##### 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,
    2002                                             
|          
|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.     þ

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

The aggregate market value of the voting and
non-voting common equity held by non-affiliates computed by
reference to the price at which the common equity was last sold
as of June 28, 2002, the last business day of the
registrants most recently completed second fiscal quarter
was $581,262,414.

As of March 3, 2003, the number of shares of
Class A Common Stock, $.01 par value outstanding was
73,794,606, and the number of shares of Class B Common
Stock, $.01 par value, outstanding was 30,670,422.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants Proxy Statement
for the 2003 Annual Meeting of Stockholders, to be filed, are
incorporated by reference in Part III of this report.



---






---

TABLE OF CONTENTS



|                                                  |                                                                                                         |  |  |  |  |  |  | 
|------------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                           
|                                                  | Item 1. Description of 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                                                                        
|                                                  | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|                                                  | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                    
|                                                  | Item 8. Consolidated Financial Statements and Supplementary Data                                       
|                                                  | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|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 and Related Stockholder Matters
|                                                  | Item 13. Certain Relationships and Related Transactions                                                
|                                                  | Item 14. Controls and Procedures                                                                       
|PART IV                                          
|                                                  | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                              
|INDEX TO EXHIBITS                                
|SIGNATURES                                       
|CERTIFICATION                                    
|INDEX TO EXHIBITS                                
|EX-10.3 Agreement to Stockholders Agreement      
|EX-10.4 Acknowledgement to Stockholders Agreement
|EX-10.5 Acknowledgement to Stockholders Agreement
|EX-10.6 Consent/Waiver to Stockholders Agreement 
|EX-10.7 Consent/Waiver to Stockholders Agreement 
|EX-10.8 Consent/Waiver to Stockholders Agreement 
|EX-10.9 Agreement to Stockholders Agreement      
|EX-10.15 Amendment to Credit Security Agreement  
|EX-10.28 Trademark License Extention Agreement   
|EX-10.30 Trademark License Extension Agreement   
|EX-10.32 Trademark License Extension Agreement   
|EX-10.38 Intercompany Services Agreement         
|EX-10.44 Extension Agreement                     
|EX-10.45 Federal Income Tax Sharing Agreement    
|EX-10.63 Severance Agreement                     
|EX-21.1 List of Subsidiaries                     
|EX-23.1 Consent of KPMG LLP                      
|EX-99.1 Certification of 10-K Report             



---



##### Table of Contents



TABLE OF CONTENTS

|           |         |  |                                                                                           |      |  |    | 
|---------- | ------- |  | ----------------------------------------------------------------------------------------- | ---- |  | -- | 
|           |         |  |                                                                                           | Page
|           |         |  |                                                                                           |     
|Part I     |         |  | 2                                                                                         |     
|           | Item 1  |  | Business                                                                                  |      |  | 2  | 
|           | Item 2  |  | Properties                                                                                |      |  | 25 | 
|           | Item 3  |  | Legal Proceedings                                                                         |      |  | 26 | 
|           | Item 4  |  | Submission of Matters to a Vote of Security
    Holders                                   |      |  | 26 | 
|Part II    |         |  | 27                                                                                        |     
|           | Item 5  |  | Market for Our Common Equity and Related
    Stockholder Matters                          |      |  | 27 | 
|           | Item 6  |  | Selected Financial Data                                                                   |      |  | 29 | 
|           | Item 7  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |      |  | 30 | 
|           | Item 7A |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |      |  | 45 | 
|           | Item 8  |  | Consolidated Financial Statements and
    Supplementary Data                              |      |  | 47 | 
|           | Item 9  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |      |  | 47 | 
|Part III   |         |  | 47                                                                                        |     
|           | Item 10 |  | Directors and Executive Officers of the Company                                           |      |  | 47 | 
|           | Item 11 |  | Executive Compensation                                                                    |      |  | 47 | 
|           | Item 12 |  | Security Ownership of Certain Beneficial Owners
    and Management                        |      |  | 47 | 
|           | Item 13 |  | Certain Relationships and Related Transactions                                            |      |  | 47 | 
|           | Item 14 |  | Controls and Procedures                                                                   |      |  | 61 | 
|Part IV    |         |  | 62                                                                                        |     
|           | Item 15 |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |      |  | 62 | 
|Signatures |         |  | 69                                                                                        |     

1



---



##### Table of Contents



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

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






PART I







|        |                        
|------- | -----------------------
|Item 1. | Description of Business

Company Overview

We own and operate pay television channels, known
around the world as the Hallmark Channel, dedicated to
high-quality, entertainment programming for adults and families.
The importance and appeal of this format has been confirmed by
the results of a quantitative research conducted for our
U.S. channel.

As a network, we offer compelling stories with
talented actors, masterfully written, directed and produced. In
addition, we purchased more than 700 titles from the Hallmark
Entertainment Distribution, LLC (Hallmark Entertainment
Distribution) library in September 2001. We believe that
with the programming we own (the Crown Media
Library, the Library or the film
assets), together with the programming we license from
Hallmark Entertainment Distribution and third parties, we have
established the Hallmark Channel internationally and in the
United States as destinations for viewers seeking high-quality,
entertainment for adults and families, 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. The following table shows for our
channels: our programming sources, selected pay television
distributors and the total number of our subscribers as of
December 31, 2002.

|                                     |  |                                                                                                     |  |                                                                                                                                     
|------------------------------------ |  | --------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------
|                                     |  |                                                                                                    
|                                     |  | Hallmark Channel                                                                                   
|                                     |  |                                                                                                    
|                                     |  | International                                                                                       |  | U.S.                                                                                                                                
|                                     |  |                                                                                                     |  |                                                                                                                                     
|Programming Sources                  |  |  Crown Media Library
     Hallmark Entertainment Distribution
     Third-party sources           |  |  Crown Media Library
     Hallmark Entertainment Distribution
     Third-party sources                                           
|Selected Pay Television Distributors |  |  BskyB
     Measat
     Pramer
     Sky Network
     Telepiu
     Via Digital
     Videoland |  |  Adelphia
     Cablevision
     Charter
     Comcast (merged with AT&T)
     Cox
     DirecTV
     EchoStar
     Time Warner
|Total Subscribers                    |  | 49.5 million                                                                                        |  | 48.8 million                                                                                                                        

2



---



##### Table of Contents



As of February 28, 2003, our total number of
subscribers had increased to approximately 103.6 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 have
benefited from the volume and availability of programming in our
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. Programming from third parties has also become an
important part of our channels as we continually develop and
refine our programming strategy.

