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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-Q

|               |  |                                                                                         
|-------------- |  | ----------------------------------------------------------------------------------------
|(Mark One)
[X] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 
|               |  |                                                                                         
|               |  | For the quarterly period ended September 30, 2002                                       
|               |  |                                                                                         
|               |  | or                                                                                      
|               |  |                                                                                         
|[  ]           |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to                .

Commission File Number: 000-30700

Crown Media Holdings, Inc.

(Exact Name of Registrant as Specified in Its Charter)


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

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

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

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

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

As of November 8, 2002, the number of shares of Class A Common Stock, $.01 par
value outstanding was 73,670,775, and the number of shares of Class B Common
Stock, $.01 par value, outstanding was 30,670,422.



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TABLE OF CONTENTS



|                                                   |                                                                                               |                                                                |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                     
|                                                   | Item 1. Financial Statements (Unaudited)                                                     
|                                                   |                                                                                               | CONSOLIDATED BALANCE SHEETS                                   
|                                                   |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS  
|                                                   |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS                         
|                                                   |                                                                                               | CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|                                                   | ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                   | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                                   | Item 4. Controls and Procedures.                                                             
|PART II. OTHER INFORMATION                        
|                                                   | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                        
|CERTIFICATION                                     
|EX-10.1 Amended/Restated Program License Agreement
|Section 906 Certification of CEO and CFO          



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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 (Unaudited)  December 31, 2001 and September 30, 2002                                               |    |      | 3  | 
|           |  |                                                                                       |  | Consolidated
Statements of Operations and Comprehensive Loss (Unaudited)Three and Nine Months Ended September 30, 2001 and 2002 |    |      | 5  | 
|           |  |                                                                                       |  | Consolidated
Statements of Cash Flows (Unaudited)Nine Months Ended September 30, 2001 and 2002                                  |    |      | 6  | 
|           |  |                                                                                       |  | Condensed Notes to Unaudited Consolidated Financial Statements                                                                   |    |      | 7  | 
|Item 2     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |                                                                                                                                  | 24 |     
|           |  |                                                                                       |  | Forward-Looking Statements and Risk Factors                                                                                      |    |      | 32 | 
|Item 3     |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |                                                                                                                                  | 39 |     
|Item 4     |  | Controls and Procedures                                                               |  |                                                                                                                                  | 41 |     
|PART II    |  | Other Information                                                                     |  |                                                                                                                                  | 42 |     
|Item 6     |  | Exhibits and Reports on Form 8-K                                                      |  |                                                                                                                                  | 42 |     
|Signatures |  |                                                                                       |  |                                                                                                                                  | 43 |     

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

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

The names Hallmark, Hallmark Entertainment, 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        |  | As of        
|                                                                                             |                      |                                      |         | December 31, |  | September 30,
|                                                                                             |                      |                                      |         | 2001         |  | 2002         
|                                                                                             |                      |                                      |         |              |  |              
|                                                                                             |                      |                                      |         | (Unaudited) 
|                                                                                             |                      | ASSETS                               |         |              |  |               |         |           |  | 
|Cash and cash equivalents                                                                    |                      | $                                    | 13,859  |              |  | $             | 3,302   |          
|Cash in escrow                                                                               |                      |                                      | 111,625 |              |  |               |        |          
|Accounts receivable, less allowance for doubtful accounts of $7,361 and $6,972,
respectively |                      |                                      | 29,911  |              |  |               | 44,763  |          
|Program license fees  affiliates, net of accumulated amortization                           |                      |                                      | 12,199  |              |  |               | 23,725  |          
|Program license fees  non-affiliates, net of accumulated amortization                       |                      |                                      | 35,425  |              |  |               | 53,098  |          
|Subtitling and dubbing, net of accumulated amortization                                      |                      |                                      | 2,584   |              |  |               | 3,225   |          
|Prepaid and other assets                                                                     |                      |                                      | 11,364  |              |  |               | 15,247  |          
|                                                                                             |                      |                                      |         |              |  |               |         |          
|                                                                                             | Total current assets |                                      |         | 216,967      |  |               |         | 143,360   | 
|Restricted cash                                                                              |                      |                                      | 340     |              |  |               | 340     |          
|Accounts receivable, net of current portion                                                  |                      |                                      | 6,253   |              |  |               | 7,692   |          
|Program license fees  affiliates, net of current portion                                    |                      |                                      | 60,679  |              |  |               | 47,391  |          
|Program license fees  non-affiliates, net of current portion                                |                      |                                      | 33,219  |              |  |               | 65,419  |          
|Subtitling and dubbing, net of current portion                                               |                      |                                      | 4,795   |              |  |               | 4,771   |          
|Film assets, net of accumulated amortization                                                 |                      |                                      | 808,138 |              |  |               | 792,435 |          
|Subscriber acquisition fees, net of accumulated amortization                                 |                      |                                      | 126,965 |              |  |               | 114,929 |          
|Property and equipment, net of accumulated depreciation                                      |                      |                                      | 43,882  |              |  |               | 37,163  |          
|Goodwill                                                                                     |                      |                                      | 314,033 |              |  |               | 314,033 |          
|Debt issuance costs, net of accumulated amortization                                         |                      |                                      | 8,760   |              |  |               | 6,601   |          
|Prepaid and other assets, net of current portion                                             |                      |                                      | 2,327   |              |  |               | 1,762   |          
|                                                                                             |                      |                                      |         |              |  |               |         |          
|                                                                                             | Total assets         |                                      | $       | 1,626,358    |  |               | $       | 1,535,896 | 
|                                                                                             |                      |                                      |         |              |  |               |         |          
|                                                                                             |                      | LIABILITIES AND STOCKHOLDERS EQUITY |         |              |  |               |         |           |  | 
|LIABILITIES:                                                                                 |                      |                                      |         |              |  |               |         |          
|Accounts payable and accrued liabilities                                                     |                      | $                                    | 38,842  |              |  | $             | 23,620  |          
|Subscriber acquisition fees payable                                                          |                      |                                      | 23,020  |              |  |               | 9,548   |          
|License fees payable to affiliates                                                           |                      |                                      |        |              |  |               | 14,073  |          
|License fees payable to non-affiliates                                                       |                      |                                      | 33,088  |              |  |               | 52,634  |          

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|                                                                                                                                                                                                                                            |                                            |  |           |              |  |               |           |           |  | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ |  | --------- | ------------ |  | ------------- | --------- | --------- |  | 
|                                                                                                                                                                                                                                            |                                            |  |           | As of        |  | As of        
|                                                                                                                                                                                                                                            |                                            |  |           | December 31, |  | September 30,
|                                                                                                                                                                                                                                            |                                            |  |           | 2001         |  | 2002         
|                                                                                                                                                                                                                                            |                                            |  |           |              |  |              
|                                                                                                                                                                                                                                            |                                            |  |           | (Unaudited) 
|Payables to affiliates                                                                                                                                                                                                                      |                                            |  | 5,952     |              |  |               | 7,197     |          
|Credit facility and interest payable                                                                                                                                                                                                        |                                            |  | 111,905   |              |  |               | 903       |          
|Capital lease obligation                                                                                                                                                                                                                    |                                            |  | 1,318     |              |  |               | 1,404     |          
|Deferred programming revenue                                                                                                                                                                                                                |                                            |  | 1,316     |              |  |               | 1,534     |          
|                                                                                                                                                                                                                                            |                                            |  |           |              |  |               |           |          
|                                                                                                                                                                                                                                            | Total current liabilities                  |  |           | 215,441      |  |               |           | 110,913   | 
|Accrued liabilities, net of current portion                                                                                                                                                                                                 |                                            |  | 934       |              |  |               | 4,198     |          
|Subscriber acquisition fees payable, net of current portion                                                                                                                                                                                 |                                            |  | 5,262     |              |  |               | 3,014     |          
|License fees payable to affiliates, net of current portion                                                                                                                                                                                  |                                            |  | 62,299    |              |  |               | 67,685    |          
|License fees payable to non-affiliates, net of current portion                                                                                                                                                                              |                                            |  | 23,127    |              |  |               | 47,020    |          
|Credit facility, net of current portion                                                                                                                                                                                                     |                                            |  | 151,438   |              |  |               | 270,542   |          
|Capital lease obligation, net of current portion                                                                                                                                                                                            |                                            |  | 10,723    |              |  |               | 9,659     |          
|Convertible debt                                                                                                                                                                                                                            |                                            |  | 43,733    |              |  |               | 46,513    |          
|Derivative liability                                                                                                                                                                                                                        |                                            |  | 12,495    |              |  |               | 802       |          
|Payable to affiliates                                                                                                                                                                                                                       |                                            |  | 100,000   |              |  |               | 100,000   |          
|                                                                                                                                                                                                                                            |                                            |  |           |              |  |               |           |          
|                                                                                                                                                                                                                                            | Total liabilities                          |  |           | 625,452      |  |               |           | 660,346   | 
|COMMITMENTS AND CONTINGENCIES
GUARANTEED PREFERRED BENEFICIAL INTEREST IN CROWN MEDIA
TRUSTS DEBENTURES                                                                                                                                    |                                            |  | 199,040   |              |  |               | 214,472   |          
|PREFERRED MINORITY INTEREST                                                                                                                                                                                                                 |                                            |  | 25,000    |              |  |               | 25,000    |          
|STOCKHOLDERS EQUITY:                                                                                                                                                                                                                       |                                            |  |           |              |  |               |           |          
|Class A common stock, $.01 par value; 200,000,000 shares authorized; issued
shares of 73,913,395 and 73,670,775, respectively; outstanding shares of
73,488,395 and 73,670,775 as of December 31, 2001 and September 30, 2002,
respectively |                                            |  | 735       |              |  |               | 737       |          
|Class B common stock, $.01 par value; 120,000,000 shares authorized; issued and
outstanding shares of 30,670,422 as of December 31, 2001 and September 30, 2002                                                                             |                                            |  | 307       |              |  |               | 307       |          
|Paid-in capital                                                                                                                                                                                                                             |                                            |  | 1,256,754 |              |  |               | 1,258,396 |          
|Accumulated other comprehensive income (loss)                                                                                                                                                                                               |                                            |  | (620      | )            |  |               | 512       |          
|Accumulated deficit                                                                                                                                                                                                                         |                                            |  | (480,310  | )            |  |               | (623,874  | )        
|                                                                                                                                                                                                                                            |                                            |  |           |              |  |               |           |          
|                                                                                                                                                                                                                                            | Total stockholders equity                 |  |           | 776,866      |  |               |           | 636,078   | 
|                                                                                                                                                                                                                                            |                                            |  |           |              |  |               |           |          
|                                                                                                                                                                                                                                            | Total liabilities and stockholders equity |  | $         | 1,626,358    |  |               | $         | 1,535,896 | 
|                                                                                                                                                                                                                                            |                                            |  |           |              |  |               |           |          

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 |         | Nine Months Ended
|                                                                                     |                                              |                |                          |        |                    |         |                  
|                                                                                     |                                              |                |                          |        | September 30,      |         | September 30,    
|                                                                                     |                                              |                |                          |        |                    |         |                  
|                                                                                     |                                              |                |                          |        | 2001               |         | 2002              |        | 2001   |         | 2002  
|                                                                                     |                                              |                |                          |        |                    |         |                   |        |        |         |       
|                                                                                     |                                              |                |                          |        | (Unaudited)       
|Revenues:                                                                            |                                              |                |                          |        |                    |         |                   |        |        |         |        |        |        |          |         |       
|                                                                                     | Subscriber fees                              |                | $                        | 17,139 |                    |         | $                 | 16,916 |        |         | $      | 49,734 |        |          | $       | 51,784 |       
|                                                                                     | Advertising                                  |                |                          | 7,443  |                    |         |                   | 16,649 |        |         |        | 21,168 |        |          |         | 47,362 |       
|                                                                                     | Advertising by Hallmark Cards, Inc.          |                |                          | 1,511  |                    |         |                   | 1,511  |        |         |        | 4,221  |        |          |         | 4,221  |       
|                                                                                     | Film licensing fees                          |                |                          |       |                    |         |                   | 5,034  |        |         |        |       |        |          |         | 15,485 |       
|                                                                                     | Other fees                                   |                |                          | 242    |                    |         |                   | 23     |        |         |        | 728    |        |          |         | 57     |       
|                                                                                     |                                              |                |                          |        |                    |         |                   |        |        |         |        |        |        |          |         |       
|                                                                                     |                                              |                | Total revenues           |        |                    | 26,335  |                   |        |        | 40,133  |        |        |        | 75,851   |         |        |        | 118,909  |  
|Cost of Services:                                                                    |                                              |                |                          |        |                    |         |                   |        |        |         |        |        |        |          |         |       
|                                                                                     | Programming costs:                           |                |                          |        |                    |         |                   |        |        |         |        |        |        |          |         |        |       
|                                                                                     |                                              | Affiliates     |                          |        | 16,779             |         |                   |        | 9,881  |         |        |        | 44,605 |          |         |        | 29,643 |         
|                                                                                     |                                              | Non-affiliates |                          |        | 35,844             |         |                   |        | 13,469 |         |        |        | 51,115 |          |         |        | 39,693 |         
|                                                                                     | Amortization of film assets                  |                |                          |       |                    |         |                   | 7,042  |        |         |        |       |        |          |         | 19,757 |       
|                                                                                     | Amortization of subscriber acquisition costs |                |                          | 2,573  |                    |         |                   | 5,280  |        |         |        | 2,573  |        |          |         | 14,792 |       
|                                                                                     | Depreciation and amortization                |                |                          | 1,304  |                    |         |                   | 1,185  |        |         |        | 3,439  |        |          |         | 3,557  |       
|                                                                                     | Operating costs                              |                |                          | 15,563 |                    |         |                   | 13,564 |        |         |        | 43,245 |        |          |         | 43,094 |       
|                                                                                     |                                              |                |                          |        |                    |         |                   |        |        |         |        |        |        |          |         |       
|                                                                                     |                                              |                | Total cost of services   |        |                    | 72,063  |                   |        |        | 50,421  |        |        |        | 144,977  |         |        |        | 150,536  |  
|Selling, general and administrative expenses                                         |                                              |                | 16,329                   |        |                    |         | 14,035            |        |        |         | 50,327 |        |        |          | 43,016  |       
|Marketing expenses                                                                   |                                              |                | 10,773                   |        |                    |         | 8,657             |        |        |         | 27,600 |        |        |          | 29,020  |       
|Depreciation and amortization                                                        |                                              |                | 1,879                    |        |                    |         | 2,523             |        |        |         | 6,983  |        |        |          | 7,164   |       
|Amortization of goodwill                                                             |                                              |                | 5,524                    |        |                    |         |                  |        |        |         | 14,520 |        |        |          |        |       
|                                                                                     |                                              |                |                          |        |                    |         |                   |        |        |         |        |        |        |          |         |       
|                                                                                     |                                              |                | Loss from operations     |        |                    | (80,233 | )                 |        |        | (35,503 | )      |        |        | (168,556 | )       |        |        | (110,827 | )
|Equity in net losses of unconsolidated entities                                      |                                              |                |                         |        |                    |         |                  |        |        |         | (655   | )      |        |          | (389    | )     
|Accretion of guaranteed preferred beneficial interest                                |                                              |                |                         |        |                    |         | (2,987            | )      |        |         |       |        |        |          | (14,765 | )     
|Interest expense, net                                                                |                                              |                | (2,322                   | )      |                    |         | (4,547            | )      |        |         | (4,734 | )      |        |          | (15,921 | )     
|                                                                                     |                                              |                |                          |        |                    |         |                   |        |        |         |        |        |        |          |         |       
|                                                                                     |                                              |                | Loss before income taxes |        |                    | (82,555 | )                 |        |        | (43,037 | )      |        |        | (173,945 | )       |        |        | (141,902 | )
|Income tax provision                                                                 |                                              |                | (397                     | )      |                    |         | (470              | )      |        |         | (1,403 | )      |        |          | (1,662  | )     
|                                                                                     |                                              |                |                          |        |                    |         |                   |        |        |         |        |        |        |          |         |       
|                                                                                     |                                              |                | Net loss                 |        |                    | (82,952 | )                 |        |        | (43,507 | )      |        |        | (175,348 | )       |        |        | (143,564 | )
|                                                                                     |                                              |                |                          |        |                    |         |                   |        |        |         |        |        |        |          |         |       
|Other comprehensive loss:                                                            |                                              |                |                          |        |                    |         |                   |        |        |         |        |        |        |          |         |       
|                                                                                     | Gain (loss) on fair value of derivative      |                |                          |       |                    |         |                   | (659   | )      |         |        |       |        |          |         | 204    |       
|                                                                                     | Foreign currency translation adjustment      |                |                          | 521    |                    |         |                   | 614    |        |         |        | (260   | )      |          |         | 928    |       
|                                                                                     |                                              |                |                          |        |                    |         |                   |        |        |         |        |        |        |          |         |       
|                                                                                     |                                              |                | Comprehensive loss       |        | $                  | (82,431 | )                 |        | $      | (43,552 | )      |        | $      | (175,608 | )       |        | $      | (142,432 | )
|                                                                                     |                                              |                |                          |        |                    |         |                   |        |        |         |        |        |        |          |         |       
|Weighted average number of Class A and Class B shares
outstanding, basic and diluted |                                              |                | 68,115                   |        |                    |         | 104,341           |        |        |         | 64,871 |        |        |          | 104,231 |       
|                                                                                     |                                              |                |                          |        |                    |         |                   |        |        |         |        |        |        |          |         |       
|Net loss per share, basic and diluted                                                |                                              | $              | (1.22                    | )      |                    | $       | (0.42             | )      |        | $       | (2.70  | )      |        | $        | (1.38   | )     
|                                                                                     |                                              |                |                          |        |                    |         |                   |        |        |         |        |        |        |          |         |       

