##### Table of Contents



---

---

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)
         [X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2001

or

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    .

Commission File Number: 000-30700

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

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

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

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

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

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

As of July 27, 2001, the number of shares of Class A Common Stock, $.01 par
value outstanding was 34,795,456, and the number of shares of Class B Common
Stock, $.01 par value, outstanding was 30,670,422.

---

---





---

TABLE OF CONTENTS



|                                                                                              |                                                                         |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                                                                
|ITEM 1. Financial Statements (Unaudited)                                                     
|                                                                                              | CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES                        
|                                                                                              | Introductory Comments                                                  
|                                                                                              | PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS                        
|                                                                                              | Management's Discussion and Analysis of Pro Forma Results of Operations
|                                                                                              | CONSOLIDATED BALANCE SHEETS                                            
|                                                                                              | CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS           
|                                                                                              | CONSOLIDATED STATEMENTS OF CASH FLOWS                                  
|                                                                                              | CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                                                              | Forward-Looking Statements and Risk Factors                            
|ITEM 3. Quantitative and Qualitative Disclosures About Market Risk                           
|PART II: OTHER INFORMATION                                                                   
|ITEM 1. Legal Proceedings                                                                    
|ITEM 2. Changes in Securities and Use of Proceeds                                            
|ITEM 4. Submission of Matters to a Vote of Security Holders                                  
|ITEM 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                                                                   
|EX-3.2 Amend. to Amended/Restated Cert. of Incorp.                                           
|EX-10.1 $50,000,000 Promissory Note                                                          
|EX-10.2 Amendment No. 1 to the Promissory Note                                               
|EX-99 Press Releases                                                                         



---



##### Table of Contents



TABLE OF CONTENTS

|           |  |                                                                                                                              |  |      |    | 
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|           |  |                                                                                                                              |  | Page |   
|           |  |                                                                                                                              |  |      |   
|Part I     |  | Financial Information                                                                                                        |  |      | 3  | 
|          
|Item 1     |  | Financial Statements (Unaudited)                                                                                            
|          
|          
|          
|          
|          
|           |  | CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES                                                                             
|          
|          
|          
|          
|           |  | Introductory Comments                                                                                                        |  |      | 3  | 
|           |  | Pro Forma Consolidated Statements of Operations
(Unaudited)  Three and Six Months Ended June 30, 2000 and
2001              |  |      | 4  | 
|          
|          
|          
|          
|           |  | Managements Discussion and Analysis of Pro Forma Results of
Operations                                                      |  |      | 4  | 
|           |  | Consolidated Balance Sheets  December 31, 2000 and June
30, 2001 (Unaudited)                                                |  |      | 7  | 
|           |  | Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)  Three and Six Months Ended June 30, 2000 and
2001 |  |      | 8  | 
|          
|          
|          
|          
|           |  | Consolidated Statements of Cash Flows (Unaudited)  Six
Months Ended June 30, 2000 and 2001                                  |  |      | 9  | 
|           |  | Condensed Notes to Consolidated Financial Statements                                                                         |  |      | 10 | 
|          
|          
|          
|          
|          
|Item 2     |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations                                        |  |      | 26 | 
|          
|           |  | Forward-Looking Statements and Risk Factors                                                                                  |  |      | 33 | 
|          
|          
|          
|          
|          
|Item 3     |  | Quantitative and Qualitative Disclosures About Market
Risk                                                                   |  |      | 39 | 
|          
|          
|          
|          
|          
|Part II    |  | Other Information                                                                                                            |  |      | 40 | 
|          
|          
|          
|          
|          
|Item 1     |  | Legal Proceedings                                                                                                            |  |      | 40 | 
|          
|          
|          
|          
|          
|Item 2     |  | Changes in Securities and Use of Proceeds                                                                                    |  |      | 41 | 
|          
|          
|          
|          
|          
|Item 4     |  | Submission of Matters to a Vote of Security Holders                                                                          |  |      | 41 | 
|          
|          
|          
|          
|          
|Item 6     |  | Exhibits and Reports on Form 8-K                                                                                             |  |      | 43 | 
|          
|          
|          
|          
|          
|Signatures |  |                                                                                                                              |  |      | 44 | 

2



---



##### Table of Contents



The discussion set forth in this Form 10-Q contains statements concerning
potential future events. Such forward-looking statements are based on
assumptions by Crown Media Holdings, Inc.s (Crown Media Holdings)
management, as of the date of this Form 10-Q, including assumptions about risks
and uncertainties faced by Crown Media Holdings. Readers can identify these
forward-looking statements by their use of such verbs as expects,
anticipates, believes, or similar verbs or conjugations of such verbs. If
any of managements assumptions prove incorrect or should unanticipated
circumstances arise, Crown Media Holdings actual results, levels of activity,
performance, or achievements could materially differ from those anticipated by
such forward-looking statements. Among the factors that could cause actual
results to differ materially are those discussed in Item 2 Risk Factors of
this Form 10-Q. Crown Media Holdings will not update any forward-looking
statements in this Form 10-Q to reflect future events or developments.

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

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




PART I. FINANCIAL INFORMATION




ITEM 1. Financial Statements
(Unaudited)

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

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

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

The consolidated financial statements of Crown Media Holdings include the
assets, liabilities and results of Crown Media International for all periods
presented. Crown Media Holdings considers Crown Media International as a
predecessor corporation for financial reporting purposes. The historical
consolidated financial statements of Crown Media Holdings also include the
results of operations for (i) 22.5% of the common interests in Crown Media
United States (formerly Odyssey Holdings, LLC) owned by Crown Media Holdings
for the entire year ended December 31, 2000, under the equity
method (ii) an additional 55% of the
common interests in Crown Media United States owned by us since May 9, 2000,
when we completed our initial public offering and acquired those additional
interests, (iii) the remaining 22.5% common interests in Crown Media United
States owned by us since March 15, 2001, when we acquired those remaining
common interests, and (iv) the 100% interest in H&H Programming  Asia since
March 15, 2001, when we acquired the remaining 50% interest in that entity.

The unaudited pro forma financial information stated below presents a summary of
consolidated results of operations of Crown Media Holdings, Crown Media
International, Crown Media United States and H&H Programming  Asia, as if each
of these acquisitions

3



---



##### Table of Contents



listed above had occurred on January 1 of the periods presented, along
with certain pro forma adjustments to give effect to the amortization of
goodwill and other intangibles and other adjustments. The unaudited pro forma financial
information is not necessarily indicative of the results of operations had the
transactions been effected on the assumed dates.

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










CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES

PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

|                                                                  |                               |                |                              |        |                    |         |        |                  |             |         |        |        |        |         |        |        |        |         |  
|----------------------------------------------------------------- | ----------------------------- | -------------- | ---------------------------- | ------ | ------------------ | ------- | ------ | ---------------- | ----------- | ------- | ------ | ------ | ------ | ------- | ------ | ------ | ------ | ------- | -
|                                                                  |                               |                |                              |        | Three Months Ended |         |        | Six Months Ended |            
|                                                                  |                               |                |                              |        | June 30,           |         |        | June 30,         |            
|                                                                  |                               |                |                              |        |                    |         |        |                  |            
|                                                                  |                               |                |                              |        | 2000               |         |        | 2001             |             |         | 2000   |        |        | 2001    |       
|                                                                  |                               |                |                              |        |                    |         |        |                  |             |         |        |        |        |         |       
|                                                                  |                               |                |                              |        |                    |         |        |                  | (Unaudited) |        
|Revenues:                                                        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Subscriber fees               |                | $                            | 11,773 |                    |         | $      | 16,712           |             |         | $      | 22,922 |        |         | $      | 32,676 |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Advertising                   |                |                              | 3,045  |                    |         |        | 7,673            |             |         |        | 4,762  |        |         |        | 13,724 |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Advertising by Hallmark Cards |                |                              | 692    |                    |         |        | 1,617            |             |         |        | 1,255  |        |         |        | 2,710  |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Other                         |                |                              | 232    |                    |         |        | 475              |             |         |        | 464    |        |         |        | 497    |       
|                                                                  |                               |                |                              |        |                    |         |        |                  |             |         |        |       
|                                                                  |                               |                | Total revenues               |        |                    | 15,742  |        |                  |             | 26,477  |        |        |        | 29,403  |        |        |        | 49,607  |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Cost of Services:                                                
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Programming costs:           
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                               | Affiliates     |                              |        | 12,054             |         |        |                  | 16,033      |         |        |        | 19,824 |         |        |        | 31,298 |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                               | Non-affiliates |                              |        | 3,376              |         |        |                  | 6,851       |         |        |        | 7,437  |         |        |        | 12,496 |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Operating costs               |                |                              | 16,007 |                    |         |        | 13,234           |             |         |        | 23,841 |        |         |        | 28,282 |       
|                                                                  |                               |                |                              |        |                    |         |        |                  |             |         |        |       
|                                                                  |                               |                | Total cost of services       |        |                    | 31,437  |        |                  |             | 36,118  |        |        |        | 51,102  |        |        |        | 72,076  |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Selling, general and administrative expenses                      |                               |                | 16,450                       |        |                    |         | 23,474 |                  |             |         | 35,435 |        |        |         | 41,408 |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Marketing expenses                                                |                               |                | 5,887                        |        |                    |         | 6,372  |                  |             |         | 9,335  |        |        |         | 16,826 |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Amortization of goodwill and other intangibles                    |                               |                | 5,469                        |        |                    |         | 5,469  |                  |             |         | 10,938 |        |        |         | 10,938 |       
|                                                                  |                               |                |                              |        |                    |         |        |                  |             |         |        |       
|                                                                  |                               |                | Loss from operations         |        |                    | (43,501 | )      |                  |             | (44,956 | )      |        |        | (77,407 | )      |        |        | (91,641 | )
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Interest income (expense), net                                    |                               |                | 58                           |        |                    |         | (1,652 | )                |             |         | (45    | )      |        |         | (2,466 | )     
|                                                                  |                               |                |                              |        |                    |         |        |                  |             |         |        |       
|                                                                  |                               |                | Net loss before income taxes |        |                    | (43,443 | )      |                  |             | (46,608 | )      |        |        | (77,452 | )      |        |        | (94,107 | )
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Income tax provision                                              |                               |                | (318                         | )      |                    |         | (621   | )                |             |         | (551   | )      |        |         | (1,006 | )     
|                                                                  |                               |                |                              |        |                    |         |        |                  |             |         |        |       
|                                                                  |                               |                | Net loss                     |        | $                  | (43,761 | )      |                  | $           | (47,229 | )      |        | $      | (78,003 | )      |        | $      | (95,113 | )
|                                                                  |                               |                |                              |        |                    |         |        |                  |             |         |        |       
|Weighted average number of Class A and Class B shares
Outstanding |                               |                | 65,377                       |        |                    |         | 65,443 |                  |             |         | 65,377 |        |        |         | 65,429 |       
|                                                                  |                               |                |                              |        |                    |         |        |                  |             |         |        |       
|                                                                  |                               |                | Net loss per share           |        | $                  | (0.67   | )      |                  | $           | (0.72   | )      |        | $      | (1.19   | )      |        | $      | (1.45   | )
|                                                                  |                               |                |                              |        |                    |         |        |                  |             |         |        |       




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

Three and Six Months Ended June 30, 2001, Compared to Three and Six Months
Ended June 30, 2000

Revenues.Total revenues for the three and six months ended June 30,
2001, increased to $26.5 million and $49.6 million, respectively, from $15.7
million and $29.4 million, which represent increases of $10.8 million, or 68%,
and $20.2 million, or 69%, respectively, over the comparable periods in 2000.
Subscriber fees revenue increased to $16.7 million and $32.7 million,
respectively, from $11.8 million and $22.9 million, for the three and six
months ended June 30, 2001, which represent increases of $4.9 million, or 42%,
and $9.8 million, or 43%, respectively, over the comparable periods in 2000.
The increased subscriber fees revenue resulted from new market launches and
expanded distribution in existing markets. The number of subscribers to the
Hallmark Channel, as of June 30, 2001, increased to 73.1 million from 54.9
million as of June 30, 2000, which represents an increase of 18.2 million, or
33%. As international subscriber fees continue to experience downward pressure
(for the reasons described below) and our subscriber base expands, we continue
to focus on increasing advertising revenues. Advertising revenues increased to
$9.3 million and $16.4 million from $3.7 million and $6.0 million,
respectively, for the three and six months ended June 30, 2001, which represent
increases of $5.6 million, or 149%, and $10.4 million, or 173%, respectively,
over the comparable periods in 2000. The increases in advertising revenues
reflect our growth in subscribers, higher advertising rates, channel
programming which became more attractive to advertisers, and expanded sales of
advertising time primarily in the United States, the United Kingdom and Latin
America.

Total subscriber fees revenue increased at a greater rate than subscribers
primarily as the result of the addition of certain domestic long-term
distribution agreements. However, subscribers of our international channel
increased at a higher rate than international subscriber fees revenue primarily
because a number of new subscribers were added during promotional periods in
which fees were reduced or waived. During the first quarter of 2001,
distribution of our international channel was expanded in Taiwan to

4



---



##### Table of Contents



approximately 4.0 million subscribers and launched in South Korea to
approximately 1.2 million subscribers. Fifty percent and 56% of total revenues
for the three and six months ended June 30, 2001, and 66% and 67%,
respectively, of total revenues for the three and six months ended June 30,
2000, were earned internationally. Subscribers to our domestic channel
increased from 26.7 million as of June 30, 2000, to 31.3 million as of June 30,
2001, which represents an increase of 4.6 million, or 17%. Additionally, rates
for domestic subscriber fees and advertising revenues increased as a
result of our newly executed distribution agreements. International fees per subscriber are
expected to experience continuing downward pressure in the future due to the
competitive nature of the industry, the growth of digital cable, the shift
in the industry from subscriber fees revenue to advertising revenue,
and the economic turbulance in certain of our markets.

Ratings on our domestic channel increased over the prior years quarter.
Our Adult 18-54 audience composition in Primetime (Monday through Sunday 8 
11 p.m.) increased 9%. Our Total Day rating for the second quarter of 2001
matched the ratings of the second quarter of 2000, and our Primetime ratings
increased 33% over the second quarter of 2000.

Cost of services.Cost of services for the three and six months ended
June 30, 2001, increased to $36.1 million and $72.1 million from $31.4 million
and $51.1 million, which represent increases of $4.7 million, or 15%, and $21.0
million, or 41%, respectively, over the comparable periods in 2000. Cost of
services as a percent of total revenue decreased to 136% and 145%,
respectively, for the three and six months ended June 30, 2001, as compared to
200% and 174%, respectively, for the three and six months ended 2000. These
decreases were primarily due to the Companys increased employment of in-house
resources to produce interstitials (which are promotional segments that
are aired between programs) and the utilization of the Network Operations Center
to perform certain playback functions previously provided by third-party
vendors. Programming costs for the three and six months ended June 30, 2001,
rose 48% and 61%, respectively, as we invested in additional and higher quality
programming, including the greater use of Hallmark Entertainment Distribution
titles necessary to fulfill our programming strategy. We also acquired and continue to amortize popular programming from third-party suppliers to meet this strategy. To enhance the quality of our new and existing subscribers' pay television experience and support the utilization of the Network Operations Center, we expanded our broadcast operations, contributing to the rise in our operating costs. Total cost of services increased due to our amortizing
additional licensed programming and servicing our expanded markets.

Selling, general and administrative expenses.Selling, general and
administrative expenses for the three and six months ended June 30, 2001,
increased to $23.5 million and $41.4 million from $16.5 million and $35.4
million, which represent increases of $7.0 million, or 43%, and $6.0 million,
or 17%, respectively, over the comparable periods in 2000. These increases
primarily reflect increased costs associated with supporting expanded
distribution in existing markets, supporting new markets and the continued
development of a corporate infrastructure to support increased distribution and
advertising, including expansion of the management team and increased staffing
levels. Selling, general and administrative expenses as a percent of total
revenue decreased to 89% and 84%, respectively, for the three and six months
ended June 30, 2001, as compared to 105% and 121%, respectively, for the three
and six months ended June 30, 2000. These decreases are due to increases in
total revenues of 68% and 69%, respectively, noted above and decreases in
travel, entertainment, and other costs.

Marketing expenses.Marketing expenses for the three and six months ended
June 30, 2001, increased to $6.4 million and $16.8 million from $5.9 million
and $9.3 million, which represent increases of $486,000, or 8%, and $7.5
million, or 80%, respectively, over the comparable periods in 2000. Marketing
expenses increased in the first and second quarters of 2001 due to
the airing of several movies supported by aggressive
marketing campaigns to drive consumer awareness and the introduction of our new
brand package, which includes branded theme blocks, a new positioning line,
on-air graphics and signature music. The newly redesigned brand began a
worldwide roll-out on November 1, 2000. Additionally, in an
effort to strengthen our domestic brand awareness, we incurred and
will continue to incur expenses related to the promotion and
advertising campaigns supporting our August 5, 2001, relaunch of the
Odyssey Network as the Hallmark Channel.

Amortization of goodwill and other intangibles.Amortization of goodwill
and other intangibles for both the three and six months ended June 30, 2001 and
2000, were $5.5 million and $10.9 million, respectively. In conjunction with
the acquisition of an additional 55% common interest in Crown Media United States on May 9, 2000, we recorded
goodwill in the amount of $248.8 million, which is being amortized over 20
years. In conjunction with the acquisition of EM.TV & Merchandising AGs
(EM.TV) 50% interest in H&H Programming  Asia and the remaining 22.5%
common interests in Crown Media United States on March 15, 2001, we recorded
goodwill and other intangibles in the amount of $92.6 million, which are being
amortized over 10 years subject to final appraisal. The amortization of
goodwill arising from past acquisitions will cease as of
January 1, 2002, in accordance with revised accounting standards
issued by the Financial Accounting Standards Board in June 2001.
However, goodwill and other intangible assets will be subject to
periodic (at least annual) tests for impairment and recognition of
impairment losses in the future could be required based on a new
methodology for measuring impairments prescribed by these
pronouncements. The revised standards include transition rules and
requirements for identification, valuation and recognition of a much
broader list of intangibles as part of business combinations than
prior practice, most of which will continue to be amortized. We have
not yet fully assessed the impact of these new standards on our
prospective financial statements, but we expect that the amount and
timing of non-cash charges related to intangibles acquired in
business combinations will change significantly from prior practice.

