##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF
1934


|           |  |                                                                                           
|---------- |  | ------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                           
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31,
	2001                                              
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
	OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
	from           to          .                                   

Commission file number: 000-30700

Crown Media Holdings, Inc.

(Exact name of Registrant as Specified in Its
Charter)


|                                                                |  |                                      
|--------------------------------------------------------------- |  | -------------------------------------
|Delaware                                                        |  | 84-1524410                           
|(State or other jurisdiction of
	incorporation or organization) |  | (I.R.S. Employer
	Identification No.)

6430 S. Fiddlers Green
Circle,

Suite 500,


Greenwood Village, Colorado 80111


(Address of Principal Executive Offices and
Zip Code)


(303) 220-7990

(Registrants Telephone Number, Including
Area Code)


Securities registered pursuant to
Section 12(b) of the Act: None

Securities registered pursuant to
Section 12(g) of the Act: Class A Common Stock,
$0.01 par value

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 for 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 þ          No o

Indicate by check
mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.     o

As of
March 13, 2002, the aggregate market value of the voting
and non-voting common equity held by non-affiliates of the
registrant was $110,206,777. This excludes shares held by
persons who may be considered affiliates.

As of
March 13, 2002, the number of shares of Class A Common
Stock, $.01 par value outstanding was 73,575,830, and the
number of shares of Class B Common Stock, $.01 par
value, outstanding was 30,670,422.

DOCUMENTS INCORPORATED BY REFERENCE

Portions
of the Registrants Proxy Statement for the 2002 Annual
Meeting of Stockholders, to be filed, are incorporated by
reference in Part III of this report.



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TABLE OF CONTENTS



|                                                   |                                                                                                          |  |  |  |  |  |  | 
|-------------------------------------------------- | -------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                            
|                                                   | Item 1. Business                                                                                        
|                                                   | Item 2. Properties                                                                                      
|                                                   | Item 3. Legal Proceedings                                                                               
|                                                   | Item 4. Submission of Matters to a Vote of Security Holders                                             
|PART II                                           
|                                                   | Item 5. Market for Our Common Equity and Related Stockholder Matters                                    
|                                                   | Item 6. Selected Financial Data                                                                         
|SELECTED YEARLY FINANCIAL INFORMATION             
|                                                   | Item 7. Managements Discussion and Analysis of Historical Financial Condition and Results of Operations
|                                                   | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                     
|                                                   | Item 8. Consolidated Financial Statements and Supplementary Data                                        
|PART III                                          
|                                                   | Item 10. Directors and Executive Officers of the Company                                                
|                                                   | Item 11. Executive Compensation                                                                         
|                                                   | Item 12. Security Ownership of Certain Beneficial Owners and Management                                 
|                                                   | Item 13. Certain Relationships and Related Transactions                                                 
|PART IV                                           
|                                                   | Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                                
|SIGNATURES                                        
|EX-10.2 2nd Amended/Restated Stockholders Agrmt   
|EX-10.5 Amendment No 2 to Credit Agreement        
|EX-10.7 Amended/Restated Limited Guarantee Agrmt  
|EX-10.14 Amended/Restated Program License Agrmt   
|EX-10.15 Amended/Restated Program License Agrmt   
|EX-10.20 Security Agreement                       
|EX-10.22 Amended/Restated Company Agreement       
|EX-10.28 Service Agreement                        
|EX-10.29 Registration Rights Agreement            
|EX-10.39 5th Agreement to Lease                   
|EX-10.44 Employment Agreement - William Aliber    
|EX-10.45 Employment Agreement - Paul FitzPatrick  
|EX-10.46 Employment Agreement - Lana Curbi        
|EX-10.47 Employment Agreement - Russel Givens, Jr.
|EX-10.51 Irrevocable Standby Letter of Credit     
|EX-10.52 Reduction Certificate re Letter of Credit
|EX-21.1 List of our Subsidiaries                  
|EX-23.1 Consent of Arthur Andersen LLP            
|EX-99.1 Letter - Representation by Arthur Andersen



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##### Table of Contents



TABLE OF CONTENTS

|           |  |                                                                                        |    |      |    | 
|---------- |  | -------------------------------------------------------------------------------------- | -- | ---- | -- | 
|           |  |                                                                                        |    | Page
|           |  |                                                                                        |    |     
|PART I    
|Item 1     |  | Business                                                                               |    |      | 2  | 
|Item 2     |  | Properties                                                                             |    |      | 28 | 
|Item 3     |  | Legal Proceedings                                                                      |    |      | 29 | 
|Item 4     |  | Submission of Matters to a Vote of Security
	Holders                                   |    |      | 30 | 
|PART II   
|Item 5     |  | Market for Our Common Equity and Related
	Stockholder Matters                          |    |      | 32 | 
|Item 6     |  | Selected Financial Data                                                                |    |      | 33 | 
|Item 7     |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |    |      | 39 | 
|Item 7A    |  | Quantitative and Qualitative Disclosures About
	Market Risk                            |    |      | 54 | 
|Item 8     |  | Consolidated Financial Statements and
	Supplementary Data                              |    |      | 56 | 
|Item 9     |  | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosure  |    |      | 56 | 
|PART III  
|Item 10    |  | Directors and Executive Officers of the Company                                        |    |      | 56 | 
|Item 11    |  | Executive Compensation                                                                 |    |      | 56 | 
|Item 12    |  | Security Ownership of Certain Beneficial Owners
	and Management                        |    |      | 56 | 
|Item 13    |  | Certain Relationships and Related Transactions                                         |    |      | 56 | 
|PART IV   
|Item 14    |  | Exhibits, Financial Statement Schedules and
	Reports on Form 8-K                       |    |      | 70 | 
|Signatures |  |                                                                                        | 75 |     

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The discussion set forth in this Annual Report
on Form 10-K contains statements concerning potential
future events. Such forward-looking statements are based on
assumptions by Crown Media Holdings, Inc.s (Crown
Media Holdings) management, as of the date of this Annual
Report on Form 10-K, 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 Annual Report on Form 10-K under the heading
Forward-Looking Statements and Risk Factors. Crown
Media Holdings will not update any forward-looking statements
contained in this Annual Report on Form 10-K to reflect
future events or developments.

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

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




PART I




Item 1.     Business

Company Overview

We own and operate pay television channels, known
as the Hallmark Channel, dedicated to high quality,
entertainment programming for adults, which is also appealing to
children. Based upon research conducted for us, we believe that
this format is both important to consumers and much needed by
consumers. As a network, we offer great stories with great
actors, masterfully written, directed and produced. In addition,
we recently purchased more than 700 titles from the Hallmark
Entertainment Distribution, LLC (Hallmark Entertainment
Distribution) library. We believe that with the
programming we own (the Crown Media Library),
together with the programming we license from Hallmark
Entertainment Distribution and third parties, we are
establishing the Hallmark Channel internationally and in the
United States as destinations for viewers seeking high quality
family-friendly entertainment and as attractive outlets for
advertisers seeking to target these viewers. We have
distribution agreements with leading pay television distributors
in each of our markets. We distribute the channel
internationally and in the United States. The following table
shows for our channels, our

2



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programming sources, selected pay television
distributors and the total number of our subscribers as of
December 31, 2001.


|                    |  |                                       |  |                                      
|------------------- |  | ------------------------------------- |  | -------------------------------------
|                    |  |                                      
|                    |  | Hallmark Channel                     
|                    |  |                                      
|                    |  | International                         |  | U.S.                                 
|                    |  |                                       |  |                                      
|Programming Sources |  |  Crown Media Library                 |  |  Crown Media Library                
|                    |  |  Hallmark Entertainment Distribution |  |  Hallmark Entertainment Distribution
|                    |  |  Third-party sources                 |  |  Third-party sources                
|                   
|Selected Pay        |  |  BskyB                               |  |  AT&T                               
|Television          |  |  Sky Network                         |  |  Time Warner                        
|Distributors        |  |  Measat                              |  |  DirecTV                            
|                    |  |  Videoland                           |  |  Charter                            
|                    |  |  Via Digital                         |  |  Adelphia                           
|                    |  |  Telepiu                             |  |  EchoStar                           
|                    |  |                                       |  |  Cox                                
|                    |  |                                       |  |  Comcast                            
|                    |  |                                       |  |  Cablevision                        
|                   
|Total Subscribers   |  | 44.4 million                          |  | 43.5 million                         

As of February 28, 2002, our total number of
subscribers had increased to approximately 89.5 million.
For a more detailed description of our channels, see
 Channels  The Hallmark
Channel  International and
 Channels  The Hallmark
Channel  United States.

Our domestic and international channels are
expected to benefit from our newly acquired Crown Media Library.
Our channels also enjoy the benefits of long-term program
agreements with Hallmark Entertainment Distribution, which
generally provide exclusive pay television access to the
Hallmark Entertainment Distribution library titles we did not
purchase and to new production and first-run presentations
controlled by Hallmark Entertainment Distribution. Our library
and the programming that we have access to through our program
license agreements with Hallmark Entertainment Distribution
consist of some of the most highly rated made-for-television
movies, based on A.C. Nielson ratings. These programs have also
won numerous Emmy Awards, Golden Globe Awards and Peabody Awards.

We have distribution agreements with leading pay
television distributors in each of our markets. Internationally,
these include British Sky Broadcasting, Sky Network, Videoland,
Telepiu, Via Digital and Measat. In the United States, the nine
largest pay television distributors account for approximately
85% of all pay cable and television subscribers as of
December 31, 2001. We currently distribute our
U.S. channel on cable and satellite systems operated by
each of these nine pay television distributors, and at
December 31, 2001, we had long-term distribution agreements
with eight of the top nine pay television distributors. We are
seeking to increase our subscriber base by signing a long-term
distribution agreement with the remaining top nine distributor.
No individual pay television distributor accounted for more than
10% of our consolidated revenues or 15% of our consolidated
subscribers for the year ended December 31, 2001.

Through Crown Media Distribution, we exploit the
Crown Media Library to the extent not used by us. We license the
use of Crown Media Library films and programming to third
parties in return for license fees.

Information concerning revenues, operating losses
and identifiable assets attributable to each of our domestic and
international pay television programming services and our
distribution of films may be found in Note 15 of Notes to
Consolidated Financial Statements in the Report.

Development of Business

Internationally, the Hallmark Channel is operated
and distributed in approximately 110 international countries by
Crown Media International, which commenced operations as a
Delaware corporation in June

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1995, and in the United Kingdom by Crown
Entertainment. Domestically, the Hallmark Channel (formerly
known as the Odyssey Network) is operated and distributed by
Crown Media United States, which commenced operations as a
Delaware limited liability company in July 1995. Significant
investors in Crown Media Holdings include Hallmark Entertainment
Holdings, Inc. (Hallmark Entertainment Holdings), a
subsidiary of Hallmark Cards, Incorporated (Hallmark
Cards), Liberty Media Corporation (Liberty
Media), the National Interfaith Cable Coalition, Inc.
(NICC), J.P. Morgan Partners (BHCA), L. P.
(J.P. Morgan), and DIRECTV Enterprises, Inc.
(DIRECTV).




| |                        
| | -----------------------
| | Purchase of Film Assets

On September 28, 2001, Crown Media Holdings
completed the acquisition of the Crown Media Library, comprised
of approximately 700 film titles and related rights and
property, representing over 3,000 hours of programming,
from the film assets of Hallmark Entertainment Distribution, a
wholly-owned subsidiary of Hallmark Entertainment, LLC
(Hallmark Entertainment). Under the terms of the
agreement, we assumed $220.0 million of Hallmark
Entertainment Distribution debt and payables and issued
33,744,528 shares of our Class A common stock. The
number of shares of common stock was determined by a formula
based on the average closing price of the common stock from
November 6, 2000 (the date we announced that we were
contemplating the transaction) to September 27, 2001 (the
day prior to closing), which average price was $17.78 per
share. A committee of directors independent of Hallmark
Entertainment and its affiliates considered and negotiated this
transaction, including the purchase price, and received a
fairness opinion from its financial advisor. Additionally, the
stockholders of Crown Media Holdings, other than Hallmark Cards
and its affiliates, approved the transaction at a meeting on
July 17, 2001. Of the shares issued in the transaction,
425,000 shares were issued into escrow and will be returned
to us if a previously announced, proposed settlement of a
stockholder lawsuit relating to the transaction becomes final.

Crown Media Holdings recorded the film assets at
carrying cost for financial reporting purposes, which was less
than the fair value at the closing date, because the transaction
was entered into by entities under common control. In accordance
with the Purchase and Sale Agreement with Hallmark
Entertainment, Hallmark Entertainment Distribution had
60 days from the close of the transaction to provide Crown
Media Holdings with any adjustments to the carrying cost of the
film assets. These adjustments have been made and are properly
reflected in our financial statements.



| |                          
| | -------------------------
| | Network Operations Center

For the first five years of our existence, we
relied upon our affiliates and third-party providers to
originate and distribute the Hallmark Channel worldwide. Faced
with rapid distribution growth throughout Europe, Latin America
and Asia, we decided to build a worldwide playback and
origination center in Greenwood Village, Colorado. On
February 14, 2001, we opened our advanced, fully digital
6,000 square foot global Network Operations Center, with
the launch of three channels into Europe. In the following
weeks, additional European channels were launched, followed by
launches into Israel, Russia, the Middle East and Latin America.

The Network Operations Center enables us to
control signal operations for many of our channels, with the
intent of having high on-air transmission quality, achieving
economies of scale in production and distribution, facilitating
the roll-out of new channels, allowing for distribution of
programming in digital and other formats as required in the
rapidly evolving broadband environment and enabling us to
provide increased support to our advertisers. The Network
Operations Center currently has capacity to distribute
thirty-two channels and is distributing our programming on
twelve feeds throughout Europe, Latin America and the Middle
East. We intend to distribute our programming to additional
countries (including the U.S.) through the Network Operations
Center as our existing arrangements with third party up-link
providers expire.



| |               
| | --------------
| | Reorganization

In order to utilize the synergies between Crown
Media International, our international operating subsidiary, and
Crown Media United States, our domestic operating subsidiary,
approximately 15% of the

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Companys employees were involuntarily
terminated during October 2001. Employees affected by this
reorganization were primarily members of our marketing, finance
and administrative departments. We incurred costs related to
this reorganization, which have been accounted for under
Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring), and SEC Staff Accounting
Bulletin (SAB) No. 100, Restructuring and
Impairment Charges. These costs were comprised primarily of
the termination benefits of severance salary and outplacement
service for all affected employees. During fourth quarter 2001,
we incurred restructuring charges of $4.6 million related
to the reorganization.




| |                 
| | ----------------
| | Credit Agreement

On September 28, 2001, we entered into a
credit agreement with a syndicate of banks, led by JP Morgan
Chase Bank (formerly The Chase Manhattan Bank) as Administrative
Agent and Issuing Bank, under which the banks extended to us a
five-year secured credit facility of up to $285.0 million,
later increased in 2001 to $320.0 million. For further
information see  Liquidity and Capital
Resources.



| |                  
| | -----------------
| | Private Placement

On December 17, 2001, we completed a
$265.0 million private placement to a group of
institutional investors. For further information see
 Liquidity and Capital Resources.



| |                                                
| | -----------------------------------------------
| | Re-Branding of International and
	U.S. Channels

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



| |        
| | -------
| | DIRECTV

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

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



| |      
| | -----
| | EM.TV

In connection with the July 27, 2001,
purchase by Hallmark Entertainment of the 5,377,721 shares
of Crown Media Holdings Class A common stock held by The
Jim Henson Company, a subsidiary of German Media Company EM.TV,
Crown Media United States substantially revised its two program
agreements with The Jim Henson Company and EM.TV, under which
Crown Media United States was obligated to purchase both
pre-existing and original programming. The revisions replace all
prior obligations. Crown Media United States now licenses only
two series from The Jim Henson Company. For the revisions to the
agreements, Crown Media United States paid to The Jim Henson
Company and EM.TV $13.0 million and wrote-off program
license fees totaling $15.2 million. The entire
$28.2 million is included in non-affiliate programming
costs in the accompanying consolidated statement of operations
for the year ended December 31, 2001.

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| |                                 
| | --------------------------------
| | Interactive and
	Video-on-Demand

We have been engaged in joint efforts with
Hallmark Entertainment to develop an interactive television
model designed to incorporate a wide array of products and
services from Crown Media Holdings, Hallmark Cards, Hallmark
Entertainment and others. This new television application
involves a graphic user interface, appearing on the television
screen that will allow consumers to use several features. These
can include video-on-demand (VOD), which will allow
consumers to select and view films from our library, an
interactive arts and crafts channel for kids featuring
Crayola® products, and a unique electronic messaging
system that will allow consumers to incorporate film clips from
our library in their message. We are testing this application in
several markets.

On November 19, 2001, Hallmark Entertainment
Distribution, Crown Media Distribution, and iN DEMAND, the
nations leading pay-per-view network, signed a cable
video-on-demand licensing agreement for titles housed in
Hallmark Entertainment Distributions and Crown Media
Distributions program libraries. Under terms of the
agreement, Hallmark Entertainment and Crown Media Distribution
provide iN DEMAND, on a non-exclusive basis, with selected
telefilms, miniseries, series and specials housed in their
respective libraries for the pay-per-view networks
recently launched VOD service.

Industry Overview

The pay television industry is comprised
primarily of program suppliers, pay television channel providers
and pay television distributors. Program suppliers, from whom we
acquire or license a portion of our programming, include many of
the major production studios and other independent production
companies and independent owners of programming. These program
suppliers create, develop and finance the production of, or
control, movies, television miniseries, series and other
programming. Due to our recent acquisition of the Crown Media
Library, we are now also a program supplier. Program suppliers
generate revenues by licensing their programming to broadcasters
and pay television channel providers around the world. These
licenses are typically specific by territory and are limited to
a certain number of showings within specified periods of time.

We are also a pay television channel provider.
Pay television channel providers include all channel providers
except free-to-air broadcasters such as ABC, NBC, CBS, FOX, WB
and the BBC. Pay television channel providers both produce
programming and acquire or license programming from program
suppliers and generally package the programming according to an
overriding theme. Pay television restricts viewership through
security encryption devices that limit viewership to paying
subscribers. Pay television channel providers compete with each
other for distribution and to attract viewers and advertisers.
Pay television providers generally target an audience with a
certain demographic composition, so that they can then sell
advertising to advertisers seeking to reach that audience.

Pay television distributors own and operate the
platforms used to deliver channels to subscribers. These
distributors use several different technologies to reach their
subscribers as described below. Distributors attempt to create a
mix of channels that will be attractive to their subscriber
population in an attempt to gain new subscribers and to reduce
subscriber turnover. Distributors have different levels of
service for subscribers, with each service level containing some
different channels. More recently, distributors have begun to
offer additional broadband services such as Internet access,
telephony and video-on-demand over their systems.

As a result of the recently increased competition
for limited analog channel space in the United States, pay
television channel providers are often required to pay
subscriber acquisition fees to pay television distributors for
carriage on their systems. These subscriber acquisition fees are
paid to television distributors on a per subscriber basis and
generally in advance of the receipt of subscriber fee revenues
from such pay television distributors.

Distribution Platforms

Four major distribution platforms are currently
used to transmit programming. First, cable television systems
use coaxial or fiber optic cable to transmit multiple channels
between a central facility, known as a headend, and the
individual subscribers television set. Second, analog and
digital satellite broadcast systems

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(such as direct-to-home or DTH) use
satellite transponders to broadcast television programming to
individual dwellings with satellite reception equipment,
including a dish and a decoder. Third, digital terrestrial
television broadcasters (DTT) typically broadcast
locally or through regional or national ground-based
transmission networks. In general, such broadcasters use
landline, microwave or satellite transmission systems to
distribute programming to terrestrial transmission facilities
for broadcast directly to viewers homes. Finally, channels
can also be distributed through satellite master antenna
television (SMATV). SMATV is used primarily for
buildings, such as apartments and other buildings that receive
programming from satellites by means of a single antenna that is
connected to a pay television distributors headend. The
television signals are then distributed to individual units in
the building by cable.


Sources of Revenue



| |                
| | ---------------
| | Subscriber Fees

Pay television customers subscribe for basic
services by paying monthly fees for basic channels to pay
television distributors. The customers can also subscribe to
additional packages of premium or pay-per-view services upon
payment of additional fees. In most markets, pay television
distributors generally pay a fee per subscriber to channel
providers. We are a channel provider.



| |                    
| | -------------------
| | Advertising Revenue

The advertising market differs greatly around the
world. In the United States, the most developed television
market, it was estimated by Advertising Age that, as of
December 31, 2000, 52% of all advertising expenditures were
spent on television and 10% of all advertising expenditures were
spent on cable television. In other parts of the world, the
amount spent by advertisers on television varies according to
the development of each countrys television market.
Program ratings systems in many non-United States markets are
also less developed, and as a result, advertisers rely largely
on subscriber counts rather than empirical measurements when
buying advertising time.

Television advertising is sold in a variety of
formats. Many pay television channels rely largely upon the spot
advertisement format. Spot advertisements are normally 30
seconds long and air during or between programs. They are often
sold in packages of a certain number of broadcasts or to deliver
a certain number of viewers. An alternative to spot advertising
is sponsorship, by which a company sponsors a program or
selection of programs on a channel by applying their branding
around the programming.

The ability of a television channel to generate
advertising revenue largely depends on estimated or actual
viewing levels, primarily based on ratings, and on advertising
rates. Typically, in the United States and some other markets,
independent ratings systems on which advertising sales can be
based are well established and widely accepted within the
industry. In addition, pay television channel providers and
distributors may also provide estimated or actual subscriber
information.

Historically, advertisers have spent more on
advertising through traditional broadcast television than
through pay television. We believe that as pay television
continues to gain viewership relative to broadcast television,
it should attract a larger percentage of the total available
dollars spent on television advertising. Also, as pay television
draws audience share from broadcast television, audience
demographics become fragmented; and, as a result, advertisers
are able to target groups of viewers with specific demographic
profiles.



| |                  
| | -----------------
| | Licensing Revenue

Program suppliers sell or license programming to
pay television channel providers who pay a license fee for the
right to air the programming over a certain period in their
program package. Revenue from television and distribution
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. Long-term receivables arising from licensing
agreements are recorded at their net present value.

7



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Channels



| |                                      
| | -------------------------------------
| | The Hallmark Channel 
	International



| |         
| | --------
| | Overview

The international channel commenced 2001 with
33.5 million subscribers and ended the year with
44.4 million subscribers, an increase of 32%. We currently
distribute the international channel to 22 geographic markets
covering approximately 110 countries, dubbed or subtitled into
26 languages. Our markets include Asia Pacific, with
18.2 million subscribers, Latin America, with
11.0 million subscribers, Europe, Middle East and Africa,
with 9.6 million subscribers, and the United Kingdom, with
5.6 million subscribers.



| |            
| | -----------
| | Programming

The international channel offers a range of
award-winning programming including made-for-television movies,
miniseries, epics, historical dramas, literary classics,
romances and contemporary stories. We seek programming that is
consistent with our programming theme: great stories that
stay with you. The high quality, broad appeal,
entertainment programming we offer is based on classic
literature and universal themes, includes world-renowned actors
and actresses, such as Katherine Hepburn, Paul Newman, Gregory
Peck, Glenn Close, Sidney Poitier, Whoopi Goldberg, Anjelica
Huston, James Earl Jones, and James Coburn and is often filmed
in international locations.

Significant sources for our programming are the
Crown Media Library and programming produced since
January 1, 2001, by Hallmark Entertainment, which is
available to us through our program agreements. Prior to the
purchase of the Crown Media Library, we licensed substantially
all of the titles in that library from Hallmark Entertainment
Distribution. We enjoy access to new Hallmark Entertainment
programming through an amended five-year program license
agreement with Hallmark Entertainment Distribution. For more
information regarding the program license agreements with
Hallmark Entertainment Distribution, please see Part III
below. Hallmark Entertainment currently provides family
programming for audiences worldwide, generally delivering more
than 40 projects each year. For the year ended December 31,
2001, approximately 64% of our international programming was
from the Crown Media Library or licensed from Hallmark
Entertainment Distribution. We licensed for that same time
period the remaining portion of the international channels
programming line-up from third parties. This third party
programming is consistent with the themes and quality of the
material we own or license from Hallmark Entertainment
Distribution. We license programming from third party suppliers
such as Carlton International Media Limited, CBS Broadcast
International, Alliance Atlantis International Television
Distribution Limited, Beyond Distribution Pty Ltd., Southern
Star Sales Limited, Hearst Entertainment, Inc., Paramount
Pictures (Australia) Pty Ltd., Columbia Tri-Star International
and Buena Vista (Disney).

During 2001, we aired third-party series such as
Star Trek, Judging Amy, and Law and Order and
acquired for 2002 The Guardian, Party of Five, Touched by an
Angel, and more Law and Order and Judging Amy.
We also aired third-party movies and mini-series including
Pretty Woman, Princess Bride, Mission Impossible I,
Color of Money, Judy Garland: Me and My Shadows, and
Blonde: The Marilyn Monroe Story.



| |             
| | ------------
| | Distribution

In the countries where we offer the international
channel, we distribute the channel through a variety of
distribution platforms, including cable, DTH, DTT and SMATV. We
partner with international pay television distributors such as
BSkyB, Sky Network, Videoland, Telepiu, Via Digital and Measat,
and our international distribution agreements with such
distributors generally last two to five years. We have the
capability to create and deliver our channel in a short period
of time through our broadcast infrastructure.

We regularly review existing and potential
markets to assess their prospects. As the number of
international channel subscribers increases in a market, we
assess our ability to increase revenue or develop new revenue
sources by subdividing the market through the addition of
satellite signals to individual countries within that market as
opportunities  particularly advertising 
arise. When we subdivide a market, we are able to customize the
channel to appeal to a more specific audience. The delivery of
the international channel

8



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##### Table of Contents



to more targeted audiences also increases the
number of potential advertisers on the channel by creating more
targeted advertising opportunities for local or regional
businesses in the markets in which we operate.


The following chart shows the approximate number
of television households and pay television households, as
estimated by Kagan World Media at December 31, 2001 (except
where noted), and the number of our international channel
subscribers at year-end 2000 and 2001.

|                                |                             |          |  |         |         |             |  |                |         |               |  |            |      |  |  |       |        |  |  |       |        |  |  |        |       | 
|------------------------------- | --------------------------- | -------- |  | ------- | ------- | ----------- |  | -------------- | ------- | ------------- |  | ---------- | ---- |  |  | ----- | ------ |  |  | ----- | ------ |  |  | ------ | ----- | 
|                                |                             |          |  |         |         |             |  |                |         |              
|                                |                             |          |  |         |         |             |  | Hallmark       |         | Hallmark     
|                                |                             |          |  |         |         |             |  | Channel- Intl |         | Channel-Intl
|                                |                             |          |  |         |         |             |  | Subscribers(1) |         | December 31, 
|                                |                             | Total TV |  | Pay TV  |         | %           |  |                |         | 2001 % of    
|                                |                             | House-   |  | House-  |         | Pay TV      |  | December 31,   |         | December 31,  |  | Pay TV    
|Markets                         |                             | holds    |  | holds   |         | Penetration |  | 2000           |         | 2001          |  | Households
|                                |                             |          |  |         |         |             |  |                |         |               |  |           
|                                |                             |          |  |         |         |             |  |               
|                                |                             | (000s)  |  |         |         | (000s)     |  |               
|Asia Pacific:                   |                             |          |  |         |         |             |  |                |         |               |  |            |      |  |  |       |        |  |  |       |        |  |  |       
|                                | Australia                   |          |  | 6,995   |         |             |  | 1,750          |         |               |  | 25.0%      |      |  |  | 463   |        |  |  | 542   |        |  |  | 31.0%  |      
|                                | China                       |          |  | 267,700 |         |             |  | 82,900         |         |               |  | 31.0       |      |  |  | 103   |        |  |  | 106   |        |  |  | 0.1%   |      
|                                | India(4)                    |          |  | 96,359  |         |             |  | 39,238         |         |               |  | 40.7       |      |  |  | 6,018 |        |  |  | 8,757 |        |  |  | 22.3%  |      
|                                | Indonesia                   |          |  | 30,500  |         |             |  | 1,925          |         |               |  | 6.3        |      |  |  | 64    |        |  |  | 80    |        |  |  | 4.2%   |      
|                                | Japan                       |          |  | 47,850  |         |             |  | 27,410         |         |               |  | 57.3       |      |  |  | 130   |        |  |  | 130   |        |  |  | 0.5%   |      
|                                | Korea(2)                    |          |  | 13,354  |         |             |  | 3,050          |         |               |  | 22.8       |      |  |  | 1,000 |        |  |  | 2,613 |        |  |  | 85.7%  |      
|                                | Malaysia                    |          |  | 3,600   |         |             |  | 792            |         |               |  | 22.0       |      |  |  | 396   |        |  |  | 454   |        |  |  | 57.3%  |      
|                                | New Zealand                 |          |  | 1,280   |         |             |  | 766            |         |               |  | 59.8       |      |  |  | 210   |        |  |  | 283   |        |  |  | 36.9%  |      
|                                | Philippines                 |          |  | 9,100   |         |             |  | 1,820          |         |               |  | 20.0       |      |  |  | 765   |        |  |  | 750   |        |  |  | 41.2%  |      
|                                | Singapore                   |          |  | 1,000   |         |             |  | 327            |         |               |  | 32.7       |      |  |  | 260   |        |  |  | 190   |        |  |  | 58.1%  |      
|                                | Taiwan                      |          |  | 6,150   |         |             |  | 5,113          |         |               |  | 83.1       |      |  |  | 1,960 |        |  |  | 3,950 |        |  |  | 77.3%  |      
|                                | Thailand                    |          |  | 13,760  |         |             |  | 720            |         |               |  | 5.2        |      |  |  | 324   |        |  |  | 340   |        |  |  | 47.2%  |      
|                                |                             |          |  |         |         |             |  |                |         |               |  |            |      |  |  |       |        |  |  |       |        |  |  |       
|                                |                             | Subtotal |  |         | 497,648 |             |  |                | 165,811 |               |  |            | 33.3 |  |  |       | 11,693 |  |  |       | 18,195 |  |  |        | 11.0% | 
|Europe, Middle East and Africa: |                             |          |  |         |         |             |  |                |         |               |  |            |      |  |  |       |        |  |  |       |        |  |  |       
|                                | Africa(3)                   |          |  | 6,256   |         |             |  | 1,361          |         |               |  | 21.8       |      |  |  | 600   |        |  |  | 699   |        |  |  | 51.4%  |      
|                                | Belgium/ Holland            |          |  | 10,755  |         |             |  | 10,459         |         |               |  | 97.2       |      |  |  | 196   |        |  |  | 136   |        |  |  | 1.3%   |      
|                                | Bulgaria/ Croatia/ Slovenia |          |  | 2,964   |         |             |  | 1,089          |         |               |  | 36.7       |      |  |  | 168   |        |  |  | 254   |        |  |  | 23.3%  |      
|                                | Czech Republic              |          |  | 4,058   |         |             |  | 1,844          |         |               |  | 45.4       |      |  |  | 356   |        |  |  | 408   |        |  |  | 22.1%  |      
|                                | Denmark                     |          |  | 2,458   |         |             |  | 1,891          |         |               |  | 76.9       |      |  |  | 219   |        |  |  | 324   |        |  |  | 17.1%  |      
|                                | Finland/ Iceland            |          |  | 2,091   |         |             |  | 1,215          |         |               |  | 58.1       |      |  |  | 49    |        |  |  | 70    |        |  |  | 5.8%   |      
|                                | Hungary                     |          |  | 3,620   |         |             |  | 2,958          |         |               |  | 81.7       |      |  |  | 166   |        |  |  | 244   |        |  |  | 8.2%   |      
|                                | Israel(2)                   |          |  | 1,650   |         |             |  | 1,369          |         |               |  | 83.0       |      |  |  | 1,262 |        |  |  | 1,369 |        |  |  | 100.0% |      
|                                | Italy                       |          |  | 21,240  |         |             |  | 2,869          |         |               |  | 13.5       |      |  |  | 986   |        |  |  | 1,015 |        |  |  | 35.4%  |      
|                                | Middle East (2)(6)          |          |  | 4,705   |         |             |  | 2,604          |         |               |  | 55.3       |      |  |  | 112   |        |  |  | 184   |        |  |  | 7.1%   |      
|                                | Norway                      |          |  | 1,884   |         |             |  | 1,261          |         |               |  | 66.9       |      |  |  | 304   |        |  |  | 432   |        |  |  | 34.3%  |      
|                                | Poland                      |          |  | 12,555  |         |             |  | 6,751          |         |               |  | 53.8       |      |  |  | 1,193 |        |  |  | 1,194 |        |  |  | 17.7%  |      
|                                | Portugal                    |          |  | 3,304   |         |             |  | 1,542          |         |               |  | 46.7       |      |  |  | 78    |        |  |  | 118   |        |  |  | 7.7%   |      
|                                | Romania                     |          |  | 7,663   |         |             |  | 3,603          |         |               |  | 47.0       |      |  |  | 344   |        |  |  | 556   |        |  |  | 15.4%  |      
|                                | Russia                      |          |  | 59,145  |         |             |  | 8,986          |         |               |  | 15.2       |      |  |  | 337   |        |  |  | 378   |        |  |  | 4.2%   |      
|                                | Slovakia                    |          |  | 1,879   |         |             |  | 1,237          |         |               |  | 65.8       |      |  |  | 295   |        |  |  | 344   |        |  |  | 27.8%  |      
|                                | Spain                       |          |  | 13,167  |         |             |  | 4,132          |         |               |  | 31.4       |      |  |  | 766   |        |  |  | 878   |        |  |  | 21.2%  |      
|                                | Sweden                      |          |  | 4,175   |         |             |  | 2,902          |         |               |  | 69.5       |      |  |  | 417   |        |  |  | 647   |        |  |  | 22.3%  |      
|                                | Turkey                      |          |  | 16,100  |         |             |  | 1,200          |         |               |  | 7.5        |      |  |  | 170   |        |  |  | 394   |        |  |  | 32.8%  |      
|                                | United Kingdom              |          |  | 24,137  |         |             |  | 10,516         |         |               |  | 43.6       |      |  |  | 4,208 |        |  |  | 5,557 |        |  |  | 52.8%  |      
|                                |                             |          |  |         |         |             |  |                |         |               |  |            |      |  |  |       |        |  |  |       |        |  |  |       

9



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##### Table of Contents



|               |                        |          |  |        |         |             |  |                |         |               |  |            |       |  |  |       |        |  |  |       |        |  |  |       |       | 
|-------------- | ---------------------- | -------- |  | ------ | ------- | ----------- |  | -------------- | ------- | ------------- |  | ---------- | ----- |  |  | ----- | ------ |  |  | ----- | ------ |  |  | ----- | ----- | 
|               |                        |          |  |        |         |             |  |                |         |              
|               |                        |          |  |        |         |             |  | Hallmark       |         | Hallmark     
|               |                        |          |  |        |         |             |  | Channel- Intl |         | Channel-Intl
|               |                        |          |  |        |         |             |  | Subscribers(1) |         | December 31, 
|               |                        | Total TV |  | Pay TV |         | %           |  |                |         | 2001 % of    
|               |                        | House-   |  | House- |         | Pay TV      |  | December 31,   |         | December 31,  |  | Pay TV    
|Markets        |                        | holds    |  | holds  |         | Penetration |  | 2000           |         | 2001          |  | Households
|               |                        |          |  |        |         |             |  |                |         |               |  |           
|               |                        |          |  |        |         |             |  |               
|               |                        | (000s)  |  |        |         | (000s)     |  |               
|               |                        | Subtotal |  |        | 203,806 |             |  |                | 69,789  |               |  |            | 34.2  |  |  |       | 12,226 |  |  |       | 15,201 |  |  |       | 21.8% | 
|Latin America: |                        |          |  |        |         |             |  |                |         |               |  |            |       |  |  |       |        |  |  |       |        |  |  |      
|               | Argentina              |          |  | 10,400 |         |             |  | 5,534          |         |               |  | 53.2       |       |  |  | 3,875 |        |  |  | 4,180 |        |  |  | 75.5% |      
|               | Brazil                 |          |  | 37,900 |         |             |  | 5,370          |         |               |  | 14.2       |       |  |  | 920   |        |  |  | 1,076 |        |  |  | 20.0% |      
|               | Chile                  |          |  | 4,300  |         |             |  | 930            |         |               |  | 21.6       |       |  |  | 353   |        |  |  | 502   |        |  |  | 54.0% |      
|               | Colombia               |          |  | 8,400  |         |             |  | 772            |         |               |  | 9.2        |       |  |  | 256   |        |  |  | 509   |        |  |  | 65.9% |      
|               | Mexico                 |          |  | 18,300 |         |             |  | 3,431          |         |               |  | 18.7       |       |  |  | 2,611 |        |  |  | 2,910 |        |  |  | 84.8% |      
|               | Other Latin America(5) |          |  | 14,700 |         |             |  | 2,746          |         |               |  | 18.7       |       |  |  | 889   |        |  |  | 1,046 |        |  |  | 38.1% |      
|               | Venezuela              |          |  | 3,900  |         |             |  | 989            |         |               |  | 25.4       |       |  |  | 698   |        |  |  | 808   |        |  |  | 81.7% |      
|               |                        |          |  |        |         |             |  |                |         |               |  |            |       |  |  |       |        |  |  |       |        |  |  |      
|               |                        | Subtotal |  |        | 97,900  |             |  |                | 19,772  |               |  |            | 20.2  |  |  |       | 9,602  |  |  |       | 11,031 |  |  |       | 55.8% | 
|               |                        |          |  |        |         |             |  |                |         |               |  |            |       |  |  |       |        |  |  |       |        |  |  |      
|               |                        | TOTAL    |  |        | 799,354 |             |  |                | 255,372 |               |  |            | 31.9% |  |  |       | 33,521 |  |  |       | 44,427 |  |  |       |       | 
|               |                        |          |  |        |         |             |  |                |         |               |  |            |       |  |  |       |        |  |  |       |        |  |  |      






|    |                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Total subscribers include promotional
	(free) subscribers at December 31, 2000, and
	December 31, 2001.                                                                                    
|   
|(2) | Source: Zenith Media.                                                                                                                                                                      
|   
|(3) | Source: Baskerville Communications Corporation.                                                                                                                                            
|   
|(4) | India includes Bangladesh, Brunei, Macau,
	Mauritius, New Guinea, Republic of Palau, and Sri Lanka                                                                                         
|   
|(5) | Other Latin America includes Aruba, Bolivia,
	Costa Rica, Curacao, Dominican Republic, Ecuador, El Salvador,
	Guatemala, Honduras, Jamaica, Nicaragua, Panama, Paraguay, Peru,
	and Uruguay
|   
|(6) | Middle East includes Estonia, Kazakhstan, Latvia,
	Lithuania, Middle East, and Republic of Ukraine                                                                                         



| |                    
| | -------------------
| | Sources of Revenues

Like most international pay television channels,
we currently derive substantially all of our international
revenues from subscriber fees and, to a lesser extent,
advertising sales. We generally charge our pay television
distributors a fee per subscriber for the right to broadcast our
international channel. We have significantly increased the
number of subscribers to our international channel in the past
year, and as a result, have achieved an increase in revenues
generated from subscriber fees. International fees per
subscriber are expected to experience downward pressure in the
future due to the competitive nature of the industry, the growth
of digital cable, political and economic turmoil and the shift
in the industry from subscriber fees revenue to advertising
revenues. For the years ended December 31, 2001, 2000, and
1999 revenues derived from subscriber fees for the international
channel were approximately $52.6 million,
$39.8 million, and $27.7 million, respectively.

We also derive revenues from the sale of
advertising time on our international channel. We generate
revenues directly from advertisers as well as from our pay
television distributors under distribution agreements that may
provide for a sharing of net revenues from advertising. We
believe that the increasing number of subscribers to our
international channel and the favorable demographics of its
family audience provide us with the opportunity to substantially
increase revenues from the sale of advertising time. Currently
the advertising revenues from our international channel are
derived primarily from activities in a limited number of
countries, including certain countries in East Asia, the United
Kingdom, Poland, South Africa, Mexico, and certain other
countries in Latin America.

Our core advertising staff has developed and is
implementing our advertising sales strategy. We have identified
key markets and opened sales offices and identified potential
clients in these markets. We have advertising sales offices in
Miami, New York, Singapore, and London, and have entered into
representation

10



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##### Table of Contents



agreements with third parties for advertising
sales in Argentina, Australia, India, Malaysia, Mexico,
Philippines, Poland, Singapore, South Africa, South Korea,
Taiwan, and the United Kingdom.


During 2000 and 2001, we increased the number of
satellite feeds delivering our channel, which enabled us to
further customize our channel in specific markets. For example,
we now send multiple signals to Latin America that have been
customized to cater to certain key countries of Latin America,
rather than sending a single feed to all of Latin America. We
believe localized feeds will lead to more opportunities for the
sale of advertising to local businesses or to multinational
advertisers interested in reaching customers in specific
countries. We also built and launched a Network Operations
Center, which enables us to control delivery of our channels to
our pay television distributors. As a result, we are able to
insert commercials into our programming, instead of relying on
our affiliates for that service.

For the years ended December 31, 2001, 2000,
and 1999 revenues from the sale of advertising on our
international channel were $12.1 million,
$6.0 million, and $1.7 million, respectively.



| |                    
| | -------------------
| | Sales and Marketing

Our international channel focuses its marketing
efforts to maximize our two revenue streams in the individual
markets in which the channel is distributed. Our international
channels marketing efforts vary by market depending on the
maturity of the local television industry, the level of
distribution of our international channel and the potential for
the sale of advertising.

In markets where our international channel has
not maximized its carriage with pay television distributors,
marketing efforts are primarily directed toward potential new
distributors. These marketing efforts include advertising in
trade publications and participating in industry trade shows, as
well as direct mail and public relations campaigns. In these
markets, efforts are also made to market the channel to
potential viewers to drive consumer demand for carriage of the
channel by local affiliates.

In markets where our international channel has
obtained substantial distribution or has exclusive agreements
with primary distributors, marketing efforts are primarily
directed toward maintaining and increasing subscribers and
viewership. Our efforts in these markets are directed toward
adults ages 18 to 49. These consumer-directed marketing
efforts are coordinated with and are often partially funded by
our pay television distributors in each market. These efforts
often include traditional marketing campaigns consisting of
print, billboard, cross-channels, radio and television
advertising. Additionally, we emphasize our unique relationship
with our primary content supplier, Hallmark Entertainment,
through the use of premier screening events, press tours with
actors and actresses and viewer trips to movie sets. We also use
our website to market and promote the channel through schedule
information, movie synopses, games and contests.

In markets where we are developing our
international channels advertising business, marketing
efforts are also directed toward potential advertisers. When
marketing the Hallmark Channel to potential advertisers, we
focus on media planners and buyers and on regional and
international advertisers.



| |                                      
| | -------------------------------------
| | The Hallmark Channel  United
	States



| |         
| | --------
| | Overview

Our domestic channel ended 2001 with
43.5 million subscribers, an increase of 64% for the year.
We currently distribute our domestic channel through more than
25 cable operators and satellite providers. By the end of 2001,
we had agreements with AT&T, Time Warner, DirecTV, Charter,
Echostar, Cox, Adelphia, and Cablevision for the distribution of
our channel, which are eight of the nine largest pay television
distributors in the United States.



| |            
| | -----------
| | Programming

Our domestic channel offers a range of high
quality, broad appeal, entertainment programming including
movies, miniseries, epics, historical dramas, romances, literary
classics, and contemporary stories. Our primary sources for
programming on our domestic channel are the Crown Media Library
and programming licensed

11



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##### Table of Contents



from Hallmark Entertainment Distribution. Prior
to the purchase of the Crown Media Library, we licensed
substantially all of the titles in that library from Hallmark
Entertainment Distribution. We also license programming from
third parties for exhibition on our domestic channel.


Examples of programming from our library and the
Hallmark Entertainment library include, Larry McMurtrys
Lonesome Dove, 10th Kingdom, Sabrina the Teenage Witch, Dog of
the Yukon: Call of the Wild and Larry McMurtrys
Dead Mans Walk as well as programming from The
Collection from the Hallmark Hall of Fame library such as
William Faulkners Old Man, Rose Hill, Sarah Plain and
Tall and Night Ride Home. We benefit from these
original Hallmark Entertainment productions, which are sometimes
premiered and often aired on our domestic channel. Examples of
third party programming shown on our domestic channel include
the popular drama series Dr. Quinn Medicine Woman,
Northern Exposure, Hart to Hart, I Dream of Jeannie and
Bewitched. Other examples of our third party programming
include acquired movies and miniseries such as Roots, North
and South, Great Gatsby, Animal Farm and Don Quixote.
Our license agreements with third parties typically provide for
an upfront license fee for the right to exhibit a program in the
United States within a specified period of time.



| |             
| | ------------
| | Distribution

We currently distribute our domestic channel to
approximately 49% of all United States pay television
subscribers. The following table shows the approximate number of
pay television households and domestic channel subscribers for
each of the nine largest pay television distributors, and all
other pay television distributors as a group, in the United
States as of December 31, 2001.

|                           |       |                                    |        |                |  |                |       |        |  |  |      |      |  
|-------------------------- | ----- | ---------------------------------- | ------ | -------------- |  | -------------- | ----- | ------ |  |  | ---- | ---- | -
|                           |       |                                    |        |                |  | Hallmark      
|                           |       | Total U.S.                         |        | Hallmark       |  | Channel  U.S.
|                           |       | Pay TV                             |        | Channel  U.S. |  | % of Pay TV   
|Pay Television Distributor |       | Households(1)                      |        | Subscribers(1) |  | Households    
|                           |       |                                    |        |                |  |               
|                           |       |                                   
|                           |       | (In thousands, except percentages)
|Time Warner                |       |                                    | 12,864 |                |  |                | 9,175 |        |  |  | 71.3 | %   
|DirecTV                    |       |                                    | 10,576 |                |  |                | 8,081 |        |  |  | 76.4 | %   
|AT&T                       |       |                                    | 14,469 |                |  |                | 7,707 |        |  |  | 53.3 | %   
|Charter                    |       |                                    | 7,180  |                |  |                | 4,501 |        |  |  | 62.7 | %   
|Adelphia                   |       |                                    | 5,658  |                |  |                | 2,368 |        |  |  | 41.9 | %   
|Echostar                   |       |                                    | 6,665  |                |  |                | 2,163 |        |  |  | 32.5 | %   
|Cox                        |       |                                    | 6,273  |                |  |                | 2,098 |        |  |  | 33.4 | %   
|Cablevision                |       |                                    | 2,988  |                |  |                | 1,475 |        |  |  | 49.4 | %   
|Comcast                    |       |                                    | 8,742  |                |  |                | 1,418 |        |  |  | 16.2 | %   
|All others                 |       |                                    | 12,821 |                |  |                | 4,546 |        |  |  | 35.5 | %   
|                           |       |                                    |        |                |  |                |       |        |  |  |      |     
|                           | Total |                                    |        | 88,236         |  |                |       | 43,532 |  |  |      | 49.3 | %
|                           |       |                                    |        |                |  |                |       |        |  |  |      |     



---



|    |                                                                                             
|--- | --------------------------------------------------------------------------------------------
|(1) | Sources: Nielsen Code and The Nielsen Public U.E.
	January 2002 and Skyreport November 2001.