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)

|                                                         |                                                                      |                                                                             |                                                       |                                                      |          |                   |          |          |          |         |          |  
|-------------------------------------------------------- | -------------------------------------------------------------------- | --------------------------------------------------------------------------- | ----------------------------------------------------- | ---------------------------------------------------- | -------- | ----------------- | -------- | -------- | -------- | ------- | -------- | -
|                                                         |                                                                      |                                                                             |                                                       |                                                      |          | Nine Months Ended
|                                                         |                                                                      |                                                                             |                                                       |                                                      |          | September 30,    
|                                                         |                                                                      |                                                                             |                                                       |                                                      |          | 2001              |          | 2002    
|                                                         |                                                                      |                                                                             |                                                       |                                                      |          |                   |          |         
|                                                         |                                                                      |                                                                             |                                                       |                                                      |          | (Unaudited)      
|CASH FLOWS FROM OPERATING ACTIVITIES:                    |                                                                      |                                                                             |                                                       |                                                      |          |                   |          |         
|                                                         |                                                                      | Net loss                                                                    |                                                       | $                                                    | (175,348 | )                 |          | $        | (143,564 | )      
|                                                         |                                                                      | Adjustments to reconcile net loss to net cash used in
operating activities: |                                                       |                                                      |          |                   |          |          |          |        
|                                                         |                                                                      |                                                                             | (Gain) loss on sale of property and equipment         |                                                      |          | 138               |          |          |          | 13      |         
|                                                         |                                                                      |                                                                             | Loss on derivative asset                              |                                                      |          |                  |          |          |          | 458     |         
|                                                         |                                                                      |                                                                             | Amortization and depreciation                         |                                                      |          | 112,910           |          |          |          | 120,732 |         
|                                                         |                                                                      |                                                                             | Accretion of guaranteed preferred beneficial interest |                                                      |          |                  |          |          |          | 26,458  |         
|                                                         |                                                                      |                                                                             | Gain on change in fair value of derivative liability  |                                                      |          |                  |          |          |          | (11,693 | )       
|                                                         |                                                                      |                                                                             | Accretion of convertible debt                         |                                                      |          |                  |          |          |          | 6,594   |         
|                                                         |                                                                      |                                                                             | Provision for allowance for doubtful accounts         |                                                      |          | 4,765             |          |          |          | 2,958   |         
|                                                         |                                                                      |                                                                             | Equity in net losses of unconsolidated entities       |                                                      |          | 655               |          |          |          |        |         
|                                                         |                                                                      |                                                                             | Stock-based compensation                              |                                                      |          | 1,230             |          |          |          | 16      |         
|                                                         |                                                                      |                                                                             | Changes in operating assets and liabilities:          |                                                      |          |                   |          |          |          |         |         
|                                                         |                                                                      |                                                                             |                                                       | Increase in accounts receivable                      |          |                   | (13,802  | )        |          |         | (18,995  | )
|                                                         |                                                                      |                                                                             |                                                       | Additions to program license fees                    |          |                   | (66,519  | )        |          |         | (119,426 | )
|                                                         |                                                                      |                                                                             |                                                       | Increase in subtitling and dubbing                   |          |                   | (3,563   | )        |          |         | (4,184   | )
|                                                         |                                                                      |                                                                             |                                                       | Additions to subscriber acquisition fees             |          |                   | (17,290  | )        |          |         | (8,503   | )
|                                                         |                                                                      |                                                                             |                                                       | (Increase) decrease in prepaid and other assets      |          |                   | (34      | )        |          |         | (3,825   | )
|                                                         |                                                                      |                                                                             |                                                       | Increase in accounts payable and accrued liabilities |          |                   | 7,564    |          |          |         | 25,827   |  
|                                                         |                                                                      |                                                                             |                                                       | Decrease in interest payable                         |          |                   | (40      | )        |          |         | (2,597   | )
|                                                         |                                                                      |                                                                             |                                                       | Decrease in subscriber acquisition fees payable      |          |                   | (797     | )        |          |         | (15,720  | )
|                                                         |                                                                      |                                                                             |                                                       | Increase in affiliate license fees payable           |          |                   | 23,738   |          |          |         | 25,190   |  
|                                                         |                                                                      |                                                                             |                                                       | Increase (decrease) in payables to affiliates        |          |                   | (3,045   | )        |          |         | 923      |  
|                                                         |                                                                      |                                                                             |                                                       | Increase (decrease) in deferred programming revenue  |          |                   | (457     | )        |          |         | 217      |  
|                                                         |                                                                      |                                                                             |                                                       |                                                      |          |                   |          |         
|                                                         |                                                                      |                                                                             |                                                       | Net cash used in operating activities                |          |                   | (129,895 | )        |          |         | (119,121 | )
|                                                         |                                                                      |                                                                             |                                                       |                                                      |          |                   |          |         
|CASH FLOWS FROM INVESTING ACTIVITIES:                    |                                                                      |                                                                             |                                                       |                                                      |          |                   |          |         
|                                                         |                                                                      | Purchases of property and equipment                                         |                                                       |                                                      | (10,907  | )                 |          |          | (1,524   | )      
|                                                         |                                                                      | Proceeds from disposition of property and equipment                         |                                                       |                                                      | 128      |                   |          |          | 97       |        
|                                                         |                                                                      | Acquisition of H&H Programming  Asia, net of cash acquired                 |                                                       |                                                      | (690     | )                 |          |          |         |        
|                                                         |                                                                      |                                                                             |                                                       |                                                      |          |                   |          |         
|                                                         |                                                                      |                                                                             |                                                       | Net cash used in investing activities                |          |                   | (11,469  | )        |          |         | (1,427   | )
|                                                         |                                                                      |                                                                             |                                                       |                                                      |          |                   |          |         
|CASH FLOWS FROM FINANCING ACTIVITIES:                    |                                                                      |                                                                             |                                                       |                                                      |          |                   |          |         
|                                                         | Proceeds from the issuance of common stock, net of issuance
costs    |                                                                             |                                                       | 54                                                   |          |                   |          |         |         
|                                                         | Proceeds from the exercise of stock options                          |                                                                             |                                                       | 744                                                  |          |                   |          | 1,629    |         
|                                                         | Borrowings from HC Crown note payable                                |                                                                             |                                                       | 116,220                                              |          |                   |          |         |         
|                                                         | Borrowings from credit facility                                      |                                                                             |                                                       | 209,971                                              |          |                   |          | 119,000  |         
|                                                         | Payments on borrowings from HC Crown note payable                    |                                                                             |                                                       | (83,000                                              | )        |                   |          |         |         
|                                                         | Payments on borrowings from credit facility                          |                                                                             |                                                       | (120,000                                             | )        |                   |          | (110,589 | )       
|                                                         | Decrease in cash in escrow                                           |                                                                             |                                                       |                                                     |          |                   |          | 111,625  |         
|                                                         | Distribution to holders of guaranteed preferred beneficial
interests |                                                                             |                                                       |                                                     |          |                   |          | (11,027  | )       
|                                                         | Debt issuance costs                                                  |                                                                             |                                                       | (5,467                                               | )        |                   |          |         |         
|                                                         | Principal payments under capital lease obligation                    |                                                                             |                                                       | (899                                                 | )        |                   |          | (978     | )       
|                                                         |                                                                      |                                                                             |                                                       |                                                      |          |                   |          |         
|                                                         |                                                                      |                                                                             |                                                       | Net cash provided by financing activities            |          |                   | 117,623  |          |          |         | 109,660  |  
|                                                         | Effect of exchange rate changes on cash                              |                                                                             |                                                       | (50                                                  | )        |                   |          | 331      |         
|                                                         |                                                                      |                                                                             |                                                       |                                                      |          |                   |          |         
|                                                         |                                                                      |                                                                             |                                                       | Net decrease in cash and cash equivalents            |          |                   | (23,791  | )        |          |         | (10,557  | )
|Cash and cash equivalents, beginning of period           |                                                                      |                                                                             | 34,274                                                |                                                      |          |                   | 13,859   |         
|                                                         |                                                                      |                                                                             |                                                       |                                                      |          |                   |          |         
|Cash and cash equivalents, end of period                 |                                                                      | $                                                                           | 10,483                                                |                                                      |          | $                 | 3,302    |         
|                                                         |                                                                      |                                                                             |                                                       |                                                      |          |                   |          |         
|Supplemental disclosure of cash and non-cash activities: |                                                                      |                                                                             |                                                       |                                                      |          |                   |          |         
|                                                         | Interest paid                                                        |                                                                             | $                                                     | 4,738                                                |          |                   | $        | 9,336    |         
|                                                         | Interest paid on preferred securities                                |                                                                             | $                                                     |                                                     |          |                   | $        | 13,316   |         
|                                                         | Income taxes paid                                                    |                                                                             | $                                                     | 1,403                                                |          |                   | $        | 1,662    |         
|                                                         | Asset acquired through capital lease obligation                      |                                                                             | $                                                     | 13,252                                               |          |                   | $        |         |         
|                                                         | Acquisition of H&H Programming  Asia, net of cash acquired:         |                                                                             |                                                       |                                                      |          |                   |          |          |         
|                                                         |                                                                      |                                                                             | Accounts receivable and other assets                  |                                                      | $        | 1,622             |          |          | $        |        |         
|                                                         |                                                                      |                                                                             | Program license fees                                  |                                                      |          | 2,678             |          |          |          |        |         
|                                                         |                                                                      |                                                                             | Goodwill and other intangibles                        |                                                      |          | 93,924            |          |          |          |        |         
|                                                         |                                                                      |                                                                             | Accounts payable and other liabilities                |                                                      |          | 3,227             |          |          |          |        |         
|                                                         |                                                                      |                                                                             | Credit facility                                       |                                                      |          | 3,100             |          |          |          |        |         
|                                                         |                                                                      |                                                                             | Affiliate license fees payable                        |                                                      |          | 5,388             |          |          |          |        |         
|                                                         |                                                                      |                                                                             | Issuance of Class A common stock                      |                                                      |          | 85,819            |          |          |          |        |         
|                                                         | Purchase of film assets:                                             |                                                                             |                                                       |                                                      |          |                   |          |          |         
|                                                         |                                                                      |                                                                             | Film assets                                           |                                                      | $        | 810,928           |          |          | $        |        |         
|                                                         |                                                                      |                                                                             | Accounts receivable                                   |                                                      |          | 4,651             |          |          |          |        |         
|                                                         |                                                                      |                                                                             | Receivable from affiliate                             |                                                      |          | 1,515             |          |          |          |        |         
|                                                         |                                                                      |                                                                             | Deferred tax asset valuation allowance reduction      |                                                      |          | 95,314            |          |          |          |        |         
|                                                         |                                                                      |                                                                             | Derivative asset                                      |                                                      |          | 458               |          |          |          |        |         
|                                                         |                                                                      |                                                                             | Payables to affiliates                                |                                                      |          | 100,000           |          |          |          |        |         
|                                                         |                                                                      |                                                                             | Credit facility                                       |                                                      |          | 120,000           |          |          |          |        |         
|                                                         |                                                                      |                                                                             | Deferred tax liability                                |                                                      |          | 100,634           |          |          |          |        |         
|                                                         |                                                                      |                                                                             | Issuance of Class A common stock                      |                                                      |          | 592,232           |          |          |          |        |         
|                                                         | Subscriber acquisition fees:                                         |                                                                             |                                                       |                                                      |          |                   |          |          |         
|                                                         |                                                                      |                                                                             | Subscriber acquisition fees                           |                                                      | $        | 80,081            |          |          | $        |        |         
|                                                         |                                                                      |                                                                             | Issuance of Class A common stock                      |                                                      |          | 80,081            |          |          |          |        |         

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 Nine Months Ended September 30, 2001 and 2002

1. Business and Organization

Organization

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

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

Liquidity

The Companys financial position and operations changed significantly
during 2001. Substantial revenue producing assets were acquired through the
issuance of debt and stock and funds available under the Companys credit
facility. In August 2001, the Company issued $80.1 million of common stock for
additional carriage on a U.S. pay television distributor. In September 2001,
the Company acquired approximately 700 films for $592.0 million in common stock
and assumption of $220.0 million of debt. The expectation is that these
additional assets will provide substantial revenue for the foreseeable future.
These acquisitions and the Companys continuing use of cash in operations
required several new financings during 2001. In September 2001, the Company
established a bank credit facility of $285.0 million, which was subsequently
increased in December 2001, to $320.0 million. In December 2001, the Company
also issued $265.0 million of preferred securities in a private placement
transaction.