We have distribution agreements with leading pay
television distributors in each of our markets. Internationally,
these include British Sky Broadcasting (BskyB),
Measat, Pramer, Sky Network, Telepiu, Via Digital and Videoland.
We currently distribute our domestic channel through
approximately 3,500 cable systems and communities and satellite
providers. By the end of 2002, we had agreements with Adelphia,
Cablevision, Charter, Cox, DirecTV, EchoStar, Mediacom, NCTC,
and Time Warner for the distribution of our channel. Because of
the acquisition of AT&T by Comcast during 2002, our contract
with AT&T is now being administered by Comcast. We continue
to provide programming to former AT&T subscribers now with
Comcast. In the United States, Adelphia, Cablevision, Charter,
Comcast, Cox, DirecTV, EchoStar and Time Warner account for
approximately 88% of all pay cable and television subscribers as
of December 31, 2002. BskyB accounted for 17% of our
consolidated revenue for the year ended December 31, 2002.
BskyB accounted for 36% of our international revenue for the
year ended December 31, 2002. No individual pay television
distributor or advertiser accounted for 10% of our domestic
revenue for the year ended December 31, 2002. No individual
pay television distributor accounted for 10% of our consolidated
subscribers for the year ended December 31, 2002.

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

We license the trademark Hallmark for
use on our channels pursuant to certain trademark license
agreements with Hallmark Cards, Incorporated (Hallmark
Cards). We believe that the use of this trademark is
extremely important, particularly for our domestic channel, due
to the substantial name recognition and favorable
characteristics associated with the name in the United States.
For further information concerning these trademark license
agreements, see Part III  Item 13. Certain
Relationships and Related Transactions  Hallmark
Trademark License Agreements.

Information concerning revenue, 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 this Report.

Development of Business

Crown Media Holdings, Inc., which was
incorporated in the state of Delaware in December 1999, through
its subsidiaries, owns and operates pay television channels
dedicated to high quality, entertainment programming for adults
and families, in the United States and in various countries
throughout the world. The international operations of the
Hallmark Channel now extend to approximately 122 countries and
are operated by Crown Media International and, in the United
Kingdom, by Crown Entertainment. Crown Media International
commenced its operations outside the United States in 1995.
Domestically, the Hallmark Channel is operated and distributed
by Crown Media United States. Crown Media International acquired
an interest in Crown Media United States in 1998, and as a
result of several transactions, Crown Media Holdings owned 100%
of the common interests of Crown Media United States by March
2001. See Item 7, Managements Discussion and Analysis
of Financial Condition and Results of Operations. Significant

3



---



##### Table of Contents



investors in Crown Media Holdings include
Hallmark Entertainment Investment Co. (Hallmark
Entertainment Investments), a subsidiary of 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).


Please see Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations, for information regarding a reorganization in 2002,
a write-down of certain programming and a tax sharing agreement
with Hallmark Cards.

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 rights to, movies, television miniseries, series and
other programming. Due to our acquisition of the Crown Media
Library, we are a program supplier. Program suppliers generate
revenue by licensing their programming to broadcasters and video
distributors (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 over-the-air broadcasters) and major U.S. and
international networks. Pay television channel providers often
produce programming and acquire or license programming from
program suppliers and generally package the programming
according to an overriding theme and brand strategy. 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 audiences with a certain
demographic composition, so that they can then sell advertising
to advertisers seeking to reach the providers demographic
audiences.

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, particularly in
the U.S., 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 and
increased use of the digital cable capacity for new broadband
services, 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 any receipt of subscriber fee
revenue 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 (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 hotels that
receive programming from

4



---



##### Table of Contents



satellites by means of a single antenna that is
connected to the buildings headend. The television signals
are then distributed to individual units in the building by
cable.


Sources of Revenue



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

Pay television customers subscribe to 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. Primarily in international markets,
pay television distributors generally pay a fee per subscriber
for all or some subscribers to channel providers. We are a
channel provider. See Item 7, Managements Discussion
and Analysis of Financial Condition and Results of Operations.



| |                    
| | -------------------
| | 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, 2002, 22% of all advertising expenditures were
spent on broadcast television and 17% 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. In general, advertising expenditures are less in other
countries than in the United States, both in terms of percentage
of advertising expenditures as well as absolute dollars. Program
ratings systems in many non-United States markets are growing
rapidly, and as a result, advertisers are relying less on
subscriber counts and more on 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 spots 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. Our U.S. channel sells the majority of its
advertising in the up-front season, generally in
August, for the last quarter of the same year and the first
three quarters of the following year. We hold back a small
percentage of our inventory for audience deficiency units,
ADUs, and sell the remainder in the spot market.
ADUs are units of inventory that are made available to
advertisers as compensation for inventory the advertiser
purchased that ran in programs that under-delivered on the
guaranteed ratings.

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.

Since February 2002, paid commercial programming,
infomercials, has been carried on a limited basis in
several international regional feeds of the Hallmark Channel.



| |        
| | -------
| | Ratings

For the year, the domestic Hallmark Channel was
rated the fastest growing cable network in terms of annual
audience percentage growth in ratings for 2002 compared to 2001
according to Nielsen Media Research, with a 50% increase in
ratings for total day and nearly a two-fold increase in
household impressions.

5



---



##### Table of Contents



The Channel experienced increases of more than
50% over 2001 in all of its key demographics for adults and
women for total day.


Internationally, during 2002 the international
Hallmark Channel ranked in the top ten cable and satellite
channels in the U.K. according to the Broadcaster Audience
Research Board. In the U.K., the Channel enjoyed a strong and
sustained increase in ratings over the past two years, and the
most recent research shows that the Channel has by far the
highest loyalty index of any entertainment channel.
Additionally, significant ratings growth has been achieved in
the Scandinavian market with the quadrupling of audience share
in Denmark over the last two years according to Gallup. The
Channel in Poland, our most important Central and East European
territory, experienced a 185% increase in viewing levels during
the same period according to AGB Polska. Australia continues to
be an important market for us, with a loyal audience that
improved throughout 2002 resulting in the channel delivering its
highest ratings to date in January 2003.



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

Program suppliers sell or license programming to
broadcasters and video distributors (pay television channel
providers) who pay a license fee for the right to exploit
(air) the programming over a certain period in their
program package. As a program supplier, we recognize revenue
from television and distribution licensing agreements 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 by us as deferred revenue. Long-term receivables
arising from licensing agreements are recorded at their net
present value.