Loss from operations.Loss from operations for the three and six months
ended June 30, 2001, increased to $45.0 million and $91.6 million,
respectively, from $43.5 million and $77.4 million, respectively, which
represent increases of $1.5 million, or 3%, and

5



---



##### Table of Contents



$14.2 million, or 18%, over the comparable periods in 2000. This increase
was primarily due to aggressive marketing campaigns for our domestic channel
and the introduction of our new brand package. Additionally, this increase was
partially offset by the Companys increased utilization of in-house resources
to produce interstitial product and the employment of the Network Operations
Center to perform certain playback functions previously provided by third-party
vendors.

Interest income (expense), net.Net interest expense
for the three and six months ended June 30, 2001, increased to $1.7
million and $2.5 million from $58,000 net interest income and $45,000 net
interest expense, which represent increases of $1.7 million, and $2.5 million,
respectively, over the comparable periods in 2000. These increases were
primarily due to increased borrowings to fund operations.

Income tax provision.Income tax provision for the three and six months
ended June 30, 2001, increased to $621,000 and $1.0 million from $318,000 and
$551,000, which represent increases of $303,000, or 95%, and $455,000, or 83%,
respectively, over the comparable periods in 2000. These increases were due to
the tax on the foreign-based income resulting from increased international
subscriber fees revenue as discussed above.

Net loss.Net loss for the three and six months ended June 30, 2001,
increased to $47.2 million and $95.1 million from $43.8 million and $78.0
million, which represent increases of $3.4 million, or 8%, and $17.1 million,
or 22%, respectively, over the comparable periods in 2000. These increases in
net loss for the three and six months ended June 30, 2001, were attributable to
a combination of the factors discussed above.

6



---



##### Table of Contents






CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

|                                                                                                                                                                                                                          |                                            |                      |          |              |  |   |          |             |  | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | -------------------- | -------- | ------------ |  | - | -------- | ----------- |  | 
|                                                                                                                                                                                                                          |                                            |                      |          | As of        |  |   | As of    |            
|                                                                                                                                                                                                                          |                                            |                      |          | December 31, |  |   | June 30, |            
|                                                                                                                                                                                                                          |                                            |                      |          | 2000         |  |   | 2001     |            
|                                                                                                                                                                                                                          |                                            |                      |          |              |  |   |          |            
|                                                                                                                                                                                                                          |                                            |                      |          |              |  |   |          | (Unaudited) | 
|                                                                                                                                                                                                                          |                                            | ASSETS              
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Cash and cash equivalents                                                                                                                                                                                                 |                                            | $                    | 34,274   |              |  | $ | 5,898    |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Accounts receivable, less allowance for doubtful accounts of
$2,917 and $5,351, respectively                                                                                                                              |                                            |                      | 18,159   |              |  |   | 25,867   |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Program license fees  affiliates, net of accumulated
amortization                                                                                                                                                        |                                            |                      | 25,130   |              |  |   | 46,171   |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Program license fees  non-affiliates, net of accumulated
amortization                                                                                                                                                    |                                            |                      | 19,885   |              |  |   | 27,342   |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Subtitling and dubbing, net of accumulated amortization                                                                                                                                                                   |                                            |                      | 1,525    |              |  |   | 2,173    |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Prepaids and other assets                                                                                                                                                                                                 |                                            |                      | 3,181    |              |  |   | 3,588    |            
|                                                                                                                                                                                                                          |                                            |                      |          |              |  |  
|                                                                                                                                                                                                                          | Total current assets                       |                      |          | 102,154      |  |   |          | 111,039     | 
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Restricted cash                                                                                                                                                                                                           |                                            |                      | 340      |              |  |   | 340      |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Accounts receivable, net of current portion                                                                                                                                                                               |                                            |                      | 3,074    |              |  |   | 4,764    |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Program license fees  affiliates, net of current portion                                                                                                                                                                 |                                            |                      | 86,640   |              |  |   | 66,670   |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Program license fees  non-affiliates, net of current portion                                                                                                                                                             |                                            |                      | 28,750   |              |  |   | 20,302   |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Subtitling and dubbing, net of current portion                                                                                                                                                                            |                                            |                      | 4,227    |              |  |   | 4,752    |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Subscriber acquisition fees, net of accumulated amortization                                                                                                                                                              |                                            |                      | 29,670   |              |  |   | 29,847   |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Property and equipment, net of accumulated depreciation                                                                                                                                                                   |                                            |                      | 31,067   |              |  |   | 46,668   |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Investment in/advances to unconsolidated entity                                                                                                                                                                           |                                            |                      | 611      |              |  |   |         |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Goodwill and other intangibles, net of accumulated
amortization                                                                                                                                                           |                                            |                      | 240,141  |              |  |   | 323,728  |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Prepaids and other assets, net of current portion                                                                                                                                                                         |                                            |                      | 3,404    |              |  |   | 2,246    |            
|                                                                                                                                                                                                                          |                                            |                      |          |              |  |  
|                                                                                                                                                                                                                          | Total assets                               |                      | $        | 530,078      |  |   | $        | 610,356     | 
|                                                                                                                                                                                                                          |                                            |                      |          |              |  |  
|                                                                                                                                                                                                                          |                                            | LIABILITIES         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Accounts payable and accrued liabilities                                                                                                                                                                                  |                                            | $                    | 26,027   |              |  | $ | 26,476   |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Subscriber acquisition fees payable                                                                                                                                                                                       |                                            |                      | 27,770   |              |  |   | 22,066   |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|License fees payable to affiliates                                                                                                                                                                                        |                                            |                      | 92,589   |              |  |   | 114,241  |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|License fees payable to non-affiliates                                                                                                                                                                                    |                                            |                      | 16,851   |              |  |   | 18,197   |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Payable to affiliates                                                                                                                                                                                                     |                                            |                      | 7,023    |              |  |   | 3,634    |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Note and interest payable to non-affiliate                                                                                                                                                                                |                                            |                      |         |              |  |   | 2,803    |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Notes and interest payable to HC Crown                                                                                                                                                                                    |                                            |                      | 37,549   |              |  |   | 98,602   |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Capital lease obligation                                                                                                                                                                                                  |                                            |                      |         |              |  |   | 1,264    |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Deferred programming revenue                                                                                                                                                                                              |                                            |                      | 713      |              |  |   | 395      |            
|                                                                                                                                                                                                                          |                                            |                      |          |              |  |  
|                                                                                                                                                                                                                          | Total current liabilities                  |                      |          | 208,522      |  |   |          | 287,678     | 
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Accrued liabilities, net of current portion                                                                                                                                                                               |                                            |                      | 18       |              |  |   | 443      |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|License fees payable to affiliates, net of current portion                                                                                                                                                                |                                            |                      | 27,309   |              |  |   | 25,727   |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|License fees payable to non-affiliates, net of current portion                                                                                                                                                            |                                            |                      | 22,421   |              |  |   | 19,083   |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Capital lease obligation, net of current portion                                                                                                                                                                          |                                            |                      |         |              |  |   | 11,396   |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Preferred minority interest                                                                                                                                                                                               |                                            |                      | 25,000   |              |  |   | 25,000   |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Commitments and contingencies                                                                                                                                                                                            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                          |                                            | STOCKHOLDERS EQUITY
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Class A common stock, $.01 par value; 200,000,000 shares
authorized; issued shares of 34,730,505 and 34,793,941;
outstanding shares of 29,352,784 and 34,793,941 as of
December 31, 2000, and June 30, 2001, respectively |                                            |                      | 294      |              |  |   | 348      |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Class B common stock, $.01 par value; 120,000,000 shares
authorized; issued and outstanding shares of 30,670,422 as
of December 31, 2000, and June 30, 2001, respectively                                                 |                                            |                      | 307      |              |  |   | 307      |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Paid-in capital                                                                                                                                                                                                           |                                            |                      | 496,697  |              |  |   | 584,041  |            
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Accumulated other comprehensive loss                                                                                                                                                                                      |                                            |                      | (12      | )            |  |   | (792     | )          
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|                                                                                                                                                                                                                         
|Accumulated deficit                                                                                                                                                                                                       |                                            |                      | (250,478 | )            |  |   | (342,875 | )          
|                                                                                                                                                                                                                          |                                            |                      |          |              |  |  
|                                                                                                                                                                                                                          | Total stockholders equity                 |                      |          | 246,808      |  |   |          | 241,029     | 
|                                                                                                                                                                                                                          |                                            |                      |          |              |  |  
|                                                                                                                                                                                                                          | Total liabilities and stockholders equity |                      | $        | 530,078      |  |   | $        | 610,356     | 
|                                                                                                                                                                                                                          |                                            |                      |          |              |  |  

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

7



---



##### Table of Contents






CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)

|                                                                        |                                                      |                |                              |        |                    |         |        |                  |             |         |        |        |       |         |        |        |        |         |  
|----------------------------------------------------------------------- | ---------------------------------------------------- | -------------- | ---------------------------- | ------ | ------------------ | ------- | ------ | ---------------- | ----------- | ------- | ------ | ------ | ----- | ------- | ------ | ------ | ------ | ------- | -
|                                                                        |                                                      |                |                              |        | Three Months Ended |         |        | Six Months Ended |            
|                                                                        |                                                      |                |                              |        | June 30,           |         |        | June 30,         |            
|                                                                        |                                                      |                |                              |        |                    |         |        |                  |            
|                                                                        |                                                      |                |                              |        | 2000               |         |        | 2001             |             |         | 2000   |        |       | 2001    |       
|                                                                        |                                                      |                |                              |        |                    |         |        |                  |             |         |        |        |       |         |       
|                                                                        |                                                      |                |                              |        |                    |         |        |                  | (Unaudited) |        
|Revenues:                                                              
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Subscriber fees                                      |                | $                            | 10,429 |                    |         | $      | 16,712           |             |         | $      | 19,090 |       |         | $      | 32,595 |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Advertising                                          |                |                              | 2,029  |                    |         |        | 7,673            |             |         |        | 2,146  |       |         |        | 13,725 |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Advertising by Hallmark Cards                        |                |                              | 342    |                    |         |        | 1,617            |             |         |        | 342    |       |         |        | 2,710  |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Management fees from unconsolidated entity and other |                |                              | 712    |                    |         |        | 475              |             |         |        | 1,227  |       |         |        | 486    |       
|                                                                        |                                                      |                |                              |        |                    |         |        |                  |             |         |        |       
|                                                                        |                                                      |                | Total revenues               |        |                    | 13,512  |        |                  |             | 26,477  |        |        |       | 22,805  |        |        |        | 49,516  |  
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Cost of Services:                                                      
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Programming costs:                                  
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                                                      | Affiliates     |                              |        | 6,823              |         |        |                  | 16,033      |         |        |        | 9,703 |         |        |        | 30,623 |        
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                                                      | Non-affiliates |                              |        | 3,196              |         |        |                  | 6,851       |         |        |        | 5,295 |         |        |        | 12,474 |        
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Operating costs                                      |                |                              | 13,837 |                    |         |        | 13,234           |             |         |        | 19,694 |       |         |        | 27,682 |       
|                                                                        |                                                      |                |                              |        |                    |         |        |                  |             |         |        |       
|                                                                        |                                                      |                | Total cost of services       |        |                    | 23,856  |        |                  |             | 36,118  |        |        |       | 34,692  |        |        |        | 70,779  |  
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Selling, general and administrative expenses                            |                                                      |                | 13,943                       |        |                    |         | 23,474 |                  |             |         | 20,615 |        |       |         | 41,237 |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Marketing expenses                                                      |                                                      |                | 4,856                        |        |                    |         | 6,372  |                  |             |         | 5,529  |        |       |         | 16,827 |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Amortization of goodwill and other intangibles                          |                                                      |                | 1,962                        |        |                    |         | 5,469  |                  |             |         | 2,374  |        |       |         | 8,996  |       
|                                                                        |                                                      |                |                              |        |                    |         |        |                  |             |         |        |       
|                                                                        |                                                      |                | Loss from operations         |        |                    | (31,105 | )      |                  |             | (44,956 | )      |        |       | (40,405 | )      |        |        | (88,323 | )
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Equity in net losses of unconsolidated entities and
investment expenses |                                                      |                | (2,378                       | )      |                    |         |       |                  |             |         | (7,160 | )      |       |         | (655   | )     
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Interest income (expense), net                                          |                                                      |                | 18                           |        |                    |         | (1,652 | )                |             |         | (285   | )      |       |         | (2,412 | )     
|                                                                        |                                                      |                |                              |        |                    |         |        |                  |             |         |        |       
|                                                                        |                                                      |                | Net loss before income taxes |        |                    | (33,465 | )      |                  |             | (46,608 | )      |        |       | (47,850 | )      |        |        | (91,390 | )
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Income tax provision                                                    |                                                      |                | (318                         | )      |                    |         | (621   | )                |             |         | (552   | )      |       |         | (1,006 | )     
|                                                                        |                                                      |                |                              |        |                    |         |        |                  |             |         |        |       
|                                                                        |                                                      |                | Net loss                     |        | $                  | (33,783 | )      |                  | $           | (47,229 | )      |        | $     | (48,402 | )      |        | $      | (92,396 | )
|                                                                        |                                                      |                |                              |        |                    |         |        |                  |             |         |        |       
|Other comprehensive loss:                                              
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Foreign currency translation adjustment              |                |                              | (25    | )                  |         |        | (314             | )           |         |        | (25    | )     |         |        | (781   | )     
|                                                                        |                                                      |                |                              |        |                    |         |        |                  |             |         |        |       
|                                                                        |                                                      |                | Comprehensive loss           |        | $                  | (33,808 | )      |                  | $           | (47,543 | )      |        | $     | (48,427 | )      |        | $      | (93,177 | )
|                                                                        |                                                      |                |                              |        |                    |         |        |                  |             |         |        |       
|Weighted average number of Class A and Class B shares
Outstanding       |                                                      |                | 48,953                       |        |                    |         | 65,443 |                  |             |         | 41,558 |        |       |         | 63,218 |       
|                                                                        |                                                      |                |                              |        |                    |         |        |                  |             |         |        |       
|Net loss per share                                                      |                                                      | $              | (0.70                        | )      |                    | $       | (0.72  | )                |             | $       | (1.20  | )      |       | $       | (1.46  | )     
|                                                                        |                                                      |                |                              |        |                    |         |        |                  |             |         |        |       