In connection with our growth strategy, we expect that we will continue to
make significant investments in programming and distribution. Programming
expenditures for the last three months of 2002 are expected to be in the range
of $12.0 million to $17.0 million, and cash payments of subscriber acquisition
fees are expected in the fourth quarter of 2002 to be $10.0 million to $12.0
million. Our principal uses of funds during the next twelve months are
expected to be the payment of operating expenses (including but not limited to
licensing programming from third parties and subscriber acquisition fees) and
debt service payments. Our principal sources of funds are currently cash
inflows from operations, cash on hand and available borrowings under our bank
credit facility and the HC Crown Corporation line of credit.

At September 30, 2002, we had an available cash balance of $3.3 million,
$49.5 million undrawn balance under our credit facility, and $75.0 million
available under the HC Crown line of credit. We expect cash used for some
expenses to decrease over the next 12 months, including programming costs and
administrative expenses. A large component of the decreased expenses will
result from the reorganization announced in October 2002, which we expect to
reduce operating costs by $25.0 million annually. In addition, certain
expenses, such as new programming, are discretionary. On the other hand, we
expect other expenses to increase over the next 12 months, including cash
payments for distribution. Advertising revenue is expected to continue to
increase overall, and we expect subscriber fee revenue to decrease in the next
12 months. Taking into account these factors, we believe that cash inflows
from operations, cash on hand, the available amount under our credit facility
and the HC Crown line of credit will be sufficient for our liquidity needs
through at least September 30, 2003.

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In order to provide flexibility, the Company is considering ways to raise
additional cash. Additional cash would also decrease the likelihood of further
cost cutting and delays in investments in programming and distribution. There
can be no assurance that additional funds will be available, if at all, on
terms acceptable to the Company. Any new debt financing would require the
agreement of existing lenders and preferred securities holders.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the consolidated accounts of
Crown Media Holdings and those of its wholly owned subsidiaries, including
those that prior to acquiring complete ownership were majority-owned and
controlled subsidiaries. Investments in entities that were previously not
majority-owned and controlled by Crown Media Holdings were accounted for under
the equity method. All significant intercompany balances and transactions have
been eliminated in consolidation.

Cash and Cash Equivalents

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

Restricted Cash

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

Subscriber Acquisition Fees

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

Subscriber acquisition fees are amortized over the life of the
distribution agreements as a reduction of subscriber fees revenue. If the
amortization expense exceeds the revenue recognized on a per distributor basis,
the amortization is included as a component of 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 September 30,
|                                         |                                      |   |                    |         |                    
|                                         |                                      |   | 2001               |         | 2002               
|                                         |                                      |   |                    |         |                    
|                                         |                                      |   | (In thousands)    
|Balance at cost, January 1               |                                      | $ | 32,884             |         |                     | $ | 143,153 |        
|Additions due to distribution agreements |                                      |   | 110,269            |         |                     |   | 8,502   |        
|                                         |                                      |   |                    |         |                     |   |         |        
|                                         | Subscriber acquisition fees, at cost |   |                    | 143,153 |                     |   |         | 151,655 | 
|Accumulated amortization                 |                                      |   | (16,188            | )       |                     |   | (36,726 | )      
|                                         |                                      |   |                    |         |                     |   |         |        
|                                         | Subscriber acquisition fees, net     |   | $                  | 126,965 |                     |   | $       | 114,929 | 
|                                         |                                      |   |                    |         |                     |   |         |        

As of December 31, 2001, and September 30, 2002, the consolidated balance
sheets also reflected subscriber acquisition fees payable of $28.3 million and
$12.6 million, respectively. For the three months ended September 30, 2001 and
2002, Crown Media United States made cash payments of $8.0 million and $3.8
million, respectively, reducing subscriber acquisition fees payable. For the
nine months ended September 30, 2001 and 2002, Crown Media United States made
cash payments of $15.2 million and $24.2 million, respectively. Additionally,
$80.1 million of common stock was issued in exchange for distribution rights
during 2001 (see Note 7).

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Program License Fees

Program license fees are payable in connection with the acquisition of the
rights to air programs acquired from others. In
accordance with Statement of Financial Accounting Standards (SFAS) No.
63, Financial Reporting by Broadcasters,program rights are deferred and then
amortized on a straight-line basis over their license periods (the airing
windows) or anticipated usage, whichever is shorter. At the inception of these
contracts and periodically thereafter, Crown Media Holdings evaluates the
recoverability of these costs versus the revenues directly associated with the
programming and related expenses. Where an evaluation indicates that a
programming contract will ultimately result in a loss, additional amortization
is provided to currently recognize that loss.

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

Subtitling and Dubbing

Subtitling and dubbing costs represent costs incurred to prepare
programming for airing in international markets. These costs are capitalized as
incurred and are amortized over the shorter of the programs airing window for
programming licensed from unaffiliated third-parties, the programs estimated
life (in the case of programming licensed from Hallmark Entertainment
Distribution and the Companys film assets) or 10 years. Accumulated
amortization related to subtitling and dubbing as of December 31, 2001, and
September 30, 2002, was $4.9 million and $6.0 million, respectively.

Capitalized Leases

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

Property and Equipment

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

Accounting for Trust Preferred Securities

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

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

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

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Revenue Recognition

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

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

Advertising revenues are recognized as earned in the period in which the
advertising commercials or infomercials are telecast. 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, which is generally the value
in the negotiated barter contract. The fair value is determined based upon
Crown Media Holdings historical practice of receiving cash for similar
advertisements from buyers unrelated to the other party in the current barter
transaction. When the barter advertising revenue does not meet the requirements
of EITF No. 99-17, Accounting for Advertising Barter Transactions,no revenue
is recognized. For the three months ended September 30, 2001 and 2002, revenue
from advertising barter transactions of $364,000 and $545,000, respectively,
equaled the corresponding barter expenses and were included as a component of
both advertising revenue and marketing expenses in the accompanying
consolidated statements of operations. For the nine months ended September 30,
2001 and 2002, these amounts were $1.3 million and $865,000, respectively.

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

Revenues from foreign sources for the three months ended September 30,
2001 and 2002, represented 63% and 49% respectively, of total revenue. Revenues
from foreign sources for the nine months ended September 30, 2001 and 2002,
represented 63% and 49% respectively, of total revenue. Such revenues,
generally denominated in United States dollars, were primarily from sales to
customers in Australia, India, Malaysia, Mexico, Philippines, Poland,
Singapore, South Africa, South Korea, Taiwan, and the United Kingdom, during
all periods presented.

Cost of Services

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

Film Assets

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

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

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Goodwill and Other Intangibles

In July 2001, the FASB issued SFAS 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
prohibit the prospective use of pooling-of-interests accounting and require
companies to cease amortizing goodwill and certain intangible assets with an
indefinite useful life created by business combinations accounted for using the
purchase method of accounting. Instead, goodwill and intangible assets deemed
to have an indefinite useful life are subject to an annual review for
impairment. Crown Media Holdings ceased amortizing goodwill, including goodwill
included in the carrying value of certain investments accounted for under the
equity method of accounting. Additionally, during the first quarter of 2002, an
external valuation expert reviewed the carrying value of Crown Media Holdings
goodwill and certain intangible assets for impairment, finding that an
impairment was not necessary.

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

|                                                                                     |  |                                          |         |                                 |  |      |         |      |  |   |          |   |  |   |          |  
|------------------------------------------------------------------------------------ |  | ---------------------------------------- | ------- | ------------------------------- |  | ---- | ------- | ---- |  | - | -------- | - |  | - | -------- | -
|                                                                                     |  | Three Months Ended September 30,         |         | Nine Months Ended September 30,
|                                                                                     |  | 2001                                     |         | 2002                            |  | 2001 |         | 2002
|                                                                                     |  |                                          |         |                                 |  |      |         |     
|                                                                                     |  | (In thousands, except per share amounts)
|Net Loss                                                                             |  | $                                        | (82,952 | )                               |  | $    | (43,507 | )    |  | $ | (175,348 | ) |  | $ | (143,564 | )
|Amortization of goodwill                                                             |  |                                          | 5,524   |                                 |  |      |         |      |  |   | 14,520   |   |  |   |          |  
|                                                                                     |  |                                          |         |                                 |  |      |         |      |  |   |          |   |  |   |          |  
|Adjusted net loss                                                                    |  | $                                        | (77,428 | )                               |  | $    | (43,507 | )    |  | $ | (160,828 | ) |  | $ | (143,564 | )
|                                                                                     |  |                                          |         |                                 |  |      |         |      |  |   |          |   |  |   |          |  
|Net loss per share, basic and diluted                                                |  | $                                        | (1.22   | )                               |  | $    | (0.42   | )    |  | $ | (2.70    | ) |  | $ | (1.38    | )
|Amortization of goodwill                                                             |  |                                          | 0.08    |                                 |  |      |         |      |  |   | 0.22     |   |  |   |          |  
|                                                                                     |  |                                          |         |                                 |  |      |         |      |  |   |          |   |  |   |          |  
|Adjusted net loss per share                                                          |  | $                                        | (1.14   | )                               |  | $    | (0.42   | )    |  | $ | (2.48    | ) |  | $ | (1.38    | )
|                                                                                     |  |                                          |         |                                 |  |      |         |      |  |   |          |   |  |   |          |  
|Weighted average number of Class A
and Class B shares outstanding,
basic and diluted |  |                                          | 68,115  |                                 |  |      | 104,341 |      |  |   | 64,871   |   |  |   | 104,231  |  
|                                                                                     |  |                                          |         |                                 |  |      |         |      |  |   |          |   |  |   |          |  

Taxes on Income

Income taxes are accounted for using an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have not been recognized in
Crown Media Holdings consolidated financial statements or tax returns. In
estimating future tax consequences, Crown Media Holdings generally considers
all expected future events other than changes in the tax law or rates. Crown
Media Holdings records a valuation allowance against future tax benefits if it
is determined that the benefit will more likely not be realized in future
periods. As of December 31, 2001, and September 30, 2002, the valuation
allowance was $16.0 million and $73.2 million, respectively.

Comprehensive Loss

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

Translation of Foreign Currency

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

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Net Loss Per Share

Basic net loss per share is computed by dividing the net loss for the
period by the weighted average number of common shares outstanding during the
period. Diluted net loss per share is computed based on the weighted average
number of common shares and potentially dilutive common shares outstanding. The
calculation of diluted net loss per share excludes potential common shares if
the effect is antidilutive. Potential common shares consist of incremental
common shares issuable upon the exercise of stock options. Approximately 6.7
million stock options for the three and nine months ended September 30, 2001,
and approximately 8.1 million stock options for the three and nine months ended
September 30, 2002, have been excluded from the calculations on the statements
of operations because their effect would have been antidilutive. Additionally,
10.1 million contingent appreciation certificates have also been excluded for
the three and nine months ended September 30, 2002, as their effect would have
been antidilutive. Accordingly, diluted loss per share equals basic loss per
share.

Stock-Based Compensation

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

Derivative Financial Instruments

On January 1, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities,as amended. The standard
requires the recognition of all derivative instruments on the balance sheet as
either assets or liabilities measured at fair value. Changes in fair value are
recognized immediately in earnings unless the derivatives qualify as hedges of
future cash flows. Changes in the fair value of the derivatives components of
the private placement transaction are recognized immediately in earnings.

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

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

The Company used a derivative financial instrument, primarily a forward
foreign exchange contract, to reduce the exposure of adverse effects of
fluctuating foreign currency exchange rates. This contract, which was
designated as a cash flow hedge, was entered into primarily to hedge a payable
denominated in a foreign currency, which had a maturity of less than one year.
Throughout 2001 and through July 2002, the Company entered into this contract
with a counterparty that is a major financial institution, and accordingly, the
Company believed that the risk of counterparty nonperformance was remote. The
amount of the ineffectiveness of the derivative, recorded in the consolidated
statements of operations for the three and six and one half months ended July
2002, was not significant.

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

Use of Estimates

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

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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.

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. The fair values of the above were estimated using the
current rates at which loans would be made to Crown Media Holdings for similar
remaining maturities.

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. Preparing financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, and expenses. Actual results may differ from these
estimates. 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. 2001 Annual Report on Form
10-K.

Recently Issued Accounting Pronouncements

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

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities,which is effective for
restructurings initiated after December 31, 2002. SFAS No. 146 supercedes EITF
Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)and requires companies to record exit costs and employee
termination benefits only after such costs have been incurred and their fair
values can be measured. To the extent that the Company enters into plans to
restructure the business in the future, SFAS No. 146 will have a significant
effect on the Companys consolidated financial statements.