During 2001, we signed or amended long-term
distribution agreements with NCTC, DirecTV, Adelphia, Echostar,
Cable One, Charter Communications, MediaOne and Buckeye
Communications.



| |                    
| | -------------------
| | Sources of Revenues

We currently derive all of our revenues of our
domestic channel from subscriber fees and advertising sales. We
charge our pay television distributors a monthly per subscriber
fee for the right to broadcast our domestic channel. Generally,
these distribution agreements last for five to 10 years, and
include annual increases of both subscribers and per subscriber
fees. A distribution agreement may also involve a payment by us
for the establishment of the relationship or, together with or
in lieu of any payment, the free carriage of our channel to
subscribers for a period of time. In August 2001, we entered
into a strategic relationship with DirecTV under which the
Hallmark Channel was repositioned to DirecTVs TOTAL CHOICE
Package,

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resulting in significantly more subscribers to
the Hallmark Channel. As part of the strategic relationship,
DirecTV received approximately 5.4 million shares of our
Class A common stock. This new distribution agreement
provides for certain subscriber fees to be paid to us depending
upon the number of subscribers at the end of the any month; the
fees are reduced if certain subscriber levels are met. For the
years ended December 31, 2001, 2000, and 1999 revenues
derived from subscriber fees for the domestic channel were
approximately $20.5 million, $11.1 million, and
$7.8 million, respectively.


For additional information regarding the DirecTV
relationship and discussions with other distributors, please see
Revenues under Item 7 Managements
Discussion and Analysis of Financial Condition and Results of
Operations.

As a result of our domestic channels
demographically favorable subscriber base, we generate
significant revenues from the sale of advertising time. We have
advertising sales offices in New York, Los Angeles, Chicago and
Detroit. In addition, we have made significant investments in
programming, research, marketing and promotions, all
specifically designed to support the sale of advertising time on
our domestic channel. For the years ended December 31,
2001, 2000, and 1999 revenues from the sale of advertising time
on our domestic channel were approximately $25.4 million,
$13.7 million, and $9.3 million, respectively.



| |                    
| | -------------------
| | Sales and Marketing

Our target demographic is adults 18-49. Our
programming, however, is family-friendly. Extensive market
research indicated an opportunity for quality programming
targeted to adults yet also appealing to children. We believe
that such programming encourages families to watch television
together, resulting in larger audiences and viewer demographics
more attractive to advertisers.

Access to our library and the Hallmark
Entertainment Distribution library and its future output helps
to ensure access to high quality programming that is consistent
with our brand positioning. In addition, our association with
these known and trusted brands:



| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | provides our viewers with tangible evidence of
	our commitment to provide entertainment appropriate for the
	entire family;
|
| |  | significantly enhances our ability to attract
	advertising commitments from the largest advertisers; and                   
|
| |  | provides a competitive advantage in negotiating
	long-term distribution agreements with pay television
	distributors.      

In August 2001, we completed the re-branding of
our domestic channel as the Hallmark Channel. We believe this
rebranding has enabled us to capitalize on the popularity of the
Hallmark brand.

Our qualitative and quantitative research (Mindy
Goldberg Associates national focus groups January and February
2001 and Yankelovich Research 2001) had previously shown that
television viewers have a real need for quality television
entertainment for adults that the entire family could watch
together. Research stated that the halo effect of
the Hallmark Card brand, as well as the Hallmark Hall of Fame
Collection name, paved the way for these viewers to expect high
quality family-friendly programming they could trust. In the
opinion of viewers, according to research, the four core
attributes of the Hallmark Channel are
entertainment, quality,
contemporary, and family-friendly.

Further, the research indicated that the Hallmark
Channel would have two groups of built-in
loyalist viewers eager to watch the channel. They
were soccer moms, women 25-49 with children under 16
living at home and empty-nesters, women 25-54 with
no young children at home.

We re-branded the Hallmark Channel with a
multi-media campaign that involved commercials on other
channels, national magazines, spot/network radio, outdoor in
selected markets and use of advertising on our channel. We also
targeted distributors with advertisements in the trade press and
advertisers and advertising agencies with trade press
advertising as well as targeted out-of-home advertising in New
York City areas where the agencies are located. In addition, a
major public relations campaign garnered covers of Sunday
magazine TV guides and feature articles, while sponsorship of
prestigious industry functions (Academy of

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Television Arts & Sciences
Television Night at the Hollywood Bowl, Ad Age/
Advertising Women of NY Women to Watch Luncheon)
added to the buzz.


The re-branding campaign, designed to
differentiate the Hallmark Channel as contemporary, fresh and
surprising, positioned the network as the one that offers
Great stories that stay with you long after the television
set is turned off. Stories with the worlds greatest
actors, masterfully written, directed and produced.

During the fourth quarter 2001, our domestic
channel increased its time spent viewing per day (94
minutes vs. 74 minutes) representing a +27% increase over its
fourth quarter 2000 results.

Channel Operations



| |                 
| | ----------------
| | Channel Creation

The programming departments at each of our
channels are responsible for ensuring the consistent quality of
the programming we offer. The programming, scheduling and
acquisitions departments work in conjunction with the traffic
department and creative services to create the distinctive
appearance of our channels. Since October 2001, the creative
services function has been outsourced on an as-needed basis.

The creation of our channels begins with the
acquisition of programming. We recently acquired over 700 titles
from the Hallmark Entertainment Distribution library, which now
comprise the Crown Media Library. In addition, we license
programming from Hallmark Entertainment Distribution and other
program suppliers. Our staff reviews and summarizes all
potential programming to ensure compliance with our quality and
content standards. The acquisitions department licenses
programming based on the amount of new programming required on
our channels. In order to meet its broad programming
requirements, our international channels acquisitions
department leverages multi-channel acquisitions across many
territories to reduce license fees, but remains sensitive to
specific markets with targeted localized programming.

In most of our international markets, we
customize the Hallmark Channel by dubbing or subtitling program
elements into local languages. The decision to customize the
channel into local languages is based on local market practices,
viewer preferences and cost considerations. Language preparation
is coordinated by our program operations department. Program
language elements are typically shipped to the specific region
to ensure that nuances in dialect of the particular language are
captured. The elements are then returned to our Denver
headquarters, where the language elements are combined with the
other programming elements.

The creation of on-air promotional segments or
interstitials, which are broadcast between the feature movies,
miniseries and series, has been outsourced since October 2001 to
external vendors. Promotional segments are prepared in more than
26 languages for broadcast worldwide. These interstitials are
intended to invite viewership, guide viewers to specific
programming, and promote a Brand Awareness image for
the Hallmark Channel.

The scheduling department creates the playlist,
which contains a list of daily programming. The scheduling
department works with marketing personnel to continuously
monitor the programming mix. The playlist is then forwarded to
the traffic department.

The traffic department inserts promotional
segments and advertising into the playlist and creates the daily
log, which is the stream of programming that will ultimately be
viewed by the subscriber. The daily log, together with digital
tapes that contain the corresponding programming, are then
forwarded to either our Network Operations Center or to an
origination and playback facility, which is operated by a third
party. Digital tapes that contain the promotional segments are
forwarded to either our Network Operations Center or to the
third party origination and playback facility separately.

Channel Delivery

We deliver the daily log and digital tapes to our
Network Operations Center or to a third party origination and
playback facility for each market, where the programming,
promotional and advertising elements are combined and compressed
into a single signal, and delivered to an uplink facility. The
uplink facility then

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transmits the signal to the satellite transponder
that covers the relevant geographic market, and the transponder
reflects the signal back within its designated geographic area
to head-end facilities and Direct-to-Home satellite services
operated by pay television distributors who receive and decode
our signal and transmit our channel.


Our global Network Operations Center at our
Greenwood Village, Colorado headquarters commenced operations in
February 2001 and has the ability to perform origination and
playback services for both of our channels for up to
32 programming channels. The Network Operations Center is
an efficient, state of the art broadcasting operation. The
facility enables us to:



| |   |                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | efficiently expand distribution into new markets;                                                                                                                         
|
| |  | control delivery of our channels to our pay
	television distributors, thereby enhancing on air quality and
	reliability, while containing cost;                           
|
| |  | enhance our ability to generate advertising
	revenues; and                                                                                                                
|
| |  | distribute programming in digital and other
	formats as required in the rapidly evolving broadband
	distribution environment, while consolidating our library
	management.

In 2001, we launched the Central Europe, Eastern
Europe, Russian and Middle East, Israel, Latin America, Spain,
Turkey and Scandilux feeds from our Network Operations Center.
Currently, all signals from Latin America, Israel and Europe
(other than Italy and the United Kingdom) are played out of our
Denver facility. The remaining signals will be brought into our
facilities as the current playback vendor contracts expire.

The following chart summarizes, for each of our
markets, the distribution platforms through which we deliver our
channels, our primary pay television distributors, the various
languages in which our channels are broadcast, and the uplink
and satellites we currently use to deliver our channels.

|                     |  |              |          |                |  |                                         |  |                                                           |  |                                              |  |                    
|-------------------- |  | ------------ | -------- | -------------- |  | --------------------------------------- |  | --------------------------------------------------------- |  | -------------------------------------------- |  | -------------------
|                     |  | Primary      |          |                |  |                                         |  |                                                           |  |                                             
|                     |  | Distribution |          | Primary Pay TV |  |                                         |  | Uplink Providers/                                         |  |                                             
|Market               |  | Platforms    |          | Distributors   |  | Languages                               |  | Locations                                                 |  | Satellites                                  
|                     |  |              |          |                |  |                                         |  |                                                           |  |                                             
|Latin America        |  |              | CableDTH |                |  | DirecTV
	Sky Latin America
	Cablevision |  | Spanish
	Portuguese
	English                              |  | Crown Media
	International, Inc.
	Denver, CO |  | PAS 9              
|Asia Pacific         |  |              | CableDTH |                |  | Modi
	Rebar MSO
	UBC MSO
	SCV
	CATV     |  | Mandarin
	Thai
	English
	Japanese
	Korean
	Hindi          |  | NDTC
	Hong Kong
	SkyPerfect
	Tokyo, Japan    |  | Apstar IIR
	JCSat-3
|Central Europe       |  |              | CableDTH |                |  | United Pan- Europe Communications       |  | Polish
	Hungarian
	Croatian
	Romanian
	Bulgarian
	English |  | Crown Media
	International, Inc.
	Denver, CO |  | Hot Bird 3         
|Scandinavia/ Benelux |  |              | CableDTH |                |  | Via Sat
	Stjarn-TV                      |  | Swedish
	Dutch
	Norwegian
	Danish
	English                |  | Crown Media
	International, Inc.
	Denver, CO |  | Hot Bird 3         
|Italy                |  |              | DTH      |                |  | Telepiu                                 |  | Italian
	English                                          |  | Telepiu
	Milan, Italy                        |  | Hot Bird 3         
|Spain                |  |              | DTH      |                |  | Via Digital                             |  | Castillian
	Portuguese
	English                           |  | Crown Media
	International, Inc.
	Denver, CO |  | Hot Bird 3         

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|                        |  |              |          |                |  |                                                                                |  |                          |  |                                              |  |           
|----------------------- |  | ------------ | -------- | -------------- |  | ------------------------------------------------------------------------------ |  | ------------------------ |  | -------------------------------------------- |  | ----------
|                        |  | Primary      |          |                |  |                                                                                |  |                          |  |                                             
|                        |  | Distribution |          | Primary Pay TV |  |                                                                                |  | Uplink Providers/        |  |                                             
|Market                  |  | Platforms    |          | Distributors   |  | Languages                                                                      |  | Locations                |  | Satellites                                  
|                        |  |              |          |                |  |                                                                                |  |                          |  |                                             
|Africa                  |  |              | DTH      |                |  | Multichoice                                                                    |  | English                  |  | Multichoice
	Johannesburg,
	SAF              |  | PanAmSat 4
|Czech Republic          |  |              | Cable    |                |  | Kabel Plus
	Cable Association                                                  |  | Czech
	Slovak
	English   |  | Crown Media
	International, Inc.
	Denver, CO |  | Hot Bird 3
|Australia               |  |              | CableDTH |                |  | Foxtel
	Austar                                                                 |  | English                  |  | Foxtel
	Sydney,
	Australia                   |  | Optus B3  
|Russia and
	Middle East |  |              | CableDTH |                |  | NTV
	Metromedia
	Gulf DTH                                                      |  | Russian
	Arabic
	English |  | Crown Media
	International, Inc.
	Denver, CO |  | Hot Bird 3
|United Kingdom          |  |              | DTH      |                |  | BSkyB
	NTL                                                                     |  | English                  |  | BSkyB
	London                                |  | Astra 2D  
|Israel                  |  |              | Cable    |                |  | Tevel
	Golden Channels Matav YES DTH                                           |  | Hebrew Arabic English    |  | Crown Media International, Inc. Denver, CO   |  | Telstar 12
|United States           |  |              | Cable    |                |  | Time Warner DirecTV
	AT&T Charter
	Adelphia Echostar
	Cox Cablevision
	Comcast |  | English                  |  | AT&T Los Angeles, CA                         |  | GE C-3    
|New Zealand             |  |              | DTH      |                |  | Sky New Zealand                                                                |  | English                  |  | Sky Auckland                                 |  | Optus B1  
|Turkey                  |  |              | DTH      |                |  | Digiturk                                                                       |  | Turkish                  |  | Crown Media International, Inc. Denver, CO   |  | Hot Bird 3

16



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##### Table of Contents



The following map details the locations of
satellites used by us worldwide.

(MAP)

Film Distribution

Crown Media Distribution owns the Crown Media
Library and generates revenue from the film assets in the
library by granting licenses to use the films to third parties.
We are also using the films as programming for our television
channels and interactive uses.

Crown Media Distribution oversees sales and
distribution of the Crown Media Library to third-party
licensees. Third-party licensees purchase available rights,
which primarily include all forms of television and home video.
Crown Media Distribution has a service agreement with Hallmark
Entertainment, providing for services relating to the
administration, distribution and other exploitation of the Crown
Media Library, and directs the Hallmark sales force worldwide in
all sales matters pertaining to the Crown Media Library.

Competition

The pay television industry is highly
competitive. Our channels compete for distribution, viewers and
advertisers with other pay television channels, broadcast
television channels and with other general forms of
entertainment.

There are several sources of competition within
our industry, each of which affects our business strategy. Our
domestic channel competes with other family oriented programming
from TNT, USA Network, A&E, ABC Family, Lifetime and other
similarly targeted channels. Our international channel competes
with family oriented programming from AXN, I-SAT, Canal Fox,
TNT, and USA Network. We compete with these channels for viewers
and advertising dollars based upon quality of programming,
number of subscribers, ratings and subscriber demographics. We
compete with all channels for carriage on cable and satellite
systems that may have limited capacity.

Competition continues to intensify as the
industry shifts from analog distribution to digital
distribution. Many pay television distributors are in the
process of upgrading their physical infrastructures to
accommodate digital delivery, which will provide significantly
more channel capacity. We believe that it will take several
years for the majority of current subscribers to convert to, and
begin paying for, upgraded services. In an effort to accelerate
the conversion, pay television distributors are attempting to
place new channels on their digital

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tier as opposed to their limited, yet more widely
distributed, analog tiers. As a result, the competition for the
remaining widely distributed analog channel space is intense.
However, as more and more subscribers are converted, the digital
tier is expected to become the dominant platform.


Competitive Strengths

We have established a track record of providing
high quality programming throughout the world. We believe that
our primary competitive strengths include the following:



| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | A Library of Popular and Award-Winning
	Programming and Guaranteed Access through Long-Term Agreements
	to Other Similar Programming

Our recent purchase of more than 700 titles from
the Hallmark Entertainment Distribution library gives us control
over a significant amount of popular and award-winning
programming that we can either air on our channels or license to
third parties. These titles provide us with a portion of our
core programming, and by owning these titles, we have the
flexibility to use them as needed to create the most effective
program schedules. Owning these titles also eliminates the
license fees we otherwise would have to pay for these titles and
creates a new revenue stream for us from licensing the titles to
third parties. As of January 1, 2001, we have also entered
into a five-year program agreement with Hallmark Entertainment
(renewable at our option for an additional five-year period)
that will provide us with access to new quality productions, as
well as the titles in the Hallmark Entertainment Distribution
library that we did not purchase.



| |                                                                   
| | ------------------------------------------------------------------
| | Pay Television Channels Branded with the
	Well-Known Hallmark Name

We have re-branded our international channel,
formerly the Hallmark Entertainment Network, and our domestic
channel, formerly the Odyssey Network, as the Hallmark Channel.
We believe that viewers and distributors will associate the
Hallmark brand with family values and high quality content and
we expect that our association with this brand will facilitate
our efforts to achieve increased distribution and to attract
additional viewers that will lead to higher ratings and
advertising revenues.



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | Long-Term Distribution Contracts that Call
	for Increasing Subscriber Counts and Fees

We currently have long-term distribution
agreements with eight of the nine largest pay television
distributors in the United States. We are also seeking to enter
into a similar long-term distribution agreement with the
remaining domestic distributor. The terms of our distribution
agreements generally provide for rate increases to us over time,
although some provide for lower subscriber fees if certain
levels of subscribers are achieved.



| |                       
| | ----------------------
| | Experienced Management

Members of our senior management team have
experience launching, promoting and operating channels both
domestically and internationally. They have held senior
positions at The Discovery Channel, Cable Satellite Public
Affairs Network (C-SPAN), SCI FI Channel, the
News Corporation, Fox Broadcasting Company, Sky Broadcasting,
Tele-Communications, Inc., ABC, CBS Sports, Turner Network
Television (TNT), USA Network, MediaOne, and Granada
Medal.

Research

The research departments at Crown Media Holdings
provide strategic and tactical guidance to decision-makers
within the company, as well as providing information about the
channel to potential advertisers and affiliates.

Over the past two years, we substantially
increased our commitment to serving the needs of our various
markets by establishing research departments at Crown Media
International and Crown Media United States. These departments
provide data on the size and demographics of our audience to our
advertising sales group, and information about our audiences,
competitors, markets and industry to decision makers in our
Company.

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| |                                  
| | ---------------------------------
| | Hallmark Channel 
	International

Our international channel began 2001 subscribing
to ratings services in two countries; by the end of the year, we
had established subscriptions to nine ratings services in Latin
America and Asia. These services provide data on the size and
composition of our audience to potential advertising clients, as
well as providing information that is used within the company to
make knowledge-based decisions regarding programming, marketing,
and other issues.

In early 2001, we completed the two-phase
branding study begun the year before. This large study on viewer
perceptions of the Hallmark Channel around the world helped us
to refine our programming mix and our promotional messages. Its
findings have also been used as the basis for many affiliate and
advertising sales presentations. Over the course of the year,
audience and advertiser research was conducted in four of our
five key ad-supported markets  Argentina, India,
Mexico, and Taiwan  to help us tailor our product and
communication to the needs of those markets.



| |                                  
| | ---------------------------------
| | Hallmark Channel  United
	States

Currently, our domestic channels research
department translates our overall business strategy into a
cohesive research program. This information assists our
executives to more effectively target, brand, promote, program,
and better understand where opportunities lie, in order to
increase our domestic channels market share.

Last year the research department was
reorganized, acquiring sophisticated ratings systems (Npower,
PNF2 and Adviews) and competitive tracking database hardware and
software. Trends and changes from these ratings systems are
reported to top management for short and long-term strategic
planning. Additionally, the research department established a
capability to do in-house pilot testing at cost for new or
existing original product.

Our domestic channels research department
was responsible for the development and execution of all
re-branding research that transformed the Odyssey Network to the
Hallmark Channel. The research studies successfully repositioned
the network with advertisers, cable operators and viewers. In
January and February 2001 nineteen Branding Focus groups were
conducted among women and men in different life stages to assess
the viability of our domestic channel. Yankelovich Partners were
then commissioned in March 2001 to conduct a national
representative study among cable subscribers in order to assess
viewer interest in the new Hallmark Channel.

Our domestic channels performance is
tracked through an internal tracking study established in July
2001, which is a monthly telephone survey conducted among a
national probability sample of approximately 1000 adults. As of
January 2002, the department also subscribes to Equitrends
Research for brand data, which includes quality, salience, and
equity scores for both television networks and all brands.
Another valuable resource is Cable Q, a research service
that virtually all advertisers and networks have subscribed to
for more than thirty years. Cable Q data is useful for
monitoring the level of viewer satisfaction. The
TVQ/ Cable Q system is distinguished by its ability to
measure the commitment viewers develop over time to
specific shows and cable nets. Historically, this resource has
served the industry as a solid indicator of future success.

In its Cable Q debut in 2001, Hallmark
Channel ranked second among total network viewers
with a Positive Q score that was 57% higher than the average for
all cable nets. Hallmark Channel also ranked first among
regular network viewers (the most loyal and
attentive viewers reached by each cablenet). The channels
score in this viewer group was 72% higher than the average for
all cable nets.

Currently, our domestic channels research
has contracted Millward Brown, a U.K. market research firm, to
conduct a segmentation study that could be used as a template
for brand global segmentation. The purpose of this study is to
better define, understand and speak to our target audience(s),
which will also drive communications strategies for advertising
sales, distribution, consumers and the financial community.

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| |                     
| | --------------------
| | Advertising Research

Advertisers achieved more quality time with
viewers who watch our domestic channel, as reported in a
Hallmark Channel survey conducted by Opinion Research
Corporation International (ORC International) in
November 2001 among a national probability sample of 1,006
adults, 18 years of age or older. The study found that more
than half of viewers surveyed (57%) feel more positive about a
company, product or service because it advertises on the
Hallmark Channel. The Hallmark Channel came in second following
Discovery Network (59%) and preceded The Learning Channel (52%)
and the History Channel (51%). According to the ORC
International study, Hallmark Channels halo
effect increases the positive perception of companies,
products or services because of association with the Hallmark
brand. According to viewers, the positive attributes most
closely associated with Hallmark Channel are
trustworthy, high-quality,
entertaining, positive story and
contemporary.

Employees

We had 412 employees as of December 31,
2001. Neither we nor any of our subsidiaries are parties to
collective bargaining agreements. We believe that our relations
with our employees are good.

Substantially all of our international
channels employees work at our headquarters in Greenwood
Village, Colorado. Substantially all of our domestic
channels employees work at our offices in Studio City,
California and New York, New York.

Regulation

The operations of television channels in the
markets in which we operate, including the United States, are
regulated. The scope of regulation 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. For example, throughout most
of our Western European markets, broadcasting regulation has
been formally harmonized to a substantial degree under the
regulatory structure of the European Union. 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, prescribe minimum standards
for the content and scheduling of television advertisements.
Some provide that a certain portion of programming carried by
broadcasters be produced domestically and, to some degree, be
sourced from domestic production companies who are independent
of the broadcaster.

Local pay television distributors in foreign
countries typically have a statutory duty to ensure that the
programming and advertising that they re-transmit on behalf of
foreign broadcasters conforms to the regulatory scheme under
which each local platform provider is licensed. Our contracts
with many of our local platform providers require that our
programming comply with domestic broadcasting regulations.
Generally, each of our pay television distributors and thus our
programming carried on their systems must adhere to the
broadcasting and advertising regulations of each platform
providers licensing jurisdiction.

Within the United States, program access rules
applicable to channel providers with ownership ties to pay
television distributors limit business combinations between
these two types of companies that do not comply with these rules.

Financial Information about Geographic
Areas

Information concerning revenues and long-lived
assets attributable to external customers, domestically and
internationally, may be found in Note 15 of our Notes to
Consolidated Financial Statements in the Report.

Forward-Looking Statements and Risk
Factors

We have made some statements, which constitute
forward-looking statements. These statements involve known and
unknown risks, uncertainties and other factors that may cause
our actual results, levels of activity,

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##### Table of Contents



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


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

Risks Relating to Our Business



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

Both our international and domestic channels have
a history of net losses and we expect to continue to report net
losses for the foreseeable future. As of December 31, 2001,
we had an accumulated deficit of approximately
$480.3 million and net goodwill and other intangibles of
approximately $314.0 million. Amortization of goodwill and
other intangibles resulted in an $8.6 million and
$20.0 million charge to earnings for the years ended
December 31, 2000 and 2001, respectively.

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



| |                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 December 31, 2001, our total debt was
$319.1 million and we had $13.9 million of cash and
cash equivalents. In conjunction with our private placement
transaction, $111.6 million was placed into an escrow
account to repay a portion of our credit facility on
January 7, 2002. In addition, subject to the restrictions
under our various debt agreements, we may borrow additional
amounts under our existing credit facility to cover the negative
cash flow resulting from our current operations, and incur
additional indebtedness from time to time to cover our operating
losses, to finance acquisitions or capital expenditures or for
other purposes. We expect that our principal sources of funds
during 2002 will be cash generated from operating activities and
borrowings under our senior credit facility.

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;                                                                                                                               

21



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| |   |                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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
$12.3 million to $11.8 million for the year ended
December 31, 2001, from net interest income of $523,000 for
the year ended December 31, 2000. The increase in interest
expense in the past year 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, credit facility and a private
placement during 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 that our current bank credit facility
and line of credit with HC Crown, together with cash generated
from operations and cash on hand, will be sufficient for our
liquidity needs through at least March 31, 2003. However,
because we currently operate at a loss and have a negative cash
flow, any significant expense not included in our internal
budget or any development that hampers our growth in revenues or
decreases any of our revenues, would result in the need for
additional external funds in order to continue operations. We
have no arrangements for any external financings, whether debt
or equity, and are not certain whether any such new external
financing would be available on acceptable terms. Any new debt
financing would require the cooperation and agreement of
existing lenders.



| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | Modification of any existing agreements
	with United States distributors could have a favorable or
	unfavorable impact on our revenues and expenses.

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



| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | 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

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forced to incur additional costs to acquire
alternative programming and the growth of our subscriber base
could be hindered.




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

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



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

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

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



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

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

23



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##### Table of Contents





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

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



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

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



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

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



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

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

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

We commenced operations at the Network Operations
Center in February 2001. We are currently using the Network
Operations Center for the origination and playback of signals
for the Hallmark Channel internationally in Europe, Latin
America and the Middle East and intend to expand our use of the
Network Operations Center as existing contracts with third-party
providers expire. 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 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
revenues has been generated from foreign operations. In order to
maintain or expand our presence in foreign markets, we have
entered and may in the future enter into joint ventures or other
strategic relationships with local operators in those markets.
Certain foreign laws, regulations and judicial procedures may
not be as protective of programmer rights as those applicable in
the United States. In addition, many foreign countries have
currency and exchange laws regulating the international transfer
of currencies. To the extent that significant currency
fluctuations result in materially higher costs to any of our
foreign customers, those customers may be unable or unwilling to
make the required payments. We may be subject to delays in
access to courts and to the remedies local laws impose in order
to collect our payments and recover our assets. We also may
experience problems with collecting accounts due from foreign
customers, which would adversely affect our revenues and income.
Our growth and profitability may also suffer as a result of,
among other matters, competitive pressures on video delivery,
labor stoppages, recessions and other political or economic
events adversely affecting world or regional trading markets or
affecting a particular customer.



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

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



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

As a result of our acquisitions of all the common
interests in Crown Media United States and H&H
Programming-Asia, we have generated a significant amount of
goodwill and other intangibles. We have

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amortized the goodwill and other intangibles from
these acquisitions on a straight-line basis over 20 years
and 10 years, respectively. The amount of goodwill and
other intangibles that we amortized was treated as a charge
against earnings under accounting principles generally accepted
in the United States. In accordance with recent accounting
pronouncements, we have ceased after 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. See
Recently Issued Accounting Pronouncements in
Note 2 of Notes to our Financial Statements included
elsewhere in this Report.


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



| |                                                                  
| | -----------------------------------------------------------------
| | Our stock price may be volatile and could
	decline substantially.

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



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

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



| |                                                                                       
| | --------------------------------------------------------------------------------------
| | 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, after applicable lock-up
agreements have expired in May 2002, by our existing
stockholders in the future or the perception that these sales
could occur. These sales also might make it difficult for us to
sell equity securities in the future at a time and price that we
deem appropriate. In addition, some of our existing stockholders
who hold restricted stock have the ability to require us to
register their shares for public sale. Similarly, holders of
contingent appreciation certificates issued in connection with
preferred securities of Crown Media Trust, have the ability to
require us to register for public sale shares of our
Class A common stock that these holders receive upon
exercise of the contingent appreciation certificates.

Risks Relating to Our Industry



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

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

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the Internet, radio, print media, personal
computers and other alternative sources of entertainment and
information. Future technological developments may affect
competition within this business.


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

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

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



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

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



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

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

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

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


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




Item 2.     Properties

The following table provides certain summary
information with respect to the principal real properties leased
by the Company. We do not own any real property. The leases for
these offices and facilities expire between April 2002 and June
2010. The Company believes the facilities, office space and
other real properties leased are adequate for its current
operations.

Hallmark Channel 
International

|                                                              |  |                                                                                                            |  |             |        | 
|------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------- |  | ----------- | ------ | 
|                                                              |  |                                                                                                            |  | Approximate
|                                                              |  |                                                                                                            |  | Area in    
|Location                                                      |  | Use                                                                                                        |  | Square Feet
|                                                              |  |                                                                                                            |  |            
|6430 South Fiddlers Green Circle
	Greenwood Village, Colorado |  | Executive and administrative office, post
	production and editing facilities and Network Operations Center |  |             | 52,988 | 
|12700 Ventura Blvd.
	Studio City, California                  |  | Executive and administrative office                                                                        |  |             | 13,455 | 
|1325 Avenue of the Americas
	New York, New York               |  | Sales and program acquisition office                                                                       |  |             | 3,781  | 
|1177 Avenue of the Americas
	New York, New York               |  | Sales and administrative office                                                                            |  |             | 4,782  | 
|95 Merrick Way
	Coral Gables, Florida                         |  | Sales and administrative office                                                                            |  |             | 3,939  | 
|234 A Kings Road
	London, England                             |  | Sales and scheduling office                                                                                |  |             | 5,786  | 
|10 F-1 Sung Chiang Road
	Taipei, Taiwan                       |  | Sales office                                                                                               |  |             | 1,600  | 
|25 Canton Road
	Hong Kong                                     |  | Sales office                                                                                               |  |             | 1,600  | 
|19 Loyang Way
	Singapore                                      |  | Sales office                                                                                               |  |             | 3,224  | 
|21 Nehru Place
	New Delhi                                     |  | Sales and administrative office                                                                            |  |             | 375    | 

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Hallmark Channel  United
States

|                                                |  |                                                                                 |  |             |        | 
|----------------------------------------------- |  | ------------------------------------------------------------------------------- |  | ----------- | ------ | 
|                                                |  |                                                                                 |  | Approximate
|                                                |  |                                                                                 |  | Area in    
|Location                                        |  | Use                                                                             |  | Square Feet
|                                                |  |                                                                                 |  |            
|12700 Ventura Blvd.
	Studio City, California    |  | Executive and administrative office and post
	production and editing facilities |  |             | 37,345 | 
|1177 Avenue of the Americas
	New York, New York |  | Sales and administrative office and advertising
	traffic                        |  |             | 14,346 | 
|205 N. Michigan Ave.
	Chicago, Illinois         |  | Sales office                                                                    |  |             | 3,048  | 

We own most of the equipment and furnishings used
in our businesses, except for satellite transponders, which are
leased. See Note 8 of Notes to Consolidated Financial
Statements for information on our leasing of property and
equipment.




Item 3.     Legal
Proceedings

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

In June 2001, we, Hallmark Cards and the other
defendants and the plaintiff entered into a memorandum of
understanding stating an agreement in principle on a settlement
of the lawsuit concerning the films transaction. In accordance
with the memorandum of understanding, we conferred with the
plaintiffs counsel regarding information disclosed in a
supplement to the proxy statement for the annual meeting of
stockholders at which the films transaction was considered. Our
stockholders (excluding Hallmark Entertainment Distribution and
its affiliates) approved of the films transaction at the
reconvened annual meeting on July 17, 2001. As permitted by
the memorandum of understanding, the films transaction closed on
September 28, 2001.

As of February 20, 2002, we and the other
parties to the lawsuit entered into a settlement agreement
concerning the lawsuit, with terms contemplated by the
memorandum of understanding. The settlement agreement provides
that the purchase price of the film assets will be reduced by
425,000 shares of Class A common stock. In accordance
with the memorandum of understanding and the settlement
agreement, 425,000 shares of Class A common stock have
been placed in escrow pending release to us if there is final
court approval of the settlement or to Hallmark Cards if the
settlement is not approved by the court. The settlement
agreement also provides that all claims, rights and causes of
actions against us, our officers, directors, employees, agents,
attorneys, investment bankers and other related parties that
arise out of the events alleged in the lawsuit will be released
if the settlement receives final court approval. The settlement

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agreement will be terminated if the final court
approval does not occur for any reason. As part of the
settlement, the plaintiffs counsel may apply to the court
for an award for attorneys fees and expenses in an amount
not to exceed $700,000 inclusive of disbursements. We will pay
these fees and disbursements that are actually awarded by the
court, without interest. We anticipate that a portion of these
fees and disbursements will be covered by our insurers. We are
also paying the cost of preparing and mailing a notice to our
stockholders of the court hearing on the settlement.


As required by the settlement agreement, the
parties have presented the settlement to the court for approval.
A hearing regarding the settlement is scheduled in April, 2002.
However, the court reserves the rights to adjourn the settlement
hearing from time to time. At the settlement hearing, the court
will be asked to determine whether, among other things:
(1) to approve the settlement as fair and reasonable, and
in the best interest of a class consisting of all record owners
and beneficial owners of our common stock on any day from
November 6, 2000 (the date that the films transaction was
publicly announced) to and including September 28, 2001,
the effective date of closing the films transaction; (2) to
dismiss the lawsuit such that no plaintiff or class member could
sue on their claims again; (3) to certify the lawsuit as a
class action; and (4) if the court approves the settlement,
to grant the request of the plaintiffs counsel for
attorneys fees and reimbursement of expenses in connection with
the lawsuit.

All the defendants have denied, and have
continued to deny, that they have committed any violations of
law. The memorandum of understanding permitted the films
transaction, viewed by us as important, to proceed without risk
of injunction or other relief. As stated in the settlement
agreement, the defendants entered into the settlement in order
to avoid the substantial expense, inconvenience and distraction
of continued litigation, to dispose of potentially burdensome
and protracted litigation, and to finally put to rest and
terminate the claims arising out of the films transaction.




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

None.

Executive Officers of Registrant

The following lists our executive officers and
information regarding their principal occupations during at
least the last five years.

David J. Evans, 61,has been the President and Chief Executive Officer of Crown
Media Holdings and a Director of Crown Media Holdings since May
2000. He also has served on BskyBs board of directors
since November 2001. Prior to that, he served as President and
Chief Executive Officer of Crown Media International from March
1999 to May 2000, the Non-Executive Chairman of the Governance
Committee of Crown Media United States since March 1999, and a
Director of Crown Media International from July 1999 until May
2000. Prior to that, he was the President and Chief Executive
Officer of Telecommunications International, Inc. from September
1997 until February 1999. From July 1996 until August 1997,
Mr. Evans was the Executive Vice President of News Corp.
and also the President and Chief Executive Officer of Sky Latin
America. Prior to that, he was the President and Chief Operating
Officer for Fox Television from August 1994 until June 1996.

William J. Aliber,
40,has been the Executive Vice
President and Chief Financial Officer of Crown Media Holdings
since May 2000. Prior to that, he was Executive Vice President
and Chief Financial Officer of Crown Media International from
March 1997 through May 2000 and a Director of Crown Media
International from May 1998 through May 2000. He also served as
the Vice President and Chief Financial Officer of Hallmark
Entertainment, Inc. from June 1996 through May 2000. Prior to
that, he was the Director of Corporate Finance for Hallmark
Cards from January 1995 until June 1996.

Lana E. Corbi, 47,has been President and Chief Executive Officer of Crown Media
United States since October 2001. Prior to that, she served as
Executive Vice President and Chief Operating Officer of Crown
Media Holdings from June 2000 through October 2001. Prior to
that, she was the Chief Operating Officer of Odyssey Holdings
from April 1999 through June 2000. She was President, Network
Distribution, of Fox

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Broadcasting Company from May 1997 until April
1999. Ms. Corbi was the Executive Vice President, Network
Distribution of Fox Broadcasting Company from May 1996 until May
1997. She was the President and Chief Operating Officer of
Blackstar, L.L.C. from September 1995 until May 1996.
Ms. Corbi was Senior Vice President, Network Distribution,
for Fox Broadcasting Company from October 1994 until September
1995.


Paul A. FitzPatrick,
55,has been Executive Vice President
and Chief Operating Officer of Crown Media Holdings since
October 2001. Prior to that, he was Chief Operating Officer of
Crown Media United States from September 2000 through October
2001. Prior to joining Crown Media United States,
Mr. FitzPatrick served as Chief Operating Officer of the
Golf Channel from April 1997 through April 2000. He also was the
President, Chief Executive Officer and Founder of News Talk
Television from March 1988 through April 1997. Between 1991 and
1993, Mr. FitzPatrick was also President and Chief
Operating Officer of The Weather Channel. He also served as
President and Chief Operating Officer of Cable Satellite Public
Affairs Network (C-SPAN) during his career.

Russel H. Givens,
55,has been President and Chief
Executive Officer of Crown Media International since July 2000.
Prior to that, he served as Executive Vice President and Chief
Operating Officer of Crown Media International commencing in
July 1998. From October 1994 until July 1998, he served as the
Vice President, European Cable/ Telephony for MediaOne,
International.

Chris R. Moseley,
51,has been Executive Vice President,
Worldwide Marketing and Brand Strategy of Crown Media Holdings,
Inc. since July 2000. Prior to joining Crown Media Holdings,
Ms. Moseley worked as Executive Vice President of ABC, Inc.
Network Marketing. From 1989 to October 1999, Ms. Moseley
worked as Senior Vice President of Marketing for Discovery
Communications, Inc.

Charles L. Stanford,
56,has been Executive Vice President,
Legal and Business Affairs and General Counsel of Crown Media
Holdings since May 2001. Prior to that, he was Senior Vice
President, Business Affairs and General Counsel of Crown Media
Holdings from October 2000 to May 2001. He also served as Senior
Vice President, Legal and Business Affairs of Crown Media
International from November 1999 through October 2000.
Mr. Stanford served as Vice President, Legal and Business
Affairs of Cable and New Media of ABC, Inc. from January 1996
until October 1999.

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PART II




Item 5.     Market
for Our Common Equity and Related Stockholder
Matters

Market Information

Our Class A common stock is listed on the
Nasdaq National Market System (NASDAQ) under the
ticker symbol CRWN. Set forth below are the high and
low sales prices for our Class A common stock for the
period May 9, 2000, the date of our initial public
offering, to June 30, 2000, and for each subsequent
quarterly period in 2000 and 2001, as reported on the Nasdaq
National Market System.

|               |  |             |        |     |  |   |        | 
|-------------- |  | ----------- | ------ | --- |  | - | ------ | 
|               |  |            
|               |  | Price Range
|               |  |            
|Common Stock   |  | High        |        | Low
|               |  |             |        |    
|2000           |  |             |        |     |  |   |        | 
|First Quarter  |  | $           |       |     |  | $ |       | 
|Second Quarter |  | $           | 16.250 |     |  | $ | 10.000 | 
|Third Quarter  |  | $           | 18.125 |     |  | $ | 12.750 | 
|Fourth Quarter |  | $           | 21.250 |     |  | $ | 10.750 | 
|              
|2001           |  |             |        |     |  |   |        | 
|First Quarter  |  | $           | 21.813 |     |  | $ | 15.000 | 
|Second Quarter |  | $           | 22.000 |     |  | $ | 16.630 | 
|Third Quarter  |  | $           | 18.650 |     |  | $ | 9.500  | 
|Fourth Quarter |  | $           | 14.020 |     |  | $ | 8.320  | 

Holders

As of March 13, 2002, there were
approximately 49 record holders of the Class A common
stock and one record holder of the Class B common stock.

Dividends

We have not paid any cash dividends on our common
stock since inception. We anticipate that we will retain all of
our earnings, if any, in the foreseeable future to finance the
continued growth and expansion of our business, and we have no
current intention to pay cash dividends. Our bank credit
facility also contains limitations on declaring or paying any
cash dividends.

Recent Sales of Unregistered
Securities

On December 17, 2001, we completed a
$265.0 million private placement to a group of
institutional investors. Under the terms of the private
placement, Crown Media Holdings issued to the investors an
aggregate of 265,000 units, each unit being comprised of
one preferred security of Crown Media Trust and one contingent
appreciation certificate issued by Crown Media Holdings. Crown
Media Trust issued the preferred securities to us in exchange
for our 6.75% subordinated debentures due 2007. We will pay
interest on the debentures at the same rate and at the same time
as Crown Media Trust will make distributions on the preferred
securities. We have guaranteed on a subordinated basis Crown
Media Trusts obligations under the preferred securities.

Each preferred security of Crown Media Trust has
a stated liquidation amount of $1,000 and each contingent
appreciation certificate issued by the Company entitles the
holder to receive cash, or at the holders option, purchase
approximately 38.3 shares of the Companys
Class A common stock at a price of $13.07 per share,
subject to adjustment. Distributions on the preferred securities
are cumulative, payable quarterly in arrears, and accumulate
from the date of issuance at the annual rate of 6.75% of the
$1,000 liquidation amount. The contingent appreciation
certificates issued by Crown Media Holdings will expire on
March 15, 2008. On or after the occurrence of certain
defined purchase or liquidation events, the holders will be
entitled, at their option, (i) to a cash payment for a
minimum return amount, or (ii) to purchase approximately

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38.3 shares of Class A common stock at
a price initially equal to $13.07, subject to adjustment,
calculated on the date Crown Media Trust redeems or purchases
the preferred securities. The contingent appreciation
certificates, if fully exercised for stock, would represent
approximately 10.1 million shares of the Companys
Class A common stock.


The placement agents for the private placement
were Credit Suisse First Boston and Dain Rauscher Wessels, a
division of Dain Rauscher Incorporated. In the private
placement, we received $252.4 million in net proceeds after
commissions of $12.6 million paid to the placement agents.

The issuance of the units was exempt from
registration under the Securities Act of 1933 as a non-public
offering pursuant to Section 4(2) of the Act and
Regulation D thereunder. In relying upon this exemption, we
relied upon representations and warranties made by the
purchasers as well as a review of the circumstances of the
transaction, including the fact that no public advertising or
announcements were used in the private placement.




Item 6.     Selected
Financial Data

Selected Historical Consolidated Financial
Data of Crown Media Holdings

In the table below, we provide you with selected
historical consolidated financial and other data of Crown Media
Holdings and its subsidiaries. The following selected
consolidated statement of operations data for the years ended
December 31, 1997, 1998, 1999, 2000, and 2001, and the
consolidated balance sheet data as of December 31, 1997,
1998, 1999, 2000, and 2001 are derived from the audited
financial statements of Crown Media Holdings and its
subsidiaries. This data should be read together with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated
financial statements and related notes included elsewhere in
this Annual Report on Form 10-K.