Channels



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



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

The international channel commenced 2002 with
44.4 million subscribers and ended the year with
49.5 million subscribers, an increase of 11%. We currently
distribute the international channel to 16 geographic markets
covering approximately 122 countries, dubbed or subtitled
into 26 languages compared to 22 geographic markets
covering 110 countries as of December 31, 2001. Our
markets include Asia Pacific, with approximately
19.0 million subscribers, Europe, Middle East and Africa,
with more than 12.3 million subscribers, Latin America,
with more than 11.1 million subscribers, and the United
Kingdom, with more than 7.1 million subscribers.



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

The international channel offers a range of
award-winning programming including made-for-television movies,
miniseries, epics, historical dramas and series. We seek
programming that is consistent with our programming theme:
great stories that stay with you. The high quality,
entertainment programming for adults and families that we offer
is based on universal themes, includes world-renowned actors and
actresses, such as Katherine Hepburn, Paul Newman, Gregory Peck,
Glenn Close, Sidney Poitier, Whoopi Goldberg, Anjelica Huston,
and James Earl Jones 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, Inc.
(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, 2002,
approximately 54% of our international programming was from the
Crown Media Library or licensed from Hallmark Entertainment
Distribution. We licensed for that same time period the

6



---



##### Table of Contents



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, 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 2002, we aired third-party series such as
Star Trek, Judging Amy, Law and Order, The Guardian, Party of
Five, and Touched by an Angel. 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
distribute the channel through distribution agreements with
local pay television operators such as BskyB, Measat, Pramer,
Sky Network, Telepiu, Via Digital and Videoland. Our
distribution agreements with such operators generally last two
to five years. We have the capability to create and deliver our
channel to new platforms in a short period of time through our
broadcast infrastructure based in Greenwood Village, Colorado.
We have entered into a strategic relationship with Pramer,
S.C.A. (Pramer), which perform all day-to-day
operations including program acquisitions, scheduling,
marketing, advertising and affiliate sales, playback and uplink
for our operations in Mexico, Central and South America.

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 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.

7



---



##### Table of Contents



The following chart shows the approximate number
of television households and pay television households, as
estimated by Kagan World Media at December 31, 2002 (except
where noted), and the number of our international channel
subscribers at year-end 2001 and 2002.