Reclassifications

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

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3. Program license fees

Program license fees are comprised of the following:

|                                                           |                               |   |                    |         |                     |   |          |         | 
|---------------------------------------------------------- | ----------------------------- | - | ------------------ | ------- | ------------------- | - | -------- | ------- | 
|                                                           |                               |   | As of December 31, |         | As of September 30,
|                                                           |                               |   |                    |         |                    
|                                                           |                               |   | 2001               |         | 2002               
|                                                           |                               |   |                    |         |                    
|                                                           |                               |   | (In thousands)    
|Program license fees  Hallmark Entertainment
Distribution |                               | $ | 103,539            |         |                     | $ | 102,261  |        
|Program license fees  NICC                                |                               |   | 287                |         |                     |   | 8,612    |        
|Program license fees  other affiliates                    |                               |   | 13,821             |         |                     |   | 14,440   |        
|Program license fees  non-affiliates                      |                               |   | 93,795             |         |                     |   | 165,380  |        
|Prepaid program license fees                               |                               |   | 6,750              |         |                     |   | 10,250   |        
|                                                           |                               |   |                    |         |                     |   |          |        
|                                                           | Program license fees, at cost |   |                    | 218,192 |                     |   |          | 300,943 | 
|Accumulated amortization                                   |                               |   | (76,670            | )       |                     |   | (111,310 | )      
|                                                           |                               |   |                    |         |                     |   |          |        
|                                                           | Program license fees, net     |   | $                  | 141,522 |                     |   | $        | 189,633 | 
|                                                           |                               |   |                    |         |                     |   |          |        

License fees payable are comprised of the following:

|                                                           |                      |   |                    |         |                     |   |        |         | 
|---------------------------------------------------------- | -------------------- | - | ------------------ | ------- | ------------------- | - | ------ | ------- | 
|                                                           |                      |   | As of December 31, |         | As of September 30,
|                                                           |                      |   |                    |         |                    
|                                                           |                      |   | 2001               |         | 2002               
|                                                           |                      |   |                    |         |                    
|                                                           |                      |   | (In thousands)    
|License fees payable  Hallmark Entertainment
Distribution |                      | $ | 62,299             |         |                     | $ | 79,251 |        
|License fees payable  NICC                                |                      |   |                   |         |                     |   | 1,349  |        
|License fees payable  other affiliate                     |                      |   |                   |         |                     |   | 1,158  |        
|License fees payable  non-affiliates                      |                      |   | 56,215             |         |                     |   | 99,654 |        
|                                                           |                      |   |                    |         |                     |   |        |        
|                                                           | License fees payable |   | $                  | 118,514 |                     |   | $      | 181,412 | 
|                                                           |                      |   |                    |         |                     |   |        |        

4. Property and Equipment

Property and equipment are comprised of the following:

|                                          |                                 |   |                    |        |                     |   |         |        | 
|----------------------------------------- | ------------------------------- | - | ------------------ | ------ | ------------------- | - | ------- | ------ | 
|                                          |                                 |   | As of December 31, |        | As of September 30,
|                                          |                                 |   |                    |        |                    
|                                          |                                 |   | 2001               |        | 2002               
|                                          |                                 |   |                    |        |                    
|                                          |                                 |   | (In thousands)    
|Technical equipment and computers         |                                 | $ | 37,745             |        |                     | $ | 37,703  |       
|Leased assets                             |                                 |   | 13,252             |        |                     |   | 13,252  |       
|Furniture, fixtures and equipment         |                                 |   | 2,025              |        |                     |   | 2,168   |       
|Leasehold improvements                    |                                 |   | 8,604              |        |                     |   | 9,132   |       
|Construction-in-progress                  |                                 |   | 424                |        |                     |   | 539     |       
|                                          |                                 |   |                    |        |                     |   |         |       
|                                          | Property and equipment, at cost |   |                    | 62,050 |                     |   |         | 62,794 | 
|Accumulated depreciation and amortization |                                 |   | (18,168            | )      |                     |   | (25,631 | )     
|                                          |                                 |   |                    |        |                     |   |         |       
|                                          | Property and equipment, net     |   | $                  | 43,882 |                     |   | $       | 37,163 | 
|                                          |                                 |   |                    |        |                     |   |         |       

Depreciation and amortization expense totaled $3.2 million and $3.7
million, respectively, for the three months ended September 30, 2001 and 2002.
Depreciation and amortization expense totaled $10.4 million and $10.7 million,
respectively, for the nine months ended September 30, 2001 and 2002.

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

5. Investments in and Advances to Unconsolidated Entities

Investment in H&H Programming  Asia

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

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

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

Investment in Crown Media United States

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

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

6. Credit Facility and Private Placement

Credit Facility

In connection with the completion of the purchase of the film assets,
Crown Media Holdings entered into a credit agreement with a syndicate of banks,
led by JP Morgan Chase Bank, under which the banks have extended to Crown Media
Holdings, as amended in December 2001, a five-year $320.0 million secured
credit facility. On the accompanying consolidated balance sheet at December 31,
2001, the amount of $111.9 million was included as a current liability
(including interest of approximately $936,000), because this amount was
required to be paid on January 7, 2002, from the proceeds of the issuance of
the preferred securities, and $151.4 million was included as a long-term
liability. At September 30, 2002, an outstanding amount of $270.5 million was
included as a long-term liability as the entire balance is due in 2006. This
loan is guaranteed by Crown Media Holdings subsidiaries and is secured by all
tangible and intangible property of Crown Media Holdings and its subsidiaries.
A portion of the borrowings under the credit facility were used to pay $120.0
million of debt assumed as part of the consideration for acquiring the film
assets and to repay $84.2 million outstanding under a $150.0 million line of
credit provided by HC Crown. At September 30, 2002, the balance available to
Crown Media Holdings for general working capital purposes under the credit
facility is $49.5 million. JP Morgan Chase Bank and J.P. Morgan Partners (BHCA)
L.P., a significant stockholder of Crown Media Holdings, are both affiliates of
J.P. Morgan Chase & Co.

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

Since the inception of the credit facility, Crown Media Holdings has
elected the monthly Eurodollar rate. For 2001, amounts under the revolver
accrued interest at rates from 5.0% to 5.59% and amounts under the term loan
accrued interest at rates from 5.11% to 5.59%. For the nine months ended
September 30, 2002 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 4.78% to 5.11%. Interest expense on borrowings under the credit
facility for the three and nine months ended September 30, 2002, was $3.2
million and $8.3 million, respectively. At December 31, 2001, and September 30,
2002, accrued interest of $936,000 and $628,000, respectively, was reflected in
the current portion of the credit facility and accrued interest on the
accompanying consolidated balance sheet.

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Future contractual maturities of principal are as follows:

|           |  |                |         | 
|---------- |  | -------------- | ------- | 
|           |  | Years Ended   
|           |  | December 31,  
|           |  |               
|           |  | (In thousands)
|2002       |  | $              |        | 
|2003       |  |                |        | 
|2004       |  |                |        | 
|2005       |  |                |        | 
|2006       |  |                | 270,542 | 
|Thereafter |  |                |        | 
|           |  |                |         | 
|           |  | $              | 270,542 | 
|           |  |                |         | 

Private Placement

On December 17, 2001, Crown Media Holdings completed a $265.0 million
private placement to a group of institutional investors. Under the terms of the
private placement, Crown Media Holdings issued 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 additional financing allowed Crown Media Holdings to reduce the amount
outstanding under its bank credit facility by $111.6 million. The $111.6
million was placed into an escrow account until it was paid on January 7, 2002.
Additionally, the Company used a portion of the proceeds of the private
placement to repay $70.6 million under lines of credit provided by HC Crown and
$69.4 million of amounts payable to Hallmark Entertainment Distribution
pursuant to certain program license agreements held by subsidiaries of Crown
Media Holdings.

Each preferred security has a stated liquidation amount of $1,000, and
each contingent appreciation certificate entitles the holder to receive cash,
or at the holders option, purchase approximately 38.3 shares of the Companys
Class A common stock at a price of $13.07 per share, subject to adjustment.
Crown Media Trust issued the preferred securities to Crown Media Holdings in
exchange for 6.75% Subordinated Debentures from Crown Media Holdings due 2007.
Crown Media Holdings pays interest on the debentures at the same rate and at
the same time as Crown Media Trust is required to make distributions on the
preferred securities. Crown Media Holdings has guaranteed, on a subordinated
basis, Crown Media Trusts obligations under the preferred securities.

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

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

On or after December 15, 2003, Crown Media Holdings will have the right to
redeem any and all of the outstanding debentures at a redemption price equal to
100% of the aggregate principal amount of the debentures, together with any
accrued and unpaid interest thereon. Since their issuance through September 30,
2002, the Company had expected to redeem the debentures on December 15, 2004,
and was accreting its convertible debt and guaranteed preferred beneficial
interest to the amount expected to be paid, either in cash or common stock, in
satisfaction of the minimum return, at an internal rate of return of 14%. For a
change in this expectation, see Note 10, Subsequent Events, below. In the event
of a change of control, the Company must either exercise its right to redeem
all or offer to purchase any and all of the outstanding debentures at a price
equal to 110% of the aggregate principal amount of the debentures, together
with any accrued and unpaid interest thereon.

The financing was recorded at $265.0 million and required 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 as determined on December 17, 2001, was $197.7 million, on
December 31, 2001, was $199.0 million, and on September 30, 2002, was $214.5
million, net of offering costs.

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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 $43.5 million on December 17, 2001, $43.7 million
as of December 31, 2001, and $46.5 million as of September 30, 2002, which has
been classified as convertible debt on the accompanying consolidated balance
sheets. The transaction also resulted in a net derivative liability on December
17, 2001, of $12.1 million, on December 31, 2001, of $12.5 million, and on
September 30, 2002, of $802,000.

The following table summarizes the transaction as at the transaction date,
as of December 31, 2001, and as of September 30, 2002. 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, |         | September 30,
|                                                                           |                                                                                                       |                                                                        |         | Allocation     |         | 2001         |         | 2002         
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |              
|                                                                           |                                                                                                       |                                                                        |         | (In thousands)
|Convertible debt
Value of contingent appreciation certificates             |                                                                                                       | $                                                                      | 93,682  |                |         |              |         |               |         |   |         |        
|                                                                           | Value of embedded derivative                                                                          |                                                                        |         | (50,212        | )       |              |         |               |         |   |         |         |        
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |               |         |   |         |        
|                                                                           |                                                                                                       | Total carrying amount of convertible debt(a)(b)                        |         |                | 43,470  |              |         | $             | 43,733  |   |         | $       | 46,513  | 
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |               |         |   |         |        
|Derivative liability(c)                                                    |                                                                                                       |                                                                        | 12,083  |                |         | $            | 12,495  |               |         | $ | 802     |        
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |               |         |   |         |        
|Allocable offering costs included in debt issuance
costs(d)                |                                                                                                       |                                                                        | (2,444  | )              |         | $            | (2,427  | )             |         | $ | (1,799  | )      
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |               |         |   |         |        
|Guaranteed preferred beneficial interest in Crown Media
Trusts debentures |                                                                                                       |                                                                        | 209,447 |                |         | $            | 210,699 |               |         | $ | 234,913 |        
|                                                                           | Distribution to holders of guaranteed preferred beneficial
interest in Crown Media Trusts debentures |                                                                        |         |               |         |              |         |              |         |   |         | (11,027 | )      
|                                                                           | Allocable offering costs(e)                                                                           |                                                                        |         | (11,771        | )       |              |         | (11,659       | )       |   |         | (9,414  | )      
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |               |         |   |         |        
|                                                                           |                                                                                                       | Total carrying value of guaranteed preferred beneficial
interest(b)(f) |         |                | 197,676 |              |         | $             | 199,040 |   |         | $       | 214,472 | 
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |               |         |   |         |        
|                                                                           | Net proceeds allocated to securities sold                                                             |                                                                        | $       | 250,785        |         |              |         |               |         |   |         |         |        
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |               |         |   |         |        
|Gross proceeds from private placement                                      |                                                                                                       | $                                                                      | 265,000 |                |         |              |         |               |         |   |         |        
|Offering costs                                                             |                                                                                                       |                                                                        | (14,215 | )              |         |              |         |               |         |   |         |        
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |               |         |   |         |        
|                                                                           | Net proceeds allocated to securities sold                                                             |                                                                        | $       | 250,785        |         |              |         |               |         |   |         |         |        
|                                                                           |                                                                                                       |                                                                        |         |                |         |              |         |               |         |   |         |        



---

|(a) |  | Accreted principal to $45.6 million and additional 7.25% to meet minimum return requirements over three years.       
|--- |  | ---------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Interest payable at 6.75% per annum in cash each quarter. Balance due at anticipated redemption of December 15, 2004.
|   
|(c) |  | Marked to fair value through income (loss) at each reporting date.                                                   
|   
|(d) |  | Amortized to interest expense over three years.                                                                      
|   
|(e) |  | Accreted to guaranteed preferred beneficial interest over three years.                                               
|   
|(f) |  | Accreted principal to $219.4 million and additional 7.25% to meet minimum return requirements over three years.      

7. Related Party Transactions

Demand Notes

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

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

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

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

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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 both the bank credit facility
and the Crown Media Trust preferred securities, and its availability may be
reduced dollar for dollar in an amount equal to additional capital raised by
Crown Media Holdings. The rate of interest under the line of credit is equal to
LIBOR plus three percent, payable quarterly. HC Crowns obligation to make
loans under this line of credit is supported by an irrevocable letter of credit
from Credit Suisse First Boston. As of both December 31, 2001, and September
30, 2002, the Company had no borrowings under this note to HC Crown. In
addition, until the termination of the subordination and support agreement
entered into by Hallmark Cards in connection with the private placement and
until such time as the debentures and contingent appreciation certificates are
paid in full, Hallmark Cards has agreed to loan Crown Media Holdings an amount
necessary to pay, when due, the $100.0 million in obligations which were
incurred by Crown Media Holdings in connection with its acquisition of the film
assets. Lastly, Hallmark Entertainment, LLC (Hallmark Entertainment) agreed
to subordinate approximately $60.0 million in obligations owed by subsidiaries
of Crown Media Holdings to it pursuant to certain program license agreements.
Under this note, the Company is obligated to pay a commitment fee of 1.5% of
the initial maximum amount of the note 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, 2001, and September 30, 2002, the $1.1 million commitment fee
was included in payable to affiliates in the accompanying consolidated balance
sheets. The line of credit was required by the credit facility and was amended
to its present form in conjunction with the issuance of the Crown Media Trusts
preferred securities.

Hallmark Agreements Related to Bank Credit Facility and Preferred Securities

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

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

Costs Incurred on Crown Media Holdings Behalf

Since inception, Hallmark Entertainment has paid certain costs related to
payroll and benefits, insurance, operational and financing expenditures and
capital expenditures on behalf of Crown Media Holdings. These transactions are
recorded in the books and records of Crown Media Holdings. For the three and
nine months ended September 30, 2001, and the three months ended September 30,
2002, respectively, no amounts were paid to Hallmark Entertainment. For the
nine months ended September 30, 2002, approximately $1.4 million was paid to
Hallmark Entertainment. Unreimbursed costs of $1.8 million and $1.2 are
included in the item payable to affiliates in the accompanying consolidated
balance sheets as of December 31, 2001, and September 30, 2002, respectively.