On May 9, 2000, Crown Media Holdings
completed its initial public offering. At the same time, Crown
Media Holdings acquired 100% of Crown Media International, Inc.,
and as part of this acquisition acquired the 22.5% common
interests in Crown Media United States, LLC (formerly known as
Odyssey Holdings, LLC) and 50% common interests of H&H
Programming-Asia, LLC then owned by Crown Media International,
and separately acquired an additional 55% of the common
interests in Crown Media United States. Prior to that date,
Crown Media Holdings did not have any significant operations. On
March 15, 2001, Crown Media Holdings acquired the remaining
22.5% of the common interests in Crown Media United States and
the remaining 50% interest in H&H Programming-Asia, which
operated The Kermit Channel, which were held by The Jim Henson
Company, Inc. The consolidated historical financial statements
of Crown Media Holdings include the results of operation for
Crown Media International as a predecessor corporation for all
periods presented, including its initial ownership of 22.5% of
the common interests in Crown Media United States, and include
each of the other interests described above from the date of
their acquisition.

|                              |                                            |                                          |                |       |        |       |   |        |        |        |   |        |        |        |   |        |        |        |   |        |        |         | 
|----------------------------- | ------------------------------------------ | ---------------------------------------- | -------------- | ----- | ------ | ----- | - | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------- | 
|                              |                                            |                                         
|                              |                                            | Years Ended December 31,                
|                              |                                            |                                         
|                              |                                            | 1997                                     |                | 1998  |        | 1999  |   | 2000   |        | 2001  
|                              |                                            |                                          |                |       |        |       |   |        |        |       
|                              |                                            |                                         
|                              |                                            | (In thousands, except per share amounts)
|Statement of Operations Data: |                                            |                                          |                |       |        |       |   |        |        |        |   |        |        |        |   |        |        |        |   |       
|Revenues:                     |                                            |                                          |                |       |        |       |   |        |        |        |   |        |        |        |   |        |        |        |   |       
|                              | Subscriber fees                            |                                          | $              | 9,100 |        |       | $ | 20,648 |        |        | $ | 27,670 |        |        | $ | 47,921 |        |        | $ | 66,537 |       
|                              | Advertising                                |                                          |                | 176   |        |       |   | 84     |        |        |   | 1,729  |        |        |   | 16,016 |        |        |   | 37,513 |       
|                              | Licensing fees                             |                                          |                |      |        |       |   |       |        |        |   |       |        |        |   |       |        |        |   | 2,267  |       
|                              | Management fees from unconsolidated entity |                                          |                | 526   |        |       |   | 2,955  |        |        |   | 2,510  |        |        |   | 2,879  |        |        |   | 740    |       
|                              |                                            |                                          |                |       |        |       |   |        |        |        |   |        |        |        |   |        |        |        |   |       
|                              |                                            |                                          | Total revenues |       |        | 9,802 |   |        |        | 23,687 |   |        |        | 31,909 |   |        |        | 66,816 |   |        |        | 107,057 | 
|Cost of services:             |                                            |                                          |                |       |        |       |   |        |        |        |   |        |        |        |   |        |        |        |   |       
|                              | Programming costs:                         |                                          |                |       |        |       |   |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|                              |                                            | Affiliates                               |                |       | 10,322 |       |   |        | 12,307 |        |   |        | 12,331 |        |   |        | 31,307 |        |   |        | 55,027 |        
|                              |                                            | Non-affiliates                           |                |       | 7,770  |       |   |        | 14,187 |        |   |        | 10,452 |        |   |        | 18,933 |        |   |        | 62,158 |        

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|                                                                   |                              |                                          |        |         |   |      |        |         |   |      |         |         |   |   |        |          |   |   |         |          |  
|------------------------------------------------------------------ | ---------------------------- | ---------------------------------------- | ------ | ------- | - | ---- | ------ | ------- | - | ---- | ------- | ------- | - | - | ------ | -------- | - | - | ------- | -------- | -
|                                                                   |                              |                                         
|                                                                   |                              | Years Ended December 31,                
|                                                                   |                              |                                         
|                                                                   |                              | 1997                                     |        | 1998    |   | 1999 |        | 2000    |   | 2001
|                                                                   |                              |                                          |        |         |   |      |        |         |   |     
|                                                                   |                              |                                         
|                                                                   |                              | (In thousands, except per share amounts)
|Amortization of film library                                       |                              |                                          |       |         |   |      |       |         |   |      |        |         |   |   |       |          |   |   | 3,533   |         
|Operating costs                                                    |                              |                                          | 6,990  |         |   |      | 16,831 |         |   |      | 18,796  |         |   |   | 40,444 |          |   |   | 65,134  |         
|                                                                   |                              |                                          |        |         |   |      |        |         |   |      |         |         |   |   |        |          |   |   |         |         
|                                                                   | Total cost of services       |                                          |        | 25,082  |   |      |        | 43,325  |   |      |         | 41,579  |   |   |        | 90,684   |   |   |         | 185,852  |  
|Selling, general and administrative expenses                       |                              |                                          | 5,741  |         |   |      | 9,916  |         |   |      | 22,851  |         |   |   | 51,791 |          |   |   | 87,065  |         
|Marketing expenses                                                 |                              |                                          | 378    |         |   |      | 1,634  |         |   |      | 3,426   |         |   |   | 21,280 |          |   |   | 34,809  |         
|Amortization of goodwill                                           |                              |                                          |       |         |   |      |       |         |   |      |        |         |   |   | 8,639  |          |   |   | 20,032  |         
|                                                                   |                              |                                          |        |         |   |      |        |         |   |      |         |         |   |   |        |          |   |   |         |         
|                                                                   | Loss from operations         |                                          |        | (21,399 | ) |      |        | (31,188 | ) |      |         | (35,947 | ) |   |        | (105,578 | ) |   |         | (220,701 | )
|Equity in net losses of unconsolidated entities                    |                              |                                          |       |         |   |      | (4,918 | )       |   |      | (18,992 | )       |   |   | (9,328 | )        |   |   | (655    | )       
|Guaranteed preferred beneficial accretion and
	interest expense    |                              |                                          |       |         |   |      |       |         |   |      |        |         |   |   |       |          |   |   | (1,428  | )       
|Interest income (expense), net                                     |                              |                                          |       |         |   |      | 1,273  |         |   |      | 798     |         |   |   | 523    |          |   |   | (10,392 | )       
|                                                                   |                              |                                          |        |         |   |      |        |         |   |      |         |         |   |   |        |          |   |   |         |         
|                                                                   | Net loss before income taxes |                                          |        | (21,399 | ) |      |        | (34,833 | ) |      |         | (54,141 | ) |   |        | (114,383 | ) |   |         | (233,176 | )
|Income tax (provision) benefit                                     |                              |                                          | (179   | )       |   |      | (632   | )       |   |      | (2,556  | )       |   |   | (1,743 | )        |   |   | 3,344   |         
|                                                                   |                              |                                          |        |         |   |      |        |         |   |      |         |         |   |   |        |          |   |   |         |         
|                                                                   | Net loss                     |                                          | $      | (21,578 | ) |      | $      | (35,465 | ) |      | $       | (56,697 | ) |   | $      | (116,126 | ) |   | $       | (229,832 | )
|                                                                   |                              |                                          |        |         |   |      |        |         |   |      |         |         |   |   |        |          |   |   |         |         
|Weighted average number of Class A and
	Class B shares outstanding |                              |                                          | 27,603 |         |   |      | 29,637 |         |   |      | 32,989  |         |   |   | 50,786 |          |   |   | 74,691  |         
|                                                                   |                              |                                          |        |         |   |      |        |         |   |      |         |         |   |   |        |          |   |   |         |         
|Net loss per share                                                 |                              | $                                        | (0.78  | )       |   | $    | (1.27  | )       |   | $    | (1.84   | )       |   | $ | (2.32  | )        |   | $ | (3.08   | )       
|                                                                   |                              |                                          |        |         |   |      |        |         |   |      |         |         |   |   |        |          |   |   |         |         

|                                                   |                                  |                    |         |       |  |      |         |       |  |      |         |        |  |   |         |        |  |   |           |        | 
|-------------------------------------------------- | -------------------------------- | ------------------ | ------- | ----- |  | ---- | ------- | ----- |  | ---- | ------- | ------ |  | - | ------- | ------ |  | - | --------- | ------ | 
|                                                   |                                  |                   
|                                                   |                                  | As of December 31,
|                                                   |                                  |                   
|                                                   |                                  | 1997               |         | 1998  |  | 1999 |         | 2000  |  | 2001
|                                                   |                                  |                    |         |       |  |      |         |       |  |     
|                                                   |                                  |                   
|                                                   |                                  | (In thousands)    
|Balance Sheet Data:                                |                                  |                    |         |       |  |      |         |       |  |      |         |        |  |   |         |        |  |   |           |       
|Cash and cash equivalents                          |                                  | $                  | 209     |       |  | $    | 2,877   |       |  | $    | 3,865   |        |  | $ | 34,274  |        |  | $ | 13,859    |       
|Goodwill                                           |                                  |                    |        |       |  |      |        |       |  |      |        |        |  |   | 240,141 |        |  |   | 314,033   |       
|Total assets                                       |                                  |                    | 30,276  |       |  |      | 117,674 |       |  |      | 80,003  |        |  |   | 530,078 |        |  |   | 1,626,358 |       
|Total long-term debt, excluding current maturities |                                  |                    |        |       |  |      | 10,000  |       |  |      |        |        |  |   |        |        |  |   | 205,894   |       
|Stockholders equity (deficit)                     |                                  |                    | (34,813 | )     |  |      | (20,197 | )     |  |      | (62,967 | )      |  |   | 246,808 |        |  |   | 776,866   |       
|Other Data:                                        |                                  |                    |         |       |  |      |         |       |  |      |         |        |  |   |         |        |  |   |           |       
|Capital expenditures                               |                                  | $                  | 1,031   |       |  | $    | 6,665   |       |  | $    | 2,569   |        |  | $ | 22,809  |        |  | $ | 24,402    |       
|Total subscribers at year end:                     |                                  |                    |         |       |  |      |         |       |  |      |         |        |  |   |         |        |  |   |           |       
|                                                   | Hallmark Channel  International |                    |         | 5,121 |  |      |         | 8,710 |  |      |         | 20,794 |  |   |         | 33,531 |  |   |           | 44,412 | 
|                                                   | Hallmark Channel  U.S.          |                    |         |      |  |      |         |      |  |      |         |       |  |   |         | 26,488 |  |   |           | 43,532 | 
|                                                   |                                  |                    |         |       |  |      |         |       |  |      |         |        |  |   |         |        |  |   |           |       
|                                                   | Total subscribers                |                    |         | 5,121 |  |      |         | 8,710 |  |      |         | 20,794 |  |   |         | 60,019 |  |   |           | 87,944 | 

Selected Pro Forma Consolidated Financial Data
of Crown Media Holdings

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

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The unaudited pro forma information combines the
results of operations of Crown Media Holdings, Crown Media
International, Crown Media United States and H&H
Programming  Asia as if the reorganization and the
acquisitions described above involving these entities had
occurred at the beginning of the periods presented, along with
certain pro forma adjustments to give effect to amortization of
goodwill and other intangibles and excludes the results of The
Kermit Channel which was collapsed in 2001, contract termination
charges and certain other related adjustments, reorganization
costs, and a fourth quarter 2001 tax benefit. The contract
termination and certain other adjustments consisted primarily of
exit charges and write-offs in the third quarter of 2001 of
approximately $28.2 million relating to programming
agreements with The Jim Henson Company and EM.TV. They are
included as programming costs in our consolidated historical
financial statements. Reorganization costs of $4.6 million
in the fourth quarter of 2001 were also excluded from the pro
forma results and were comprised primarily of the termination
benefits of severance and outplacement service for all affected
employees. Additionally, we excluded the tax benefit of
$5.3 million recorded in the fourth quarter of 2001.

Management believes that the results of
operations for each period should be analyzed after reflecting
the acquisitions for the full year and by excluding the effects
of these significant items. As such, the following pro forma
discussion excludes the impact of these items. However, similar
items may occur in any period. Accordingly, investors and other
financial statement users should also review the accompanying
historical consolidated financial data.

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CROWN MEDIA HOLDINGS, INC.






SELECTED YEARLY FINANCIAL
INFORMATION


(In thousands, except per share
data)


|                                                                   |                                                |                              |          |                              |  |           |         |            |   |      |          |           |   |   |          |         |   |   |         |         |   |   |          |        |  
|------------------------------------------------------------------ | ---------------------------------------------- | ---------------------------- | -------- | ---------------------------- |  | --------- | ------- | ---------- | - | ---- | -------- | --------- | - | - | -------- | ------- | - | - | ------- | ------- | - | - | -------- | ------ | -
|                                                                   |                                                |                              |          |                             
|                                                                   |                                                | Year Ended December 31, 2000 |          | Year Ended December 31, 2001
|                                                                   |                                                |                              |          |                             
|                                                                   |                                                | Historical                   |          | Adj.                         |  | Pro Forma |         | Historical |   | Adj. |          | Pro Forma
|                                                                   |                                                |                              |          |                              |  |           |         |            |   |      |          |          
|Gross revenues:                                                    |                                                |                              |          |                              |  |           |         |            |   |      |          |           |   |   |          |         |   |   |         |         |   |   |          |       
|                                                                   | Subscriber fees(a)                             |                              | $        | 47,921                       |  |           | $       | 3,769      |   |      | $        | 51,690    |   |   | $        | 73,146  |   |   | $       | 80      |   |   | $        | 73,226 |  
|                                                                   | Advertising                                    |                              |          | 16,016                       |  |           |         | 3,705      |   |      |          | 19,721    |   |   |          | 37,513  |   |   |         |        |   |   |          | 37,513 |  
|                                                                   | Licensing fees                                 |                              |          |                             |  |           |         |           |   |      |          |          |   |   |          | 2,267   |   |   |         |        |   |   |          | 2,267  |  
|                                                                   | Other                                          |                              |          | 2,879                        |  |           |         | (1,356     | ) |      |          | 1,523     |   |   |          | 740     |   |   |         |        |   |   |          | 740    |  
|                                                                   |                                                |                              |          |                              |  |           |         |            |   |      |          |           |   |   |          |         |   |   |         |         |   |   |          |       
|Total gross revenues                                               |                                                |                              | 66,816   |                              |  |           | 6,118   |            |   |      | 72,934   |           |   |   | 113,666  |         |   |   | 80      |         |   |   | 113,746  |       
|                                                                   | Amortization of subscriber acquisition fees(a) |                              |          |                             |  |           |         | (3,466     | ) |      |          | (3,466    | ) |   |          | (6,609  | ) |   |         |        |   |   |          | (6,609 | )
|                                                                   |                                                |                              |          |                              |  |           |         |            |   |      |          |           |   |   |          |         |   |   |         |         |   |   |          |       
|Net revenues                                                       |                                                |                              | 66,816   |                              |  |           | 2,652   |            |   |      | 69,468   |           |   |   | 107,057  |         |   |   | 80      |         |   |   | 107,137  |       
|Cost of services:                                                  |                                                |                              |          |                              |  |           |         |            |   |      |          |           |   |   |          |         |   |   |         |         |   |   |          |       
|                                                                   | Programming costs                              |                              |          | 50,240                       |  |           |         | 9,964      |   |      |          | 60,204    |   |   |          | 117,185 |   |   |         | (29,935 | ) |   |          | 87,250 |  
|                                                                   | Amortization of film library                   |                              |          |                             |  |           |         |           |   |      |          |          |   |   |          | 3,533   |   |   |         |        |   |   |          | 3,533  |  
|                                                                   | Operating costs                                |                              |          | 40,444                       |  |           |         | 3,595      |   |      |          | 44,039    |   |   |          | 65,134  |   |   |         | (1,393  | ) |   |          | 63,741 |  
|                                                                   |                                                |                              |          |                              |  |           |         |            |   |      |          |           |   |   |          |         |   |   |         |         |   |   |          |       
|Total cost of services                                             |                                                |                              | 90,684   |                              |  |           | 13,559  |            |   |      | 104,243  |           |   |   | 185,852  |         |   |   | (31,328 | )       |   |   | 154,524  |       
|Selling, general and administrative expenses                       |                                                |                              | 51,791   |                              |  |           | 10,814  |            |   |      | 62,605   |           |   |   | 87,065   |         |   |   | (4,393  | )       |   |   | 82,672   |       
|Marketing expenses                                                 |                                                |                              | 21,280   |                              |  |           | 3,802   |            |   |      | 25,082   |           |   |   | 34,809   |         |   |   | 2       |         |   |   | 34,811   |       
|Amortization of goodwill and other intangibles                     |                                                |                              | 8,639    |                              |  |           | 13,347  |            |   |      | 21,986   |           |   |   | 20,032   |         |   |   | 1,954   |         |   |   | 21,986   |       
|                                                                   |                                                |                              |          |                              |  |           |         |            |   |      |          |           |   |   |          |         |   |   |         |         |   |   |          |       
|Loss from operations                                               |                                                |                              | (105,578 | )                            |  |           | (38,870 | )          |   |      | (144,448 | )         |   |   | (220,701 | )       |   |   | 33,845  |         |   |   | (186,856 | )     
|Equity in net losses of unconsolidated entities                    |                                                |                              | (9,328   | )                            |  |           | 9,328   |            |   |      |         |           |   |   | (655     | )       |   |   | 655     |         |   |   |         |       
|Guaranteed preferred beneficial accretion and
	interest expense    |                                                |                              |         |                              |  |           |        |            |   |      |         |           |   |   | (1,428   | )       |   |   |        |         |   |   | (1,428   | )     
|Interest income (expense), net                                     |                                                |                              | 523      |                              |  |           | 42      |            |   |      | 565      |           |   |   | (10,392  | )       |   |   | (55     | )       |   |   | (10,447  | )     
|                                                                   |                                                |                              |          |                              |  |           |         |            |   |      |          |           |   |   |          |         |   |   |         |         |   |   |          |       
|Net loss before income taxes                                       |                                                |                              | (114,383 | )                            |  |           | (29,500 | )          |   |      | (143,883 | )         |   |   | (233,176 | )       |   |   | 34,445  |         |   |   | (198,731 | )     
|Income tax provision                                               |                                                |                              | (1,743   | )                            |  |           |        |            |   |      | (1,743   | )         |   |   | 3,344    |         |   |   | (5,320  | )       |   |   | (1,976   | )     
|                                                                   |                                                |                              |          |                              |  |           |         |            |   |      |          |           |   |   |          |         |   |   |         |         |   |   |          |       
|Net loss                                                           |                                                | $                            | (116,126 | )                            |  | $         | (29,500 | )          |   | $    | (145,626 | )         |   | $ | (229,832 | )       |   | $ | 29,125  |         |   | $ | (200,707 | )     
|                                                                   |                                                |                              |          |                              |  |           |         |            |   |      |          |           |   |   |          |         |   |   |         |         |   |   |          |       
|Net loss per share                                                 |                                                | $                            | (2.32    | )                            |  |           |         |            |   | $    | (2.23    | )         |   | $ | (3.08    | )       |   |   |         |         |   | $ | (1.93    | )     
|                                                                   |                                                |                              |          |                              |  |           |         |            |   |      |          |           |   |   |          |         |   |   |         |         |   |   |          |       
|Weighted average number of Class A and
	Class B shares outstanding |                                                |                              | 50,786   |                              |  |           |         |            |   |      | 65,377   |           |   |   | 74,691   |         |   |   |         |         |   |   | 104,159  | (b)   
|                                                                   |                                                |                              |          |                              |  |           |         |            |   |      |          |           |   |   |          |         |   |   |         |         |   |   |          |       



---



|    |  |                                               
|--- |  | ----------------------------------------------
|(a) |  | Netted in audited financial statements.       
|   
|(b) |  | Includes shares issued in library transaction.

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##### Table of Contents



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



| |                                                                       
| | ----------------------------------------------------------------------
| | Year Ended December 31, 2001 Compared
	to Year Ended December 31, 2000

Revenues.Gross
subscriber fees revenue increased to $73.2 million from
$51.7 million for the year ended December 31, 2001,
which represents an increase of $21.5 million, or 42%, over
the comparable period in 2000. The increased subscriber fees
revenue resulted from new market launches in the first half of
2001 and expanded distribution in existing markets. The number
of subscribers to the Hallmark Channel, as of December 31,
2001, increased to 87.9 million from 60.0 million as
of December 31, 2000, which represents an increase of
27.9 million, or 47%. Subscribers to our international
channel increased at a higher rate than international subscriber
fees revenue primarily because a number of new subscribers were
added during promotional periods in which fees were reduced or
waived. International fees per subscriber are expected to
experience continuing downward pressure in the future due to the
competitive nature of the industry, the growth of digital cable,
the shift in the industry from subscriber fees revenue to
advertising revenue, foreign currency devaluation associated
with global economies and the economic turbulence in certain of
our markets. Additionally, rates for international subscriber
fees decreased and may continue to decrease as we renew
distribution agreements, which may provide for lower rates than
under previous agreements. Seventy-two percent of gross
subscriber fees revenue for the year ended December 31,
2001, and 78% of gross subscriber fees revenue for the year
ended December 31, 2000, were earned internationally.
Subscribers to our domestic channel increased from
26.5 million as of December 31, 2000, to
43.5 million as of December 31, 2001, which represents
an increase of 17.0 million, or 64%. During third quarter
2001, we completed a distribution agreement with DirecTV, which
added approximately five million new subscribers. For additional
information on subscriber acquisition and other fees, see
Note 2 of Notes to Consolidated Financial Statements. Net
revenues for the year ended December 31, 2001, increased to
$107.1 million from $69.5 million, which represents an
increase of $37.6 million, or 54%, respectively, over the
comparable period in 2000. Because of the need to acquire a
subscriber base, the amortization of subscriber acquisition
costs and other fees may result in a decline in net subscriber
revenues, as we net amortization of subscriber acquisition costs
and other fees against revenue in accordance with generally
accepted accounting principles in the United States.

Advertising revenues increased to
$37.5 million from $19.7 million for the year ended
December 31, 2001, which represents an increase of
$17.8 million, or 90%, over the comparable period in 2000.
The increase in advertising revenues reflects our growth in
subscribers, higher ratings, higher advertising rates in the
domestic market, channel programming which became more
attractive to advertisers, and expanded sales of advertising
time primarily in the United States, the United Kingdom and
Latin America. Advertising revenues from our domestic channel
were $25.4 million for the year ended December 31,
2001, compared to $13.7 million for the year ended
December 31, 2000. We are currently facing a challenging
advertising market in the United States due to its continuing
softness, although it appears that this advertising market is
improving.

During fourth quarter 2001, Crown Media Holdings
commenced earning revenue through a new business segment, film
distribution, via its purchase of the Crown Media Library.
Notwithstanding our use of these film assets on our channels, we
are generating licensing fees revenue as we establish ourselves
in the program distribution market and expand our customer base.
As part of the purchase, we were entitled to all assets and
assumed all liabilities generated by licensing the film assets
to third parties from January 1, 2001, to
September 28, 2001, which resulted in a $1.5 million
reduction to the purchase price for the Crown Media Library.
From the closing of the transaction in September 2001 to
December 31, 2001, we earned licensing fees of
$2.3 million.

Cost of services.Cost of services for the year ended
December 31, 2001, increased to $154.5 million from
$104.2 million, which represents an increase of
$50.3 million, or 48%, over the comparable period in 2000.
Cost of services as a percent of net revenue decreased to 144%
for the year ended December 31, 2001, as compared to 150%
for the year ended 2000. This decrease was primarily due to our
employment of in-house resources to produce interstitials (the
promotional segments aired between programs) and the utilization
of our Network Operations Center to perform certain playback
functions previously provided by third-party vendors.
Programming costs for the year ended December 31, 2001,
rose 45% as we invested in additional and

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##### Table of Contents



higher quality programming, particularly
series-based programming necessary to fulfill our programming
strategy. From the date of the acquisition until
December 31, 2001, amortization of the film library was
$3.5 million. We anticipate a decline in affiliated
programming amortization expense due to the completion of the
purchase of the film assets on September 28, 2001, but
expect a significant increase in amortization related to our new
film assets. Generally, we will amortize our film assets used
internally over ten years and for external sales upon
recognizing revenue. We also acquired and continue to amortize
popular programming from third-party suppliers to meet our
strategy and the demands of our customers. In order to attract
and maintain viewers, we plan to purchase additional series from
third-party suppliers. To enhance the quality of our new and
existing subscribers pay television experience and support
the utilization of the Network Operations Center, we expanded
the number of employees in our broadcast operations,
contributing to the rise in our operating costs. Total cost of
services increased due to our amortizing additional licensed
programming and servicing our expanded markets.


Selling, general and administrative expenses.Selling, general and administrative
expenses for the year ended December 31, 2001, increased to
$82.7 million from $62.6 million, which represents an
increase of $20.1 million, or 32%, over the comparable
period in 2000. These increases primarily reflect increased
costs associated with supporting expanded distribution in
existing markets, supporting new markets and the continued
development of a corporate infrastructure to support increased
distribution and advertising, including expansion of the
management team. Due to a company-wide travel restriction in
September 2001 and the implementation of teleconferencing,
travel and entertainment expenses declined during the third
quarter of 2001. Additionally, depreciation increased after the
launch of our Network Operations Center in the first quarter of
2001 and the company-wide upgrade of our network infrastructure,
computers and technical equipment. Selling, general and
administrative expenses as a percent of total revenue decreased
to 77% for the year ended December 31, 2001, as compared to
90% for the year ended December 31, 2000. This decrease is
due to an increase in net revenues of 54% noted above and
decreases in travel, entertainment, and other costs.

Marketing expenses.Marketing expenses for the year ended
December 31, 2001, increased to $34.8 million from
$25.1 million, which represents an increase of
$9.7 million, or 39%, over the comparable period in 2000.
Marketing expenses increased in the first, second and third
quarters of 2001 due to aggressive marketing campaigns to drive
consumer awareness and the introduction of our new brand
package, which included branded theme blocks, a new positioning
line, on-air graphics and signature music. The newly redesigned
brand began a worldwide rollout on November 1, 2000, and
was completed on August 5, 2001. Additionally, in an effort
to strengthen our domestic brand awareness, we incurred and will
continue to incur expenses related to the promotion and
advertising campaigns supporting our August 5, 2001,
re-branding of the Odyssey Network as the Hallmark Channel.

Amortization of goodwill and other
intangibles.Amortization of goodwill
and other intangibles for both the years ended December 31,
2001 and 2000, were $22.0 million, respectively. In
conjunction with the acquisition of an additional 55% common
interest in Crown Media United States on May 9, 2000, we
recorded goodwill in the amount of $248.8 million, which
has been amortized over 20 years. In conjunction with the
acquisition of EM.TV & Merchandising AGs
(EM.TV) 50% interest in H&H
Programming  Asia and the remaining 22.5% common
interests in Crown Media United States on March 15, 2001,
we recorded goodwill and other intangibles in the amount of
$93.9 million, which has been amortized over 10 years.
The amortization of goodwill arising from past acquisitions
ceased as of January 1, 2002, in accordance with revised
accounting standards issued by the Financial Accounting
Standards Board in June 2001. We will no longer record
amortization expense of $5.5 million per quarter, or
$22.0 million per year, which will significantly decrease
our net loss. However, goodwill and other intangible assets will
be subject to periodic (at least annual) tests for impairment,
and recognition of impairment losses in the future could be
required based on a new methodology for measuring impairments
prescribed by these pronouncements. The revised standards
include transition rules and requirements for identification,
valuation and recognition of a much broader list of intangibles
as part of business combinations than prior practice, most of
which will continue to be amortized. We are still in the process
of assessing the impact of these new standards on our
prospective financial statements, but we expect that the amount
and timing of non-cash charges related to intangibles acquired
in business combinations will change significantly from prior
practice.

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##### Table of Contents



Loss from operations.Loss from operations for the year
ended December 31, 2001, increased to $186.9 million
from $144.4 million, which represents an increase of
$42.5 million, or 29%, over the comparable period in 2000.
This increase was primarily due to aggressive marketing
campaigns for our domestic channel, the introduction of our new
brand package, and factors affecting the cost of services as
described above. This increase was partially offset by our
increased utilization of in-house resources to produce
interstitial product and the employment of the Network
Operations Center to perform certain playback functions
previously provided by third-party vendors.

Guaranteed preferred beneficial interest
expense.Guaranteed preferred
beneficial interest expense for the year ended December 31,
2001, was $1.4 million. This expense relates to future
payments on our debentures issued on December 17, 2001, in
connection with the preferred securities of Crown Media Trust.
We are aware of a recent accounting exposure draft issued by the
Financial Accounting Standards Board, which may cause us to
reclassify our guaranteed preferred beneficial interests in
Crown Media Trusts debentures as convertible debt if
adopted. Changing the classification of our preferred securities
from guaranteed preferred beneficial interests to convertible
debt would also change the Companys treatment of its debt
issuance costs and would have the effect of increasing our net
loss by an estimated $1.1 million for the year ended
December 31, 2002, due to the timing of recognition of
costs related to the offering.

Interest income (expense), net.Net interest expense for the year
ended December 31, 2001, increased to $10.4 million
from net interest income of $565,000, which represents an
increase of $11.0 million, over the comparable period in
2000. These increases were primarily due to increased borrowings
on our credit facility with JP Morgan Chase Bank to fund
operations.

Income tax provision.Income tax provision for the year
ended December 31, 2001, increased to $1.9 million
from $1.7 million, which represents an increase of
$233,000, or 13%, over the comparable period in 2000. This
increase was due to the tax on the foreign-based income
resulting from increased international subscriber fees revenue
as discussed above. The Argentine and Brazilian governments are
considering the implementation of taxation on advertising sales.
If implemented, our foreign taxes would increase as would our
net loss.

Net loss.Net loss
for the year ended December 31, 2001, increased to
$200.7 million from $145.6 million, which represents
an increase of $55.1 million, or 38%, over the comparable
period in 2000. This increase in net loss for the year ended
December 31, 2001, was attributable to a combination of the
factors discussed above.






|        |                                                                                                   
|------- | --------------------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
	of Historical Financial Condition and Results of
	Operations

Overview

Crown Media Holdings was established as a holding
company with no material assets, liabilities, contingent
liabilities or operations prior to the completion of our
reorganization and initial public offering on May 9, 2000.
On May 9, 2000, Crown Media Holdings completed a
reorganization in which all of Crown Media Holdings
outstanding shares were exchanged for 100% of Crown Media
International and 77.5% of the common interests in Crown Media
United States, 22.5% of which was held by Crown Media
International, 32.5% by Liberty Media and 22.5% by NICC. Our
consolidated financial statements include the assets and
liabilities of Crown Media International at their historical
carrying values because both Crown Media Holdings and Crown
Media International were entities under common control before
and after the reorganization. The accompanying consolidated
financial statements also include the assets and liabilities and
results of operations of Crown Media Holdings other direct
and indirect, wholly and majority-owned subsidiaries. The
interests in Crown Media United States acquired from Liberty
Media (32.5%) and NICC (22.5%) are included in our consolidated
financial statements at their fair value using purchase
accounting as of the date of the reorganization. In conjunction
with the reorganization, Crown Media Holdings also completed its
initial public offering of 10,000,000 shares of
Class A common stock at $14 per share. The net
proceeds from this offering, after expenses and underwriting
discounts and commissions, were approximately
$125.4 million.

39



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##### Table of Contents



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

For more information on significant recent
developments, see Item 1 Business in this
Report.

Revenues

Our revenues consist of subscriber fees,
advertising revenues and licensing fees revenues. Subscriber
fees are generally payable to us on a per subscriber basis by
pay television distributors for the right to carry our channels.
Subscriber fee revenue is recorded net of promotional
subscribers and amortization of subscriber acquisition and other
fees. In the United States, we pay certain television
distributors up-front subscriber acquisition and other fees to
carry our channel. However, such payments are not common in the
international cable television markets. Subscriber acquisition
and other fees paid are capitalized and amortized over the term
of the applicable distribution agreement. At the time we sign a
distribution agreement, and periodically thereafter, we evaluate
the recoverability of the costs we incur against the revenues
directly associated with each agreement.

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 in the territory
	and length of term of the contract.

In some circumstances, distributors provide
minimum revenue guarantees.

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



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

We continue to seek ways to increase our
subscriber base to support advertising. We are subject to
requests by distributors for subscription acquisition fees, in
the United States, or, both domestically and internationally,
other payments for carriage on our channel or promotional time
periods without subscriber fees. We may have a decline in net
subscriber revenues from our domestic channel because of this
environment and because we net amortization of subscription
acquisition costs and other fees against revenue in accordance
with generally accepted accounting principles in the United
States.

Several of the Crown Media United States
existing distribution agreements contain most favored
nations clauses. These clauses typically provide that, in
the event the Crown Media United States enters into a subsequent
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

40



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##### Table of Contents



other distributors, whose agreements contain
most favored nations provisions, have indicated an
interest in some or all of the DirecTV terms, and Crown Media
United States is currently in discussions with these
distributors. Any modification of these existing agreements to
adopt the DirecTV terms, or any other new terms could result in
the payment of cash or the issuance of stock by Crown Media
Holdings and could affect subscriber and advertising revenues.


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

Cost of Services

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

In connection with our purchase of film assets
from Hallmark Entertainment Distribution, we have signed a
service agreement with Hallmark Entertainment. Under the service
agreement, Hallmark Entertainment will provide services to us to
assist in the administration, distribution and other
exploitation of the film assets, and we will pay Hallmark
Entertainment approximately $1.5 million per year for up to
the three-year term of the agreement. For further information,
please see Certain Relationships and Related
Transactions   Purchase of Film Library Assets
from Hallmark Entertainment Distribution  
Service Agreement with Hallmark Entertainment.

Income Tax Provision

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

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

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

Foreign withholding tax may be claimed as a
credit against our United States tax liability, subject to
certain limitations. Any amounts not allowed as a credit in the
year generated may be carried back to the two preceding tax
years and then forward to the five succeeding tax years.
Alternatively, if taxes cannot be claimed as a credit during
these carry back and carryover periods, an election may be made
to claim these taxes as a deduction, thus resulting in a tax
benefit to the extent of our tax rate and our ability to use
such deductions. Tax losses may only be used to offset taxable
income. To the extent losses are limited, such excess losses may
be carried back to the two preceding tax years and then forward
to the 20 succeeding tax years.

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

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

For additional information on the income tax
provision, please see Note 11 to Notes to Consolidated
Financial Statements in this Report.

Foreign Currency Exchange and
Inflation

We plan to enter into hedging transactions to
reduce our exposure to foreign currency exchange rate risks.
However, we may continue to experience economic loss and a
negative effect on earnings and equity with respect to our
holdings solely as a result of foreign currency exchange rate
fluctuations. See Forward Looking Statements and Risk
Factors  Risks Related to Our Business  We
are subject to the risks of doing business outside the United
States. We also assumed a hedging contract in connection
with the purchase of the film assets as described in
Note 10 to Notes to Consolidated Financial Statements under
the heading Purchase of Film Assets in this Report.

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

We have not been materially affected by inflation.

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

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following discussion addresses certain accounting
policies involving significant judgments, estimates, or
assumptions.




| |                    
| | -------------------
| | Revenue Recognition

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



| |                                 
| | --------------------------------
| | Program License Fees Paid by
	Us

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



| |            
| | -----------
| | Film Assets

The Company amortizes its film assets based on
recognized revenue in the case of sales to third parties, using
projections of sales to third parties for 10 years in
determining the amortization amount for any sale to a third
party, and based on a 10-year amortization for anticipated
internal use of the film assets. Our 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 an initial,
external valuation of our film assets at the time of purchase.
The film assets are also reviewed by the Company for impairment
whenever events or changes in circumstances indicate that the
carrying amount of any such asset may not be recoverable and at
least annually. At least annually, the Company is also required
by its debt covenants to have an external review of the film
assets valuation.



| |                       
| | ----------------------
| | Property and Equipment

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



| |                            
| | ---------------------------
| | Subscriber Acquisition Fees

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

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| |                                             
| | --------------------------------------------
| | Private Placement and Resulting
	Derivatives

In December 2001, Crown Media Holdings completed
a $265.0 million private placement by issuing trust
preferred securities with contingent appreciation certificates.
The structure of the agreement allowed the Company to record the
trust preferred securities as guaranteed preferred beneficial
interest in our debentures held by Crown Media Trust while the
contingent appreciation certificates are recorded as debt. The
agreement also included embedded derivatives, which will be
marked to market through income (expense) over the term of
the agreement or until settlement, if earlier. A fair value
allocation was performed by the Company to record the trust
preferred securities, the debt and the derivative. This
calculation is discussed in Note 9 to Notes of Consolidated
Financial Statements. The interest component of the private
placement is also being allocated between interest expense and
guaranteed preferred beneficial interest expense in the
consolidated statement of operations to correspond to the
allocation of the components on the consolidated balance sheet.

On or after December 15, 2003, Crown Media
Holdings will have the right to redeem any and all of the
outstanding debentures at a redemption price equal to 100% of
the aggregate principal amount of the debentures, together with
any accrued and unpaid interest thereon. Currently, the Company
expects to redeem the debentures during 2004, and the accounting
treatment for the debentures and preferred securities is based
in part on this expectation.

Currently, there is an accounting exposure draft
on long-term liabilities, which could cause the Company to
classify all the trust preferred securities as debt and the
corresponding amortization as interest expense, if the exposure
draft is adopted.



| |                                
| | -------------------------------
| | Goodwill and Other
	Intangibles

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

In connection with the issuance of SFAS 142
Goodwill and Other Intangibles and our acquisition
of the remaining interests in Crown Media United States and
H&H Programming  Asia, we have engaged an
independent firm to complete a valuation of Crown Media United
States and H&H Programming  Asia as a basis for
determining any adjustments to our estimated allocations of
these purchase prices for these entities and to assist us in our
annual analysis of impairment of goodwill and other intangibles.



| |                   
| | ------------------
| | Deferred Tax Asset

Crown Media Holdings has provided a valuation
allowance of $16.0 million on its net deferred tax assets
because of uncertainty regarding their realizability. If we took
the position that our deferred tax asset was realizable, we
would have recorded a tax benefit against our loss for 2001 and
would have reduced our net loss by the amount of that benefit.

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Effects of Transactions with Related and
Certain Other Parties

See Part III, Item 13, Certain
Relationships and Related Transactions.

Results of Operations



| |                                                                       
| | ----------------------------------------------------------------------
| | Year Ended December 31, 2001 Compared
	to Year Ended December 31, 2000

Overview.Significant variances exist between
results of operations in 2000 and 2001 as a result of the
reorganization of Crown Media United States as of May 9,
2000, as well as the acquisitions of the remaining common
interests of Crown Media United States and H&H
Programming  Asia on March 15, 2001.

Revenues.Net
revenues for the year ended December 31, 2001, increased to
$107.1 million from $66.8 million, which represents an
increase of $40.3 million, or 60%, over the comparable
period in 2000. Subscriber fees revenue increased to
$66.5 million from $47.9 million for the year ended
December 31, 2001, which represents an increase of
$18.6 million, or 39%, over the comparable period in 2000.
The increased subscriber fees revenue resulted from new market
launches in the first half of 2001 and expanded distribution in
existing markets. The number of subscribers to the Hallmark
Channel, as of December 31, 2001, increased to
87.9 million from 60.0 million as of December 31,
2000, which represents an increase of 27.9 million, or 47%.
Subscribers to our international channel increased at a higher
rate than international subscriber fees revenue primarily
because a number of new subscribers were added during
promotional periods in which fees were reduced or waived.
International fees per subscriber are expected to experience
continuing downward pressure in the future due to the
competitive nature of the industry, the growth of digital cable,
the shift in the industry from subscriber fees revenue to
advertising revenue, foreign currency devaluation associated
with global economies and the economic turbulence in certain of
our markets. Additionally, rates for international subscriber
fees decreased and may continue to decrease as we renew
distribution agreements, which may provide for lower rates than
under previous agreements. Seventy-nine percent of subscriber
fees revenue for the year ended December 31, 2001, and 69%
of subscriber fees revenue for the year ended December 31,
2000, were earned internationally. Subscribers to our domestic
channel increased from 26.5 million as of December 31,
2000, to 43.5 million as of December 31, 2001, which
represents an increase of 17.0 million, or 64%. During
third quarter 2001, we completed a distribution agreement with
DirecTV, which added approximately five million new subscribers.

Our subscriber revenues are decreased by the
amount of the amortization of subscriber acquisition and other
fees. This amortization amount was $6.6 million for the
year ended December 31, 2001. See Note 2 of Notes to
Consolidated Financial Statements.

Advertising revenues increased to
$37.5 million from $16.0 million for the year ended
December 31, 2001, which represents an increase of
$21.5 million, or 134%, over the comparable period in 2000.
The increase in advertising revenues reflects our growth in
subscribers, higher ratings, higher advertising rates in the
domestic market, channel programming which became more
attractive to advertisers, and expanded sales of advertising
time primarily in the United States, the United Kingdom and
Latin America. Advertising revenues from our domestic channel
were $25.4 million for the year ended December 31,
2001, compared to $10.0 million for the year ended
December 31, 2000. We are now facing a challenging
advertising market in the United States due to its continuing
softness, although it appears that this advertising market is
improving.

During fourth quarter 2001, Crown Media Holdings
commenced earning revenue through a new business segment, film
distribution, via its purchase of the Crown Media Library.
Notwithstanding our use of these film assets on our channels, we
are generating licensing fees revenue as we establish ourselves
in the program distribution market and expand our customer base.
As part of the purchase, we were entitled to all assets and
assumed all liabilities generated by licensing the film assets
to third parties from January 1, 2001, to
September 28, 2001, which resulted in a $1.5 million
reduction to the purchase price for the Crown Media Library.
From the closing of the transaction in September 2001 to
December 31, 2001, we earned licensing fees of
$2.3 million.

Cost of services.Cost of services for the year ended
December 31, 2001, increased to $185.9 million from
$90.7 million, which represents an increase of
$95.2 million, or 105%, over the comparable period in

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2000. Cost of services as a percent of total
revenue increased to 174% for the year ended December 31,
2001, as compared to 136% for the year ended 2000. This increase
was due to increased programming costs for year ended
December 31, 2001, which rose 133%, as we invested in
additional and higher quality programming, particularly
series-based programming necessary to fulfill our programming
strategy. This increase was also due to the $28.2 million
of expenses incurred to write-off and exit certain programming
contracts with EM.TV during third quarter 2001. These increases
were offset to an extent by the utilization of our Network
Operation Center to perform certain playback functions
previously provided by third-party vendors. We also acquired and
continue to amortize popular programming from third-party
suppliers to meet our strategy and the demands of our customers.
In order to attract and maintain viewers, we plan to purchase
additional series from third-party suppliers. From the date of
the acquisition until December 31, 2001, amortization of
our film assets was $3.5 million. We anticipate a decline
in affiliated programming amortization expense due to the
completion of the purchase of the film assets on
September 28, 2001, but expect a significant increase in
amortization related to our new film assets. Generally, we will
amortize our film assets used internally over ten years and for
external sales upon recognizing revenue. To enhance the quality
of our new and existing subscribers pay television
experience and support the utilization of the Network Operations
Center, we expanded the number of employees in our broadcast
operations, contributing to the rise in our operating costs.
Total cost of services increased due to our amortizing
additional licensed programming, incurring costs related to
exiting programming contracts, and servicing our expanded
markets.


Selling, general and administrative expenses.Selling, general and administrative
expenses for the year ended December 31, 2001, increased to
$87.1 million from $51.8 million, which represents an
increase of $35.3 million, or 68%, over the comparable
period in 2000. These increases primarily reflect increased
costs associated with supporting expanded distribution in
existing markets, supporting new markets and the continued
development of a corporate infrastructure to support increased
distribution and advertising, including expansion of the
management team. In October 2001, we implemented a
reorganization, which resulted in the termination of a number of
employees, primarily those in marketing, finance and
administrative departments. We recorded an expense of
$4.6 million related to the reorganization, comprised
primarily of salary and benefits. Due to a company-wide travel
restriction in September 2001 and the implementation of
teleconferencing, travel and entertainment expenses declined
during the third quarter of 2001. Additionally, depreciation
increased after the launch of our Network Operations Center in
the first quarter of 2001 and the company-wide upgrade of our
network infrastructure, computers and technical equipment.
Selling, general and administrative expenses as a percent of
total revenue increased to 81% for the year ended
December 31, 2001, as compared to 78% for the year ended
December 31, 2000 due to the $4.6 million of
reorganization expenses incurred during fourth quarter 2001.

Marketing expenses.Marketing expenses for the year ended
December 31, 2001, increased to $34.8 million from
$21.3 million, which represents an increase of
$13.5 million, or 64%, over the comparable period in 2000.
Marketing expenses increased in the first, second and third
quarters of 2001 due to aggressive marketing campaigns to drive
consumer awareness and the introduction of our new brand
package, which included branded theme blocks, a new positioning
line, on-air graphics and signature music. The newly redesigned
brand began a worldwide rollout on November 1, 2000, and
was completed on August 5, 2001. Additionally, in an effort
to strengthen our domestic brand awareness, we incurred and will
continue to incur expenses related to the promotion and
advertising campaigns supporting our August 5, 2001,
re-branding of the Odyssey Network as the Hallmark Channel.

Amortization of goodwill and other
intangibles.Amortization of goodwill
and other intangibles for the year ended December 31, 2001,
increased to $20.0 million from $8.6 million, which
represents an increase of $11.4 million, or 132%, over the
comparable period in 2000. In conjunction with the acquisition
of an additional 55% common interest in Crown Media United
States on May 9, 2000, and the acquisition of the remaining
common interests in Crown Media United States and H&H
Programming  Asia on March 15, 2001, we recorded
goodwill in the amounts of $248.8 million and
$93.9 million, which have been amortized over 20 years
and 10 years, respectively. The amortization of goodwill
arising from past acquisitions ceased as of January 1,
2002, in accordance with revised accounting standards issued by
the Financial Accounting Standards Board in June 2001. We no
longer record amortization expense of $5.5 million per
quarter, or

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$22.0 million per year, which will
significantly decrease our net loss subsequent to
December 31, 2001. However, goodwill and other intangible
assets will be subject to periodic (at least annual) tests for
impairment and recognition of impairment losses in the future
could be required based on a new methodology for measuring
impairments, prescribed by these pronouncements. The revised
standards include transition rules and requirements for
identification, valuation and recognition of a much broader list
of intangibles as part of business combinations than prior
practice, most of which will continue to be amortized. We are
still in the process of assessing the impact of these new
standards on our prospective financial statements, but we expect
that the amount and timing of non-cash charges related to
intangibles acquired in business combinations will change
significantly from prior practice.


Loss from operations.Loss from operations for the year
ended December 31, 2001, increased to $220.7 million
from $105.6 million, which represents an increase of
$115.1 million, or 109%, over the comparable period in
2000. This increase was primarily due to aggressive marketing
campaigns for our domestic channel, the introduction of our new
brand package, factors affecting the cost of services as
described above, and write-down and other costs incurred in
connection with the exit of certain contracts with EM.TV and its
subsidiaries subsequent to Hallmark Entertainments
purchase of EM.TVs interest in us. These increases were
partially offset by our increased utilization of in-house
resources to produce interstitial product and the employment of
our Network Operations Center to perform certain playback
functions previously provided by third-party vendors.

Equity in net losses of unconsolidated
entities and investment expenses.Equity in net losses of unconsolidated
entities and investment expenses for the year ended
December 31, 2001, decreased to $655,000 from
$9.3 million, which represents a decrease of
$8.7 million, or 93%, over the comparable period in 2000.
This decrease was primarily due to the acquisition of a majority
interest in Crown Media United States on May 9, 2000, and
the acquisition of the remaining common interests in Crown Media
United States and H&H Programming  Asia on
March 15, 2001. We commenced consolidation of Crown Media
United States and H&H Programming  Asia on the
dates of the acquisition. Net losses derived from Crown Media
United States and H&H Programming  Asia were
recorded under the equity method of accounting through
May 9, 2000, and March 15, 2001, respectively, and
consolidated thereafter.

Guaranteed preferred beneficial interest
expense.Guaranteed preferred
beneficial interest expense for the year ended December 31,
2001, was $1.4 million. This expense relates to future
payments on our debentures issued on December 17, 2001, in
connection with the preferred securities of Crown Media Trust.
We are aware of a recent accounting exposure draft issued by the
Financial Accounting Standards Board, which may cause us to
reclassify our guaranteed preferred beneficial interests in
Crown Media Trusts debentures as convertible debt if
adopted. Changing the classification of our preferred securities
from guaranteed preferred beneficial interests to convertible
debt would also change the Companys treatment of its debt
issuance costs and would have the effect of increasing our net
loss by an estimated $1.1 million for the year ended
December 31, 2002, due to the timing of recognition of
costs related to the offering.

Interest income (expense), net.Net interest expense for the year
ended December 31, 2001, was $10.4 million. Net
interest income for the year ended December 31, 2000, was
$523,000. The increase in net interest expense was primarily due
to increased borrowings from the JP Morgan Chase Bank credit
facility to fund operations.

Income tax benefit (provision).Income tax benefit for the year ended
December 31, 2001, increased to $3.3 million from an
income tax provision of $1.7 million, which represents an
increase of $5.0 million, or 292%, over the comparable
period in 2000. This increase was due to a tax benefit from our
film assets transaction during the fourth quarter 2001 offset by
the tax on the foreign-based income resulting from increased
international subscriber fees revenue discussed above. The
Argentine and Brazilian governments are considering the
implementation of taxation on advertising sales. If implemented,
our foreign taxes would increase as would our net loss.

Net loss.Net loss
for the year ended December 31, 2001, increased to
$229.8 million from $116.1 million, which represents
an increase of $113.7 million, or 98%, over the comparable
period in 2000. The increase

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in net loss for the year ended December 31,
2001, was attributable to a combination of the factors discussed
above.




| |                                                                       
| | ----------------------------------------------------------------------
| | Year Ended December 31, 2000 Compared
	to Year Ended December 31, 1999

Overview.The actual
results of operations reflect the predecessor entity, Crown
Media International, for the year ended December 31, 1999
and for the period of January 1, 2000 through May 9,
2000. Therefore, significant variances exist as a result of the
acquisition of Crown Media United States as of May 9, 2000.

Revenues.Total
revenues for the year ended December 31, 2000 increased to
$66.8 million from $31.9 million, which represents an
increase of $34.9 million, or 109%, over the comparable
period in 1999. Part of the increase in total revenues was due
to the acquisition of Crown Media United States on May 9,
2000. Crown Media Holdings recorded $18.7 million, or 100%,
of Crown Media United States revenue for the period May 9
through December 31, 2000. Subscriber fees revenue
increased to $47.9 million from $27.7 million for the
year ended December 31, 2000, which represents an increase
of $20.2 million, or 73%, over the comparable period in
1999. The increased subscriber fees revenues resulted from new
market launches and expanded distribution in existing markets.
The number of subscribers to our international and domestic
channels as of December 31, 2000 increased by 188% to
60 million from 20.8 million as of December 31,
1999. Advertising revenues increased to $16.0 million from
$1.7 million for the year ended December 31, 2000,
which represents an increase of $14.3 million, or 826%,
over the comparable period in 1999. The increase in advertising
revenues reflects our growing subscriber base, expanding sales
of advertising time primarily in the United States and the
United Kingdom, and higher advertising rates. Fifty of the
leading domestic advertisers advertised on our domestic channel
during 2000. We received management fees from the Kermit Channel
during 2000. As a result of the purchase of EM.TVs
interests and the collapsing of the Kermit Channel into a block
on our international channel, we will not earn management fee
revenues in the future.