|                                |                                        |          |  |         |         |             |  |                          |         |                   |  |             |      |  |  |       |        |  |  |       |        |  |  |       |       | 
|------------------------------- | -------------------------------------- | -------- |  | ------- | ------- | ----------- |  | ------------------------ | ------- | ----------------- |  | ----------- | ---- |  |  | ----- | ------ |  |  | ----- | ------ |  |  | ----- | ----- | 
|                                |                                        |          |  |         |         |             |  |                          |         |                  
|                                |                                        |          |  |         |         |             |  | Hallmark Channel  Intl |         | Hallmark         
|                                |                                        |          |  |         |         |             |  | Subscribers(1)           |         | Channel  Intl  
|                                |                                        | Total TV |  | Pay TV  |         |             |  |                          |         | December 31, 2002
|                                |                                        | House-   |  | House-  |         | % Pay TV    |  | December 31,             |         | December 31,      |  | % of Pay TV
|Markets                         |                                        | Holds    |  | Holds   |         | Penetration |  | 2001                     |         | 2002              |  | Households 
|                                |                                        |          |  |         |         |             |  |                          |         |                   |  |            
|                                |                                        |          |  |         |         |             |  |                         
|                                |                                        | (000s)  |  |         |         | (000s)     |  |                         
|Asia Pacific:                   |                                        |          |  |         |         |             |  |                          |         |                   |  |             |      |  |  |       |        |  |  |       |        |  |  |      
|                                | Australia                              |          |  | 7,050   |         |             |  | 1,750                    |         |                   |  | 24.8        | %    |  |  | 542   |        |  |  | 588   |        |  |  | 33.6% |      
|                                | China                                  |          |  | 313,014 |         |             |  | 237,891                  |         |                   |  | 76.0        |      |  |  | 106   |        |  |  |      |        |  |  | 0.0%  |      
|                                | India(2)                               |          |  | 96,359  |         |             |  | 39,238                   |         |                   |  | 40.7        |      |  |  | 8,757 |        |  |  | 8,803 |        |  |  | 22.4% |      
|                                | Indonesia                              |          |  | 30,500  |         |             |  | 1,925                    |         |                   |  | 6.3         |      |  |  | 80    |        |  |  | 98    |        |  |  | 5.1%  |      
|                                | Japan                                  |          |  | 47,850  |         |             |  | 27,410                   |         |                   |  | 57.3        |      |  |  | 130   |        |  |  |      |        |  |  | 0.0%  |      
|                                | Korea(3)                               |          |  | 13,354  |         |             |  | 3,300                    |         |                   |  | 24.7        |      |  |  | 2,613 |        |  |  | 3,213 |        |  |  | 97.4% |      
|                                | Malaysia                               |          |  | 3,600   |         |             |  | 792                      |         |                   |  | 22.0        |      |  |  | 454   |        |  |  | 700   |        |  |  | 88.4% |      
|                                | New Zealand                            |          |  | 1,280   |         |             |  | 766                      |         |                   |  | 59.8        |      |  |  | 283   |        |  |  | 352   |        |  |  | 46.0% |      
|                                | Philippines                            |          |  | 10,238  |         |             |  | 1,820                    |         |                   |  | 17.8        |      |  |  | 750   |        |  |  | 654   |        |  |  | 35.9% |      
|                                | Singapore                              |          |  | 1,000   |         |             |  | 327                      |         |                   |  | 32.7        |      |  |  | 190   |        |  |  | 259   |        |  |  | 79.2% |      
|                                | Taiwan                                 |          |  | 6,515   |         |             |  | 5,258                    |         |                   |  | 80.7        |      |  |  | 3,950 |        |  |  | 3,950 |        |  |  | 75.1% |      
|                                | Thailand                               |          |  | 15,568  |         |             |  | 720                      |         |                   |  | 4.6         |      |  |  | 340   |        |  |  | 358   |        |  |  | 49.7% |      
|                                |                                        |          |  |         |         |             |  |                          |         |                   |  |             |      |  |  |       |        |  |  |       |        |  |  |      
|                                |                                        | Subtotal |  |         | 546,328 |             |  |                          | 321,197 |                   |  |             | 58.8 |  |  |       | 18,195 |  |  |       | 18,975 |  |  |       | 5.9%  | 
|Europe, Middle East and Africa: |                                        |          |  |         |         |             |  |                          |         |                   |  |             |      |  |  |       |        |  |  |       |        |  |  |      
|                                | Africa(3)                              |          |  | 6,359   |         |             |  | 1,501                    |         |                   |  | 23.6        |      |  |  | 699   |        |  |  | 788   |        |  |  | 52.5% |      
|                                | Belgium/ Holland                       |          |  | 10,755  |         |             |  | 10,459                   |         |                   |  | 97.2        |      |  |  | 136   |        |  |  | 218   |        |  |  | 2.1%  |      
|                                | Bulgaria/ Croatia/ Slovenia/Yugoslavia |          |  | 2,964   |         |             |  | 1,089                    |         |                   |  | 36.7        |      |  |  | 254   |        |  |  | 450   |        |  |  | 41.3% |      
|                                | Czech Republic                         |          |  | 4,082   |         |             |  | 2,049                    |         |                   |  | 50.2        |      |  |  | 408   |        |  |  | 417   |        |  |  | 20.4% |      
|                                | Denmark                                |          |  | 2,458   |         |             |  | 1,891                    |         |                   |  | 76.9        |      |  |  | 324   |        |  |  | 938   |        |  |  | 49.6% |      
|                                | Finland/ Iceland                       |          |  | 2,091   |         |             |  | 1,215                    |         |                   |  | 58.1        |      |  |  | 70    |        |  |  | 68    |        |  |  | 5.6%  |      
|                                | Hungary                                |          |  | 3,646   |         |             |  | 3,067                    |         |                   |  | 84.1        |      |  |  | 244   |        |  |  | 468   |        |  |  | 15.3% |      
|                                | Israel(3)                              |          |  | 1,750   |         |             |  | 1,730                    |         |                   |  | 98.9        |      |  |  | 1,369 |        |  |  | 1,721 |        |  |  | 99.5% |      
|                                | Italy                                  |          |  | 21,240  |         |             |  | 2,869                    |         |                   |  | 13.5        |      |  |  | 1,015 |        |  |  | 908   |        |  |  | 31.6% |      
|                                | Middle East (3)(4)                     |          |  | 4,705   |         |             |  | 2,604                    |         |                   |  | 55.3        |      |  |  | 184   |        |  |  | 415   |        |  |  | 15.9% |      
|                                | Norway                                 |          |  | 1,884   |         |             |  | 1,261                    |         |                   |  | 66.9        |      |  |  | 432   |        |  |  | 498   |        |  |  | 39.5% |      
|                                | Poland                                 |          |  | 12,630  |         |             |  | 7,056                    |         |                   |  | 55.9        |      |  |  | 1,194 |        |  |  | 1,455 |        |  |  | 20.6% |      
|                                | Portugal                               |          |  | 3,304   |         |             |  | 1,542                    |         |                   |  | 46.7        |      |  |  | 118   |        |  |  | 208   |        |  |  | 13.5% |      
|                                | Romania                                |          |  | 7,701   |         |             |  | 3,758                    |         |                   |  | 48.8        |      |  |  | 556   |        |  |  | 1,154 |        |  |  | 30.7% |      
|                                | Russia                                 |          |  | 59,677  |         |             |  | 10,147                   |         |                   |  | 17.0        |      |  |  | 378   |        |  |  | 497   |        |  |  | 4.9%  |      
|                                | Slovak Republic                        |          |  | 2,117   |         |             |  | 1,756                    |         |                   |  | 82.9        |      |  |  | 344   |        |  |  | 294   |        |  |  | 16.7% |      
|                                | Spain                                  |          |  | 13,167  |         |             |  | 4,132                    |         |                   |  | 31.4        |      |  |  | 878   |        |  |  | 609   |        |  |  | 14.7% |      
|                                | Sweden                                 |          |  | 4,175   |         |             |  | 2,902                    |         |                   |  | 69.5        |      |  |  | 647   |        |  |  | 719   |        |  |  | 24.8% |      
|                                | Turkey                                 |          |  | 16,100  |         |             |  | 1,200                    |         |                   |  | 7.5         |      |  |  | 394   |        |  |  | 452   |        |  |  | 37.7% |      
|                                | United Kingdom                         |          |  | 24,640  |         |             |  | 10,516                   |         |                   |  | 42.7        |      |  |  | 5,557 |        |  |  | 7,135 |        |  |  | 67.8% |      
|                                |                                        |          |  |         |         |             |  |                          |         |                   |  |             |      |  |  |       |        |  |  |       |        |  |  |      
|                                |                                        | Subtotal |  |         | 205,445 |             |  |                          | 72,744  |                   |  |             | 35.4 |  |  |       | 15,201 |  |  |       | 19,412 |  |  |       | 26.7% | 

