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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended March 31, 2003

or

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

For the transition period from
          to          .

Commission File Number: 000-30700

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

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

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

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

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

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

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

As of May 9, 2003, the number of shares of Class A Common Stock, $.01 par value
outstanding was 73,794,606, and the number of shares of Class B Common Stock,
$.01 par value, outstanding was 30,670,422.



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TABLE OF CONTENTS



|                                                  |                                                                                               |                                                                         |  |  |  |  |  | 
|------------------------------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                    
|                                                  | Item 1. Financial Statements (Unaudited)                                                     
|                                                  |                                                                                               | CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
|                                                  |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS           
|                                                  |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS                                  
|                                                  |                                                                                               | CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS         
|                                                  | ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                  | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                                  | Item 4. Controls and Procedures.                                                             
|PART II. OTHER INFORMATION                       
|                                                  | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                       
|EX-10.2 Binding Memorandum of Understanding      
|EX-10.3 Binding Memorandum of Understanding      
|EX-10.4 Technical Services Agreement             
|EX-10.5 March 11, 2003, Amendment to Agreement   
|EX-10.6 Employment Adgreement - David Kenin      
|EX-10.7 Employment Adgreement - William Abbott   
|EX-99.1 Section 906 Certifications of CEO and CFO



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TABLE OF CONTENTS

|           |  |                                                                                       |  |                                                                                |    |      |   | 
|---------- |  | ------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------ | -- | ---- | - | 
|           |  |                                                                                       |  |                                                                                |    | Page
|           |  |                                                                                       |  |                                                                                |    |     
|PART I     |  | Financial Information                                                                 |  |                                                                                |    |     
|Item 1     |  | Financial Statements (Unaudited)                                                      |  |                                                                                | 3  |     
|           |  |                                                                                       |  | CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES                                    |    |      |   | 
|           |  |                                                                                       |  | Consolidated Balance Sheets  December 31, 2002 and March 31, 2003 (Unaudited) |    |      | 3 | 
|           |  |                                                                                       |  | Consolidated Statements of Operations and Comprehensive Loss (Unaudited)       |    |      | 4 | 
|           |  |                                                                                       |  |  Three Months Ended March 31, 2002 and 2003                                   |    |      |   | 
|           |  |                                                                                       |  | Consolidated Statements of Cash Flows (Unaudited)                              |    |      | 5 | 
|           |  |                                                                                       |  |  Three Months Ended March 31, 2002 and 2003                                   |    |      |   | 
|           |  |                                                                                       |  | Condensed Notes to Unaudited Consolidated Financial Statements                 |    |      | 6 | 
|Item 2     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |                                                                                | 21 |     
|Item 3     |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |                                                                                | 35 |     
|Item 4     |  | Controls and Procedures                                                               |  |                                                                                | 37 |     
|PART II    |  | Other Information                                                                     |  |                                                                                | 38 |     
|Item 6     |  | Exhibits and Reports on Form 8-K                                                      |  |                                                                                | 38 |     
|Signatures |  |                                                                                       |  |                                                                                | 39 |     

2



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

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

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




PART I. FINANCIAL INFORMATION




Item 1.Financial Statements (Unaudited)




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

|                                                                                                                                                             |                                            |                                      |           |                    |  |                 |           |             |  | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------------------------------------ | --------- | ------------------ |  | --------------- | --------- | ----------- |  | 
|                                                                                                                                                             |                                            |                                      |           | As of December 31, |  | As of March 31,
|                                                                                                                                                             |                                            |                                      |           | 2002               |  | 2003           
|                                                                                                                                                             |                                            |                                      |           |                    |  |                
|                                                                                                                                                             |                                            |                                      |           |                    |  |                 |           | (Unaudited)
|                                                                                                                                                             |                                            | ASSETS                               |           |                    |  |                 |           |             |  | 
|Cash and cash equivalents                                                                                                                                    |                                            | $                                    | 335       |                    |  | $               | 7,281     |            
|Accounts receivable, less allowance for doubtful accounts of $7,516 and $8,447,
respectively                                                                 |                                            |                                      | 41,629    |                    |  |                 | 41,099    |            
|Program license fees  affiliates, net of accumulated amortization                                                                                           |                                            |                                      | 12,632    |                    |  |                 | 21,552    |            
|Program license fees  non-affiliates, net of accumulated amortization                                                                                       |                                            |                                      | 46,557    |                    |  |                 | 55,065    |            
|Subtitling and dubbing, net of accumulated amortization                                                                                                      |                                            |                                      | 3,265     |                    |  |                 | 2,807     |            
|Prepaids and other assets                                                                                                                                    |                                            |                                      | 12,837    |                    |  |                 | 11,430    |            
|                                                                                                                                                             |                                            |                                      |           |                    |  |                 |           |            
|                                                                                                                                                             | Total current assets                       |                                      |           | 117,255            |  |                 |           | 139,234     | 
|Restricted cash                                                                                                                                              |                                            |                                      | 340       |                    |  |                 | 340       |            
|Program license fees  affiliates, net of current portion                                                                                                    |                                            |                                      | 37,318    |                    |  |                 | 31,097    |            
|Program license fees  non-affiliates, net of current portion                                                                                                |                                            |                                      | 51,470    |                    |  |                 | 60,880    |            
|Subtitling and dubbing, net of current portion                                                                                                               |                                            |                                      | 1,051     |                    |  |                 | 1,051     |            
|Film assets, net of accumulated amortization                                                                                                                 |                                            |                                      | 786,826   |                    |  |                 | 780,535   |            
|Subscriber acquisition fees, net of accumulated amortization                                                                                                 |                                            |                                      | 140,265   |                    |  |                 | 133,686   |            
|Property and equipment, net of accumulated depreciation                                                                                                      |                                            |                                      | 35,612    |                    |  |                 | 33,618    |            
|Goodwill                                                                                                                                                     |                                            |                                      | 314,033   |                    |  |                 | 314,033   |            
|Debt issuance costs, net of accumulated amortization                                                                                                         |                                            |                                      | 6,309     |                    |  |                 | 5,932     |            
|Prepaids and other assets, net of current portion                                                                                                            |                                            |                                      | 1,783     |                    |  |                 | 1,721     |            
|                                                                                                                                                             |                                            |                                      |           |                    |  |                 |           |            
|                                                                                                                                                             | Total assets                               |                                      | $         | 1,492,262          |  |                 | $         | 1,502,127   | 
|                                                                                                                                                             |                                            |                                      |           |                    |  |                 |           |            
|                                                                                                                                                             |                                            | LIABILITIES AND STOCKHOLDERS EQUITY |           |                    |  |                 |           |             |  | 
|LIABILITIES:                                                                                                                                                 |                                            |                                      |           |                    |  |                 |           |            
|Accounts payable and accrued liabilities                                                                                                                     |                                            | $                                    | 47,425    |                    |  | $               | 34,449    |            
|Subscriber acquisition fees payable                                                                                                                          |                                            |                                      | 45,930    |                    |  |                 | 36,991    |            
|License fees payable to affiliates                                                                                                                           |                                            |                                      | 8,104     |                    |  |                 | 15,544    |            
|License fees payable to non-affiliates                                                                                                                       |                                            |                                      | 50,652    |                    |  |                 | 53,015    |            
|Payables to affiliates                                                                                                                                       |                                            |                                      | 6,680     |                    |  |                 | 6,148     |            
|Interest payable to HC Crown                                                                                                                                 |                                            |                                      | 10        |                    |  |                 | 415       |            
|Credit facility and interest payable                                                                                                                         |                                            |                                      | 871       |                    |  |                 | 784       |            
|Capital lease obligation                                                                                                                                     |                                            |                                      | 1,433     |                    |  |                 | 1,464     |            
|Deferred programming revenue                                                                                                                                 |                                            |                                      | 599       |                    |  |                 | 273       |            
|                                                                                                                                                             |                                            |                                      |           |                    |  |                 |           |            
|                                                                                                                                                             | Total current liabilities                  |                                      |           | 161,704            |  |                 |           | 149,083     | 
|Accrued liabilities, net of current portion                                                                                                                  |                                            |                                      | 31,385    |                    |  |                 | 23,861    |            
|Subscriber acquisition fees payable, net of current portion                                                                                                  |                                            |                                      | 2,624     |                    |  |                 | 1,032     |            
|License fees payable to affiliates, net of current portion                                                                                                   |                                            |                                      | 60,229    |                    |  |                 | 60,229    |            
|License fees payable to non-affiliates, net of current portion                                                                                               |                                            |                                      | 39,206    |                    |  |                 | 49,199    |            
|Note payable to HC Crown                                                                                                                                     |                                            |                                      | 5,000     |                    |  |                 | 54,500    |            
|Payable to Hallmark Entertainment Holdings, Inc.                                                                                                             |                                            |                                      | 52,052    |                    |  |                 | 52,052    |            
|Payable to Hallmark Entertainment, Inc.                                                                                                                      |                                            |                                      | 47,948    |                    |  |                 | 47,948    |            
|Credit facility, net of current portion                                                                                                                      |                                            |                                      | 320,000   |                    |  |                 | 320,000   |            
|Capital lease obligation, net of current portion                                                                                                             |                                            |                                      | 9,290     |                    |  |                 | 8,912     |            
|Convertible debt                                                                                                                                             |                                            |                                      | 47,916    |                    |  |                 | 49,322    |            
|Derivative liability                                                                                                                                         |                                            |                                      | 762       |                    |  |                 | 1,018     |            
|                                                                                                                                                             |                                            |                                      |           |                    |  |                 |           |            
|                                                                                                                                                             | Total liabilities                          |                                      |           | 778,116            |  |                 |           | 817,156     | 
|COMMITMENTS AND CONTINGENCIES                                                                                                                                |                                            |                                      |           |                    |  |                 |           |            
|GUARANTEED PREFERRED BENEFICIAL INTEREST IN CROWN MEDIA
TRUSTS DEBENTURES                                                                                   |                                            |                                      | 221,551   |                    |  |                 | 228,638   |            
|PREFERRED MINORITY INTEREST                                                                                                                                  |                                            |                                      | 25,000    |                    |  |                 | 25,000    |            
|STOCKHOLDERS EQUITY:                                                                                                                                        |                                            |                                      |           |                    |  |                 |           |            
|Class A common stock, $.01 par value; 200,000,000 shares authorized; issued
and outstanding shares of 73,794,606; as of December 31, 2002 and March 31,
2003 |                                            |                                      | 738       |                    |  |                 | 738       |            
|Class B common stock, $.01 par value; 120,000,000 shares authorized; issued and
outstanding shares of 30,670,422 as of December 31, 2002 and March 31, 2003  |                                            |                                      | 307       |                    |  |                 | 307       |            
|Paid-in capital                                                                                                                                              |                                            |                                      | 1,259,242 |                    |  |                 | 1,269,895 |            
|Accumulated other comprehensive income                                                                                                                       |                                            |                                      | 647       |                    |  |                 | 422       |            
|Accumulated deficit                                                                                                                                          |                                            |                                      | (793,339  | )                  |  |                 | (840,029  | )          
|                                                                                                                                                             |                                            |                                      |           |                    |  |                 |           |            
|                                                                                                                                                             | Total stockholders equity                 |                                      |           | 467,595            |  |                 |           | 431,333     | 
|                                                                                                                                                             |                                            |                                      |           |                    |  |                 |           |            
|                                                                                                                                                             | Total liabilities and stockholders equity |                                      | $         | 1,492,262          |  |                 | $         | 1,502,127   | 
|                                                                                                                                                             |                                            |                                      |           |                    |  |                 |           |            