Subscribers of our international channel
increased at a higher rate than subscriber revenues as a number
of new subscribers were added with promotional periods. During
2000, our international channel was launched in the United
Kingdom to approximately 3.5 million subscribers, in Israel
to approximately 1.2 million subscribers, and in Hungary to
approximately 250,000 subscribers. During 1999, we launched our
international channel in Argentina, India, Philippines, Romania
and Russia. Subscribers of our domestic channel increased by
100.0%, or 26.5 million, due to our May 9, 2000,
acquisition of Crown Media United States. Rates negotiated for
domestic subscriber fees and advertising revenues increased as
we continue to sign new distribution agreements. By the end of
2000, we had signed agreements with six of the top nine leading
pay television distributors. Sixty-nine percent of total
revenues in 2000 and 92% of total revenues in 1999 were earned
internationally.

Cost of services.Cost of services for the year ended
December 31, 2000 increased to $90.7 million from
$41.6 million, which represents an increase of
$49.1 million, or 118%, over the comparable period in 1999.
This increase was primarily due to the acquisition of Crown
Media United States on May 9, 2000. We recorded
$34.6 million, or 100%, of Crown Media United States
cost of services for the period May 9 through December 31,
2000. Cost of services as a percentage of total revenue
increased to 136% for the year ended 2000, as compared to 130%
for the year ended 1999. This increase was due primarily to a
$27.5 million increase in programming costs and a
$21.6 million increase in operating costs for the
aforementioned period. Programming costs rose as we invested in
additional and higher quality programming, including the greater
use of Hallmark Entertainment titles necessary to fulfill our
programming strategy. Also during 2000, our domestic channel
purchased rights to the series Dr. Quinn, Medicine Woman
from a third-party supplier. Higher subscriber acquisition costs
were primarily attributable to amortization of costs related to
a domestic distribution contract commencing during the third
quarter of 1999. Additionally, we negotiated other distribution
contracts, which required payment of subscriber acquisition
costs, during the fourth quarter of 2000. Additionally,
operating costs rose as we expanded existing markets and
launched our international channel in the United Kingdom,
Israel, Turkey and Hungary during 2000. Total cost of services
increased reflecting the increased infrastructure, certain key
senior management additions, and costs associated with
supporting new markets.

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Selling, general and administrative expenses.Selling, general and administrative
expenses for the year ended December 31, 2000 increased to
$51.8 million from $22.9 million, which represents an
increase of $28.9 million, or 127%, over the comparable
period in 1999. This increase was primarily due to the
acquisition of Crown Media United States on May 9, 2000. We
recorded $17.0 million, or 100%, of Crown Media United
States selling, general and administrative expenses for
the period May 9 through December 31, 2000. Selling,
general and administrative expenses as a percent of total
revenue increased to 78% for the year ended December 31,
2000, as compared to 72% for the year ended December 31,
1999. This increase primarily reflects increased costs
associated with supporting new markets and the continued
development of a corporate infrastructure to support increased
distribution and advertising, including expansion of the
management team and increased staffing levels. This increase
also includes $4.2 million in salaries and benefits
primarily related to compensatory stock option expense for the
year 2000.

Marketing expenses.Marketing expenses for the year ended December 31, 2000,
increased to $21.3 million from $3.4 million, which
represents an increase of $17.9 million, or 521%, over the
comparable period in 1999. This increase was primarily due to
the acquisition of Crown Media United States on May 9,
2000. Additionally, marketing expenses increased in 2000 and are
expected to increase the first and second quarters of 2001 due
to the introduction of our new brand package, which includes
branded theme blocks, a new positioning line, on-air graphics
and signature music. The newly redesigned brand began a
worldwide rollout on November 1, 2000.

Amortization of goodwill and other
intangibles.Amortization of goodwill
and other intangibles for the years ended December 31,
2000, was $8.6 million. In conjunction with the acquisition
of Crown Media United States on May 9, 2000, we recorded
goodwill in the amount of $248.8 million, which is being
amortized over 20 years.

Loss from
operations.Loss from operations for
the year ended December 31, 2000, increased to
$105.6 million from $36.0 million, which represents an
increase of $69.6 million, or 194%, over the comparable
period in 1999. This increase in the loss from operations for
the year ended December 31, 2000, was attributable to a
combination of the factors discussed above.

Equity in net losses of unconsolidated
entities and investment expenses.Equity in net losses of unconsolidated entities and investment
expenses for the year ended December 31, 2000, decreased to
$9.3 million from $19.0 million, which represents a
decrease of $9.7 million, or 51%, over the comparable
period in 1999. This decrease was primarily due to the
acquisition of Crown Media United States on May 9, 2000. We
commenced consolidation of Crown Media United States on the date
of the acquisition. Net losses derived from Crown Media United
States were recorded under the equity method of accounting
through May 9, 2000, and consolidated thereafter.

Interest income,
net.Net interest income for the year
ended December 31, 2000, decreased to $523,000 from
$798,000, which represents a decrease of $275,000, or 34%, over
the comparable period in 1999. Interest income was earned
primarily from short-term investments of initial public offering
proceeds in 2000 and a note receivable from Hallmark
Entertainment in 1999. Net interest income decreased in 2000 due
to lower available funds for investment and interest expense.

Income tax provision.Income tax provision for the year
ended December 31, 2000, decreased to $1.7 million
from $2.6 million, which represents a decrease of $813,000,
or 32%, over the comparable period in 1999. This decrease was
attributable to a reversal of deferred tax liabilities related
to the increase in ownership of Crown Media United States.

Net loss.Net loss
for the year ended December 31, 2000, increased to
$116.1 million from $56.7 million, which represents an
increase of $59.4 million, or 105%, over the comparable
periods in 1999. This increase in net loss for the year ended
December 31, 2000, was attributable to a combination of the
factors discussed above.

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Liquidity and Capital Resources

Cash used in operating activities was
$245.7 million, $105.3 million and $29.1 million
for the years ended December 31, 2001, 2000 and 1999,
respectively. Cash was used primarily to fund operating
expenditures related to net losses of $229.8 million,
$116.1 million and $56.7 million for the years ended
December 31, 2001, 2000 and 1999, respectively. The
increase in cash used during 2001 was the result of the
$95.6 million paid for program license fees and the
$30.2 million paid to pay television distributors for
subscriber acquisition fees. The increase in cash used in 2000
was also impacted by the $105.2 million paid for program
license fees. Additionally, our accounts receivable increased
$20.5 million and $13.1 million for the years ended
December 31, 2001 and 2000, respectively.

Cash used in investing activities was
$11.3 million and $14.1 million for the years ended
December 31, 2001 and 2000, respectively. Cash provided by
investing activities was $17.3 million for the year ended
December 31, 1999. The decrease in cash used in 2001 was
due to a decrease in capital additions primarily due to the
completion of our Network Operations Center in February 2001.
The $22.8 million in capital additions in 2000 was offset
by the $13.1 million received in conjunction with the
acquisition of Crown Media United States during 2000. The
decrease in cash provided from 1999 was due to the
$22.8 million increase in purchases of property and
equipment for the year ended December 31, 2000. During
2000, we purchased a significant amount of equipment to aid in
the completion of our Network Operations Center. In 1999, cash
provided by investing activities resulted from Hallmark
Entertainments repayment of a $25.0 million
short-term loan issued during 1998.

Cash provided by financing activities was
$236.7 million, $149.7 million and $12.7 million
for the years ended December 31, 2001, 2000 and 1999,
respectively. Financing activities in 2001 included
$111.6 million, which was part of the net proceeds of the
private placement of preferred securities and was placed in
escrow to pay the current maturities of the JP Morgan Chase Bank
credit facility on January 7, 2002. The cash provided by
financing activities in 2001 were $251.6 million in
proceeds from our December 17, 2001, private placement and
the $263.1 million and $116.2 million increase in
borrowings from the JP Morgan Chase Bank credit facility and HC
Crown, respectively. The cash provided by financing activities
in 2000 was comprised largely of the $125.4 million net
proceeds from our initial public offering on May 9, 2000.
Prior to the initial public offering, we obtained an additional
$24.1 million in borrowings from an affiliate and
$10.0 million in capital contributions to fund our
pre-acquisition obligation to Odyssey Holdings (now Crown Media
United States). During 1998, Crown Media Holdings received
$70.0 million in capital contributions, $50.0 million
in conjunction with the issuance of Class B Common Stock to
Chase Equity Associates (now JP Morgan Partners (BHCA), L.P.)
and $20.0 million from Hallmark Entertainment. The decrease
in cash provided by financing activities in 1999 was due to
reduced borrowings from affiliates, as the 1998 capital
contributions continued to finance operations in 1999.

The Companys financial position and
operations have changed significantly during 2001. We engaged in
the acquisition of assets, primarily using stock as
consideration, and completed two financing transactions. In
March 2001, we acquired 22.5% of Crown Media United States and
50% of H&H Programming-Asia for approximately
$85.8 million in stock. In September 2001, we acquired
approximately 700 films for $592.0 million in common stock
and assumption of $220.0 million of debt. We expect both
these transactions to substantially increase our revenues.

In September 2001, we received a bank credit
facility of $285.0 million, which was subsequently
increased in December 2001 to $320.0 million. In December
2001, we also issued $265.0 million of trust preferred
securities in a private placement transaction. At the same time
we established a $75.0 million line of credit with HC
Crown. The proceeds of the preferred securities were in part
used to reduce the bank credit facility and repay previously
outstanding borrowings from HC Crown.

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The following table aggregates all of our
contractual commitments as of December 31, 2001.

|                                   |                                                                              |                              |        |        |     |       |        |       |  |       |       |       |  |   |       |      |  |   |      |      | 
|---------------------------------- | ---------------------------------------------------------------------------- | ---------------------------- | ------ | ------ | --- | ----- | ------ | ----- |  | ----- | ----- | ----- |  | - | ----- | ---- |  | - | ---- | ---- | 
|                                   |                                                                              |                             
|                                   |                                                                              | Scheduled Payments by Period
|                                   |                                                                              |                             
|                                   |                                                                              |                              |        | Less   |     |       |        | After
|                                   |                                                                              |                              |        | Than   |     | 1-3   |        | 4-5   |  | 5    
|Contractual Obligations            |                                                                              | Total                        |        | 1 Year |     | Years |        | Years |  | Years
|                                   |                                                                              |                              |        |        |     |       |        |       |  |      
|Long-Term Debt                     |                                                                              | $                            | 307.0  |        |     | $     | 111.9  | (a)   |  | $     | 43.7  |       |  | $ | 151.4 |      |  | $ |     |     
|Capital Lease Obligations          |                                                                              |                              | 12.0   |        |     |       | 1.3    |       |  |       | 3.0   |       |  |   | 3.5   |      |  |   | 4.2  |     
|Operating Leases                   |                                                                              |                              | 95.0   |        |     |       | 17.3   |       |  |       | 29.8  |       |  |   | 22.3  |      |  |   | 25.6 |     
|Other Long-Term Obligations        |                                                                              |                              |        |        |     |       |        |       |  |       |       |       |  |   |       |      |  |   |      |     
|                                   | Program license fees payable to non-affiliates                               |                              |        | 56.2   |     |       |        | 33.1  |  |       |       | 23.1  |  |   |       |     |  |   |      |     | 
|                                   | Program license fees payable to Hallmark
	Entertainment Distribution         |                              |        | 62.3   | (b) |       |        |      |  |       |       |      |  |   |       | 62.3 |  |   |      |     | 
|                                   | Subscriber acquisition fees                                                  |                              |        | 28.3   |     |       |        | 23.0  |  |       |       |      |  |   |       | 1.0  |  |   |      | 4.3  | 
|                                   | Payable to Hallmark Entertainment Holdings                                   |                              |        | 52.1   | (b) |       |        |      |  |       |       |      |  |   |       | 52.1 |  |   |      |     | 
|                                   | Payable to Hallmark
	Entertainment, Inc.                                     |                              |        | 47.9   | (b) |       |        |      |  |       |       |      |  |   |       | 47.9 |  |   |      |     | 
|                                   | Guaranteed preferred beneficial interests in
	Crown Media Trusts debentures |                              |        | 199.0  | (c) |       |        |      |  |       |       | 199.0 |  |   |       |     |  |   |      |     | 
|                                   | Preferred Minority Interest                                                  |                              |        | 25.0   |     |       |        |      |  |       |       |      |  |   |       | 10.0 |  |   |      | 15.0 | 
|                                   |                                                                              |                              |        |        |     |       |        |       |  |       |       |       |  |   |       |      |  |   |      |     
|Total Contractual Cash Obligations |                                                                              | $                            | 884.8  |        |     | $     | 186.6  |       |  | $     | 298.6 |       |  | $ | 350.5 |      |  | $ | 49.1 |     
|Cash in Escrow                     |                                                                              |                              | (111.6 | )(d)   |     |       | (111.6 | )     |  |       |      |       |  |   |      |      |  |   |     |     
|                                   |                                                                              |                              |        |        |     |       |        |       |  |       |       |       |  |   |       |      |  |   |      |     
|Net Contractual Cash Obligations   |                                                                              | $                            | 773.2  |        |     | $     | 75.0   |       |  | $     | 298.6 |       |  | $ | 350.5 |      |  | $ | 49.1 |     
|                                   |                                                                              |                              |        |        |     |       |        |       |  |       |       |       |  |   |       |      |  |   |      |     



---



|    |  |                                                                                                                     
|--- |  | --------------------------------------------------------------------------------------------------------------------
|(a) |  | Current maturity of $111.9 million includes
	$936,000 of accrued interest.                                          
|   
|(b) |  | Can only be paid subsequent to repayment of
	credit facility per agreement.                                         
|   
|(c) |  | Currently, the Company expects to redeem the
	preferred securities in 2004, which is prior to the maturity in
	2007.
|   
|(d) |  | Cash in escrow was used to repay a portion of
	credit facility on January 7, 2002.                                  

In connection with our growth strategy, we expect
that we will continue to make significant investments in
programming, distribution and technology, as well as additional
investments in infrastructure and facilities. We anticipate cash
capital expenditures of $11.7 million for the year ending
December 31, 2002. Our principal uses of funds in 2002 are
expected to be the payment of operating expenses (including but
not limited to licensing programming from third parties),
working capital, capital expenditure requirements, and debt
service payments. The Companys principal sources of funds
are expected to be cash generated from operations (before
interest), cash on hand and available borrowings under the bank
credit facility and the HC Crown line of credit. The credit
facility and the preferred securities contain certain provisions
that by their terms limit Crown Media Holdings and/or its
subsidiaries ability to, among other things, incur
additional debt.

After reducing existing debt with a majority of
the proceeds from the private placement, we had an available
cash balance of $13.9 million at December 31, 2001. In
addition, as of January 25, 2002, we have
$147.9 million available under the bank credit facility and
$75.0 million available under the HC Crown line of credit.
We believe that available credit under the bank credit facility
at December 31, 2001, of $57.6 million and the
$75.0 million HC Crown line of credit, together with cash
generated from operations and cash on-hand, will be sufficient
for our liquidity needs through at least March 31, 2003.



| |                
| | ---------------
| | Cash Flow Risks

Our dependence on operating cash flow, in
addition to other cash resources, means that risks involved in
our businesses can significantly affect our liquidity. Any
unexpected decrease in subscriber revenues (whether as a result
of the termination of distributor relationships or changes in
the terms of carriage with a distributor),

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less growth of advertising revenues than
projected internally or unanticipated expenses could result in
the need to raise additional cash externally. Other risks
described in Risk Factors under Item 1 of this
report could also affect our operating cash flow. We have no
arrangements for any additional external financings of debt or
equity, and we are not certain whether any such financing would
be available on acceptable terms. On the other hand, subject to
these risks, we expect our cash flow to improve significantly in
mid-2003 as we realize more revenues from our film library and
from increased advertising on our channels.




| |                     
| | --------------------
| | Bank Credit Facility

In connection with the completion of the
acquisition of the film assets from Hallmark Entertainment
Distribution as described above on September 28, 2001, we
entered into a credit agreement with a syndicate of banks, led
by JP Morgan Chase Bank as Administrative Agent and Issuing
Bank, under which the banks extended to us a five-year secured
credit facility of up to $285.0 million, subsequently
increased to $320.0 million in conjunction with the private
placement. The loan is guaranteed by our subsidiaries and is
secured by all tangible and intangible property of Crown Media
Holdings and its subsidiaries.

The bank credit facility encompasses a term loan
of $100.0 million and a revolving line of credit of
$220.0 million, which includes up to $20.0 million of
letters of credit available to be issued at our request. The
aggregate principal amount of all outstanding revolving credit
loans and term loans as well as letters of credit available
under the credit facility must not exceed the amount of the
Library Credit then in effect. The Library Credit
means 50% of the most recent valuation of the film assets, based
upon the net present value of cash flows. Currently the Library
Credit is in excess of the maximum amount of the bank loans.

Each loan (which includes the term loans and any
revolving credit loans) bears interest at a Eurodollar rate or
an alternate base rate as we may request at the time of
borrowing in accordance with the credit agreement. The
Eurodollar rate is based on the London interbank market for
Eurodollars, and remains in effect for the time period of the
loan ranging from one, two, three, six or twelve months. The
alternate rate is based upon the prime rate of JP Morgan Chase
Bank, a certificate of deposits rate or the Federal Funds
effective rate, which is adjusted whenever the rate changes. We
are required to pay a commitment fee of 0.5% per annum of
the committed, but not outstanding, amounts under the revolving
credit facility, payable in quarterly installments.

The credit facility contains a number of
affirmative and negative covenants. The affirmative covenants
include: our furnishing financial reports to the lenders and our
observing in all material respects all material agreements with
respect to the distribution or exploitation of film assets.
Negative covenants include: Limitations on indebtedness, liens,
investments, Restricted Payments, capital
expenditures, changes in our business activities, and other
matters; not amending the promissory note with HC Crown, the
related letter of credit issued for our benefit or certain of
our other material agreements; a requirement that EBITDA not be
less than specified amounts for each quarter through
December 31, 2003 and specified amounts for each fiscal
year, starting December 31, 2004, which include
-$42 million for the quarter ended March 31, 2002,
$43 million at June 30 and September 30,
2002 and -$38 million at December 31, 2001;
maintaining net worth of not less than specified base amounts
plus income and 50% of equity investments after
December 17, 2001, which includes a base amount of
$731 million at March 31, 2002 decreasing to a base
amount of $602 million at December 31, 2002; not
permitting the Leverage Ratio (that is, the ratio of aggregate
principal amount of indebtedness at the date of determination
excluding any preferred stock and non-interest bearing
obligations to EBITDA for the 12-month period ending on the date
of determination) to exceed maximum leverage ratios from
December 31, 2004 through June 30, 2006; and not
permitting the Interest Coverage Ratio (the ratio of EBITDA to
interest expense) at any time during the twelve-month periods
ending at the end of each calendar quarter commencing
December 31, 2004 to be less than specified ratios.
Restricted Payments include any distribution on our equity, any
redemption or other acquisition of our equity, any payment on
debt of Crown Media Holdings which is subordinated to the bank
loans, any reduction of the HC Crown line of credit for Crown
Media Holdings, any payment on certain obligations assumed by
Crown Media Holdings under the purchase agreement for the film
assets and any other payment to Hallmark Cards, Hallmark
Entertainment or any of their affiliates. The bank credit
agreement permits Crown Media Holdings to use net cash proceeds
from the issuance of debt or equity to be used for certain
Restricted Payments. The

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bank credit agreement also permits, among other
things, payments by Crown Media Holdings to Hallmark
Entertainment Distribution under program license agreements and
to Hallmark Entertainment, Hallmark Cards or their affiliates
under the terms of service agreements up to certain dollar
amounts.


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



| |                  
| | -----------------
| | 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 to the investors units,
each unit comprised of one preferred security of Crown Media
Trust, a newly created subsidiary of the Company, and one
contingent appreciation certificate, issued by Crown Media
Holdings.

The additional financing allowed Crown Media
Holdings to reduce the amount outstanding under its syndicated
bank credit facility, led by JP Morgan Chase Bank, which had
been drawn down to satisfy obligations assumed in the recently
completed acquisition of film assets from Hallmark Entertainment
Distribution and for other working capital purposes.
Additionally, the Company used a portion of the proceeds of the
private placement to repay certain debt outstanding under lines
of credit provided by HC Crown, and amounts payable to Hallmark
Entertainment Distribution pursuant to certain program license
agreements held by subsidiaries of Crown Media Holdings.

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

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

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

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On or after December 15, 2003, Crown Media
Holdings will have the right to redeem any and all of the
outstanding debentures at a redemption price equal to 100% of
the aggregate principal amount of the debentures, together with
any accrued and unpaid interest thereon. In the event of a
change of control, the Company must either exercise its right to
redeem all or offer to purchase any and all of the outstanding
debentures at a price equal to 110% of the aggregate principal
amount of the debentures, together with any accrued and unpaid
interest thereon. For additional information on the accounting
for this transaction, please see Note 9 of Notes to
Consolidated Financial Statements in this Report.

The debentures contain certain covenants,
including restrictions on Crown Media Holdings ability to
incur indebtedness, make certain payments, engage in certain
affiliated transactions, and engage in certain business
combinations or asset sales.

The holders of the shares of the Companys
Class A common stock, issued upon exercise of the
contingent appreciation certificates, are generally entitled to
make one demand registration request in relation to such shares
and also have certain piggy-back registration rights in
connection with any public underwritten offering of Crown Media
Holdings stock.



| |                        
| | -----------------------
| | HC Crown Line of Credit

In connection with the private placement, HC
Crown issued a $75.0 million line of credit to Crown Media
Holdings. The line of credit has a final maturity date no later
than December 21, 2007. The line of credit is subordinate
to both the bank facility and the units issued in the private
placement, and its availability may be reduced dollar for dollar
in an amount equal to additional capital raised by Crown Media
Holdings. Crown Media Holdings will pay interest on any
borrowings under the line of credit at a rate equal to LIBOR
plus three percent, payable quarterly. In addition, until the
termination of the Subordination and Support Agreement entered
into by Hallmark Cards in connection with the private placement
and such time as the debentures and contingent appreciation
certificates are paid in full, Hallmark Cards has agreed to
loan Crown Media Holdings an amount necessary to pay, when
due, the $100.0 million in obligations owed by Hallmark
Entertainment Distribution which were assumed by Crown Media
Holdings in connection with its acquisition of the film library.
Lastly, Hallmark Entertainment Distribution agreed to
subordinate approximately $60.0 million in obligations owed
by subsidiaries of Crown Media Holdings to it pursuant to
certain program license agreements. 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.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 7A. | 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
December 31, 2001, the decline of the fair value of the
fixed income portfolio would not be material.

As of December 31, 2001, our cash,
restricted cash, cash equivalents and short-term investments had
a fair value of $14.2 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 December 31, 2001, all of our investments in this
category were in fixed rate instruments or money market type
accounts. A decrease in interest rates has the effect of
reducing our future annual interest income from this portfolio,
since funds would be reinvested at lower rates as the
instruments mature. Over time, any net percentage decrease in
our interest rates could be reflected in a corresponding net
percentage decrease in our interest income. For the year ended
December 31, 2001, the impact of interest rate
fluctuations, changed business prospects and all other factors
did not have a material impact on the fair value of this
portfolio, or on our income derived from this portfolio.

54



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

As of December 31, 2001, we estimated the
fair value of our credit facility with JP Morgan Chase,
excluding accrued interest, to be approximately
$262.4 million using quoted market prices where available,
or discounted cash flow analyses. The fair value of our debt is
affected by fluctuations in interest rates. A hypothetical 10%
increase or decrease in assumed interest rates would decrease or
increase the fair value of our debt by approximately
$1.2 million. These calculations include the assumption
that the balance of our outstanding debt as of December 31,
2001, would not change during the year and that a yearly
interest rate was used. To the extent interest rates increase,
our costs of financing will also increase because of variable
rates applicable to our outstanding debt.

As of December 31, 2001, we estimated the
value of our preferred securities, excluding accrued interest,
to be approximately $242.8 million and the value of our
derivative liability to be $12.5 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 decrease the
value of our derivative liability by approximately
$2.2 million. A hypothetical 10% decrease in our stock
price would increase the value of our derivative liability by
approximately $1.5 million. A hypothetical 10% increase in
the interest rate would decrease the value of our derivative
liability by approximately $423,000. A hypothetical 10% decrease
in the interest rate would decrease the value of our derivative
by approximately $289,000. These calculations include the
assumption that the balance of our derivative liability as of
December 31, 2001, 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 plan to enter into various derivative investment
transactions in the near term pursuant to our investment and
risk management policies and procedures in areas such as hedging
and counterparty exposure practices. We did not and will not use
derivatives for speculative purposes.

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

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



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

Our material interest bearing assets consisted of
cash equivalents, restricted cash, and short-term investments.
The balance of our interest bearing assets was
$14.2 million, or 1% of total assets, as of
December 31, 2001. Our material liabilities subject to
interest rate risk consisted of a capital lease obligation, a
credit facility with JP Morgan Chase Bank, and our private
placement. The balance of those liabilities was
$319.1 million, or 51% of total liabilities, as of
December 31, 2001. The balance of our guaranteed preferred
beneficial interest in Crown Media Trusts debentures was
$199.0 million. Net interest expense for the twelve months
ended December 31, 2001, was $10.4 million, or 10%, of
our total revenues. Our guaranteed preferred beneficial interest
expense for the twelve months ended December 31, 2001, was
$1.4 million, or 1%, of our total revenues. 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.

55



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

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






|        |                                                          
|------- | ---------------------------------------------------------
|Item 8. | Consolidated Financial Statements and
	Supplementary Data

Our Consolidated Financial Statements begin at
page F-1 of this Annual Report on Form 10-K.



|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
	Accountants on Accounting and Financial Disclosure

None.




PART III

The information required by this Part III is
incorporated by reference to information in the definitive proxy
statement for our 2002 annual meeting of stockholders under the
headings Election of Directors, Board
Information, Compensation of Directors and Executive
Officers, Section 16(a) Beneficial Ownership
Reporting Compliance, and Security Ownership of
Certain Beneficial Owners and Management. We intend to
file the definitive proxy statement with the Securities and
Exchange Commission on or prior to April 30, 2002.




Item 10.     Directors
and Executive Officers of the Company

The information required by this Item 10 is
set forth in the Proxy Statement to be delivered to stockholders
in connection with our Annual Meeting of Stockholders to be held
on or about May 30, 2002 under the headings Election
of Directors, Board Information, and
Compensation of Directors and Executive Officers,
and is incorporated by reference herein.




Item 11.     Executive
Compensation

The information required by this Item 11 is
set forth in the Proxy Statement under the headings Board
Information and Compensation of Directors and
Executive Officers, and is incorporated by reference
herein.




Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

The information required by this Item 12 is
set forth in the Proxy Statement under the heading
Security Ownership of Certain Beneficial Owners and
Management, and is incorporated by reference herein.




Item 13.     Certain
Relationships and Related Transactions

The following summary descriptions of
agreements to which we are a party are qualified in their
entirety by reference to the agreement to which each summary
description relates, each of which we have filed with the
SEC.

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Purchase of Film Library Assets from Hallmark
Entertainment Distribution

On April 10, 2001, we signed a Purchase and
Sale Agreement with Hallmark Entertainment Distribution in which
we agreed to purchase 702 pictures from Hallmark
Entertainment Distributions film library. The films
transaction was completed on September 28, 2001. The
consideration for the film library assets consisted of the
following:



| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | 33,744,528 shares of Class A common
	stock of Crown Media Holdings;                                                                            
|
| |  | Our payment of $120.0 million of debt
	related to the film library assets payable by Hallmark
	Entertainment and certain of its affiliates; and
|
| |  | Our assumption of $100.0 million of payables
	related to the film library assets.                                                              

The number of shares of common stock was
determined by a formula based on the average closing price of
the common stock from November 6, 2000 (the date we
announced that we were contemplating the transaction) to
September 27, 2001 (the day prior to closing), which
average price was $17.78 per share. A committee of
directors independent of Hallmark Entertainment and its
affiliates considered and negotiated this transaction, including
the purchase price, and received a fairness opinion from its
financial advisor. Additionally, the stockholders of Crown Media
Holdings, other than Hallmark Cards and its affiliates, approved
the transaction at a meeting on July 17, 2001. Of the
shares issued in the transaction, 425,000 shares were
issued into escrow and will be returned to us if a previously
announced, proposed settlement of a stockholder lawsuit relating
to the transaction becomes final.

In connection with the purchase of the film
library assets, we entered into the following additional
agreements:

Service Agreement with Hallmark
Entertainment



| |   |                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Hallmark Entertainment will provide services
	related to the administration, distribution and other
	exploitation of the film library assets, and we will pay
	Hallmark Entertainment approximately $1.5 million per year
	for the three-year term of the agreement. Either party may
	terminate the agreement after the first year upon 60 days
	written notice.
|
| |  | Hallmark Entertainment will use commercially
	reasonable efforts to maximize the licensing revenues from the
	film library assets consistent with its past efforts for
	comparable products among the film library assets.                                                                                                                                       
|
| |  | We have sole discretion to determine which of the
	purchased films will be licensed by Hallmark Entertainment to
	third parties, as well as the distribution territories, time
	periods and other licensing terms.                                                                                                                                               

Registration Rights Agreement



| |   |                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We agreed to grant Hallmark Entertainment
	Distribution four demand registration rights and unlimited
	piggyback registration rights with respect to the shares of
	Class A common stock that were issued in the transaction.

In connection with the purchase of the film
assets, the program agreements between Hallmark Entertainment
Distribution and each of Crown Media International and Crown
Media United States were amended as described below.

Hallmark Program Agreements

Crown Media
International.Crown Media
International licenses programming from Hallmark Entertainment
Distribution, a subsidiary of Hallmark Entertainment, for
distribution on a country-by-country basis outside the United
States and Canada, under an Amended and Restated Program License
Agreement, dated as of January 1, 2001, between Crown Media
International and Hallmark Entertainment Distribution. Under
this program agreement, Crown Media International is required to
license from Hallmark Entertainment Distribution, and Hallmark
Entertainment Distribution is required to license to us, for the
term of the

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agreement, ending on December 31, 2005,
substantially all of the television motion pictures and
miniseries Hallmark Entertainment Distribution owns or produces.
Crown Media International is not required to license more than
50 new pictures or miniseries per year and is not required
to license any picture or miniseries if not produced,
co-produced or financed by Hallmark Entertainment Distribution,
unless Hallmark Entertainment Distribution acquired rights to
the picture or miniseries prior to January 1, 2001. The
program agreement is renewable at the option of Crown Media
International for an additional five-year period, provided that
it is not in default under the program agreement or any other
agreement it has with Hallmark Entertainment Distribution.


Hallmark Entertainment Distribution has existing
contractual relationships with distributors that preclude Crown
Media International from obtaining programming under the program
agreement in several territories in which it does not currently
operate, the most significant of which is Germany. Hallmark
Entertainment Distribution is expressly permitted to renew
indefinitely its contracts with distributors in Germany, Italy
and Spain and may renew contracts with other distributors to the
extent the existing contracts afford the distributor renewal
rights.

Crown Media International has the right to
distribute the programming it licenses under the program
agreement through cable, DTH systems and certain other forms of
interactive or digital media. However, it does not license
programming for distribution on a pay-per-view basis. The
territory for Crown Media Internationals digital and
interactive rights to this programming is worldwide, including
the United States and Canada, whereas the territory for its
cable and DTH rights is worldwide excluding the United States
and Canada. In addition, Crown Media International and Hallmark
Entertainment Distribution have agreed to negotiate in good
faith on a product-by-product basis for pay television license
rights to programming not covered under the program agreement,
including documentaries, series and specials.

Under the program agreement Crown Media
International generally licenses each movie or miniseries for a
minimum of three time periods each of 18 months or
12 months duration, with each 18- or 12-month period
separated by a period of one to three years depending on whether
Hallmark Entertainment Distribution licenses the programming to
a third party during the interim periods. The first 18- or
12-month time period begins on the later of the date specified
in the program agreement or the date Crown Media International
launches in a country. The number of times we can telecast a
movie or miniseries is determined by viewer preferences and
industry practices on a country-by-country basis.

Crown Media International pays license fees to
Hallmark Entertainment Distribution on a country-by-country,
program-by-program basis for each of the three time periods for
which it licenses programming. The fees generally increase
5% per year and are payable in four equal installments for
the first time period and six equal installments for subsequent
time periods. During the year ended December 31, 2001,
Crown Media International paid $39.4 million in fees under
its original program agreement with Hallmark Entertainment
Distribution, dated as of July 1, 1999. As of
December 31, 2001, there were $6.0 million, in accrued
and unpaid fees. We anticipate that the fees payable to Hallmark
Entertainment Distribution under the amended and restated
program agreement will be lower as a result of our purchase of
film library assets we previously licensed from Hallmark
Entertainment Distribution.

Crown Media United
States.Crown Media United States
licenses programming from Hallmark Entertainment Distribution
under an Amended and Restated Program License Agreement dated as
of January 1, 2001, for distribution within the United
States. Other than as set forth below, the terms of the amended
and restated program agreement are substantially the same as
those described above in relation to the agreement between
Hallmark Entertainment Distribution and Crown Media
International.

Crown Media United States has the right to
telecast the programming it licenses under the program agreement
through all forms of television, except on a pay-per-view basis.
Under the program agreement, Crown Media United States generally
licenses each movie or miniseries for a period of five years and
has the right to telecast the movie or miniseries 30 times
during that period. In addition, under the program agreement,
Crown Media United States has the right to order, and Hallmark
Entertainment Distribution is required to produce, four two-hour
movies and one series during the term of the program agreement.

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Crown Media United States pays license fees to
Hallmark Entertainment Distribution in equal annual installments
over the five-year period that it telecasts the movie or
miniseries. The fees generally increase 5% per year. During
the year ended December 31, 2001, Crown Media United States
paid Hallmark Entertainment Distribution $30.0 million in
fees under the original program agreement dated as of
November 13, 1998. As of December 31, 2001, Crown
Media United States had $56.3 million in accrued and unpaid
program license fees under the program agreement. We anticipate
that the fees payable to Hallmark Entertainment Distribution
under the amended and restated program agreement will be lower
as a result of our purchase of film library assets we previously
licensed from Hallmark Entertainment Distribution.

Our officers and representatives of Hallmark
Entertainment Distribution negotiated the terms of these
programming agreements. The agreements were approved by our
Board of Directors. Changes from previously existing programming
agreements were reviewed by the independent committee of the
Board of Directors that considered the purchase of the Crown
Film Library in 2001.

Crown Media United States Amended and Restated
Company Agreement

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 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, 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 Management, a subsidiary of the National
Interfaith Cable Coalition, 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 is required to make certain payments
to the National Interfaith Cable Coalition in relation to the
provision of programming by the National Interfaith Cable
Coalition. Prior to the February 2001 amendment, these payments
were $3.5 million annually and, so long as VISN Management
owned the preferred interest, $1.5 million multiplied by
the quotient of the preferred liquidation preference divided by
$25.0 million. For the year ended December 31, 2000,
Crown Media United States paid $5.1 million to the National
Interfaith Cable Coalition in accordance with the amended and
restated company agreement. Pursuant to the amendment adopted in
2001, Crown Media United States will be required to pay to the
National Interfaith Cable Coalition 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 series program block;                             
|
| |  | up to $600,000 per holiday special produced
	by the National Interfaith Cable Coalition; and                                  
|
| |  | $1 million per dramatic holiday
	special co-produced by the National Interfaith Cable Coalition
	and Hallmark Entertainment.

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In addition, during 2000, Crown Media United
States was required to broadcast a minimum of 30 hours of
programming from the National Interfaith Cable Coalition and an
additional 10 hours of values-based programming. 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 and the National Interfaith Cable
Coalition produces for Crown Media United States up to six
holiday specials per year. 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 the
National Interfaith Cable Coalition in launching and operating a
new channel, which will be distributed by digital satellite and
cable. This assistance will include the provision to the
National Interfaith Cable Coalition of management and operation
services, with some services at no cost and some services for
fees.

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 year ended December 31, 2001, Crown
Media United States paid the National Interfaith Cable Coalition
$5.3 million related to this agreement.

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

Acquisition of Remaining Interests in Crown
Media United States and H&H Programming 
Asia

In March 2001, we purchased the 22.5% interest of
The Jim Henson Company in Crown Media United States and its 50%
interest in H&H Programming  Asia. As a
result, we now own 100% of the common interests in Crown Media
United States and H&H Programming  Asia. In
consideration for these interests, we issued
5,377,721 shares of our Class A common stock to
The Jim Henson Company. On July 27, 2001, Hallmark
Entertainment purchased the 5,377,721 shares of our
outstanding Class A common stock from The Jim Henson
Company. For additional information on this transaction, see
Development of Business in Item 1 Business in
this Report and Recent Developments in Item 6
Managements Discussion and Analysis of Financial Condition
and Operating Results in this Report.

DIRECTV Affiliation Agreement

On August 20, 2001, Crown Media United
States entered into an Affiliation Agreement with DIRECTV, Inc.,
a wholly owned subsidiary of DIRECTV Enterprises, Inc. Pursuant
to the Affiliation Agreement, DirecTV will distribute the
Hallmark Channel on its DBS distribution system in the United
States and pay us license fees for such distribution. At the
same time we entered into a Stock Purchase Agreement with
DIRECTV Enterprises whereby we issued 5,360,202 shares of
our Class A common stock. Prior to entering into agreements
related to the affiliation agreement, DIRECTV Enterprises, Inc.
was not a stockholder of Crown Media Holdings.

Hallmark Advertising

Hallmark Cards made a $5.0 million
advertising commitment to Crown Media United States covering a
one-year period from the fourth quarter of 2000 through the
third quarter of 2001. Hallmark Cards purchased
$2.5 million of advertising time on the Hallmark Channel in
the U.S. during 2000 at negotiated market rates.

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Hallmark Cards has made another $5.0 million
advertising commitment to the Hallmark Channel in the
U.S. for the 2001/2002 broadcast year. During the year
ended December 31, 2001, Hallmark Cards purchased
$5.0 million of advertising on the Hallmark Channel in the
United States at negotiated market rates.


Hallmark Demand Notes and Line of
Credit

From November 1999 through April 2000, Crown
Media Holdings entered into a series of agreements with HC
Crown, under which HC Crown agreed to lend Crown Media
Holdings up to $40.0 million. Amounts borrowed under this
agreement accrued interest at 130% of the Applicable Federal
Rate as set forth in the Internal Revenue Code (7.96% as of
December 31, 2000), with the interest compounding on an
annual basis. Amounts outstanding were due on demand. As of
December 31, 2000, principal borrowings under the note were
approximately $36.8 million, excluding accrued interest of
$520,000, both of which are included in notes and interest
payable to HC Crown on the accompanying consolidated balance
sheets. On December 17, 2001, we paid HC Crown
$37.1 million, in satisfaction of the aggregate balance
outstanding as of that date, including accrued interest, under
the notes. The notes were cancelled on December 17, 2001.

On February 12, 2001, Crown Media Holdings
entered into an agreement with HC Crown under which
HC Crown agreed to lend Crown Media Holdings up to
$150.0 million. HC Crowns obligation to make
loans under this agreement was supported by an irrevocable
letter of credit from Bank of America. The line of credit had an
interest rate equal to the London Interbank Offered Rate
published on the first day of each quarter in The Wall
Street Journal, plus 1.2% to 2.2% depending on the ratio of
Crown Media Holdings total debt to EBITDA. On
September 28, 2001, we paid HC Crown $70.0 million, in
satisfaction of the aggregate balance outstanding as of that
date, including accrued interest, under the line of credit. This
line of credit was cancelled on September 28, 2001.

On July 10, 2001, Crown Media Holdings
entered into a promissory note with HC Crown representing a
line of credit for up to $50.0 million. This note had
interest at 130% of the short-term applicable federal rate,
compounded on an annual basis. Amounts outstanding were due on
demand. Interest on this note was payable within 45 days
after the end of each calendar quarter. On December 17,
2001, we paid HC Crown $33.5 million, in satisfaction
of the aggregate balance outstanding as of that date, including
accrued interest, under the note. This note was cancelled on
December 17, 2001.

On December 14, 2001, we 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 February 12, 2001. The line of credit has a
final maturity date no later than December 21, 2007. It is
subordinate both to the syndicated bank facility and the units
issued in the private placement. It 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, 2001, we had
no borrowings under the note to HC Crown.

Under this note, we are obligated to pay a
commitment fee of 1.5% of the initial maximum amount of the
note, which may be paid at our option in 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. The line of
credit represented by this note was required by the bank credit
facility and was amended to its present form in accordance with
requirements of the private placement of preferred securities of
the Crown Media Trust.

Hallmark Agreements Related to Bank Credit
Facility and Preferred Securities

Hallmark Cards and Hallmark Entertainment entered
into certain agreements in order to induce the banks to enter
into our bank credit agreement. Hallmark Cards, Crown Media
Holdings and the banks are parties to a subordination and
support agreement dated August 31, 2001. Under the
subordination and support agreement, the obligations of Crown
Media Holdings to pay (a) the HC Crown line of credit
for Crown Media Holdings, and (b) approximately
$100.0 million in accounts payable of Hallmark
Entertainment Distribution as provided by the purchase agreement
for the film assets are subordinated in right of payment to

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Crown Media Holdings obligations to the
banks. Crown Media Holdings is not permitted to pay subordinated
obligations except for certain Restricted Payments permitted by
the bank credit agreement. In the subordination and support
agreement, Hallmark Cards also agrees to cause HC Crown to
advance up to $75.0 million under the HC Crown line of
credit to Crown Media Holdings (less the amount of any reduction
on the HC Crown line of credit because of the application
of net cash proceeds from issuing debt or equity as permitted by
the bank credit agreement), to the extent necessary to enable
Crown Media Holdings to meet its cash needs including the
repayment of the bank loans, provided that Crown Media Holdings
has borrowed the full amount then available under the bank
credit agreement. Further, Hallmark Cards agrees that the
HC Crown line of credit will not be declared due and
payable if any obligations to the banks remain outstanding.


Under an amended and restated limited guarantee
agreement and acknowledgement dated August 31, 2001, as
amended and restated as of December 14, 2001, with the
banks, Hallmark Cards guarantees up to a defined maximum amount
Crown Media Holdings performance of obligations under the
bank credit agreement when due. The maximum amount is
$75.0 million, less the aggregate principal amount
outstanding under the HC Crown line of credit and less net
cash proceeds from issuing debt or equity used to make payments
on the HC Crown line of credit as permitted by the bank
credit agreement.

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

In connection with the private placement of units
consisting of preferred securities issued by Crown Media Trust
and contingent appreciation certificates, Hallmark Cards,
certain of its subsidiaries and other parties thereto entered
into a Subordination and Support Agreement (the
Subordination Agreement), pursuant to which Hallmark
Cards agreed to loan Crown Media Holdings up to
$75.0 million under a subordinated revolving credit line,
which is the December 14, 2001, note mentioned above
payable to HC Crown. The line of credit has a final
maturity date no later than December 21, 2007. The line of
credit is subordinate to both the bank facility and the units,
and its availability may be reduced dollar for dollar in an
amount equal to additional capital raised by Crown Media
Holdings. Crown Media Holdings will pay interest on any
borrowings under the line of credit at a rate equal to LIBOR
plus 3%, payable quarterly. In addition, until the termination
of the Subordination Agreement and such time as the debentures
issued to Crown Media Trust and contingent appreciation
certificates are paid in full, Hallmark Cards will agree to
loan Crown Media Holdings an amount necessary to pay, when
due, the $100.0 million in obligations owed to third
parties by Hallmark Entertainment Distribution which were
assumed by Crown Media Holdings in connection with its
acquisition of the film library. Lastly Hallmark Entertainment
Distribution agreed to subordinate approximately
$60.0 million in obligations owed by subsidiaries of Crown
Media Holdings to it pursuant to certain program license
agreements.

Real Property Lease

In connection with our lease of office facilities
at 6430 S. Fiddlers Green Circle, Greenwood Village,
Colorado, Hallmark Entertainment signed a guaranty of lease
obligations on June 1, 1998 at no cost to us. Under the
guaranty, Hallmark Entertainment agreed to guarantee full and
timely performance of all of our obligations during our lease
term. The lease is for 52,988 square feet and has a term of
10 years that ends in August 2008. The lease provides for a
rate of $22.64 per square foot during the first year of the
lease and increases annually to $27.08 per square foot in
2008.

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Stockholders Agreement And Registration
Rights



| |        
| | -------
| | General

We are a party to a stockholders agreement,
amended and restated as of August 30, 2001, with Hallmark
Entertainment, Liberty Media Corporation, Liberty Crown Inc. (an
affiliate of Liberty Media Corporation), VISN Management,
J.P. Morgan Partners, DIRECTV Enterprises, Inc., and,
pursuant to an acknowledgement and agreement dated
December 31, 2001, Hallmark Entertainment Holdings. The
stockholders agreement provides that our Board will consist of
not less than 11 directors, with six nominated by Hallmark
Entertainment Holdings, one nominated by each of Liberty Media
Corporation, VISN Management and J.P. Morgan Partners and
two independent directors, who must not be officers, directors
or employees of any of the parties or their affiliates, and who
will be nominated by the Board. The rights of the parties to
nominate a director will terminate on the later of (1) such
party owning less than 5% of our common stock then outstanding
or (2) such party ceasing to own at least 75% of the number
of shares of our common stock held by them immediately after our
initial public offering in May 2000. DIRECTV Enterprises is
entitled to appoint an observer to the board of directors of
Crown Media Holdings until DIRECTV Enterprises and its
affiliates cease to own beneficially in the aggregate at least
75% of the shares of our common stock acquired by them in the
August, 2001 transaction.

The stockholders agreement also provides that we
will not enter into any material transaction, except for
specified transactions, with any of the other parties or their
affiliates involving an aggregate value of (1)
$35.0 million or less, unless such transaction is approved
by a majority of our independent directors and (2) more
than $35.0 million, unless such transaction is approved by
a majority of the members of our Board not nominated by the
interested party.

The other parties to the stockholders agreement
agreed not to transfer more than 25% of our common stock owned
by them as of August 30, 2001 until after May 9, 2002,
except to their affiliates, another party to the stockholders
agreement or their affiliates, to their executives under a
stock-based compensation package, or in a transaction involving
a merger, consolidation or business combination with, or sale of
all of our common stock to, a third party that is not affiliated
with us.

In addition, the stockholders agreement provides
that, in the event that Hallmark Entertainment Holdings proposes
to transfer 20% or more of our outstanding common stock to an
unaffiliated third party, each other party to the stockholders
agreement will have the right to participate on the same terms
in that transaction with respect to a proportionate number of
such other partys shares. The stockholders agreement also
provides that if we issue for cash an amount of our common
stock, in either a public offering or private transaction, that
causes Liberty Media Corporation and its affiliates to own, in
the aggregate, less than 10% of our outstanding common stock,
Liberty Media Corporation will have the right to purchase, at
such public offering price or the average closing price of the
Class A common stock over a five-day period prior to the
closing of such private transaction, as applicable, an amount of
our Class A common stock so as to restore its 10% ownership
interest. Liberty Media Corporation must exercise such right not
less than seven days prior to the closing of such issuance. If
Crown Media Holdings grants to any other person rights similar
to those purchase rights provided to Liberty Media Corporation,
then Crown Media Holdings is required to grant DIRECTV
Enterprises the same rights.



| |                    
| | -------------------
| | Registration Rights

Under the stockholders agreement, Hallmark
Entertainment Holdings has the right to require us on four
occasions, and the other parties, as a group, have the right to
require us on two occasions, to register for sale their shares
of our common stock, so long as the number of shares they
require us to register in each case is at least 7% of our common
stock then outstanding. The other parties also have an unlimited
number of piggyback registration rights. This means
that any time we register our common stock for sale, they will
have the right to include their common stock in that offering
and sale.