8



---



##### Table of Contents



|               |                        |          |  |        |         |             |  |                          |         |                   |  |             |      |   |  |       |        |  |  |       |        |  |  |       |       | 
|-------------- | ---------------------- | -------- |  | ------ | ------- | ----------- |  | ------------------------ | ------- | ----------------- |  | ----------- | ---- | - |  | ----- | ------ |  |  | ----- | ------ |  |  | ----- | ----- | 
|               |                        |          |  |        |         |             |  |                          |         |                  
|               |                        |          |  |        |         |             |  | Hallmark Channel  Intl |         | Hallmark         
|               |                        |          |  |        |         |             |  | Subscribers(1)           |         | Channel  Intl  
|               |                        | Total TV |  | Pay TV |         |             |  |                          |         | December 31, 2002
|               |                        | House-   |  | House- |         | % Pay TV    |  | December 31,             |         | December 31,      |  | % of Pay TV
|Markets        |                        | Holds    |  | Holds  |         | Penetration |  | 2001                     |         | 2002              |  | Households 
|               |                        |          |  |        |         |             |  |                          |         |                   |  |            
|               |                        |          |  |        |         |             |  |                         
|               |                        | (000s)  |  |        |         | (000s)     |  |                         
|Latin America: |                        |          |  |        |         |             |  |                          |         |                   |  |             |      |   |  |       |        |  |  |       |        |  |  |      
|               | Argentina              |          |  | 10,600 |         |             |  | 5,735                    |         |                   |  | 54.1        |      |   |  | 4,180 |        |  |  | 4,183 |        |  |  | 72.9% |      
|               | Brazil                 |          |  | 38,400 |         |             |  | 6,410                    |         |                   |  | 16.7        |      |   |  | 1,076 |        |  |  | 822   |        |  |  | 12.8% |      
|               | Chile                  |          |  | 4,400  |         |             |  | 1,013                    |         |                   |  | 23.0        |      |   |  | 502   |        |  |  | 514   |        |  |  | 50.7% |      
|               | Colombia               |          |  | 8,600  |         |             |  | 919                      |         |                   |  | 10.7        |      |   |  | 509   |        |  |  | 535   |        |  |  | 58.2% |      
|               | Mexico                 |          |  | 19,000 |         |             |  | 4,425                    |         |                   |  | 23.3        |      |   |  | 2,910 |        |  |  | 3,083 |        |  |  | 69.7% |      
|               | Other Latin America(5) |          |  | 14,700 |         |             |  | 2,746                    |         |                   |  | 18.7        |      |   |  | 1,046 |        |  |  | 1,104 |        |  |  | 40.2% |      
|               | Venezuela              |          |  | 4,000  |         |             |  | 1,132                    |         |                   |  | 28.3        |      |   |  | 808   |        |  |  | 895   |        |  |  | 79.1% |      
|               |                        |          |  |        |         |             |  |                          |         |                   |  |             |      |   |  |       |        |  |  |       |        |  |  |      
|               |                        | Subtotal |  |        | 99,700  |             |  |                          | 22,380  |                   |  |             | 22.4 |   |  |       | 11,031 |  |  |       | 11,136 |  |  |       | 49.8% | 
|               |                        |          |  |        |         |             |  |                          |         |                   |  |             |      |   |  |       |        |  |  |       |        |  |  |      
|               |                        | TOTAL    |  |        | 851,473 |             |  |                          | 416,321 |                   |  |             | 48.9 | % |  |       | 44,427 |  |  |       | 49,523 |  |  |       |       | 
|               |                        |          |  |        |         |             |  |                          |         |                   |  |             |      |   |  |       |        |  |  |       |        |  |  |      



---



|    |                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------
|(1) | Total subscribers include promotional
    (free) subscribers at December 31, 2001, and
    December 31, 2002.          
|   
|(2) | India includes Bangladesh, Brunei, Macau,
    Mauritius, New Guinea, Republic of Palau, and Sri Lanka.                 
|   
|(3) | Source: Zenith Media.                                                                                                  
|   
|(4) | Middle East includes Estonia, Kazakhstan, Latvia,
    Lithuania, Middle East, and Republic of Ukraine.                 
|   
|(5) | Other Latin America includes Bolivia, Costa Rica,
    Curacao, Dominican Republic, Ecuador, El Salvador, and Guatemala.



| |                   
| | ------------------
| | Sources of Revenue

Like most international pay television channels,
we currently derive the majority of our international revenue
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 increased the number of subscribers to our international
channel in the past year, and as a result, have achieved an
increase in revenue generated from subscriber fees.
International fees per subscriber have and will continue to
experience downward pressure due to the competitive nature of
the industry, the growth of digital cable, political and
economic turmoil in Latin America and the shift in the industry
in the more developed countries from subscriber fee revenue to
advertising revenue. We also expect our international fees to
decline as we exit certain markets and utilize strategic
alliances in other markets. For the years ended
December 31, 2002, 2001, and 2000 revenue derived from
subscriber fees for the international channel were approximately
$54.4 million, $52.6 million, and $39.8 million,
respectively.

We also derive revenue from the sale of
advertising time on our international channel. We generate
revenue directly from advertisers as well as from our pay
television distributors under distribution agreements that may
provide for a sharing of net revenue from advertising. We
believe that the number of subscribers to our international
channel and the favorable demographics of its family-focused
audience provide us with the opportunity to substantially
increase revenue from the sale of advertising time. Currently
advertising revenue from our international channel is derived
primarily from activities in a limited number of countries,
including East Asia, Mexico, Poland, South Africa, the United
Kingdom and certain countries in Latin America. For the years
ended December 31, 2002, 2001, and 2000 revenue from the
sale of advertising on our international channel were
$23.1 million, $12.1 million, and $6.0 million,
respectively.

During 2000 and 2001, we built and commenced
operation of 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 from a central point and we can deploy new
feeds quickly while benefiting from economies of scale.

The Company currently has international sales
offices in Buenos Aires, Hong Kong, London and Sydney.

9



---



##### Table of Contents





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

Our international channel focuses its marketing
efforts on maximizing 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 Channel and the potential for the sale of
advertising.

In markets where our international channel is not
being carried by substantially all of the pay television
distributors, marketing efforts are primarily directed toward
potential new distributors. These 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 subscribers and viewership. Our
efforts in these markets are directed toward a primary target of
men and women aged 18 to 49 and a secondary target of men
and women aged 25 to 54. 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
Distribution, 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 2002 with
48.8 million subscribers, an increase of 12% from
43.5 million at the 2001 year-end. We currently
distribute our domestic channel through approximately 3,500
cable systems and communities and satellite providers. By the
end of 2002, we had agreements with Adelphia, Cablevision,
Charter, Cox, DirecTV, EchoStar, Mediacom, NCTC, and Time Warner
for the distribution of our channel as well as a number of
smaller pay television providers and systems. Because of the
acquisition of AT&T by Comcast during 2002, our contract
with AT&T is now being administered by Comcast. We continue
to provide programming to former AT&T subscribers now with
Comcast.



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

Our domestic channel offers a range of high
quality, entertainment programming for adults and families
including movies, miniseries, epics, historical dramas,
romances, literary classics, and contemporary stories. Sources
for programming on our domestic channel include the Crown Media
Library, programming licensed from Hallmark Entertainment
Distribution, and programming licensed from third parties. Prior
to the purchase of the Crown Media Library, we licensed
substantially all of the titles in that library from Hallmark
Entertainment Distribution.