Services Agreement with Hallmark Cards

Hallmark Cards, its subsidiaries and various affiliates, provide Crown
Media Holdings with services that include payroll, legal, financial, tax and
other general corporate services. This service agreement has a term of three
years, commencing January 1, 2000. We

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are currently negotiating and expect to enter into a renewal agreement.
Additionally, Hallmark Cards made a payment on Crown Media Holdings behalf for
certain expenses in the amount of $500,000 during first quarter 2002. For each
of the three months ended September 30, 2001 and 2002, Crown Media Holdings had
accrued $125,000, respectively, under the agreement. For each of the nine
months ended September 30, 2001 and 2002, Crown Media Holdings had accrued
$375,000, respectively, under the agreement. At December 31, 2001, and
September 30, 2002, unpaid accrued service fees of $3.1 million and $4.1
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. At December 31, 2001, and September 30, 2002,
unpaid accrued service fees of $1.5 million and $750,000, respectively, 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-license 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 nine months ended September 30, 2002, Crown Media United
States entered into sublicensing arrangements which resulted in $75,000 and
$222,500 being payable to Hallmark Entertainment Distribution under this
sharing arrangement and which has been included in the accompanying
consolidated balance sheet under payable to affiliates. 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 $13.5
million and $7.5 million, respectively, for the three months ended September
30, 2001 and 2002. These costs were $36.4 million and $22.7 million,
respectively, for the nine months ended September 30, 2001 and 2002. As of
December 31, 2001, and September 30, 2002, $62.3 million and $79.3 million,
respectively, are included in license fees payable to affiliates in the
accompanying consolidated balance sheets. In December 2001, Crown Media
Holdings paid $69.4 million to Hallmark Entertainment Distribution for license
fees with proceeds from its private
placement transaction.

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Class B Common Stock

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

Purchase of Film Assets

On September 28, 2001, Crown Media Holdings completed the acquisition of
film assets, comprised of approximately 700 film titles and related rights and
property, representing over 3,000 hours of programming, from the film assets of
Hallmark Entertainment Distribution, a wholly-owned subsidiary of Hallmark
Entertainment Holdings. Under the terms of the acquisition, the Company assumed
$220.0 million of Hallmark Entertainment Distribution debt and payables and
issued 33,319,528 shares of the Companys Class A common stock, net of the
reduction of the 425,000 shares returned to the Company in accordance with the
finalization of the stockholder lawsuit. The number of shares of common stock
was determined by a formula based on the average closing price of the common
stock from November 6, 2000 (the date the Company announced that it was
contemplating the transaction) to September 27, 2001 (the day prior to
closing), which average price was $17.78 per share. A committee of directors
independent of Hallmark Entertainment and its affiliates considered and
negotiated this transaction, including the purchase price, and received a
fairness opinion from its financial advisor. Additionally, the stockholders of
Crown Media Holdings, other than Hallmark Cards and its affiliates, approved
the transaction at a meeting on July 17, 2001.

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

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

Marketing Agreement

Crown Media United States and Hallmark Cards have entered into an
agreement to sponsor the Hallmark Keepsake Sweepstakes, a national promotion in
November and December 2002, involving a watch-and-win contest, prize
give-aways, and six Hallmark Entertainment original productions. Crown Media
United States has committed up to $10.0 million to this sponsorship through the
first quarter 2003, and Hallmark Cards and Hallmark Entertainment Holdings are
also providing contest prizes with a similar value to those provided
by Crown Media United States.

NICC License Agreements

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

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

Pursuant to a February 2001 amendment in conjunction with our acquisition
of the remaining ownership of Crown Media United States, the Company committed
to annual advances, in the amount of $5.3 million subject to annual
escalations, initially treated as a license fee for certain existing
programming provided by NICC to Crown Media United States. In addition, Crown
Media United States will fund a portion of the costs of new programming
produced by or with NICC. Crown Media United States will also assist

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

On October 7, 2002, as described in Note 10, management determined that
the $5.3 million annual license fees described above will not benefit
the Company's operations under the refined programming strategy. As such, these amounts will
be expensed during the fourth quarter of 2002. The Company is still obligated
to air the programming developed by NICC and under the terms of the agreement
cannot use this allocated airtime for any other programming.

Subscriber Acquisition Fees Agreement

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

8. Commitments and Contingencies

Distribution Agreements

Several of Crown Media United States existing distribution agreements
contain most favored nations clauses. These clauses typically provide that,
in the event Crown Media United States enters into 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 the Companys subscribers increased significantly.
Several other distributors, whose agreements contain most favored nations
provisions, have indicated an interest in some or all of the DirecTV terms, and
Crown Media United States is currently in discussions with these distributors.
Any modification of these existing agreements to adopt the DirecTV terms, or
any other new terms could result in the payment of cash or the issuance of
stock by Crown Media Holdings and will negatively affect subscriber revenues
and increase operating costs.

9. Operations in Different Geographic Areas

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

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

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

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|                                       |                                |                           |       |               |  |              |     |           |  |              |        |        |   |  |         |       |         | 
|-------------------------------------- | ------------------------------ | ------------------------- | ----- | ------------- |  | ------------ | --- | --------- |  | ------------ | ------ | ------ | - |  | ------- | ----- | ------- | 
|                                       |                                |                           |       | Revenue from  |  | Revenue from |     | Operating |  |              |        |       
|                                       |                                |                           |       | Unrelated     |  | Related      |     | Income    |  | Identifiable
|                                       |                                |                           |       | Entities      |  | Entities     |     | (Loss)    |  | Assets      
|                                       |                                |                           |       |               |  |              |     |           |  |             
|                                       |                                |                           |       | (In millions)
|Three Months Ended September 30, 2001: |                                |                           |       |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       | Domestic                       |                           | $     | 8.4           |  |              | $   | 1.5       |  |              | $      | (69.2  | ) |  | $       | 249.3 |        
|                                       | International                  |                           |       | 16.5          |  |              |     |          |  |              |        | (10.8  | ) |  |         | 80.6  |        
|                                       | Film Distribution              |                           |       |              |  |              |     |          |  |              |        | (0.2   | ) |  |         | 812.4 |        
|                                       |                                |                           |       |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       |                                | $                         | 24.9  |               |  | $            | 1.5 |           |  | $            | (80.2  | )      |   |  | 1,142.3 |      
|                                       |                                |                           |       |               |  |              |     |           |  |              |        |        |   |  |         |      
|Assets not allocated to segments:      |                                |                           |       |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       | Cash and cash equivalents      |                           |       |               |  |              |     |           |  |              |        |        |   |  |         | 10.5  |        
|                                       | Accounts receivable            |                           |       |               |  |              |     |           |  |              |        |        |   |  |         | 26.2  |        
|                                       | Goodwill and other intangibles |                           |       |               |  |              |     |           |  |              |        |        |   |  |         | 318.9 |        
|                                       |                                |                           |       |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       |                                | Consolidated total assets |       |               |  |              |     |           |  |              |        |        |   |  |         | $     | 1,497.9 | 
|                                       |                                |                           |       |               |  |              |     |           |  |              |        |        |   |  |         |      
|Three Months Ended September 30,
2002: |                                |                           |       |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       | Domestic                       |                           | $     | 13.5          |  |              | $   | 1.5       |  |              | $      | (35.1  | ) |  | $       | 290.4 |        
|                                       | International                  |                           |       | 20.1          |  |              |     |          |  |              |        | 3.1    |   |  |         | 80.3  |        
|                                       | Film Distribution              |                           |       | 5.0           |  |              |     |          |  |              |        | (3.5   | ) |  |         | 795.4 |        
|                                       |                                |                           |       |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       |                                | $                         | 38.6  |               |  | $            | 1.5 |           |  | $            | (35.5  | )      |   |  | 1,166.1 |      
|                                       |                                |                           |       |               |  |              |     |           |  |              |        |        |   |  |         |      
|Assets not allocated to segments:      |                                |                           |       |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       | Cash and cash equivalents      |                           |       |               |  |              |     |           |  |              |        |        |   |  |         | 3.3   |        
|                                       | Accounts receivable            |                           |       |               |  |              |     |           |  |              |        |        |   |  |         | 52.5  |        
|                                       | Goodwill and other intangibles |                           |       |               |  |              |     |           |  |              |        |        |   |  |         | 314.0 |        
|                                       |                                |                           |       |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       |                                | Consolidated total assets |       |               |  |              |     |           |  |              |        |        |   |  |         | $     | 1,535.9 | 
|                                       |                                |                           |       |               |  |              |     |           |  |              |        |        |   |  |         |      
|Nine Months Ended September 30, 2001:  |                                |                           |       |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       | Domestic                       |                           | $     | 24.0          |  |              | $   | 4.2       |  |              | $      | (142.7 | ) |  | $       | 249.3 |        
|                                       | International                  |                           |       | 47.7          |  |              |     |          |  |              |        | (25.6  | ) |  |         | 80.6  |        
|                                       | Film Distribution              |                           |       |              |  |              |     |          |  |              |        | (0.2   | ) |  |         | 812.4 |        
|                                       |                                |                           |       |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       |                                | $                         | 71.7  |               |  | $            | 4.2 |           |  | $            | (168.5 | )      |   |  | 1,142.3 |      
|                                       |                                |                           |       |               |  |              |     |           |  |              |        |        |   |  |         |      
|Assets not allocated to segments:      |                                |                           |       |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       | Cash and cash equivalents      |                           |       |               |  |              |     |           |  |              |        |        |   |  |         | 10.5  |        
|                                       | Accounts receivable            |                           |       |               |  |              |     |           |  |              |        |        |   |  |         | 26.2  |        
|                                       | Goodwill and other intangibles |                           |       |               |  |              |     |           |  |              |        |        |   |  |         | 318.9 |        
|                                       |                                |                           |       |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       |                                | Consolidated total assets |       |               |  |              |     |           |  |              |        |        |   |  |         | $     | 1,497.9 | 
|                                       |                                |                           |       |               |  |              |     |           |  |              |        |        |   |  |         |      
|Nine Months Ended September 30, 2002:  |                                |                           |       |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       | Domestic                       |                           | $     | 40.5          |  |              | $   | 4.2       |  |              | $      | (96.7  | ) |  | $       | 290.4 |        
|                                       | International                  |                           |       | 58.7          |  |              |     |          |  |              |        | (5.2   | ) |  |         | 80.3  |        
|                                       | Film Distribution              |                           |       | 15.5          |  |              |     |          |  |              |        | (8.9   | ) |  |         | 795.4 |        
|                                       |                                |                           |       |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       |                                | $                         | 114.7 |               |  | $            | 4.2 |           |  | $            | (110.8 | )      |   |  | 1,166.1 |      
|                                       |                                |                           |       |               |  |              |     |           |  |              |        |        |   |  |         |      
|Assets not allocated to segments:      |                                |                           |       |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       | Cash and cash equivalents      |                           |       |               |  |              |     |           |  |              |        |        |   |  |         | 3.3   |        
|                                       | Accounts receivable            |                           |       |               |  |              |     |           |  |              |        |        |   |  |         | 52.5  |        
|                                       | Goodwill and other intangibles |                           |       |               |  |              |     |           |  |              |        |        |   |  |         | 314.0 |        
|                                       |                                |                           |       |               |  |              |     |           |  |              |        |        |   |  |         |      
|                                       |                                | Consolidated total assets |       |               |  |              |     |           |  |              |        |        |   |  |         | $     | 1,535.9 | 
|                                       |                                |                           |       |               |  |              |     |           |  |              |        |        |   |  |         |      

Some of the markets in which we operate, including the Asian market, the
South American market (specifically Argentina), 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.

No customer accounted for more than 10% of Crown Media Holdings total
revenues for the three and nine months ended September 30, 2001 and 2002.

10. Subsequent Events

On October 7, 2002, Crown Media Holdings announced a corporate
reorganization of its operations in order to concentrate its efforts on the
U.S. market and its most successful international territories. The Company
intends to achieve this by decentralizing many oversight and non-technical
support functions located in its U.S. offices and transferring these
responsibilities to regional staff. In Latin America, the Company is in
negotiations to enter into a strategic alliance with a local distribution
partner who, under Crown Media Holdings direction, would assist in the
operation of the Hallmark Channel in this region. The reorganization, which is
expected to be complete by the end of the first quarter of 2003, is expected to
result in a 30% reduction of the Companys workforce.

Reflecting the reorganization, we plan to record a charge of approximately
$20.0 million during the fourth quarter of 2002. This charge will be comprised
of a cash charge of approximately $5.0 million for severance costs and a
non-cash charge of approximately $15.0 million related to satellites and
facilities exit costs. As a result, the Company expects to reduce operating
costs, compared to 2002, by a total of $25.0 million, comprised primarily of
decreases in amortization and expenditures for overhead, satellite leasing,
marketing and programming.

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In addition, Crown Media Holdings plans to record a non-cash charge in the
fourth quarter of $55.0 to $60.0 million related to certain programming
reflecting refinement of Crown Media Holdings programming strategy.

Additionally, in light of the decline in the market price of the Companys
Class A common stock, which affects the desirability of offering stock in the
future to redeem the preferred securities, management determined that the
Company will not make an optional early redemption of its trust preferred
securities, but will wait until their final redemption date in December 2007.
Consequently, under the applicable terms of the preferred securities and
related contingent appreciation certificates, the cumulative interest rate is
expected to be 18%, an increase of 4% from the 14% cumulative rate, which would
have been payable if the securities were redeemed at the previously
anticipated date of December 2004. The change in the interest rate from 14% to
18% will result in higher interest expense and accretion of guaranteed
preferred beneficial interest that will negatively impact the Companys results
of operations for all future periods until these securities are redeemed. The
required quarterly cash payments on the preferred securities remain unchanged,
although the final redemption amount will be higher.

On November 8, 2002, we entered into an amendment of a distribution
agreement with a large distributor in the United States.  In addition to
extending the term of the distribution agreement, the amendment provides for
payment of a substantial cash amount to resolve the application of a most
favored nations clause in that distributor's agreement to the DirecTV terms and
to provide for the launch of our Channel to a substantial number of additional
full-time subscribers. We paid a portion of this amount upon execution and will
make monthly cash payments through December 2003 for the balance.  We are also
required to make additional per subscriber market support payments for
subscribers in excess of the minimum number of subscribers which the
distributor has committed to deliver in consideration for the foregoing cash
amount.  In addition, if this minimum number of subscribers is delivered by the
distributor, subscriber fees will not be payable for subscribers above a
specified number.  The amendment also contains a most favored nations provision
relating to other distribution agreements. The consideration given as a result
of the amendment will become subscriber acquisition fees that are amortized
over the remaining life of the distribution agreement. The marketing support
payments under the amendment will be marketing expenses when incurred.

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

Revenues

Our revenues consist of subscriber fees, advertising 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. Subscriber fee
revenue is recorded net of promotional subscribers and amortization of
subscriber acquisition fees. 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 paid are capitalized and amortized over
the term of the applicable distribution agreement. At the time we sign a
distribution agreement, and periodically thereafter, we evaluate the
recoverability of the costs we incur against the revenues directly associated
with each agreement.

Subscriber fees vary according to:



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

In some circumstances, distributors provide minimum revenue guarantees.

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



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

We are in continuous negotiations both with our existing distributors and
new distributors to increase our subscriber base. In the United States, we are
sometimes subject to requests by distributors to pay subscriber acquisition
fees for these additional subscribers or to 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 revenues will continue to be
negatively affected by these subscriber acquisition fees, discounted subscriber
fees and other payments, however, we believe that the resulting increase in
subscribers will allow us to attract additional advertisers and command higher
advertising rates.