We are obligated to pay all expenses that result
from the registration of the other parties common stock
under the stockholders agreement, other than registration and
filing fees, attorneys fees, underwriter fees or

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expenses and underwriting discounts and
commissions. We have also indemnified the other parties against
any liabilities that may result from their sale of common stock,
including Securities Act liabilities.




| |                                                                                     
| | ------------------------------------------------------------------------------------
| | Rights Relating To Crown Media United
	States Amended And Restated Company Agreement

Under the stockholders agreement, so long as we
or any of our affiliates are entitled to have a representative
on the Crown Media United States governance committee, and VISN
Management and its affiliates either are entitled to nominate
to, or designate a member of, our Board, or beneficially own any
preferred interests in Crown Media United States, neither we nor
any of our affiliates will, without the consent of the member of
our Board nominated by VISN Management or a representative of
the National Interfaith Cable Coalition, vote in favor of:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | any specified change in, or action described in,
	the Crown Media United States amended and restated company
	agreement that relates to VISN Managements preferred
	interest in Crown Media United States or that relates to VISN
	Managements rights to programming on the Hallmark Channel
	in the U.S. or its programming budget;                                                                                                                                                          
|
| |  | any repayment or redemption of specified equity
	interests in Crown Media United States;                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | any transfer of all of Crown Media United
	States assets or any business combination involving Crown
	Media United States where Crown Media United States is not the
	surviving entity, unless the transferee assumes specified
	obligations under the Crown Media United States amended and
	restated company agreement until the later of the fifth
	anniversary of these offerings or the second anniversary of the
	transfer or business combination;                                      
|
| |  | the dissolution of Crown Media United States,
	except in connection with a complete liquidation;                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | any transfer of all of Crown Media United
	States assets to, or any business combination involving
	Crown Media United States with, us or any of our
	affiliates, or any other material transaction with us or any of
	our affiliates, unless we comply with specified restrictions
	relating to any financial benefit we receive from the
	transaction that is more than what we would have received had
	the transaction been on an arms-length basis or on
	commercially reasonable terms;
|
| |  | any transfer of all of Crown Media United
	States assets or any business combination involving Crown
	Media United States where Crown Media United States is not the
	surviving entity, prior to the second anniversary of the initial
	public offering; or                                                                                                                                                                                                                                    
|
| |  | any amendment to the Crown Media United
	States amended and restated company agreement that would
	result in none of us or our affiliates having the right to
	consent to take any of the actions listed in the above bullet
	points.                                                                                                                                                                                                                                                          

We have agreed under the stockholders agreement
not to transfer any of our interests in Crown Media United
States prior to the second anniversary of the initial public
offering without the consent of VISN Management or the National
Interfaith Cable Coalition. In addition, we have agreed not to
transfer any of our interests in Crown Media United States after
the second anniversary of the initial public offering unless the
transfer is conditioned on the requirement that the transferee
assume our obligations described above. Under the terms of the
stockholders agreement, the transferees obligations will
generally expire on the later of (1) the fifth anniversary
of the initial public offering, (2) the second anniversary
of the transfer or (3) the repayment of VISN
Managements preferred interest in Crown Media United
States, except that the obligations of the transferee will
expire upon dissolution of Crown Media United States.

Intercompany Services Agreement

We signed an intercompany services agreement,
dated as of January 1, 2000, with Hallmark Cards under
which Hallmark Cards has agreed for a term of three years to
provide us with the following services:



| |   |                                                                           
| | - | --------------------------------------------------------------------------
| |  | tax services;                                                             
|
| |  | risk management, health, safety and environmental
	services and insurance;

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| |   |                                           
| | - | ------------------------------------------
| |  | legal services;                           
|
| |  | treasury and cash management services; and
|
| |  | real estate consulting services.          

We have agreed to pay Hallmark Cards
$500,000 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. We made no payments to Hallmark
Cards in 2001 for services, expenses and fees under this
agreement. The balance of the payable for services, expenses and
fees under this agreement as of December 31, 2001, was
approximately $2.0 million. The intercompany services
agreement was originally negotiated between officers of Crown
Media International and Hallmark Cards. The management of Crown
Media International believed that the services provided under
the agreement had a value at least equal to the annual fee.

In addition to the services described above, we
have incurred costs that have been paid by Hallmark
Entertainment on our behalf related to payroll and benefits,
insurance, operating, financial and capital expenditures. These
costs are reflected on our financial statements, and to the
extent that we have not reimbursed Hallmark Entertainment, the
costs are included in payables to affiliates in our consolidated
financial statements included elsewhere in this prospectus
supplement. We reimbursed Hallmark Entertainment
$3.6 million, for the year ended December 31, 2001.
The balance of the payable as of December 31, 2001 was
approximately $1.8 million.

Hallmark Trademark License
Agreements

We are permitted to use the Hallmark
and Hallmark Entertainment trademarks in accordance
with the terms of a royalty-free two-year trademark license
agreement dated as of December 1, 2000, between Hallmark
Cards and Crown Media International. Under that agreement, we
may use the Hallmark and Hallmark Entertainment trademarks
outside the United States and Canada only for so long as
Hallmark Cards and its wholly owned subsidiaries collectively
own at least 51% of the voting interest and at least 35% of the
equity interest of Crown Media Holdings, and designate a
majority of our Board and so long as there is no event of
default under the agreement.

Crown Media International has the non-exclusive
right to use the Hallmark and Hallmark Entertainment trademarks
to promote, market, advertise, distribute and sell television
motion pictures and miniseries produced by or at the direction
of Hallmark Entertainment Productions, LLC or its subsidiaries.
Crown Media International also has the non-exclusive right to
use the Hallmark and Hallmark Entertainment trademarks to
promote, market, advertise, distribute and sell its network and
channel so long as these television motion pictures and
miniseries along with other television motion pictures and
miniseries acquired under our program agreement with Hallmark
Entertainment Distribution represent at least 50% of the monthly
programming of that network or channel or 20% of the monthly
programming during the first six months that we launch that
network or channel in a territory. The program license agreement
with Hallmark Entertainment Distribution does not require it to
make available a minimum amount of programming. If Hallmark
Entertainment Distribution fails to provide sufficient
programming to meet the minimum thresholds required under the
trademark license agreement, that failure could cause a default
under the trademark license agreement.

Except for the uses permitted by the trademark
license agreement of Crown Media International, we are not
permitted to use the Hallmark name alone or with any other names.

Under the agreement, if Hallmark Cards notifies
us in writing that it has determined that we have failed to
comply with the usage standards set forth in the agreement or
have otherwise breached our obligations under the agreement, we
must stop any non-complying activity within 10 days of that
notice or we will be in default of the agreement. We will also
be in default if Hallmark Cards delivers such a written notice
to us with respect to its standards three or more times in any
12-month period. In addition, there will be a default under the
agreement if we fail to cure any breach of the program agreement
with Hallmark Entertainment Distribution, if we fail to make any
payments due under loan agreements within five days of the due
date, or if our auditors determine that we are no longer a going
concern.

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The license agreement can be terminated
immediately and without notice if we transfer in any way our
rights under the license agreement, if we have an event of
default under the agreement or in events of bankruptcy,
insolvency or similar proceedings. With respect to a particular
country in which we use the Hallmark Entertainment trademark,
the license agreement will terminate if the television motion
pictures and miniseries produced by Hallmark Entertainment or
its subsidiaries and other motion pictures and miniseries
acquired under the program agreement with Hallmark Entertainment
comprise less than 50% of the programming of the network or
channel based on actual hours of broadcast in the country.

There is a similar trademark license agreement
between Hallmark Cards and a subsidiary of Crown Media
International that permits the use of the Hallmark and Hallmark
Entertainment trademarks in the United Kingdom for two years
from December 1, 2000.

Crown Media United States operates under the
benefit of a limited trademark license agreement with Hallmark
Licensing, Inc., amended and restated on March 27, 2001.
The agreement permits the use of the Hallmark trademarks in the
United States through August 30, 2003, under terms, which
are similar to the terms applicable to the use of the Hallmark
trademarks outside the United States by Crown Media
International. As with Crown Media Internationals
trademark agreement with Hallmark Cards, the amended and
restated Crown Media United States trademark agreement permits
Crown Media United States to name its network service as the
Hallmark Channel. The agreement contains usage
standards, which limit certain types of programming and
programming content aired on Crown Media United States
network.

Tax Sharing Agreement

Hallmark Entertainment has entered into a tax
sharing agreement with us and certain of our subsidiaries
(collectively, the Crown Group) that provides for tax sharing
payments between Hallmark Entertainment and the Crown Group with
respect to any consolidated, combined or unitary tax return
filed after the closing of the initial public offering in which
the Crown Group, or any member of the Crown Group, joins
Hallmark Cards or certain of its subsidiaries (collectively,
Hallmark Group). Such tax sharing payments are not made in
respect of United States federal income taxes of the Crown Group
because the Crown Group is not part of the Hallmark Cards
affiliated group of corporations filing consolidated returns for
United States federal income tax purposes.

Under the tax sharing agreement, where the
Hallmark Group and the Crown Group do file consolidated,
combined or unitary tax returns, the Crown Group makes tax
sharing payments to Hallmark Entertainment (or receives from
Hallmark Entertainment) equal to the taxes (or tax refunds) that
the Crown Group would have paid (or received) if it filed on a
stand-alone basis. Such payments are computed based upon the
Crown Groups income, loss and other tax items after the
day following the closing of the initial public offering.

The Crown Group has appointed Hallmark
Entertainment as its agent in connection with any tax return or
proceeding involving both one or more members of the Hallmark
Group and one or more members of the Crown Group for any
pre-initial public offering or post-initial public offering
period.

Corporate Opportunities Policy Established by
Hallmark Entertainment

The following is a description of a general
policy adopted by the Hallmark Entertainment board of directors
in connection with the stockholders agreement and our initial
public offering. The policy provides that we will be the primary
(but not exclusive) vehicle for the pursuit of corporate
opportunities relating to the ownership and operation of pay
television channels dedicated to family programming, Pay
Television Opportunities, that are provided or otherwise
made available to Hallmark Entertainment and its subsidiaries.
However, Pay Television Opportunities do not include
opportunities: (1) developed by or made available to any
public company that is a subsidiary of Hallmark Entertainment or
any of Hallmark Entertainments subsidiaries (other than us
and our subsidiaries), (2) relating to the production or
distribution of programming that is developed by, or provided or
made available to, a subsidiary of Hallmark Entertainment that
does not own or operate pay television channels dedicated to
family programming and whose primary business is the production
or distribution of programming, (3) arising out of or
relating to Pay Television Opportunities that have been provided
or made available to us but which we have determined not to
pursue or have failed to

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pursue within the applicable time period
reasonably specified by Hallmark Entertainment, or (4) that
Hallmark Entertainment or any of its subsidiaries is legally or
contractually obligated to provide or make available to a person
other than us.


Under the policy, we are not obligated to pursue
any Pay Television Opportunity presented to us by Hallmark
Entertainment. If we determine not to pursue or fail to pursue
an opportunity, in each case within such time as Hallmark
Entertainment may reasonably specify (taking into account the
type and nature of the Pay Television Opportunity provided or
made available) in its communication to us relating to such Pay
Television Opportunity, then Hallmark Entertainment and its
subsidiaries may pursue such Pay Television Opportunity.

The policy became effective upon completion of
the initial public offering. The policy automatically terminates
upon the first to occur of: (1) Hallmark Entertainment and
its subsidiaries ceasing to beneficially own, in the aggregate,
at least a majority in voting power of our outstanding voting
securities entitled to vote generally upon all matters submitted
to common stockholders and (2) the third anniversary of the
completion of the initial public offering.

The policy provides that the Hallmark
Entertainment board of directors is required to act in
accordance with its fiduciary duties owed to Hallmark
Entertainment and Hallmark Entertainments fiduciary
duties, if any, to its subsidiaries in making all determinations
in connection with the policy. With respect to any Pay
Television Opportunity that may be subject to the policy and any
obligation (fiduciary or otherwise) to one or more other
subsidiaries, the Hallmark Entertainment board of directors will
have discretion to determine, without reference to the policy,
to which of us or such other subsidiary of Hallmark
Entertainment such Pay Television Opportunity will be provided
or made available. Notwithstanding anything set forth in the
policy, Hallmark Entertainment will have no obligation to
exercise any rights it may have as a stockholder, partner or
member of any entity that is not a wholly owned subsidiary or to
exercise any rights available to it under agreements with other
stockholders, partners or members, in order to implement
determinations under the policy. All determinations of the
Hallmark Entertainment board of directors with respect to the
Hallmark Entertainment policy and the interpretation of the
Hallmark Entertainment policy are conclusive and binding.

The policy further provides that Hallmark
Entertainments board of directors from time to time may
amend, modify or rescind the policy or adopt additional or other
policies or make exceptions with respect to the application of
the policy in connection with particular facts and
circumstances, all as the Hallmark Entertainment board of
directors may determine, consistent with its fiduciary duties
and in accordance with the stockholders agreement.

Certain Business Relationships and Conflicts
of Interest

Hallmark Entertainment Holdings controls all of
our outstanding shares of Class B common stock,
representing approximately 90% of the voting power on all
matters submitted to our stockholders, and also owns a
substantial number of shares of Class A common stock.
Hallmark Entertainment Holdings control could discourage
others from initiating potential merger, takeover or other
change of control transactions that may otherwise be beneficial
to our businesses or holders of Class A common stock. As a
result, the market price of our Class A common stock or our
business could suffer.

Hallmark Entertainment Holdings control
relationship with us also could give rise to conflicts of
interest, including:



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

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In addition, our directors, who are also officers
or directors of Hallmark Entertainment Holdings or its
affiliates, will have fiduciary duties, including duties of
loyalty, to both companies and may have conflicts of interest
with respect to matters potentially involving or affecting us.
For example, Robert A. Halmi, Jr. is our Chairman of the Board
and also a Director and President of Hallmark Entertainment
Holdings, which could create potential conflicts of interest. As
a result, it is possible that we may receive less favorable
contractual terms from Hallmark Entertainment Holdings or its
affiliates than if none of our officers or directors had any
affiliation with Hallmark Entertainment Holdings or its
affiliates.

Our certificate of incorporation provides that
Hallmark Cards will have no duty to refrain from engaging in
activities or lines of business that are the same as or similar
to the activities or lines of business in which we engage, and
neither Hallmark Cards nor any officer or director of Hallmark
Cards, except as provided below, will be liable to us or to our
stockholders for breach of any fiduciary duty by reason of any
such activities of Hallmark Cards. In the event that Hallmark
Cards acquires knowledge of a potential transaction or matter
which may be a corporate opportunity for both Hallmark Cards and
us, Hallmark Cards will have no duty to communicate or offer
that corporate opportunity to us and will not be liable to us or
our stockholders for breach of any fiduciary duty as a
stockholder by reason of the fact that Hallmark Cards pursues or
acquires that corporate opportunity for itself, directs that
corporate opportunity to another person, or does not communicate
information regarding that corporate opportunity to us.

In the event that one of our directors or
officers who is also a director or officer of Hallmark Cards
acquires knowledge of a potential transaction or matter which
may be a corporate opportunity for both us and Hallmark Cards,
that director or officer will have fully satisfied his or her
fiduciary duty to us and our stockholders with respect to that
corporate opportunity if that director or officer acts in a
manner consistent with the following policy:



| |   |                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a corporate opportunity offered to any person who
	is one of our officers, and who is also a director but not an
	officer of Hallmark Cards, will belong to us;                                                                                                                                                                                
|
| |  | a corporate opportunity offered to any person who
	is one of our directors but not one of our officers, and who is
	also a director or officer of Hallmark Cards, will belong to us
	if that opportunity is expressly offered to that person in his
	or her capacity as one of our directors, and otherwise will
	belong to Hallmark Cards; and
|
| |  | a corporate opportunity offered to any person who
	is one of our officers and an officer of Hallmark Cards will
	belong to us if that opportunity is expressly offered to that
	person in his or her capacity as one of our officers, and
	otherwise will belong to Hallmark Cards.                                                            

For purposes of the policy:



| |   |                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a director who is our Chairman of the Board or
	Chairman of a committee of the Board will not be deemed to be
	one of our officers by reason of holding that position, unless
	that person is one of our full-time employees;                                                                                                                                                 
|
| |  | references to us shall mean us and all
	corporations, partnerships, joint ventures, associations and
	other entities in which we beneficially own, directly or
	indirectly, 50% or more of the outstanding voting stock, voting
	power, partnership interests or similar voting
	interests; and                                                                               
|
| |  | the term Hallmark Cards means
	Hallmark Cards and all corporations, partnerships, joint
	ventures, associations and other entities, other than us, as we
	are defined in this paragraph, in which Hallmark Cards
	beneficially owns, directly or indirectly, 50% or more of the
	outstanding voting stock, voting power, partnership interests or
	similar voting interests.

The foregoing provisions of our certificate of
incorporation will expire on the date that Hallmark Cards ceases
to own beneficially common stock representing at least 20% of
the total voting power of all of our classes of outstanding
capital stock and no person who is one of our directors or
officers is also a director or officer of Hallmark Cards or any
of its subsidiaries.

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Other than as disclosed above and under
 Stockholders Agreement and Registration
Rights and  Corporate Opportunities
Policy Established by Hallmark Entertainment, there are no
specific policies in place with respect to any conflicts that
may arise. We expect conflicts to be resolved on a case-by-case
basis, and in a manner consistent with applicable law.

Transactions With JP Morgan Chase
Bank

We have a credit agreement with a syndicate of
banks lead by JP Morgan Chase Bank providing a secured line of
credit and term loan of up to a total of $320.0 million due
August 31, 2006. As part of this credit facility, JP Morgan
Chase Bank has committed to lend to us up to $45.0 million.
At December 31, 2001, JP Morgan Chase Bank had outstanding
loans to us under the line of credit of $37.4 million. Each
loan under the credit facility bears interest at a Eurodollar
rate or an alternate base rate as we may request at the time of
borrowing in accordance with the credit agreement. We are
required to pay a commitment fee of 0.5% per annum of the
committed, but not outstanding, amounts under the revolving
credit facility, payable in quarterly installments. We paid a
total of $262,000 in interest and $304,736 in fees to JP Morgan
Chase Bank under the credit facility for the year ended
December 31, 2001.

JP Morgan Chase Bank serves as an indenture
trustee for debentures issued by us to Crown Media Trust in
connection with the issuance of preferred securities by Crown
Media Trust in a private placement. JP Morgan Chase Bank serves
as the property trustee under the trust creating the Crown Media
Trust, which is one of several trustees of the Crown Media
Trust, and also as the preferred guarantee trustee relating to
our guarantee of the preferred securities issued by Crown Media
Trust. Chase Manhattan Bank USA, National Association, an
affiliate of JP Morgan Chase Bank, serves as the Delaware
trustee of Crown Media Trust, which is a trustee with its
principal place of business in the State of Delaware. We
incurred fees and disbursements to JP Morgan Chase Bank and
Chase Manhattan Bank USA, National Association for these trustee
services during the year ended December 31, 2001, which
will be paid during 2002.

Arnold L. Chavkin, one of our directors, and JP
Morgan Partners (BHCA), L.P., a beneficial owner of more than 5%
of our outstanding Class A common stock, are related
parties to JP Morgan Chase & Co. and its wholly-owned
subsidiary, JP Morgan Chase Bank. JP Morgan Chase & Co.
is a publicly-traded financial holding company. JP Morgan
Partners (BHCA), L.P. is an indirect non-bank subsidiary of JP
Morgan Chase & Co. JP Morgan Chase & Co. owns
100% of the sole general partner of JP Morgan Partners (BHCA),
L.P., and also owns 100% of Chatham Ventures, Inc. which is the
sole limited partner of JP Morgan Partners (BHCA), L.P. JPMP
Master Fund Manager, L.P. is the sole general partner of JP
Morgan Partners (BHCA), L.P. JPMP Capital Corp. is the sole
general partner of JPMP Master Fund Manager, L.P., and limited
partners of JPMP Master Fund Manager, L.P. are comprised of
investment professionals, including Mr. Chavkin, and
others. JPMP Capital Corp. is a 100% non-bank subsidiary of JP
Morgan Chase & Co. JP Morgan Partners, LLC serves as
the management company for the private equity organization of JP
Morgan Chase & Co. and is known as JP Morgan Partners.
JP Morgan Partners, LLC is an indirect 100% subsidiary of
JP Morgan Chase & Co. and is a direct wholly-owned
subsidiary of JPMP Capital Corp. JP Morgan Partners, LLC is the
employer of JP Morgan Partners staff in New York City.

Mr. Chavkin is an Executive Vice President
of JP Morgan Partners, LLC, an Executive Vice President of JPMP
Capital Corp. and one of the limited partners of JPMP Master
Fund Manager, L.P. He is not an officer of JP Morgan
Chase & Co. or JP Morgan Chase Bank. He also serves as
an Executive Vice President or executive partner of certain
domestic entities and global funds of various JP Morgan Partners
related entities.

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PART IV






|         |                                                                 
|-------- | ----------------------------------------------------------------
|Item 14. | Exhibits, Financial Statement Schedules and
	Reports on Form 8-K

(A) List of Documents Filed as Part of This
Report

(1) Consolidated Financial Statements.



| |                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------
| | Report of Independent Public Accountants                                                                            
| | Consolidated Balance Sheets as of
	December 31, 2000 and 2001                                                       
| | Consolidated Statements of Operations and
	Comprehensive Loss for the Years Ended December 31, 1999,
	2000, and 2001
| | Consolidated Statements of Stockholders
	Equity (Deficit) for the Years Ended December 31, 1999,
	2000, and 2001   
| | Consolidated Statements of Cash Flows for the
	Years Ended December 31, 1999, 2000, and 2001                        

(2) Exhibits

Index to Exhibits

|        |    |    |  |               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------- | -- | -- |  | ------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |    |  |              
|Number  |    |    |  | Exhibit Title
|        |    |    |  |              
|        | 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 (previously filed as Exhibit 3.2 to our
	Quarterly Report on Form 10-Q filed on July 31, 2001
	and incorporated herein by reference).                                                                                                                                                                                                                                                     
|        | 3  | .3 |  |              |  | Amended and Restated By-Laws (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).                                                                                                                                                                                                                                                        
|        | 4  | .1 |  |              |  | Form of Specimen Certificate for our Class A
	Common Stock (previously filed as Exhibit 4.1 to our
	Registration Statement on Form S-1/ A (Amendment
	No. 1), Commission File No. 333-95573, and
	incorporated herein by reference).                                                                                                                                                                                                                          
|        | 10 | .1 |  |              |  | Second Amended and Restated Stockholders
	Agreement, dated August 31, 2001 (previously filed as
	Exhibit 10.6 to our Quarterly Report on Form 10-Q
	filed on November 13, 2001 and incorporated herein by
	reference).                                                                                                                                                                                                                                        
|        | 10 | .2 |  |              |  | Acknowledgment and Agreement to the Second
	Amended and Restated Stockholders Agreement, dated as of
	December 31, 2001, by Hallmark Entertainment Holdings, Inc.                                                                                                                                                                                                                                                                                             
|        | 10 | .3 |  |              |  | Credit, Security, Guaranty and Pledge Agreement,
	dated August 31, 2001, by and among Crown Media Holdings,
	Inc., its Subsidiaries named therein, the Lenders named therein
	and The Chase Manhattan Bank (now known as JP Morgan Chase Bank)
	as Administrative Agent and Issuing Bank (filed as
	Exhibit 10.1 to our Current Report on Form 8-K, filed
	on October 3, 2001, and incorporated herein by reference).                                         
|        | 10 | .4 |  |              |  | Amendment No. 1, dated as of
	December 14, 2001, 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 JP Morgan Chase Bank as
	Administrative Agent and as Issuing Bank (previously filed as
	Exhibit 10.1 to our Current Report on Form 8-K, filed
	on December 18, 2001, and incorporated herein by reference).
|        | 10 | .5 |  |              |  | Amendment No. 2, dated as of
	December 31, 2001, 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 JP Morgan Chase Bank as
	Administrative Agent and as Issuing Bank.                                                                                                                                         

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|        |    |     |  |               |  |                                                                                                                                                                                                                                                                                                                                                                                                                          
|------- | -- | --- |  | ------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |              
|Number  |    |     |  | Exhibit Title
|        |    |     |  |              
|        | 10 | .6  |  |              |  | Subordination and Support Agreement dated
	August 31, 2001, among Crown Media Holdings, Inc., Hallmark
	Cards, Incorporated and The Chase Manhattan Bank (now known as
	JP Morgan Chase Bank) as agent for the Lenders and the
	Issuing Bank referred to in the Credit Agreement (previously
	filed as Exhibit 10.3 to our Current Report on
	Form 8-K, filed on October 3, 2001, and incorporated
	herein by reference).
|        | 10 | .7  |  |              |  | Amended and Restated Limited Guarantee Agreement
	and Acknowledgement, dated as of August 31, 2001 as amended
	and restated as of December 14, 2001, made by Hallmark
	Cards, Incorporated in favor of JP Morgan Chase Bank
	(formerly known as The Chase Manhattan Bank) as agent on behalf
	of the Lenders and the Issuing Bank.                                                                                       
|        | 10 | .8  |  |              |  | Hallmark Inducement Agreement dated
	August 31, 2001, between Hallmark Entertainment, Inc. and
	The Chase Manhattan Bank (now known as JP Morgan Chase Bank) in
	its capacity as agent under the credit agreement (previously
	filed as Exhibit 10.5 to our Current Report on
	Form 8-K, filed on October 3, 2001, and incorporated
	herein by reference).                                                               
|        | 10 | .9  |  |              |  | Securities Purchase Agreement, dated as of
	December 17, 2001, by and among Crown Media Holdings, Inc.,
	Crown Media Trust and the Investors Named Therein (previously
	filed as Exhibit 10.3 to our Current Report on
	Form 8-K, filed on December 18, 2001, and incorporated
	herein by reference).                                                                                                                    
|        | 10 | .10 |  |              |  | Contingent Appreciate Certificate Agreement,
	dated as of December 17, 2001, by and among Crown Media
	Holdings, Inc. and the Holders Named Therein (previously filed
	as Exhibit 10.4 to our Current Report on Form 8-K,
	filed on December 18, 2001, and incorporated herein by
	reference).                                                                                                                           
|        | 10 | .11 |  |              |  | Indenture, dated as of December 17, 2001, by
	and between Crown Media Holdings, as Issuer, and JPMorgan Chase
	Bank, as Indenture Trustee (previously filed as
	Exhibit 10.5 to our Current Report on Form 8-K, filed
	on December 18, 2001, and incorporated herein by reference).                                                                                                                                      
|        | 10 | .12 |  |              |  | Preferred Securities Guarantee Agreement, dated
	as of December 17, 2001, by and between Crown Media
	Holdings, Inc., as Guarantor, and JPMorgan Chase Bank, as
	Preferred Guarantee Trustee (previously filed as
	Exhibit 10.6 to our Current Report on Form 8-K, filed
	on December 18, 2001, and incorporated herein by reference).                                                                                   
|        | 10 | .13 |  |              |  | Subordination and Support Agreement, dated as of
	December 17, 2001, by and among Crown Media Holdings, Inc.,
	Obligor, Crown Media Trust, Hallmark Cards, Incorporated,
	JPMorgan Chase Bank, Indenture Trustee, and the holders of
	Certificates identified therein (previously filed as
	Exhibit 10.7 to our Current Report on Form 8-K, filed
	on December 18, 2001, and incorporated herein by reference).          
|        | 10 | .14 |  |              |  | Amended and Restated Program License Agreement,
	dated as of January 1, 2001, by and between Hallmark
	Entertainment Distribution, LLC, and Crown Media International,
	Inc.                                                                                                                                                                                                                                             
|        | 10 | .15 |  |              |  | Amended and Restated Program License Agreement,
	dated as of January 1, 2001, by and between Hallmark
	Entertainment Distribution, LLC and Crown Media United States,
	LLC (formerly known as Odyssey Holdings, LLC).                                                                                                                                                                                                    
|        | 10 | .16 |  |              |  | Amended and Restated Trademark License Agreement,
	dated as of December 1, 2000, by and between Hallmark
	Cards, Incorporated and Crown Media International, Inc.
	(previously filed as Exhibit 10.7 to our Annual Report on
	Form 10-K filed on March 27, 2001 and incorporated
	herein by reference).                                                                                                                  
|        | 10 | .17 |  |              |  | Amended and Restated Trademark License Agreement
	(UK), dated as of December 1, 2000, by and between Hallmark
	Cards, Incorporated and Hallmark Entertainment Limited (formerly
	known as Hallmark Entertainment Networks (UK) Ltd.)
	(previously filed as Exhibit 10.7 to our Annual Report on
	Form 10-K filed on March 27, 2001 and incorporated by
	reference herein).                                               
|        | 10 | .18 |  |              |  | Amended and Restated Trademark License Agreement,
	dated as of March 27, 2001, by and between Hallmark
	Licensing, Inc. and Odyssey Holdings, LLC (now known as Crown
	Media United States, LLC) (previously filed as
	Exhibit 10.1 to our Quarterly Report on Form 10-Q
	filed on May 4, 2001, and incorporated herein by reference.)                                                                                   

71



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|        |    |      |  |               |  |                                                                                                                                                                                                                                                                                                                                                                    
|------- | -- | ---- |  | ------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |              
|Number  |    |      |  | Exhibit Title
|        |    |      |  |              
|        | 10 | .19  |  |              |  | Security Agreement, dated as of August 1,
	1999, by and between Hallmark Entertainment Networks, Inc. (now
	known as Crown Media International, Inc.) and Hallmark Cards,
	Incorporated (previously filed as Exhibit 10.10 to our
	Registration Statement on Form S-1/ A (Amendment
	No. 1), Commission File No. 333-95573, and
	incorporated herein by reference).
|        | 10 | .20  |  |              |  | Security Agreement, dated as of March 27,
	2001, by and between Odyssey Holdings, LLC (now known as Crown
	Media United States, LLC) and Hallmark Licensing, Inc.                                                                                                                                                                                                  
|        | 10 | .21  |  |              |  | Amended and Restated Company Agreement of Odyssey
	Holdings, L.L.C. (now known as Crown Media United
	States, LLC) (previously filed as Exhibit 10.11 to our
	Registration Statement on Form S-1/ A (Amendment
	No. 1), Commission File No. 333-95573, and
	incorporated herein by reference).                                                                     
|        | 10 | .22  |  |              |  | Amendment to the Amended and Restated Company
	Agreement of Odyssey Holdings, LLC, dated March 15, 2001.                                                                                                                                                                                                                                                           
|        | 10 | .23  |  |              |  | Agreement, dated as of February 22, 2001, by
	and among Odyssey Holdings, LLC, National Interfaith Cable
	Coalition, Inc. and VISN Management Corp. (previously filed
	as Exhibit 10.2 to our Quarterly Report on Form 10-Q
	filed on May 4, 2001 and incorporated herein by reference.)                                                                           
|        | 10 | .24  |  |              |  | Amended and Restated Intercompany Service
	Agreement, dated as of January 1, 2000, between Crown Media
	Holdings, Inc. and Hallmark Cards, Incorporated (previously
	filed as Exhibit 10.12 to our Registration Statement on
	Form S-1/ A (Amendment No. 1), Commission File
	No. 333-95573, and incorporated herein by reference).                                
|        | 10 | .25* |  |              |  | Amended and Restated Crown Media Holdings, Inc.
	2000 Long Term Incentive Plan (previously filed as
	Exhibit 10.13 to Our Annual Report on Form 10-K filed
	on March 27, 2001, and incorporated herein by reference).                                                                                                                                              
|        | 10 | .26  |  |              |  | Program License Agreement, dated as of
	November 13, 1998, between National Interfaith Cable
	Coalition, Inc. and Odyssey Holdings, L.L.C. (previously filed
	as Exhibit 10.17 to our Registration Statement on
	Form S-1/ A (Amendment No. 1), Commission File
	No. 333-95573, and incorporated herein by reference).                                             
|        | 10 | .27  |  |              |  | Purchase and Sale Agreement, dated April 10,
	2001, by and between Crown Media Holdings, Inc. and Hallmark
	Entertainment Distribution, LLC (previously filed as
	Appendix A to definitive proxy materials filed on
	May 7, 2001, and incorporated by reference herein).                                                                                           
|        | 10 | .28  |  |              |  | Service Agreement, dated September 28, 2001,
	by and between Hallmark Entertainment, Inc. and Crown Media
	Holdings, Inc., as assigned to Crown Media Distribution,
	LLC, pursuant to letter dated December 14, 2001.                                                                                                                                              
|        | 10 | .29  |  |              |  | Registration Rights Agreement, dated as of
	September 28, 2001, by and between Crown Media Holdings,
	Inc. and Hallmark Entertainment Distribution, as amended by
	assignments dated September 28, 2001 and December 31,
	2001.                                                                                                                                    
|        | 10 | .30  |  |              |  | Stock Purchase Agreement, dated as of
	August 20, 2001, by and between Crown Media Holdings, Inc.
	and DIRECTV Enterprises, Inc. (previously filed as
	Exhibit 10.7.1 to our Amendment No. 1 to our Quarterly
	Report on Form 10-Q/ A filed on January 10, 2002 and
	incorporated herein by reference).                                                            
|        | 10 | .31  |  |              |  | Affiliation Agreement for DBS Satellite
	Exhibition of Cable Network Programming, dated as of
	August 20, 2001, by and between Crown Media United States,
	LLC, and DIRECTV, Inc. (previously filed as Exhibit 10.7.2
	to our Amendment No. 1 to our Quarterly Report on
	Form 10-Q/ A filed on January 10, 2002 and
	incorporated herein by reference).           
|        | 10 | .32  |  |              |  | Affiliation Agreement for DBS Satellite
	Exhibition of Cable Network Programming, dated as of
	March 6, 2000, by and between Crown Media United States,
	LLC, and DIRECTV, Inc. (previously filed as Exhibit 10.7.3
	to our Amendment No. 1 to our Quarterly Report on
	Form 10-Q/ A filed on January 10, 2002 and
	incorporated herein by reference).             
|        | 10 | .33  |  |              |  | Letter, dated August 30, 2001, by and
	between DIRECTV, Inc. and Crown Media Holdings, Inc. (previously
	filed as Exhibit 10.7.4 to our Amendment No. 1 to our
	Quarterly Report on Form 10-Q/ A filed on January 10,
	2002 and incorporated herein by reference).                                                                                                 

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|        |    |      |  |               |  |                                                                                                                                                                                                                                                                                                                                                                                     
|------- | -- | ---- |  | ------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |              
|Number  |    |      |  | Exhibit Title
|        |    |      |  |              
|        | 10 | .34  |  |              |  | Lease, dated as of June 1, 1998, by and
	between High Pointe I Development Group L.L.C. and Hallmark
	Entertainment Network, Inc. (now known as Crown Media
	International, Inc.) (previously filed as Exhibit 10.20 to
	our Registration Statement on Form S-1/ A (Amendment
	No. 1), Commission File No. 333-95573, and
	incorporated herein by reference).                       
|        | 10 | .35  |  |              |  | First Amendment to Lease, dated as of
	March 23, 1999, by and between High Pointe I
	Development Group L.L.C. and Hallmark Entertainment Network,
	Inc. (now known as Crown Media International, Inc.) (previously
	filed as Exhibit 10.21 to our Registration Statement on
	Form S-1/ A (Amendment No. 1), Commission File
	No. 333-95573, and incorporated herein by reference).  
|        | 10 | .36  |  |              |  | Second Amendment to Lease, dated as of
	August 17, 1999, by and between High Pointe I
	Development Group L.L.C. and Hallmark Entertainment Network,
	Inc. (now known as Crown Media International, Inc.) (previously
	filed as Exhibit 10.22 to our Registration Statement on
	Form S-1/ A (Amendment No. 1), Commission File
	No. 333-95573, and incorporated herein by reference).
|        | 10 | .37  |  |              |  | Third Amendment to Lease, dated as of
	September 26, 2000, by and between High Pointe 1
	Development Group L.L.C. and Crown Media International, Inc.
	(formerly known as Hallmark Entertainment Network, Inc.)
	(previously filed as Exhibit 10.20 to our Annual Report on
	Form 10-K filed on March 27, 2001, and incorporated
	herein by reference).                             
|        | 10 | .38  |  |              |  | Fourth Amendment to Lease, dated as of
	February 6, 2001, by and between High Pointe 1 Development
	Group, L.L.C. and Crown Media Inc. (now known as Crown Media
	International, Inc.) (previously filed as Exhibit 10.21 to
	our Annual Report on Form 10-K filed on March 27,
	2001, and incorporated by reference herein).                                                       
|        | 10 | .39  |  |              |  | Fifth Amendment to Lease, dated as of
	February 12, 2002, by and between High Pointe 1
	Development Group LLC and Crown Media International, Inc.                                                                                                                                                                                                                                   
|        | 10 | .40  |  |              |  | Guaranty of Lease Obligations, dated June 1,
	1998, by Hallmark Entertainment, Inc. for High Pointe I
	Development Group L.L.C. (previously filed as Exhibit 10.23
	to our Registration Statement on Form S-1/ A (Amendment
	No. 1), Commission File No. 333-95573, and
	incorporated herein by reference).                                                                         
|        | 10 | .41* |  |              |  | Employment Agreement, dated as of
	September 18, 2001, between Crown Media Holdings, Inc. and
	David Evans (previously filed as Exhibit 10.8 to our
	Quarterly Report on Form 10-Q filed on November 13,
	2001 and incorporated herein by reference).                                                                                                                               
|        | 10 | .42* |  |              |  | Employment Agreement, dated as of July 5,
	2000, between Crown Media Holdings, Inc. and Chris Moseley
	(previously filed as Exhibit 10.26 to our Annual Report on
	Form 10-K filed on March 27, 2001 and incorporated
	herein by reference).                                                                                                                                        
|        | 10 | .43* |  |              |  | Employment Agreement, dated as of
	October 25, 2000, by and between Crown Media Holdings, Inc.
	and Charles Stanford (previously filed as Exhibit 10.26 to
	our Annual Report on Form 10-K filed on March 27, 2001
	and incorporated herein by reference).                                                                                                                          
|        | 10 | .44* |  |              |  | Employment Agreement, dated as of January 1,
	2001, by and between Crown Media Holdings, Inc. and William
	Aliber.                                                                                                                                                                                                                                                                  
|        | 10 | .45* |  |              |  | Employment Agreement, dated as of
	September 19, 2000, by and between Odyssey Holdings, L.L.C.
	(now known as Crown Media United States, LLC) and Paul
	FitzPatrick.                                                                                                                                                                                                                
|        | 10 | .46* |  |              |  | Employment Agreement, dated as of
	September 25, 2001, by and between Crown Media United
	States, LLC and Lana Corbi.                                                                                                                                                                                                                                                               
|        | 10 | .47* |  |              |  | Employment Agreement, dated as of
	December 20, 2001, by and between Crown Media
	International, Inc. and Russel H. Givens, Jr.                                                                                                                                                                                                                                                     
|        | 10 | .48* |  |              |  | Separation Agreement, dated January 28,
	1999, between Hallmark Entertainment Networks, Inc. (now known
	as Crown Media International, Inc.) and George Stein (previously
	filed as Exhibit 10.29 to our Registration Statement on
	Form S-1/ A (Amendment No. 1), Commission File
	No. 333-95573, and incorporated herein by reference).                                           

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|        |    |     |  |               |  |                                                                                                                                                                                                                                                                                                                                     
|------- | -- | --- |  | ------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |              
|Number  |    |     |  | Exhibit Title
|        |    |     |  |              
|        | 10 | .49 |  |              |  | $50,000,000 Promissory Note, dated July 10,
	2001, made by Crown Media Holdings, Inc. in favor of HC Crown
	Corporation (previously filed as Exhibit 10.1 to our
	Quarterly Report on Form 10-Q filed on May 4, 2001 and
	incorporated herein by reference).                                                                        
|        | 10 | .50 |  |              |  | $75,000,000 Promissory Note, dated
	December 14, 2001, made by Crown Media Holdings, Inc.,
	Crown Media International, Inc. and Crown Media United States,
	LLC in favor of HC Crown Corp. (previously filed as
	Exhibit 10.2 to our Current Report on Form 8-K, filed
	on December 18, 2001, and incorporated herein by reference).
|        | 10 | .51 |  |              |  | $150,000,000 Irrevocable Standby Letter of Credit
	No. TS-07001786, dated October 3, 2001, issued by
	Credit Suisse First Boston, in favor of the Crown Media
	Holdings, Inc.                                                                                                                                                       
|        | 10 | .52 |  |              |  | Reduction Certificate to $150,000,000 Irrevocable
	Standby Letter of Credit, dated December 21, 2001.                                                                                                                                                                                                                               
|        | 21 | .1  |  |              |  | List of our Subsidiaries.                                                                                                                                                                                                                                                                                                           
|        | 23 | .1  |  |              |  | Consent of Arthur Andersen LLP.                                                                                                                                                                                                                                                                                                     
|        | 99 | .1  |  |              |  | Crown Media Holdings letter regarding
	representation by Arthur Andersen LLP.                                                                                                                                                                                                                                                       



---



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

(B) Reports on Form 8-K

During the quarter ended December 31, 2001,
we filed the following Form 8-K reports:



| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | Report filed October 3, 2001 (dated
	September 28, 2001) regarding Item 2 and Item 5;
|
| |  | Report filed October 26, 2001 (dated
	October 25, 2001) regarding Item 5 and;        
|
| |  | Report filed December 18, 2001 (dated
	December 17, 2001) regarding Item 5.          

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SIGNATURES

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



| |                           
| | --------------------------
| | CROWN MEDIA HOLDINGS, INC.



| |     |                   
| | --- | ------------------
| | By: | /s/ DAVID J. EVANS

| |                                       
| | --------------------------------------
| |                                       
| | David J. Evans                        
| | President and Chief Executive
	Officer

March 29, 2002

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

|                                                   |  |                                            |  |               
|-------------------------------------------------- |  | ------------------------------------------ |  | --------------
|Signature                                          |  | Title                                      |  | Date          
|                                                   |  |                                            |  |               
|/s/ DAVID J. EVANSDavid J. Evans                   |  | Director and Principal Executive Officer   |  | March 29, 2002
|                                                  
|/s/ WILLIAM J. ALIBERWilliam J. Aliber             |  | Principal Financial and Accounting Officer |  | March 29, 2002
|                                                  
|/s/ WILFORD V. BANE, JR.Wilford V. Bane, Jr.       |  | Director                                   |  | March 29, 2002
|                                                  
|/s/ ARNOLD L. CHAVKINArnold L. Chavkin             |  | Director                                   |  | March 29, 2002
|                                                  
|/s/ ROBERT J. DRUTENRobert J. Druten               |  | Director                                   |  | March 29, 2002
|                                                  
|/s/ DONALD J. HALL, JR.Donald J. Hall, Jr.         |  | Director                                   |  | March 29, 2002
|                                                  
|/s/ ROBERT A. HALMI, JR.Robert A. Halmi, Jr.       |  | Director                                   |  | March 29, 2002
|                                                  
|/s/ IRVINE O. HOCKADAY, JR.Irvine O. Hockaday, Jr. |  | Director                                   |  | March 29, 2002
|                                                  
|/s/ DAVID B. KOFFDavid B. Koff                     |  | Director                                   |  | March 29, 2002
|                                                  
|/s/ PETER A. LUNDPeter A. Lund                     |  | Director                                   |  | March 29, 2002
|                                                  
|/s/ JOHN P. MASCOTTEJohn P. Mascotte               |  | Director                                   |  | March 29, 2002

75



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CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES

SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

Years Ended December 31, 1999, 2000, and
2001


(In thousands)


|                                |      |           |   |            |  |             |   |               |  |  |   |       |  |  |   |       | 
|------------------------------- | ---- | --------- | - | ---------- |  | ----------- | - | ------------- |  |  | - | ----- |  |  | - | ----- | 
|                                |      | Balance   |   | Additions  |  |             |   |              
|                                |      | at        |   | Charged to |  | Write-Offs  |   |              
|                                |      | Beginning |   | Costs and  |  | of Accounts |   | Balance at   
|Description                     |      | of Period |   | Expenses   |  | Receivable  |   | End of Period
|                                |      |           |   |            |  |             |   |              
|Allowance for doubtful accounts |      |           |   |            |  |             |   |               |  |  |   |       |  |  |   |      
|                                | 1999 |           | $ | 71         |  |             | $ | 672           |  |  | $ | 48    |  |  | $ | 695   | 
|                                | 2000 |           |   | 695        |  |             |   | 3,440         |  |  |   | 1,218 |  |  |   | 2,917 | 
|                                | 2001 |           |   | 2,917      |  |             |   | 5,635         |  |  |   | 1,191 |  |  |   | 7,361 | 

76



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INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                                    |  |      |      | 
|------------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | 
|                                                                                                                    |  | Page
|                                                                                                                    |  |     
|Crown Media Holdings, Inc. and Subsidiaries
	Report of Independent Public Accountants                               |  |      | F-3  | 
|Consolidated Balance Sheets as of
	December 31, 2000 and 2001                                                       |  |      | F-4  | 
|Consolidated Statements of Operations and
	Comprehensive Loss for the Years Ended December 31, 1999,
	2000 and 2001 |  |      | F-6  | 
|Consolidated Statements of Stockholders
	Equity (Deficit) for the Years Ended December 31, 1999,
	2000 and 2001    |  |      | F-7  | 
|Consolidated Statements of Cash Flows for the
	Years Ended December 31, 1999, 2000 and 2001                         |  |      | F-8  | 
|Notes to Consolidated Financial Statements                                                                          |  |      | F-11 | 

F-1



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(This page intentionally left blank)

F-2



---



##### Table of Contents



REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

To Crown Media Holdings, Inc.:

We have audited the accompanying consolidated
balance sheets of Crown Media Holdings, Inc. (a Delaware
corporation) and subsidiaries as of December 31, 2000 and
2001, and the related consolidated statements of operations and
comprehensive loss, stockholders equity (deficit) and
cash flows for each of the three years in the period ended
December 31, 2001. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Crown Media Holdings, Inc.
and subsidiaries as of December 31, 2000 and 2001, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the
United States.



| |                    
| | -------------------
| | ARTHUR ANDERSEN LLP

Denver, Colorado

January 25, 2002 (except with respect to
certain


matters discussed in Note 17, as to which the


date is February 20, 2002).