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 in the Hallmark Hall of Fame library such as
William Faulkners Old Man, Rose Hill, Sarah Plain and
Tall and What the Deaf Man Heard. 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, Touched By An Angel, Rawhide, Bonanza, and
Hawaii 5-0. Other examples of our third party programming
include acquired movies

10



---



##### Table of Contents



and miniseries such as Roots, North and
South, and Great Gatsby. Our license agreements with
third parties typically provide for a license fee paid out over
the term of the license 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 54% 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 eight largest pay television distributors, and all
other pay television distributors as a group, in the United
States as of December 31, 2002.

|                           |       |                                    |        |                |  |                    |       |        |  |  |      |      |  
|-------------------------- | ----- | ---------------------------------- | ------ | -------------- |  | ------------------ | ----- | ------ |  |  | ---- | ---- | -
|                           |       |                                    |        |                |  | Hallmark          
|                           |       | Total                              |        | Hallmark       |  | Channel  U.S.    
|                           |       | U.S. Pay TV                        |        | Channel  U.S. |  | % of Distributors
|Pay Television Distributor |       | Households(1)                      |        | Subscribers(1) |  | Pay TV Households 
|                           |       |                                    |        |                |  |                   
|                           |       |                                   
|                           |       | (In thousands, except percentages)
|DirecTV                    |       |                                    | 11,160 |                |  |                    | 9,262 |        |  |  | 83.0 | %   
|Comcast                    |       |                                    | 23,899 |                |  |                    | 8,963 |        |  |  | 37.5 | %   
|Time Warner                |       |                                    | 13,143 |                |  |                    | 8,815 |        |  |  | 67.1 | %   
|Charter                    |       |                                    | 7,174  |                |  |                    | 4,919 |        |  |  | 68.6 | %   
|Echostar                   |       |                                    | 8,010  |                |  |                    | 3,660 |        |  |  | 45.7 | %   
|Adelphia                   |       |                                    | 5,768  |                |  |                    | 3,625 |        |  |  | 62.8 | %   
|Cox                        |       |                                    | 6,332  |                |  |                    | 3,106 |        |  |  | 49.1 | %   
|Cablevision                |       |                                    | 3,042  |                |  |                    | 1,521 |        |  |  | 50.0 | %   
|All others                 |       |                                    | 11,157 |                |  |                    | 4,944 |        |  |  | 44.3 | %   
|                           |       |                                    |        |                |  |                    |       |        |  |  |      |     
|                           | Total |                                    |        | 89,685         |  |                    |       | 48,815 |  |  |      | 54.4 | %
|                           |       |                                    |        |                |  |                    |       |        |  |  |      |     



---



|    |                                                                                                
|--- | -----------------------------------------------------------------------------------------------
|(1) | Source: Nielsen Code and The Nielsen Public U.E.
    December 2002 and Skyreport November 2002.

During 2002, we amended our long-term
distribution agreement with Time Warner. During 2001, we signed
or amended long-term distribution agreements with NCTC, DirecTV,
Adelphia, Echostar, Cable One, Charter Communications, and
Buckeye Communications.



| |                   
| | ------------------
| | Sources of Revenue

We currently derive all of our domestic channel
revenue 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 from five to 10 years, and
sometimes 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 and discounts or
no fees if certain subscriber levels are achieved. Please see
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations, for information
regarding subscriber fees. For the years ended December 31,
2002, 2001, and 2000 revenue derived from subscriber fees for
the domestic channel were approximately $13.5 million,
$13.9 million, and $11.1 million, respectively.

We have advertising sales offices in New York,
Los Angeles, Chicago, Atlanta 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, 2002, 2001, and 2000 revenue from the sale of
advertising time on our domestic channel were approximately
$46.0 million, $25.4 million, and $13.7 million,
respectively.

11



---



##### Table of Contents





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

Our primary target demographic is adults aged 25
to 54, with a female skew and our secondary target is adults
aged 18 to 49. Our programming is targeted to adults, but is
appropriate for viewing by the entire family, which is important
to viewers, advertisers and affiliates alike.

For over 50 years Hallmark has been a leader
in high-quality original television production. The Hallmark
Channel is the only home on cable television for the Hallmark
Hall of Fame Collection, a selection of movies from an
award-winning entertainment series. Much of the Hallmark
Channels unique programming comes from Hallmark
Entertainment, including Moby Dick, Alice in Wonderland
and Dinotopia. Hallmark Entertainment original
productions rank among the highest-rated programs on
U.S. broadcast network television.

The power of the Hallmark brand and the quality
of Hallmark Entertainment combine to:



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

In November and December of 2002, Hallmark and
the Hallmark Channel launched the Hallmark Keepsake Sweepstakes,
the largest cable/retail promotion in U.S. cable television
history. It featured six holiday-themed original programming
events, which resulted in the networks then-highest
ratings ever for a December monthly period; the primetime
average increased 40% over December 2001. This multi-media
advertising campaign, which included television, print and radio
displays throughout the 4,500 Hallmark Gold Crown stores, and
the distribution of over 145 million game pieces in
conjunction with the airing of six holiday-themed programming
events.

Channel Operations

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. Some of these functions are
outsourced on an as-needed basis.

The creation of our channels begins with the
acquisition of programming. We acquired in 2001 over 700 titles
from the Hallmark Entertainment Distribution library, which
comprise the Crown Media Library. In addition, we license
programming from Hallmark Entertainment Distribution and other
program suppliers. Our staff or contractors review and summarize
all potential programming to ensure compliance with our quality
and content standards. The acquisitions staff in our regional
offices licenses programming based on the amount of new
programming required on the channels. Each of the acquisitions
offices work together to leverage multi-channel acquisitions
across many territories to reduce license fees, but remain
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 in the regional headquarters in London and Hong
Kong and by Pramer in Buenos Aires. Program language elements
are typically shipped to the specific region to ensure that
nuances in dialect of the particular language are captured. The
language versions are then combined with the other programming
elements.

The creation of on-air promotional segments
interstitials, which are broadcast between the
feature movies, miniseries and series, are typically outsourced
to external vendors. Promotional segments are prepared in many
languages for broadcast worldwide. These interstitials are
intended to invite viewership, guide viewers to specific
programming, and promote brand awareness for the
Hallmark Channel.