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

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

|                                                                                     |                                                       |                |                          |        |                              |         |         |        |        |         |  
|------------------------------------------------------------------------------------ | ----------------------------------------------------- | -------------- | ------------------------ | ------ | ---------------------------- | ------- | ------- | ------ | ------ | ------- | -
|                                                                                     |                                                       |                |                          |        | Three Months Ended March 31,
|                                                                                     |                                                       |                |                          |        |                             
|                                                                                     |                                                       |                |                          |        | 2002                         |         | 2003   
|                                                                                     |                                                       |                |                          |        |                              |         |        
|                                                                                     |                                                       |                |                          |        | (Unaudited)                 
|Revenue:                                                                             |                                                       |                |                          |        |                              |         |         |       
|                                                                                     | Subscriber fees                                       |                | $                        | 17,907 |                              |         | $       | 16,026 |       
|                                                                                     | Advertising                                           |                |                          | 13,400 |                              |         |         | 22,009 |       
|                                                                                     | Advertising by Hallmark Cards                         |                |                          | 1,170  |                              |         |         | 350    |       
|                                                                                     | Licensing fees                                        |                |                          | 6,979  |                              |         |         | 3,539  |       
|                                                                                     | Other revenue                                         |                |                          | 13     |                              |         |         | 34     |       
|                                                                                     |                                                       |                |                          |        |                              |         |         |       
|                                                                                     |                                                       |                | Total revenue            |        |                              | 39,469  |         |        |        | 41,958  |  
|Cost of Services:                                                                    |                                                       |                |                          |        |                              |         |         |       
|                                                                                     | Programming costs:                                    |                |                          |        |                              |         |         |        |       
|                                                                                     |                                                       | Affiliates     |                          |        | 10,382                       |         |         |        | 8,737  |        
|                                                                                     |                                                       | Non-affiliates |                          |        | 13,369                       |         |         |        | 14,706 |        
|                                                                                     | Amortization of film library                          |                |                          | 7,248  |                              |         |         | 6,777  |       
|                                                                                     | Subscriber acquisition fee expense                    |                |                          | 4,247  |                              |         |         | 5,996  |       
|                                                                                     | Depreciation and amortization of technical facilities |                |                          | 1,186  |                              |         |         | 1,185  |       
|                                                                                     | Operating costs                                       |                |                          | 13,225 |                              |         |         | 10,492 |       
|                                                                                     |                                                       |                |                          |        |                              |         |         |       
|                                                                                     |                                                       |                | Total cost of services   |        |                              | 49,657  |         |        |        | 47,893  |  
|Selling, general and administrative expense                                          |                                                       |                | 16,567                   |        |                              |         | 14,165  |       
|Marketing expense                                                                    |                                                       |                | 9,794                    |        |                              |         | 5,439   |       
|Depreciation and amortization expense                                                |                                                       |                | 2,220                    |        |                              |         | 2,423   |       
|                                                                                     |                                                       |                |                          |        |                              |         |         |       
|                                                                                     |                                                       |                | Loss from operations     |        |                              | (38,769 | )       |        |        | (27,962 | )
|Guaranteed preferred beneficial accretion                                            |                                                       |                | (10,602                  | )      |                              |         | (11,047 | )     
|Interest expense and other, net                                                      |                                                       |                | (6,090                   | )      |                              |         | (7,342  | )     
|                                                                                     |                                                       |                |                          |        |                              |         |         |       
|                                                                                     |                                                       |                | Loss before income taxes |        |                              | (55,461 | )       |        |        | (46,351 | )
|Income tax provision                                                                 |                                                       |                | (549                     | )      |                              |         | (339    | )     
|                                                                                     |                                                       |                |                          |        |                              |         |         |       
|                                                                                     |                                                       |                | Net loss                 |        | $                            | (56,010 | )       |        | $      | (46,690 | )
|                                                                                     |                                                       |                |                          |        |                              |         |         |       
|Other comprehensive income (loss):                                                   |                                                       |                |                          |        |                              |         |         |       
|                                                                                     | Gain (loss) on fair value of derivative               |                |                          | (57    | )                            |         |         |       |       
|                                                                                     | Foreign currency translation adjustment               |                |                          | (203   | )                            |         |         | (225   | )     
|                                                                                     |                                                       |                |                          |        |                              |         |         |       
|                                                                                     |                                                       |                | Comprehensive loss       |        | $                            | (56,270 | )       |        | $      | (46,915 | )
|                                                                                     |                                                       |                |                          |        |                              |         |         |       
|Weighted average number of Class A and Class B shares
outstanding, basic and diluted |                                                       |                | 104,212                  |        |                              |         | 104,465 |       
|                                                                                     |                                                       |                |                          |        |                              |         |         |       
|Net loss per share, basic and diluted                                                |                                                       | $              | (0.54                    | )      |                              | $       | (0.45   | )     
|                                                                                     |                                                       |                |                          |        |                              |         |         |       

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

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

|                                                         |                                                                               |                                                                             |                                                       |                                                                 |         |                              |         |        |         |        |         |  
|-------------------------------------------------------- | ----------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ----------------------------------------------------- | --------------------------------------------------------------- | ------- | ---------------------------- | ------- | ------ | ------- | ------ | ------- | -
|                                                         |                                                                               |                                                                             |                                                       |                                                                 |         | Three Months Ended March 31,
|                                                         |                                                                               |                                                                             |                                                       |                                                                 |         |                             
|                                                         |                                                                               |                                                                             |                                                       |                                                                 |         | 2002                         |         | 2003  
|                                                         |                                                                               |                                                                             |                                                       |                                                                 |         |                              |         |       
|                                                         |                                                                               |                                                                             |                                                       |                                                                 |         | (Unaudited)                 
|CASH FLOWS FROM OPERATING ACTIVITIES:                    |                                                                               |                                                                             |                                                       |                                                                 |         |                              |         |       
|                                                         |                                                                               | Net loss                                                                    |                                                       | $                                                               | (56,010 | )                            |         | $      | (46,690 | )     
|                                                         |                                                                               | Adjustments to reconcile net loss to net cash used in
operating activities: |                                                       |                                                                 |         |                              |         |        |         |       
|                                                         |                                                                               |                                                                             | Depreciation and amortization                         |                                                                 |         | 41,052                       |         |        |         | 42,619 |        
|                                                         |                                                                               |                                                                             | Accretion on guaranteed preferred beneficial interest |                                                                 |         | 8,375                        |         |        |         | 10,791 |        
|                                                         |                                                                               |                                                                             | Gain on change in fair value of derivative liability  |                                                                 |         | 2,227                        |         |        |         | 256    |        
|                                                         |                                                                               |                                                                             | Accretion on convertible debt                         |                                                                 |         | 2,131                        |         |        |         | 2,551  |        
|                                                         |                                                                               |                                                                             | Provision for allowance for doubtful accounts         |                                                                 |         | 570                          |         |        |         | 1,328  |        
|                                                         |                                                                               |                                                                             | Gain on sale of property and equipment                |                                                                 |         | (5                           | )       |        |         | (6     | )      
|                                                         |                                                                               |                                                                             | Stock-based compensation                              |                                                                 |         | 6                            |         |        |         | 3      |        
|                                                         |                                                                               |                                                                             | Changes in operating assets and liabilities:          |                                                                 |         |                              |         |        |         |        |        
|                                                         |                                                                               |                                                                             |                                                       | Increase in accounts receivable                                 |         |                              | (13,199 | )      |         |        | (854    | )
|                                                         |                                                                               |                                                                             |                                                       | Additions to program license fees                               |         |                              | (44,609 | )      |         |        | (45,115 | )
|                                                         |                                                                               |                                                                             |                                                       | Increase in subtitling and dubbing                              |         |                              | (1,344  | )      |         |        | (679    | )
|                                                         |                                                                               |                                                                             |                                                       | Additions to subscriber acquisition fees                        |         |                              | (2,936  | )      |         |        | (860    | )
|                                                         |                                                                               |                                                                             |                                                       | (Increase) decrease in prepaids and other assets                |         |                              | (205    | )      |         |        | 647     |  
|                                                         |                                                                               |                                                                             |                                                       | Increase (decrease) in accounts payable and accrued
liabilities |         |                              | 2,427   |        |         |        | (5,646  | )
|                                                         |                                                                               |                                                                             |                                                       | Decrease in interest payable                                    |         |                              | (1,018  | )      |         |        | (453    | )
|                                                         |                                                                               |                                                                             |                                                       | Decrease in subscriber acquisition fees payable                 |         |                              | (11,192 | )      |         |        | (10,530 | )
|                                                         |                                                                               |                                                                             |                                                       | Increase in affiliate license fees payable                      |         |                              | 15,602  |        |         |        | 4,994   |  
|                                                         |                                                                               |                                                                             |                                                       | Increase (decrease) in payables to affiliates                   |         |                              | 761     |        |         |        | (373    | )
|                                                         |                                                                               |                                                                             |                                                       | Increase (decrease) in deferred programming revenue             |         |                              | 519     |        |         |        | (326    | )
|                                                         |                                                                               |                                                                             |                                                       |                                                                 |         |                              |         |       
|                                                         |                                                                               |                                                                             |                                                       | Net cash used in operating activities                           |         |                              | (56,848 | )      |         |        | (48,343 | )
|                                                         |                                                                               |                                                                             |                                                       |                                                                 |         |                              |         |       
|CASH FLOWS FROM INVESTING ACTIVITIES:                    |                                                                               |                                                                             |                                                       |                                                                 |         |                              |         |       
|                                                         |                                                                               | Purchases of property and equipment                                         |                                                       |                                                                 | (1,606  | )                            |         |        | (832    | )     
|                                                         |                                                                               | Proceeds from disposition of property and equipment                         |                                                       |                                                                 | 23      |                              |         |        | 22      |       
|                                                         |                                                                               |                                                                             |                                                       |                                                                 |         |                              |         |       
|                                                         |                                                                               |                                                                             |                                                       | Net cash used in investing activities                           |         |                              | (1,583  | )      |         |        | (810    | )
|                                                         |                                                                               |                                                                             |                                                       |                                                                 |         |                              |         |       
|CASH FLOWS FROM FINANCING ACTIVITIES:                    |                                                                               |                                                                             |                                                       |                                                                 |         |                              |         |       
|                                                         | Proceeds from the issuance of common stock due upon exercise
of stock options |                                                                             |                                                       | 1,136                                                           |         |                              |         |       |        
|                                                         | Proceeds from tax sharing agreement with Hallmark Cards                       |                                                                             |                                                       |                                                                |         |                              |         | 10,650 |        
|                                                         | Borrowings from HC Crown note payable                                         |                                                                             |                                                       |                                                                |         |                              |         | 49,500 |        
|                                                         | Borrowings from credit facility                                               |                                                                             |                                                       | 55,000                                                          |         |                              |         |       |        
|                                                         | Payments on credit facility                                                   |                                                                             |                                                       | (110,587                                                        | )       |                              |         |       |        
|                                                         | Decrease in cash in escrow                                                    |                                                                             |                                                       | 111,625                                                         |         |                              |         |       |        
|                                                         | Distribution to holders of guaranteed preferred beneficial
interests          |                                                                             |                                                       | (3,621                                                          | )       |                              |         | (3,703 | )      
|                                                         | Principal payments under capital lease obligation                             |                                                                             |                                                       | (319                                                            | )       |                              |         | (347   | )      
|                                                         |                                                                               |                                                                             |                                                       |                                                                 |         |                              |         |       
|                                                         |                                                                               |                                                                             |                                                       | Net cash provided by financing activities                       |         |                              | 53,234  |        |         |        | 56,100  |  
|                                                         | Effect of exchange rate changes on cash                                       |                                                                             |                                                       | (51                                                             | )       |                              |         | (1     | )      
|                                                         |                                                                               |                                                                             |                                                       |                                                                 |         |                              |         |       
|                                                         |                                                                               |                                                                             |                                                       | Net increase (decrease) in cash and cash equivalents            |         |                              | (5,248  | )      |         |        | 6,946   |  
|Cash and cash equivalents, beginning of period           |                                                                               |                                                                             | 13,859                                                |                                                                 |         |                              | 335     |       
|                                                         |                                                                               |                                                                             |                                                       |                                                                 |         |                              |         |       
|Cash and cash equivalents, end of period                 |                                                                               | $                                                                           | 8,611                                                 |                                                                 |         | $                            | 7,281   |       
|                                                         |                                                                               |                                                                             |                                                       |                                                                 |         |                              |         |       
|Supplemental disclosure of cash and non-cash activities: |                                                                               |                                                                             |                                                       |                                                                 |         |                              |         |       
|                                                         | Interest paid                                                                 |                                                                             | $                                                     | 2,863                                                           |         |                              | $       | 3,812  |        
|                                                         | Interest paid on preferred securities                                         |                                                                             | $                                                     | 4,373                                                           |         |                              | $       | 4,472  |        
|                                                         | Income taxes paid                                                             |                                                                             | $                                                     | 549                                                             |         |                              | $       | 339    |        
|                                                         | Stock-based compensation                                                      |                                                                             | $                                                     | 6                                                               |         |                              | $       | 3      |        
|                                                         | Change in fair value of derivative asset                                      |                                                                             | $                                                     | 57                                                              |         |                              | $       |       |        

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

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CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2002 and 2003

1. Business and Organization

Organization

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

Liquidity

In connection with the Companys growth strategy and if it is financially
able to do so, the Company expects to continue making significant investments
in programming and distribution during the remainder of 2003. Programming
expenditures for the full year 2003 are expected to be in the range of $175.0
million to $185.0 million, and cash payments for subscriber acquisition fees in
2003 are expected to be $50.0 million to $60.0 million. Through March 31, 2003
the Company has expended $25.0 million for programming and $11.4 million for
subscriber acquisition fees. If necessary, the Company believes it has
discretion to reduce some of this anticipated spending. The Company also
expects that the reorganization announced in October 2002 will reduce operating
costs by $25.0 million annually. The Companys principal uses of funds during
the remainder of 2003 are expected to be the payment of operating expenses,
payments for licensing of programming from third parties and subscriber
acquisition fees, and interest payments under our bank credit facility and
distributions payable on our preferred securities aggregating $30.0 million to
$33.0 million.

