                                   
|        |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 32   |             |  | Section 1350 Certifications.