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

On November 8, 2002, we entered into an amendment of a distribution
agreement with a large distributor in the United States.  In addition to
extending the term of the distribution agreement, the amendment provides for
payment of a substantial cash amount to resolve the application of a most
favored nations clause in that distributor's agreement to the DirecTV terms and
to provide for the launch of our Channel to a substantial number of additional
full-time subscribers. We paid a portion of this amount upon execution and will
make monthly cash payments through December 2003 for the balance.  We are also
required to make additional per subscriber market support payments for
subscribers in excess of the minimum number of subscribers which the
distributor has committed to deliver in consideration for the foregoing cash
amount.  In addition, if this minimum number of subscribers is delivered by the
distributor, subscriber fees will not be payable for subscribers above a
specified number.  The amendment also contains a most favored nations provision
relating to other distribution agreements. The consideration given as a result
of the amendment will become subscriber acquisition fees that are amortized
over the remaining life of the distribution agreement. The marketing support
payments under the amendment will be marketing expenses when incurred.

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

In markets where regular audience measurements are available, our
advertising rates are calculated on the basis of an agreed upon price per unit
of audience measurement in return for a guaranteed investment level by the
advertiser. In these countries, we commit to provide advertisers certain rating
levels in connection with their advertising. Revenue is recorded net of
estimated shortfalls, which are usually settled by providing the advertiser
additional advertising time. In other markets, our advertising rates are
calculated on the basis of cost per advertising spot or package of advertising
spots, and the price varies by audience level expected (but not measured)
during a particular time slot. This is the predominant arrangement in the
countries outside the United States in which we sell advertising time.
Advertising rates also vary by time of year based on seasonal changes in
television viewership.

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

Cost of Services

Our cost of services consists primarily of program license fees,
amortization of our film assets, amortization of subscriber acquisition fees,
the cost of signal distribution, dubbing and subtitling, and creating the
promotional segments that are aired between programs. We expect cost of
services to continue to increase in the future as we expand our existing
markets and 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 up to the three-year term of the agreement ending in September 2004.

Discussion of Critical Accounting Policies

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

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

Revenue Recognition

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

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We have a disagreement with a U.S. pay television distributor about
subscriber fees required to be paid by that distributor, which is
the subject of ongoing discussions. Based upon our best judgment, we have
determined to recognize only a certain percentage of the subscriber fees
involved in this disagreement. As a result, we increased bad debt expense by
approximately $1.8 million relating to accrued subscriber fees owed by this
distributor from October 2001 through March 31, 2002, and have recognized only
a certain percentage of accrued subscriber fees for this distributor since that
date, amounting to $2.0 million from April 1, 2002, through September 30, 2002.

Program License Fees Paid by Us

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

Film Assets

The Company amortizes its film assets based on recognized revenue in the
case of sales to third parties, using projections of sales to third parties for
10 years in determining the amortization amount for any sale to a third party,
and based on a 10-year amortization for anticipated internal use of the film
assets. 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 by an initial, external valuation of the Companys film assets
at the time of acquisition. The film assets are also reviewed by the Company
for impairment whenever events or changes in circumstances indicate that the
carrying amount of any such asset may not be recoverable. At least annually,
the Company is required by the covenants in its credit facility to have a
valuation expert perform a valuation of the film assets and the individual film
assets will be written-down to their fair values if necessary.

Property and Equipment

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

Subscriber Acquisition Fees

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

Private Placement

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

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On or after December 15, 2003, Crown Media Holdings will have the right to
redeem any and all of the outstanding debentures at a redemption price equal to
100% of the aggregate principal amount of the debentures, together with any
accrued and unpaid interest thereon. Since their issuance through September 30,
2002, the Company expected to redeem the debentures during 2004. In light of
the decline in the market price of the Companys Class A common stock, which
affects the desirability of offering stock in the future to redeem the
preferred securities, management determined that the Company will not make an
optional early redemption of its trust preferred securities, but will wait
until their final redemption date in December 2007. Consequently, under the
applicable terms of the preferred securities and related contingent
appreciation certificates, the cumulative interest rate is expected to be 18%,
an increase of 4% from the 14% cumulative rate, which would have been payable
if the securities were redeemed at the previously anticipated date of December
2004. The change in the interest rate from 14% to 18% will result in higher
interest expense and accretion of guaranteed preferred beneficial interest that
will negatively impact the Companys results of operations for all future
periods until these securities are redeemed. The required quarterly cash
payments on the preferred securities remain unchanged, although the final
redemption amount will be higher.

Currently, there are accounting and regulatory discussions on long-term
liabilities, which could cause the Company to classify all the trust preferred
securities as debt and the corresponding amortization as interest expense, if
these discussions result in new accounting rules.

Goodwill and Other Intangibles

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

In connection with the issuance of SFAS No. 142 and our acquisition of the
remaining interests in Crown Media United States and H&H Programming  Asia, we
engaged an independent firm to complete a valuation of Crown Media United
States and H&H Programming  Asia to assist us in our annual analysis of
impairment of goodwill and other intangibles. Based on the firms review as of
December 31, 2001, our goodwill and other intangibles were not impaired.

Deferred Tax Asset

Crown Media Holdings has provided a valuation allowance of $73.2 million
on its net deferred tax assets because of uncertainty regarding their
realizability. If we took the position that our deferred tax asset was
realizable, we would have recorded a tax benefit against our losses for the
nine months ended September 30, 2002, and would have reduced our net losses by
the amount of that benefit.

Effects of Transactions with Related and Certain Other Parties

Marketing Agreement

Crown Media United States and Hallmark Cards have entered into an
agreement to sponsor the Hallmark Keepsake Sweepstakes, a national promotion in
November and December 2002, involving a watch-and-win contest, prize
give-aways, and six Hallmark Entertainment original productions. Crown Media
United States has committed up to $10.0 million to this sponsorship through the
first quarter 2003, and Hallmark Cards and Hallmark Entertainment Holdings are
also providing contest prizes with a similar value to those provided
by Crown Media United States. The goal of this national
promotion is to increase viewership and ratings for the domestic Hallmark
Channel.

See Related Party Transactions in Note 7 to Notes of Unaudited
Consolidated Financial Statements in this Report. Transactions with related
parties are also described in Item 13 Certain Relationships and Related
Transactions in our Annual Report on Form 10-K for the year ended December 31,
2001, and other than as described above, there have not been any new
transactions with related parties during the quarters ended March 31, 2002,
June 30, 2002, and September 30, 2002.

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Results of Operations

Three and Nine Months Ended September 30, 2002 Compared to Three and Nine Months Ended September 30, 2001

Revenues.Net revenues for the three and nine months ended September 30,
2002, increased to $40.1 million and $118.9 million from $26.3 million and
$75.9, which represents increases of $13.8 million, or 52%, and $43.0 million,
or 57%, over the comparable periods in 2001. Before taking into account
subscriber acquisition fees, subscriber fee revenue in the third quarter
increased 3% to $18.8 million from $18.2 million in the prior years quarter,
reflecting increased distribution worldwide. After the amortization of
subscriber acquisition fees of $1.9 million in 2002 and $1.1 million in 2001,
subscriber fee revenue decreased to $16.9 million for the three months ended
September 30, 2002, from $17.1 million, which represents a decrease of
$223,000, or 1%, over the comparable period in 2001. After the amortization of
subscriber acquisition fees of $5.7 million in 2002 and $4.6 million in 2001,
subscriber fee revenue increased to $51.8 million for the nine months ended
September 30, 2002, from $49.7 million, which represents an increase of $2.1
million, or 4%, over the comparable period in 2001. The increased subscriber
fee revenue resulted from expanded distribution in existing markets. The number
of subscribers to the Hallmark Channel, as of September 30, 2002, was 95.7
million compared to 82.9 million as of September 30, 2001, which represents an
increase of 12.8 million, or 15%. Subscribers to our domestic channel increased
from 39.7 million as of September 30, 2001, to 47.5 million as of September 30,
2002, which represents an increase of 7.8 million, or 20%. Subscribers of the
Hallmark Channel increased at a higher rate than subscriber fee revenue because
a number of new subscribers were added with promotion periods and the amount of
subscriber acquisition fees netted against revenue also increased. Eighty
percent and 78% of subscriber fees revenue for the three and nine months ended
September 30, 2002, and 77% and 79% of subscriber fees revenue for the three
and nine months ended September 30, 2001, were earned internationally. The
amounts of subscriber fees after the amortization of subscriber acquisition
fees were $3.3 million and $11.2 million for the domestic Hallmark Channel for
the three and nine months ended September 30, 2002, and were $13.6 million and
$40.6 million for the international Hallmark Channel for the three and nine
months ended September 30, 2002. The amortization of subscriber acquisition
costs has and may continue to result in a decline in net domestic subscriber
revenues, as we net amortization of subscriber acquisition costs against
revenue in accordance with generally accepted accounting principles in the
United States. Certain of our international subscriber fee rates have and will
continue to decrease as we renew distribution agreements, which may provide for
lower 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 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 $18.2 million and $51.6 million for the
three and nine months ended September 30, 2002, from $9.0 million and $25.4
million, which represents increases of $9.2 million, or 103%, and $26.2
million, or 103%, over the comparable periods in 2001. The increases in
advertising revenue reflect the following during 2002: our growth in both
domestic and international subscribers; higher ratings in the United States and
in the United Kingdom; higher advertising rates; and expanded sales of
advertising time primarily in the United States and the United Kingdom.
Advertising revenue from our domestic channel were $11.6 million and $33.4
million for the three and nine months ended September 30, 2002, compared to
$5.7 million and $17.3 million for the three and nine months ended September
30, 2001. Additionally, the number of advertisers on our domestic channel rose
from approximately 128 in September 2001 to approximately 246 in the September
2002.

We may experience a decline in advertising revenue from certain
international markets as a result of the reorganization announced in October
2002. Under the reorganized structure regional staff will assume the
responsibility for a number of functions including advertising sales. In Latin
America, it is intended that these functions will be handled by the local
distribution partner as part of its local operations management. Additionally,
due to the renegotiation of one of our international advertising contracts, our
advertising revenue in the international market will be substantially lower
during the fourth quarter of 2002 than in each of the previous three quarters
of 2002. We do not expect this renegotiation to detrimentally affect
international advertising revenue in 2003.

During fourth quarter 2001, Crown Media Holdings commenced earning revenue
through a new business segment, film distribution, via its purchase of film
assets from Hallmark Entertainment Distribution. Notwithstanding our use of
these film assets on our channels, we are generating film licensing fee revenue
as we establish ourselves in the program distribution market and expand our
customer base. For the three and nine months ended September 30, 2002, we
earned film licensing fee revenue of $5.0 million and $15.5 million. This level
of licensing fees reflects a soft demand in the international market for our
film products at prices maintained by us.

Cost of services.Cost of services for the three months ended September
30, 2002, decreased to $50.4 million from $72.1 million, which represents a
decrease of $21.7 million, or 30%, over the comparable period in 2001. Cost of
services for the nine months ended September 30, 2002, increased to $150.5
million from $145.0 million, which represents an increase of $5.5 million, or
4%, over the comparable period in 2001. Cost of services as a percent of net
revenue decreased to 126% and 127% for the three and nine months ended
September 30, 2002, as compared to 274% and 191% for the three and nine months
ended 2001. These decreases were primarily due to our 52% and 57% increases in
net revenues mentioned above. Programming costs for the three and nine months

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ended September 30, 2002, decreased 56% and 28% due to expanded use of our
film assets and the $28.2 million of expenses incurred in third quarter 2001 to
write-off and exit certain programming contracts with EM.TV and The Jim Henson
Company. For the three and nine months ended September 30, 2002, amortization
of our film assets was $7.0 million and $19.8 million, which we did not incur
during the same periods of 2001. We had some decline in affiliate programming
amortization expense due to the completion of the purchase of the film assets
on September 28, 2001, as we now own a portion of the material previously
licensed. Generally, we amortize our film assets used internally over ten years
(commencing September 28, 2001) and for external sales upon recognizing
revenue. Expanded distribution in our domestic markets resulted in amortization
of subscriber acquisition fees of $5.3 million and $14.8 million for the three
and nine months ended September 30, 2002, as compared to $2.6 million for each
of the same periods of 2001. Operating costs for the three and nine months
ended September 30, 2002, which include playback, dubbing and subtitling,
transponder and interstitial expenses, decreased 13% and 1% as a result of less
interstitial product and less subtitling and dubbing in our international
market resulting from decreased purchases of international programming. The
decrease in operating costs was partially offset by an increase in bad debt
expense in second quarter of 2002. Much of the increase in the bad debt expense
concerns a disagreement about subscriber fees required to be paid by a U.S. pay
television distributor, which is the subject of ongoing discussions. We added
to the bad debt reserve a percentage of accrued subscriber fees owed by this
distributor prior to March 31, 2002, and also determined to recognize only a
certain percentage of such subscriber fees after March 31, 2002.

In the fourth quarter of 2002, we plan to write-off and to have exit costs
for certain programming contracts, totaling approximately $55.0  $60.0
million, reflecting the refinement of the channels programming strategy, and
to record a write-down of $15.0 million related to satellites and facilities
exit costs as a result of the reorganization approved by our board of directors
on October 7, 2002. Please see Recent Developments below. These write-offs
and exit costs will be part of the cost of services in the fourth quarter of
2002.

Selling, general and administrative expenses.Selling, general and
administrative expenses for the three and nine months ended September 30, 2002,
decreased to $14.0 million and $43.0 million from $16.3 million and $50.3
million, which represent decreases of $2.3 million, or 14%, and $7.3 million,
or 15%, over the comparable periods in 2001. These decreases resulted from a
reduction in salary, benefit and travel expenses. Salary and benefit expenses
declined as a result of the termination of certain high level positions during
2001 and unfilled positions in our international market. Our continuing use of
teleconferencing, changes to our travel policy, and an overall decrease in
international travel lowered travel expenses. Selling, general and
administrative expenses as a percent of total revenue decreased to 35% and 36%
for the three and nine months ended September 30, 2002, as compared to 62% and
66% for the three and nine months ended September 30, 2001. These decreases
were due to the increases in net revenues of 52% and 57% noted above. In the
fourth quarter of 2002, we plan to localize many oversight and non-technical
support functions to regional staff and record severance costs of approximately
$5.0 million that are part of the reorganization approved by our board of
directors on October 7, 2002. Please see Recent Developments below. These
severance costs will increase selling, general and administrative expenses in
the fourth quarter of 2002.