The Companys principal sources of funds are currently cash inflows from
operations (before expenditures for programming and subscriber acquisition
fees), cash on hand, approximately $20.5 million availability under the $75.0
million HC Crown line of credit, and periodic cash inflows expected under the
new tax sharing agreement with Hallmark Cards. Crown Media Holdings borrowed
approximately $49.5 million under the line of credit with HC Crown in the first
quarter of 2003 to pay scheduled significant subscriber acquisition fee
payments, marketing costs and programming fees accrued at the end of the
previous year and to support the cash needs of its current operations. The
Company expects that the tax sharing agreement will result in approximately
$40.0 million to $50.0 million of additional funds during 2003. As of April 30,
2003, $21.3 million had been received under the tax sharing agreement. The
Company also believes that since the tax sharing agreement is with the
Companys most significant shareholder, there is a potential that future tax
sharing payments could become available to the Company at an earlier date, if
needed.

The Company projects that advertising revenue, subscriber fees and
licensing fees will increase in 2003, and that certain operating expenses will
continue to decrease as a result of the reorganization begun in the fourth
quarter of

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2002. Taking into account these projected revenues and reduced
expenditures, the Company believes that cash flow from its operations, cash on
hand, remaining availability under the HC Crown line of credit, and payments
anticipated under the tax sharing agreement will be sufficient to meet its
liquidity needs through at least March 2004. However, any decline in the
popularity of the Hallmark Channel, any significant future modifications to the
Companys distribution agreements, an economic decline in the advertising
market, an unexpected increase in competition or other adverse operating
conditions will impact the Companys ability to achieve its projected operating
results. If the projected operating results are not achieved, the Company will
need to obtain additional funding. In that event, the Company would consider
pursuing alternatives to raise additional cash, which could include the
issuance of additional equity or debt securities. There can be no assurance,
however, that additional funding will be available, if at all, on terms
acceptable to the Company. Any new debt financing would require the agreement
of existing lenders, preferred securities holders and Hallmark Cards.

2. Summary of Significant Accounting Policies

Principles of Consolidation

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

Cash and Cash Equivalents

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

Restricted Cash

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

Subscriber Acquisition Fees

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

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

Subscriber acquisition fees are comprised of the following:

|                                     |                                  |   |                    |         |                 |   |         |         | 
|------------------------------------ | -------------------------------- | - | ------------------ | ------- | --------------- | - | ------- | ------- | 
|                                     |                                  |   | As of December 31, |         | As of March 31,
|                                     |                                  |   | 2002               |         | 2003           
|                                     |                                  |   |                    |         |                
|                                     |                                  |   | (In thousands)    
|Subscriber acquisition fees, at cost |                                  | $ | 186,085            |         |                 | $ | 186,945 |        
|Accumulated amortization             |                                  |   | (45,820            | )       |                 |   | (53,259 | )      
|                                     |                                  |   |                    |         |                 |   |         |        
|                                     | Subscriber acquisition fees, net |   | $                  | 140,265 |                 |   | $       | 133,686 | 
|                                     |                                  |   |                    |         |                 |   |         |        

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As of December 31, 2002 and March 31, 2003, the consolidated balance
sheets also reflected subscriber
acquisition fees payable of $48.6 million and $38.0 million, respectively.
For the three months ended March 31, 2002 and 2003, Crown Media United States
made cash payments of $14.1 million and $11.4 million, respectively, reducing
subscriber acquisition fees payable.

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

Program License Fees

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

Subtitling and Dubbing

Subtitling and dubbing represent costs incurred to prepare programming for
airing in international markets. These costs are capitalized as incurred and
are amortized over the shorter of the programs airing window for programming
licensed from unaffiliated third-parties or the programs estimated life (in
the case of programming licensed from Hallmark Entertainment Distribution and
the Companys film assets). Beginning in 2003, subtitling and dubbing costs
related to programming licensed from Hallmark Entertainment Distribution are
being amortized over a maximum period of 3 years. Amortization expense for
subtitling and dubbing costs was $1.1 million for each of the three months
ended March 31, 2002 and 2003, respectively.

|                                       |                                    |   |                    |       |                 |   |        |       | 
|-------------------------------------- | ---------------------------------- | - | ------------------ | ----- | --------------- | - | ------ | ----- | 
|                                       |                                    |   | As of December 31, |       | As of March 31,
|                                       |                                    |   | 2002               |       | 2003           
|                                       |                                    |   |                    |       |                
|                                       |                                    |   | (In thousands)    
|Subtitling and dubbing assets, at cost |                                    | $ | 8,343              |       |                 | $ | 8,761  |      
|Accumulated amortization               |                                    |   | (4,027             | )     |                 |   | (4,903 | )    
|                                       |                                    |   |                    |       |                 |   |        |      
|                                       | Subtitling and dubbing assets, net |   | $                  | 4,316 |                 |   | $      | 3,858 | 
|                                       |                                    |   |                    |       |                 |   |        |      

Capitalized Leases

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

Property and Equipment

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

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Accounting for Trust Preferred Securities

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

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

Revenue Recognition

Subscriber fees from pay television distributors are recognized as revenue
when an agreement is executed, programming is provided, price is determinable,
and collectibility is reasonably assured. Subscriber fees from pay television
distributors are recorded net of amortization of subscriber acquisition costs
in accordance with Emerging Issues Tax Force No. 01-9, Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendors Products). Subscriber acquisition fee expense is recorded to the
extent that the amortization of subscriber acquisition costs exceed the related
revenue earned from the pay television distributor.

Advertising revenues are recognized as earned in the period in which the
advertising is telecast. If uncertainty as to the collectibility of this
revenue exists, the revenue is recognized on a cash basis. Advertising revenues
are recorded net of agency commissions and estimated advertising deficiency
reserves.

Advertising revenue and expenses in barter transactions are recorded at
the fair value of the advertising to be provided. The fair value is determined
based upon amounts paid in cash for similar advertisements from buyers
unrelated to the other party in the barter transaction. When the barter
advertising revenue does not meet the requirements of EITF No. 99-17,
Accounting for Advertising Barter Transactions,no revenue is recognized. For
the three months ended March 31, 2002 and 2003, revenue from advertising barter
transactions of $113,000 and $94,000, respectively, and the corresponding
barter expenses were included in marketing expenses in the accompanying
consolidated statements of operations.

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

Revenues from foreign sources for the three months ended March 31, 2002
and 2003, represented 45% and 44% respectively, of total revenue. Such
revenues, generally denominated in United States dollars, were primarily from
sales to customers in Australia, India, Malaysia, Mexico, Philippines, Poland,
Singapore, South Africa, South Korea, Taiwan, and the United Kingdom, during
all periods presented.

Cost of Services

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

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Film Assets

The Company amortizes its film assets using the
individual-film-forecast-computation method over a 10-year period, which
amortizes such assets in the same ratio that current period actual revenue
bears to estimated unrecognized ultimate revenues as of the beginning of the
current fiscal year for sales to third parties and internal usage. The
Companys projections regarding sales to third parties and anticipated internal
use are based on the history of each film and similar films, sales and
marketing plans, and other factors, all of which require significant judgment
by management. The 10-year period used for sales to third parties and internal
use commences on the date of acquisition and is the same time period used in
the initial, external valuation of the Companys film assets at the time of
acquisition. The Company also reviews the film assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. If the carrying value of the individual film
assets exceeds the fair value, the film assets are written-down to their fair
values. At least annually, the Company is required by the covenants in its
credit facility to have a outside valuation expert perform a valuation of the
film assets. These valuations supported the Companys determination that the
estimated fair value of the film assets as of December 31, 2002, exceeded the
carrying value. Amortization expense for the film library was $7.2 million and
$6.7 million for the three months ended March 31, 2002 and 2003, respectively.

|                         |                                              |   |                    |         |                 |   |         |         | 
|------------------------ | -------------------------------------------- | - | ------------------ | ------- | --------------- | - | ------- | ------- | 
|                         |                                              |   | As of December 31, |         | As of March 31,
|                         |                                              |   | 2002               |         | 2003           
|                         |                                              |   |                    |         |                
|                         |                                              |   | (In thousands)    
|Film assets              |                                              | $ | 816,172            |         |                 | $ | 816,609 |        
|Accumulated amortization |                                              |   | (29,346            | )       |                 |   | (36,074 | )      
|                         |                                              |   |                    |         |                 |   |         |        
|                         | Film assets, net of accumulated amortization |   | $                  | 786,826 |                 |   | $       | 780,535 | 
|                         |                                              |   |                    |         |                 |   |         |        

Goodwill

In July 2001, the FASB issued SFAS No. 141, Business Combinations(SFAS
No. 141) and No. 142, Goodwill and Other Intangible Assets(SFAS No. 142),
which were adopted by Crown Media Holdings on January 1, 2002. These standards
require companies to cease amortizing goodwill and certain intangible assets
with an indefinite useful life created by business combinations accounted for
using the purchase method of accounting. Instead, goodwill and intangible
assets deemed to have an indefinite useful life are subject to an annual review
for impairment. Crown Media Holdings ceased amortizing goodwill, including
goodwill included in the carrying value of certain investments accounted for
under the equity method of accounting effective January 1, 2002. Valuation
experts evaluated the carrying value of the Companys goodwill for impairment
upon implementation of SFAS No. 142 and at November 30, 2002, which the Company
has selected as its annual goodwill impairment review date. These evaluations
support the Companys determination that the estimated fair value of goodwill
currently exceeds the carrying value.

Taxes on Income

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

Translation of Foreign Currency

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

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Net Loss Per Share

Basic net loss per share is computed by dividing the net loss for the
period by the weighted average number of common shares outstanding during the
period. Diluted net loss per share is computed based on the weighted average
number of common shares and potentially dilutive common shares outstanding. The
calculation of diluted net loss per share excludes potential common shares if
the effect is antidilutive. Potential common shares consist of incremental
common shares issuable upon the exercise of stock options. Approximately 8.3
million and 7.7 million stock options for the three months ended March 31, 2002
and 2003, respectively, have been excluded from the calculations of earnings
per share because their effect would have been antidilutive. Additionally, 10.1
million contingent appreciation certificates have also been excluded from the
calculations of earnings per share for the three months ended March 31, 2002
and 2003, as their effect would have been antidilutive.

Stock-Based Compensation

At December 31, 2002, the Company accounts for its stock-based employee
compensation plan using the intrinsic value method under the recognition and
measurement principles of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees,and related Interpretations.
Accordingly, compensation cost for stock options issued to employees is
measured as the excess, if any, of the quoted market price of the Companys
stock at the date of the grant over the amount an employee must pay to acquire
the stock. In December 2002, FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure  an amendment of SFAS
No. 123.SFAS No. 148 requires certain additional disclosures related to
stock-based compensation plans. SFAS No. 123, Accounting for Stock-Based
Compensation,encourages, but does not require companies to record compensation
cost for stock-based employee compensation plans at fair value.

Had compensation costs for these plans been determined consistent with
SFAS 123, Crown Media Holdings net loss and loss per share would have been
increased to the following pro forma amounts for the three months ended March
31, 2002 and 2003:

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

|                                      |                                       |   |                              |         |      |   |         |         |  
|------------------------------------- | ------------------------------------- | - | ---------------------------- | ------- | ---- | - | ------- | ------- | -
|                                      |                                       |   | Three Months Ended March 31,
|                                      |                                       |   |                             
|                                      |                                       |   | 2002                         |         | 2003
|                                      |                                       |   |                              |         |     
|Net loss before stock options expense |                                       | $ | (56,010                      | )       |      | $ | (46,690 | )      
|Stock options expense                 |                                       |   | (3,083                       | )       |      |   | (1,678  | )      
|                                      |                                       |   |                              |         |      |   |         |        
|                                      | Net loss                              |   | $                            | (59,093 | )    |   | $       | (48,368 | )
|                                      |                                       |   |                              |         |      |   |         |        
|                                      | Weighted average shares               |   |                              | 104,212 |      |   |         | 104,465 |  
|                                      |                                       |   |                              |         |      |   |         |        
|                                      | Net loss per share, basic and diluted |   | $                            | (0.57   | )    |   | $       | (0.46   | )
|                                      |                                       |   |                              |         |      |   |         |        

For purposes of this pro forma presentation, the fair value of each option
grant was estimated at the date of grant using a Black-Scholes model with the
following weighted-average assumptions for grants during the three months ended
March 31, 2002. No options were granted during the three months ended March 31,
2003.

|                          |  |                    |         |  
|------------------------- |  | ------------------ | ------- | -
|                          |  | Three Months Ended
|                          |  | March 31, 2002    
|                          |  |                   
|Risk-free interest rate   |  |                    | 6.00    | %
|Volatility factor         |  |                    | 35.21   | %
|Dividend yield            |  |                    | 0       | %
|Expected terms of options |  |                    | 4 years |  

Derivative Financial Instruments

On January 1, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities,as amended. The standard
requires the recognition of all derivative instruments on the balance sheet as

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either assets or liabilities measured at fair value. Changes in fair value
are recognized immediately in earnings unless the derivatives qualify as hedges
of future cash flows. The Company discontinues hedge accounting prospectively
when it is determined that the derivative is no longer effective in offsetting
the cash flows of the hedged item, the derivative expires or is sold,
terminated or exercised, or the derivative is no longer designated as a hedging
instrument. Changes in the fair value of the contingent appreciation
certificates in the private placement transaction are recognized immediately in
earnings. See Note 6 for a discussion of the derivative liability related to
the private placement transaction.