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

8



---



##### Table of Contents






CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

|                                                         |                                                                                                   |                                                                                                                                    |                                                                 |                                                      |         |                  |         |         |        |         |         |  
|-------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------- | ---------------------------------------------------- | ------- | ---------------- | ------- | ------- | ------ | ------- | ------- | -
|                                                         |                                                                                                   |                                                                                                                                    |                                                                 |                                                      |         | Six Months Ended |        
|                                                         |                                                                                                   |                                                                                                                                    |                                                                 |                                                      |         | June 30,         |        
|                                                         |                                                                                                   |                                                                                                                                    |                                                                 |                                                      |         |                  |        
|                                                         |                                                                                                   |                                                                                                                                    |                                                                 |                                                      |         | 2000             |         |         | 2001   |        
|                                                         |                                                                                                   |                                                                                                                                    |                                                                 |                                                      |         |                  |         |         |        |        
|                                                         |                                                                                                   |                                                                                                                                    |                                                                 |                                                      |         | (Unaudited)      |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                   
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Net loss                                                                                          |                                                                                                                                    | $                                                               | (48,402                                              | )       |                  | $       | (92,396 | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Adjustments to reconcile net loss to net cash used in operating activities:                      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                   | Amortization and depreciation                                                                                                      |                                                                 |                                                      | 20,979  |                  |         |         | 61,991 |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                   | Provision for losses on accounts receivable                                                                                        |                                                                 |                                                      | 1,989   |                  |         |         | 3,117  |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                   | Equity in net losses of unconsolidated subsidiaries                                                                                |                                                                 |                                                      | 7,160   |                  |         |         | 655    |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                   | Stock-based compensation                                                                                                           |                                                                 |                                                      | 5,427   |                  |         |         | 909    |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                   | Gain on sale of property and equipment                                                                                             |                                                                 |                                                      |        |                  |         |         | (7     | )      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                   | Changes in operating assets and liabilities net of effects from purchases
of Crown Media United States and H&H Programming  Asia:
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                   |                                                                                                                                    | Increase in accounts receivable                                 |                                                      |         | (6,493           | )       |         |        | (11,144 | )      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                   |                                                                                                                                    | Decrease in interest receivable                                 |                                                      |         | 34               |         |         |        |        |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                   |                                                                                                                                    | Additions to program license fees                               |                                                      |         | (19,496          | )       |         |        | (40,068 | )      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                   |                                                                                                                                    | Increase in subtitling and dubbing                              |                                                      |         | (1,484           | )       |         |        | (2,493  | )      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                   |                                                                                                                                    | Increase in prepaids and other assets                           |                                                      |         | (478             | )       |         |        | (2,705  | )      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                   |                                                                                                                                    | Increase (decrease) in accounts payable and accrued liabilities |                                                      |         | 2,712            |         |         |        | (3,305  | )      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                   |                                                                                                                                    | Increase (decrease) in subscriber acquisition fees payable      |                                                      |         | 560              |         |         |        | (5,703  | )      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                   |                                                                                                                                    | Increase (decrease) in affiliate license fees payable           |                                                      |         | (18,314          | )       |         |        | 14,494  |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                   |                                                                                                                                    | Increase (decrease) in payable to affiliates                    |                                                      |         | 519              |         |         |        | (3,389  | )      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                   |                                                                                                                                    | Decrease in deferred revenue                                    |                                                      |         | (1,134           | )       |         |        | (318    | )      
|                                                         |                                                                                                   |                                                                                                                                    |                                                                 |                                                      |         |                 
|                                                         |                                                                                                   |                                                                                                                                    |                                                                 | Net cash used in operating activities                |         |                  | (56,421 | )       |        |         | (80,362 | )
|                                                         |                                                                                                   |                                                                                                                                    |                                                                 |                                                      |         |                 
|CASH FLOWS FROM INVESTING ACTIVITIES:                   
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Purchases of property and equipment                                                               |                                                                                                                                    |                                                                 | (9,955                                               | )       |                  |         | (8,538  | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Proceeds from disposition of property and equipment                                               |                                                                                                                                    |                                                                 |                                                     |         |                  |         | 83      |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Cash acquired from the purchase of Crown Media United States                                      |                                                                                                                                    |                                                                 | 13,055                                               |         |                  |         |        |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Acquisition of H&H Programming  Asia, net of cash                                                |                                                                                                                                    |                                                                 |                                                     |         |                  |         | (482    | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Other investments in and issuance of note receivable                                              |                                                                                                                                    |                                                                 | (2,466                                               | )       |                  |         |        |       
|                                                         |                                                                                                   |                                                                                                                                    |                                                                 |                                                      |         |                 
|                                                         |                                                                                                   |                                                                                                                                    |                                                                 | Net cash provided by (used in) investing activities  |         |                  | 634     |         |        |         | (8,937  | )
|                                                         |                                                                                                   |                                                                                                                                    |                                                                 |                                                      |         |                 
|CASH FLOWS FROM FINANCING ACTIVITIES:                   
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Proceeds from the issuance of common stock, net of issuance costs                                 |                                                                                                                                    |                                                                 | 125,351                                              |         |                  |         |        |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Proceeds from the issuance of common stock due to exercise of stock options                       |                                                                                                                                    |                                                                 |                                                     |         |                  |         | 670     |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Capital contributions                                                                             |                                                                                                                                    |                                                                 | 10,000                                               |         |                  |         |        |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Borrowings from H.C. Crown note payable                                                           |                                                                                                                                    |                                                                 | 24,832                                               |         |                  |         | 62,502  |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Borrowings from non-affiliate note payable                                                        |                                                                                                                                    |                                                                 |                                                     |         |                  |         | 225     |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Repayment of borrowings on H.C. Crown note payable                                                |                                                                                                                                    |                                                                 |                                                     |         |                  |         | (1,450  | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Repayment of borrowings on non-affiliate note payable                                             |                                                                                                                                    |                                                                 |                                                     |         |                  |         | (314    | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Repayment of borrowings on Crown Media United States note payable                                 |                                                                                                                                    |                                                                 | (10,000                                              | )       |                  |         |        |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Principal payments under capital lease obligation                                                 |                                                                                                                                    |                                                                 |                                                     |         |                  |         | (593    | )     
|                                                         |                                                                                                   |                                                                                                                                    |                                                                 |                                                      |         |                 
|                                                         |                                                                                                   |                                                                                                                                    |                                                                 | Net cash provided by financing activities            |         |                  | 150,183 |         |        |         | 61,040  |  
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Effect of exchange rate changes on cash                                                           |                                                                                                                                    |                                                                 | 25                                                   |         |                  |         | (117    | )     
|                                                         |                                                                                                   |                                                                                                                                    |                                                                 |                                                      |         |                 
|                                                         |                                                                                                   |                                                                                                                                    |                                                                 | Net increase (decrease) in cash and cash equivalents |         |                  | 94,421  |         |        |         | (28,376 | )
|                                                        
|                                                        
|                                                        
|                                                        
|Cash and cash equivalents, beginning of period           |                                                                                                   |                                                                                                                                    | 3,866                                                           |                                                      |         |                  | 34,274  |        
|                                                         |                                                                                                   |                                                                                                                                    |                                                                 |                                                      |         |                 
|Cash and cash equivalents, end of period                 |                                                                                                   | $                                                                                                                                  | 98,287                                                          |                                                      |         | $                | 5,898   |        
|                                                         |                                                                                                   |                                                                                                                                    |                                                                 |                                                      |         |                 
|Supplemental disclosure of cash and non-cash activities:
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Interest paid                                                                                     |                                                                                                                                    | $                                                               | 449                                                  |         |                  | $       | 2,321   |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Income taxes paid                                                                                 |                                                                                                                                    | $                                                               | 552                                                  |         |                  | $       | 1,006   |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Accretion related to predecessor Class B common stock subject to put
and call through May 9, 2000 |                                                                                                                                    | $                                                               | 1,484                                                |         |                  | $       |        |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Asset acquired through capital lease obligation                                                   |                                                                                                                                    | $                                                               |                                                     |         |                  | $       | 13,252  |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Purchase of Crown Media United States and H&H Programming  Asia, net of
cash acquired:          
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                   | Accounts receivable and other assets                                                                                               |                                                                 | $                                                    | 12,571  |                  |         | $       | 1,715  |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                   | Program license fees                                                                                                               |                                                                 |                                                      | 84,079  |                  |         |         | 2,678  |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                   | Subscriber acquisition fees                                                                                                        |                                                                 |                                                      | 24,422  |                  |         |         |       |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                   | Goodwill
and other intangibles                                                                                                     |                                                                 |                                                      | 248,780 |                  |         |         | 92,583 |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                   | Accounts payable and other liabilities                                                                                             |                                                                 |                                                      | 18,951  |                  |         |         | 2,089  |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                   | Subscriber acquisition fees payable                                                                                                |                                                                 |                                                      | 27,210  |                  |         |         |       |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                   | Note and interest payable to non-affiliate                                                                                         |                                                                 |                                                      |        |                  |         |         | 2,892  |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                   | License fees payable  affiliate                                                                                                   |                                                                 |                                                      | 64,317  |                  |         |         | 5,694  |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                   | Preferred minority interest                                                                                                        |                                                                 |                                                      | 25,000  |                  |         |         |       |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                   | Issuance of Class A common stock                                                                                                   |                                                                 |                                                      | 216,901 |                  |         |         | 85,819 |        

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

9



---



##### Table of Contents






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

1. Business and Organization

Organization

Crown Media Holdings owns and operates pay television channels dedicated
to high quality, broad appeal, entertainment programming, in the United States
and in various countries throughout the world. Internationally, the Hallmark
Channel (formerly known as the Hallmark Entertainment Network) is operated and
distributed in more than 100 international countries by Crown Media
International, which commenced operations as a Delaware corporation in June
1995. Domestically, the Hallmark Channel (to be so renamed on August 5, 2001,
from the Odyssey Network) is operated and distributed by Crown Media United
States LLC which commenced operations as a limited liability company in July 1995.
Significant investors in Crown Media Holdings include Hallmark Entertainment,
Inc. (Hallmark Entertainment), a subsidiary of Hallmark Cards, Incorporated,
Liberty Media Corp., the National Interfaith Cable Coalition (NICC) and J. P.
Morgan Partners (BHCA), L. P. (J.P. Morgan).

Crown Media Holdings was established as a holding company with no material
assets, liabilities, contingent liabilities or operations prior to the
completion of our reorganization and initial public offering on May 9, 2000.
Therefore, for the periods prior to May 9, 2000, for financial reporting
purposes, we are reporting the assets, liabilities and results of operations of
Crown Media International, as Crown Media Holdings and Crown Media
International were entities under common control before and after the
reorganization.

On May 9, 2000, Crown Media Holdings completed a reorganization in which
all of Crown Media Holdings outstanding shares were exchanged for 100% of
Crown Media International and 77.5% of the common interests in Crown Media
United States. Our consolidated financial statements include
the assets and liabilities of Crown Media International at their historical
carrying values since both we and Crown Media International are entities under
common control before and after the reorganization. The accompanying
consolidated financial statements also include the assets and liabilities and
results of operations of Crown Media Holdings other indirect, wholly and
majority-owned subsidiaries. Additionally, on May 9, 2000, we acquired
Liberty Medias 32.5% interest in Crown Media United States and NICCs
22.5% interest in Crown Media United States, and included these interests in our
consolidated financial statements at their fair market value using purchase
accounting as of the date of the reorganization. In conjunction with the
reorganization, Crown Media Holdings completed its initial public offering of
10,000,000 shares of Class A common stock at $14 per share. The net proceeds
from this offering, after expenses and underwriting discounts and commissions,
were approximately $125.4 million.

Crown Media United States initially dedicated its pay television channel
in the United States primarily to religious programming. In April 1999, Crown
Media United States relaunched its channel as one dedicated to high-quality
family programming.

Prior to the initial public offering and reorganization, Crown Media
International held a 22.5% common equity interest in Crown Media United States.
The assets and liabilities of Crown Media United States and its subsidiaries
relating to Crown Media Internationals original 22.5% interest in Crown Media
United States are included in Crown Media Holdings consolidated financial
statements based on their historical carrying values. Crown Media Internationals 50%
interest in H&H Programming  Asia, which operated The Kermit Channel until
December 2000, was treated as an equity investment until March 15, 2001, in
Crown Media Holdings consolidated financial statements. On March 15, 2001,
Crown Media Holdings acquired from The Jim Henson Company, Inc. (The Jim
Henson Company) the remaining 22.5% common interests in Crown Media United
States and the remaining 50% interest in H&H Programming  Asia which we did
not previously own, for approximately $85.8 million. In consideration for these
ownership interests, we issued approximately 5.4 million shares of our Class A
common stock to The Jim Henson Company. The acquisition was recorded at fair
market value using purchase accounting as of March 15, 2001.

Recent Developments

Proposed Films Transaction

10



---



##### Table of Contents



We have entered into an agreement for the purchase by us from Hallmark
Entertainment Distribution, LLC (Hallmark Entertainment Distribution) (the
films transaction) of made-for-television movies, specials, theatrical films,
mini-series, series and made-for-video product consisting of 702 titles, along
with related film properties and rights (the film assets). The film assets
will be subject to any contractual rights previously granted to third parties.
The purchase price for the film assets consists of the following:



| |  |  | The number of shares of Class A Common Stock calculated as
follows with the average stock price meaning the average of the
closing price per share of the Class A Common Stock as reported on
the Nasdaq National Market System on each trading day during the
period beginning on November 6, 2000 (the date on which we publicly
announced we were investigating the possibility of a transaction) and
ending on the trading date immediately prior to the closing date for
the films transaction:
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (1) |  | if the average stock price is less than $17.00, then
35,294,118 shares;                                                                                           
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | if the average stock price is greater than $18.70,
then 32,085,562 shares; or                                                                                     
|
| | (3) |  | if the average stock price is at least $17.00, but
not greater than $18.70, then the number of shares shall equal
$600,000,000 divided by the average stock price.



| |  |  | Our assumption or payment of
$120.0 million of debt related to
the film assets payable by Hallmark Entertainment, Inc. and certain
of its affiliates to J.P. Morgan Chase & Company and other lenders
under a credit and security agreement; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our assumption of $100.0 million of payables related to the film
assets.                                                                                                                                                                        

Based on an average stock price of $18.09 from November 6, 2000, to April
10, 2001, when we signed the purchase and sale agreement, we would issue
33,169,794 shares. The value of the stock, based on this average price, would
be $600.0 million, resulting in a total purchase price for the film assets of
approximately $820.0 million. The closing price of shares of Class A common
stock on the closing date may be higher or lower than the average stock price
used in calculating the number of shares of Class A common stock we will issue
in the transaction. Of the shares issued in the transaction, 425,000 shares
will be issued in escrow and will be returned to us if a previously announced,
proposed settlement of a lawsuit related to the films transaction becomes
final.

In connection with the purchase of the film assets, we will enter into
additional agreements, including a service agreement with Hallmark
Entertainment regarding the administration, distribution and exploitation of
the film assets, and amended program agreements between Hallmark Entertainment
Distribution and each of Crown Media International and Crown Media United
States. We and Hallmark Entertainment Distribution will also enter into a
registration rights agreement regarding the shares issued in the films
transaction.

Our stockholders (excluding Hallmark Entertainment Distribution and its
affiliates) approved the films transaction on July 17, 2001.

Liquidity

In connection with our growth strategy, we expect that we will continue to
make significant investments in programming, distribution and technology, as
well as additional investments in infrastructure and facilities. We are
currently committed to spend more than $100.0 million for programming over the
next 12 months. We are also committed to four quarterly payments of $6.8
million for subscriber acquisition fees payable and to pay the other
obligations mentioned above. We also expect to report net losses for the
foreseeable future. A line of credit with HC Crown Corporation (HC Crown), a
subsidiary of Hallmark Cards for $150.0 million is in place to cover our
anticipated needs through March 31, 2002, with a remaining amount available of
$89.5 million, as of June 30, 2001. This line of credit with HC Crown is
payable no later than April 1, 2002. The lenders obligation to make loans
under the line of credit is backed up by a letter of credit issued by Bank of
America.

We anticipate closing the acquisition of the film assets from Hallmark
Entertainment Distribution as described above in August, 2001. In conjunction
with that transaction, we plan to enter into a credit agreement with a
syndicate of banks, lead by the Chase Manhattan Bank, under which the banks
will extend to us a five-year secured credit facility of up to $300.0 million. A
portion of the borrowings under the bank credit facility will be used to pay
$120.0 million of debt assumed as part of the consideration for acquiring the
film assets and to repay approximately $70.0 million under the line of credit
with HC Crown. It is also anticipated that HC Crown

11



---



##### Table of Contents



will then enter into a new line of credit with us
for $150.0 million. We
believe that, when these transactions are completed, the 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
December 31, 2002.

In July 2001, we entered into an additional line of credit with HC Crown
in the amount of $50.0 million. We are borrowing under this note for working capital
needs and contemplate that this note will remain outstanding after we enter
into the bank credit agreement although the note is payable on demand.

We also believe
that the films transaction, if completed, will provide more
flexibility for our future financings.
In addition to the funding to be provided in connection with the anticipated films transaction,
we plan to file with the Securities and Exchange Commission in the second half
of 2001 a shelf registration statement which will allow us to make from time to
time one or more offerings in an aggregate total amount of up to
$500.0 million
of our securities. We expect that securities covered by the registration
statement will include our common stock, preferred stock, debt securities
(which may or may not be convertible) and warrants to purchase stock. We will
explore the possibility of selling equity and debt securities for part of the
total amount during 2001 using the registration statement, depending on market
conditions, our projected cash needs and other factors. Proceeds from any such
offering in 2001 would be used to reduce our bank debt and other then existing
indebtedness and to fund working capital. (This information does not
constitute an offer of any securities for sale.)

As indicated above, whether or not the films transaction described above
is completed, we will need and seek during the next 12 months additional funds
to operate and expand our businesses. Any additional equity financings could
result in dilution to our existing investors. Any debt financings will likely
increase our interest expense and may impose restrictive covenants. There can
be no assurances that we will be able to consummate any proposed equity or debt
financing.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the consolidated accounts of
Crown Media Holdings and those of its majority-owned and controlled
subsidiaries. Investments in entities that are not majority-owned and
controlled by Crown Media Holdings are accounted for under the equity method.
All significant intercompany balances and transactions have been eliminated in
consolidation.

Interim Financial Statements

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

Cash and Cash Equivalents

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

Restricted Cash

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

Subscriber Acquisition Fees

Crown Media Holdings has distribution agreements with six of the top nine
United States pay television distributors which carry the Hallmark Channel on
some of their cable systems. Crown Media Holdings is obligated to pay
subscriber acquisition fees, if certain subscriber levels are met, as defined
in certain of these agreements, and one-time subscriber fees in order to obtain
carriage of the Hallmark Channel by those distributors.

12



---



##### Table of Contents



During the six months ended June 30, 2001, Crown Media Holdings recorded
an additional $3.7 million in subscriber acquisition fees and recorded
amortization of $3.5 million for such fees, resulting in a balance of $29.8
million. As of June 30, 2001, the balance sheet also reflected subscriber
acquisition fees payable of $22.1 million, due primarily in four quarterly
installments of $6.8 million which began on April 1, 2001.

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 expense. 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 for programming licensed from Hallmark Entertainment Distribution, or 10
years. Accumulated amortization related to subtitling and dubbing as of
December 31, 2000, and June 30, 2001, was $2.9 million and $3.8 million,
respectively.

Property and Equipment

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

Revenue Recognition

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

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

In 1999, the Emerging Issues Tax Force (EITF) Issue No. 99-17,
Accounting for Advertising Barter Transactions was issued. EITF No. 99-17
establishes accounting and reporting standards for bartering advertising
transactions. Advertising revenue and expenses in barter transactions are
recorded at the fair value of the advertising to be provided. The fair value is
determined based upon the Companys 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 the rule, no revenue is recognized. For the three and six
months ended June 30, 2001, revenue from advertising barter transactions and
corresponding barter expenses were $431,000 and $928,000, respectively, and
were included as a component of advertising revenue and marketing expenses in
the accompanying consolidated statements of operations. No barter revenue or
related barter expense was recorded for the three and six months ended June 30,
2000.

Revenues from foreign sources for the three and six months ended June 30,
2000, represented 73% and 82%, respectively, of total subscriber fees revenue.
Revenues from foreign sources for the three and six months ended June 30, 2001,
represented 50% and 56%, respectively, of total subscriber fees revenue. Such
revenues, generally denominated in United States dollars, were primarily from

13



---



##### Table of Contents



sales to customers in Australia, the Benelux countries, Italy, New
Zealand, South Africa, Spain and certain countries in Asia, the Middle East and
Latin America, during both periods presented, and the United States for the six
months ended June 30, 2001.