F-3



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                                              |                      |                           |         |         |  |   |         |           | 
|--------------------------------------------------------------------------------------------- | -------------------- | ------------------------- | ------- | ------- |  | - | ------- | --------- | 
|                                                                                              |                      |                          
|                                                                                              |                      | As of December 31,       
|                                                                                              |                      |                          
|                                                                                              |                      | 2000                      |         | 2001   
|                                                                                              |                      |                           |         |        
|                                                                                              |                      |                          
|                                                                                              |                      | (In thousands,           
|                                                                                              |                      | except per share amounts)
|ASSETS                                                                                       
|                                                                                             
|Cash and cash equivalents                                                                     |                      | $                         | 34,274  |         |  | $ | 13,859  |          
|Cash in escrow                                                                                |                      |                           |        |         |  |   | 111,625 |          
|Accounts receivable, less allowance for doubtful
	accounts of $2,917 and $7,361, respectively |                      |                           | 18,159  |         |  |   | 29,911  |          
|Program license fees  affiliates, net
	of accumulated amortization                           |                      |                           | 20,107  |         |  |   | 12,199  |          
|Program license fees  non-affiliates,
	net of accumulated amortization                       |                      |                           | 24,908  |         |  |   | 35,425  |          
|Subtitling and dubbing, net of accumulated
	amortization                                      |                      |                           | 1,525   |         |  |   | 2,584   |          
|Prepaids and other assets                                                                     |                      |                           | 3,181   |         |  |   | 11,364  |          
|                                                                                              |                      |                           |         |         |  |   |         |          
|                                                                                              | Total current assets |                           |         | 102,154 |  |   |         | 216,967   | 
|Restricted cash                                                                               |                      |                           | 340     |         |  |   | 340     |          
|Accounts receivable, net of current portion                                                   |                      |                           | 3,074   |         |  |   | 6,253   |          
|Program license fees  affiliates, net
	of current portion                                    |                      |                           | 73,654  |         |  |   | 60,679  |          
|Program license fees  non-affiliates,
	net of current portion                                |                      |                           | 41,736  |         |  |   | 33,219  |          
|Subtitling and dubbing, net of current portion                                                |                      |                           | 4,227   |         |  |   | 4,795   |          
|Film assets, net of accumulated amortization                                                  |                      |                           |        |         |  |   | 808,138 |          
|Subscriber acquisition fees, net of accumulated
	amortization                                 |                      |                           | 29,670  |         |  |   | 126,965 |          
|Property and equipment, net of accumulated
	depreciation                                      |                      |                           | 31,067  |         |  |   | 43,882  |          
|Investment in/advances to unconsolidated entity                                               |                      |                           | 611     |         |  |   |        |          
|Goodwill, net of accumulated amortization                                                     |                      |                           | 240,141 |         |  |   | 314,033 |          
|Debt issuance costs, net of accumulated
	amortization                                         |                      |                           |        |         |  |   | 8,760   |          
|Prepaids and other assets, net of current portion                                             |                      |                           | 3,404   |         |  |   | 2,327   |          
|                                                                                              |                      |                           |         |         |  |   |         |          
|                                                                                              | Total assets         |                           | $       | 530,078 |  |   | $       | 1,626,358 | 
|                                                                                              |                      |                           |         |         |  |   |         |          

F-4



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS 
(Continued)

|                                                                                                                                                                                                                                                  |                                            |                           |          |         |  |   |           |           | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------- | -------- | ------- |  | - | --------- | --------- | 
|                                                                                                                                                                                                                                                  |                                            |                          
|                                                                                                                                                                                                                                                  |                                            | As of December 31,       
|                                                                                                                                                                                                                                                  |                                            |                          
|                                                                                                                                                                                                                                                  |                                            | 2000                      |          | 2001   
|                                                                                                                                                                                                                                                  |                                            |                           |          |        
|                                                                                                                                                                                                                                                  |                                            |                          
|                                                                                                                                                                                                                                                  |                                            | (In thousands,           
|                                                                                                                                                                                                                                                  |                                            | except per share amounts)
|                                                                                                                                                                                                                                                 
|LIABILITIES AND STOCKHOLDERS
	EQUITY                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                 
|LIABILITIES:                                                                                                                                                                                                                                      |                                            |                           |          |         |  |   |           |          
|Accounts payable and accrued liabilities                                                                                                                                                                                                          |                                            | $                         | 26,027   |         |  | $ | 38,842    |          
|Subscriber acquisition fees payable                                                                                                                                                                                                               |                                            |                           | 27,770   |         |  |   | 23,020    |          
|License fees payable to affiliates                                                                                                                                                                                                                |                                            |                           | 82,571   |         |  |   |          |          
|License fees payable to non-affiliates                                                                                                                                                                                                            |                                            |                           | 26,869   |         |  |   | 33,088    |          
|Payables to affiliates                                                                                                                                                                                                                            |                                            |                           | 7,023    |         |  |   | 5,952     |          
|Notes and interest payable to HC Crown                                                                                                                                                                                                            |                                            |                           | 37,549   |         |  |   |          |          
|JP Morgan Chase credit facility and interest
	payable                                                                                                                                                                                             |                                            |                           |         |         |  |   | 111,905   |          
|Capital lease obligation                                                                                                                                                                                                                          |                                            |                           |         |         |  |   | 1,318     |          
|Deferred programming revenue                                                                                                                                                                                                                      |                                            |                           | 713      |         |  |   | 1,316     |          
|                                                                                                                                                                                                                                                  |                                            |                           |          |         |  |   |           |          
|                                                                                                                                                                                                                                                  | Total current liabilities                  |                           |          | 208,522 |  |   |           | 215,441   | 
|Accrued liabilities, net of current portion                                                                                                                                                                                                       |                                            |                           | 18       |         |  |   | 934       |          
|Subscriber acquisition fees payable, net of
	current portion                                                                                                                                                                                      |                                            |                           |         |         |  |   | 5,262     |          
|License fees payable to affiliates, net of
	current portion                                                                                                                                                                                       |                                            |                           | 27,309   |         |  |   | 62,299    |          
|License fees payable to non-affiliates, net of
	current portion                                                                                                                                                                                   |                                            |                           | 22,421   |         |  |   | 23,127    |          
|JP Morgan Chase credit facility, net of current
	portion                                                                                                                                                                                          |                                            |                           |         |         |  |   | 151,438   |          
|Capital lease obligation, net of current portion                                                                                                                                                                                                  |                                            |                           |         |         |  |   | 10,723    |          
|Convertible debt                                                                                                                                                                                                                                  |                                            |                           |         |         |  |   | 43,733    |          
|Derivative liability                                                                                                                                                                                                                              |                                            |                           |         |         |  |   | 12,495    |          
|Payable to Hallmark Entertainment Holdings                                                                                                                                                                                                        |                                            |                           |         |         |  |   | 52,052    |          
|Payable to Hallmark
	Entertainment, Inc.                                                                                                                                                                                                          |                                            |                           |         |         |  |   | 47,948    |          
|                                                                                                                                                                                                                                                  |                                            |                           |          |         |  |   |           |          
|                                                                                                                                                                                                                                                  | Total liabilities                          |                           |          | 258,270 |  |   |           | 625,452   | 
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                     |                                            |                           |          |         |  |   |           |          
|GUARANTEED PREFERRED BENEFICIAL INTEREST IN CROWN
	MEDIA TRUSTS DEBENTURES                                                                                                                                                                       |                                            |                           |         |         |  |   | 199,040   |          
|PREFERRED MINORITY INTEREST                                                                                                                                                                                                                       |                                            |                           | 25,000   |         |  |   | 25,000    |          
|STOCKHOLDERS EQUITY:                                                                                                                                                                                                                             |                                            |                           |          |         |  |   |           |          
|Class A common stock, $.01 par value;
	150,000,000 and 200,000,000 shares authorized; issued
	shares of 34,730,505 and 73,913,395, respectively; outstanding
	shares of 29,352,784 and 73,488,395 as of December 31, 2000
	and 2001, respectively |                                            |                           | 294      |         |  |   | 735       |          
|Class B common stock, $.01 par value;
	120,000,000 shares authorized; issued and outstanding
	shares of 30,670,422 as of December 31, 2000 and 2001,
	respectively                                                                                |                                            |                           | 307      |         |  |   | 307       |          
|Paid-in capital                                                                                                                                                                                                                                   |                                            |                           | 496,697  |         |  |   | 1,256,754 |          
|Accumulated other comprehensive loss                                                                                                                                                                                                              |                                            |                           | (12      | )       |  |   | (620      | )        
|Accumulated deficit                                                                                                                                                                                                                               |                                            |                           | (250,478 | )       |  |   | (480,310  | )        
|                                                                                                                                                                                                                                                  |                                            |                           |          |         |  |   |           |          
|                                                                                                                                                                                                                                                  | Total stockholders equity                 |                           |          | 246,808 |  |   |           | 776,866   | 
|                                                                                                                                                                                                                                                  |                                            |                           |          |         |  |   |           |          
|                                                                                                                                                                                                                                                  | Total liabilities and stockholders equity |                           | $        | 530,078 |  |   | $         | 1,626,358 | 
|                                                                                                                                                                                                                                                  |                                            |                           |          |         |  |   |           |          

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

F-5



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS

|                                                                                      |                                         |                           |                              |        |        |         |        |        |        |          |         |        |        |          |  
|------------------------------------------------------------------------------------- | --------------------------------------- | ------------------------- | ---------------------------- | ------ | ------ | ------- | ------ | ------ | ------ | -------- | ------- | ------ | ------ | -------- | -
|                                                                                      |                                         |                          
|                                                                                      |                                         | Years Ended December 31, 
|                                                                                      |                                         |                          
|                                                                                      |                                         | 1999                      |                              | 2000   |        | 2001   
|                                                                                      |                                         |                           |                              |        |        |        
|                                                                                      |                                         |                          
|                                                                                      |                                         | (In thousands,           
|                                                                                      |                                         | except per share amounts)
|Revenues:                                                                             |                                         |                           |                              |        |        |         |        |        |        |          |         |       
|                                                                                      | Subscriber fees                         |                           | $                            | 27,670 |        |         | $      | 47,921 |        |          | $       | 66,537 |       
|                                                                                      | Advertising                             |                           |                              | 1,729  |        |         |        | 13,972 |        |          |         | 32,493 |       
|                                                                                      | Advertising by Hallmark Cards           |                           |                              |       |        |         |        | 2,044  |        |          |         | 5,020  |       
|                                                                                      | Licensing fees                          |                           |                              |       |        |         |        |       |        |          |         | 2,267  |       
|                                                                                      | Management and other fees               |                           |                              | 2,510  |        |         |        | 2,879  |        |          |         | 740    |       
|                                                                                      |                                         |                           |                              |        |        |         |        |        |        |          |         |       
|                                                                                      |                                         |                           | Total revenues               |        |        | 31,909  |        |        |        | 66,816   |         |        |        | 107,057  |  
|Cost of Services:                                                                     |                                         |                           |                              |        |        |         |        |        |        |          |         |       
|                                                                                      | Programming costs:                      |                           |                              |        |        |         |        |        |        |          |         |        |       
|                                                                                      |                                         | Affiliates                |                              |        | 12,331 |         |        |        | 31,307 |          |         |        | 55,027 |         
|                                                                                      |                                         | Non-affiliates            |                              |        | 10,452 |         |        |        | 18,933 |          |         |        | 62,158 |         
|                                                                                      | Amortization of film library            |                           |                              |       |        |         |        |       |        |          |         | 3,533  |       
|                                                                                      | Operating costs                         |                           |                              | 18,796 |        |         |        | 40,444 |        |          |         | 65,134 |       
|                                                                                      |                                         |                           |                              |        |        |         |        |        |        |          |         |       
|                                                                                      |                                         |                           | Total cost of services       |        |        | 41,579  |        |        |        | 90,684   |         |        |        | 185,852  |  
|Selling, general and administrative expenses                                          |                                         |                           | 22,851                       |        |        |         | 51,791 |        |        |          | 87,065  |       
|Marketing expenses                                                                    |                                         |                           | 3,426                        |        |        |         | 21,280 |        |        |          | 34,809  |       
|Amortization of goodwill                                                              |                                         |                           |                             |        |        |         | 8,639  |        |        |          | 20,032  |       
|                                                                                      |                                         |                           |                              |        |        |         |        |        |        |          |         |       
|                                                                                      |                                         |                           | Loss from operations         |        |        | (35,947 | )      |        |        | (105,578 | )       |        |        | (220,701 | )
|Equity in net losses of unconsolidated entities                                       |                                         |                           | (18,992                      | )      |        |         | (9,328 | )      |        |          | (655    | )     
|Guaranteed preferred beneficial accretion and
	interest expense                       |                                         |                           |                             |        |        |         |       |        |        |          | (1,428  | )     
|Interest income (expense), net                                                        |                                         |                           | 798                          |        |        |         | 523    |        |        |          | (10,392 | )     
|                                                                                      |                                         |                           |                              |        |        |         |        |        |        |          |         |       
|                                                                                      |                                         |                           | Net loss before income taxes |        |        | (54,141 | )      |        |        | (114,383 | )       |        |        | (233,176 | )
|Income tax (provision) benefit                                                        |                                         |                           | (2,556                       | )      |        |         | (1,743 | )      |        |          | 3,344   |       
|                                                                                      |                                         |                           |                              |        |        |         |        |        |        |          |         |       
|                                                                                      |                                         |                           | Net loss                     |        | $      | (56,697 | )      |        | $      | (116,126 | )       |        | $      | (229,832 | )
|                                                                                      |                                         |                           |                              |        |        |         |        |        |        |          |         |       
|Other comprehensive loss:                                                             |                                         |                           |                              |        |        |         |        |        |        |          |         |       
|                                                                                      | Loss on fair value of derivative        |                           |                              |       |        |         |        |       |        |          |         | (204   | )     
|                                                                                      | Foreign currency translation adjustment |                           |                              |       |        |         |        | (12    | )      |          |         | (404   | )     
|                                                                                      |                                         |                           |                              |        |        |         |        |        |        |          |         |       
|                                                                                      |                                         |                           | Comprehensive loss           |        | $      | (56,697 | )      |        | $      | (116,138 | )       |        | $      | (230,440 | )
|                                                                                      |                                         |                           |                              |        |        |         |        |        |        |          |         |       
|Weighted average number of Class A and
	Class B shares outstanding, basic and diluted |                                         |                           | 32,989                       |        |        |         | 50,786 |        |        |          | 74,691  |       
|                                                                                      |                                         |                           |                              |        |        |         |        |        |        |          |         |       
|Net loss per share, basic and diluted                                                 |                                         | $                         | (1.84                        | )      |        | $       | (2.32  | )      |        | $        | (3.08   | )     
|                                                                                      |                                         |                           |                              |        |        |         |        |        |        |          |         |       

The accompanying notes are an integral part of
these

consolidated statements of operations and
comprehensive loss.


F-6



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY (DEFICIT)

|                            |                                                                                                       |                |        |         |  |         |     |         |  |         |        |               |  |             |     |               |  |   |           |         |  |   |      |      |   |   |          |          |   |   |         |          |  
|--------------------------- | ----------------------------------------------------------------------------------------------------- | -------------- | ------ | ------- |  | ------- | --- | ------- |  | ------- | ------ | ------------- |  | ----------- | --- | ------------- |  | - | --------- | ------- |  | - | ---- | ---- | - | - | -------- | -------- | - | - | ------- | -------- | -
|                            |                                                                                                       |                |        |         |  |         |     |         |  |         |        | Accumulated   |  |             |     | Total        
|                            |                                                                                                       |                |        | Class A |  |         |     | Class B |  |         |        | Other         |  |             |     | Stockholders
|                            |                                                                                                       | Class A        |        | Common  |  | Class B |     | Common  |  | Paid-in |        | Comprehensive |  | Accumulated |     | Equity       
|                            |                                                                                                       | Shares         |        | Stock   |  | Shares  |     | Stock   |  | Capital |        | Loss          |  | Deficit     |     | (Deficit)    
|                            |                                                                                                       |                |        |         |  |         |     |         |  |         |        |               |  |             |     |              
|                            |                                                                                                       |               
|                            |                                                                                                       | (In thousands)
|Balances, December 31, 1998 |                                                                                                       |                |       |         |  | $       |    |         |  |         | 28,830 |               |  | $           | 288 |               |  | $ | 51,836    |         |  | $ |     |      |   | $ | (72,321  | )        |   | $ | (20,197 | )       
|                            | Hallmark Entertainment capital contribution
	related to investment in Crown Media United States       |                |        |        |  |         |     |        |  |         |        | 1,227         |  |             |     | 12            |  |   |           | 17,765  |  |   |      |     |   |   |          |         |   |   |         | 17,777   |  
|                            | Accretion related to predecessor Class B
	common stock subject to put and call                        |                |        |        |  |         |     |        |  |         |        |              |  |             |     |              |  |   |           |        |  |   |      |     |   |   |          | (3,850   | ) |   |         | (3,850   | )
|                            | Net loss                                                                                              |                |        |        |  |         |     |        |  |         |        |              |  |             |     |              |  |   |           |        |  |   |      |     |   |   |          | (56,697  | ) |   |         | (56,697  | )
|                            |                                                                                                       |                |        |         |  |         |     |         |  |         |        |               |  |             |     |               |  |   |           |         |  |   |      |      |   |   |          |          |   |   |         |         
|Balances, December 31, 1999 |                                                                                                       |                |       |         |  |         |    |         |  |         | 30,057 |               |  |             | 300 |               |  |   | 69,601    |         |  |   |     |      |   |   | (132,868 | )        |   |   | (62,967 | )       
|                            | Hallmark Entertainment, Inc. capital contribution
	related to investment in Crown Media United States |                |        |        |  |         |     |        |  |         |        | 613           |  |             |     | 7             |  |   |           | 8,882   |  |   |      |     |   |   |          |         |   |   |         | 8,889    |  
|                            | Accretion related to predecessor Class B
	common stock subject to put and call                        |                |        |        |  |         |     |        |  |         |        |              |  |             |     |              |  |   |           |        |  |   |      |     |   |   |          | (1,484   | ) |   |         | (1,484   | )
|                            | Conversion of JP Morgan Chase predecessor
	Class B common stock to Class A common stock               |                |        | 3,837   |  |         |     | 38      |  |         |        |              |  |             |     |              |  |   |           | 62,896  |  |   |      |     |   |   |          |         |   |   |         | 62,934   |  
|                            | Issuance of Class A common stock in
	connection with the initial public offering                      |                |        | 10,000  |  |         |     | 100     |  |         |        |              |  |             |     |              |  |   |           | 125,251 |  |   |      |     |   |   |          |         |   |   |         | 125,351  |  
|                            | Issuance of Class A common stock in
	connection with the acquisition of Crown Media United States     |                |        | 15,493  |  |         |     | 155     |  |         |        |              |  |             |     |              |  |   |           | 216,746 |  |   |      |     |   |   |          |         |   |   |         | 216,901  |  
|                            | Issuance of stock for exercise of options                                                             |                |        | 23      |  |         |     | 1       |  |         |        |              |  |             |     |              |  |   |           | 193     |  |   |      |     |   |   |          |         |   |   |         | 194      |  
|                            | Stock-based compensation                                                                              |                |        |        |  |         |     |        |  |         |        |              |  |             |     |              |  |   |           | 13,128  |  |   |      |     |   |   |          |         |   |   |         | 13,128   |  
|                            | Foreign currency translation adjustment                                                               |                |        |        |  |         |     |        |  |         |        |              |  |             |     |              |  |   |           |        |  |   |      | (12  | ) |   |          |         |   |   |         | (12      | )
|                            | Net loss                                                                                              |                |        |        |  |         |     |        |  |         |        |              |  |             |     |              |  |   |           |        |  |   |      |     |   |   |          | (116,126 | ) |   |         | (116,126 | )
|                            |                                                                                                       |                |        |         |  |         |     |         |  |         |        |               |  |             |     |               |  |   |           |         |  |   |      |      |   |   |          |          |   |   |         |         
|Balances, December 31, 2000 |                                                                                                       |                | 29,353 |         |  |         | 294 |         |  |         | 30,670 |               |  |             | 307 |               |  |   | 496,697   |         |  |   | (12  | )    |   |   | (250,478 | )        |   |   | 246,808 |         
|                            | Issuance of Class A common stock in
	connection with the EM.TV transaction                            |                |        | 5,378   |  |         |     | 53      |  |         |        |              |  |             |     |              |  |   |           | 85,766  |  |   |      |     |   |   |          |         |   |   |         | 85,819   |  
|                            | Issuance of Class A common stock in
	connection with the DirecTV transaction                          |                |        | 5,360   |  |         |     | 54      |  |         |        |              |  |             |     |              |  |   |           | 80,081  |  |   |      |     |   |   |          |         |   |   |         | 80,135   |  
|                            | Issuance of Class A common stock in
	connection with the library transaction                          |                |        | 33,320  |  |         |     | 333     |  |         |        |              |  |             |     |              |  |   |           | 591,899 |  |   |      |     |   |   |          |         |   |   |         | 592,232  |  
|                            | Issuance of stock for exercise of options                                                             |                |        | 77      |  |         |     | 1       |  |         |        |              |  |             |     |              |  |   |           | 806     |  |   |      |     |   |   |          |         |   |   |         | 807      |  
|                            | Stock-based compensation                                                                              |                |        |        |  |         |     |        |  |         |        |              |  |             |     |              |  |   |           | 1,505   |  |   |      |     |   |   |          |         |   |   |         | 1,505    |  
|                            | Foreign currency translation adjustment                                                               |                |        |        |  |         |     |        |  |         |        |              |  |             |     |              |  |   |           |        |  |   |      | (404 | ) |   |          |         |   |   |         | (404     | )
|                            | Loss on fair value of derivative                                                                      |                |        |        |  |         |     |        |  |         |        |              |  |             |     |              |  |   |           |        |  |   |      | (204 | ) |   |          |         |   |   |         | (204     | )
|                            | Net loss                                                                                              |                |        |        |  |         |     |        |  |         |        |              |  |             |     |              |  |   |           |        |  |   |      |     |   |   |          | (229,832 | ) |   |         | (229,832 | )
|                            |                                                                                                       |                |        |         |  |         |     |         |  |         |        |               |  |             |     |               |  |   |           |         |  |   |      |      |   |   |          |          |   |   |         |         
|Balances, December 31, 2001 |                                                                                                       |                | 73,488 |         |  | $       | 735 |         |  |         | 30,670 |               |  | $           | 307 |               |  | $ | 1,256,754 |         |  | $ | (620 | )    |   | $ | (480,310 | )        |   | $ | 776,866 |         
|                            |                                                                                                       |                |        |         |  |         |     |         |  |         |        |               |  |             |     |               |  |   |           |         |  |   |      |      |   |   |          |          |   |   |         |         

The accompanying notes are an integral part of
these

consolidated statements of stockholders
equity (deficit).


F-7



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                      |                                                                              |                                                        |                                                                  |                                                      |        |         |         |          |        |          |          |          |         |         |          |  
|------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------ | ---------------------------------------------------------------- | ---------------------------------------------------- | ------ | ------- | ------- | -------- | ------ | -------- | -------- | -------- | ------- | ------- | -------- | -
|                                      |                                                                              |                                                       
|                                      |                                                                              | Years Ended December 31,                              
|                                      |                                                                              |                                                       
|                                      |                                                                              | 1999                                                   |                                                                  | 2000                                                 |        | 2001   
|                                      |                                                                              |                                                        |                                                                  |                                                      |        |        
|                                      |                                                                              |                                                       
|                                      |                                                                              | (In thousands)                                        
|CASH FLOWS FROM OPERATING ACTIVITIES: |                                                                              |                                                        |                                                                  |                                                      |        |         |         |          |        |          |          |         
|                                      | Net loss                                                                     |                                                        | $                                                                | (56,697                                              | )      |         | $       | (116,126 | )      |          | $        | (229,832 | )      
|                                      | Adjustments to reconcile net loss to net cash
	used in operating activities: |                                                        |                                                                  |                                                      |        |         |         |          |        |          |          |          |        
|                                      |                                                                              | Loss on sale of property and equipment                 |                                                                  |                                                      |       |         |         |          | 5      |          |          |          | 740     |        
|                                      |                                                                              | Amortization and depreciation                          |                                                                  |                                                      | 29,340 |         |         |          | 66,562 |          |          |          | 152,615 |        
|                                      |                                                                              | Accretion on guaranteed preferred beneficial
	interest |                                                                  |                                                      |       |         |         |          |       |          |          |          | 1,428   |        
|                                      |                                                                              | Accretion on convertible debt                          |                                                                  |                                                      |       |         |         |          |       |          |          |          | 859     |        
|                                      |                                                                              | Provision for allowance for doubtful accounts          |                                                                  |                                                      | 672    |         |         |          | 3,440  |          |          |          | 5,638   |        
|                                      |                                                                              | Equity in net losses of unconsolidated
	subsidiaries   |                                                                  |                                                      | 17,343 |         |         |          | 9,328  |          |          |          | 655     |        
|                                      |                                                                              | Deferred and stock-based compensation                  |                                                                  |                                                      | 6,806  |         |         |          | 13,128 |          |          |          | 1,505   |        
|                                      |                                                                              | Provision for deferred taxes                           |                                                                  |                                                      | 1,600  |         |         |          |       |          |          |          | (5,320  | )      
|                                      |                                                                              | Changes in operating assets and liabilities:           |                                                                  |                                                      |        |         |         |          |        |          |          |          |         |        
|                                      |                                                                              |                                                        | Increase in accounts receivable                                  |                                                      |        | (3,214  | )       |          |        | (13,137  | )        |          |         | (20,463 | )       
|                                      |                                                                              |                                                        | Additions to program license fees                                |                                                      |        | (21,184 | )       |          |        | (105,151 | )        |          |         | (95,629 | )       
|                                      |                                                                              |                                                        | Increase in subtitling and dubbing                               |                                                      |        | (2,596  | )       |          |        | (3,278   | )        |          |         | (4,644  | )       
|                                      |                                                                              |                                                        | Additions to subscriber acquisition fees                         |                                                      |        |        |         |          |        | (8,462   | )        |          |         | (30,187 | )       
|                                      |                                                                              |                                                        | (Increase) decrease in prepaids and other assets                 |                                                      |        | 844     |         |          |        | (2,606   | )        |          |         | (8,222  | )       
|                                      |                                                                              |                                                        | Increase (decrease) in accounts payable and
	accrued liabilities |                                                      |        | (3,774  | )       |          |        | 32,966   |          |          |         | 21,503  |         
|                                      |                                                                              |                                                        | Increase in interest payable                                     |                                                      |        | 49      |         |          |        | 700      |          |          |         | 187     |         
|                                      |                                                                              |                                                        | Increase in subscriber acquisition fees payable                  |                                                      |        |        |         |          |        | 560      |          |          |         | 512     |         
|                                      |                                                                              |                                                        | Increase (decrease) in affiliate license fees
	payable           |                                                      |        | 4,361   |         |          |        | 20,563   |          |          |         | (36,613 | )       
|                                      |                                                                              |                                                        | Decrease in payables to affiliates                               |                                                      |        |        |         |          |        | (2,220   | )        |          |         | (1,071  | )       
|                                      |                                                                              |                                                        | Increase (decrease) in deferred programming
	revenue             |                                                      |        | (2,632  | )       |          |        | (1,536   | )        |          |         | 603     |         
|                                      |                                                                              |                                                        |                                                                  |                                                      |        |         |         |          |        |          |          |         
|                                      |                                                                              |                                                        |                                                                  | Net cash used in operating activities                |        |         | (29,082 | )        |        |          | (105,264 | )        |         |         | (245,736 | )
|                                      |                                                                              |                                                        |                                                                  |                                                      |        |         |         |          |        |          |          |         
|CASH FLOWS FROM INVESTING ACTIVITIES: |                                                                              |                                                        |                                                                  |                                                      |        |         |         |          |        |          |          |         
|                                      | Purchases of property and equipment                                          |                                                        |                                                                  | (2,569                                               | )      |         |         | (22,809  | )      |          |          | (11,150  | )      
|                                      | Proceeds from disposition of property and
	equipment                         |                                                        |                                                                  |                                                     |        |         |         | 117      |        |          |          | 518      |        
|                                      | Investment in the Kermit Channel                                             |                                                        |                                                                  | (5,094                                               | )      |         |         | (4,318   | )      |          |          |         |        
|                                      | Other investments in and issuance of note
	receivable                        |                                                        |                                                                  |                                                     |        |         |         | (180     | )      |          |          |         |        
|                                      | Cash acquired from the purchase of Crown Media
	United States                |                                                        |                                                                  |                                                     |        |         |         | 13,055   |        |          |          |         |        
|                                      | Acquisition of H&H Programming 
	Asia, net of cash acquired                 |                                                        |                                                                  |                                                     |        |         |         |         |        |          |          | (690     | )      
|                                      | Proceeds from note receivable from Hallmark
	Entertainment                   |                                                        |                                                                  | 25,000                                               |        |         |         |         |        |          |          |         |        
|                                      |                                                                              |                                                        |                                                                  |                                                      |        |         |         |          |        |          |          |         
|                                      |                                                                              |                                                        |                                                                  | Net cash provided by (used in) investing
	activities |        |         | 17,337  |          |        |          | (14,135  | )        |         |         | (11,322  | )
|                                      |                                                                              |                                                        |                                                                  |                                                      |        |         |         |          |        |          |          |         

F-8



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH
FLOWS  (Continued)

|                                                                                         |                                                                                |                                                       |       |         |        |      |        |         |         |   |        |          |         |  
|---------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ----------------------------------------------------- | ----- | ------- | ------ | ---- | ------ | ------- | ------- | - | ------ | -------- | ------- | -
|                                                                                         |                                                                                |                                                      
|                                                                                         |                                                                                | Years Ended December 31,                             
|                                                                                         |                                                                                |                                                      
|                                                                                         |                                                                                | 1999                                                  |       | 2000    |        | 2001
|                                                                                         |                                                                                |                                                       |       |         |        |     
|                                                                                         |                                                                                |                                                      
|                                                                                         |                                                                                | (In thousands)                                       
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                    |                                                                                |                                                       |       |         |        |      |        |         |         |   |        |         
|                                                                                         | Proceeds from the issuance of common stock, net
	of issuance costs             |                                                       |       |        |        |      |        | 125,351 |         |   |        | 54       |        
|                                                                                         | Proceeds from the issuance of common stock due to
	exercise of stock options   |                                                       |       |        |        |      |        | 194     |         |   |        | 807      |        
|                                                                                         | Proceeds from the issuance of predecessor common
	stock                        |                                                       |       | 20,000  |        |      |        | 10,000  |         |   |        |         |        
|                                                                                         | Proceeds from the issuance of trust preferred
	securities                      |                                                       |       |        |        |      |        |        |         |   |        | 251,625  |        
|                                                                                         | Borrowings from HC Crown note payable                                          |                                                       |       | 12,733  |        |      |        | 24,138  |         |   |        | 116,220  |        
|                                                                                         | Borrowings from JP Morgan Chase credit facility                                |                                                       |       |        |        |      |        |        |         |   |        | 263,070  |        
|                                                                                         | Payments on borrowings on HC Crown note payable                                |                                                       |       |        |        |      |        |        |         |   |        | (153,021 | )      
|                                                                                         | Payments on borrowings from JP Morgan Chase
	credit facility                   |                                                       |       |        |        |      |        |        |         |   |        | (123,763 | )      
|                                                                                         | Payments on Crown Media United States note payable                             |                                                       |       | (20,000 | )      |      |        | (10,000 | )       |   |        |         |        
|                                                                                         | Increase in cash in escrow                                                     |                                                       |       |        |        |      |        |        |         |   |        | (111,625 | )      
|                                                                                         | Debt issuance costs                                                            |                                                       |       |        |        |      |        |        |         |   |        | (5,467   | )      
|                                                                                         | Principal payments under capital lease obligation                              |                                                       |       |        |        |      |        |        |         |   |        | (1,211   | )      
|                                                                                         |                                                                                |                                                       |       |         |        |      |        |         |         |   |        |         
|                                                                                         |                                                                                | Net cash provided by financing activities             |       |         | 12,733 |      |        |         | 149,683 |   |        |          | 236,689 |  
|                                                                                         | Effect of exchange rate changes on cash                                        |                                                       |       |        |        |      |        | 125     |         |   |        | (46      | )      
|                                                                                         |                                                                                |                                                       |       |         |        |      |        |         |         |   |        |         
|                                                                                         |                                                                                | Net increase (decrease) in cash and cash
	equivalents |       |         | 988    |      |        |         | 30,409  |   |        |          | (20,415 | )
|Cash and cash equivalents, beginning of period                                           |                                                                                |                                                       | 2,877 |         |        |      | 3,865  |         |         |   | 34,274 |         
|                                                                                         |                                                                                |                                                       |       |         |        |      |        |         |         |   |        |         
|Cash and cash equivalents, end of period                                                 |                                                                                | $                                                     | 3,865 |         |        | $    | 34,274 |         |         | $ | 13,859 |         
|                                                                                         |                                                                                |                                                       |       |         |        |      |        |         |         |   |        |         
|Supplemental disclosure of cash and non-cash
	activities:                                |                                                                                |                                                       |       |         |        |      |        |         |         |   |        |         
|                                                                                         | Interest paid                                                                  |                                                       | $     | 21      |        |      | $      | 3,039   |         |   | $      | 6,393    |        
|                                                                                         | Income taxes paid                                                              |                                                       | $     | 956     |        |      | $      | 1,743   |         |   | $      | 1,976    |        
|                                                                                         | Accretion related to predecessor Class B
	common stock subject to put and call |                                                       | $     | 3,850   |        |      | $      | 1,484   |         |   | $      |         |        
|                                                                                         | Stock-based compensation                                                       |                                                       | $     |        |        |      | $      | 13,128  |         |   | $      | 1,505    |        
|                                                                                         | Conversion of predecessor Class B common
	stock to Class A common stock        |                                                       | $     |        |        |      | $      | 62,934  |         |   | $      |         |        
|                                                                                         | Asset acquired through capital lease obligation                                |                                                       | $     |        |        |      | $      |        |         |   | $      | 13,252   |        
|                                                                                         | Asset acquired through exchange                                                |                                                       | $     |        |        |      | $      |        |         |   | $      | 1,132    |        
|                                                                                         | Change in fair value of derivative asset                                       |                                                       | $     |        |        |      | $      |        |         |   | $      | 204      |        
|Purchase of Crown Media United States and H&H
	Programming  Asia, net of cash acquired: |                                                                                |                                                       |       |         |        |      |        |         |         |   |        |         
|                                                                                         | Accounts receivable and other assets                                           |                                                       | $     |        |        |      | $      | 12,571  |         |   | $      | 1,622    |        
|                                                                                         | Program license fees                                                           |                                                       |       |        |        |      |        | 84,079  |         |   |        | 2,678    |        
|                                                                                         | Subscriber acquisition fees                                                    |                                                       |       |        |        |      |        | 24,422  |         |   |        |         |        
|                                                                                         | Goodwill                                                                       |                                                       |       |        |        |      |        | 248,780 |         |   |        | 93,924   |        
|                                                                                         | Accounts payable and other liabilities                                         |                                                       |       |        |        |      |        | 18,951  |         |   |        | 3,227    |        
|                                                                                         | Subscriber acquisition fees payable                                            |                                                       |       |        |        |      |        | 27,210  |         |   |        |         |        
|                                                                                         | JP Morgan Chase credit facility                                                |                                                       |       |        |        |      |        |        |         |   |        | 3,100    |        
|                                                                                         | Affiliate license fees payable                                                 |                                                       |       |        |        |      |        | 64,317  |         |   |        | 5,388    |        
|                                                                                         | Preferred minority interest                                                    |                                                       |       |        |        |      |        | 25,000  |         |   |        |         |        
|                                                                                         | Issuance of Class A common stock                                               |                                                       |       |        |        |      |        | 216,901 |         |   |        | 85,819   |        

F-9



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH
FLOWS  (Continued)

|                                       |                                                  |                          |   |      |  |      |   |   |  |  |   |         | 
|-------------------------------------- | ------------------------------------------------ | ------------------------ | - | ---- |  | ---- | - | - |  |  | - | ------- | 
|                                       |                                                  |                         
|                                       |                                                  | Years Ended December 31,
|                                       |                                                  |                         
|                                       |                                                  | 1999                     |   | 2000 |  | 2001
|                                       |                                                  |                          |   |      |  |     
|                                       |                                                  |                         
|                                       |                                                  | (In thousands)          
|Purchase of film assets:               |                                                  |                          |   |      |  |      |   |   |  |  |   |        
|                                       | Film assets                                      |                          | $ |     |  |      | $ |  |  |  | $ | 810,928 | 
|                                       | Accounts receivable                              |                          |   |     |  |      |   |  |  |  |   | 4,651   | 
|                                       | Receivable from affiliate                        |                          |   |     |  |      |   |  |  |  |   | 1,515   | 
|                                       | Deferred tax asset valuation allowance reduction |                          |   |     |  |      |   |  |  |  |   | 95,314  | 
|                                       | Derivative asset                                 |                          |   |     |  |      |   |  |  |  |   | 458     | 
|                                       | Payables to affiliates                           |                          |   |     |  |      |   |  |  |  |   | 100,000 | 
|                                       | JP Morgan Chase credit facility                  |                          |   |     |  |      |   |  |  |  |   | 120,000 | 
|                                       | Deferred tax liability                           |                          |   |     |  |      |   |  |  |  |   | 100,634 | 
|                                       | Issuance of Class A common stock                 |                          |   |     |  |      |   |  |  |  |   | 592,232 | 
|Subscriber acquisition and other fees: |                                                  |                          |   |      |  |      |   |   |  |  |   |        
|                                       | Subscriber acquisition and other fees            |                          | $ |     |  |      | $ |  |  |  | $ | 80,081  | 
|                                       | Issuance of Class A common stock                 |                          |   |     |  |      |   |  |  |  |   | 80,081  | 

The accompanying notes are an integral part of
these

consolidated statements of cash flows.


F-10



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

For the Years Ended December 31, 1999,
2000 and 2001


1.     Business and
Organization



| |             
| | ------------
| | Organization

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

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

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

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

F-11



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |          
| | ---------
| | Liquidity

In connection with our growth strategy, we expect
that we will continue to make significant investments in
programming, distribution and technology, as well as additional
investments in infrastructure and facilities. The Companys
principal sources of funds are expected to be cash generated
from operations (before interest), cash on hand and available
borrowings under the credit facility and the HC Crown line of
credit. The credit facility and the preferred securities contain
certain provisions that by their terms limit Crown Media
Holdings and/or its subsidiaries ability to, among other
things, incur additional debt. The Companys principal uses
of funds are expected to be the payment of operating expenses
(including but not limited to licensing programming from third
parties), working capital, capital expenditure requirements, and
debt service payments.

The Companys financial position and
operations have changed significantly during 2001. Substantial
revenue producing assets were acquired through the issuance of
debt and stock. In March 2001, we acquired 22.5% of Crown Media
United States and 50% of H&H Programming-Asia for
approximately $85.8 million in stock. In August 2001, we
issued $80.1 million of common stock for additional
carriage on a cable system. In September 2001, we acquired
approximately 700 films for $592.0 million in common stock
and assumption of $220.0 million of debt. The expectation
is that these additional assets will provide substantial revenue
for the foreseeable future. Our continuing use of cash in
operations has resulted in several new financings. In September
2001, we established a bank credit facility of
$285.0 million, which was subsequently increased in
December 2001, to $320.0 million. In December 2001, we also
issued $265.0 million of preferred securities in a private
placement transaction. After reducing existing debt with a
majority of the proceeds from the private placement, we had an
available cash balance of $13.9 million at
December 31, 2001. In addition, as of January 25,
2002, we have $147.9 million available under the bank
credit facility and $75.0 million available under the HC
Crown line of credit. We believe that this available credit,
together with cash generated from operations and cash on-hand,
will be sufficient for our liquidity needs through at least
March 31, 2003.

2.     Summary of
Significant Accounting Policies



| |                            
| | ---------------------------
| | Principles of Consolidation

The consolidated financial statements include the
consolidated accounts of Crown Media Holdings and those of its
wholly owned and majority-owned and controlled subsidiaries.
Historically, we held investments in entities that were not
majority-owned and controlled by Crown Media Holdings, which
were accounted for under the equity method. All significant
intercompany balances and transactions have been eliminated in
consolidation.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

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



| |               
| | --------------
| | Cash in Escrow

Crown Media Holdings placed $111.6 million
of proceeds from its private placement transaction in an escrow
account until certain current borrowings matured on
January 7, 2002. Use of these proceeds was restricted by
our bank credit facility and were used on January 7, 2002,
to reduce amounts under the bank credit facility.

F-12



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                
| | ---------------
| | 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 United States pay
television distributors based on number of subscribers, which
carry the Hallmark Channel on some of their cable, satellite,
terrestrial television, or satellite master antenna television
systems. Crown Media United States is obligated to pay
subscriber acquisition fees, if certain subscriber levels are
met, as defined in certain of these agreements, or in order to
obtain carriage of the Hallmark Channel by those distributors.

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

Subscriber acquisition and other fees are
comprised of the following:

|                                                        |                                                              |                |        |        |  |   |         |         | 
|------------------------------------------------------- | ------------------------------------------------------------ | -------------- | ------ | ------ |  | - | ------- | ------- | 
|                                                        |                                                              | 2000           |        | 2001  
|                                                        |                                                              |                |        |       
|                                                        |                                                              |               
|                                                        |                                                              | (In thousands)
|Balance at cost, January 1                              |                                                              | $              |       |        |  | $ | 32,884  |        
|Acquired through purchase of Crown Media United
	States |                                                              |                | 24,422 |        |  |   |        |        
|Additions due to distribution agreements                |                                                              |                | 8,462  |        |  |   | 110,269 |        
|                                                        |                                                              |                |        |        |  |   |         |        
|                                                        | Subscriber acquisition and other fees, at cost,
	December 31 |                |        | 32,884 |  |   |         | 143,153 | 
|Accumulated amortization                                |                                                              |                | (3,214 | )      |  |   | (16,188 | )      
|                                                        |                                                              |                |        |        |  |   |         |        
|                                                        | Subscriber acquisition and other fees, net                   |                | $      | 29,670 |  |   | $       | 126,965 | 
|                                                        |                                                              |                |        |        |  |   |         |        

As of December 31, 2000 and 2001, the
consolidated balance sheets also reflected subscriber
acquisition fees payable of $27.8 million and
$28.3 million, respectively. During 2000 and 2001, Crown
Media United States made cash payments of $8.5 million and
$26.4 million, respectively, reducing subscriber
acquisition fees payable. Additionally, $80.1 million of
common stock was issued in exchange for distribution rights
during 2001 (see note 10). Currently, Crown Media United
States is committed to current payments of $22.0 million in
first quarter 2002, $1.0 million in second quarter 2002,
and a future payment of $5.3 million for subscriber
acquisition fees.



| |                     
| | --------------------
| | Program License Fees

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

SFAS No. 63 also requires an entity
providing programming to report an asset and liability for the
rights licensed under a programming agreement only when the
license period begins and when certain other defined
requirements are met. As such, the accompanying consolidated
balance sheets do not reflect both assets and

F-13



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

liabilities of $122.2 million and
$81.7 million as of December 31, 2000 and 2001,
respectively, related to committed program license fees payable
to Hallmark Entertainment Distribution and other third parties
with airing windows to begin subsequent to period-end.



| |                       
| | ----------------------
| | Subtitling and Dubbing

Subtitling and dubbing costs represent costs
incurred to prepare programming for airing in international
markets. These costs are capitalized as incurred and are
amortized over the shorter of the programs airing window
for programming licensed from unaffiliated third-parties, the
programs estimated life (in the case of programming
licensed from Hallmark Entertainment Distribution) or
10 years. Accumulated amortization related to subtitling
and dubbing as of December 31, 2000 and 2001, was
$2.9 million and $4.9 million, respectively.



| |                   
| | ------------------
| | Capitalized Leases

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



| |                       
| | ----------------------
| | Property and Equipment

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



| |                                           
| | ------------------------------------------
| | Accounting for Trust Preferred
	Securities

Crown Media Holdings formed a special-purpose
entity, Crown Media Trust in December 2001. Crown Media Trust
loaned the proceeds from its sales of units of preferred
securities 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 investors of the
preferred securities.

Crown Media Holdings consolidates Crown Media
Trust in accordance with Accounting Research Bulletin 51,
Consolidated Financial Statements, and SFAS No. 94,
Consolidation of All Majority-Owned Subsidiaries. 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 calculations using
cash flows and Black-Scholes models, a portion of the preferred
securities have been allocated and classified in Crown Media
Holdings balance sheet as guaranteed preferred beneficial
interests in Crown Media Trusts debentures (mezzanine
minority interest) and a portion has been classified as
convertible debt. Issuance costs related to the guaranteed
preferred beneficial interests portion were netted against the
guaranteed preferred beneficial interests and accreted as
additional minority interest in earnings. Issuance costs related
to the convertible debt portion were recorded as a
deferred debt issuance costs asset and amortized as
additional interest expense. See Note 9 for additional
discussion of the terms and related accounting for the preferred
securities and Crown Media Holdings related subordinated
debentures.

Crown Media Holdings is aware of recent
accounting exposure drafts, which may cause the Company to
reclassify its guaranteed preferred beneficial interests in
Crown Media Trusts debentures as convertible debt if

F-14



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

these drafts are adopted. Changing the
classification of our preferred securities from guaranteed
preferred beneficial interests to convertible debt could
significantly impact the Companys financial statements.



| |                    
| | -------------------
| | Revenue Recognition

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

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

Advertising revenue and expenses in barter
transactions are recorded at the fair value of the advertising
to be provided. The fair value is determined based upon Crown
Media Holdings historical practice of receiving cash for
similar advertisements from buyers unrelated to the other party
in the current barter transaction. When the barter advertising
revenue does not meet the requirements of Emerging Issues Task
Force (EITF) No. 99-17, Accounting for
Advertising Barter Transactions, no revenue is recognized.
For the years ended December 31, 2000 and 2001, revenue
from advertising barter transactions equaled the corresponding
barter expenses and were $2.2 million and
$2.0 million, respectively, and were included as a
component of both advertising revenue and marketing expenses in
the accompanying consolidated statements of operations. No
barter revenue or related barter expense was recorded for the
year ended December 31, 1999.

Revenue from television and distribution
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. Long-term receivables arising from licensing
agreements are recorded at their net present value.

Revenues from foreign sources for the years ended
December 31, 1999, 2000 and 2001, represented 92%, 69%, and
61% respectively, of total revenue. Such revenues, generally
denominated in United States dollars, were primarily from sales
to customers in Argentina, 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 and amortization of program license fees,
subtitling and dubbing.



| |            
| | -----------
| | Film Assets

The Company amortizes its film assets based on
recognized revenue in the case of sales to third parties, using
projections of sales to third parties for 10 years in
determining the amortization amount for any sale to a third
party, and based on a 10-year amortization for anticipated
internal use of the film assets. Our 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 an initial,
external valuation of our film assets at the time of purchase.
The film assets are also reviewed by the Company for impairment
whenever events or changes in circumstances indicate that the
carrying amount of any such asset may not be recoverable and at
least annually. At least annually, the Company is also required
by its debt covenants to have an external review of the film
assets valuation.

F-15



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                  
| | -----------------
| | Minority Interest

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



| |                
| | ---------------
| | Taxes on Income

Income taxes are accounted for using an asset and
liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences
of events that have been recognized in Crown Media
Holdings consolidated financial statements or tax returns.
In estimating future tax consequences, Crown Media Holdings
generally considers all expected future events other than
changes in the tax law or rates.



| |                   
| | ------------------
| | Comprehensive Loss

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



| |                                 
| | --------------------------------
| | Translation of Foreign
	Currency

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



| |                   
| | ------------------
| | Net Loss Per Share

Basic net loss per share is computed by dividing
the net loss available to common stockholders for the period by
the weighted average number of common shares outstanding during
the period. Diluted net loss per share is computed based on the
weighted average number of common shares and potentially
dilutive common shares outstanding. The calculation of diluted
net loss per share excludes potential common shares if the
effect is anti-dilutive. Potential common shares consist of
incremental common shares issuable upon the exercise of stock
options. Approximately 4.1 million and 6.9 million
stock options for the years ended December 31, 2000 and
2001, respectively, have been excluded from the calculations
below because their effect would have been anti-dilutive.
Accordingly, diluted loss per share equals basic loss per share.
No stock options were outstanding for the year ended
December 31, 1999.