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

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

The Company used a forward foreign exchange contract in 2001 and 2002, to
reduce the exposure of adverse effects of fluctuating foreign currency exchange
rates. This contract, which was designated as a cash flow hedge, was entered
into primarily to hedge a payable denominated in a foreign currency, which had
a maturity of less than one year. The foreign exchange contract was settled at
maturity and the net loss was reclassified to earnings during 2002.

Use of Estimates

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

Concentration of Credit Risk

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

Fair Value

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

Interim Financial Statements

In the opinion of management, the accompanying balance sheets and related
interim statements of operations and cash flows, include all adjustments,
consisting only of normal recurring items, as well as the accounting changes to
adopt SFAS No. 133, SFAS No. 141, and SFAS No. 142, necessary for their fair
presentation in conformity with accounting principles generally accepted in the
United States. Preparing financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, and expenses. Actual results may differ from these
estimates. Interim results are not necessarily indicative of results for a full
year. The information included in this Form 10-Q should be read in conjunction
with Managements Discussion and

12



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##### Table of Contents



Analysis and financial statements and notes thereto included in the Crown
Media Holdings, Inc. 2002 Annual Report on Form 10-K.

Reclassifications

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

3. Reorganization

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

The Company recorded a reorganization charge of $28.8 million during the
fourth quarter of 2002. This charge was comprised of a charge of $5.5 million
for severance costs and charges of $23.3 million related to exit costs for
satellite, transponder and facility leases. As a result of the reorganization,
the Company expects to reduce annual operating costs significantly, primarily
as a result of decreases in expenditures for overhead, satellites and
facilities, marketing and programming costs.

The following table displays the activity and balances of the
restructuring reserve account from October 7, 2002, to March 31, 2003.

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

Deductions reflect total cash payments of $7.0 million through March 31,
2003, representing termination benefits paid and satellite and transponder
contractual obligations paid. Additions reflect accretion through March 31,
2003, of $272,000 representing accretion on our satellite, transponder and
facility lease obligations.

4. Program license fees

Program license fees are comprised of the following:

|                                                           |                                                       |   |                    |         |                 |   |         |         | 
|---------------------------------------------------------- | ----------------------------------------------------- | - | ------------------ | ------- | --------------- | - | ------- | ------- | 
|                                                           |                                                       |   | As of December 31, |         | As of March 31,
|                                                           |                                                       |   | 2002               |         | 2003           
|                                                           |                                                       |   |                    |         |                
|                                                           |                                                       |   | (In thousands)    
|Program license fees  Hallmark Entertainment
Distribution |                                                       | $ | 82,910             |         |                 | $ | 85,904  |        
|Program license fees  NICC                                |                                                       |   |                   |         |                 |   | 5,541   |        
|Program license fees  other affiliates                    |                                                       |   | 8,341              |         |                 |   | 8,341   |        
|Program license fees  non-affiliates                      |                                                       |   | 129,906            |         |                 |   | 156,782 |        
|Prepaid program license fees                               |                                                       |   | 10,250             |         |                 |   | 10,400  |        
|                                                           |                                                       |   |                    |         |                 |   |         |        
|                                                           | Program license fees, at cost                         |   |                    | 231,407 |                 |   |         | 266,968 | 
|Accumulated amortization                                   |                                                       |   | (83,430            | )       |                 |   | (98,374 | )      
|                                                           |                                                       |   |                    |         |                 |   |         |        
|                                                           | Program license fees, net of
accumulated amortization |   | $                  | 147,977 |                 |   | $       | 168,594 | 
|                                                           |                                                       |   |                    |         |                 |   |         |        

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Programming costs for the three months ended March 31, 2002 and 2003, were
$23.8 million and $23.4 million, respectively. Amortization of program license
fees, included as a component of programming cost, was $23.3 million and $23.8
million for the three months ended March 31, 2002 and 2003.

License fees payable are comprised of the following:

|                                                           |                                              |   |                    |         |                 |   |         |         | 
|---------------------------------------------------------- | -------------------------------------------- | - | ------------------ | ------- | --------------- | - | ------- | ------- | 
|                                                           |                                              |   | As of December 31, |         | As of March 31,
|                                                           |                                              |   | 2002               |         | 2003           
|                                                           |                                              |   |                    |         |                
|                                                           |                                              |   | (In thousands)    
|License fees payable  Hallmark Entertainment
Distribution |                                              | $ | 68,243             |         |                 | $ | 72,992  |        
|License fees payable  NICC                                |                                              |   |                   |         |                 |   | 2,781   |        
|License fees payable  other affiliates                    |                                              |   | 90                 |         |                 |   |        |        
|License fees payable  non-affiliates                      |                                              |   | 89,858             |         |                 |   | 102,214 |        
|                                                           |                                              |   |                    |         |                 |   |         |        
|                                                           | Total license fees payable                   |   |                    | 158,191 |                 |   |         | 177,987 | 
|Less
current maturities                                    |                                              |   | (58,756            | )       |                 |   | (68,559 | )      
|                                                           |                                              |   |                    |         |                 |   |         |        
|                                                           | License fees payable, net of current portion |   | $                  | 99,435  |                 |   | $       | 109,428 | 
|                                                           |                                              |   |                    |         |                 |   |         |        

5. Property and Equipment

Property and equipment are comprised of the following:

|                                          |                                                         |   |                    |        |                 |   |            |        |  |  |     |  | 
|----------------------------------------- | ------------------------------------------------------- | - | ------------------ | ------ | --------------- | - | ---------- | ------ |  |  | --- |  | 
|                                          |                                                         |   | As of December 31, |        | As of March 31, |   |            |        | 
|                                          |                                                         |   | 2002               |        | 2003            |   | (In years)
|                                          |                                                         |   |                    |        |                 |   |           
|                                          |                                                         |   | (In thousands)     |        |                 |   |           
|Technical equipment and computers         |                                                         | $ | 38,584             |        |                 | $ | 39,017     |        |  |  | 3-5 | 
|Leased asset                              |                                                         |   | 13,252             |        |                 |   | 13,252     |        |  |  | 8   | 
|Furniture, fixtures and equipment         |                                                         |   | 2,162              |        |                 |   | 2,055      |        |  |  | 5   | 
|Leasehold improvements                    |                                                         |   | 8,215              |        |                 |   | 8,144      |        |  |  | 3-7 | 
|Construction-in-progress                  |                                                         |   | 1,520              |        |                 |   | 2,062      |        |  |  |     | 
|                                          |                                                         |   |                    |        |                 |   |            |        |  |  |     | 
|                                          | Property and equipment, at cost                         |   |                    | 63,733 |                 |   |            | 64,530 |  |  |     |  | 
|Accumulated depreciation and
amortization |                                                         |   | (28,121            | )      |                 |   | (30,912    | )      |  |  |     | 
|                                          |                                                         |   |                    |        |                 |   |            |        |  |  |     | 
|                                          | Property and equipment, net of
accumulated depreciation |   | $                  | 35,612 |                 |   | $          | 33,618 |  |  |     |  | 
|                                          |                                                         |   |                    |        |                 |   |            |        |  |  |     | 

Depreciation and amortization expense related to property and equipment
totaled $3.0 million and $2.8 million for the three months ended March 31, 2002
and 2003, respectively. Amortization expense related to software and other
intangibles was $400,000 and $800,000, respectively, for the three months ended
March 31, 2002 and 2003.

6. Private Placement

On December 17, 2001, Crown Media Holdings completed a $265.0 million
private placement to a group of institutional investors. Under the terms of the
private placement, Crown Media Holdings issued units to the investors, each
unit consisted of one preferred security of Crown Media Trust, and one
contingent appreciation certificate, issued by Crown Media Holdings. The
financing was recorded at $265.0 million and required the allocation of fair
value to the various components based on the terms of the private placement
agreement. Crown Media Holdings calculated the guaranteed preferred beneficial
interest portion of the preferred securities using an internal rate of return
analysis (cumulative present value of expected future cash flows) on the
preferred securities. The carrying value of the guaranteed preferred beneficial
interest was $221.6 million on December 31, 2002, and was $228.6 million on
March 31, 2003, net of unamortized offering costs.

Crown Media Holdings calculated the initial value of the contingent
appreciation certificate portion of the preferred securities by using
Black-Scholes models and by using a combination of put and call options that
would provide the same future payout as the convertible debt portion. The
resulting value of the contingent appreciation certificates, net of embedded
derivatives, was $47.9 million as of December 31, 2002, and $49.3 million as of
March 31, 2003, which has been classified as convertible debt on the
accompanying consolidated balance sheets. The transaction also resulted in a
net derivative liability on of $762,000 on December 31, 2002, and $1.0 million
on March 31, 2003.

14



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##### Table of Contents



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

|                                                                           |                                                                                                       |                                                                        |         |            |         |              |         |                |         |   |         |         |         | 
|-------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ------- | ---------- | ------- | ------------ | ------- | -------------- | ------- | - | ------- | ------- | ------- | 
|                                                                           |                                                                                                       |                                                                        |         | Initial    |         | As of        |         | As of         
|                                                                           |                                                                                                       |                                                                        |         | Fair Value |         | December 31, |         | March 31,     
|                                                                           |                                                                                                       |                                                                        |         | Allocation |         | 2002         |         | 2003          
|                                                                           |                                                                                                       |                                                                        |         |            |         |              |         |               
|                                                                           |                                                                                                       |                                                                        |         |            |         |              |         | (In thousands) |         |   |         |        
|Convertible debt                                                           |                                                                                                       |                                                                        |         |            |         |              |         |                |         |   |         |        
|                                                                           | Value of contingent appreciation certificates                                                         |                                                                        | $       | 93,682     |         |              |         |                |         |   |         |         |        
|                                                                           | Value of embedded derivative                                                                          |                                                                        |         | (50,212    | )       |              |         |                |         |   |         |         |        
|                                                                           |                                                                                                       |                                                                        |         |            |         |              |         |                |         |   |         |         |         | 
|                                                                           |                                                                                                       | Total carrying amount of convertible debt(a)(b)                        |         |            | 43,470  |              |         | $              | 47,916  |   |         | $       | 49,322  | 
|                                                                           |                                                                                                       |                                                                        |         |            |         |              |         |                |         |   |         |         |         | 
|Derivative liability(c)                                                    |                                                                                                       |                                                                        | 12,083  |            |         | $            | 762     |                |         | $ | 1,018   |        
|                                                                           |                                                                                                       |                                                                        |         |            |         |              |         |                |         |   |         |         |         | 
|Allocable offering costs included in debt issuance
costs(d)                |                                                                                                       |                                                                        | (2,444  | )          |         | $            | (2,020  | )              |         | $ | (1,917  | )      
|                                                                           |                                                                                                       |                                                                        |         |            |         |              |         |                |         |   |         |         |         | 
|Guaranteed preferred beneficial interest in Crown Media
Trusts debentures |                                                                                                       |                                                                        | 209,447 |            |         | $            | 245,241 |                |         | $ | 255,586 |        
|                                                                           | Distribution to holders of guaranteed preferred beneficial
interest in Crown Media Trusts debentures |                                                                        |         |           |         |              |         | (14,730        | )       |   |         | (18,433 | )      
|                                                                           | Allocable offering costs(e)                                                                           |                                                                        |         | (11,771    | )       |              |         | (8,960         | )       |   |         | (8,515  | )      
|                                                                           |                                                                                                       |                                                                        |         |            |         |              |         |                |         |   |         |         |         | 
|                                                                           |                                                                                                       | Total carrying value of guaranteed preferred beneficial
interest(b)(f) |         |            | 197,676 |              |         | $              | 221,551 |   |         | $       | 228,638 | 
|                                                                           |                                                                                                       |                                                                        |         |            |         |              |         |                |         |   |         |         |         | 
|                                                                           | Net proceeds allocated to securities sold                                                             |                                                                        | $       | 250,785    |         |              |         |                |         |   |         |         |        
|Gross proceeds from private placement                                      |                                                                                                       | $                                                                      | 265,000 |            |         |              |         |                |         |   |         |        
|                                                                           |                                                                                                       |                                                                        |         |            |         |              |         |                |         |   |         |         |         | 
|Offering costs                                                             |                                                                                                       |                                                                        | (14,215 | )          |         |              |         |                |         |   |         |        
|                                                                           |                                                                                                       |                                                                        |         |            |         |              |         |                |         |   |         |        
|                                                                           | Net proceeds allocated to securities sold                                                             |                                                                        | $       | 250,785    |         |              |         |                |         |   |         |         |        
|                                                                           |                                                                                                       |                                                                        |         |            |         |              |         |                |         |   |         |         |         | 



---

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

7. Related Party Transactions

Demand Notes

On December 14, 2001, the Company executed a promissory note, in the
amount of $75.0 million payable to HC Crown in replacement of the promissory
note with HC Crown dated September 28, 2001. This note may be borrowed against
or prepaid without penalty and has a final maturity date no later than December
21, 2007. The line of credit is subordinate to both the bank credit facility
and the Crown Media Trust preferred securities, and its availability may be
reduced dollar for dollar in an amount equal to additional capital raised by
Crown Media Holdings. The rate of interest under the line of credit is equal to
LIBOR plus three percent, payable quarterly. HC Crowns obligation to make
loans under this line of credit is supported by an irrevocable letter of credit
from Credit Suisse First Boston. As of December 31, 2002, and March 31, 2003,
principal borrowings under the note were $5.0 million and $54.5 million,
respectively, with accrued interest of $10,000 and $415,000, respectively, both
of which were included in notes and interest payable to HC Crown on the
accompanying consolidated balance sheet. Under the $75.0 million note, the
Company is obligated to pay a commitment fee of 1.5% of the initial maximum
amount of the note, which may be paid in cash or by issuing common stock valued
at the average closing price of the common stock for the 15 trading days prior
to the date the fee is due. The commitment fee is payable in arrears in four
equal installments on the last business day of each calendar quarter during
2002. At both December 31, 2002, and March 31, 2003, the $281,000 commitment
fee was included in payable to affiliates in the accompanying consolidated
balance sheets. In December 2002, we issued 123,831 shares as payment for
$844,000 of fees. The line of credit was amended to its present form in
conjunction with the issuance of the Crown Media Trusts preferred securities.