Cost of Services

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

Minority Interest

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

Comprehensive Loss

Crown Media Holdings adopted SFAS No. 130, Reporting Comprehensive
Income, during 1998. This statement establishes standards for the reporting
and presentation of comprehensive income (loss) and its components in financial
statements and thereby reports a measure of all changes in equity of an
enterprise that result from transactions and other economic events other than
transactions with owners. No tax benefit has been provided on the foreign
currency translation loss component for any period.

Translation of Foreign Currency

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

Net Loss Per Share

Basic net loss per share is computed by dividing the net loss available to
common stockholders for the period by the weighted average number of common
shares outstanding during the period. Diluted net loss per share is computed
based on the weighted average number of common shares and potentially dilutive
common shares outstanding. The calculation of diluted net loss per share
excludes potential common shares if the effect is anti-dilutive. Potential
common shares consist of incremental common shares issuable upon the exercise
of stock options. Approximately 2.4 million for the three and six months ended
June 30, 2000, and approximately 5.7 million for the three and six months ended
June 30, 2001, of stock options have been excluded from the calculations below
because their effect would have been anti-dilutive. Accordingly, diluted loss
per share equals basic loss per share.

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

|                                                                                                  |                                               |   |                                          |        |   |                  |         |        |      |   |         |        |   |   |         |        |  
|------------------------------------------------------------------------------------------------- | --------------------------------------------- | - | ---------------------------------------- | ------ | - | ---------------- | ------- | ------ | ---- | - | ------- | ------ | - | - | ------- | ------ | -
|                                                                                                  |                                               |   | Three Months Ended                       |        |   | Six Months Ended |        
|                                                                                                  |                                               |   | June 30,                                 |        |   | June 30,         |        
|                                                                                                  |                                               |   |                                          |        |   |                  |        
|                                                                                                  |                                               |   | 2000                                     |        |   | 2001             |         |        | 2000 |   |         | 2001   |  
|                                                                                                  |                                               |   |                                          |        |   |                  |         |        |      |   |         |        |  
|                                                                                                  |                                               |   | (In thousands, except per share amounts) |       
|Net loss                                                                                          |                                               | $ | (33,783                                  | )      |   | $                | (47,229 | )      |      | $ | (48,402 | )      |   | $ | (92,396 | )     
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Accretion related to predecessor Class B common stock
subject to put and call through May 9, 2000 |                                               |   | (453                                     | )      |   |                  |        |        |      |   | (1,484  | )      |   |   |        |       
|                                                                                                  |                                               |   |                                          |        |   |                  |         |        |      |   |         |       
|                                                                                                  |                                               | $ | (34,236                                  | )      |   | $                | (47,229 | )      |      | $ | (49,886 | )      |   | $ | (92,396 | )     
|                                                                                                  |                                               |   |                                          |        |   |                  |         |        |      |   |         |       
|Denominator:                                                                                     
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                  | Weighted average common shares outstanding(1) |   |                                          | 48,953 |   |                  |         | 65,443 |      |   |         | 41,558 |   |   |         | 63,218 |  
|                                                                                                  |                                               |   |                                          |        |   |                  |         |        |      |   |         |       
|Net loss per share:                                                                              
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                  | Basic and diluted net loss per share          |   | $                                        | (0.70  | ) |                  | $       | (0.72  | )    |   | $       | (1.20  | ) |   | $       | (1.46  | )
|                                                                                                  |                                               |   |                                          |        |   |                  |         |        |      |   |         |       



---

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

14



---



##### Table of Contents



Stock-Based Compensation

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

Use of Estimates

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

Concentration of Credit Risk

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

Fair Value

The carrying amounts of financial instruments, including amounts payable
and receivable, are reasonable estimates of their fair value because of their
short-term nature. The fair values were estimated using the current rates at
which loans would be made to Crown Media Holdings for similar remaining
maturities. Investments in private companies and partnerships are recorded at
fair value as of the date of investment. Crown Media Holdings periodically
reviews the fair value of its investments. If a review indicates that the
carrying value of an asset is not recoverable, the carrying value is reduced to
its estimated fair value.

Recently Issued Accounting Pronouncements

In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities was issued. This statement was subsequently amended by SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities 
Deferral of the Effective Date of FASB Statement No. 133, which changed the
effective date to fiscal years beginning after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. Crown Media Holdings has not used derivative instruments
nor does it engage in hedging activities and thus the adoption in 2001 did not
have a material effect on its financial statements.

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

In June 2001, FASB approved SFAS No. 141, Business Combinations and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 prohibits the use
of the pooling of interests method. SFAS No. 142 requires the cessation of
the amortization of goodwill subsequent to December 31, 2001. SFAS Nos. 141 and
142 are effective for business combinations initiated after June 30, 2001, and
for goodwill of Crown Media Holdings from and after January 1, 2002. The
adoption of SFAS No. 142 will have a material effect on Crown Media Holdings
financial statements, as goodwill will no longer be amortized and the related
expense of $21.9 million will no longer be a component of our statement of
operations. However, a potential impairment of goodwill will be evaluated at least
annually, and if necessary, any required write-down will be recognized as a
charge to operations.

Reclassifications

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

15



---



##### Table of Contents



3. Program license fees

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

|                                                           |                               |   |                    |         |  |                |         |         | 
|---------------------------------------------------------- | ----------------------------- | - | ------------------ | ------- |  | -------------- | ------- | ------- | 
|                                                           |                               |   | As of December 31, |         |  | As of June 30, |        
|                                                           |                               |   |                    |         |  |                |        
|                                                           |                               |   | 2000               |         |  | 2001           |        
|                                                           |                               |   |                    |         |  |                |        
|                                                           |                               |   | (In thousands)     |        
|Program license fees  Hallmark Entertainment
Distribution |                               | $ | 107,028            |         |  | $              | 119,286 |        
|                                                          
|                                                          
|                                                          
|                                                          
|Program license fees  The Jim Henson Company              |                               |   | 20,963             |         |  |                | 22,556  |        
|                                                          
|                                                          
|                                                          
|                                                          
|Program license fees  NICC                                |                               |   |                   |         |  |                | 5,306   |        
|                                                          
|                                                          
|                                                          
|                                                          
|Program license fees  other affiliates                    |                               |   | 10,622             |         |  |                | 13,570  |        
|                                                          
|                                                          
|                                                          
|                                                          
|Program license fees  non-affiliates                      |                               |   | 53,031             |         |  |                | 60,069  |        
|                                                          
|                                                          
|                                                          
|                                                          
|Prepaid program license fees                               |                               |   | 6,870              |         |  |                | 6,999   |        
|                                                           |                               |   |                    |         |  |               
|                                                           | Program license fees, at cost |   |                    | 198,514 |  |                |         | 227,786 | 
|                                                          
|                                                          
|                                                          
|                                                          
|Accumulated amortization                                   |                               |   | (38,109            | )       |  |                | (67,301 | )      
|                                                           |                               |   |                    |         |  |               
|                                                           | Program license fees, net     |   | $                  | 160,405 |  |                | $       | 160,485 | 
|                                                           |                               |   |                    |         |  |               

License fees payable are comprised of the following:

|                                                           |                      |   |                    |         |  |                |         |         | 
|---------------------------------------------------------- | -------------------- | - | ------------------ | ------- |  | -------------- | ------- | ------- | 
|                                                           |                      |   | As of December 31, |         |  | As of June 30, |        
|                                                           |                      |   |                    |         |  |                |        
|                                                           |                      |   | 2000               |         |  | 2001           |        
|                                                           |                      |   |                    |         |  |                |        
|                                                           |                      |   | (In thousands)     |        
|License fees payable  Hallmark Entertainment
Distribution |                      | $ | 109,859            |         |  | $              | 134,102 |        
|                                                          
|                                                          
|                                                          
|                                                          
|License fees payable  The Jim Henson Company              |                      |   | 10,039             |         |  |                | 2,828   |        
|                                                          
|                                                          
|                                                          
|                                                          
|License fees payable  NICC                                |                      |   |                   |         |  |                | 2,648   |        
|                                                          
|                                                          
|                                                          
|                                                          
|License fees payable  other affiliates                    |                      |   | 21                 |         |  |                | 390     |        
|                                                          
|                                                          
|                                                          
|                                                          
|License fees payable  non-affiliates                      |                      |   | 39,251             |         |  |                | 37,280  |        
|                                                           |                      |   |                    |         |  |               
|                                                           | License fees payable |   | $                  | 159,170 |  |                | $       | 177,248 | 
|                                                           |                      |   |                    |         |  |               

4. Property and Equipment

Property and equipment are comprised of the following:

|                                          |                                 |   |                    |        |  |                |         |        | 
|----------------------------------------- | ------------------------------- | - | ------------------ | ------ |  | -------------- | ------- | ------ | 
|                                          |                                 |   | As of December 31, |        |  | As of June 30, |        
|                                          |                                 |   |                    |        |  |                |        
|                                          |                                 |   | 2000               |        |  | 2001           |        
|                                          |                                 |   |                    |        |  |                |        
|                                          |                                 |   | (In thousands)     |       
|Technical equipment and computers         |                                 | $ | 19,702             |        |  | $              | 36,541  |       
|                                         
|                                         
|                                         
|                                         
|Transponder                               |                                 |   |                   |        |  |                | 13,252  |       
|                                         
|                                         
|                                         
|                                         
|Leasehold improvements                    |                                 |   | 2,485              |        |  |                | 7,468   |       
|                                         
|                                         
|                                         
|                                         
|Furniture, fixtures and equipment         |                                 |   | 1,765              |        |  |                | 2,171   |       
|                                         
|                                         
|                                         
|                                         
|Construction-in-progress                  |                                 |   | 15,109             |        |  |                | 86      |       
|                                          |                                 |   |                    |        |  |               
|                                          | Property and equipment, at cost |   |                    | 39,061 |  |                |         | 59,518 | 
|                                         
|                                         
|                                         
|                                         
|Accumulated depreciation and amortization |                                 |   | (7,994             | )      |  |                | (12,850 | )     
|                                          |                                 |   |                    |        |  |               
|                                          | Property and equipment, net     |   | $                  | 31,067 |  |                | $       | 46,668 | 
|                                          |                                 |   |                    |        |  |               

Construction-in-progress as of December 31, 2000 consisted primarily of
costs incurred for an advanced global Network Operations Center at our
Greenwood Village, Colorado, headquarters, which was placed in service in the
first quarter of 2001. Technical equipment, computers and leasehold
improvements were reclassified from construction-in-progress to their related
captions during the first quarter 2001 in conjunction with the launch of our
Network Operations Center. Depreciation and amortization expense totaled $1.7
million and $3.7 million, respectively, for the three and six months ended June
30, 2000 and $2.4 million and $6.1 million, respectively, for the three and six
months ended June 30, 2001.

5. Investments in and Advances to Unconsolidated Entities

Investment in H&H Programming  Asia

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

16



---



##### Table of Contents



Each of Crown Media International and The Jim Henson Company held a 50%
interest in H&H Programming  Asia through March 15, 2001. Crown Media
Holdings investment in H&H Programming  Asia was reflected in the
consolidated financial statements using the equity method of accounting until
March 15, 2001, the date of the acquisition (see note 1), at which time it
became a consolidated subsidiary. Crown Media Holdings equity in the net loss
of H&H Programming -Asia was approximately $1.0 million and $2.3 million for
the three and six months ended June 30, 2000, and $655,000 for the two and one
half months ended March 15, 2001.

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

Crown Media Holdings provided services to H&H Programming  Asia in
exchange for a management fee as provided in an agreement between Crown Media
International and H&H Programming  Asia. This fee, which was approximately
$712,000 and $1.2 million, respectively, for the three and six months ended
June 30, 2000, included direct and indirect costs incurred on behalf of H&H
Programming  Asia, as provided by the agreements. No fees were recorded for
the three and six months ended June 30, 2001.

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

Investment in Crown Media United States

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

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

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

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

17



---



##### Table of Contents



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

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

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

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

The consolidated financial statements of Crown Media Holdings include the
assets, liabilities and results of Crown Media International for all periods
presented. Crown Media Holdings considers Crown Media International as a
predecessor corporation for financial reporting purposes. The historical
consolidated financial statements of Crown Media Holdings also include the
results of operations for (i) 22.5% of the common interests in Crown Media
United States owned by Crown Media Holdings
for the entire year ended December 31, 2000, (ii) an additional 55% of the
common interests in Crown Media United States owned by us since May 9, 2000,
when we completed our initial public offering and acquired those additional
interests, (iii) the remaining 22.5% common interests in Crown Media United
States owned by us since March 15, 2001, when we acquired those remaining
common interests, and (iv) the 100% interest in H&H Programming  Asia since
March 15, 2001, when we acquired the remaining 50% interest in that entity.

In connection with our acquisition of The Jim Henson Companys interest in
Crown Media United States in March, 2001, Crown Media United States entered
into a program license agreement with EM.TV & Merchandising AG (EM.TV). Under
the agreement, Crown Media United States licensed family programming from EM.TV
for use on our channels, with the programs to be determined by Crown Media
United States and EM.TV, for a minimum of approximately $1.6 million in license
fees during each year of the term of the agreement. Concurrently, Crown Media
United States licensed, under a separate agreement with The Jim Henson Company,
the non-exclusive, royalty-free right to use in the United States the trademark
Kermit to identify the program block in which the programming licensed from
The Jim Henson Company and EM.TV is broadcast. These agreements were
substantially revised and the license terminated on July 27, 2001. See Note 13
Subsequent Events.

The unaudited pro forma financial information stated below presents a
summary of consolidated results of operations of Crown Media Holdings, Crown
Media International, Crown Media United States and H&H Programming  Asia, as
if each of these acquisitions discussed above had occurred on January 1 of the
periods presented, along with certain pro forma adjustments to give effect to
the amortization of goodwill and other intangibles and other adjustments. The
unaudited pro forma financial information is not necessarily indicative of the results of
operations as they would have been had the transactions been effected on the
assumed dates.

18



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES

PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

|                                                                  |                               |                |                              |        |                    |         |        |                  |             |         |        |        |        |         |        |        |        |         |  
|----------------------------------------------------------------- | ----------------------------- | -------------- | ---------------------------- | ------ | ------------------ | ------- | ------ | ---------------- | ----------- | ------- | ------ | ------ | ------ | ------- | ------ | ------ | ------ | ------- | -
|                                                                  |                               |                |                              |        | Three Months Ended |         |        | Six Months Ended |            
|                                                                  |                               |                |                              |        | June 30,           |         |        | June 30,         |            
|                                                                  |                               |                |                              |        |                    |         |        |                  |            
|                                                                  |                               |                |                              |        | 2000               |         |        | 2001             |             |         | 2000   |        |        | 2001    |       
|                                                                  |                               |                |                              |        |                    |         |        |                  |             |         |        |        |        |         |       
|                                                                  |                               |                |                              |        |                    |         |        |                  | (Unaudited) |        
|Revenues:                                                        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Subscriber fees               |                | $                            | 11,773 |                    |         | $      | 16,712           |             |         | $      | 22,922 |        |         | $      | 32,676 |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Advertising                   |                |                              | 3,045  |                    |         |        | 7,673            |             |         |        | 4,762  |        |         |        | 13,724 |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Advertising by Hallmark Cards |                |                              | 692    |                    |         |        | 1,617            |             |         |        | 1,255  |        |         |        | 2,710  |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Other                         |                |                              | 232    |                    |         |        | 475              |             |         |        | 464    |        |         |        | 497    |       
|                                                                  |                               |                |                              |        |                    |         |        |                  |             |         |        |       
|                                                                  |                               |                | Total revenues               |        |                    | 15,742  |        |                  |             | 26,477  |        |        |        | 29,403  |        |        |        | 49,607  |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Cost of Services:                                                
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Programming costs:           
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                               | Affiliates     |                              |        | 12,054             |         |        |                  | 16,033      |         |        |        | 19,824 |         |        |        | 31,298 |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                               | Non-affiliates |                              |        | 3,376              |         |        |                  | 6,851       |         |        |        | 7,437  |         |        |        | 12,496 |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Operating costs               |                |                              | 16,007 |                    |         |        | 13,234           |             |         |        | 23,841 |        |         |        | 28,282 |       
|                                                                  |                               |                |                              |        |                    |         |        |                  |             |         |        |       
|                                                                  |                               |                | Total cost of services       |        |                    | 31,437  |        |                  |             | 36,118  |        |        |        | 51,102  |        |        |        | 72,076  |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Selling, general and administrative expenses                      |                               |                | 16,450                       |        |                    |         | 23,474 |                  |             |         | 35,435 |        |        |         | 41,408 |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Marketing expenses                                                |                               |                | 5,887                        |        |                    |         | 6,372  |                  |             |         | 9,335  |        |        |         | 16,826 |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Amortization of goodwill and other intangibles                    |                               |                | 5,469                        |        |                    |         | 5,469  |                  |             |         | 10,938 |        |        |         | 10,938 |       
|                                                                  |                               |                |                              |        |                    |         |        |                  |             |         |        |       
|                                                                  |                               |                | Loss from operations         |        |                    | (43,501 | )      |                  |             | (44,956 | )      |        |        | (77,407 | )      |        |        | (91,641 | )
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Interest income (expense), net                                    |                               |                | 58                           |        |                    |         | (1,652 | )                |             |         | (45    | )      |        |         | (2,466 | )     
|                                                                  |                               |                |                              |        |                    |         |        |                  |             |         |        |       
|                                                                  |                               |                | Net loss before income taxes |        |                    | (43,443 | )      |                  |             | (46,608 | )      |        |        | (77,452 | )      |        |        | (94,107 | )
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Income tax provision                                              |                               |                | (318                         | )      |                    |         | (621   | )                |             |         | (551   | )      |        |         | (1,006 | )     
|                                                                  |                               |                |                              |        |                    |         |        |                  |             |         |        |       
|                                                                  |                               |                | Net loss                     |        | $                  | (43,761 | )      |                  | $           | (47,229 | )      |        | $      | (78,003 | )      |        | $      | (95,113 | )
|                                                                  |                               |                |                              |        |                    |         |        |                  |             |         |        |       
|Weighted average number of Class A and Class B shares
Outstanding |                               |                | 65,377                       |        |                    |         | 65,443 |                  |             |         | 65,377 |        |        |         | 65,429 |       
|                                                                  |                               |                |                              |        |                    |         |        |                  |             |         |        |       
|                                                                  |                               |                | Net loss per share           |        | $                  | (0.67   | )      |                  | $           | (0.72   | )      |        | $      | (1.19   | )      |        | $      | (1.45   | )
|                                                                  |                               |                |                              |        |                    |         |        |                  |             |         |        |       