12



---



##### Table of Contents



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

The traffic department inserts promotional
segments and advertising into the play list and creates the
daily log, which contains a detailed schedule of the stream of
programming, commercials and promotional materials that will
ultimately be viewed by the subscriber for each regional feed of
the Hallmark Channel. The daily log, together with digital tapes
that contain the corresponding programming, are then forwarded
to either our Network Operations Center or, to the third party
facility, which is performing the playback and uplink services
for the feed. 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 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 consisting
of 6,000 square feet at our Greenwood Village, Colorado
headquarters commenced operations in February 2001 and has the
ability to perform origination and playback services 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
    revenue;                                                                                                                               
|
| |  | distribute programming in digital and other
    formats as required in the rapidly evolving broadband
    distribution environment, while consolidating our library
    management; and
|
| |  | offer playback services to other channel
    providers.                                                                                                                                

In 2001, we launched the Central Europe, Eastern
Europe, Russia, Middle East, Israel, Latin America, Spain,
Turkey and Scandilux feeds from our Network Operations Center.
In February 2003, the playback operations for the two domestic
feeds of the Hallmark Channel were transferred from a facility
in Los Angeles to the Network Operations Center in Denver. By
the end of the second quarter of 2003, it is anticipated that
the playback operations of all the Channels Asian feeds
will be moved from a facility in Hong Kong to the Network
Operations Center. Also in the second quarter of 2003, Pramer
will start producing the Channels four feeds for Latin
America at a facility in Buenos Aires, however, three of the
feeds will then be transmitted back to our Network Operations
Center for distribution over our satellite capacity to our
affiliates in most of Latin America. The remaining feed will be
uplinked by Pramer from Buenos Aires for distribution to
subscribers in Argentina, Uruguay and Paraguay.

13



---



##### Table of Contents



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       |  |                                                                                |  |                                                                          |  | Playback                                          |  |                                                   |  |                  
|                         |  | Distribution  |  | Primary Pay TV                                                                 |  |                                                                          |  | Providers/                                        |  | Uplink Providers/                                 |  |                  
|Market                   |  | Platforms     |  | Distributors                                                                   |  | Languages                                                                |  | Locations                                         |  | Locations                                         |  | Satellites       
|                         |  |               |  |                                                                                |  |                                                                          |  |                                                   |  |                                                   |  |                  
|Latin America            |  | Cable
    DTH |  | DirecTV
    Sky Latin America
    Cablevision                                  |  | Spanish
    Portuguese
    English                                       |  | Pramer, S.C.A.
    Argentina                      |  | Crown Media
    International, LLC
    Denver, CO |  | PAS 9
    NSS 806
|Asia Pacific             |  | Cable
    DTH |  | Modi
    Videoland
    UBC MSO
    CNJOY                                       |  | Mandarin
    Thai
    English
    Korean
    Hindi                       |  | DMC
    Hong Kong                                 |  | Galaxy
    Hong Kong
    Tokyo, Japan             |  | Apstar IIR       
|Central Europe           |  | Cable
    DTH |  | United Pan- Europe
    Communications                                          |  | Polish
    Hungarian
    Croatian
    Romanian
    Bulgarian
    English |  | Crown Media
    International, LLC
    Denver, CO |  | BT London, England                                |  | Hot Bird 3       
|Scandinavia/
    Benelux |  | Cable
    DTH |  | Via Sat
    Canal Digital
    Teledenmark                                      |  | Swedish
    Dutch
    Norwegian
    Danish
    English                   |  | Crown Media
    International, LLC
    Denver, CO |  | BT London, England                                |  | Hot Bird 3       
|Italy                    |  | DTH           |  | Telepiu                                                                        |  | Italian
    English                                                      |  |                                                   |  | Telepiu Milan, Italy                              |  | Hot Bird 3       
|Spain                    |  | DTH           |  | Via Digital                                                                    |  | Castillian Portuguese English                                            |  | Crown Media International, LLC Denver, CO         |  | BT London, England                                |  | Hot Bird 3       
|Africa                   |  | DTH           |  | Multichoice                                                                    |  | English                                                                  |  |                                                   |  | Multichoice Johannesburg, SAF                     |  | PanAmSat 4       
|Czech Republic           |  | Cable         |  | Kabel Plus
    Cable Association                                               |  | Czech Slovak English                                                     |  | Crown Media International, LLC Denver, CO         |  | BT London, England                                |  | Hot Bird 3       
|Australia                |  | Cable DTH     |  | Foxtel
    Austar                                                              |  | English                                                                  |  | Foxtel Sydney, Australia                          |  | Foxtel Sydney, Australia                          |  | Optus B3         
|Russia and Middle East   |  | Cable DTH     |  | NTV
    Gulf DTH                                                               |  | Russian Arabic English                                                   |  | Crown Media International, LLC Denver, CO         |  | BT London, England                                |  | Hot Bird 3       
|United Kingdom           |  | DTH           |  | BskyB
    NTL                                                                  |  | English                                                                  |  | BSkyB London, England                             |  | BSkyB London, England                             |  | Astra 2D         
|Israel                   |  | Cable         |  | Tevel Golden Channels Matav YES DTH                                            |  | Hebrew Arabic English                                                    |  | Crown Media International, LLC Denver, CO         |  | BT London, England                                |  | Hot Bird 3       
|United States            |  | Cable         |  | Time Warner DirecTV AT&T Charter Adelphia
    Echostar Cox Cablevision Comcast |  | English                                                                  |  | Crown Media International, LLC Denver, CO         |  | DMC Denver, CO                                    |  | SES Satcom C-3   
|New Zealand              |  | DTH           |  | Sky New Zealand                                                                |  | English                                                                  |  | Sky Auckland                                      |  | Sky Auckland                                      |  | Optus B1         
|Turkey                   |  | DTH           |  | Digiturk                                                                       |  | Turkish English                                                          |  | Crown Media International, LLC Denver, CO         |  | BT London, England                                |  | Hot Bird 3       

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.

14



---



##### Table of Contents



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 Entertainment sales
force worldwide in all sales matters pertaining to the Crown
Media Library. The term of this service agreement with Hallmark
Entertainment expires at the end of 2003, but we expect that the
agreement will be extended.

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 general entertainment
programming from TNT, USA Network, A&E, the Discovery
Channel, Lifetime, ABC Family and other similarly targeted
channels. Our international channel competes with general
entertainment programming from AXN, I-SAT, Canal Fox, TNT, UK
Gold 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 have upgraded
their physical infrastructures to accommodate digital delivery,
which provides 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 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:



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

Our channels are branded with the Hallmark name.
We believe that viewers and distributors associate the Hallmark
brand with family values and high quality content and that our
association with this brand facilitates our efforts to achieve
increased distribution and to attract additional viewers that
leads to higher ratings and advertising revenue.



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

We currently have long-term distribution
agreements with AT&T, Adelphia, Cablevision, Charter, Cox,
DirecTV, EchoStar, Mediacom, NCTC, and Time Warner in the United
States, as well as a number of other distributors. We are also
seeking to enter into a similar long-term distribution agreement
with Comcast. The terms of our major distribution agreements
generally provide for subscriber count increases and rate
increases to us over time, although some provide for lower or no
subscriber fees if certain levels of subscribers are achieved.