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##### Table of Contents



Tax Sharing Agreement

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

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

During the quarter ended March 31, 2003, the Company received $10.7
million under the tax sharing agreement. These receipts have been recorded as a
component of additional paid in capital.

Costs Incurred on Crown Media Holdings Behalf

Since inception, Hallmark Entertainment has paid certain costs related to
payroll and benefits, insurance, operational and financing expenditures and
capital expenditures on behalf of Crown Media Holdings. These transactions are
recorded in the books and records of Crown Media Holdings. For the three months
ended March 31, 2002 and 2003, respectively, $400,000 and $845,000,
respectively, were paid to Hallmark Entertainment. Unreimbursed costs of $1.1
million and $255,000 are included in the item payable to affiliates in the
accompanying consolidated balance sheets as of December 31, 2002, and March 31,
2003, respectively.

Services Agreement with Hallmark Cards

Crown Media Holdings has an intercompany services agreement with Hallmark
Cards, which was effective January 1, 2003, under which Hallmark Cards has
agreed for a term of three years, subject to cancellation by either party after
the first or second year, to provide us with tax, risk management, health
safety, environmental, insurance, legal, treasury and cash management services
and real estate consulting services. This agreement replaces an intercompany
services agreement, which expired on January 1, 2003. Under the new agreement,
the Company has agreed to pay Hallmark Cards $515,000 per year for these
services, plus out-of-pocket expenses and third party fees, payable in arrears
on the last business day of each quarter. Additionally, Hallmark Cards made a
payment on Crown Media Holdings behalf for certain expenses in the amount of
$500,000 during first quarter 2002. For the three months ended March 31, 2002
and 2003, Crown Media Holdings had accrued $125,000 and $129,000, respectively,
under the agreement. At December 31, 2002, and March 31, 2003, unpaid accrued
service fees of $5.0 million and $5.2 million, respectively, were included in
payable to affiliates in the accompanying consolidated balance sheets.

Services Agreement with Hallmark Entertainment

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

16



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##### Table of Contents



$1.9 million to Hallmark Entertainment for these services in April 2002.
Crown Media Holdings paid $375,000 to Hallmark Entertainment during first
quarter 2003. At both December 31, 2002, and March 31, 2003, unpaid accrued
service fees of $375,000, respectively, were included in payable to affiliates
in the accompanying consolidated balance sheet.

Program License Agreements with Hallmark Entertainment Distribution

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

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

As part of the program license agreements with Hallmark Entertainment
Distribution, in the event that either Crown Media United States or Crown Media
International sub-license any licensed program to a third party, they must
equally share with Hallmark Entertainment Distribution the excess, if any, of
the sublicensing fee over the initial program license fee paid by the Company.
For the year December 31, 2002, Crown Media United States entered into
sublicensing arrangements which resulted in $749,000 being payable to Hallmark
Entertainment Distribution under this sharing arrangement and which has been
included in the accompanying consolidated balance sheet as payable to
affiliates. In addition, pursuant to an amendment to the program license
agreements, dated as of May 15, 2002, Crown Media United States and Crown Media
International authorized Hallmark Entertainment Distribution to solicit and
enter into third party license agreements for titles held by them under the
program license agreements. In the event that the length of the license sold
to such third party exceeds the length of the license held by Crown Media
United States or Crown Media International, the fees related to such excess
period are to be paid to Hallmark Entertainment Distribution.

Programming costs related to the Hallmark program agreements were $7.9
million and $5.8 million, respectively, for the three months ended March 31,
2002 and 2003. As of December 31, 2002, and March 31, 2003, $68.2 million and
$73.0 million, respectively, are included in license fees payable to affiliates
in the accompanying consolidated balance sheets. In fourth quarter 2002, Crown
Media Holdings paid $25.0 million to Hallmark Entertainment Distribution for
license fees.

NICC License Agreements

In connection with an investment by Crown Media International in Crown
Media United States on November 13, 1998, HEN Domestic Holdings, Inc., a wholly
owned subsidiary of Crown Media International, and Vision Group, VISN
Management Corporation (VISN) and Henson Cable Networks, Inc. signed an
amended and restated company agreement governing the operation of Crown Media
United States. As of February 22, 2001 and January

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##### Table of Contents



1, 2002 the parties agreed to certain amendments to the amended and
restated company agreement, as more fully described below. The company
agreement was negotiated at arms length with the other party or parties to the
agreement.

VISN owns a $25.0 million preferred interest in Crown Media United States.
Under the amended and restated company agreement, the members agreed that if
during any year ending after January 1, 2005 and prior to December 31, 2009,
Crown Media United States has net profits in excess of $10.0 million, and the
preferred interest has not been redeemed, Crown Media United States will redeem
the preferred interest in an amount equal to the lesser of:



| |  |  | such excess;                                                                       
| | - |  | -----------------------------------------------------------------------------------
|
| |  |  | $5.0 million; or                                                                   
|
| |  |  | the amount equal to the preferred liquidation preference on the date of redemption.

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

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



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

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

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

The term of the obligations contained in the February 2001 amendment
expire on March 26, 2006, but may be terminated earlier if NICC sells more than
50% of the Crown Media Holdings shares it owned on February 22, 2001. In
addition, six months prior to the expiration of the agreement, Crown Media
United States must negotiate in good faith with NICC regarding a continuation
of the programming and funding commitment to NICC. If agreement is not reached
and Crown Media United States does not continue the NICC programming and
funding commitments at the same levels, NICC is entitled to compel Crown Media
Holdings to buy all of NICCs Crown Media Holdings shares at their then-current
market value no later than 60 days following the expiration of the amendment.
Crown Media United States, however, can nullify this put by electing to
continue the NICC programming and funding commitments at the same levels.
During the three months ended March 31, 2002 and 2003, Crown Media United
States paid NICC $3.1 million and $4.4 million, respectively, related to this
agreement.

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

8. Operations in Different Geographic Areas

Information relating to Crown Media Holdings continuing operations is set
forth in the following table (operating loss is defined as total revenues less
cost of services; selling, general and administrative expenses; depreciation
and amortization expenses; and marketing expenses).

|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |       |         | 
|----------------------------------------- | ------------------------- | ------------------------- | ---- | ------------ |  | ------------ | --- | ------------- |  | ------------ | ----- | ----- | - |  | ------- | ----- | ------- | 
|                                          |                           |                           |      | Revenue from |  | Revenue from |     | Loss          |  |              |       |      
|                                          |                           |                           |      | Unrelated    |  | Related      |     | from          |  | Identifiable
|                                          |                           |                           |      | Entities     |  | Entities     |     | Operations    |  | Assets      
|                                          |                           |                           |      |              |  |              |     |               |  |             
|                                          |                           |                           |      |              |  |              |     | (In millions) |  |              |       |      
|Three months ended March 31, 2002:        |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|                                          | Domestic                  |                           | $    | 13.4         |  |              | $   | 1.2           |  |              | $     | (22.5 | ) |  | $       | 268.9 |        
|                                          | International             |                           |      | 17.9         |  |              |     |              |  |              |       | (14.6 | ) |  |         | 84.9  |        
|                                          | Film Distribution         |                           |      | 7.0          |  |              |     |              |  |              |       | (1.7  | ) |  |         | 805.8 |        
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |       |        
|                                          |                           | $                         | 38.3 |              |  | $            | 1.2 |               |  |              | (38.8 | )     |   |  | 1,159.6 |      
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|Guaranteed preferred beneficial accretion |                           |                           |      |              |  |              |     |               |  |              | (10.6 | )     |   |  |         |      
|Interest expense and other, net           |                           |                           |      |              |  |              |     |               |  |              | (6.1  | )     |   |  |         |      
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|Loss before income taxes                  |                           |                           |      |              |  |              |     |               |  | $            | (55.5 | )     |   |  |         |      
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |       |        
|Assets not allocated to segments:         |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|                                          | Cash and cash equivalents |                           |      |              |  |              |     |               |  |              |       |       |   |  |         | 8.6   |        
|                                          | Accounts receivable       |                           |      |              |  |              |     |               |  |              |       |       |   |  |         | 48.8  |        
|                                          | Goodwill                  |                           |      |              |  |              |     |               |  |              |       |       |   |  |         | 314.0 |        
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |       |        
|                                          |                           | Consolidated total assets |      |              |  |              |     |               |  |              |       |       |   |  |         | $     | 1,531.0 | 
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |       |        
|Three months ended March 31, 2003:        |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|                                          | Domestic                  |                           | $    | 19.4         |  |              | $   | 0.4           |  |              | $     | (14.9 | ) |  | $       | 285.0 |        
|                                          | International             |                           |      | 18.7         |  |              |     |              |  |              |       | (8.4  | ) |  |         | 71.8  |        
|                                          | Film Distribution         |                           |      | 3.5          |  |              |     |              |  |              |       | (4.7  | ) |  |         | 782.9 |        
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |       |        
|                                          |                           | $                         | 41.6 |              |  | $            | 0.4 |               |  |              | (28.0 | )     |   |  | 1,139.7 |      
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |       |        
|Guaranteed preferred beneficial accretion |                           |                           |      |              |  |              |     |               |  |              | (11.1 | )     |   |  |         |      
|Interest expense and other, net           |                           |                           |      |              |  |              |     |               |  |              | (7.3  | )     |   |  |         |      
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|Loss before income taxes                  |                           |                           |      |              |  |              |     |               |  | $            | (46.4 | )     |   |  |         |      
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|Assets not allocated to segments:         |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|                                          | Cash and cash equivalents |                           |      |              |  |              |     |               |  |              |       |       |   |  |         | 7.3   |        
|                                          | Accounts receivable       |                           |      |              |  |              |     |               |  |              |       |       |   |  |         | 41.1  |        
|                                          | Goodwill                  |                           |      |              |  |              |     |               |  |              |       |       |   |  |         | 314.0 |        
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      
|                                          |                           | Consolidated total assets |      |              |  |              |     |               |  |              |       |       |   |  |         | $     | 1,502.1 | 
|                                          |                           |                           |      |              |  |              |     |               |  |              |       |       |   |  |         |      

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

British Sky Broadcasting accounted for 15% of our consolidated revenues
for the three months ended March 31, 2003. No individual pay television
distributor accounted for 10% of our consolidated subscribers for the three
months ended March 31, 2003.

9. Subsequent Events

Our Board of Directors approved in April 2003 actions to provide
additional incentives to our employees and to encourage retention of the
employees because outstanding stock options held by employees have exercise
prices significantly below the current market value of our Class A common
stock. We are making an offer in May 2003 to senior management and vice
presidents, totaling approximately 55 persons, to exchange their options for
restricted stock units (RSUs). The exchange ratio is that options for 2.5
shares of our Class A common stock may be exchanged for one restricted stock
unit. Each restricted stock unit represents the right to receive, at the
discretion of

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our Board, upon vesting one share of common stock or the value of the
share in cash at the time of vesting. The RSUs will vest in three annual
installments over three years. In the exchange offer, a total of up to
5,424,986 options may be exchanged for up to 2,169,994 RSUs. As a result of
the exchange offer, we expect to record non-cash compensation expense based on
the fair value of our common stock on the date of grant of the RSUs over the
vesting period of the RSUs. Options that are not exchanged will be subject to
variable plan accounting in which compensation will be remeasured at each
reporting date until the options are exercised, expire unexercised or are
forfeited.