7. Capital Lease

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

|                                            |                              |   |                |        | 
|------------------------------------------- | ---------------------------- | - | -------------- | ------ | 
|                                            |                              |   | As of June 30, |       
|                                            |                              |   |                |       
|                                            |                              |   | 2001           |       
|                                            |                              |   |                |       
|                                            |                              |   | (in thousands) |       
|2001                                        |                              | $ | 1,150          |       
|                                           
|                                           
|                                           
|                                           
|2002                                        |                              |   | 2,300          |       
|                                           
|                                           
|                                           
|                                           
|2003                                        |                              |   | 2,300          |       
|                                           
|                                           
|                                           
|                                           
|2004                                        |                              |   | 2,300          |       
|                                           
|                                           
|                                           
|                                           
|2005                                        |                              |   | 2,300          |       
|                                           
|                                           
|                                           
|                                           
|Thereafter                                  |                              |   | 6,900          |       
|                                            |                              |   |               
|                                            | Total minimum lease payments |   |                | 17,250 | 
|                                           
|                                           
|                                           
|                                           
|Less amount representing interest           |                              |   | (4,590         | )     
|                                            |                              |   |               
|Present value of net minimum lease payments |                              |   | 12,660         |       
|                                           
|                                           
|                                           
|                                           
|Less current maturities                     |                              |   | (1,264         | )     
|                                            |                              |   |               
|Longterm obligation                        |                              | $ | 11,396         |       
|                                            |                              |   |               

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

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

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

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

19



---



##### Table of Contents



9. Related Party Transactions

Costs Incurred on Crown Media Holdings Behalf

Since inception, Hallmark Entertainment has paid certain costs related to
payroll and benefits, insurance, operational and financing expenditures and
capital expenditures on behalf of Crown Media International. These transactions
are recorded in the books and records of Crown Media International. For the
three and six months ended June 30, 2000 and 2001, respectively, no amounts
were paid to Hallmark Entertainment. Unreimbursed costs of $5.4 million and
$1.4 million are included in the item payable to affiliates in the
accompanying consolidated balance sheets as of December 31, 2000, and June 30,
2001, respectively.

Program License Agreement with Hallmark Entertainment Distribution

The primary supplier of programming to Crown Media Holdings is Hallmark
Entertainment Distribution. Crown Media International has a program agreement
with Hallmark Entertainment Distribution through December 31, 2004, which is
renewable through December 31, 2009. 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 distinct 18-month time periods. Crown Media
International also has the exclusive right to exhibit programming in markets
where it does not currently operate, subject to any third party agreement
existing at the time Crown Media International launches in those markets. In
addition, under the agreement, Hallmark Entertainment Distribution is generally
obligated to sell to Crown Media International and Crown Media International is
obligated to purchase all of the programming it produces 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 November 13, 1998. Under the program agreement, Crown
Media United States generally licenses made-for-television movies and
miniseries owned or controlled by Hallmark Entertainment Distribution, as well
as all programming produced by or on behalf of Hallmark Entertainment
Distribution for Crown Media United States. The program agreement has a term of
five years and is automatically renewable for additional three year periods,
subject to rate adjustments, so long as Hallmark Entertainment Distribution, as
applicable, or its affiliates, own 10% or more of Crown Media United States. In
the event that Hallmark Entertainment Distribution owns less than 10% of Crown
Media United States, the remaining term of the applicable program agreement
will be two years from the date its ownership reaches that level.

Programming costs related to the Hallmark program agreements were $5.2
million, $11.9 million, $8.1 million, and $22.9 million, respectively, for the
three and six months ended June 30, 2000 and 2001, respectively. As of December
31, 2000, and June 30, 2001, $109.9 million and $134.1 million, respectively,
are included in license fees payable to affiliates in the accompanying
consolidated balance sheets. We are not paying Hallmark Entertainment
Distribution in accordance with terms of our agreements, pursuant to a waiver
granted to us by Hallmark Entertainment Distribution. These
agreements were amended to defer payments to future dates.

Services Agreement with Hallmark

Hallmark, its subsidiaries and various affiliates, provide Crown Media
Holdings with services that include payroll, legal, financial, tax and other
general corporate services. For the year ended December 31, 2000, and the six
months ended June 30, 2001, Crown Media Holdings has accrued $500,000 and
$250,000, respectively, under the agreement. At both December 31, 2000, and
June 30, 2001, unpaid accrued service fees of $1.6 million and $2.2 million,
respectively, were included in payable to affiliates in the accompanying
consolidated balance sheets.

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. Amounts borrowed under this agreement bear
interest at 130% of the Applicable Federal Rate as set forth in the Internal
Revenue Code (7.96% and 5.41% as of December 31, 2000, and June 30, 2001,
respectively), with the interest compounding on an annual basis. Amounts
outstanding are due on demand. At both December 31, 2000, and June 30, 2001,
principal borrowings under the note were approximately $36.8 million excluding
accrued interest of $520,000.

On February 12, 2001, Crown Media Holdings entered into an agreement with
HC Crown under which HC Crown agreed to lend Crown Media Holdings up to $150.0
million. HC Crowns obligation to make loans under this agreement is supported
by an irrevocable letter of credit from Bank of America. The line of credit
bears an interest rate equal to the London Interbank Offered Rate published on
the first day of each quarter in The Wall Street Journal, plus 1.2% to 2.2%
depending on the ratio of Crown Media Holdings total debt to EBITDA. The
interest rate increases by 0.25% if the note has not been fully repaid by
September 1, 2001 and by 0.5% if the note has not been paid by December 31,
2001. Interest is payable quarterly, and the principal amount with any accrued
interest is due April 1, 2002. As of June 30, 2001, principal borrowings under
the line of credit were approximately $60.5 million

20



---



##### Table of Contents



excluding accrued interest of $782,000. The line of credit contains a
covenant regarding financial information and limitations on additional
indebtedness in excess of $10.0 million, liens for amounts in
excess of $5.0 million, sales or other disposition of assets other than in the ordinary course
of business and a merger or consolidation with a third party. The covenants
also provide that the Company is to obtain minimum quarterly levels of
subscribers, revenues and EBITDA. This agreement was amended to
change certain restrictive covenants.

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. This note
bears interest at 130% of the short-term applicable federal rate, compounded on
an annual basis. Amounts outstanding are due on demand. Interest on this note
is payable within 45 days after the end of each calendar quarter.

Class B Common Stock

Hallmark Entertainment controls all of our outstanding shares of Class B
common stock, representing approximately 90% of the voting power on all matters
submitted to our stockholders. The Class B common stock has certain
preferential rights with respect to the conversion and voting. Each share of
Class B common stock is convertible at the option of the holder into one share
of Class A common stock. Shares of Class B common stock are generally
automatically convertible into Class A common stock upon sale or other transfer
by the selling stockholder. In addition, Class B common stockholders are
entitled to 10 votes per share as compared to the holders of Class A common
stock, who receive one vote per share of Class A common stock. With the
exception of the voting and conversion rights, share of Class A common stock
and shares of Class B common stock are identical.

NICC License Agreements

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

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

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

Crown Media United States also licensed programming for distribution in
the United States from The Jim Henson Company under a program license
agreement, dated November 13, 1998. Under this program agreement, Crown Media
United States generally licensed made-for-television movies and miniseries
owned or controlled by The Jim Henson Company, as well as all programming
produced by or on behalf of The Jim Henson Company for Crown Media United
States. At December 31, 2000, and June 30, 2001, license fees payable to The
Jim Henson Company of $10.0 million and $2.8 million, respectively, were
included in license fees payable to affiliates in the accompanying balance
sheet. This agreement was substantially revised on July 27, 2001. See Note 13
Subsequent Events.

Films Transaction

Note 1 contains a description of the proposed films transaction with
Hallmark Entertainment Distribution.

21



---



##### Table of Contents



10. Income Taxes

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

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

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

Crown Media Holdings has not recorded a tax benefit for federal or state
tax losses. Crown Media Holdings has recorded a tax provision related to
foreign taxes. Crown Media Holdings has established a deferred tax asset,
consisting primarily of net operating losses generated after May 9, 2000, and a
deferred tax liability as required for certain timing items. Crown Media
Holdings has provided a full valuation allowance on the net deferred tax asset
because of uncertainty regarding its realizability.

The income tax provision is comprised of the following:

|          |                 |                |   |                    |     |  |                  |                |     |      |   |     |      |  |   |       |       | 
|--------- | --------------- | -------------- | - | ------------------ | --- |  | ---------------- | -------------- | --- | ---- | - | --- | ---- |  | - | ----- | ----- | 
|          |                 |                |   | Three Months Ended |     |  | Six Months Ended |               
|          |                 |                |   | June 30,           |     |  | June 30,         |               
|          |                 |                |   |                    |     |  |                  |               
|          |                 |                |   | 2000               |     |  | 2001             |                |     | 2000 |   |     | 2001 | 
|          |                 |                |   |                    |     |  |                  |                |     |      |   |     |      | 
|          |                 |                |   |                    |     |  |                  | (In thousands) |    
|Current: 
|         
|         
|         
|         
|          | Federal         |                | $ |                   |     |  | $                |               |     |      | $ |    |      |  | $ |      |      
|         
|         
|         
|         
|          | Foreign         |                |   | 318                |     |  |                  | 621            |     |      |   | 552 |      |  |   | 1,006 |      
|         
|         
|         
|         
|          | State and local |                |   |                   |     |  |                  |               |     |      |   |    |      |  |   |      |      
|          |                 |                |   |                    |     |  |                  |                |     |      |   |    
|          |                 | Total current  |   |                    | 318 |  |                  |                | 621 |      |   |     | 552  |  |   |       | 1,006 | 
|         
|         
|         
|         
|Deferred:
|         
|         
|         
|         
|          | Federal         |                |   |                   |     |  |                  |               |     |      |   |    |      |  |   |      |      
|         
|         
|         
|         
|          | State and local |                |   |                   |     |  |                  |               |     |      |   |    |      |  |   |      |      
|          |                 |                |   |                    |     |  |                  |                |     |      |   |    
|          |                 | Total deferred |   |                    |    |  |                  |                |    |      |   |     |     |  |   |       |      | 
|          |                 |                |   |                    |     |  |                  |                |     |      |   |    
|          |                 | Total          |   | $                  | 318 |  |                  | $              | 621 |      |   | $   | 552  |  |   | $     | 1,006 | 
|          |                 |                |   |                    |     |  |                  |                |     |      |   |    

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

|                                                         |                      |   |                    |     |  |                  |                |     |      |   |         |      |  |   |         |       | 
|-------------------------------------------------------- | -------------------- | - | ------------------ | --- |  | ---------------- | -------------- | --- | ---- | - | ------- | ---- |  | - | ------- | ----- | 
|                                                         |                      |   | Three Months Ended |     |  | Six Months Ended |               
|                                                         |                      |   | June 30,           |     |  | June 30,         |               
|                                                         |                      |   |                    |     |  |                  |               
|                                                         |                      |   | 2000               |     |  | 2001             |                |     | 2000 |   |         | 2001 | 
|                                                         |                      |   |                    |     |  |                  |                |     |      |   |         |      | 
|                                                         |                      |   |                    |     |  |                  | (In thousands) |    
|Taxes computed at 35%                                    |                      | $ | (11,713            | )   |  | $                | (16,313        | )   |      | $ | (16,748 | )    |  | $ | (31,986 | )    
|                                                        
|                                                        
|                                                        
|                                                        
|Net operating losses not benefiting Crown Media Holdings |                      |   | 11,713             |     |  |                  |               |     |      |   | 16,748  |      |  |   |        |      
|                                                        
|                                                        
|                                                        
|                                                        
|Goodwill                                                 |                      |   |                   |     |  |                  | 1,929          |     |      |   |        |      |  |   | 3,178   |      
|                                                        
|                                                        
|                                                        
|                                                        
|Valuation allowance                                      |                      |   |                   |     |  |                  | 14,384         |     |      |   |        |      |  |   | 28,808  |      
|                                                        
|                                                        
|                                                        
|                                                        
|Additional tax on foreign income                         |                      |   | 318                |     |  |                  | 621            |     |      |   | 552     |      |  |   | 1,006   |      
|                                                         |                      |   |                    |     |  |                  |                |     |      |   |         |     
|                                                         | Income tax provision |   | $                  | 318 |  |                  | $              | 621 |      |   | $       | 552  |  |   | $       | 1,006 | 
|                                                         |                      |   |                    |     |  |                  |                |     |      |   |         |     

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

22



---



##### Table of Contents



|                          |                              |                                |   |                |      |   |          |         |      |  
|------------------------- | ---------------------------- | ------------------------------ | - | -------------- | ---- | - | -------- | ------- | ---- | -
|                          |                              |                                |   | As of          |      |   | As of    |        
|                          |                              |                                |   | December 31,   |      |   | June 30, |        
|                          |                              |                                |   | 2000           |      |   | 2001     |        
|                          |                              |                                |   |                |      |   |          |        
|                          |                              |                                |   | (In thousands) |     
|Deferred tax assets:     
|                         
|                         
|                         
|                         
|                          | Deferred revenue             |                                | $ | 285            |      |   | $        | 158     |     
|                         
|                         
|                         
|                         
|                          | Bad debt reserve             |                                |   | 941            |      |   |          | 2,140   |     
|                         
|                         
|                         
|                         
|                          | Accrued compensation         |                                |   | 2,314          |      |   |          | 1,114   |     
|                         
|                         
|                         
|                         
|                          | Net operating loss           |                                |   | 25,463         |      |   |          | 55,188  |     
|                         
|                         
|                         
|                         
|                          | Unconsolidated entity losses |                                |   | 2,699          |      |   |          | 6,025   |     
|                         
|                         
|                         
|                         
|                          | Other                        |                                |   | 399            |      |   |          | 399     |     
|                         
|                         
|                         
|                         
|                          | Valuation allowance          |                                |   | (31,593        | )    |   |          | (64,516 | )   
|                          |                              |                                |   |                |      |  
|                          |                              | Total deferred tax assets      |   |                | 508  |   |          |         | 508  |  
|                         
|                         
|                         
|                         
|Deferred tax liabilities:
|                         
|                         
|                         
|                         
|                          | Depreciation                 |                                |   | (508           | )    |   |          | (508    | )   
|                         
|                         
|                         
|                         
|                          | Other                        |                                |   |               |      |   |          |        |     
|                          |                              |                                |   |                |      |  
|                          |                              | Total deferred tax liabilities |   |                | (508 | ) |          |         | (508 | )
|                          |                              |                                |   |                |      |  
|                          |                              | Net deferred taxes             |   | $              |     |   |          | $       |     |  
|                          |                              |                                |   |                |      |  

As of December 31, 2000, and June 30, 2001, cumulative net tax operating
losses are approximately $63.7 million and $138.0 million and expire in 2020 and
2021.

11. Commitments and Contingencies

On June 6, 2001, Crown Media Holdings received a complaint filed by a
stockholder regarding Crown Media Holdings proposed purchase of approximately
700 film titles and related property and rights from Hallmark Entertainment
Distribution. The complaint was filed before the 2001 Annual Meeting of
stockholders, which was held on June 7th. A vote on the acquisition of the
films was postponed until July 17, 2001, so stockholders could be informed of
this development.

The complaint, filed as a class action on behalf of holders of the
Companys Class A common stock, was brought against Crown Media Holdings, its
directors, Hallmark Cards, Hallmark Entertainment Distribution, and Hallmark
Entertainment for damages, rescission or other relief. The complaint alleges
that the proposed acquisition of the films is the product of an unfair process
designed to be advantageous to Hallmark Cards as the controlling stockholder,
that the price being paid to Hallmark Entertainment Distribution is not
entirely fair and that the proxy statement failed to make certain disclosures.

The parties have agreed in principle to settle the lawsuit. The proposed
settlement provides that the purchase price for the films and related assets
will be reduced by 425,000 shares of Crown Media Holdings Class A common stock.
The proposed settlement is subject to a number of requirements, including
entering into a definitive settlement stipulation, certification of a class
consisting of all owners of Crown Media common stock (excluding the
defendants), and final court approval of the settlement. While it will likely
take a number of months to obtain final court approval of the settlement, the
proposed settlement specifically permits the films transaction to be completed
in the interim. See note 13, Subsequent Events.