F-16



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                                                                                   |                                               |                                          |         |        |   |      |          |        |   |   |          |        |  
|-------------------------------------------------------------------------------------------------- | --------------------------------------------- | ---------------------------------------- | ------- | ------ | - | ---- | -------- | ------ | - | - | -------- | ------ | -
|                                                                                                   |                                               |                                         
|                                                                                                   |                                               | Years Ended December 31,                
|                                                                                                   |                                               |                                         
|                                                                                                   |                                               | 1999                                     |         | 2000   |   | 2001
|                                                                                                   |                                               |                                          |         |        |   |     
|                                                                                                   |                                               |                                         
|                                                                                                   |                                               | (In thousands, except per share amounts)
|Net loss                                                                                           |                                               | $                                        | (56,697 | )      |   | $    | (116,126 | )      |   | $ | (229,832 | )     
|Accretion related to predecessor Class B
	common stock subject to put and call through May 9, 2000 |                                               |                                          | (3,850  | )      |   |      | (1,484   | )      |   |   |         |       
|                                                                                                   |                                               |                                          |         |        |   |      |          |        |   |   |          |       
|                                                                                                   |                                               | $                                        | (60,547 | )      |   | $    | (117,610 | )      |   | $ | (229,832 | )     
|                                                                                                   |                                               |                                          |         |        |   |      |          |        |   |   |          |       
|Denominator:                                                                                       |                                               |                                          |         |        |   |      |          |        |   |   |          |       
|                                                                                                   | Weighted average common shares outstanding(1) |                                          |         | 32,989 |   |      |          | 50,786 |   |   |          | 74,691 |  
|                                                                                                   |                                               |                                          |         |        |   |      |          |        |   |   |          |       
|Net loss per share:                                                                                |                                               |                                          |         |        |   |      |          |        |   |   |          |       
|                                                                                                   | Basic and diluted loss per share              |                                          | $       | (1.84  | ) |      | $        | (2.32  | ) |   | $        | (3.08  | )
|                                                                                                   |                                               |                                          |         |        |   |      |          |        |   |   |          |       



---



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



| |                         
| | ------------------------
| | Stock-Based Compensation

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



| |                                  
| | ---------------------------------
| | Derivative Financial
	Instruments

On January 1, 2001, the Company adopted
SFAS 133, Accounting for Derivative Instruments and
Hedging Activities, as amended. The standard requires the
recognition of all derivative instruments on the balance sheet
as either assets or liabilities measured at fair value. Changes
in fair value are recognized immediately in earnings unless the
derivatives qualify as hedges of future cash flows. 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 uses derivative financial
instruments, primarily forward foreign exchange contracts, to
reduce the exposure of adverse effects of fluctuating foreign
currency exchange rates. These contracts, which have been
designated as cash flow hedges, were entered into primarily to
hedge certain intercompany payments denominated in foreign
currencies, which have maturities of less than one year. The
unrecognized

F-17



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

income (loss) on the revaluation of forward
currency contracts is recognized in cost of sales upon
expiration of the contract. Throughout 2001, the Company entered
into these contracts with a counterparty that is a major
financial institution, and accordingly, the Company believes
that the risk of counterparty nonperformance is remote. The
amount of the hedges ineffectiveness as of
December 31, 2001, recorded in the consolidated statement
of operations, was not significant.

See note 9 for a discussion of the
derivative liability related to the private placement
transaction.



| |                 
| | ----------------
| | Use of Estimates

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



| |                             
| | ----------------------------
| | Concentration of Credit Risk

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



| |           
| | ----------
| | Fair Value

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



| |                                           
| | ------------------------------------------
| | Recently Issued Accounting
	Pronouncements

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

Crown Media Holdings adopted Statement of
Position 00-2, Accounting by Producers and Distributors
of Films (SOP 00-2) on September 28,
2001, in conjunction with the purchase of the film assets.
SOP 00-2 established new film accounting standards,
including changes in revenue recognition and accounting for
advertising, development and overhead costs. Specifically,
SOP 00-2 requires advertising costs for theatrical and
television product to be expensed as incurred. SOP 00-2
also requires all film costs to be classified in the balance
sheet as noncurrent assets.

In April 2001, the FASBs EITF reached a
final consensus EITF Issue No. 00-25, Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the
Vendors Products (EITF 00-25), which
was codified in EITF Issue No. 01-9, Accounting for
Consideration Given by a Vendor to a Customer

F-18



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Including a Reseller of the Vendors
Products)in November 2001.
EITF 01-9 will be effective for Crown Media Holdings in the
first quarter of 2002. EITF 01-9 clarifies the income
statement classification of costs incurred by a vendor in
connection with the resellers purchase or promotion of the
vendors products, resulting in certain cooperative
advertising and product placement costs previously classified as
selling expenses to be reflected as a reduction of revenues
earned from that activity. While Crown Media Holdings is in the
process of evaluating the overall impact of EITF 01-9 on
its consolidated financial statements, it is not expected that
EITF 01-9 will have a significant impact on Crown Media
Holdings consolidated financial statements.

In July 2001, the FASB issued SFAS No. 141,
Business Combinations (SFAS 141) and
No. 142, Goodwill and Other Intangible Assets
(SFAS 142). These standards change the
accounting for business combinations by, among other things,
prohibiting the prospective use of pooling-of-interests
accounting and requiring companies to stop amortizing goodwill
and certain intangible assets with an indefinite useful life
created by business combinations accounted for using the
purchase method of accounting. Instead, goodwill and intangible
assets deemed to have an indefinite useful life will be subject
to an annual review for impairment. The new standards generally
will be effective for Crown Media Holdings in the first quarter
of 2002 and for purchase business combinations consummated after
June 30, 2001. Crown Media Holdings is in the process of
quantifying the anticipated impact of adopting the provisions of
SFAS 142, which is expected to be significant.

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



| |                  
| | -----------------
| | Reclassifications

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

3.     Program
license fees

Program license fees are comprised of the
following:

|                                                            |                               |                    |         |         |  |   |         |         | 
|----------------------------------------------------------- | ----------------------------- | ------------------ | ------- | ------- |  | - | ------- | ------- | 
|                                                            |                               |                   
|                                                            |                               | As of December 31,
|                                                            |                               |                   
|                                                            |                               | 2000               |         | 2001   
|                                                            |                               |                    |         |        
|                                                            |                               |                   
|                                                            |                               | (In thousands)    
|Program license fees  Hallmark
	Entertainment Distribution |                               | $                  | 107,028 |         |  | $ | 103,539 |        
|Program license fees  NICC                                 |                               |                    |        |         |  |   | 287     |        
|Program license fees  other affiliates                     |                               |                    | 10,622  |         |  |   | 13,821  |        
|Program license fees  non-affiliates                       |                               |                    | 73,994  |         |  |   | 93,795  |        
|Prepaid program license fees                                |                               |                    | 6,870   |         |  |   | 6,750   |        
|                                                            |                               |                    |         |         |  |   |         |        
|                                                            | Program license fees, at cost |                    |         | 198,514 |  |   |         | 218,192 | 
|Accumulated amortization                                    |                               |                    | (38,109 | )       |  |   | (76,670 | )      
|                                                            |                               |                    |         |         |  |   |         |        
|                                                            | Program license fees, net     |                    | $       | 160,405 |  |   | $       | 141,522 | 
|                                                            |                               |                    |         |         |  |   |         |        

On May 9, 2000, Crown Media Holdings
acquired $84.1 million of program license fees as part of
its acquisition of Crown Media United States.

F-19



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

License fees payable are comprised of the
following:

|                                                            |                      |                    |         |         |  |   |        |         | 
|----------------------------------------------------------- | -------------------- | ------------------ | ------- | ------- |  | - | ------ | ------- | 
|                                                            |                      |                   
|                                                            |                      | As of December 31,
|                                                            |                      |                   
|                                                            |                      | 2000               |         | 2001   
|                                                            |                      |                    |         |        
|                                                            |                      |                   
|                                                            |                      | (In thousands)    
|License fees payable  Hallmark
	Entertainment Distribution |                      | $                  | 109,859 |         |  | $ | 62,299 |        
|License fees payable  other affiliates                     |                      |                    | 21      |         |  |   |       |        
|License fees payable  non-affiliates                       |                      |                    | 49,290  |         |  |   | 56,215 |        
|                                                            |                      |                    |         |         |  |   |        |        
|                                                            | License fees payable |                    | $       | 159,170 |  |   | $      | 118,514 | 
|                                                            |                      |                    |         |         |  |   |        |        

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

Crown Media United States licensed programming
for distribution in the United States from The Jim Henson
Company under a program license agreement, dated
November 13, 1998. Under this program agreement, Crown
Media United States generally licensed made-for-television
movies and miniseries owned or controlled by The Jim Henson
Company, as well as all programming produced by or on behalf of
The Jim Henson Company for Crown Media United States. Crown
Media United States substantially revised its two program
agreements with The Jim Henson Company and EM.TV on
July 27, 2001, under which Crown Media United States was
obligated to purchase both pre-existing and original
programming. The revisions replace all prior obligations. Crown
Media United States licenses only two series from The Jim Henson
Company. For revisions of the agreements, Crown Media United
States paid to The Jim Henson Company and EM.TV
$13.0 million. Additionally, Crown Media United States and
Crown Media International wrote-off $15.2 million of
program license fees. The entire $28.2 million is included
in non-affiliate programming costs in the accompanying
consolidated statement of operations for the year ended
December 31, 2001.

4.     Property and
Equipment

Property and equipment are comprised of the
following:

|                                          |                                 |                    |        |        |  |   |         |        | 
|----------------------------------------- | ------------------------------- | ------------------ | ------ | ------ |  | - | ------- | ------ | 
|                                          |                                 |                   
|                                          |                                 | As of December 31,
|                                          |                                 |                   
|                                          |                                 | 2000               |        | 2001  
|                                          |                                 |                    |        |       
|                                          |                                 |                   
|                                          |                                 | (In thousands)    
|Technical equipment and computers         |                                 | $                  | 19,702 |        |  | $ | 37,745  |       
|Leased asset (see Note 8)                 |                                 |                    |       |        |  |   | 13,252  |       
|Furniture, fixtures and equipment         |                                 |                    | 1,765  |        |  |   | 2,025   |       
|Leasehold improvements                    |                                 |                    | 2,485  |        |  |   | 8,604   |       
|Construction-in-progress                  |                                 |                    | 15,109 |        |  |   | 424     |       
|                                          |                                 |                    |        |        |  |   |         |       
|                                          | Property and equipment, at cost |                    |        | 39,061 |  |   |         | 62,050 | 
|Accumulated depreciation and amortization |                                 |                    | (7,994 | )      |  |   | (18,168 | )     
|                                          |                                 |                    |        |        |  |   |         |       
|                                          | Property and equipment, net     |                    | $      | 31,067 |  |   | $       | 43,882 | 
|                                          |                                 |                    |        |        |  |   |         |       

Construction-in-progress as of December 31,
2000 consisted primarily of costs incurred for an advanced
global Network Operations Center at our Greenwood Village,
Colorado, headquarters, which was placed in service in the first
quarter of 2001. Technical equipment, computers and leasehold
improvements were

F-20



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

reclassified from construction-in-progress to
their related captions during the first quarter of 2001 in
conjunction with the launch of our Network Operations Center.
Depreciation and amortization expense totaled $2.4 million,
$5.2 million and $11.5 million, respectively, for the
years ended December 31, 1999, 2000 and 2001.

5.     Investments in
and Advances to Unconsolidated Entities



| |                                      
| | -------------------------------------
| | Investment in H&H
	Programming  Asia

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

Each of Crown Media International and The Jim
Henson Company held a 50% interest in H&H
Programming  Asia through March 15, 2001. Crown
Media Holdings investment in H&H
Programming  Asia was reflected in the consolidated
financial statements using the equity method of accounting until
March 15, 2001, the date of the acquisition of the
remaining 50% interest (see note 1), at which time it
became a consolidated subsidiary. Crown Media Holdings
equity in the net loss of H&H Programming  Asia
was approximately $5.0 million and $4.5 million for
the years ended December 31, 1999 and 2000, and $655,000
for the two and one half months ended March 15, 2001.

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

Crown Media Holdings provided services to H&H
Programming  Asia in exchange for a management fee as
provided in an agreement between Crown Media International and
H&H Programming  Asia. This fee, which was
approximately $2.5 million and $2.9 million,
respectively, for the years ended December 31, 1999 and
2000, included direct and indirect costs incurred on behalf of
H&H Programming  Asia, as provided by the
agreements. No fees were recorded for the year ended
December 31, 2001.

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



| |                                         
| | ----------------------------------------
| | Investment in Crown Media United
	States

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

Crown Media International funded its 1998 capital
contribution to Crown Media United States with the proceeds of
additional investments of $17.8 million and
$2.2 million in Crown Media International by its
stockholders, Hallmark Entertainment and J.P. Morgan,
respectively. Hallmark Entertainment and

F-21



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

J.P. Morgan were issued 1.2 million
shares of Class B common stock and 15,354 shares of
Class A common stock, respectively, related to the
additional funding. In May 1999, Hallmark Entertainment and
J.P. Morgan provided Crown Media International with
additional funding of $17.8 million and $2.2 million,
respectively, to fund Crown Media Internationals
additional capital contribution to Crown Media United States. In
connection with this funding, Crown Media International issued
1.2 million shares of Class B common stock to Hallmark
Entertainment and 15,354 shares of Class A common
stock to J.P. Morgan. The shares originally issued in
connection with this funding provided by J.P. Morgan were
subject to a put and call arrangement.

In connection with the November 1998 investments
by Crown Media International and The Jim Henson Company, VISN
Management Corp. (a subsidiary of NICC) received a redeemable
preferred interest of $25.0 million, which ranks senior to
the common equity interests of Crown Media United States. This
amount is classified as preferred minority interest in the
accompanying consolidated balance sheets. Crown Media United
States is required to redeem the entire preferred interest on or
before December 31, 2010. Partial redemptions are required
if, during any fiscal year subsequent to January 1, 2005,
and prior to December 31, 2009, Crown Media United States
has net profits in excess of $10.0 million. Following each
such year, Crown Media United States must redeem the preferred
interest in an amount equal to the lesser of such excess,
$5.0 million, or the remaining unpaid preferred interest.
Crown Media United States also has the right to redeem any
remaining unpaid preferred interest in whole (but not in part)
at any time.

Crown Media International funded its February
2000 capital contribution to Crown Media United States with the
proceeds of additional investments of $8.9 million and
$1.1 million in Crown Media International by its
stockholders, Hallmark Entertainment and JP Morgan,
respectively. Hallmark Entertainment and J.P. Morgan were
issued 613,403 shares of Class B common stock and
7,677 shares of Class A common stock, respectively,
related to the additional funding.

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

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



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

The following unaudited pro forma consolidated
statements of operations for the years ended December 31,
2000 and 2001, have been derived from the unaudited financial
statements of Crown Media Holdings and its subsidiaries. The
unaudited pro forma financial information stated below presents
a summary of consolidated results of operations of Crown Media
Holdings, Crown Media International, Crown Media United States,
Crown Entertainment and H&H Programming  Asia, as
if each of these entities had been owned since January 1 of
the periods presented, along with certain pro forma adjustments
to give effect to the amortization of goodwill and other
intangibles. Crown Media Distributions operations are only
reflected since September 28, 2001, in conjunction with the
purchase of our film assets (see Note 10). The unaudited
pro forma financial information is not necessarily indicative of
the results of operations had the transactions been effected on
the assumed dates.

F-22



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES

PRO FORMA CONSOLIDATED STATEMENTS OF
OPERATIONS (UNAUDITED)

|                                                                   |                              |                              |        |        |          |   |         |         |          |  
|------------------------------------------------------------------ | ---------------------------- | ---------------------------- | ------ | ------ | -------- | - | ------- | ------- | -------- | -
|                                                                   |                              |                             
|                                                                   |                              | Years Ended December 31,    
|                                                                   |                              |                             
|                                                                   |                              | 2000                         |        | 2001  
|                                                                   |                              |                              |        |       
|                                                                   |                              |                             
|                                                                   |                              | (In thousands, except per   
|                                                                   |                              | share amounts)              
|Revenues:                                                          |                              |                              |        |        |          |   |         |        
|                                                                   | Subscriber fees              |                              | $      | 51,890 |          |   | $       | 66,617  |         
|                                                                   | Advertising                  |                              |        | 19,724 |          |   |         | 37,513  |         
|                                                                   | Licensing fees               |                              |        |       |          |   |         | 2,267   |         
|                                                                   | Management and other fees    |                              |        | 1,522  |          |   |         | 740     |         
|                                                                   |                              |                              |        |        |          |   |         |        
|                                                                   |                              | Total revenues               |        |        | 73,136   |   |         |         | 107,137  |  
|Cost of Services:                                                  |                              |                              |        |        |          |   |         |        
|                                                                   | Programming costs            |                              |        | 64,044 |          |   |         | 117,882 |         
|                                                                   | Amortization of film library |                              |        |       |          |   |         | 3,533   |         
|                                                                   | Operating costs              |                              |        | 48,142 |          |   |         | 65,735  |         
|                                                                   |                              |                              |        |        |          |   |         |        
|                                                                   |                              | Total cost of services       |        |        | 112,186  |   |         |         | 187,150  |  
|Selling, general and administrative expenses                       |                              |                              | 64,630 |        |          |   | 87,232  |        
|Marketing expenses                                                 |                              |                              | 25,176 |        |          |   | 34,809  |        
|Amortization of goodwill                                           |                              |                              | 21,986 |        |          |   | 21,986  |        
|                                                                   |                              |                              |        |        |          |   |         |        
|                                                                   |                              | Loss from operations         |        |        | (150,842 | ) |         |         | (224,040 | )
|Guaranteed preferred beneficial accretion and
	interest expense    |                              |                              |       |        |          |   | (1,428  | )      
|Interest income (expense), net                                     |                              |                              | 571    |        |          |   | (10,446 | )      
|                                                                   |                              |                              |        |        |          |   |         |        
|                                                                   |                              | Net loss before income taxes |        |        | (150,271 | ) |         |         | (235,914 | )
|Income tax (provision) benefit                                     |                              |                              | (1,743 | )      |          |   | 3,344   |        
|                                                                   |                              |                              |        |        |          |   |         |        
|                                                                   |                              | Net loss                     |        | $      | (152,014 | ) |         | $       | (232,570 | )
|                                                                   |                              |                              |        |        |          |   |         |        
|Weighted average number of Class A and
	Class B shares outstanding |                              |                              | 65,385 |        |          |   | 75,782  |        
|                                                                   |                              |                              |        |        |          |   |         |        
|Net loss per share                                                 |                              | $                            | (2.32  | )      |          | $ | (3.07   | )      
|                                                                   |                              |                              |        |        |          |   |         |        

7.     Deferred
Programming Revenue

In December 1997, Crown Media International
renegotiated a distribution agreement with a pay television
distributor, which was extended through December 2000. As a
result of the renegotiation, the pay television distributor paid
Crown Media International $5.0 million and agreed to
provide Crown Media International with approximately
$4.3 million in future transponder services and playback
and uplink services. The entire $9.3 million from the
renegotiated agreement was initially included in deferred
revenue. Revenue is recognized in subscriber fees as services
are provided and over the life of the contract. Revenues
recognized under the renegotiated agreement were approximately
$2.6 million, $1.5 million, and $713,000 for the years
ended December 31, 1999, 2000 and 2001, respectively. At
December 31, 2000, amounts deferred under this agreement
were approximately $713,000.

In 2001, Crown Media Distribution entered into
program license agreements with third parties granting rights to
use programming during future windows. The revenue from these
agreements was recorded as

F-23



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

deferred revenue, which will be recognized as
licensing fees revenue as the windows open. At December 31,
2001, amounts deferred under these agreements were approximately
$1.3 million.

8.     Leases

Crown Media International leases a combined
uplink and transponder space segment under a long-term lease
agreement. In accordance with SFAS No. 13, Accounting
for Leases, the lease was capitalized. Future minimum lease
payments under the agreement at December 31, 2001 are as
follows:

|                                            |                              |                |        |        | 
|------------------------------------------- | ---------------------------- | -------------- | ------ | ------ | 
|                                            |                              | Years Ended   
|                                            |                              | December 31,  
|                                            |                              |               
|                                            |                              | (In thousands)
|2002                                        |                              | $              | 2,300  |       
|2003                                        |                              |                | 2,300  |       
|2004                                        |                              |                | 2,300  |       
|2005                                        |                              |                | 2,300  |       
|2006                                        |                              |                | 2,300  |       
|Thereafter                                  |                              |                | 4,600  |       
|                                            |                              |                |        |       
|                                            | Total minimum lease payments |                |        | 16,100 | 
|Less amount representing interest           |                              |                | (4,059 | )     
|                                            |                              |                |        |       
|Present value of net minimum lease payments |                              |                | 12,041 |       
|Less current maturities                     |                              |                | (1,318 | )     
|                                            |                              |                |        |       
|Long-term obligation                        |                              | $              | 10,723 |       
|                                            |                              |                |        |       



| |                            
| | ---------------------------
| | Operating Lease Commitments

Crown Media Holdings leases transponders, office
facilities and various office equipment under operating leases
that generally are not cancelable. These leases expire at
various dates through January 2011, and some contain escalation
clauses and renewal options.

Rent expense under these agreements was
$6.7 million, $16.1 million, and $17.3 million,
respectively, for the years ended December 31, 1999, 2000
and 2001. At December 31, 2001, the minimum annual rental
commitments under the leases are as follows:

|           |  |                |        | 
|---------- |  | -------------- | ------ | 
|           |  | Years Ended   
|           |  | December 31,  
|           |  |               
|           |  | (In thousands)
|2002       |  | $              | 17,308 | 
|2003       |  |                | 15,806 | 
|2004       |  |                | 13,946 | 
|2005       |  |                | 13,204 | 
|2006       |  |                | 9,137  | 
|Thereafter |  |                | 25,586 | 
|           |  |                |        | 
|           |  | $              | 94,987 | 
|           |  |                |        | 

F-24



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

9.     Credit
Facility and Private Placement



| |                
| | ---------------
| | Credit Facility

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

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

Since the inception of the credit facility, Crown
Media Holdings has elected the monthly Eurodollar rate. Amounts
under the revolver have accrued interest at rates from 5.0% to
5.59% and amounts under the term loan have accrued interest at
rates from 5.11% to 5.59%. Interest expense for the year ended
December 31, 2001, was $3.1 million. At
December 31, 2001, accrued interest of $936,000 was
reflected in the current portion of the credit facility on the
accompanying balance sheet.

F-25



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Future maturities (excluding interest) are as
follows:

|           |  |                |         | 
|---------- |  | -------------- | ------- | 
|           |  | Years Ended   
|           |  | December 31,  
|           |  |               
|           |  | (In thousands)
|2002       |  | $              | 110,969 | 
|2003       |  |                |        | 
|2004       |  |                |        | 
|2005       |  |                |        | 
|2006       |  |                | 151,438 | 
|Thereafter |  |                |        | 
|           |  |                |         | 
|           |  | $              | 262,407 | 
|           |  |                |         | 



| |                  
| | -----------------
| | 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 to the investors units,
each unit comprised of one preferred security of Crown Media
Trust, a newly created subsidiary of the Company, and one
contingent appreciation certificate, issued by Crown Media
Holdings.

The additional financing allowed Crown Media
Holdings to reduce the amount outstanding under its syndicated
bank credit facility by $111.6 million. The
$111.6 million was placed into an escrow account until an
allowed payment date of January 7, 2002. Additionally, the
Company used a portion of the proceeds of the private placement
to repay $70.6 million under lines of credit provided by
HC Crown and $69.4 million of amounts payable to
Hallmark Entertainment Distribution pursuant to certain program
license agreements held by subsidiaries of Crown Media Holdings
in December 2001.

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

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

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

F-26



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

contingent appreciation certificates, if fully
exercised for stock, would represent approximately
10.1 million shares of the Companys Class A
common stock.

On or after December 15, 2003, Crown Media
Holdings will have the right to redeem any and all of the
outstanding debentures at a redemption price equal to 100% of
the aggregate principal amount of the debentures, together with
any accrued and unpaid interest thereon. Currently, the Company
expects to redeem the debentures during 2004 and is accreting
its convertible debt and guaranteed preferred beneficial
interests at an internal rate of return of 14% assuming a
redemption date of December 15, 2004. In the event of a
change of control, the Company must either exercise its right to
redeem all or offer to purchase any and all of the outstanding
debentures at a price equal to 110% of the aggregate principal
amount of the debentures, together with any accrued and unpaid
interest thereon.

Future maturities (excluding interest) as planned
by Crown Media Holdings are as follows:

|     |  |                |         | 
|---- |  | -------------- | ------- | 
|     |  | Years Ended   
|     |  | December 31,  
|     |  |               
|     |  | (In thousands)
|2002 |  | $              |        | 
|2003 |  |                |        | 
|2004 |  |                | 265,000 | 
|     |  |                |         | 
|     |  | $              | 265,000 | 
|     |  |                |         | 

The financing was recorded at $265.0 million
and required fair value allocations 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 cash flows)
on the preferred securities. The carrying value of the
guaranteed preferred beneficial interest as determined on
December 17, 2001, was $197.7 million and on
December 31, 2001, was $199.0 million, net of offering
costs.

Crown Media Holdings calculated the contingent
appreciation certificate or convertible debt 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 an embedded derivative, was $43.5 million on
December 17, 2001, and $43.7 million as of
December 31, 2001. The transaction also resulted in a net
derivative liability on December 17, 2001, of
$12.1 million and on December 31, 2001, of
$12.5 million.

F-27



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the transaction at
the transaction date and as of year-end. The summary also
reflects the allocation of transaction costs between the various
components of the financing.

|                                                                            |                                               |                                                                         |         |              |         |   |         |         |         | 
|--------------------------------------------------------------------------- | --------------------------------------------- | ----------------------------------------------------------------------- | ------- | ------------ | ------- | - | ------- | ------- | ------- | 
|                                                                            |                                               | Initial                                                                 |         | As of       
|                                                                            |                                               | Fair Value                                                              |         | December 31,
|                                                                            |                                               | Allocation                                                              |         | 2001        
|                                                                            |                                               |                                                                         |         |             
|                                                                            |                                               |                                                                        
|                                                                            |                                               | (In thousands)                                                         
|Convertible debt                                                            |                                               |                                                                         |         |              |         |   |         |        
|                                                                            | Value of contingent appreciation certificates |                                                                         | $       | 93,682       |         |   |         |         |        
|                                                                            | Value of embedded derivative                  |                                                                         |         | (50,212      | )       |   |         |         |        
|                                                                            |                                               |                                                                         |         |              |         |   |         |        
|                                                                            |                                               | Total carrying amount of convertible debt(a)(b)                         |         |              | 43,470  |   |         | $       | 43,733  | 
|                                                                            |                                               |                                                                         |         |              |         |   |         |        
|Derivative liability(c)                                                     |                                               |                                                                         | 12,083  |              |         | $ | 12,495  |        
|                                                                            |                                               |                                                                         |         |              |         |   |         |        
|Allocable offering costs included in debt
	issuance costs(d)                |                                               |                                                                         | (2,444  | )            |         | $ | (2,427  | )      
|                                                                            |                                               |                                                                         |         |              |         |   |         |        
|Guaranteed preferred beneficial interest in Crown
	Media Trusts debentures |                                               |                                                                         | 209,447 |              |         | $ | 210,699 |        
|                                                                            | Allocable offering costs(e)                   |                                                                         |         | (11,771      | )       |   |         | (11,659 | )      
|                                                                            |                                               |                                                                         |         |              |         |   |         |        
|                                                                            |                                               | Total carrying value of guaranteed preferred
	beneficial interest(b)(f) |         |              | 197,676 |   |         | $       | 199,040 | 
|                                                                            |                                               |                                                                         |         |              |         |   |         |        
|                                                                            | 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) |  | Balance being accreted to $45.6 million.                                                                               
|   
|(b) |  | Interest payable at 6.75% per annum in cash
	each quarter. Balance due at anticipated redemption of
	December 15, 2004.
|   
|(c) |  | Marked-to-market through income (loss) at each
	reporting date.                                                        
|   
|(d) |  | Being amortized to interest expense over three
	years.                                                                 
|   
|(e) |  | Being accreted to guaranteed preferred interest
	expense over three years.                                             
|   
|(f) |  | Balance being accreted to $219.4 million.                                                                              

10. Related Party Transactions



| |             
| | ------------
| | Demand Notes

From November 1999 through April 2000, Crown
Media Holdings entered into a series of agreements with
HC Crown, under which HC Crown agreed to lend Crown
Media Holdings up to $40.0 million. Amounts borrowed under
this agreement accrued interest at 130% of the Applicable
Federal Rate as set forth in the Internal Revenue Code (7.96% as
of December 31, 2000), with the interest compounding on an
annual basis. Amounts outstanding were due on demand. As of
December 31, 2000, principal borrowings under the note were
approximately $36.8 million, excluding accrued interest of
$520,000, both of which are included in notes and interest
payable to HC Crown on the accompanying consolidated
balance sheets. On December 17, 2001, we paid HC Crown
$37.1 million, in satisfaction of the aggregate balance
outstanding as of that date, including accrued interest, under
the notes. The notes were cancelled on December 17, 2001.

F-28



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On February 12, 2001, Crown Media Holdings
entered into an agreement with HC Crown under which
HC Crown agreed to lend Crown Media Holdings up to
$150.0 million. HC Crowns obligation to make
loans under this agreement was supported by an irrevocable
letter of credit from Bank of America. On September 28,
2001, we paid HC Crown $70.0 million, in satisfaction
of the aggregate balance outstanding as of that date, including
accrued interest, under the line of credit. This line of credit
was cancelled on September 28, 2001.

On July 10, 2001, Crown Media Holdings
entered into a promissory note with HC Crown representing a
line of credit for up to $50.0 million. This note bore
interest at 130% of the short-term applicable federal rate,
compounded on an annual basis. Amounts outstanding were due on
demand. On December 17, 2001, we paid HC Crown
$33.5 million, in satisfaction of the aggregate balance
outstanding as of that date, including accrued interest, under
the note. This note was cancelled on December 17, 2001.

On December 14, 2001, we 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 February 12, 2001. The line of credit
has a final maturity date no later than December 21, 2007.
The line of credit is subordinate to both the bank facility and
the units, 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, 2001, we had
no borrowings under this note to HC Crown. In addition,
until the termination of the subordination and support agreement
entered into by Hallmark Cards in connection with the private
placement and until such time as the debentures and contingent
appreciation certificates are paid in full, Hallmark Cards has
agreed to loan Crown Media Holdings an amount necessary to
pay, when due, the $100.0 million in obligations owed to
Hallmark Entertainment Distribution, which were incurred by
Crown Media Holdings in connection with its acquisition of the
Crown Media Library. Lastly, Hallmark Entertainment agreed to
subordinate approximately $60.0 million in obligations owed
by subsidiaries of Crown Media Holdings to it pursuant to
certain program license agreements.

Under this note, we are obligated to pay a
commitment fee of 1.5% of the initial maximum amount of the
note, which may be paid at our option in 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 December 31, 2001, the $1.1 million commitment fee
was included in payable to affiliates in the accompanying
consolidated balance sheet. The line of credit represented by
this note was required by the bank credit facility and was
amended to its present form in accordance with requirements of
the private placement of preferred securities of the Crown Media
Trust.



| |                                                                              
| | -----------------------------------------------------------------------------
| | Hallmark Agreements Related to Bank Credit
	Facility and Preferred Securities

Hallmark Cards and Hallmark Entertainment entered
into certain agreements in order to induce the banks to enter
into our bank credit agreement. Hallmark Cards, Crown Media
Holdings and the banks are parties to a subordination and
support agreement dated August 31, 2001. Under the
subordination and support agreement, the obligations of Crown
Media Holdings to pay (a) the HC Crown line of credit
for Crown Media Holdings, and (b) approximately
$100.0 million in accounts payable of Hallmark
Entertainment Distribution as provided by the purchase agreement
for the Crown Media Library are subordinated in right of payment
to Crown Media Holdings obligations to the banks. Crown
Media Holdings is not permitted to pay subordinated obligations
except for certain restricted payments permitted by the bank
credit agreement. In the subordination and support agreement,
Hallmark Cards also agrees to cause HC Crown to advance up
to $75.0 million under the HC Crown line of credit to
Crown Media Holdings (less the amount of any reduction on the
HC Crown line of credit because of the application of net
cash proceeds from issuing debt or equity as

F-29



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

permitted by the bank credit agreement), to the
extent necessary to enable Crown Media Holdings to meet its cash
needs including the repayment of the bank loans, provided that
Crown Media Holdings has borrowed the full amount then available
under the bank credit agreement. Further, Hallmark Cards agrees
that the HC Crown line of credit will not be declared due
and payable if any obligations to the banks remain outstanding.

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

In connection with the private placement of units
consisting of preferred securities issued by Crown Media Trust
and contingent appreciation certificates, Hallmark Cards,
certain of its subsidiaries and other parties thereto, entered
into a Subordination and Support Agreement (the
Subordination Agreement), pursuant to which Hallmark
Cards agreed to loan Crown Media Holdings up to
$75.0 million under a subordinated revolving credit line,
which is the December 14, 2001, note mentioned above
payable to HC Crown.



| |                                                
| | -----------------------------------------------
| | 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 years ended December 31, 1999, 2000 and 2001,
respectively, approximately $0, $3.8 million and
$3.6 million were paid to Hallmark Entertainment.
Unreimbursed costs of $5.4 million and $1.8 million
are included in the item payable to affiliates in
the accompanying consolidated balance sheets as of
December 31, 2000 and 2001, respectively.



| |                                        
| | ---------------------------------------
| | Services Agreement with Hallmark
	Cards

Hallmark Cards, its subsidiaries and various
affiliates, provide Crown Media Holdings with services that
include payroll, legal, financial, tax and other general
corporate services. For each of the years ended
December 31, 1999, 2000, and 2001, Crown Media Holdings had
accrued $500,000, respectively, under the agreement. At
December 31, 2000 and 2001, unpaid accrued service fees of
$1.6 million and $3.1 million, respectively, were
included in payable to affiliates in the accompanying
consolidated balance sheets.



| |                                                
| | -----------------------------------------------
| | Services Agreement with Hallmark
	Entertainment

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

F-30



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                                    
| | -------------------------------------------------------------------
| | Program License Agreement with Hallmark
	Entertainment Distribution

The primary outside supplier of programming to
Crown Media Holdings has been Hallmark Entertainment
Distribution. Crown Media International has a program agreement
with Hallmark Entertainment Distribution through
December 31, 2005, which is renewable through
December 31, 2010, which was amended and restated as part
of our purchase of the Crown Media Library. Under the terms of
the agreement, Crown Media International has the exclusive right
to exhibit Hallmark Entertainment Distributions
programming in the territories in which Crown Media
International operates during three 18-month windows. Crown
Media International also has the exclusive right to exhibit
programming in markets where it does not currently operate,
subject to any third party agreement existing at the time Crown
Media International launches in those markets. In addition,
under the agreement, Hallmark Entertainment Distribution is
generally obligated to sell to Crown Media International all of
the programming it produces and Crown Media International is
obligated to purchase up to 50 programs produced per year
during the term of the agreement.

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

Programming costs related to the Hallmark program
agreements were $12.3 million, $36.9 million and
$43.9 million, respectively, for the years ended
December 31, 1999, 2000 and 2001. As of December 31,
2000 and 2001, $109.9 million and $62.3 million,
respectively, are included in license fees payable to affiliates
in the accompanying consolidated balance sheets. In December
2001, Crown Media Holdings paid $69.4 million to Hallmark
Entertainment Distribution for license fees with proceeds from
its private placement transaction.



| |                     
| | --------------------
| | Class B Common Stock

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



| |                        
| | -----------------------
| | Purchase of Film Assets

On September 28, 2001, Crown Media Holdings
completed the acquisition of the Crown Media Library, comprised
of approximately 700 film titles and related rights and
property, representing over 3,000 hours of programming,
from the film assets of Hallmark Entertainment Distribution, a
wholly-owned subsidiary of Hallmark Entertainment. Under the
terms of the acquisition, we assumed $220.0 million of
Hallmark Entertainment Distribution debt and payables and issued
33,744,528 shares of our Class A common stock. Of the
shares issued in the transaction, 425,000 shares were
issued into escrow and will be returned to us if a previously
announced, proposed settlement of a stockholder lawsuit relating
to the transaction becomes final. The number of shares of common
stock was determined by a formula based on the average closing
price of the

F-31



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

common stock from November 6, 2000 (the date
we announced that we were contemplating the transaction) to
September 27, 2001 (the day prior to closing), which
average price was $17.78 per share. A committee of
directors independent of Hallmark Entertainment and its
affiliates considered and negotiated this transaction, including
the purchase price, and received a fairness opinion from its
financial advisor. Additionally, the stockholders of Crown Media
Holdings, other than Hallmark Cards and its affiliates, approved
the transaction at a meeting on July 17, 2001.

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

The Crown Media Library consists primarily of
films, which were made or acquired for initial exhibition on the
domestic network television market in the United States and
Canada. Films produced initially for network broadcast are
subsequently licensed for home video and international
television as well as cable and independent television in the
United States and Canada.



| |                        
| | -----------------------
| | NICC License Agreements

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

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

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



| |                                       
| | --------------------------------------
| | Subscriber Acquisition Fees
	Agreement

On August 27, 2001, we issued
5,360,202 shares of our Class A common stock with a
then market value of $80.1 million as consideration for
entering into a distribution agreement for carriage of the
Hallmark Channel by DIRECTV. At December 31, 2001,
remaining unamortized subscriber acquisition fees of
$75.6 million were included in the accompanying
consolidated balance sheet.

F-32



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

11.     Income
Taxes

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

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

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

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

On September 28, 2001, Crown Media Holdings
completed the purchase of film assets from Hallmark
Entertainment Distribution, a wholly owned subsidiary of
Hallmark Entertainment. The recorded book value of the film
assets of approximately $810.9 million exceeds the tax
basis by $251.6 million. The difference between the cost
for financial reporting purposes and tax purposes is a
temporary difference under the liability method.
Crown Media Holdings recorded a deferred tax liability of
approximately $100.6 million related to this difference.

The deferred tax liability related to the film
assets is expected to reverse within 10 years, which is
prior to the expiration of Crown Media Holding net tax
operating losses. Therefore, at September 30, 2001, Crown
Media Holdings no longer required a valuation allowance for any
of its deferred taxes, and, as part of the film assets
transaction, reduced its valuation allowance by
$95.3 million. This amount included the release of
$7.9 million related to the valuation allowance provided on
state tax net operating losses during the first nine months of
2001. These changes in the valuation allowance did not affect
the provision for income taxes.

During the last three months of 2001, Crown Media
Holdings generated additional tax net operating losses of
$21.4 million. In addition, there were other changes to
deferred tax assets and liabilities of $700,000, resulting in an
increase to deferred tax assets of $20.7 million. Crown
Media Holdings has provided a valuation allowance of
$16.0 million on the net deferred tax asset because of
uncertainty regarding its realizability,

F-33



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

resulting in a tax benefit of $5.3 million.
The benefit was reduced by foreign taxes of $2.0 million,
resulting in a $3.3 million tax benefit.

The income tax provision (benefit) is comprised
of the following:

|          |                 |                          |   |       |       |      |   |       |       |  |   |        |        |  
|--------- | --------------- | ------------------------ | - | ----- | ----- | ---- | - | ----- | ----- |  | - | ------ | ------ | -
|          |                 |                         
|          |                 | Years Ended December 31,
|          |                 |                         
|          |                 | 1999                     |   | 2000  |       | 2001
|          |                 |                          |   |       |       |     
|          |                 |                         
|          |                 | (In thousands)          
|Current:  |                 |                          |   |       |       |      |   |       |       |  |   |       
|          | Federal         |                          | $ |      |       |      | $ |      |       |  | $ |       |       
|          | Foreign         |                          |   | 956   |       |      |   | 1,743 |       |  |   | 1,976  |       
|          | State and local |                          |   |      |       |      |   |      |       |  |   |       |       
|          |                 |                          |   |       |       |      |   |       |       |  |   |       
|          |                 | Total current            |   |       | 956   |      |   |       | 1,743 |  |   |        | 1,976  |  
|Deferred: |                 |                          |   |       |       |      |   |       |       |  |   |       
|          | Federal         |                          |   | 1,600 |       |      |   |      |       |  |   | (4,655 | )     
|          | State and local |                          |   |      |       |      |   |      |       |  |   | (665   | )     
|          |                 |                          |   |       |       |      |   |       |       |  |   |       
|          |                 | Total deferred           |   |       | 1,600 |      |   |       |      |  |   |        | (5,320 | )
|          |                 |                          |   |       |       |      |   |       |       |  |   |       
|          |                 | Total                    |   | $     | 2,556 |      |   | $     | 1,743 |  |   | $      | (3,344 | )
|          |                 |                          |   |       |       |      |   |       |       |  |   |       

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

|                                                                                                    |                                |                          |         |       |  |      |         |       |  |   |         |        |  
|--------------------------------------------------------------------------------------------------- | ------------------------------ | ------------------------ | ------- | ----- |  | ---- | ------- | ----- |  | - | ------- | ------ | -
|                                                                                                    |                                |                         
|                                                                                                    |                                | Years Ended December 31,
|                                                                                                    |                                |                         
|                                                                                                    |                                | 1999                     |         | 2000  |  | 2001
|                                                                                                    |                                |                          |         |       |  |     
|                                                                                                    |                                |                         
|                                                                                                    |                                | (In thousands)          
|Taxes computed at 35%                                                                               |                                | $                        | (18,949 | )     |  | $    | (40,034 | )     |  | $ | (81,612 | )     
|Net operating losses not benefiting Crown Media
	Holdings                                           |                                |                          | 20,549  |       |  |      | 8,441   |       |  |   |        |       
|Goodwill                                                                                            |                                |                          |        |       |  |      |        |       |  |   | 7,027   |       
|Increase in valuation allowance, exclusive of
	reduction as a result of the transfer of film assets |                                |                          |        |       |  |      | 31,593  |       |  |   | 69,265  |       
|Additional tax on foreign income                                                                    |                                |                          | 956     |       |  |      | 1,743   |       |  |   | 1,976   |       
|                                                                                                    |                                |                          |         |       |  |      |         |       |  |   |         |       
|                                                                                                    | Income tax provision (benefit) |                          | $       | 2,556 |  |      | $       | 1,743 |  |   | $       | (3,344 | )
|                                                                                                    |                                |                          |         |       |  |      |         |       |  |   |         |       

F-34



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                          |                              |                                |   |         |      |   |   |         |         |  
|------------------------- | ---------------------------- | ------------------------------ | - | ------- | ---- | - | - | ------- | ------- | -
|                          |                              |                               
|                          |                              | As of December 31,            
|                          |                              |                               
|                          |                              | 2000                           |   | 2001   
|                          |                              |                                |   |        
|                          |                              |                               
|                          |                              | (In thousands)                
|Deferred tax assets:      |                              |                                |   |         |      |   |   |        
|                          | Deferred revenue             |                                | $ | 285     |      |   | $ | 47      |        
|                          | Bad debt reserve             |                                |   | 941     |      |   |   | 2,987   |        
|                          | Accrued compensation         |                                |   | 2,314   |      |   |   | 2,351   |        
|                          | Net operating loss           |                                |   | 25,463  |      |   |   | 107,023 |        
|                          | Unconsolidated entity losses |                                |   | 2,699   |      |   |   | 2,834   |        
|                          | Other                        |                                |   | 399     |      |   |   | 637     |        
|                          | Valuation allowance          |                                |   | (31,593 | )    |   |   | (15,985 | )      
|                          |                              |                                |   |         |      |   |   |        
|                          |                              | Total deferred tax assets      |   |         | 508  |   |   |         | 99,894  |  
|Deferred tax liabilities: |                              |                                |   |         |      |   |   |        
|                          | Depreciation                 |                                |   | (508    | )    |   |   | (385    | )      
|                          | Film inventory               |                                |   |        |      |   |   | (99,509 | )      
|                          | Unconsolidated entity losses |                                |   |        |      |   |   |        |        
|                          | Other                        |                                |   |        |      |   |   |        |        
|                          |                              |                                |   |         |      |   |   |        
|                          |                              | Total deferred tax liabilities |   |         | (508 | ) |   |         | (99,894 | )
|                          |                              |                                |   |         |      |   |   |        
|                          |                              | Net deferred taxes             |   | $       |     |   |   | $       |        |  
|                          |                              |                                |   |         |      |   |   |        

As of December 31, 2000 and 2001, cumulative
net tax operating losses are approximately $63.7 million
and $267.6 million and expire in 2020 and 2021,
respectively.

12.     Commitments
and Contingencies



| |                    
| | -------------------
| | Severance Agreement

In January 1999, under the terms of a severance
agreement with a former senior executive, Crown Media
International recorded $4.0 million of expense, which is
reflected in selling, general and administrative expenses for
the year ended December 31, 1999, in the accompanying
consolidated statements of operations. In accordance with the
agreement, a payment of $2.0 million was made in January
2000 and a payment of $1.0 million was made in February
2001. On May 9, 2000, in conjunction with the initial
public offering and in accordance with the agreement, Crown
Media Holdings recorded an additional $2.0 million of
expense, paid in February 2001. As of December 31, 2000 and
2001, $4.0 million and $1.0 million, respectively,
remains accrued. The agreement requires a payment of
$1.0 million in February 2002.



| |               
| | --------------
| | Reorganization

In order to utilize the synergies between Crown
Media International, the Companys international operating
subsidiary, and Crown Media United States, the Companys
domestic operating subsidiary, approximately 15% of the
Companys employees were involuntarily terminated during
October 2001. Employees affected by this reorganization were
primarily members of the marketing, finance and administrative
departments. Crown Media Holdings incurred costs related to this
reorganization, which were accounted for under EITF Issue
No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring), and
SEC Staff Accounting

F-35



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Bulletin (SAB) No. 100,
Restructuring and Impairment Charges. These costs were
comprised primarily of the termination benefits of severance
salary and outplacement service for all affected employees.
During fourth quarter 2001, Crown Media Holdings incurred
restructuring charges of approximately $4.6 million related
to the reorganization.



| |                    
| | -------------------
| | Shareholder Lawsuit

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

In June 2001, Crown Media Holdings, Hallmark
Cards and the other defendants and the plaintiff entered into a
memorandum of understanding stating an agreement in principle on
a settlement of the lawsuit concerning the films transaction. In
accordance with the memorandum of understanding, Crown Media
Holdings conferred with the plaintiffs counsel regarding
information disclosed in a supplement to the proxy statement for
the annual meeting of stockholders at which the films
transaction was considered. Crown Media Holdings
stockholders (excluding Hallmark Entertainment Distribution and
its affiliates) approved of the films transaction at the
reconvened annual meeting on July 17, 2001. As permitted by
the memorandum of understanding, the films transaction closed on
September 28, 2001.