In addition, our Board of Directors will award all other employees who
hold a stock option with a cash payment of $1.00 for each share subject to
outstanding options held by the employee. The award will be paid in June 2004.
The option holder must be employed by us on the payout date in order to
receive the award. This award is based upon options for a total of 2,412,014
shares of our Class A common stock. As a result of this award, we expect to
record compensation expense from May 2003 through June 2004.

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

Revenue

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

Subscriber fees vary according to:



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

In some circumstances, international distributors provide minimum revenue
guarantees.

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

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

On November 7, 2002, we entered into an amendment of a distribution
agreement with a large distributor in the United States. The amendment
extended the distribution agreement for two years to December 31, 2007, and
provided for the payment of a substantial cash amount in settlement of the
most favored nation clauses in regard to the DirecTV terms and significantly
increases the distributors commitment to add full-time subscribers to our

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Channel. We paid a portion of the amount upon execution and will make
monthly cash payments through December 1, 2003, for the balance. We are also
required to pay a substantial market support payment, based on subscribers
exceeding a final commitment number, through December 31, 2004. In addition,
if the final commitment level of subscribers is achieved by the distributor,
subscriber fees will not apply to subscribers above a specified number. The
amendment also contains a most favored nation provision relating to other
distribution agreements.

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

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

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

Cost of Services

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

In connection with our purchase of film assets from Hallmark Entertainment
Distribution, we have signed a service agreement with Hallmark Entertainment.
Under the service agreement, Hallmark Entertainment is providing services to us
to assist in the administration, distribution and other exploitation of the
film assets, and we pay Hallmark Entertainment approximately $1.5 million per
year for the three-year term of the agreement ending on December 31, 2003.

Discussion of Critical Accounting Policies

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

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

2002 Reorganization and Other Charges

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

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We recorded a charge of $28.8 million during the fourth quarter of 2002
reflecting the reorganization. This charge was comprised of a charge of $5.5
million for severance costs and charges of $23.3 million related to satellite
and facility exit costs. As a result of the reorganization, the Company
expects to reduce annual operating costs by $25.0 million, comprised primarily
of decreases in expenditures for overhead, satellite and facilities, marketing
and programming, when compared to 2002.

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

Tax Sharing Agreement

On March 11, 2003, Crown Media Holdings became a member of Hallmark Cards
consolidated federal tax group and entered into a federal tax sharing agreement
with Hallmark Cards. Hallmark Cards will include Crown Media Holdings in its
consolidated federal income tax return. Accordingly, Hallmark Cards will
benefit from future tax losses, which may be generated by Crown Media Holdings.
Based on the tax sharing agreement, Hallmark Cards will pay Crown Media
Holdings all of the benefits realized by Hallmark Cards as a result of
consolidation, 75% in cash on a quarterly basis and the balance when Crown
Media Holdings becomes a taxpayer. Under this federal tax sharing agreement,
at Hallmark Cards option, this 25% balance may also be applied as an offset
against any amounts owed by Crown Media Holdings to any member of the Hallmark
Cards consolidation group under any loan, line of credit or other payable,
subject to any limitations under any loan indentures or contracts restricting
such offsets.

We will account for income taxes as if Crown Media Holdings were a
separate taxpayer. Accordingly, Hallmark Cards ability to use our tax losses
will not impact our assessment of the need for a valuation allowance on
deferred tax assets, including future tax losses. Any payments received from
Hallmark Cards under the tax sharing agreement will be recorded as an increase
in paid-in capital. During the quarter ended March 31, 2003, the Company
received $10.7 million under the tax sharing agreement. These receipts have
been recorded as a component of additional paid in capital.

Effects of Transactions with Related and Certain Other Parties

Tax Sharing Agreement

Please refer to above Discussion of Critical Accounting Policies.

Employee Incentives and Retention

Our Board of Directors approved in April 2003 actions to provide
additional incentives to our employees and to encourage retention of the
employees because outstanding stock options held by employees have exercise
prices significantly below the current market value of our Class A common
stock. We are making an offer in May 2003 to senior management and vice
presidents, totaling approximately 55 persons, to exchange their options for
restricted stock units (RSUs). The exchange ratio is that options for 2.5
shares of our Class A common stock may be exchanged for one restricted stock
unit. Each restricted stock unit represents the right to receive, at the
discretion of our Board, upon vesting one share of common stock or the value of
the share in cash at the time of vesting. The RSUs will vest in three annual
installments over three years. In the exchange offer, a total of up to
5,424,986 options may be exchanged for up to 2,169,994 RSUs. As a result of
the exchange offer, we expect to record non-cash compensation expense based on
the fair value of our common stock on the date of grant of the RSUs over the
vesting period of the RSUs. Options that are not exchanged will be subject to
variable plan accounting in which compensation will be remeasured at each
reporting date until the options are exercised, expire unexercised or are
forfeited.

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In addition, our Board of Directors will award all other employees who
hold a stock option with a cash payment of $1 for each share subject to
outstanding options held by the employee. The award will be paid in June 2004.
The option holder must be employed by us on the payout date in order to
receive the award. This award is based upon options for a total of 2,412,014
shares of our Class A common stock. As a result of this award, we expect to
record compensation expense from May 2003 through June 2004.

NICC License Agreement

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

Pramer Agreement

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

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

Results of Operations

Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002

Revenue.Total revenue for the three months ended March 31, 2003,
increased to $42.0 million from $39.5 million, which represents an increase of
$2.5 million, or 6%, over the comparable period in 2002. Subscriber fee revenue
decreased to $16.0 million for the three months ended March 31, 2003, from
$17.9 million, which represents a decrease of $1.9 million, or 11%, over the
comparable period in 2002. The decreased subscriber fee revenue resulted from
reduced subscriber fee rates as the result of amended long-term distribution
agreements and increased subscriber acquisition fees in the United States.
Subscriber acquisition fees recorded as a reduction of revenue were $1.4
million in 2003 and $1.9 million in 2002. Although the number of subscribers to
the Hallmark Channel increased as of March 31, 2003, compared to March 31,
2002, subscriber revenue was also affected by a number of other, offsetting
factors, including adding new subscribers with free promotional periods,
initial discounted subscriber fees, waiver of subscriber fees and bulk
discounts from attaining certain subscriber levels. The number of subscribers
to the Hallmark Channel, as of March 31, 2003, was 105.8 million compared to
91.5 million as of March 31, 2002, which represents an increase of 14.3
million, or 16%. Subscribers to our domestic channel increased from 44.9
million as of March 31, 2002, to 51.3 million as of March 31, 2003, which
represents an increase of 6.4 million, or 14%. Ninety-one percent of subscriber
fees revenue for the three months ended March 31, 2003, and 75% of subscriber
fees revenue for the three months ended March 31, 2002, were earned
internationally. The amount of subscriber fee revenue net of the subscriber
acquisition fee expense was $1.5 million for the domestic Hallmark Channel for
the three months ended March 31, 2003, and $14.5 million for the international
Hallmark Channel for the three months ended March 31, 2003. Increased
subscriber acquisition costs and other factors described above are expected to
continue to result in a decline in net domestic subscriber revenue. Certain of
our international subscriber fee rates have and will continue to decrease as we
renew distribution agreements, which may provide for lower per subscriber rates
than under previous agreements. International fees per subscriber are also
expected to experience continuing downward pressure in the future due to the
competitive nature of the industry, the

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growth of digital cable, the shift in the industry in certain more
developed countries from subscriber fees revenue to advertising revenue,
foreign currency devaluation associated with global economies and the economic
turbulence in certain of our markets.

Advertising revenue increased to $22.4 million for the three months ended
March 31, 2003, from $14.6 million, which represents an increase of $7.8
million, or 53%, over the comparable period in 2002. The increase in
advertising revenue reflects the following during the first quarter of 2003:
our growth in both domestic and international subscribers; higher ratings in
the United States and in the United Kingdom; higher advertising rates; and
expanded sales of advertising time primarily in the United States and the
United Kingdom. Advertising revenue from our domestic channel was $18.3 million
for the three months ended March 31, 2003, compared to $10.2 million for the
three months ended March 31, 2002. Additionally, the number of advertisers on
our domestic channel rose from approximately 148 in March 2002 to approximately
205 in March 2003.

We may experience a decline in advertising revenue from certain
international markets as a result of the reorganization announced in October
2002. Under the reorganized structure, regional staff and in the case of Latin
America, Pramer, has assumed the responsibility for a number of functions,
including advertising sales.

During the fourth quarter of 2001, we began earning film licensing fees
revenue from our purchased film assets. In addition to our use of these film
assets on our channels, we are generating film licensing fee revenue as we
establish ourselves in the program distribution market. For the three months
ended March 31, 2003, we earned film licensing fee revenue of $3.5 million as
compared to $7.0 million in 2002. This level of licensing fees is due to timing
of film deliveries. We expect our licensing fees to increase in second quarter
2003.

Cost of services.Cost of services for the three months ended March 31,
2003, decreased to $47.9 million from $49.7 million, which represents a
decrease of $1.8 million, or 4%, over the comparable period in 2002. Cost of
services as a percent of net revenue decreased to 114% for the three months
ended March 31, 2003, as compared to 126% for the three months ended March 31,
2002. This decrease was primarily due to our 6% increase in total revenue
discussed above and the reduction of operating expenses explained below.

Total programming costs for the three months ended March 31, 2003,
decreased 1% due to decreased acquisitions of programming for our international
channel offset in part by the acquisition of new programming for our domestic
channel. For the three months ended March 31, 2003, amortization of our film
assets was $6.8 million, as compared to $7.2 million in 2002. The reduction in
amortization of film assets was primarily due to the reduction in related
revenue discussed above.

Expanded distribution and new agreements in the U.S. resulted in an
increase in subscriber acquisition fee expense of $1.8 million to $6.0 million
for the three months ended March 31, 2003, as compared to $4.2 million for the
same period of 2002. Operating costs for the three months ended March 31, 2003,
which include playback, dubbing and subtitling, transponder and interstitial
expenses, decreased 21%, primarily as a result of lower salary, benefit,
satellite and transponder expenses resulting from our 2002 reorganization and
lower tape stock and duplication expenses resulting from decreased library
sales.

Selling, general and administrative expense.Selling, general and
administrative expense for the three months ended March 31, 2003, decreased to
$14.2 million from $16.6 million, which represents a decrease of $2.4 million,
or 15%, over the comparable period in 2002. These decreases resulted from a
reduction in salary, benefit, consulting and travel expenses. Salary and
benefit expenses declined as a result of the termination of certain high-level
positions during 2002 in conjunction with our 2002 reorganization. Our
continuing use of teleconferencing and an overall decrease in international
travel lowered travel expenses. Selling, general and administrative expense as
a percent of total revenue decreased to 34% for the three months ended March
31, 2003, as compared to 42% for the three months ended March 31, 2002. This
decrease was also due to the increase in total revenue of 6% noted above.

Marketing expense.Marketing expense for the three months ended March 31,
2003, decreased to $5.4 million from $9.8 million, which represents a decrease
of $4.4 million, or 44%, over the comparable period in 2002. Marketing expense
was lower for three months ended March 31, 2003, due primarily to lower media
buys for our

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domestic channel during first quarter 2003 as compared to first quarter
2002. During first quarter 2002, our domestic channel focused substantial
efforts into Hallmark Channel branding.

Depreciation and amortization expense.Depreciation and amortization
expense for the three months ended March 31, 2003, increased to $2.4 million
from $2.2 million, which represents an increase of $203,000, or 9%, over the
comparable period in 2002. Depreciation and amortization expense was higher for
the three months ended March 31, 2003, due primarily to increased software
amortization.

Guaranteed preferred beneficial accretion.Guaranteed preferred
beneficial accretion for the three months ended March 31, 2003, was $11.0
million as compared to $10.6 million in 2002. This expense relates to future
payments on our debentures issued on December 17, 2001, in connection with the
preferred securities of Crown Media Trust. We recorded gains of $256,000 and
$2.2 million, respectively, on marking our derivative liabilities to fair value
for the three months ended March 31, 2003 and 2002, as a component of the
accretion of guaranteed preferred beneficial interest. We anticipate that this
expense will further increase until the Companys redemption of the trust
preferred securities, which is required in December 2007. Management determined
in the fourth quarter of 2002 that the Company did not plan to make an early
redemption of its trust preferred securities prior to their maturity in
December 2007. This determination had the consequent impact of increasing the
cumulative interest rate from 14% to 18%.

Interest income (expense) and other, net.Net interest and other expense
for the three months ended March 31, 2003, increased to $7.3 million from $6.1
million, which represents an increase of $1.2 million, over the comparable
period in 2002. This increase was primarily due to increased borrowings under
our credit facility and the HC Crown line of credit and interest on our
convertible debt. We anticipate that this expense will further increase until
the Companys redemption of the trust preferred securities, which is required
in December 2007.