12. Operations in Different Geographic Areas

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

All of Crown Media Holdings material operations are part of the domestic
and international pay television programming service industry and, therefore,
Crown Media Holdings reports as two industry segments. 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; and
amortization of goodwill and other intangibles. Home office costs are reflected
in the domestic operating losses and are not allocated internationally):

23



---



##### Table of Contents



|                                  |                                |                           |      |              |  |   |              |               |  |           |       |       |              |  |       |       |       | 
|--------------------------------- | ------------------------------ | ------------------------- | ---- | ------------ |  | - | ------------ | ------------- |  | --------- | ----- | ----- | ------------ |  | ----- | ----- | ----- | 
|                                  |                                |                           |      | Revenue from |  |   | Revenue from |              
|                                  |                                |                           |      | Unrelated    |  |   | Related      |               |  | Operating |       |       | Identifiable | 
|                                  |                                |                           |      | Entities     |  |   | Entities     |               |  | Loss      |       |       | Assets       | 
|                                  |                                |                           |      |              |  |   |              |               |  |           |       |       |              | 
|                                  |                                |                           |      |              |  |   |              | (In millions) | 
|Three Months Ended June 30, 2000:
|                                 
|                                 
|                                 
|                                 
|                                  | Domestic                       |                           | $    | 2.6          |  |   | $            | 1.1           |  |           | $     | (26.3 | )            |  | $     | 130.1 |      
|                                 
|                                 
|                                 
|                                 
|                                  | International                  |                           |      | 9.8          |  |   |              |              |  |           |       | (4.8  | )            |  |       | 32.4  |      
|                                  |                                |                           |      |              |  |   |              |               |  |           |       |      
|                                  |                                | $                         | 12.4 |              |  | $ | 1.1          |               |  | $         | (31.1 | )     |              |  | 162.5 |      
|                                  |                                |                           |      |              |  |   |              |               | 
|Assets not allocated to segments:
|                                 
|                                 
|                                 
|                                 
|                                  | Cash and cash equivalents      |                           |      |              |  |   |              |               |  |           |       |       |              |  |       | 98.3  |      
|                                 
|                                 
|                                 
|                                 
|                                  | Accounts receivable            |                           |      |              |  |   |              |               |  |           |       |       |              |  |       | 20.1  |      
|                                 
|                                 
|                                 
|                                 
|                                  | Goodwill and other intangibles |                           |      |              |  |   |              |               |  |           |       |       |              |  |       | 246.4 |      
|                                  |                                |                           |      |              |  |   |              |               |  |           |       |       |              |  |      
|                                  |                                | Consolidated total assets |      |              |  |   |              |               |  |           |       |       |              |  |       | $     | 527.3 | 
|                                  |                                |                           |      |              |  |   |              |               |  |           |       |       |              |  |      
|Three Months Ended June 30, 2001:
|                                 
|                                 
|                                 
|                                 
|                                  | Domestic                       |                           | $    | 11.6         |  |   | $            | 1.6           |  |           | $     | (37.6 | )            |  | $     | 162.2 |      
|                                 
|                                 
|                                 
|                                 
|                                  | International                  |                           |      | 13.3         |  |   |              |              |  |           |       | (7.4  | )            |  |       | 88.0  |      
|                                  |                                |                           |      |              |  |   |              |               |  |           |       |      
|                                  |                                | $                         | 24.9 |              |  | $ | 1.6          |               |  | $         | (45.0 | )     |              |  | 250.2 |      
|                                  |                                |                           |      |              |  |   |              |               | 
|Assets not allocated to segments:
|                                 
|                                 
|                                 
|                                 
|                                  | Cash and cash equivalents      |                           |      |              |  |   |              |               |  |           |       |       |              |  |       | 5.9   |      
|                                 
|                                 
|                                 
|                                 
|                                  | Accounts receivable            |                           |      |              |  |   |              |               |  |           |       |       |              |  |       | 30.6  |      
|                                 
|                                 
|                                 
|                                 
|                                  | Goodwill and other intangibles |                           |      |              |  |   |              |               |  |           |       |       |              |  |       | 323.7 |      
|                                  |                                |                           |      |              |  |   |              |               |  |           |       |       |              |  |      
|                                  |                                | Consolidated total assets |      |              |  |   |              |               |  |           |       |       |              |  |       | $     | 610.4 | 
|                                  |                                |                           |      |              |  |   |              |               |  |           |       |       |              |  |      
|Six Months Ended June 30, 2000:  
|                                 
|                                 
|                                 
|                                 
|                                  | Domestic                       |                           | $    | 2.6          |  |   | $            | 1.6           |  |           | $     | (35.4 | )            |  | $     | 130.1 |      
|                                 
|                                 
|                                 
|                                 
|                                  | International                  |                           |      | 18.6         |  |   |              |              |  |           |       | (5.0  | )            |  |       | 32.4  |      
|                                  |                                |                           |      |              |  |   |              |               |  |           |       |      
|                                  |                                | $                         | 21.2 |              |  | $ | 1.6          |               |  | $         | (40.4 | )     |              |  | 162.5 |      
|                                  |                                |                           |      |              |  |   |              |               | 
|Assets not allocated to segments:
|                                 
|                                 
|                                 
|                                 
|                                  | Cash and cash equivalents      |                           |      |              |  |   |              |               |  |           |       |       |              |  |       | 98.3  |      
|                                 
|                                 
|                                 
|                                 
|                                  | Accounts receivable            |                           |      |              |  |   |              |               |  |           |       |       |              |  |       | 20.1  |      
|                                 
|                                 
|                                 
|                                 
|                                  | Goodwill and other intangibles |                           |      |              |  |   |              |               |  |           |       |       |              |  |       | 246.4 |      
|                                  |                                |                           |      |              |  |   |              |               |  |           |       |       |              |  |      
|                                  |                                | Consolidated total assets |      |              |  |   |              |               |  |           |       |       |              |  |       | $     | 527.3 | 
|                                  |                                |                           |      |              |  |   |              |               |  |           |       |       |              |  |      
|Six Months Ended June 30, 2001:  
|                                 
|                                 
|                                 
|                                 
|                                  | Domestic                       |                           | $    | 19.1         |  |   | $            | 2.7           |  |           | $     | (73.6 | )            |  | $     | 162.2 |      
|                                 
|                                 
|                                 
|                                 
|                                  | International                  |                           |      | 27.7         |  |   |              |              |  |           |       | (14.7 | )            |  |       | 88.0  |      
|                                  |                                |                           |      |              |  |   |              |               |  |           |       |      
|                                  |                                | $                         | 46.8 |              |  | $ | 2.7          |               |  | $         | (88.3 | )     |              |  | 250.2 |      
|                                  |                                |                           |      |              |  |   |              |               | 
|Assets not allocated to segments:
|                                 
|                                 
|                                 
|                                 
|                                  | Cash and cash equivalents      |                           |      |              |  |   |              |               |  |           |       |       |              |  |       | 5.9   |      
|                                 
|                                 
|                                 
|                                 
|                                  | Accounts receivable            |                           |      |              |  |   |              |               |  |           |       |       |              |  |       | 30.6  |      
|                                 
|                                 
|                                 
|                                 
|                                  | Goodwill and other intangibles |                           |      |              |  |   |              |               |  |           |       |       |              |  |       | 323.7 |      
|                                  |                                |                           |      |              |  |   |              |               |  |           |       |       |              |  |      
|                                  |                                | Consolidated total assets |      |              |  |   |              |               |  |           |       |       |              |  |       | $     | 610.4 | 
|                                  |                                |                           |      |              |  |   |              |               |  |           |       |       |              |  |      

The Asia Pacific market, Latin America market, Turkey and Russia have
experienced illiquidity, volatile currency exchange rates and interest rates,
political and economic conditions, and reduced economic activity. Crown Media
Holdings will be affected in the foreseeable future by economic conditions in
these regions, although it is not possible to predict the extent of such
impact.

No customer accounted for more than 10% of Crown Media Holdings total
revenues for the three and six months ended June 30, 2000 and 2001.

13. Subsequent Events

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. This note
bears interest at 130% of the short-term applicable federal rate, compounded on
an annual basis. Amounts outstanding are due on demand. Interest on this note
is payable within 45 days after the end of each calendar quarter. See Note 9
Related Party Transactions.

At the reconvened 2001 Annual Meeting of stockholders held on July 17,
2001, the stockholders approved with the affirmative vote of 79% of the
outstanding Class A common stock the proposed purchase of approximately 700
film titles and related property and rights from Hallmark Entertainment
Distribution as described in Note 1 under Proposed Films transaction. Crown
Media Holdings expects to close the purchase of the film assets from Hallmark
Entertainment Distribution in August 2001.

On July 27, 2001, Hallmark Entertainment purchased 5,377,721 shares of the
outstanding Class A common stock of Crown Media Holdings from The Jim Henson
Company, a subsidiary of German Media Company EM.TV for $90.0 million.
The shares were originally issued to The Jim Henson Company in March
2001 in exchange for The Jim Henson Companys 22.5% common interest in Crown Media United
States and The Jim Henson Companys interest in H&H Programming-Asia. At the same time, Crown
Media United

24



---



##### Table of Contents



States substantially revised its two program agreements with The Jim Henson Company and
EM.TV, under which Crown Media United States was obligated to purchase both
pre-existing and original programming. The revisions replace all prior
obligations. Crown Media United States will now license only one series from
the EM.TV library and two new series from The Jim Henson Company. For revisions of the
agreements, Crown Media United States paid to The Jim Henson Company and EM.TV $13.0 million.

25



---



##### Table of Contents






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

Overview

Crown Media Holdings owns and operates pay television channels dedicated
to high quality, broad appeal, entertainment programming, in the United States
and in various countries throughout the world. Internationally, the Hallmark
Channel (formerly known as the Hallmark Entertainment Network) is operated and
distributed in more than 100 international markets by Crown Media
International, which commenced operations as a Delaware corporation in June
1995. Domestically, the Hallmark Channel (to be so renamed on August 5, 2001,
from the Odyssey Network) 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, a
subsidiary of Hallmark Cards, Incorporated, Liberty Media Corp., NICC and J. P.
Morgan Partners.

Crown Media Holdings was established as a holding company with no material
assets, liabilities, contingent liabilities or operations prior to the
completion of our reorganization and initial public offering on May 9, 2000.
Therefore, for the periods prior to May 9, 2000, for financial reporting
purposes, we are reporting the assets, liabilities and results of operations of
Crown Media International, as Crown Media Holdings and Crown Media
International were entities under common control before and after the
reorganization.

On May 9, 2000, Crown Media Holdings completed a reorganization in which
all of Crown Media Holdings outstanding shares were exchanged for 100% of
Crown Media International and 77.5% of the common interests in Crown Media
United States. Our consolidated financial statements include
the assets and liabilities of Crown Media International at their historical
carrying values since both we and Crown Media International are entities under
common control before and after the reorganization. The accompanying
consolidated financial statements also include the assets and liabilities and
results of operations of Crown Media Holdings other indirect, wholly and
majority-owned subsidiaries. Additionally, on May 9, 2000, we
acquired Liberty Medias 32.5% interest in Crown Media United
States and NICCs 22.5% interest in Crown Media United States, and included these interests in our
consolidated financial statements at their fair market value using purchase
accounting as of the date of the reorganization. In conjunction with the
reorganization, Crown Media Holdings completed its initial public offering of
10,000,000 shares of Class A common stock at $14 per share. The net proceeds
from this offering, after expenses and underwriting discounts and commissions,
were approximately $125.4 million.

Crown Media United States initially dedicated its pay television channel
in the United States primarily to religious programming. In April 1999, Crown
Media United States relaunched its channel as one dedicated to high-quality
family programming.

Prior to the initial public offering and reorganization, Crown Media
International held a 22.5% common equity interest in Crown Media United States.
The assets and liabilities of Crown Media United States and its subsidiaries
relating to Crown Media Internationals original 22.5% interest in Crown Media
United States are included in Crown Media Holdings consolidated financial
statements at their historical carrying values. Crown Media Internationals 50%
interest in H&H Programming  Asia, which operated The Kermit Channel until
December 2000, was treated as an equity investment until March 15, 2001, in
Crown Media Holdings consolidated financial statements. On March 15, 2001,
Crown Media Holdings acquired from The Jim Henson Company the remaining 22.5% common interests in Crown Media United
States and the remaining 50% interest in H&H Programming  Asia which we did
not previously own, for approximately $85.8 million. In consideration for these
ownership interests, we issued approximately 5.4 million shares of our Class A
common stock to The Jim Henson Company. The acquisition was recorded at fair
market value using purchase accounting as of March 15, 2001.

Recent Developments

Proposed Films Transaction

We have entered into an agreement for the purchase by us from Hallmark
Entertainment Distribution of made-for-television movies, specials, theatrical
films, mini-series, series and made-for-video product consisting of 702 titles,
along with related film properties and rights (the film assets). The film
assets will be subject to any contractual rights previously granted to third
parties. The purchase price for the film assets consists of the following:



| |  |  | The number of shares of Class A Common Stock calculated as
follows with the average stock price meaning the average of the
closing price per share of the Class A Common Stock as reported on
the Nasdaq National Market
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

26



---



##### Table of Contents





| |  |  | System on each trading day during the period beginning on November 6,
2000 (the date on which we publicly announced we were investigating
the possibility of a transaction) and ending on the trading date
immediately prior to the closing date for the films transaction:
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (1) |  | if the average stock price is less than $17.00, then
35,294,118 shares;                                                                                           
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | if the average stock price is greater than $18.70,
then 32,085,562 shares; or                                                                                     
|
| | (3) |  | if the average stock price is at least $17.00, but
not greater than $18.70, then the number of shares shall equal
$600,000,000 divided by the average stock price.



| |  |  | Our assumption or payment of
$120.0 million of debt related to
the film assets payable by Hallmark Entertainment, Inc. and certain
of its affiliates to J.P. Morgan Chase & Company and other lenders
under a credit and security agreement; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our assumption of $100.0 million of payables related to the film
assets.                                                                                                                                                                        

Based on an average stock price of $18.09 from November 6, 2000, to April
10, 2001, when we signed the purchase and sale agreement, we would issue
33,169,794 shares. The value of the stock, based on this average price, would
be $600.0 million, resulting in a total purchase price for the film assets of
approximately $820.0 million. The closing price of shares of Class A common
stock on the closing date may be higher or lower than the average stock price
used in calculating the number of shares of Class A common stock we will issue
in the transaction. Of the shares issued in the transaction, 425,000 shares
will be issued in escrow and will be returned to us if a previously announced,
proposed settlement of a lawsuit related to the films transaction becomes
final.

In connection with the purchase of the film assets, we will enter into
additional agreements, including a service agreement with Hallmark
Entertainment regarding the administration, distribution and exploitation of
the film assets, and amended program agreements between Hallmark Entertainment
Distribution and each of Crown Media International and Crown Media United
States. We and Hallmark Entertainment Distribution will also enter into a
registration rights agreement regarding the shares issued in the films
transaction.

Our stockholders (excluding Hallmark Entertainment Distribution and its
affiliates) approved the films transaction on July 17, 2001.

Re-Branding of International and U.S. Channels

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

EM.TV

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

Network Operations Center

In February 2001, we opened our advanced, fully digital 6,000 square foot
global Network Operations Center (NOC) at our headquarters in Greenwood
Village, Colorado. The NOC enables us to control signal operations for many of
our channels, thereby ensuring high on-air transmission quality, achieving
economies of scale in production and distribution, facilitating the roll-out of
new

27



---



##### Table of Contents



channels, allowing for distribution of programming in digital and other
formats as required in the rapidly evolving broadband environment and enabling
us to provide increased support to our advertisers. The NOC currently has
capacity to distribute thirty-two channels and is distributing our programming
to Europe, Latin America and the Middle East. We intend to distribute our
programming to additional countries (including the U.S.) through the NOC as our
existing arrangements with third party up-link providers expire.

Crown Interactive

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

Revenues

Our revenues consist primarily of subscriber fees and advertising
revenues. Subscriber fees are generally payable to us on a per subscriber
basis by pay television distributors for the right to carry our channels.
Subscriber fee revenue is recorded net of promotional subscribers and
amortization of subscriber acquisition fees. In the United States, we pay
certain television distributors up-front subscriber acquisition fees to carry
our channels. However, distributors in international markets generally do not
require us to pay these fees. 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. Prices vary according to:



| |                                                                        |  | market;                                                                
| | ----------------------------------------------------------------------- |  | -----------------------------------------------------------------------
|
| |                                                                        |  | the relative position in the market of the distributor and the channel;
|
| |                                                                        |  | the packaging arrangements for the channel; and                        
|
| |                                                                        |  | other commercial terms such as platform exclusivity and length of term.
|
| | In some circumstances, distributors provide minimum revenue guarantees.

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



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

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

In markets where regular audience measurements are available, our
advertising rates are calculated on the basis of an agreed upon price per unit
of audience measurement in return for a guaranteed investment level by the
advertiser. In these countries, we commit to provide advertisers certain
rating levels in connection with their advertising. Revenue is recorded net of
estimated shortfalls, which are usually settled by providing the advertiser
additional advertising time. In other markets, our advertising rates are
calculated on the basis of cost per advertising spot or package of advertising
spots, and the price varies by audience level expected (but not measured)

28



---



##### Table of Contents



during a particular time slot. This is the predominant arrangement in the
countries outside the United States in which we sell advertising time.
Advertising rates also vary by time of year based on seasonal changes in
television viewership.

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

Cost of Services

Our cost of services consists primarily of program license fees and the
cost of signal distribution, dubbing and subtitling, and creating the
promotional segments that are aired between programs. New market launches can
require significant up-front investments in program license fees, signal
distribution, dubbing and subtitling, marketing, and promotional segments and
creative production. Initial revenues from new market launches generally trail
expenses by three to six months. We expect cost of services to continue to
increase in the future as we enter new markets and expand programming to
support our advertising strategy.

In addition, in connection with our purchase of film library assets from
Hallmark Entertainment Distribution, we anticipate that we will sign a service
agreement with Hallmark Entertainment Distribution. Under the service
agreement, Hallmark Entertainment Distribution will provide services related to
the administration, distribution and other exploitation of the film library
assets, and we will pay Hallmark Entertainment Distribution approximately $1.5
million per year for up to the three-year term of the agreement.