Marketing expenses.Marketing expenses for the three months ended
September 30, 2002, decreased to $8.7 million from $10.8 million, which
represents a decrease of $2.1 million, or 20%, over the comparable period in
2001. These expenses were lower for the three months ended September 30, 2002,
due to promotion and advertising campaigns in 2001 supporting the August 5,
2001, re-branding of the Odyssey Network as the Hallmark Channel. Marketing
expenses for the nine months ended September 30, 2002, increased to $29.0
million from $27.6 million, which represents an increase of $1.4 million, or
5%, over the comparable period in 2001. Marketing expenses were higher for the
nine months ended September 30, 2002, due primarily to amplified efforts to
promote the premieres of Adoptionand Strandedon our domestic channel.
Additionally, in June 2002, the relaunch of the Hallmark Channel in Australia
was accompanied by marketing campaigns to drive consumer awareness and the
introduction of our new brand package into that market. We anticipate a higher
level of marketing expenses in 2002, in large part because of the Hallmark
Keepsake Sweepstakes described above.

Amortization of goodwill and other intangibles.Amortization of goodwill
and other intangibles for the three and nine months ended September 30, 2001,
were $5.5 million and $14.5 million. In conjunction with the acquisition of an
additional 55% common interest in Crown Media United States on May 9, 2000, we
recorded goodwill in the amount of $248.8 million, which was amortized over 20
years. In conjunction with the acquisition of EM.TV & Merchandising AGs
(EM.TV) 50% interest in H&H Programming  Asia and the remaining 22.5% common
interests in Crown Media United States on March 15, 2001, we recorded goodwill
and other intangibles in the amount of $93.9 million, which were amortized over
10 years. The amortization of goodwill arising from past acquisitions ceased as
of January 1, 2002, in accordance with revised accounting standards issued by
the Financial Accounting Standards Board in June 2001. As a result of this
cessation, we did not record $5.5 million and $16.5 million of amortization
expense for the three and nine months ended September 30, 2002. However,
goodwill and other intangible assets are subject to periodic (at least annual)
tests for impairment.

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Loss from operations.Loss from operations for the three and nine months
ended September 30, 2002, decreased to $35.5 million and $110.8 million from
$80.2 million and $168.6 million, which represent decreases of $44.7 million,
or 56%, and $57.8 million, or 34%, over the comparable periods in 2001. These
decreases were primarily due to our 52% and 57% increases in net revenues
discussed above and the cessation of amortization of goodwill on January 1,
2002, and were partially offset by our expansion into existing markets and into
a new business segment.

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

Accretion of guaranteed preferred beneficial interest.Accretion of
guaranteed preferred beneficial interest for the three and nine months ended
September 30, 2002, was $3.0 million and $14.8 million. This expense relates to
future payments on our debentures issued on December 17, 2001, in connection
with the preferred securities of Crown Media Trust. We recorded gains of $6.3
million and $6.9 million on marking our derivative liabilities to fair value
for the three and nine months ended September 30, 2002, as a component of the
accretion of guaranteed preferred beneficial interest. We are aware of recent
regulatory and accounting discussions which may cause us to reclassify our
guaranteed preferred beneficial interest in Crown Media Trusts debentures as
convertible debt if those discussions result in new accounting rules. Changing
the classification of our preferred securities from guaranteed preferred
beneficial interest to convertible debt would also change the Companys
treatment of its debt issuance costs and would have had the effect of
increasing our net loss by an estimated $284,000 and $852,000 for the three and
nine months ended September 30, 2002, due to the timing of recognition of costs
related to the offering. We anticipate that this expense will further increase
in the fourth quarter and for each subsequent quarter until the Companys
redemption of the trust preferred securities in December 2007. This is due to
managements determination that the Company will not make an early redemption
of its trust preferred securities prior to their maturity in December 2007 and
the consequent impact on the cumulative interest rate increasing from 14% to
18%.

Interest income (expense), net.Net interest expense for the three and
nine months ended September 30, 2002, increased to $4.5 million and $15.9
million from $2.3 million and $4.7 million, which represent increases of $2.2
million and $11.2 million, over the comparable periods in 2001. These increases
were primarily due to the interest on our increased borrowings under our credit
facility and interest on our convertible debt. We anticipate that this expense
will further increase in the fourth quarter and for each subsequent quarter
until the Companys redemption of the trust preferred securities in December
2007. This is due to managements determination that the Company will not make
an early redemption of its trust preferred securities prior to their maturity
in December 2007 and the consequent impact on the cumulative interest rate
increasing from 14% to 18%.

Income tax provision.Income tax provision for the three and nine months
ended September 30, 2002, increased to $470,000 and $1.7 million from $397,000
and $1.4 million, which represent increases of $73,000, or 18%, and $259,000,
or 18%, over the comparable periods in 2001. These increases were due to the
tax on the foreign-based income resulting from increased international
subscriber fees and advertising revenue as discussed above. The Argentine and
Brazilian governments have implemented laws taxing advertising sales.

Net loss.Net loss for the three and nine months ended September 30,
2002, decreased to $43.5 million and $143.6 million from $83.0 million and
$175.3 million, which represent decreases of $39.5 million, or 48%, and $31.7
million, or 18%, over the comparable periods in 2001. The decreases in net loss
for the three and nine months ended September 30, 2002, were attributable to a
combination of the factors discussed above.

Liquidity and Capital Resources

Cash used in operating activities was $119.1 million and $129.9 million
for the nine months ended September 30, 2002 and 2001, respectively. Cash was
used primarily to fund operating expenditures related to net losses of $143.6
million and $175.3 million for the nine months ended September 30, 2002, and
2001, respectively. This decrease was primarily due to a lower net loss but was
partially offset by our acquisition and continued amortization of popular
programming from third-party suppliers to meet our strategy and the demands of
our customers and higher subscriber acquisition fee payments as a result of our
expanded distribution in domestic markets.

Cash used in investing activities was $1.4 million and $11.5 million for
the nine months ended September 30, 2002 and 2001, respectively. This decrease
was primarily due to our decrease in investments in capital expenditures in
2002. During the first quarter
2001, we completed and launched our Network Operations Center.

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Cash provided by financing activities was $109.7 million and $117.6
million for the nine months ended September 30, 2002 and 2001, respectively.
This decrease was primarily due to the increased borrowings during the third
quarter 2001 to fund the film assets transaction.

The following table aggregates all of our contractual commitments as of
September 30, 2002.

|                                                                                     |                                                                             |       |                              |        |     |       |       |       |     |       |       |       |   |   |       |      |       |   |      |     | 
|------------------------------------------------------------------------------------ | --------------------------------------------------------------------------- | ----- | ---------------------------- | ------ | --- | ----- | ----- | ----- | --- | ----- | ----- | ----- | - | - | ----- | ---- | ----- | - | ---- | --- | 
|                                                                                     |                                                                             |       | Scheduled Payments by Period
|                                                                                     |                                                                             |       |                             
|                                                                                     |                                                                             |       |                              |        |     |       | Less  |       |     |       |       |       |   |   |       |      | After
|                                                                                     |                                                                             |       |                              |        |     |       | Than  |       | 2-3 |       | 4-5   |       | 5
|Contractual Obligations                                                              |                                                                             | Total |                              | 1 Year |     | Years |       | Years |     | Years
|                                                                                     |                                                                             |       |                              |        |     |       |       |       |     |      
|Long-Term Debt                                                                       |                                                                             | $     | 317.3                        | (d)    |     | $     | 0.3   |       |     | $     | 46.5  |       |   | $ | 270.5 |      |       | $ |     |    
|Capital Lease Obligations                                                            |                                                                             |       | 11.1                         |        |     |       | 1.4   |       |     |       | 3.2   |       |   |   | 3.8   |      |       |   | 2.7  |    
|Operating Leases                                                                     |                                                                             |       | 111.7                        |        |     |       | 16.5  |       |     |       | 30.1  |       |   |   | 22.4  |      |       |   | 42.7 |    
|Other Long-Term Obligations
Program license fees payable to non-
affiliates and NICC |                                                                             |       | 102.1                        |        |     |       | 55.1  |       |     |       | 47.0  |       |   |   |      |      |       |   |     |    
|                                                                                     | Program license fees payable to
Hallmark Entertainment
Distribution         |       |                              | 79.3   | (a) |       |       | 19.1  |     |       |       | 60.2  |   |   |       |     |       |   |      |    | 
|                                                                                     | Program license fees payable for future
windows                             |       |                              | 139.9  |     |       |       | 48.5  |     |       |       | 52.1  |   |   |       | 34.1 |       |   |      | 5.2 | 
|                                                                                     | Subscriber acquisition fees (b)                                             |       |                              | 12.6   |     |       |       | 9.6   |     |       |       | 3.0   |   |   |       |     |       |   |      |    | 
|                                                                                     | Payable to Hallmark Entertainment
Holdings                                  |       |                              | 52.1   | (c) |       |       |      |     |       |       |      |   |   |       | 52.1 |       |   |      |    | 
|                                                                                     | Payable to Hallmark Entertainment                                           |       |                              | 47.9   | (c) |       |       |      |     |       |       |      |   |   |       | 47.9 |       |   |      |    | 
|                                                                                     | Guaranteed preferred beneficial
interests in Crown Media Trusts
debentures |       |                              | 214.5  | (d) |       |       |      |     |       |       | 214.5 |   |   |       |     |       |   |      |    | 
|                                                                                     | Preferred Minority Interest                                                 |       |                              | 25.0   |     |       |       |      |     |       |       |      |   |   |       | 25.0 |       |   |      |    | 
|                                                                                     |                                                                             |       |                              |        |     |       |       |       |     |       |       |       |   |   |       |      |       |   |      |    
|Total Contractual Cash Obligations                                                   |                                                                             | $     | 1,113.5                      |        |     | $     | 150.5 |       |     | $     | 456.6 |       |   | $ | 455.8 |      |       | $ | 50.6 |    
|                                                                                     |                                                                             |       |                              |        |     |       |       |       |     |       |       |       |   |   |       |      |       |   |      |    



---

|(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. It will, and any other amendments to current domestic
distribution agreements may, significantly increase subscriber acquisition fees.  
|   
|(c) |  | Can only be paid subsequent to repayment of credit facility per agreement.                                                                                                                                                                                 
|   
|(d) |  | Since their issuance through
September 30, 2002, the Company had expected to redeem the debentures on
December 15, 2004. Subsequent to September 30, 2002, the Company
revised its expectations to redeem the preferred
securities at the maturity in 2007.

In connection with our growth strategy, we expect that we will continue to
make significant investments in programming and distribution. Programming
expenditures for the last three months of 2002 are expected to be in the range
of $12.0 million to $17.0 million, and cash payments of subscriber acquisition
fees are expected in the fourth quarter of 2002 to be $10.0 million to $12.0
million. Our principal uses of funds during the next twelve months are
expected to be the payment of operating expenses (including but not limited to
licensing programming from third parties and subscriber acquisition fees) and
debt service payments. Our principal sources of funds are currently cash
inflows from operations, cash on hand and available borrowings under our bank
credit facility and the HC Crown Corporation line of credit.

At September 30, 2002, we had an available cash balance of $3.3 million,
$49.5 million undrawn balance under our credit facility, and $75.0 million
available under the HC Crown line of credit. We expect cash used for some
expenses to decrease over the next 12 months, including programming costs and
administrative expenses. A large component of the decreased expenses will
result from the reorganization announced in October 2002, which we expect to
reduce operating costs by $25.0 million annually. In addition, certain
expenses, such as new programming, are discretionary. On the other hand, we
expect other expenses to increase over the next 12 months, including cash
payments for distribution. Advertising revenue is expected to continue to
increase overall, and we expect subscriber fee revenue to decrease in the next
12 months. Taking into account these factors, we believe that cash inflows
from operations, cash on hand, the available amount under our credit facility
and the HC Crown line of credit will be sufficient for our liquidity needs
through at least September 30, 2003.

In order to provide flexibility, the Company is considering ways to raise
additional cash. Additional cash would also decrease the likelihood of further
cost cutting and delays in investments in programming and distribution. There
can be no assurance that additional funds will be available, if at all, on
terms acceptable to the Company. Any new debt financing would require the
agreement of existing lenders and preferred securities holders.

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Cash Flow Risks

Our dependence on operating cash flow, in addition to other cash
resources, means that risks involved in our businesses can significantly affect
our liquidity. Any unexpected decrease in subscriber revenues (whether as a
result of the termination of distributor relationships or changes in the terms
of carriage with a distributor), less than projected growth of advertising
revenues or unanticipated expenses could result in the need to raise additional
cash externally. Other risks described below could also affect our operating
cash flow. We have no arrangements for any additional external financings of
debt or equity, and we are not certain whether any such financing would be
available on acceptable terms or whether it would be permitted under our credit
facility and preferred securities.

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

Our credit facility, our private placement units comprised of Crown Media
Trusts preferred securities and Crown Media Holdings contingent appreciation
certificates and the HC Crown line of credit are described in Item 7
Managements Discussion and Analysis of Historical Financial Condition and
Results of Operation in our Annual Report on Form 10-K for the year ended
December 31, 2001, and in Note 6 to the Unaudited Consolidated Financial
Statements in this Report. We are subject to a number of affirmative and
negative covenants.

Recent Developments

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 most successful international markets. The Company intends to
achieve this by decentralizing many oversight and non-technical support
functions formally located in the Companys U.S. based offices and transferring
these responsibilities to regional staff. In Latin America the Company is
currently negotiating with a local distribution partner who it is intended,
under Crown Media Internationals direction, would assist in the operation of
the Hallmark Channel in this region. We expect to complete all
decentralization by the first quarter of 2003. Once completed, we expect that
our workforce will be reduced by approximately 30% or 130 positions.

Reflecting the reorganization, we plan to record a charge of approximately
$20.0 million during the fourth quarter of 2002. This charge will be comprised
of a cash charge of approximately $5.0 million for severance costs and a
non-cash charge of approximately $15.0 million related to satellites and
facilities exit costs. As a result, the Company expects to reduce operating
costs, compared to 2002, by a total of $25.0 million, comprised primarily of
decreases in amortization and expenditures for overhead, satellite leasing,
marketing and programming.

In addition, Crown Media Holdings plans to record a non-cash charge in the
fourth quarter of $55.0 - $60.0 million related to certain programming
reflecting the refinement of the Crown Media Holdings programming strategy.

Forward-Looking Statements and Risk Factors

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

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

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Risks Relating to Our Business

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

Both our international and domestic channels have a history of net losses
and we expect to continue to report net losses for the foreseeable future. As
of September 30, 2002, we had an accumulated deficit of approximately $623.9
million, net goodwill and other intangibles of approximately $314.0 million,
and film assets of $792.4 million.