Income tax provision.Income tax provision for the three months ended
March 31, 2003, decreased to $339,000 from $549,000, which represent a decrease
of $210,000, or 38%, over the comparable period in 2002. This decrease was due
to a decrease in taxes on the foreign income resulting from decreased
international licensing fees revenue as discussed above.

Liquidity and Capital Resources

Cash used in operating activities was $48.3 million and $56.8 million for
the three months ended March 31, 2003 and 2002, respectively. Cash was used
primarily to fund operating expenditures related to net losses of $46.7 million
and $56.0 million for the three months ended March 31, 2003 and 2002,
respectively. The decrease from 2002 to 2003 was primarily due to substantially
higher domestic and UK advertising revenue and related cash receipts, and a
decrease in programming purchased for our international markets outside the UK
in 2003. This decrease was partially offset by increased programming purchased
in our U.S. and UK markets to meet our strategy and the demands of our
customers and higher subscriber acquisition fee payments as a result of our
expanded distribution in domestic markets.

Cash used in investing activities was $810,000 and $1.6 million for the
three months ended March 31, 2003 and 2002, respectively. Capital expenditures
in 2002 were limited and have been further restricted in 2003 by our credit
facility covenants.

Cash provided by financing activities was $56.1 million and $53.2 million
for the three months ended March 31, 2003 and 2002, respectively. During the
first quarter of 2003, we have received proceeds of $10.7 million from our tax
sharing agreement with Hallmark Cards and borrowed $49.5 million on our line
with HC Crown to meet our operating demands. In 2002, we borrowed funds under
the credit facility and the HC Crown note to meet our operating demands.

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The following table aggregates all of our contractual commitments as of
March 31, 2003.

|                                   |                                                                             |       |                              |        |     |       |       |       |     |       |       |      |   |   |       |       |       |   |      |      | 
|---------------------------------- | --------------------------------------------------------------------------- | ----- | ---------------------------- | ------ | --- | ----- | ----- | ----- | --- | ----- | ----- | ---- | - | - | ----- | ----- | ----- | - | ---- | ---- | 
|                                   |                                                                             |       | Scheduled Payments by Period
|                                   |                                                                             |       |                             
|                                   |                                                                             |       |                              |        |     |       | Less  |       |     |       |       |      |   |   |       |       | After
|                                   |                                                                             |       |                              |        |     |       | Than  |       | 2-3 |       | 4-5   |      | 5
|Contractual Obligations            |                                                                             | Total |                              | 1 Year |     | Years |       | Years |     | Years
|                                   |                                                                             |       |                              |        |     |       |       |       |     |      
|Long-Term Debt                     |                                                                             | $     | 424.1                        |        |     | $     | 0.3   |       |     | $     |      |      |   | $ | 423.8 |       |       | $ |     |     
|Interest Payments                  |                                                                             |       | 91.4                         |        |     |       | 20.1  |       |     |       | 38.2  |      |   |   | 33.0  |       |       |   | 0.1  |     
|Capital Lease Obligations          |                                                                             |       | 10.4                         |        |     |       | 1.5   |       |     |       | 3.3   |      |   |   | 3.9   |       |       |   | 1.7  |     
|Operating Leases                   |                                                                             |       | 84.8                         |        |     |       | 14.6  |       |     |       | 29.5  |      |   |   | 21.5  |       |       |   | 19.2 |     
|Other Long-Term Obligations        |                                                                             |       |                              |        |     |       |       |       |     |       |       |      |   |   |       |       |       |   |      |     
|                                   | Program license fees payable to non-
affiliates and NICC                    |       | 105.0                        |        |     |       | 55.8  |       |     |       | 49.2  |      |   |   |      |       |       |   |     |     
|                                   | Program license fees payable to
Hallmark Entertainment
Distribution         |       |                              | 73.0   | (a) |       |       | 12.8  |     |       |       |     |   |   |       | 60.2  |       |   |      |     | 
|                                   | Program license fees payable for future
windows                             |       |                              | 146.4  |     |       |       | 43.3  |     |       |       | 69.1 |   |   |       | 18.3  |       |   |      | 15.7 | 
|                                   | Subscriber acquisition fees (b)                                             |       |                              | 38.0   |     |       |       | 37.0  |     |       |       | 1.0  |   |   |       |      |       |   |      |     | 
|                                   | Payable to Hallmark Entertainment
Holdings                                  |       |                              | 52.1   | (c) |       |       |      |     |       |       |     |   |   |       | 52.1  |       |   |      |     | 
|                                   | Payable to Hallmark Entertainment                                           |       |                              | 47.9   | (c) |       |       |      |     |       |       |     |   |   |       | 47.9  |       |   |      |     | 
|                                   | Guaranteed preferred beneficial
interests in Crown Media Trusts
debentures |       |                              | 228.6  | (d) |       |       |      |     |       |       |     |   |   |       | 228.6 |       |   |      |     | 
|                                   | Preferred Minority Interest                                                 |       |                              | 25.0   |     |       |       |      |     |       |       | 25.0 |   |   |       |      |       |   |      |     | 
|                                   |                                                                             |       |                              |        |     |       |       |       |     |       |       |      |   |   |       |       |       |   |      |     
|Total Contractual Cash Obligations |                                                                             | $     | 1,326.7                      |        |     | $     | 185.4 |       |     | $     | 215.3 |      |   | $ | 889.3 |       |       | $ | 36.7 |     
|                                   |                                                                             |       |                              |        |     |       |       |       |     |       |       |      |   |   |       |       |       |   |      |     



---

|(a) |  | Can only be paid with certain prescribed sources of funds as defined in the private placement agreement, assuming such funds are available.                                                                                                                            
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | We executed in early November 2002 an amendment to a distribution agreement with one of our domestic distributors. This agreement and any other amendments to current
domestic distribution agreements will significantly increase subscriber acquisition fees payable.
|   
|(c) |  | Can only be paid subsequent to repayment of credit facility per agreement.                                                                                                                                                                                             
|   
|(d) |  | Currently, the Company expects to redeem the preferred securities at the maturity in 2007.                                                                                                                                                                             

In connection with the Companys growth strategy and if it is financially
able to do so, the Company expects to continue making significant investments
in programming and distribution during the remainder of 2003. Programming
expenditures for the full year 2003 are expected to be in the range of $175.0
million to $185.0 million, and cash payments for subscriber acquisition fees in
2003 are expected to be $50.0 million to $60.0 million. Through March 31, 2003
the Company has expended $25.0 million for programming and $11.4 million for
subscriber acquisition fees. If necessary, the Company believes it has
discretion to reduce some of this anticipated spending. The Company also
expects that the reorganization announced in October 2002 will reduce operating
costs by $25.0 million annually. The Companys principal uses of funds during
the remainder of 2003 are expected to be the payment of operating expenses,
payments for licensing of programming from third parties and subscriber
acquisition fees, and interest payments under our bank credit facility and
distributions payable on our preferred securities aggregating $30.0 million to
$33.0 million.

The Companys principal sources of funds are currently cash inflows from
operations (before expenditures for programming and subscriber acquisition
fees), cash on hand, approximately $20.5 million availability under the $75.0
million HC Crown line of credit, and periodic cash inflows expected under the
new tax sharing agreement with Hallmark Cards. Crown Media Holdings borrowed
approximately $49.5 million under the line of credit with HC Crown in the first
quarter of 2003 to pay scheduled significant subscriber acquisition fee
payments, marketing costs and programming fees accrued at the end of the
previous year and to support the cash needs of its current operations. The
Company expects that the tax sharing agreement will result in approximately
$40.0 million to $50.0 million of additional funds during 2003. As of April 30,
2003, $21.3 million had been received under the tax sharing agreement. The
Company also believes that since the tax sharing agreement is with the
Companys most significant shareholder, there is a potential that future tax
sharing payments could become available to the Company at an earlier date, if
needed.

The Company projects that advertising revenue, subscriber fees and
licensing fees will increase in 2003, and that certain operating expenses will
continue to decrease as a result of the reorganization begun in the fourth
quarter of 2002. Taking into account these projected revenues and reduced
expenditures, the Company believes that cash flow from its operations, cash on
hand, remaining availability under the HC Crown line of credit, and payments
anticipated under the tax sharing agreement will be sufficient to meet its
liquidity needs through at least March 2004. However, any decline in the
popularity of the Hallmark Channel, any significant future modifications to the
Companys distribution agreements, an economic decline in the advertising
market, an unexpected increase in competition or other adverse operating
conditions will impact the Companys ability to achieve its projected

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operating results. If the projected operating results are not achieved,
the Company will need to obtain additional funding. In that event, the Company
would consider pursuing alternatives to raise additional cash, which could
include the issuance of additional equity or debt securities. There can be no
assurance, however, that additional funding will be available, if at all, on
terms acceptable to the Company. Any new debt financing would require the
agreement of existing lenders, preferred securities holders and Hallmark Cards.

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

Our bank credit facility, our private placement units comprised of Crown Media
Trusts preferred securities and Crown Media Holdings contingent appreciation
certificates and the HC Crown line of credit are described in Item 7 of
Managements Discussion and Analysis of Historical Financial Condition and
Results of Operations in our Annual Report on Form 10-K for the year ended
December 31, 2002. As a result of these agreements, we are subject to a number
of affirmative and negative covenants. There have been no material changes to
these agreements since the Amendment No. 5, dated February 5, 2003, to the
Credit, Security, Guaranty and Pledge Agreement, dated August 31, 2001, as
amended, among Crown Media Holdings, Inc., the Guarantors named therein, the
Lenders referred to therein and JP Morgan Chase Bank, which was filed as an
exhibit to our Form 10-K for the year ended December 31, 2002.

Tax Sharing Agreement

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

Risk Factors

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

Risks Relating to Our Business

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

Both our international and domestic channels have a history of net losses
and we expect to continue to report net losses for the foreseeable future. As
of March 31, 2003, we had an accumulated deficit of approximately $840.0
million, goodwill of approximately $314.0 million, and film assets of $780.5
million.

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

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

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

We have a substantial amount of indebtedness. As of March 31, 2003, our
total debt was $435.4 million and we had $7.3 of cash and cash equivalents. In
addition, subject to the restrictions under our various debt agreements, we

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may borrow additional amounts under our line of credit with HC Crown Corp.
(HC Crown) to cover the negative cash flow resulting from our current
operations, and incur additional indebtedness from time to time to cover our
operating losses, to finance acquisitions or capital expenditures or for other
purposes. Our principal sources of funds for the next 12 months will be cash
generated from operating activities, borrowings under the HC Crown line of
credit, and cash generated from the tax sharing agreement with Hallmark Cards.

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



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

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

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

High levels of interest expense could have negative effects on our future
operations. Interest expense, which is net of interest income and includes
amortization of debt issuance costs and interest expense on borrowings under
our demand notes, credit facility and private placement, increased $1.2 million
to $7.3 million for the three months ended March 31, 2003, from $6.1 for the
three months ended March 31, 2002. The increase in interest expense resulted
from an increase in the average borrowings outstanding, due to cash generated
from operations being insufficient to cover operating expenses and capital
expenditures. Consequently, we were required to make borrowings under our
demand notes and credit facility during 2002 and 2003 and to enter into the
private placement in December 2001. A substantial portion of our cash flow from
operations must be used to pay our interest expense and will not be available
for other business purposes. In addition, we may need to incur additional
indebtedness in the future. We cannot assure you that our business will
generate sufficient cash flow or that future financings will be available to
provide sufficient proceeds to meet our obligations or to service our total
debt.

Our liquidity is dependent on external funds.

We believe based on projected revenue and expenditures that our line of
credit with HC Crown and our tax sharing agreement, together with cash
generated from operations and cash on hand, will be sufficient for our
liquidity needs through at least March 31, 2004. However, because we currently
operate at a loss and have a negative cash flow, any unanticipated significant
expense or any development that hampers our growth in revenue or decreases any
of our revenue, would result in the need for additional external funds in order
to continue operations. We have no arrangements for any external financings,
whether debt or equity, and are not certain whether any such new external
financing would be available on acceptable terms. Any new debt financing would
require the cooperation and agreement of existing lenders, preferred securities
holders and Hallmark Cards.

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

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

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

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

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

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

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

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

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

If we fail to increase our advertising revenue, we may be unable to
achieve or sustain profitability, or expand our business. We expect that over
time the portion of our revenue derived from the sale of advertising time on
our

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channels will increase. We have a limited history of marketing and selling
advertising time, particularly internationally. We may be unable to identify,
attract and retain experienced sales and marketing personnel with relevant
experience for our U.S. channel, and our sales and marketing organization may
be unable to successfully compete against the significantly more extensive and
well-funded sales and marketing operations of our current or potential
competitors. Success in increasing our advertising revenue also depends upon
the number and coverage of the distributors who carry our channels, our number
of subscribers, and the viewership ratings for our programming. In addition, if
we fail to improve our ratings, we will not be able to increase our advertising
sales rate-card or may be required to run additional advertising spots which
detract from our available advertising inventory for future sales.