13.     Share
Appreciation Rights Plan and Stock Options Plan

In March 1999, Crown Media International adopted
a Share Appreciation Rights Plan (the SAR Plan) to
provide key officers of Crown Media International incentives
linked to the increase in Crown Media Internationals
market value. The Crown Media International SAR Plan allowed for
the issuance of up to three million rights that accrete value
over an initial valuation and vest over a period of thirty-six
months. The maximum distributions under the Crown Media
International SAR Plan were $15.0 million in aggregate and
$10.0 million to any individual. As of December 31,
1999, Crown Media International had issued three million rights
and accrued $2.8 million under the Crown Media
International SAR Plan. The Crown Media International SAR Plan
expired on May 10, 2000, in conjunction with the initial
public offering, as the shares were converted to stock options
based upon calculated pricing models. At that time, Crown Media
Holdings granted one million non-qualified stock options with an
exercise price of $8.33 and recognized additional compensation
expense of $5.67 per option to record them at fair value.

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CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In November 1998, Crown Media United States
adopted the Odyssey Holdings, L.L.C. Share Appreciation
Rights Plan (the SAR Plan) to provide key officers
and employees with incentives linked to the increase in Odyssey
Holdings market value. The Odyssey Holdings SAR Plan
allowed for the issuance of up to five million rights that
were to vest over a three to five year period. The Odyssey
Holdings SAR Plan expired on August 1, 2000, as the five
million SARs were converted to stock options based upon
calculated pricing models. Crown Media Holdings granted
1.3 million non-qualified stock options with an exercise
price of $8.94 and recognized additional compensation expense of
$6.93 per option to record them at fair value.

Crown Media Holdings has one stock option plan,
the Amended and Restated Crown Media Holdings, Inc. 2000
Long Term Incentive Plan (the Plan). Crown Media
Holdings accounts for the Plan under APB 25, under which
compensation cost of $4.2 million and $1.5 million,
respectively, was recognized for the years ended
December 31, 2000 and 2001.

Crown Media Holdings may grant options for up to
10.0 million shares under the Plan and has granted options
on 3.9 million shares and 3.3 million shares,
respectively, during 2000 and 2001. For options issued in
conjunction with the initial public offering, the option
exercise price equals the stocks market price on date of
grant. Options converted from the Crown Media International SAR
Plan and the Odyssey Holdings SAR Plan had exercise prices of
$8.33 and $8.94, respectively, which did not equal the
stocks market price on the date of grant. Crown Media
Holdings has recorded expense related to the aforementioned
difference. The stock options expire 10 years from the date
of grant and vest over service periods that range from date of
grant to four years.

A summary of the status of the Plan at
December 31, 2000 and 2001, and changes during the years
then ended is presented in the table and narrative below:

|                           |                   |                |       |            |   |            |   |            |  |   |       |       | 
|-------------------------- | ----------------- | -------------- | ----- | ---------- | - | ---------- | - | ---------- |  | - | ----- | ----- | 
|                           |                   |                |       |            |   | Weighted  
|                           |                   |                |       |            |   | Average   
|                           |                   |                |       | Exercise   |   | Exercise  
|                           |                   |                |       | Price      |   | Price     
|                           |                   | Shares         |       | Per Option |   | Per Option
|                           |                   |                |       |            |   |           
|                           |                   |               
|                           |                   | (In thousands)
|Balance, January 1, 2000   |                   |                |      |            |   |            |  |            |  |   |      |      
|                           | Options granted   |                |       | 3,952      |   |            | $ | 8.33-17.00 |  |   | $     | 10.98 | 
|                           | Options exercised |                |       | (23        | ) |            | $ | 8.33       |  |   | $     | 8.33  | 
|                           | Options canceled  |                |       | (8         | ) |            | $ | 14.00      |  |   | $     | 14.00 | 
|                           |                   |                |       |            |   |            |   |            |  |   |       |      
|Balance, December 31, 2000 |                   |                | 3,921 |            |   |            |   |            |  | $ | 10.99 |      
|                           |                   |                |       |            |   |            |   |            |  |   |       |      
|                           | Options granted   |                |       | 3,265      |   |            | $ | 8.80-21.00 |  |   | $     | 14.89 | 
|                           | Options exercised |                |       | (77        | ) |            | $ | 8.33-14.00 |  |   | $     | 10.32 | 
|                           | Options canceled  |                |       | (218       | ) |            | $ | 8.94-16.38 |  |   | $     | 14.60 | 
|                           |                   |                |       |            |   |            |   |            |  |   |       |      
|Balance, December 31, 2001 |                   |                | 6,891 |            |   |            |   |            |  | $ | 12.66 |      
|                           |                   |                |       |            |   |            |   |            |  |   |       |      

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CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                         |  |                     |       |                  |  |            |     |                    |  |            |       |  |  |  |       |  |  |   |       | 
|------------------------ |  | ------------------- | ----- | ---------------- |  | ---------- | --- | ------------------ |  | ---------- | ----- |  |  |  | ----- |  |  | - | ----- | 
|                         |  |                    
|Options Outstanding      |  | Options Exercisable
|                         |  |                    
|                         |  | Weighted Average    |       | Weighted Average |  |            |     | Weighted Average  
|Range of Exercise Prices |  | Remaining           |       | Exercise Price   |  |            |     | Exercise Price    
|Per Option               |  | Shares Outstanding  |       | Contractual Life |  | Per Option |     | Exercisable Shares |  | Per Option
|                         |  |                     |       |                  |  |            |     |                    |  |           
|                         |  | (In thousands)      |       |                  |  |            |     | (In thousands)     |  |           
|$ 8.33-8.94              |  |                     | 2,435 |                  |  |            | 5.6 |                    |  | $          | 8.67  |  |  |  | 1,774 |  |  | $ | 8.60  | 
|$10.60-13.05             |  |                     | 1,075 |                  |  |            | 9.6 |                    |  | $          | 12.70 |  |  |  | 25    |  |  | $ | 10.63 | 
|$14.00-15.50             |  |                     | 1,547 |                  |  |            | 7.3 |                    |  | $          | 14.19 |  |  |  | 427   |  |  | $ | 14.17 | 
|$16.37-21.00             |  |                     | 1,834 |                  |  |            | 7.8 |                    |  | $          | 16.63 |  |  |  |      |  |  | $ |      | 
|                         |  |                     |       |                  |  |            |     |                    |  |            |       |  |  |  |       |  |  |   |       | 
|                         |  |                     | 6,891 |                  |  |            |     |                    |  |            |       |  |  |  | 2,226 |  |  |   |       | 
|                         |  |                     |       |                  |  |            |     |                    |  |            |       |  |  |  |       |  |  |   |       | 

The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing
model with the following assumptions used for grants in 2000:
risk-free interest rates of 6.5% for the options with a two year
vesting period, 6.38% for the options with a three year vesting
period and 6.3% for the options with a four year vesting period;
no expected dividend yield; expected lives of two, four and six
years, respectively; and expected volatility of 38%, 34%, 33%,
respectively. Expected volatility was calculated using the
average volatilities of comparable public companies.

The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing
model with the following assumptions used for grants in 2001:
risk-free interest rates of 4.17% for the options with a two
year vesting period, 4.24% for the options with a three year
vesting period and 4.39% for the options with a four year
vesting period; no expected dividend yield; expected lives of
two, four and six years, respectively; and expected volatility
of 42%, 37%, and 35%, respectively. Expected volatility was
calculated using the average volatilities of comparable public
companies.

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 years ended
December 31, 2000 and 2001:

Pro Forma Effects

(In thousands, except per share
amounts)


|                                      |                         |      |          |          |   |   |          |          |  
|------------------------------------- | ----------------------- | ---- | -------- | -------- | - | - | -------- | -------- | -
|                                      |                         | 2000 |          | 2001    
|                                      |                         |      |          |         
|Net loss before stock options expense |                         | $    | (116,126 | )        |   | $ | (229,832 | )       
|Accretion                             |                         |      | (1,484   | )        |   |   |         |         
|Stock options expense                 |                         |      | (16,178  | )        |   |   | (10,834  | )       
|                                      |                         |      |          |          |   |   |          |         
|                                      | Net loss                |      | $        | (133,788 | ) |   | $        | (240,666 | )
|                                      |                         |      |          |          |   |   |          |         
|                                      | Weighted average shares |      |          | 50,786   |   |   |          | 74,691   |  
|                                      |                         |      |          |          |   |   |          |         
|                                      | Net loss per share      |      | $        | (2.63    | ) |   | $        | (3.22    | )
|                                      |                         |      |          |          |   |   |          |         

14.     Benefit
Plans

Crown Media Holdings adopted a new benefit plan
for all of its United States employees in November 2001.
According to the new Crown Media Employee Savings Plan
(ESP), any full-time or part-time employee may join
the ESP 90 days after his or her employment. Employees that
qualify for participation can contribute up to 16% of their
pre-tax salary, subject to a maximum contribution limit as
determined by the Internal Revenue Service. Additionally, for
every dollar up to six percent of salary an employee
contributes, Crown Media Holdings will contribute fifty cents.

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CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Through December 31, 2001, certain Crown
Media Holdings and Crown Media International employees were
allowed to participate in its 401(k) Plan (the 401(k)
Plan). Employees that qualified for participation could
contribute up to 15% of their salary on a pre-tax basis, subject
to a maximum contribution limit as determined by the Internal
Revenue Service. Crown Media Holdings and Crown Media
International were permitted to make matching contributions on
behalf of all participants who made elective deferrals in an
amount equal to a variable percentage of participants
pre-tax contributions through November 2001. Crown Media
Holdings and Crown Media International contributed $32,000,
$54,000, and $77,000 for the years ended December 31, 1999,
2000, and 2001, respectively.

Crown Media United States employees were allowed
to participate in its 401(k) Plan covering most of the employees
of Crown Media United States through December 31, 2001.
Crown Media United States made contributions to its 401(k) Plan
based on a percentage of employee contributions. Maximum
employee and company contributions were limited by the Internal
Revenue Code regulations and by the terms of the 401(k) Plan.
For the years ended December 31, 2000 and 2001, Crown Media
United States contributed $658,000 and $733,000, respectively,
to the 401(k) Plan.

15.     Operations in
Different Geographic Areas

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

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

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

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CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and amortization of goodwill and other
intangibles. Home office costs are reflected in the domestic
operating losses and are not allocated internationally):

|                                  |                                                   |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |       |         | 
|--------------------------------- | ------------------------------------------------- | ------------------------- | ----- | ------------ |  | --------- | --- | ------------ |  | - | ------ | ------ | - |  | ------- | ----- | ------- | 
|                                  |                                                   | Revenue from              |       | Revenue from |  | Operating |     |             
|                                  |                                                   | Unrelated                 |       | Related      |  | Income    |     | Identifiable
|                                  |                                                   | Entities                  |       | Entities     |  | (Loss)    |     | Assets      
|                                  |                                                   |                           |       |              |  |           |     |             
|                                  |                                                   |                          
|                                  |                                                   | (In millions)            
|Year ended December 31, 1999:     |                                                   |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|                                  | Domestic                                          |                           | $     |             |  |           | $   | 2.5          |  |   | $      | (30.1  | ) |  | $       | 8.2   |        
|                                  | International                                     |                           |       | 29.4         |  |           |     |             |  |   |        | (5.8   | ) |  |         | 24.8  |        
|                                  |                                                   |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|                                  |                                                   | $                         | 29.4  |              |  | $         | 2.5 |              |  | $ | (35.9  | )      |   |  | 33.0    |      
|                                  |                                                   |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|Assets not allocated to segments: |                                                   |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|                                  | Cash and cash equivalents                         |                           |       |              |  |           |     |              |  |   |        |        |   |  |         | 3.9   |        
|                                  | Accounts receivable                               |                           |       |              |  |           |     |              |  |   |        |        |   |  |         | 7.2   |        
|                                  | Investment in/advances to unconsolidated entities |                           |       |              |  |           |     |              |  |   |        |        |   |  |         | 35.9  |        
|                                  |                                                   |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|                                  |                                                   | Consolidated total assets |       |              |  |           |     |              |  |   |        |        |   |  |         | $     | 80.0    | 
|                                  |                                                   |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|Year ended December 31, 2000:     |                                                   |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|                                  | Domestic                                          |                           | $     | 18.1         |  |           | $   | 2.9          |  |   | $      | (94.3  | ) |  | $       | 189.6 |        
|                                  | International                                     |                           |       | 45.8         |  |           |     |             |  |   |        | (11.3  | ) |  |         | 44.2  |        
|                                  |                                                   |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|                                  |                                                   | $                         | 63.9  |              |  | $         | 2.9 |              |  | $ | (105.6 | )      |   |  | 233.8   |      
|                                  |                                                   |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|Assets not allocated to segments: |                                                   |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|                                  | Cash and cash equivalents                         |                           |       |              |  |           |     |              |  |   |        |        |   |  |         | 34.3  |        
|                                  | Accounts receivable                               |                           |       |              |  |           |     |              |  |   |        |        |   |  |         | 21.2  |        
|                                  | Investment in/advances to unconsolidated entity   |                           |       |              |  |           |     |              |  |   |        |        |   |  |         | 0.6   |        
|                                  | Goodwill and other intangibles                    |                           |       |              |  |           |     |              |  |   |        |        |   |  |         | 240.1 |        
|                                  |                                                   |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|                                  |                                                   | Consolidated total assets |       |              |  |           |     |              |  |   |        |        |   |  |         | $     | 530.0   | 
|                                  |                                                   |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|Year ended December 31, 2001:     |                                                   |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|                                  | Domestic                                          |                           | $     | 34.5         |  |           | $   | 5.0          |  |   | $      | (186.0 | ) |  | $       | 252.1 |        
|                                  | International                                     |                           |       | 65.3         |  |           |     |             |  |   |        | (31.8  | ) |  |         | 79.8  |        
|                                  | Film Distribution                                 |                           |       | 2.3          |  |           |     |             |  |   |        | (2.9   | ) |  |         | 812.0 |        
|                                  |                                                   |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|                                  |                                                   | $                         | 102.1 |              |  | $         | 5.0 |              |  | $ | (220.7 | )      |   |  | 1,143.9 |      
|                                  |                                                   |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|Assets not allocated to segments: |                                                   |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|                                  | Cash and cash equivalents                         |                           |       |              |  |           |     |              |  |   |        |        |   |  |         | 13.9  |        
|                                  | Cash in escrow                                    |                           |       |              |  |           |     |              |  |   |        |        |   |  |         | 111.6 |        
|                                  | Accounts receivable                               |                           |       |              |  |           |     |              |  |   |        |        |   |  |         | 36.2  |        
|                                  | Debt issuance costs                               |                           |       |              |  |           |     |              |  |   |        |        |   |  |         | 6.8   |        
|                                  | Goodwill and other intangibles                    |                           |       |              |  |           |     |              |  |   |        |        |   |  |         | 314.0 |        
|                                  |                                                   |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|                                  |                                                   | Consolidated total assets |       |              |  |           |     |              |  |   |        |        |   |  |         | $     | 1,626.4 | 
|                                  |                                                   |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      

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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Asia Pacific market, Latin America market,
Turkey and Russia have experienced illiquidity, volatile
currency exchange rates and interest rates, volatile political
and economic conditions, and reduced economic activity. Crown
Media Holdings will be affected in the foreseeable future by
economic conditions in these regions, although it is not
possible to predict the extent of such impact. Additionally, on
September 11, 2001, the United States encountered a
terrorist attack, which increased volatility in the economic
markets since that date.

No customer accounted for more than 10% of Crown
Media Holdings total revenues for the years ended
December 31, 2000 and 2001.

16.     Quarterly
Information (Unaudited)

The following tables contain unaudited quarterly
financial data (in thousands, except per share amounts) for the
years ended December 31, 1999, 2000 and 2001. The loss per
share for 1999 and 2000 has been recalculated to reflect the
initial public offering.

|                                                                         |                      |                |        |         |   |      |        |         |   |           |         |         |   |   |        |         |   |   |         |         |  
|------------------------------------------------------------------------ | -------------------- | -------------- | ------ | ------- | - | ---- | ------ | ------- | - | --------- | ------- | ------- | - | - | ------ | ------- | - | - | ------- | ------- | -
|                                                                         |                      |               
|                                                                         |                      | Quarters Ended
|                                                                         |                      |               
|1999                                                                     |                      | 3/31           |        | 6/30    |   | 9/30 |        | 12/31   |   | Full Year
|                                                                         |                      |                |        |         |   |      |        |         |   |          
|Total revenues                                                           |                      | $              | 7,308  |         |   | $    | 7,354  |         |   | $         | 9,250   |         |   | $ | 7,997  |         |   | $ | 31,909  |        
|Programming costs                                                        |                      |                | (6,533 | )       |   |      | (6,439 | )       |   |           | (5,149  | )       |   |   | (4,662 | )       |   |   | (22,783 | )      
|Operating costs                                                          |                      |                | (4,103 | )       |   |      | (5,117 | )       |   |           | (5,558  | )       |   |   | (4,018 | )       |   |   | (18,796 | )      
|Selling, marketing, general and administrative
	expenses                 |                      |                | (4,478 | )       |   |      | (5,181 | )       |   |           | (10,041 | )       |   |   | (6,577 | )       |   |   | (26,277 | )      
|                                                                         |                      |                |        |         |   |      |        |         |   |           |         |         |   |   |        |         |   |   |         |        
|                                                                         | Loss from operations |                |        | (7,806  | ) |      |        | (9,383  | ) |           |         | (11,498 | ) |   |        | (7,260  | ) |   |         | (35,947 | )
|Equity in net losses of unconsolidated entities
	and investment expenses |                      |                | (2,572 | )       |   |      | (4,560 | )       |   |           | (3,645  | )       |   |   | (8,215 | )       |   |   | (18,992 | )      
|Interest income, net                                                     |                      |                | 370    |         |   |      | 245    |         |   |           | 158     |         |   |   | 25     |         |   |   | 798     |        
|Income tax provision                                                     |                      |                | (626   | )       |   |      | (512   | )       |   |           | (630    | )       |   |   | (788   | )       |   |   | (2,556  | )      
|                                                                         |                      |                |        |         |   |      |        |         |   |           |         |         |   |   |        |         |   |   |         |        
|                                                                         | Net loss             |                | $      | (10,634 | ) |      | $      | (14,210 | ) |           | $       | (15,615 | ) |   | $      | (16,238 | ) |   | $       | (56,697 | )
|                                                                         |                      |                |        |         |   |      |        |         |   |           |         |         |   |   |        |         |   |   |         |        
|                                                                         | Net loss per share   |                | $      | (0.36   | ) |      | $      | (0.46   | ) |           | $       | (0.49   | ) |   | $      | (0.53   | ) |   | $       | (1.84   | )
|                                                                         |                      |                |        |         |   |      |        |         |   |           |         |         |   |   |        |         |   |   |         |        

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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                         |                      |                |        |         |   |      |         |         |   |           |         |         |   |   |         |         |   |   |         |          |  
|------------------------------------------------------------------------ | -------------------- | -------------- | ------ | ------- | - | ---- | ------- | ------- | - | --------- | ------- | ------- | - | - | ------- | ------- | - | - | ------- | -------- | -
|                                                                         |                      |               
|                                                                         |                      | Quarters Ended
|                                                                         |                      |               
|2000                                                                     |                      | 3/31           |        | 6/30(A) |   | 9/30 |         | 12/31   |   | Full Year
|                                                                         |                      |                |        |         |   |      |         |         |   |          
|Total revenues                                                           |                      | $              | 9,293  |         |   | $    | 13,512  |         |   | $         | 19,366  |         |   | $ | 24,645  |         |   | $ | 66,816  |         
|Programming costs                                                        |                      |                | (4,979 | )       |   |      | (10,020 | )       |   |           | (14,936 | )       |   |   | (20,305 | )       |   |   | (50,240 | )       
|Operating costs                                                          |                      |                | (5,857 | )       |   |      | (13,837 | )       |   |           | (16,298 | )       |   |   | (4,452  | )       |   |   | (40,444 | )       
|Selling, marketing, general and administrative
	expenses                 |                      |                | (7,345 | )       |   |      | (18,799 | )       |   |           | (18,245 | )       |   |   | (28,682 | )       |   |   | (73,071 | )       
|Amortization of goodwill                                                 |                      |                |       |         |   |      | (1,962  | )       |   |           | (3,132  | )       |   |   | (3,545  | )       |   |   | (8,639  | )       
|                                                                         |                      |                |        |         |   |      |         |         |   |           |         |         |   |   |         |         |   |   |         |         
|                                                                         | Loss from operations |                |        | (8,888  | ) |      |         | (31,106 | ) |           |         | (33,245 | ) |   |         | (32,339 | ) |   |         | (105,578 | )
|Equity in net losses of unconsolidated entities
	and investment expenses |                      |                | (5,194 | )       |   |      | (2,378  | )       |   |           | (954    | )       |   |   | (802    | )       |   |   | (9,328  | )       
|Interest income (expense), net                                           |                      |                | (303   | )       |   |      | 18      |         |   |           | 626     |         |   |   | 182     |         |   |   | 523     |         
|Income tax provision                                                     |                      |                | (2,134 | )       |   |      | (317    | )       |   |           | (468    | )       |   |   | 1,176   |         |   |   | (1,743  | )       
|                                                                         |                      |                |        |         |   |      |         |         |   |           |         |         |   |   |         |         |   |   |         |         
|                                                                         | Net loss             |                | $      | (16,519 | ) |      | $       | (33,783 | ) |           | $       | (34,041 | ) |   | $       | (31,783 | ) |   | $       | (116,126 | )
|                                                                         |                      |                |        |         |   |      |         |         |   |           |         |         |   |   |         |         |   |   |         |         
|                                                                         | Net loss per share   |                | $      | (0.52   | ) |      | $       | (0.70   | ) |           | $       | (0.57   | ) |   | $       | (0.53   | ) |   | $       | (2.32    | )
|                                                                         |                      |                |        |         |   |      |         |         |   |           |         |         |   |   |         |         |   |   |         |         



---



|    |  |                                                                                                 
|--- |  | ------------------------------------------------------------------------------------------------
|(A) |  | Reflects the acquisition and consolidation of
	Crown Media United States beginning May 10, 2000.

|                                                         |                      |                |         |         |   |      |         |         |   |           |         |         |   |   |         |         |   |   |          |          |  
|-------------------------------------------------------- | -------------------- | -------------- | ------- | ------- | - | ---- | ------- | ------- | - | --------- | ------- | ------- | - | - | ------- | ------- | - | - | -------- | -------- | -
|                                                         |                      |               
|                                                         |                      | Quarters Ended
|                                                         |                      |               
|2001                                                     |                      | 3/31(B)        |         | 6/30    |   | 9/30 |         | 12/31   |   | Full Year
|                                                         |                      |                |         |         |   |      |         |         |   |          
|Total revenues                                           |                      | $              | 23,039  |         |   | $    | 26,477  |         |   | $         | 26,335  |         |   | $ | 31,206  |         |   | $ | 107,057  |         
|Programming costs                                        |                      |                | (20,214 | )       |   |      | (22,884 | )       |   |           | (52,623 | )       |   |   | (21,464 | )       |   |   | (117,185 | )       
|Amortization of library assets                           |                      |                |        |         |   |      |        |         |   |           |        |         |   |   | (3,533  | )       |   |   | (3,533   | )       
|Operating costs                                          |                      |                | (14,448 | )       |   |      | (13,234 | )       |   |           | (19,378 | )       |   |   | (18,074 | )       |   |   | (65,134  | )       
|Selling, marketing, general and administrative
	expenses |                      |                | (28,217 | )       |   |      | (29,846 | )       |   |           | (29,043 | )       |   |   | (34,768 | )       |   |   | (121,874 | )       
|Amortization of goodwill                                 |                      |                | (3,527  | )       |   |      | (5,469  | )       |   |           | (5,524  | )       |   |   | (5,512  | )       |   |   | (20,032  | )       
|                                                         |                      |                |         |         |   |      |         |         |   |           |         |         |   |   |         |         |   |   |          |         
|                                                         | Loss from operations |                |         | (43,367 | ) |      |         | (44,956 | ) |           |         | (80,233 | ) |   |         | (52,145 | ) |   |          | (220,701 | )
|Equity in net losses of unconsolidated entities          |                      |                | (655    | )       |   |      |        |         |   |           |        |         |   |   |        |         |   |   | (655     | )       
|Guaranteed preferred beneficial interest expense         |                      |                |        |         |   |      |        |         |   |           |        |         |   |   | (1,428  | )       |   |   | (1,428   | )       
|Interest income (expense), net                           |                      |                | (760    | )       |   |      | (1,652  | )       |   |           | (2,322  | )       |   |   | (5,658  | )       |   |   | (10,392  | )       
|Income tax benefit (provision)                           |                      |                | (385    | )       |   |      | (621    | )       |   |           | (397    | )       |   |   | 4,747   |         |   |   | 3,344    |         
|                                                         |                      |                |         |         |   |      |         |         |   |           |         |         |   |   |         |         |   |   |          |         
|                                                         | Net loss             |                | $       | (45,167 | ) |      | $       | (47,229 | ) |           | $       | (82,952 | ) |   | $       | (54,484 | ) |   | $        | (229,832 | )
|                                                         |                      |                |         |         |   |      |         |         |   |           |         |         |   |   |         |         |   |   |          |         
|                                                         | Net loss per share   |                | $       | (0.74   | ) |      | $       | (0.72   | ) |           | $       | (1.22   | ) |   | $       | (0.52   | ) |   | $        | (3.08    | )
|                                                         |                      |                |         |         |   |      |         |         |   |           |         |         |   |   |         |         |   |   |          |         



---



|    |                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------
|(B) | Reflects the acquisition and consolidation of the
	remaining interests in H&H Programming  Asia
	beginning March 16, 2001.

F-42



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##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

17.     Subsequent
Event

As of February 20, 2002, Crown Media
Holdings and the other parties to the shareholder lawsuit (see
Note 12) entered into a settlement agreement concerning the
lawsuit, with terms contemplated by the memorandum of
understanding. The settlement agreement provides that the
purchase price of the film assets will be reduced by
425,000 shares of Class A common stock. In accordance
with the memorandum of understanding and the settlement
agreement, 425,000 shares of Class A common stock have
been placed in escrow pending release to us if there is final
court approval of the settlement or to Hallmark Cards if the
settlement is not approved by the court. The settlement
agreement also provides that all claims, rights and causes of
actions against Crown Media Holdings, its officers, directors,
employees, agents, attorneys, investment bankers and other
related parties that arise out of the events alleged in the
lawsuit will be released if the settlement receives final court
approval. The settlement agreement will be terminated if the
final court approval does not occur for any reason. As part of
the settlement, the plaintiffs counsel may apply to the
court for an award for attorneys fees and expenses in an
amount not to exceed $700,000 inclusive of disbursements.
Crown Media Holdings will pay these fees and disbursements that
are actually awarded by the court, without interest. Crown Media
Holdings anticipates that a portion of these fees and
disbursements will be covered by its insurers. Crown Media
Holdings is also paying the cost of preparing and mailing a
notice to its stockholders of the court hearing on the
settlement.

As required by the settlement agreement, the
parties have presented the settlement to the court for approval.
A hearing regarding the settlement is scheduled in April 2002.
However, the court reserves the rights to adjourn the settlement
hearing from time to time. At the settlement hearing, the court
will be asked to determine whether, among other things:
(1) to approve the settlement as fair and reasonable, and
in the best interest of a class consisting of all record owners
and beneficial owners of our common stock on any day from
November 6, 2000 (the date that the films transaction was
publicly announced) to and including September 28, 2001,
the effective date of closing the films transaction; (2) to
dismiss the lawsuit such that no plaintiff or class member could
sue on their claims again; (3) to certify the lawsuit as a
class action; and (4) if the court approves the settlement,
to grant the request of the plaintiffs counsel for
attorneys fees and reimbursement of expenses in connection with
the lawsuit.

All the defendants have denied, and have
continued to deny, that they have committed any violations of
law. The memorandum of understanding permitted the films
transaction, viewed by Crown Media Holdings as important, to
proceed without risk of injunction or other relief. As stated in
the settlement agreement, the defendants entered into the
settlement in order to avoid the substantial expense,
inconvenience and distraction of continued litigation, to
dispose of potentially burdensome and protracted litigation, and
to finally put to rest and terminate the claims arising out of
the films transaction.

F-43



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##### Table of Contents



INDEX TO EXHIBITS

|        |    |     |  |               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------- | -- | --- |  | ------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |              
|Number  |    |     |  | Exhibit Title
|        |    |     |  |              
|        | 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 (previously filed as Exhibit 3.2 to our
	Quarterly Report on Form 10-Q filed on July 31, 2001
	and incorporated herein by reference).                                                                                                                                                                                                                                                     
|        | 3  | .3  |  |              |  | Amended and Restated By-Laws (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).                                                                                                                                                                                                                                                        
|        | 4  | .1  |  |              |  | Form of Specimen Certificate for our Class A
	Common Stock (previously filed as Exhibit 4.1 to our
	Registration Statement on Form S-1/ A (Amendment
	No. 1), Commission File No. 333-95573, and
	incorporated herein by reference).                                                                                                                                                                                                                          
|        | 10 | .1  |  |              |  | Second Amended and Restated Stockholders
	Agreement, dated August 31, 2001 (previously filed as
	Exhibit 10.6 to our Quarterly Report on Form 10-Q
	filed on November 13, 2001 and incorporated herein by
	reference).                                                                                                                                                                                                                                        
|        | 10 | .2  |  |              |  | Acknowledgment and Agreement to the Second
	Amended and Restated Stockholders Agreement, dated as of
	December 31, 2001, by Hallmark Entertainment Holdings, Inc.                                                                                                                                                                                                                                                                                             
|        | 10 | .3  |  |              |  | Credit, Security, Guaranty and Pledge Agreement,
	dated August 31, 2001, by and among Crown Media Holdings,
	Inc., its Subsidiaries named therein, the Lenders named therein
	and The Chase Manhattan Bank (now known as JP Morgan Chase Bank)
	as Administrative Agent and Issuing Bank (filed as
	Exhibit 10.1 to our Current Report on Form 8-K, filed
	on October 3, 2001, and incorporated herein by reference).                                         
|        | 10 | .4  |  |              |  | Amendment No. 1, dated as of
	December 14, 2001, 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 JP Morgan Chase Bank as
	Administrative Agent and as Issuing Bank (previously filed as
	Exhibit 10.1 to our Current Report on Form 8-K, filed
	on December 18, 2001, and incorporated herein by reference).
|        | 10 | .5  |  |              |  | Amendment No. 2, dated as of
	December 31, 2001, 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 JP Morgan Chase Bank as
	Administrative Agent and as Issuing Bank.                                                                                                                                         
|        | 10 | .6  |  |              |  | Subordination and Support Agreement dated
	August 31, 2001, among Crown Media Holdings, Inc., Hallmark
	Cards, Incorporated and The Chase Manhattan Bank (now known as
	JP Morgan Chase Bank) as agent for the Lenders and the
	Issuing Bank referred to in the Credit Agreement (previously
	filed as Exhibit 10.3 to our Current Report on
	Form 8-K, filed on October 3, 2001, and incorporated
	herein by reference).                                     
|        | 10 | .7  |  |              |  | Amended and Restated Limited Guarantee Agreement
	and Acknowledgement, dated as of August 31, 2001 as amended
	and restated as of December 14, 2001, made by Hallmark
	Cards, Incorporated in favor of JP Morgan Chase Bank
	(formerly known as The Chase Manhattan Bank) as agent on behalf
	of the Lenders and the Issuing Bank.                                                                                                                            
|        | 10 | .8  |  |              |  | Hallmark Inducement Agreement dated
	August 31, 2001, between Hallmark Entertainment, Inc. and
	The Chase Manhattan Bank (now known as JP Morgan Chase Bank) in
	its capacity as agent under the credit agreement (previously
	filed as Exhibit 10.5 to our Current Report on
	Form 8-K, filed on October 3, 2001, and incorporated
	herein by reference).                                                                                                    
|        | 10 | .9  |  |              |  | Securities Purchase Agreement, dated as of
	December 17, 2001, by and among Crown Media Holdings, Inc.,
	Crown Media Trust and the Investors Named Therein (previously
	filed as Exhibit 10.3 to our Current Report on
	Form 8-K, filed on December 18, 2001, and incorporated
	herein by reference).                                                                                                                                                         
|        | 10 | .10 |  |              |  | Contingent Appreciate Certificate Agreement,
	dated as of December 17, 2001, by and among Crown Media
	Holdings, Inc. and the Holders Named Therein (previously filed
	as Exhibit 10.4 to our Current Report on Form 8-K,
	filed on December 18, 2001, and incorporated herein by
	reference).                                                                                                                                                                



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##### Table of Contents



|        |    |      |  |               |  |                                                                                                                                                                                                                                                                                                                                                                                                                
|------- | -- | ---- |  | ------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |              
|Number  |    |      |  | Exhibit Title
|        |    |      |  |              
|        | 10 | .11  |  |              |  | Indenture, dated as of December 17, 2001, by
	and between Crown Media Holdings, as Issuer, and JPMorgan Chase
	Bank, as Indenture Trustee (previously filed as
	Exhibit 10.5 to our Current Report on Form 8-K, filed
	on December 18, 2001, and incorporated herein by reference).                                                                                                                            
|        | 10 | .12  |  |              |  | Preferred Securities Guarantee Agreement, dated
	as of December 17, 2001, by and between Crown Media
	Holdings, Inc., as Guarantor, and JPMorgan Chase Bank, as
	Preferred Guarantee Trustee (previously filed as
	Exhibit 10.6 to our Current Report on Form 8-K, filed
	on December 18, 2001, and incorporated herein by reference).                                                                         
|        | 10 | .13  |  |              |  | Subordination and Support Agreement, dated as of
	December 17, 2001, by and among Crown Media Holdings, Inc.,
	Obligor, Crown Media Trust, Hallmark Cards, Incorporated,
	JPMorgan Chase Bank, Indenture Trustee, and the holders of
	Certificates identified therein (previously filed as
	Exhibit 10.7 to our Current Report on Form 8-K, filed
	on December 18, 2001, and incorporated herein by reference).
|        | 10 | .14  |  |              |  | Amended and Restated Program License Agreement,
	dated as of January 1, 2001, by and between Hallmark
	Entertainment Distribution, LLC, and Crown Media International,
	Inc.                                                                                                                                                                                                                                   
|        | 10 | .15  |  |              |  | Amended and Restated Program License Agreement,
	dated as of January 1, 2001, by and between Hallmark
	Entertainment Distribution, LLC and Crown Media United States,
	LLC (formerly known as Odyssey Holdings, LLC).                                                                                                                                                                                          
|        | 10 | .16  |  |              |  | Amended and Restated Trademark License Agreement,
	dated as of December 1, 2000, by and between Hallmark
	Cards, Incorporated and Crown Media International, Inc.
	(previously filed as Exhibit 10.7 to our Annual Report on
	Form 10-K filed on March 27, 2001 and incorporated
	herein by reference).                                                                                                        
|        | 10 | .17  |  |              |  | Amended and Restated Trademark License Agreement
	(UK), dated as of December 1, 2000, by and between Hallmark
	Cards, Incorporated and Hallmark Entertainment Limited (formerly
	known as Hallmark Entertainment Networks (UK) Ltd.)
	(previously filed as Exhibit 10.7 to our Annual Report on
	Form 10-K filed on March 27, 2001 and incorporated by
	reference herein).                                     
|        | 10 | .18  |  |              |  | Amended and Restated Trademark License Agreement,
	dated as of March 27, 2001, by and between Hallmark
	Licensing, Inc. and Odyssey Holdings, LLC (now known as Crown
	Media United States, LLC) (previously filed as
	Exhibit 10.1 to our Quarterly Report on Form 10-Q
	filed on May 4, 2001, and incorporated herein by reference.)                                                                         
|        | 10 | .19  |  |              |  | Security Agreement, dated as of August 1,
	1999, by and between Hallmark Entertainment Networks, Inc. (now
	known as Crown Media International, Inc.) and Hallmark Cards,
	Incorporated (previously filed as Exhibit 10.10 to our
	Registration Statement on Form S-1/ A (Amendment
	No. 1), Commission File No. 333-95573, and
	incorporated herein by reference).                                            
|        | 10 | .20  |  |              |  | Security Agreement, dated as of March 27,
	2001, by and between Odyssey Holdings, LLC (now known as Crown
	Media United States, LLC) and Hallmark Licensing, Inc.                                                                                                                                                                                                                                              
|        | 10 | .21  |  |              |  | Amended and Restated Company Agreement of Odyssey
	Holdings, L.L.C. (now known as Crown Media United
	States, LLC) (previously filed as Exhibit 10.11 to our
	Registration Statement on Form S-1/ A (Amendment
	No. 1), Commission File No. 333-95573, and
	incorporated herein by reference).                                                                                                                 
|        | 10 | .22  |  |              |  | Amendment to the Amended and Restated Company
	Agreement of Odyssey Holdings, LLC, dated March 15, 2001.                                                                                                                                                                                                                                                                                                       
|        | 10 | .23  |  |              |  | Agreement, dated as of February 22, 2001, by
	and among Odyssey Holdings, LLC, National Interfaith Cable
	Coalition, Inc. and VISN Management Corp. (previously filed
	as Exhibit 10.2 to our Quarterly Report on Form 10-Q
	filed on May 4, 2001 and incorporated herein by reference.)                                                                                                                       
|        | 10 | .24  |  |              |  | Amended and Restated Intercompany Service
	Agreement, dated as of January 1, 2000, between Crown Media
	Holdings, Inc. and Hallmark Cards, Incorporated (previously
	filed as Exhibit 10.12 to our Registration Statement on
	Form S-1/ A (Amendment No. 1), Commission File
	No. 333-95573, and incorporated herein by reference).                                                                            
|        | 10 | .25* |  |              |  | Amended and Restated Crown Media Holdings, Inc.
	2000 Long Term Incentive Plan (previously filed as
	Exhibit 10.13 to Our Annual Report on Form 10-K filed
	on March 27, 2001, and incorporated herein by reference).                                                                                                                                                                                          



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##### Table of Contents



|        |    |     |  |               |  |                                                                                                                                                                                                                                                                                                                                                                                     
|------- | -- | --- |  | ------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |              
|Number  |    |     |  | Exhibit Title
|        |    |     |  |              
|        | 10 | .26 |  |              |  | Program License Agreement, dated as of
	November 13, 1998, between National Interfaith Cable
	Coalition, Inc. and Odyssey Holdings, L.L.C. (previously filed
	as Exhibit 10.17 to our Registration Statement on
	Form S-1/ A (Amendment No. 1), Commission File
	No. 333-95573, and incorporated herein by reference).                                                              
|        | 10 | .27 |  |              |  | Purchase and Sale Agreement, dated April 10,
	2001, by and between Crown Media Holdings, Inc. and Hallmark
	Entertainment Distribution, LLC (previously filed as
	Appendix A to definitive proxy materials filed on
	May 7, 2001, and incorporated by reference herein).                                                                                                            
|        | 10 | .28 |  |              |  | Service Agreement, dated September 28, 2001,
	by and between Hallmark Entertainment, Inc. and Crown Media
	Holdings, Inc., as assigned to Crown Media Distribution,
	LLC, pursuant to letter dated December 14, 2001.                                                                                                                                                               
|        | 10 | .29 |  |              |  | Registration Rights Agreement, dated as of
	September 28, 2001, by and between Crown Media Holdings,
	Inc. and Hallmark Entertainment Distribution, as amended by
	assignments dated September 28, 2001 and December 31,
	2001.                                                                                                                                                     
|        | 10 | .30 |  |              |  | Stock Purchase Agreement, dated as of
	August 20, 2001, by and between Crown Media Holdings, Inc.
	and DIRECTV Enterprises, Inc. (previously filed as
	Exhibit 10.7.1 to our Amendment No. 1 to our Quarterly
	Report on Form 10-Q/ A filed on January 10, 2002 and
	incorporated herein by reference).                                                                             
|        | 10 | .31 |  |              |  | Affiliation Agreement for DBS Satellite
	Exhibition of Cable Network Programming, dated as of
	August 20, 2001, by and between Crown Media United States,
	LLC, and DIRECTV, Inc. (previously filed as Exhibit 10.7.2
	to our Amendment No. 1 to our Quarterly Report on
	Form 10-Q/ A filed on January 10, 2002 and
	incorporated herein by reference).                            
|        | 10 | .32 |  |              |  | Affiliation Agreement for DBS Satellite
	Exhibition of Cable Network Programming, dated as of
	March 6, 2000, by and between Crown Media United States,
	LLC, and DIRECTV, Inc. (previously filed as Exhibit 10.7.3
	to our Amendment No. 1 to our Quarterly Report on
	Form 10-Q/ A filed on January 10, 2002 and
	incorporated herein by reference).                              
|        | 10 | .33 |  |              |  | Letter, dated August 30, 2001, by and
	between DIRECTV, Inc. and Crown Media Holdings, Inc. (previously
	filed as Exhibit 10.7.4 to our Amendment No. 1 to our
	Quarterly Report on Form 10-Q/ A filed on January 10,
	2002 and incorporated herein by reference).                                                                                                                  
|        | 10 | .34 |  |              |  | Lease, dated as of June 1, 1998, by and
	between High Pointe I Development Group L.L.C. and Hallmark
	Entertainment Network, Inc. (now known as Crown Media
	International, Inc.) (previously filed as Exhibit 10.20 to
	our Registration Statement on Form S-1/ A (Amendment
	No. 1), Commission File No. 333-95573, and
	incorporated herein by reference).                       
|        | 10 | .35 |  |              |  | First Amendment to Lease, dated as of
	March 23, 1999, by and between High Pointe I
	Development Group L.L.C. and Hallmark Entertainment Network,
	Inc. (now known as Crown Media International, Inc.) (previously
	filed as Exhibit 10.21 to our Registration Statement on
	Form S-1/ A (Amendment No. 1), Commission File
	No. 333-95573, and incorporated herein by reference).  
|        | 10 | .36 |  |              |  | Second Amendment to Lease, dated as of
	August 17, 1999, by and between High Pointe I
	Development Group L.L.C. and Hallmark Entertainment Network,
	Inc. (now known as Crown Media International, Inc.) (previously
	filed as Exhibit 10.22 to our Registration Statement on
	Form S-1/ A (Amendment No. 1), Commission File
	No. 333-95573, and incorporated herein by reference).
|        | 10 | .37 |  |              |  | Third Amendment to Lease, dated as of
	September 26, 2000, by and between High Pointe 1
	Development Group L.L.C. and Crown Media International, Inc.
	(formerly known as Hallmark Entertainment Network, Inc.)
	(previously filed as Exhibit 10.20 to our Annual Report on
	Form 10-K filed on March 27, 2001, and incorporated
	herein by reference).                             
|        | 10 | .38 |  |              |  | Fourth Amendment to Lease, dated as of
	February 6, 2001, by and between High Pointe 1 Development
	Group, L.L.C. and Crown Media Inc. (now known as Crown Media
	International, Inc.) (previously filed as Exhibit 10.21 to
	our Annual Report on Form 10-K filed on March 27,
	2001, and incorporated by reference herein).                                                       
|        | 10 | .39 |  |              |  | Fifth Amendment to Lease, dated as of
	February 12, 2002, by and between High Pointe 1
	Development Group LLC and Crown Media International, Inc.                                                                                                                                                                                                                                   



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##### Table of Contents



|        |    |      |  |               |  |                                                                                                                                                                                                                                                                                                                                          
|------- | -- | ---- |  | ------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |              
|Number  |    |      |  | Exhibit Title
|        |    |      |  |              
|        | 10 | .40  |  |              |  | Guaranty of Lease Obligations, dated June 1,
	1998, by Hallmark Entertainment, Inc. for High Pointe I
	Development Group L.L.C. (previously filed as Exhibit 10.23
	to our Registration Statement on Form S-1/ A (Amendment
	No. 1), Commission File No. 333-95573, and
	incorporated herein by reference).                              
|        | 10 | .41* |  |              |  | Employment Agreement, dated as of
	September 18, 2001, between Crown Media Holdings, Inc. and
	David Evans (previously filed as Exhibit 10.8 to our
	Quarterly Report on Form 10-Q filed on November 13,
	2001 and incorporated herein by reference).                                                                                    
|        | 10 | .42* |  |              |  | Employment Agreement, dated as of July 5,
	2000, between Crown Media Holdings, Inc. and Chris Moseley
	(previously filed as Exhibit 10.26 to our Annual Report on
	Form 10-K filed on March 27, 2001 and incorporated
	herein by reference).                                                                                             
|        | 10 | .43* |  |              |  | Employment Agreement, dated as of
	October 25, 2000, by and between Crown Media Holdings, Inc.
	and Charles Stanford (previously filed as Exhibit 10.26 to
	our Annual Report on Form 10-K filed on March 27, 2001
	and incorporated herein by reference).                                                                               
|        | 10 | .44* |  |              |  | Employment Agreement, dated as of January 1,
	2001, by and between Crown Media Holdings, Inc. and William
	Aliber.                                                                                                                                                                                                                       
|        | 10 | .45* |  |              |  | Employment Agreement, dated as of
	September 19, 2000, by and between Odyssey Holdings, L.L.C.
	(now known as Crown Media United States, LLC) and Paul
	FitzPatrick.                                                                                                                                                                     
|        | 10 | .46* |  |              |  | Employment Agreement, dated as of
	September 25, 2001, by and between Crown Media United
	States, LLC and Lana Corbi.                                                                                                                                                                                                                    
|        | 10 | .47* |  |              |  | Employment Agreement, dated as of
	December 20, 2001, by and between Crown Media
	International, Inc. and Russel H. Givens, Jr.                                                                                                                                                                                                          
|        | 10 | .48* |  |              |  | Separation Agreement, dated January 28,
	1999, between Hallmark Entertainment Networks, Inc. (now known
	as Crown Media International, Inc.) and George Stein (previously
	filed as Exhibit 10.29 to our Registration Statement on
	Form S-1/ A (Amendment No. 1), Commission File
	No. 333-95573, and incorporated herein by reference).
|        | 10 | .49  |  |              |  | $50,000,000 Promissory Note, dated July 10,
	2001, made by Crown Media Holdings, Inc. in favor of HC Crown
	Corporation (previously filed as Exhibit 10.1 to our
	Quarterly Report on Form 10-Q filed on May 4, 2001 and
	incorporated herein by reference).                                                                             
|        | 10 | .50  |  |              |  | $75,000,000 Promissory Note, dated
	December 14, 2001, made by Crown Media Holdings, Inc.,
	Crown Media International, Inc. and Crown Media United States,
	LLC in favor of HC Crown Corp. (previously filed as
	Exhibit 10.2 to our Current Report on Form 8-K, filed
	on December 18, 2001, and incorporated herein by reference).     
|        | 10 | .51  |  |              |  | $150,000,000 Irrevocable Standby Letter of Credit
	No. TS-07001786, dated October 3, 2001, issued by
	Credit Suisse First Boston, in favor of the Crown Media
	Holdings, Inc.                                                                                                                                                            
|        | 10 | .52  |  |              |  | Reduction Certificate to $150,000,000 Irrevocable
	Standby Letter of Credit, dated December 21, 2001.                                                                                                                                                                                                                                    
|        | 21 | .1   |  |              |  | List of our Subsidiaries.                                                                                                                                                                                                                                                                                                                
|        | 23 | .1   |  |              |  | Consent of Arthur Andersen LLP.                                                                                                                                                                                                                                                                                                          
|        | 99 | .1   |  |              |  | Crown Media Holdings letter regarding
	representation by Arthur Andersen LLP.                                                                                                                                                                                                                                                            



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