Goodwill and Other Intangibles

As a result of our acquisitions of all the common interests in Crown Media
United States and H&H Programming-Asia, we have generated a significant amount
of goodwill and other intangibles. We are amortizing the goodwill and other
intangibles from these acquisitions on a straight-line basis over 20 years and
10 years, respectively. The amount of goodwill and other intangibles that we
amortize is treated as a charge against earnings under accounting principles
generally accepted in the United States. In accordance with recent accounting
pronouncements, we will cease after January 1, 2002 the amortization of
goodwill, and we will be required to periodically review whether the value of
our goodwill has been impaired. If we are required to write off our goodwill,
our results of operations, stockholders equity or profitability could be
materially adversely affected. See Recently Issued Accounting Pronouncements
in Note 2 to our Financial Statements included elsewhere in this Report.

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

Income Tax Provision

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

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

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

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

29



---



##### Table of Contents



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

We have generated tax losses since our inception and there is no certainty
that we will generate taxable income in the future. Our policy is to establish
a valuation allowance against our tax credits and tax losses until such time
that realization is reasonably assured.

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

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

Foreign Currency Exchange and Inflation

We plan to enter into hedging transactions to reduce our exposure to
foreign currency exchange rate risks. However, we may continue to experience
economic loss and a negative effect on earnings and equity with respect to our
holdings solely as a result of foreign currency exchange rate fluctuations.
See Forward Looking Statements and Risk Factors  Risks Related to Our
Business  We are subject to the risks of doing business outside the United
States.

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

We have not been materially affected by inflation.

Results of Operations

Three and Six Months Ended June 30, 2001 Compared to Three and Six Months Ended
June 30, 2000

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

Revenues.Total revenues for the three and six months ended June 30, 2001
increased to $26.5 million and $49.5 million from $13.5 million and $22.8
million, which represent increases of $13.0 million, or 96%, and $26.7 million,
or 117%, respectively, over the comparable periods in 2000. Subscriber fees
revenue increased to $16.7 million and $32.6 million from $10.4 million and
$19.1 million, which represent increases of $6.3 million, or 60%, and $13.5
million, or 71%, respectively, over the comparable periods in 2000. The
increased subscriber fees revenue resulted from new market launches and
expanded distribution in existing markets. The number of subscribers to the
Hallmark Channel as of June 30, 2001, increased to 73.1 million from 54.9
million, which represents an increase of 18.2 million, or 33%, over the
comparable period in 2000. As international subscriber fees continue to
experience downward pressure (for the reasons described below) and our
subscriber base expands, we continue to focus on increasing advertising
revenues. Advertising revenues increased to $9.3 million and $16.4 million from
$2.4 million and $2.5 million, which represent increases of $6.9 million, or
292%, and $13.9 million, or 561%, respectively, over the comparable periods in
2000. These increases in advertising revenues reflect our growth in
subscribers, higher advertising rates, channel programming which became more
attractive to advertisers, and expanded sales of advertising time primarily in
the United States, Latin America and the United Kingdom. We received management
fees from The Kermit Channel during the three and six months ended June 30,
2000. As a result of the purchase of The Jim Henson Companys interests and the
collapsing of The Kermit Channel into a block on the Hallmark
Channel, we did not earn management fee revenues for the three and six
months ended June 30, 2001.

30



---



##### Table of Contents



Subscribers of our international channel increased at a higher rate than
international subscriber fees revenue primarily because a number of new
subscribers were added during promotional periods in which fees were reduced or
waived. During the first quarter of 2001, distribution of our international
channel was expanded in Taiwan to approximately 4.0 million subscribers and
launched in South Korea to approximately 1.2 million subscribers. Rates
negotiated for domestic subscriber fees and advertising revenues increased as
a result of our newly executed new distribution agreements. Fifty percent and 56%,
respectively, of total revenues for the three and six months ended June 30,
2001, and 73% and 82%, respectively, of total revenues for the three and six
months ended June 30, 2000, were earned internationally. International fees per
subscriber are expected to experience downward pressure in the future due to
the competitive nature of the industry, the growth of digital cable, the
shift in the industry from subscriber fees revenue to advertising
revenue, and the economic turbulence in certain of our markets.

Ratings on our domestic channel increased over the prior years quarter.
Our Adult 18-54 audience composition in Primetime (Monday through
Sunday 8 
11 p.m.) increased 9%. Our Total Day rating for the second quarter of 2001
matched the rating of the second quarter of 2000, and our Primetime ratings
increased 33% over the second quarter of 2000.

Cost of services.Cost of services for the three and six months ended
June 30, 2001, increased to $36.1 million and $70.8 million from $23.9 million
and $34.7 million, which represent increases of $12.2 million, or 51%, and
$36.1 million, or 104%, respectively, over the comparable periods in 2000.
These increases were due primarily to increases in programming costs for the
aforementioned periods of $12.9 million and $28.1 million, respectively.
Programming costs rose as we invested in additional and higher quality
programming, including the greater use of Hallmark Entertainment titles
necessary to fulfill our programming strategy. We also acquired and continue to amortize
popular programming from third-party suppliers to meet this
strategy. To enhance the quality of our new and existing subscribers'
pay television experience and support the utilization of the Network
Operations Center, we expanded our broadcast operations, contributing
to the rise in our operating costs. Cost of services as a
percentage of total revenue decreased to 136% and 143%, respectively, for the
three and six months ended June 30, 2001, as compared to 177% and 152%,
respectively, for the three and six months ended June 30, 2000. These decreases
were primarily due to the Companys increased employment of in-house resources
to produce interstitials and the utilization of the Network Operations
Center to perform certain playback functions previously provided by third-party
vendors. Total cost of services increased due to our amortizing
additional licensed programming and servicing our expanded markets.

Selling, general and administrative expenses.Selling, general and
administrative expenses for the three and six months ended June 30, 2001,
increased to $23.5 million and $41.2 million from $13.9 million and $20.6
million, which represent increases of $9.6 million, or 68%, and $20.6 million,
or 100%, respectively, over the comparable periods in 2000. These increases
primarily reflect increased costs associated with supporting expanded
distribution in existing markets, supporting new markets and the continued
development of a corporate infrastructure to support increased distribution and
advertising, including expansion of the management team and increased staffing
levels. Selling, general and administrative expenses as a percent of total
revenue decreased to 89% and 83%, respectively, for the three and six months
ended June 30, 2001, as compared to 103% and 90%, respectively, for the three
and six months ended June 30, 2000. These decreases are due to the 96% and
117%, respectively, increases in total revenues noted above and decreases in
travel, entertainment, and other costs.

Marketing expenses.Marketing expenses for the three and six months ended
June 30, 2001, increased to $6.4 million and $16.8 million from $4.9 million
and $5.5 million, which represent increases of $1.5 million, or 31%, and $11.3
million, or 204%, respectively, over the comparable periods in 2000. Marketing
expenses increased in the first and second quarters of 2001 due to
the airing of several movies supported by aggressive
marketing campaigns to drive consumer awareness and the introduction of our new
brand package, which includes branded theme blocks, a new positioning line,
on-air graphics and signature music. The newly redesigned brand began a
worldwide roll-out on November 1, 2000. Additionally, in an
effort to strengthen our domestic brand awareness, we incurred and
will continue to incur expenses related to the promotion and
advertising campaigns supporting our August 5, 2001, relaunch of the
Odyssey Network as the Hallmark Channel.

Amortization of goodwill and other intangibles.Amortization of goodwill
and other intangibles for the three and six months ended June 30, 2001,
increased to $5.5 million and $9.0 million from $2.0 million and $2.4 million,
which represent increases of $3.5 million, or 179%, and $6.6 million, or 279%,
respectively, over the comparable periods in 2000. In conjunction with the
acquisition of an additional 55% common interest in Crown Media United States on May 9, 2000, and the
acquisition of the remaining common interests in Crown Media United States and
H&H Programming  Asia on March 15, 2001, we recorded goodwill in the amount of
$248.8 million and $92.6 million, which are being amortized over 20 years and
10 years, respectively. The amortization of goodwill arising
from past acquisitions will cease as of January 1, 2002, in accordance with
revised accounting standards issued by the Financial Accounting
Standards Board in June 2001. However, goodwill and other intangible
assets will be subject to periodic (at least annual) tests for
impairment and recognition of impairment losses in the future could
be required based on a new methodology for measuring impairments
prescribed by these pronouncements. The revised standards include
transition rules and requirements for identification, valuation and
recognition of a much broader list of intangibles as part of business
combinations than prior practice, most of which will continue to be
amortized. We have not yet fully assessed the impact of these new
standards on our prospective financial statements, but we expect that
the amount and timing of non-cash charges related to intangibles
acquired in business combinations will change significantly from
prior practice.

31



---



##### Table of Contents



Loss from operations.Loss from operations for the three and six months
ended June 30, 2001, increased to $45.0 million and $88.3 million from $31.1
million and $40.4 million, which represent increases of $13.9 million, or 45%,
and $47.9 million, or 119%, respectively, over the comparable periods in 2000.
These increases in loss from operations for the three and six months ended June
30, 2001, were attributable to a combination of the factors discussed above.

Equity in net losses of unconsolidated entities and investment expenses.
Equity in net losses of unconsolidated entities and investment expenses for the
three and six months ended June 30, 2001, decreased to $0 and $655,000 from
$2.4 million and $7.2 million, which represent decreases of $2.4 million, or
100%, and $6.5 million, or 90%, respectively, over the comparable periods in
2000. These decreases were primarily due to the acquisition of Crown Media
United States on May 9, 2000, and the acquisition of the remaining common
interests in Crown Media United States and H&H Programming  Asia on March 15,
2001. We commenced consolidation of Crown Media United States and H&H
Programming  Asia on the dates of the acquisition. Net losses derived from
Crown Media United States and H&H Programming  Asia were recorded under the
equity method of accounting through May 9, 2000, and March 15, 2001,
respectively, and consolidated thereafter.

Interest income (expense), net.Net interest expense for the three and
six months ended June 30, 2001, and the six months ended June 30, 2000, was
$1.7 million, $2.4 million, and $285,000, respectively. Net interest income for
the three months ended June 30, 2000, was $18,000. The increases in net
interest expense were primarily due to increased borrowings to fund operations.

Income tax provision.Income tax provision for the three and six months
ended June 30, 2001, increased to $621,000 and $1.0 million from $318,000 and
$552,000, which represent increases of $303,000, or 95%, and $454,000, or 82%,
respectively, over the comparable periods in 2000. These increases were due to
the tax on the foreign-based income resulting from increased international
subscriber fees revenue discussed above.

Net loss.Net loss for the three and six months ended June 30, 2001,
increased to $47.2 million and $92.4 million from $33.8 million and $48.4
million, which represent increases of $13.4 million, or 40%, and $44.0 million,
or 91%, respectively, over the comparable periods in 2000. These increases in
net loss for the three and six months ended June 30, 2001, were attributable to
a combination of the factors discussed above.

Liquidity and Capital Resources

As of June 30, 2001, we had current obligations representing license fees
for programming payable to affiliates and non-affiliates of $114.2 million and
$18.2 million, respectively. Additionally, we also had obligations as of June
30, 2001, representing notes payable, a line of credit and interest payable to
HC Crown of $98.6 million, subscriber acquisition fees payable of $22.1 million
to a third-party and capital lease obligation of $12.7 million to a
third-party. As of June 30, 2001, receivables were $25.9 million, the current
portion of program license fees was $73.5 million and cash and cash equivalents
were $5.9 million.

Cash used in operating activities was $80.4 million and $56.4 million for
the six months ended June 30, 2001 and 2000, respectively. Net cash used in
operating activities was used primarily to fund operating expenditures related
to net losses of $92.4 million and $48.4 million for the six months ended June
30, 2001 and 2000, respectively. The increases in net losses and cash used in
operating activities were due to our additional investment in higher quality
programming to fulfill our programming strategy, increasing expenses associated
with our expanding management team and staffing levels, and marketing expenses
anticipating our re-launch of the Odyssey Channel as the Hallmark Channel
effective August 5, 2001.

Cash used in investing activities was $8.9 million for the six months
ended June 30, 2001. Cash provided by investing activities was $634,000 for the
six months ended June 30, 2000. The increase in cash used was due to our
receipt of $13.1 million in conjunction with our May 9, 2000, acquisition of
Crown Media United States.

Cash provided by financing activities was $61.0 million and $150.2 million
for the six months ended June 30, 2001 and 2000, respectively. The decrease in
cash provided by financing activities was due to our May 9, 2000, initial
public offering, which resulted in net proceeds of $125.4 million. This
decrease was offset by our $60.5 million increase in borrowings from HC Crown
to fund our operations.

In connection with our growth strategy, we expect that we will continue to
make significant investments in programming, distribution and technology, as
well as additional investments in infrastructure and facilities. We are
currently committed to spend more than $100.0 million for programming over the
next 12 months. We are also committed to four quarterly payments of $6.8

32



---



##### Table of Contents



million for subscriber acquisition fees payable and to pay the other
obligations. We expect to report net losses for the foreseeable
future. A line of credit with HC Crown for $150.0 million is in place to
cover our anticipated needs through March 31, 2002, with a remaining amount
available of $89.5 million, as of June 30, 2001. This line of credit with HC
Crown is payable no later than April 1, 2002. The lenders obligation to make
loans under the line of credit is backed up by a letter of credit issued by
Bank of America.

In July 2001, we entered into an additional line of credit with HC Crown
in the amount of $50.0 million. We are borrowing under this note for working capital
needs and contemplate that this note will remain outstanding after we enter
into the bank credit agreement although the note is payable on demand.

We anticipate closing the acquisition of the film assets from Hallmark
Entertainment Distribution as described above in August 2001. In conjunction
with that transaction, we plan to enter into a credit agreement with a
syndicate of banks, lead by the Chase Manhattan Bank, under which the banks
will extend to us a five-year secured credit facility of up to $300.0 million. A
portion of the borrowings under the bank credit facility will be used to pay
$120.0 million of debt assumed as part of the consideration for acquiring the
film assets and to repay approximately $70.0 million under the line of credit
with HC Crown. It is also anticipated that HC Crown will then enter into a new
line of credit with us for $150.0 million. We believe that, when these
transactions are completed, the 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 December 31, 2002.

We also believe
that the films transaction, if completed, will provide more
flexibility for our future financings.
In addition to the funding to be provided in connection with the anticipated films transaction,
we plan to file with the Securities and Exchange Commission in the second half
of 2001 a shelf registration statement which will allow us to make from time to
time one or more offerings in an aggregate total amount of up to $500.0 million
of our securities. We expect securities covered by the registration statement
will include our common stock, preferred stock, debt securities (which may or
may not be convertible) and warrants to purchase stock. We will explore the
possibility of selling equity and debt securities for part of the total amount
during 2001 using the registration statement, depending on market conditions,
our projected cash needs and other factors. Proceeds from any such offering in
2001 would be used to reduce our bank debt and other then existing indebtedness
and to fund working capital. (This information does not constitute an offer of
any securities for sale.)

As indicated above, whether or not the films transaction described above
is completed, we will need and seek during the next 12 months additional funds
to operate and expand our businesses. Any additional equity financings could
result in dilution to our existing investors. Any debt financings will likely
increase our interest expense and may impose restrictive covenants. There can
be no assurances that we will be able to consummate any proposed equity or debt
financing.




Forward-Looking Statements and Risk Factors

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

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

Risks Relating to Our Business

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

Both our international and domestic channels have a history of net losses
and we expect to continue to report net losses for the foreseeable future. As
of June 30, 2001, we had an accumulated deficit of approximately $342.9 million
and net goodwill and other

33



---



##### Table of Contents



intangibles of approximately $323.7 million. Amortization of goodwill and
other intangibles resulted in a $5.5 million and $9.0.0 million charge to
earnings for the three and six months ended June 30, 2001, respectively.

We cannot assure you that we will achieve or sustain profitability. If we
are not able to achieve or sustain profitability, the trading price of our
Class A common stock may fall significantly.

To diminish our losses and become profitable, we will need to
substantially increase our revenues, particularly advertising revenues. This
will require, among other things, increasing the distribution of our channels,
attracting more viewers to our channels and attracting more advertisers. Risks
associated with these areas of our business are described below.

We will seek in the next 12 months or thereafter to raise additional funds,
which may not be available.

We currently have in place a line of credit with HC
Crown, for up to $150.0
million payable no later than April 1, 2002. The obligations of HC Crown under
this line are supported by an irrevocable letter of credit with Bank of
America. We contemplate the establishment of a credit facility with a group of
banks for up to $300.0 million, the repayment of the existing line of credit with
HC Crown and the establishment of a new line of credit with HC Crown for up to
$150.0 million. In addition, we have a $50.0 million line of credit with HC Crown
payable on demand, which we expect to remain outstanding after establishment of
the above-mentioned bank credit facility. We may also need to raise additional
external funds to operate and expand our business. We may not be able to obtain
the bank credit facility or the replacement line of credit with HC Crown; we
may be required to repay our lines of credit with HC Crown; and we
may not be able to obtain the needed additional funds, through borrowings or
the issuance of additional equity, on acceptable terms or at all. It is a
condition to closing the films transaction that we enter into an agreement to
assume $120.0 million of debt relating to the film assets or that we pay off that
debt.

If we cannot raise needed funds on acceptable terms, we may not be able
to:



| |  |  | complete the films transaction;                                                       
| | - |  | --------------------------------------------------------------------------------------
|
| |  |  | expand our domestic and international distribution as anticipated;                    
|
| |  |  | grow our advertising revenues;                                                        
|
| |  |  | continue our current operations;                                                      
|
| |  |  | remain current with evolving industry standards;                                      
|
| |  |  | take advantage of future opportunities;                                               
|
| |  |  | respond to competitive pressure; or                                                   
|
| |  |  | distribute effectively films that we acquire from Hallmark Entertainment
Distribution.

Because we depend on Hallmark Entertainment for a significant portion of our
programming, the loss or interruption of that programming would disrupt our
operations and services.