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

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

Hallmark Entertainment Investments controls all of our outstanding shares
of Class B common stock and owns shares of Class A common stock, representing
approximately 96.1% of the outstanding voting power on all matters submitted to
our stockholders. Hallmark Entertainment Holdings, a subsidiary of Hallmark
Cards, controls the voting of all our shares held by Hallmark Entertainment
Investments. Hallmark Entertainment Investments control could discourage
others from initiating potential merger, takeover or other change of control
transactions that may otherwise be beneficial to our business or holders of
Class A common stock. As a result, the market price of our Class A common stock
could suffer, and our business could suffer. Hallmark Entertainment
Investments control relationship with us also could give rise to conflicts of
interest, including:



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

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

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

We license the name Hallmark from Hallmark Cards and Hallmark Licensing,
Inc., for various uses, including in the name of our international and domestic
channels. The license agreement for our international channel permits the use
of the Hallmark trademarks outside the United States and Canada through
November 30, 2003, so long as Hallmark Cards and its wholly owned subsidiaries
collectively own at least 51% of our voting interest and at least 35% of our
equity interest and designate a majority of our board of directors, and so long
as there is no event of default under the agreement. The license agreement for
our domestic channel permits the use of the Hallmark trademarks in the United
States through November 30, 2003, under terms substantially similar to the
terms applicable to the license of our international channel. If Hallmark Cards
determines not to renew the trademark

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license agreements for any reason, including our failure to meet minimum
programming thresholds dependent on programming provided by affiliates of
Hallmark Cards or to comply with Hallmark Cards programming standards, we
would be forced to significantly revise our business plan and operations, and
could experience a significant erosion of our subscriber base and advertising
revenue, particularly in the United States.

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

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

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

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

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

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

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

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

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

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

32



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

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

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

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

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

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

Our stock price may be volatile and could decline substantially.

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



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

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

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

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

Risks Relating to Our Industry

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

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

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

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

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

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

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



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

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

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

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

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

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

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

Available Reports

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




Item 3.Quantitative and Qualitative Disclosures About Market Risk

We do not use derivative financial instruments in our investment
portfolio. We only invest in instruments that meet high credit and quality
standards, as specified in our investment policy guidelines. These instruments,
like all fixed income instruments, are subject to interest rate risk. The fixed
income portfolio will fall in value if there is an increase in interest rates.
If market interest rates were to increase immediately and uniformly by 10% from
levels as of March 31, 2003, the decline of the fair value of the fixed income
portfolio would not be material.

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As of March 31, 2003, our cash, restricted cash, cash equivalents and
short-term investments had a fair value of $7.6 million, which was invested in
cash and short-term commercial paper. The primary purpose of these investing
activities has been to preserve principal until the cash is required to fund
operations. Consequently, the size of this portfolio fluctuates significantly
as cash is raised and used in our business.

The value of certain investments in this portfolio can be impacted by the
risk of adverse changes in securities and economic markets and interest rate
fluctuations. At March 31, 2003, all of our investments in this category were
in fixed rate instruments or money market type accounts. A decrease in interest
rates has the effect of reducing our future annual interest income from this
portfolio, since funds would be reinvested at lower rates as the instruments
mature. Over time, any net percentage decrease in our interest rates could be
reflected in a corresponding net percentage decrease in our interest income.
For the three months ended March 31, 2003, the impact of interest rate
fluctuations, changed business prospects and all other factors did not have a
material impact on the fair value of this portfolio, or on our income derived
from this portfolio.

We have not used derivative financial instruments for speculative
purposes. As of March 31, 2003, we are not hedged or otherwise protected
against risks associated with any of our investing or financing activities.

As of March 31, 2003, we estimated the fair value of borrowings under our
bank credit facility, excluding accrued interest, to be approximately $320.0
million and the fair value of borrowings under our line of credit with HC
Crown, excluding interest, to be approximately $54.5 million. Because the
interest rates on these facilities are variable and are reset periodically, the
fair value of our debt is not significantly affected by fluctuations in
interest rates. A hypothetical 10% increase or decrease in assumed interest
rates would decrease or increase the fair value of our debt by approximately
$1.6 million, assuming that the balance of and the interest rates on our debt
were fixed as of March 31, 2003. To the extent interest rates increase, our
costs of financing will also increase because of variable rates applicable to
our outstanding debt. A hypothetical increase in assumed interest rates of 10%
would have resulted in additional interest expense of $1.6 million during the
three months ended March 31, 2003.

As of March 31, 2003, we estimated the value of our preferred securities
to be approximately $228.6 million, the value of our convertible debt to be
$49.3 million and the value of our derivative liability to be $1.0 million
using quoted market prices where available, or discounted cash flow analyses.
The value of our derivative liability is affected by fluctuations in our stock
price and interest rates. A hypothetical 10% increase in our stock price would
increase the value of our derivative liability by approximately $462,000. A
hypothetical 10% decrease in our stock price would increase the value of our
derivative liability by approximately $65,000. A hypothetical 10% increase in
the interest rate would decrease the value of our derivative liability by
approximately $267,000. A hypothetical 10% decrease in the interest rate would
decrease the value of our derivative liability by approximately $244,000. These
calculations include the assumption that the balance of our derivative
liability as of March 31, 2003, would not change during the year and that a
yearly interest rate was used.

We are exposed to market risk.

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

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

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

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

Our material interest bearing assets consisted of cash equivalents,
restricted cash, and short-term investments. The balance of our interest
bearing assets was $7.3, or less than 1% of total assets, as of March 31, 2003.
Our material liabilities subject to interest rate risk consisted of a capital
lease obligation, our bank credit facility, our line of credit with HC Crown,
and our private placement securities. The balance of those liabilities was
$435.4 million, or 53% of total liabilities, as of March 31, 2003. The balance
of our guaranteed preferred beneficial interest in Crown Media Trusts
debentures was $228.6 million. Net interest expense for the three months ended
March 31, 2003, was $7.3 million, or 17%, of our total revenue. Our guaranteed
preferred beneficial accretion for the three months ended March 31, 2003, was
$11.0 million, or 26%, of our total revenue. Our net interest expense and
preferred beneficial interest expense is sensitive to changes in the general
level of interest rates, primarily U.S. interest rates, and the volatility of
our Class A common stock to the extent this volatility impacts the value of the
derivative liability in our preferred securities. In this regard, changes in
U.S. interest rates affect the interest bearing assets and our borrowings as do
changes in the price of our Class A common stock.

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

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




Item 4.Controls and Procedures.

Evaluation of disclosure controls and procedures.

The Company, under the supervision and with the participation of the
Companys management, including its Chief Executive Officer and Chief Financial
Officer, carried out an evaluation of the effectiveness of the design and
operation of the Companys disclosure controls and procedures as of April 11,
2003 (the Evaluation Date). Based upon this evaluation, the Chief Executive
Officer and Chief Financial Officer concluded as of the Evaluation Date that
the Companys disclosure controls and procedures were effective for purposes of
recording, processing, summarizing and timely reporting material information
required to be disclosed in reports that the Company files under the Exchange
Act.

Changes in internal controls.

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

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PART II. OTHER INFORMATION




Item 6.Exhibits and Reports on Form 8-K

(a)

INDEX TO EXHIBITS

|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|3.1     |  | Amended and Restated Certificate of Incorporation (previously
filed as Exhibit 3.1 to our Registration Statement on Form S-1/A
(Amendment No. 2), Commission File No. 333-95573, and incorporated
herein by reference).                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|3.2     |  | Amendment to the Amended and Restated Certificate of
Incorporation, as filed with the State of Delaware on June 7, 2001
(previously filed as Exhibit 3.2 to our Quarterly Report on Form
10-Q for the quarter ended June 30, 2001, and incorporated herein
by reference).                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|3.3     |  | Amended and Restated Bylaws (previously filed as Exhibit 3.2 to
our Registration Statement on Form S-1/A (Amendment No. 3),
Commission File No. 333-95573, and incorporated herein by
reference).                                                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.1    |  | Amendment No. 5, dated as of February 5, 2003, to the Credit,
Security, Guaranty and Pledge Agreement, dated as of August 31,
2001, among Crown Media Holdings, Inc. as Borrower, the Guarantors
named therein, the Lenders named therein and JPMorgan Chase Bank
as Administrative Agent and as Issuing Bank (previously filed as
Exhibit 10.15 to our Annual Report on Form 10-K for the year ended
December 31, 2002, and incorporated herein by reference).
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.2    |  | Binding Memorandum of Understanding, dated January 30, 2003,
between Pramer S.C.A. and Crown Media International, LLC.                                                                                                                                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.3    |  | Binding Memorandum of Understanding, dated January 30, 2003,
between Latin America Media Distribution S.C.A. and Crown Media
International, LLC.                                                                                                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.4    |  | Technical Services Agreement, dated January 30, 2003, between
Pramer S.C.A. and Crown Media International, LLC.                                                                                                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.5    |  | March 11, 2003, Amendment to Agreement dated as of November 13,
1998, between Odyssey Holdings, LLC and the National Interfaith
Cable Coalition, Inc.                                                                                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.6*   |  | Employment Agreement, dated as of December 20, 2001, by Crown
Media United States, LLC and David Kenin.                                                                                                                                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.7*   |  | Employment Agreement, dated as of January 27, 2000, by Odyssey
Holdings, LLC and William Abbott.                                                                                                                                                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|99.1    |  | Section 906 Certification of the Chief Executive Officer and Chief
Financial Officer.                                                                                                                                                                                                                                                                                                                                                                          



---

|* |  | Management contract or compensating plan or arrangement.
|- |  | --------------------------------------------------------

(b)  Reports on Form 8-K

During the quarter ended March 31, 2003, we filed the following Form 8-K
report:



| |  |  | Report filed on March 12, 2003, regarding Item 5.
| | - |  | -------------------------------------------------

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SIGNATURES

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

CROWN MEDIA HOLDINGS, INC.

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

David J. Evans       |  | Director and Principal
Executive Officer   |  | May 15, 2003
|                                             |  |                                            |  |             
|By: /s/ WILLIAM J. ALIBER

William J. Aliber |  | Principal Financial and
Accounting Officer |  | May 15, 2003

39



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CERTIFICATION

I, David J. Evans, certify that:



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



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



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



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



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

Dated: May 15, 2003

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

40



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CERTIFICATION

I, William J. Aliber, certify that:



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



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



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



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



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

Dated: May 15, 2003

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

41



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##### Table of Contents



INDEX TO EXHIBITS

|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|3.1     |  | Amended and Restated Certificate of Incorporation (previously
filed as Exhibit 3.1 to our Registration Statement on Form S-1/A
(Amendment No. 2), Commission File No. 333-95573, and incorporated
herein by reference).                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|3.2     |  | Amendment to the Amended and Restated Certificate of
Incorporation, as filed with the State of Delaware on June 7, 2001
(previously filed as Exhibit 3.2 to our Quarterly Report on Form
10-Q for the quarter ended June 30, 2001, and incorporated herein
by reference).                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|3.3     |  | Amended and Restated Bylaws (previously filed as Exhibit 3.2 to
our Registration Statement on Form S-1/A (Amendment No. 3),
Commission File No. 333-95573, and incorporated herein by
reference).                                                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.1    |  | Amendment No. 5, dated as of February 5, 2003, to the Credit,
Security, Guaranty and Pledge Agreement, dated as of August 31,
2001, among Crown Media Holdings, Inc. as Borrower, the Guarantors
named therein, the Lenders named therein and JPMorgan Chase Bank
as Administrative Agent and as Issuing Bank (previously filed as
Exhibit 10.15 to our Annual Report on Form 10-K for the year ended
December 31, 2002, and incorporated herein by reference).
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.2    |  | Binding Memorandum of Understanding, dated January 30, 2003,
between Pramer S.C.A. and Crown Media International, LLC.                                                                                                                                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.3    |  | Binding Memorandum of Understanding, dated January 30, 2003,
between Latin America Media Distribution S.C.A. and Crown Media
International, LLC.                                                                                                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.4    |  | Technical Services Agreement, dated January 30, 2003, between
Pramer S.C.A. and Crown Media International, LLC.                                                                                                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.5    |  | March 11, 2003, Amendment to Agreement dated as of November 13,
1998, between Odyssey Holdings, LLC and the National Interfaith
Cable Coalition, Inc.                                                                                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.6*   |  | Employment Agreement, dated as of December 20, 2001, by Crown
Media United States, LLC and David Kenin.                                                                                                                                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.7*   |  | Employment Agreement, dated as of January 27, 2000, by Odyssey
Holdings, LLC and William Abbott.                                                                                                                                                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|99.1    |  | Section 906 Certification of the Chief Executive Officer and Chief
Financial Officer.                                                                                                                                                                                                                                                                                                                                                                          



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|* |  | Management contract or compensating plan or arrangement.
|- |  | --------------------------------------------------------