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

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

We have a substantial amount of indebtedness. As of September 30, 2002,
our total debt was $329.0 million and we had $3.3 million of cash and cash
equivalents. In addition, subject to the restrictions under our various debt
agreements, we may borrow additional amounts under our existing credit facility
to cover the negative cash flow resulting from our current operations, and
incur additional indebtedness from time to time to cover our operating losses,
to finance acquisitions or capital expenditures or for other purposes.
Currently, our principal sources of funds during the remainder of 2002 and 2003
are cash generated from operating activities, borrowings under our senior
credit facility and borrowings under the HC Crown line of credit.

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



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

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

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

High levels of interest expense could have negative effects on our future
operations. Interest expense, which is net of interest income and includes
amortization of debt issuance costs and interest expense on borrowings under
our demand notes, credit facility and private placement, increased $7.1 million
to $9.4 million for the three months ended September 30, 2002, from $2.3 for
the three months ended September 30, 2001. Interest expense increased $27.9
million to $32.6 million for the nine months ended September 30, 2002, from
$4.7 for the nine months ended September 30, 2001. The increase in interest
expense in the past twelve months resulted from an increase in the average
borrowings outstanding, due to cash generated from operations being
insufficient to cover operating expenses and capital expenditures.
Consequently, we were required to make borrowings under our demand notes and
credit facility during 2001 and 2002 and to enter into the private placement in
December 2001. 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. The interest expense for financial reporting purposes will increase
significantly in the fourth quarter of 2002 as a result of a change in the
expectation of management in regard to the anticipated retirement or redemption
of the preferred securities issued in the private placement. In addition, we
may need to incur additional indebtedness in the future. We cannot assure you
that our business will generate sufficient
cash flow or that future financings will be available to provide
sufficient proceeds to meet our obligations or to service our total debt.

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Our liquidity is dependent on external funds.

We believe that our current bank credit facility and line of credit with
HC Crown, together with cash generated from operations and cash on hand, will
be sufficient for our liquidity needs through at least September 30, 2003.
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 revenues or decreases any of our revenues, would result in the need
for additional external funds in order to continue operations. We have no
arrangements for any external financings, whether debt or equity, and are not
certain whether any such new external financing would be available on
acceptable terms. Any new debt financing would require the cooperation and
agreement of existing lenders and preferred securities holders.

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 revenues.

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, and Crown Media
United States is currently in discussions with these distributors. Any
modification of these existing agreements to adopt the DirecTV terms, or any
other new terms could result in the payment of cash or the issuance of stock by
Crown Media Holdings and will negatively affect subscriber revenues. For
information concerning an amendment to an existing distribution agreement with
a large domestic distributor, please see Revenues under this Item 2.

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

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

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

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

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

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

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We anticipate that in due course we will develop our own
distribution/sales network and hire employees to perform the services currently
performed by Hallmark Entertainment under the service agreement. Our ability to
do so is unproven and will require financial, operational and management
resources. We may not be able to hire the number of employees, or employees who
are sufficiently qualified, to perform these services, or do so in a cost
efficient manner. If the cost to develop and maintain this employee base is
greater, or if this process takes longer than anticipated, it could have a
negative impact on the revenues we anticipate generating from the film assets.

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

If we fail to increase our advertising revenue, we may be unable to
achieve or sustain profitability, or expand our business. We expect that over
time the portion of our revenues derived from the sale of advertising time on
our channels will increase. We have a limited history of marketing and selling
advertising time, particularly internationally. We may be unable to identify,
attract and retain experienced sales and marketing personnel with relevant
experience 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.

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

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



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

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

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

We license the name Hallmark from Hallmark Cards and Hallmark Licensing,
Inc., for various uses, including in the name of our international and domestic
channels. The two-year license agreement for our international channel, dated
as of December 1, 2000, permits the use of the Hallmark trademarks outside the
United States and Canada so long as Hallmark Cards and its wholly owned
subsidiaries collectively own at least 51% of our voting interest and at least
35% of our equity interest and designate a majority of our board of directors,
and so long as there is no event of default under the agreement. We are
currently negotiating and expect to renew these agreements. The license
agreement for our domestic channel, dated as of March 27, 2001, permits the use
of the Hallmark trademarks in the United States through August 30, 2003, under
terms substantially similar to the terms applicable to the license of our

35



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international channel. If Hallmark Cards determines not to renew the
trademark license agreements for any reason, including our failure to meet
minimum programming thresholds dependent on programming provided by affiliates
of Hallmark Cards or to comply with Hallmark Cards programming standards, we
would be forced to significantly revise our business plan and operations, and
could experience a significant erosion of our subscriber base and revenues.

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

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

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

We commenced operations at the Network Operations Center in February 2001.
We are currently using the Network Operations Center for the origination and
playback of signals for the Hallmark Channel internationally in Europe, the
Middle East and for the short-term Latin America. 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.

Planned cost savings in Latin America are based on the use of a local
distribution partner.

During 2002 and 2003, we plan to move the majority of our operations
concerning the distribution of the Hallmark Channel in Mexico, Central and
South America to a local distribution partner in the region. One purpose of the
proposed action is to reduce substantially our expenses for operations in this
region, and accordingly the reduction of these expenses is dependent upon the
completion of negotiations to engage the local distribution partner. These
negotiations are underway at the date of this Report.

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

If our local partner 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 and our business in the region could be detrimentally affected. In
addition, we anticipate that the local distribution partner will perform
locally the origination and playback services currently performed under our
control in the Network Operations Center. Any significant interruption at
their playback center, which affects the distribution signal 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.
 to
attract, hire or retain the necessary personnel, or if we lose the services of
our key executives, we may be unable to implement our business plan or keep
pace with developing trends in our industry.

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

Historically, a significant portion of our revenues has been generated
from foreign operations. In order to maintain or expand our presence in foreign
markets, we have entered and may in the future enter into joint ventures or
other strategic relationships with local operators in those markets. Certain
foreign laws, regulations and judicial procedures may not be as protective of
programmer rights as those applicable in the United States. In addition, many
foreign countries have currency and exchange laws regulating the international

36



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transfer of currencies. To the extent that significant currency
fluctuations result in materially higher costs to any of our foreign customers,
those customers may be unable or unwilling to make the required payments. We
may be subject to delays in access to courts and to the remedies local laws
impose in order to collect our payments and recover our assets. We also may
experience problems with collecting accounts due from foreign customers, which
would adversely affect our revenues and income. Our growth and profitability
may also suffer as a result of, among other matters, competitive pressures on
video delivery, labor stoppages, recessions and other political or economic
events adversely affecting world or regional trading markets or affecting a
particular customer.

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

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

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

As a result of our acquisitions of all the common interests in Crown Media
United States and H&H Programming-Asia, we have generated a significant amount
of goodwill and other intangibles. We have amortized the goodwill and other
intangibles from these acquisitions on a straight-line basis over 20 years and
10 years, respectively. The amount of goodwill and other intangibles that we
amortized was treated as a charge against earnings under accounting principles
generally accepted in the United States. In accordance with recent accounting
pronouncements, we have 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 securities
analysts or investors in any quarter;
| | - |  | ----------------------------------------------------------------------------------------------------------
|
| |  |  | downward revisions in securities analysts estimates;                                                     
|
| |  |  | material announcements by us or our competitors;                                                          
|
| |  |  | governmental regulatory action;                                                                           
|
| |  |  | technological innovations by competitors or competing technologies;                                       
|
| |  |  | investor perceptions of our industry or prospects, or those of our
customers; and                         
|
| |  |  | changes in general market conditions or economic trends.                                                  

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

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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.
Similarly, holders of contingent appreciation certificates issued in connection
with preferred securities of Crown Media Trust, have the ability to require us
to register for public sale shares of our Class A common stock that these
holders receive upon exercise of the contingent appreciation certificates.

Risks Relating to Our Industry

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

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

A continuing trend towards business combinations and alliances in both the
domestic and foreign communications industries may create significant new
competitors for us or intensify existing competition. Many of these combined
entities will have resources far greater than ours. These combined entities may
provide bundled packages of programming, delivery and other services that
compete directly with the products we offer. These entities may also offer
services sooner and at more competitive rates than we do. In addition, these
alliances may benefit from both localized content and the local political
climate.

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

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

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

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



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

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

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

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

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

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

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




Item 3. Quantitative and Qualitative Disclosures About Market Risk

We do not use derivative financial instruments in our investment
portfolio. We only invest in instruments that meet high credit and quality
standards, as specified in our investment policy guidelines. These instruments,
like all fixed income instruments, are subject to interest rate risk. The fixed
income portfolio will fall in value if there is an increase in interest rates.
If market interest rates were to increase immediately and uniformly by 10% from
levels as of September 30, 2002, the decline of the fair value of the fixed
income portfolio would not be material.

As of September 30, 2002, our cash, restricted cash, cash equivalents and
short-term investments had a fair value of $3.6 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 September 30, 2002, all of our investments in this category
were in fixed rate instruments or money market type accounts. A decrease in
interest rates has the effect of reducing our future annual interest income
from this portfolio, since funds would be reinvested at lower rates as the
instruments mature. Over time, any net percentage decrease in our interest
rates could be reflected in a corresponding net percentage decrease in our
interest income. For the three and nine months ended September 30, 2002, the
impact of interest rate fluctuations, changed business prospects and all other
factors did not have a material impact on the fair value of this portfolio, or
on our income derived from this portfolio.

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

As of September 30, 2002, we estimated the fair value of our bank credit
facility, excluding accrued interest, to be approximately $270.5 million using
quoted market prices where available, or discounted cash flow analyses. The
fair value of our debt is affected by fluctuations in interest rates. A
hypothetical 10% increase or decrease in assumed interest rates would decrease
or increase the fair value of our debt by approximately $1.3 million. These
calculations include the assumption that the balance of our outstanding debt as
of September 30, 2002, would not change during the year and that a yearly
interest rate was used. To the extent interest rates increase, our costs of
financing will also increase because of variable rates applicable to our
outstanding debt.

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As of September 30, 2002, we estimated the value of our preferred
securities to be approximately $261.0 million and the value of our derivative
liability to be $802,000 using quoted market prices where available, or
discounted cash flow analyses. The value of our derivative liability is
affected by fluctuations in our stock price and interest rates. A hypothetical
10% increase in our stock price would increase the value of our derivative
liability by approximately $247,000. A hypothetical 10% decrease in our stock
price would decrease the value of our derivative liability by approximately
$212,000. A hypothetical 10% increase in the interest rate would increase the
value of our derivative liability by approximately $27,000. A hypothetical 10%
decrease in the interest rate would decrease the value of our derivative
liability by approximately $7,000. These calculations include the assumption
that the balance of our derivative liability as of September 30, 2002, would
not change during the year and that a yearly interest rate was used.

We are exposed to market risk.

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

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

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

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

Our material interest bearing assets consisted of cash equivalents,
restricted cash, and short-term investments. The balance of our interest
bearing assets was $3.6 million, or less than 1% of total assets, as of
September 30, 2002. Our material liabilities subject to interest rate risk
consisted of a capital lease obligation, our bank credit facility, and our
private placement. The balance of those liabilities was $329.0 million, or 50%
of total liabilities, as of September 30, 2002. The balance of our guaranteed
preferred beneficial interest in Crown Media Trusts debentures was $214.5
million. Net interest expense for the three and nine months ended September 30,
2002, was $4.5 million, or 11%, of our total revenues and $15.9 million, or
13%, of our total revenues, respectively. Our guaranteed preferred beneficial
accretion expense for the three and nine months ended September 30, 2002, was
$3.0 million, or 7%, of our total revenues and $14.8 million, or 12%, of our
total revenues, respectively. Our net interest expense and preferred beneficial
interest expense is sensitive to changes in the general level of interest
rates, primarily U.S. interest rates, and the volatility of our Class A common
stock to the extent this volatility impacts the value of the derivative
liability in our preferred securities. In this regard, changes in U.S. interest
rates affect the interest bearing assets and our borrowings as do changes in
the price of our Class A common stock.

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

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

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Item 4. Controls and Procedures.

Evaluation of disclosure controls and procedures.

The Company, under the supervision and with the participation of the
Companys management, including its Chief Executive Officer and Chief Financial
Officer, carried out an evaluation of the effectiveness of the design and
operation of the Companys disclosure controls and procedures
within 90 days of filing this Report. Based upon this evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective for
purposes of recording, processing, summarizing and timely reporting material
information required to be disclosed in reports that the Company files under
the Exchange Act.

Changes in internal controls.

There were no significant changes in our internal controls and no other
factors that could significantly affect these controls subsequent to
management's evaluation of the Company's disclosure controls and
procedures. The Company did not need to implement any corrective actions
with regard to any significant deficiency or material weakness in its internal
controls.

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PART II. OTHER INFORMATION




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    |  | Amendments, made as of May 15, 2002, to those certain Amended and
Restated Program License Agreements dated as of January 1, 2001
between Hallmark Entertainment Distribution, LLC and Crown Media
United States, LLC and Crown Media International, LLC.               
|        |  |                                                                                                                                                                                                                                                                         
|99      |  | Section 906 Certification of the Chief Executive Officer and Chief
Financial Officer.                                                                                                                                                                                   



---

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

None.

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SIGNATURES

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

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

November 14, 2002

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

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

David J. Evans       |  | Director and Principal
Executive Officer   |  | November 14, 2002
|                                         |  |                                            |  |                  
|/s/ WILLIAM J. ALIBER

William J. Aliber |  | Principal Financial and
Accounting Officer |  | November 14, 2002

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CERTIFICATION

I, David J. Evans, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Crown Media
Holdings, Inc.;                                                                                                                                                                                                                                             
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:                                                                                                     



| | a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the Evaluation
Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data
and have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Dated: November 14, 2002

| |     |  |                                                      | 
| | --- |  | ---------------------------------------------------- | 
| | /s/ |  | DAVID J. EVANS                                       | 
| |     |  |                                                      | 
| |     |  | David J. Evans
President and Chief Executive Officer | 

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CERTIFICATION

I, William J. Aliber, certify that:



|5. |  | I have reviewed this quarterly report on Form 10-Q of Crown Media
Holdings, Inc.;                                                                                                                                                                                                                                             
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|6. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|  
|7. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;                   
|  
|8. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:                                                                                                     



| | a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the Evaluation
Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data
and have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Dated: November 14, 2002

| |     |  |                                                                        | 
| | --- |  | ---------------------------------------------------------------------- | 
| | /s/ |  | WILLIAM J. ALIBER                                                      | 
| |     |  |                                                                        | 
| |     |  | William J. Aliber
Executive Vice President and Chief Financial Officer | 

45



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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    |  | Amendments, made as of May 15, 2002, to those certain Amended and
Restated Program License Agreements dated as of January 1, 2001
between Hallmark Entertainment Distribution, LLC and Crown Media
United States, LLC and Crown Media International, LLC.               
|        |  |                                                                                                                                                                                                                                                                         
|99      |  | Section 906 Certification of the Chief Executive Officer and Chief
Financial Officer.