We may be unable to implement our operating strategy successfully without
the continued availability and commercial success of programming from Hallmark
Entertainment. If this programming were to become unavailable or unsuccessful
for any reason during the term of the program agreements, we could be unable to
obtain alternative programming of equivalent quality and popularity or on terms
as favorable to us. Consequently, any significant interruption in the supply
of programming from Hallmark Entertainment for any reason could hinder our
ability to attract and retain subscribers, generate revenues and achieve
profitability.

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.

34



---



##### Table of Contents



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 library assets from Hallmark Entertainment Distribution may
be lower than we anticipate.

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

We will initially be dependent on Hallmark Entertainment to distribute and
maximize licensing fees from the film library assets.

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

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

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

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

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

Hallmark Entertainment controls all of our outstanding shares of Class B
common stock and owns directly and indirectly shares of Class A common stock,
representing approximately 90% of the voting power on all matters submitted to
our stockholders. Hallmark Entertainments control could discourage others
from initiating potential merger, takeover or other change of control
transactions that may otherwise be beneficial to our business or holders of
Class A common stock. As a result, the market price of our Class A common
stock could suffer, and our business could suffer. Hallmark Entertainments
control relationship with us also could give rise to conflicts of interest,
including:

35



---



##### Table of Contents





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

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

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

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

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

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

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

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

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

36



---



##### Table of Contents



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

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

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

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

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

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

The amount of our goodwill and other intangibles may hinder our ability to
achieve profitability.

As a result of our acquisitions of all the common interests in Crown Media
United States and H&H Programming-Asia, we have generated a significant amount
of goodwill and other intangibles. We are amortizing the goodwill and other
intangibles from these acquisitions on a straight-line basis over 20 years and
10 years, respectively. The amount of goodwill and other intangibles that we
amortize is treated as a charge against earnings under accounting principles
generally accepted in the United States. In accordance with recent accounting
pronouncements, we will cease after January 1, 2002, the
amortization of this acquired
goodwill, and we will be required to periodically review whether the value of
our goodwill has been impaired. If we are required to write down our goodwill,
our results of operations, stockholders equity or profitability could be
materially adversely affected. See Recently Issued Accounting Pronouncements
in Note 2 to our Financial Statements included elsewhere in this Report.

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.

37



---



##### Table of Contents



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

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

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

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



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

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

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

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

Our programming could be affected by a possible strike of the Screen Actors
Guild or the American Federation of Television and Radio Artists.

The current contract of the Screen Actors Guild (SAG) and American
Federation of Television and Radio Artists (AFTRA) with the motion picture
and television producers expired on June 30, 2001. On July 3, 2001, SAG and
AFTRA reached a tentative, three-year theatrical motion picture and television
production agreement with the Alliance of Motion Picture and Television
Producers (AMPTP). We do not know whether definitive renewal agreements can
be entered into without a strike. Others in the entertainment business might
join any strike. A strike by SAG or AFTRA could affect our ability to acquire
programs in the future or the costs of those programs. Any interruption in
programming or an increase in costs could have a material adverse effect on our
results of operations or financial condition.

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

38



---



##### Table of Contents



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

As of June 30, 2001, our cash, restricted cash, cash equivalents and
short-term investments had a fair value of $6.2 million. Of that amount, all
was invested in cash and short-term commercial paper. The primary purpose of
these investing activities has been to preserve principal until the cash is
required to fund operations. Consequently, the size of this portfolio
fluctuates significantly as cash is raised and used in our business.

The value of certain investments in this portfolio can be impacted by the
risk of adverse changes in securities and economic markets and interest rate
fluctuations. At June 30, 2001, all of our investments in this category were in
fixed rate instruments or money market type accounts. A decrease in interest
rates has the effect of reducing our future annual interest income from this
portfolio, since funds would be reinvested at lower rates as the instruments
mature. Over time, any net percentage decrease in our interest rates could be
reflected in a corresponding net percentage decrease in our interest income.
For the three months ended June 30, 2001, the impact of interest rate
fluctuations, changed business prospects and all other factors did not have a
material impact on the fair value of this portfolio, or on our income derived
from this portfolio.

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

As of June 30, 2001, we estimated the fair value of our debt and other
notes payable (including affiliates), excluding accrued interest, to be approximately $112.8 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 $610,000. These calculations include the assumption that the balance of our outstanding
debt as of June 30, 2001, would not change during the six months and that a
yearly interest rate was used. To the extent interest rates increase, our costs
of financing would increase at such time as we are required to refinance our
debt.

We are exposed to market risk.

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

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

39



---



##### Table of Contents



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

Our interest income and expense is subject to fluctuations in interest rates.

Our material interest bearing assets consisted of cash equivalents,
restricted cash, and short-term investments. The balance of our interest
bearing assets was $6.2 million, or 1% of total assets, as of June 30, 2001.
Our material liabilities subject to interest rate risk consisted of notes
payable to HC Crown Corporation and a capital lease obligation. The balance of
those liabilities was $111.3 million, or 32% of total liabilities, as of June
30, 2001. Net interest expense for the three and six months ended June 30,
2001, was $1.7 million, or 6%, and $2.4 million, or 5%, respectively, of our
total revenues. Our net interest expense is sensitive to changes in the general
level of interest rates, primarily U.S. interest rates. In this regard, changes
in U.S. interest rates affect the interest bearing assets and our borrowings.

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

We will evaluate our foreign currency exposure on a net basis. We receive
subscriber fees revenue from countries throughout the world. Increasingly,
however, these revenues are being offset by expenses arising from our foreign
facilities as well as non-U.S. dollar expenses. Currently, our foreign expenses
exceed our revenues. As a result, our financial results could be significantly
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in the foreign markets in which our services are sold. We
are exposed to changes in exchange rates in Latin America, Europe, Asia, and
Africa. Our exposure to foreign exchange rates primarily exists with the
British pound. When the U.S. dollar strengthens against the currencies in these
countries, the U.S. dollar value of non-U.S. dollar-based revenues decreases;
when the U.S. dollar weakens, the U.S. dollar value of non-U.S. dollar-based
revenues increases. Accordingly, changes in exchange rates, and in particular,
a strengthening of the U.S. dollar, may adversely affect our revenues as
expressed in U.S. dollars.




PART II: OTHER INFORMATION




ITEM 1. Legal Proceedings

On June 6, 2001, we received a legal complaint from a stockholder
regarding the films transaction. The lawsuit was filed on that date in the
court of Chancery in the State of Delaware for New Castle County and names as
defendants us, all of our directors (including one director who had previously
resigned on May 3, 2001, due to new employment responsibilities), Hallmark
Cards, Hallmark Entertainment Distribution and Hallmark Entertainment. The
complaint, filed as a purported class action on behalf of holders of the
Companys Class A common stock as well as a derivative action on behalf of
Crown Media Holdings, requests rescission of the films transaction, an award of
damages to the purported class or other relief. The plaintiff alleges that the
proposed films transaction is the product of an unfair process designed to
advantage Hallmark Cards as the controlling stockholder and that the price
being paid to Hallmark Entertainment Distribution is not entirely fair. In
that regard, the complaint alleges that the independent committee formed by our
Board of Directors did not function properly and failed to provide a
disinterested mechanism to obtain a fair arms length transaction with Hallmark
Entertainment Distribution, that the financial adviser and counsel were not
independent and that the financial advisers opinion was insufficient and
unreliable. The complaint also alleges that the issuance of shares of Class A
common stock to Hallmark Entertainment Distribution in the transaction will
allow Hallmark Cards to have control of the vote of our Class A common stock in
the event of a separate class vote. In addition, the complaint alleges that
the defendants breached a duty of disclosure by failing to disclose in the
proxy statement all material facts in connection with the films transaction. A
copy of the complaint is available from the Registers office of the Delaware
Court of Chancery for New Castle County, Civil Action No. 18949.

In June, 2001, we, Hallmark Cards and the other defendants and the
plaintiff entered into a memorandum of understanding stating an agreement in
principle on a settlement of the lawsuit concerning the films transaction. The
memorandum of understanding provides that the purchase price for the film
assets will be reduced by 425,000 shares of Class A common stock. At the
closing of the films transaction, these shares are to be placed in escrow
pending release to us if there is final court approval of the settlement. (If
the settlement is not approved by the court, then the shares will be
transferred to Hallmark Cards.) As required by the memorandum of
understanding, we also conferred with the plaintiffs counsel regarding the
information disclosed in a supplement to the proxy statement for the Annual
Meeting of stockholders at which the films transaction was considered.
Attorneys fees for the plaintiff in an amount determined by the court will be
paid by us. We will also pay the cost of notices in the settlement.

40



---



##### Table of Contents



The memorandum of understanding provides that all defendants have denied,
and continue to deny, that they have committed any violations of law and that
they are entering into the settlement solely because the proposed settlement
would eliminate the burden, expense, and distraction of further litigation, and
would permit the films transaction to proceed without risk of injunctive or
other relief.

The memorandum of understanding provides that the parties will attempt in
good faith to enter into a stipulation of settlement and to present the
settlement to the court for hearing and approval as soon as practicable, and
that, following appropriate notice to our stockholders, the parties will use
their best efforts to obtain final court approval of the settlement including
that the lawsuit will be dismissed with prejudice. The memorandum of
understanding contemplates that prior to the settlement, a class consisting of
all record owners and beneficial owners of our common stock on any day from
November 6, 2000 (the date that the films transaction was publicly announced)
to and including the date of the mailing of the notice of settlement, other
than the defendants, will be certified by the court. The memorandum of
understanding provides that all claims, rights and causes of action against us,
our officers, directors, employees, agents, attorneys, investment bankers and
other related parties that arise out of the events alleged in the lawsuit will
be released if the settlement receives final court approval. The memorandum of
understanding will be terminated if the films transaction is not effectuated
for any reason or if the final court approval of the settlement does not occur
for any reason.

Our stockholders (excluding Hallmark Entertainment Distribution and its
affiliates) approved the films transaction at the reconvened Annual Meeting on
July 17, 2001. The memorandum of understanding permits the closing of the
films transaction prior to the settlement becoming final. Because of the
importance of the films transaction, we intend to close the transaction as soon
as practical.




ITEM 2. Changes in Securities and Use of Proceeds

On March 15, 2001, we issued 5,377,721 shares of our Class A common stock
to The Jim Henson Company. All of these shares were issued in exchange for the
interests of The Jim Henson Company in Crown Media United States (formerly
Odyssey Holdings) and in H&H Programming-Asia. The issuance of the shares was
exempt from registration under the Securities Act pursuant to Section 4(2) and
Rule 506 promulgated thereunder. We relied upon certain representations and
warranties made by The Jim Henson Company in claiming an exemption from
registration. On July 27, 2001, Hallmark Entertainment purchased the
5,377,721 shares of the outstanding Class A common stock of Crown
Media Holdings from The Jim Henson Company, a subsidiary of EM.TV
&
Merchandising AG.




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

The 2001 annual meeting of stockholders was held on June 7, 2001, and
reconvened on July 17, 2001. The following proposals were voted upon at the
meeting, with the following number of votes cast for, against or withheld:

Proposal One  Approval of the Acquisition by Crown Media Holdings, Inc.
of Film Assets from Hallmark Entertainment Distribution, LLC, including the
issuance of 32,085,562 to 35,294,118 shares of Class A Stock:

|           |  |               |     |  |                                  |  |           | 
|---------- |  | ------------- | --- |  | -------------------------------- |  | --------- | 
|Votes For  |  | Votes Against |     |  | Abstentions and Broker Non-Votes | 
|           |  |               |     |  |                                  | 
|27,707,477 |  |               | 400 |  |                                  |  | 5,380,921 | 

41



---



##### Table of Contents



Proposal Two  Election of Ten Directors

|                        |  |           |            |  |                |  |           |                  |  |                 |     | 
|----------------------- |  | --------- | ---------- |  | -------------- |  | --------- | ---------------- |  | --------------- | --- | 
|                        |  |           |            |  |                |  |           |                  |  | Abstentions and |    
|Name                    |  | Votes For |            |  | Votes Withheld |  |           | Broker Non-Votes | 
|                        |  |           |            |  |                |  |           |                  | 
|Wilford V. Bane, Jr.    |  |           | 28,054,893 |  |                |  | 119,600   |                  |  |                 | -0- | 
|                       
|                       
|                       
|                       
|Arnold L. Chavkin       |  |           | 28,055,493 |  |                |  | 119,000   |                  |  |                 | -0- | 
|                       
|                       
|                       
|                       
|Robert J. Druten        |  |           | 26,963,721 |  |                |  | 1,210,772 |                  |  |                 | -0- | 
|                       
|                       
|                       
|                       
|David J. Evans          |  |           | 26,963,721 |  |                |  | 1,210,772 |                  |  |                 | -0- | 
|                       
|                       
|                       
|                       
|Robert A. Halmi, Jr.    |  |           | 26,963,721 |  |                |  | 1,210,772 |                  |  |                 | -0- | 
|                       
|                       
|                       
|                       
|Donald J. Hall, Jr.     |  |           | 26,963,721 |  |                |  | 1,210,772 |                  |  |                 | -0- | 
|                       
|                       
|                       
|                       
|Irvine O. Hockaday, Jr. |  |           | 26,963,721 |  |                |  | 1,210,772 |                  |  |                 | -0- | 
|                       
|                       
|                       
|                       
|David B. Koff           |  |           | 28,055,193 |  |                |  | 119,300   |                  |  |                 | -0- | 
|                       
|                       
|                       
|                       
|Peter A. Lund           |  |           | 26,770,654 |  |                |  | 1,403,839 |                  |  |                 | -0- | 
|                       
|                       
|                       
|                       
|John P. Mascotte        |  |           | 28,055,193 |  |                |  | 119,300   |                  |  |                 | -0- | 

Proposal Three  Approval of Amendment to the Amended and Restated
Certificate of Incorporation of Crown Media Holdings, Inc. to Increase the
Authorized Number of Shares of Class A Common Stock to 200,000,000:

|           |  |               |        |  |                                  |  |       | 
|---------- |  | ------------- | ------ |  | -------------------------------- |  | ----- | 
|Votes For  |  | Votes Against |        |  | Abstentions and Broker Non-Votes | 
|           |  |               |        |  |                                  | 
|26,160,193 |  |               | 11,800 |  |                                  |  | 2,500 | 

Proposal Four  Ratification of Amendment to the Amended and Restated
Crown Media Holdings, Inc. 2000 Long Term Incentive Plan:

|           |  |               |           |  |                                  |  |       | 
|---------- |  | ------------- | --------- |  | -------------------------------- |  | ----- | 
|Votes For  |  | Votes Against |           |  | Abstentions and Broker Non-Votes | 
|           |  |               |           |  |                                  | 
|26,909,207 |  |               | 1,172,531 |  |                                  |  | 2,505 | 

42



---



##### Table of Contents






ITEM 6. Exhibits and Reports on Form 8-K

(a)

INDEX TO EXHIBITS

|        |  |                                                                                                                                                                                                                        
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|Number  |  | Description                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                        
|3.1     |  | Amended and Restated Certificate of Incorporation (previously filed
as Exhibit 3.1 to our Registration Statement on Form S-1/A
(Amendment No. 2), Commission File No. 333-95573, and
incorporated herein by reference).
|       
|       
|       
|       
|3.2     |  | Amendment to the Amended and Restated Certificate of Incorporation,
as filed with the State of Delaware on June 7, 2001.                                                                                               
|       
|       
|       
|       
|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, incorporated herein by
Reference).                          
|       
|       
|       
|       
|10.1    |  | $50,000,000 Promissory Note, dated July 10, 2001, of Crown Media Holdings to HC Crown Corporation.                                                                                                                     
|       
|       
|       
|       
|10.2    |  | Amendment No. 1, effective as of  June 30, 2001, to the
Promissory Note, dated February 12, 2001, made by Crown Media
Holdings, Inc. in favor of HC Crown Corporation.                                                 
|       
|       
|       
|       
|99      |  |  Press Releases of Crown Media Holdings, Inc. dated May 23, 2000,
May 30, 2001, June 1, 2001, June 4, 2001,
June 8, 2001, July 2, 2001, and July 30, 2001.                                                            

(b)   Reports on Form 8-K

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



| |  | Report filed April 19, 2001 (dated April 12, 2001) regarding Item 5;
|- |  | --------------------------------------------------------------------
| 
| |  | Report filed April 25, 2001 (dated April 25, 2001) regarding Item 5;
| 
| |  | Report filed May 31, 2001 (dated May 31, 2001) regarding Item 5; and
| 
| |  | Report filed June 11, 2001 (dated June 8, 2001) regarding Item 5.   

43



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Date: July 31, 2001

|                                                                                                              
|--------------------------------------------------------------------------------------------------------------
|CROWN MEDIA HOLDINGS, INC                                                                                     
|                                                                                                              
|/s/ DAVID J. EVANS
David J. EvansPresident, Chief Executive Officer
and Director
(Principal Executive Officer)

Date: July 31, 2001

|                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------
|/s/ WILLIAM J. ALIBER
William J. AliberExecutive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)

44



---



##### 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.                                                                                               
|       
|       
|       
|       
|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, incorporated herein by
Reference).                         
|       
|       
|       
|       
|10.1    |  | $50,000,000 Promissory Note, dated July 10, 2001, of Crown Media
Holdings to HC Crown Corporation.                                                                                                                     
|       
|       
|       
|       
|10.2    |  | Amendment No. 1, effective as of  June 30, 2001, to the
Promissory Note, dated February 12, 2001, made by Crown Media
Holdings, Inc. in favor of HC Crown Corporation.                                                 
|       
|       
|       
|       
|99      |  |  Press Releases of Crown Media Holdings, Inc. dated May 23, 2000,
May 30, 2001, June 1, 2001, June 4, 2001,
June 8, 2001, July 2, 2001, and July 30, 2001.                                                            

45