15



---



##### Table of Contents





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

Our Library of more than 700 titles 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
provides a revenue stream for us from licensing the titles to
third parties. We have a five-year program agreement with
Hallmark Entertainment ending December 31, 2005, that
provides us with access to new quality productions, as well as
the titles in the Hallmark Entertainment Distribution library
that we did not purchase.



| |                       
| | ----------------------
| | 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), the News Corporation,
Telecommunications International, Inc., ABC, CBS Sports, Turner
Network Television (TNT), MediaOne, International,
the Golf Channel and USA Networks (USA).

Research

The research department at Crown Media Holdings
provides strategic and tactical guidance to decision-makers
within the Company, as well as providing information about the
channel to potential advertisers and affiliates. This department
provides 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
within our Company.

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.

In 2001 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.

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 1,000 adults.
Since January 2002, the department has also subscribed 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 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 networks. Historically, this resource has served
the industry as a solid indicator of future success.

Employees

We had 356 employees as of December 31,
2002, compared to 412 employees at 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 and London, England. Substantially all of our
domestic channels employees work at our offices in Studio
City, California and New York, New York.

16



---



##### Table of Contents



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, many nations have
broadcasting legislation and regulations, which set minimum
standards regarding program 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 which 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 revenue 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 this Report.

Risk Factors

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



| |                                   
| | ----------------------------------
| | Risks Relating to Our
    Business



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

Both our international and domestic channels have
a history of net losses and we expect to continue to report net
losses for the foreseeable future. As of December 31, 2002,
we had an accumulated deficit of approximately
$793.3 million, net goodwill of approximately
$314.0 million, and film assets of $786.8 million.

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

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

17



---



##### Table of Contents





| |                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, 2002, our total debt was
$384.5 million and we had $335,000 of cash and cash
equivalents. In addition, subject to the restrictions under our
various debt agreements, we may borrow additional amounts under
our line of credit with HC Crown Corp. (HC Crown) to
cover the negative cash flow resulting from our current
operations, and incur additional indebtedness from time to time
to cover our operating losses, to finance acquisitions or
capital expenditures or for other purposes. Our principal
sources of funds for the next 15 months will be cash
generated from operating activities, borrowings under the HC
Crown line of credit, and cash generated from the tax sharing
agreement with Hallmark Cards. For further information on the HC
Crown line of credit and the tax sharing agreement, see
Part III  Item 13  Certain
Relationships and Related Transactions 
Hallmark Demand Notes and Line of Credit and
Tax Sharing Agreement.

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



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

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



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

High levels of interest expense could have
negative effects on our future operations. Interest expense,
which is net of interest income and includes amortization of
debt issuance costs and interest expense on borrowings under our
demand notes, credit facility and private placement, increased
$38.0 million to $49.8 million for the year ended
December 31, 2002, from $11.8 for the year ended
December 31, 2001. Interest expense increased
$12.3 million to $11.8 million for the year ended
December 31, 2001, from interest income of $523,000 for the
year ended December 31, 2000. The increase in interest
expense in the past twelve months resulted from an increase in
the average borrowings outstanding, due to cash generated from
operations being insufficient to cover operating expenses and
capital expenditures. Consequently, we were required to make
borrowings under our demand notes and credit facility during
2001 and 2002 and to enter into the private placement in
December 2001. A substantial portion of our cash flow from
operations must be used to pay our interest expense and will not
be available for other business purposes. 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.

18



---



##### Table of Contents





| |                                                  
| | -------------------------------------------------
| | Our liquidity is dependent on external
    funds.

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



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

Several of the Crown Media United States
existing distribution agreements contain most favored
nations clauses. These clauses typically provide that, in
the event Crown Media United States enters into an agreement
with another distributor on more favorable terms, these terms
must be offered to the existing distributor, subject to certain
exceptions and conditions. In August 2001, Crown Media United
States entered into a new distribution agreement with DirecTV,
Inc. under which the Hallmark Channel was repositioned to
DirecTVs TOTAL CHOICE® Package and our subscribers
increased significantly. Several other distributors, whose
agreements contain most favored nations provisions,
have indicated an interest in some or all of the DirecTV terms.
Crown Media United States is currently in discussions with
several other of these distributors and has already amended its
agreement with one of the distributors to incorporate some of
the DirectTV terms. For information concerning this amendment to
an existing distribution agreement with a large domestic
distributor, please see Revenue under Item 7
below. Any further modification of these existing agreements to
adopt the DirecTV terms, or any other new terms, could result in
the payment of cash or the issuance of stock by us and will
negatively affect subscriber revenue.



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

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



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

Our success depends partly upon unpredictable and
volatile factors beyond our control, such as viewer preferences,
competing programming and the availability of other
entertainment activities. We may not be able to anticipate and
react effectively to shifts in tastes and interests in our
markets. 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 revenue we anticipate
receiving from licensing of our film assets and cause a decline
in both advertising and subscriber fees revenue. The decline in
revenue could hinder or prevent us from achieving profitability
and could adversely affect the market price of our Class A
common stock.

19



---



##### Table of Contents





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

Currently, we are dependent on Hallmark
Entertainment to distribute and license our film assets to third
parties for us under the terms of a three-year service
agreement, which commenced January 1, 2001. This
arrangement reduces our control over the sales and distribution
of the film assets and might delay our realization of the full
revenue stream from the film assets. We and Hallmark
Entertainment each have the right to terminate the service
agreement after the first year. If Hallmark Entertainment elects
to terminate the agreement 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
revenue 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 revenue
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
revenue derived from the sale of advertising time on our
channels will increase. We have a limited history of marketing
and selling advertising time, particularly internationally. We
may be unable to identify, attract and retain experienced sales
and marketing personnel with relevant experience for our
U.S. channel, and our sales and marketing organization may
be unable to successfully compete against the significantly more
extensive and well-funded sales and marketing operations of our
current or potential competitors. Success in increasing our
advertising revenue also depends upon the number and coverage of
the distributors who carry our channels, our number of
subscribers, and the viewership ratings for our programming. In
addition, if we fail to improve our ratings, we will not be able
to increase our advertising sales rate-card or may be required
to run additional advertising spots which detract from our
available advertising inventory for future sales.

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



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

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



| |   |                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | conflicts between Hallmark Entertainment
    Investments, as our controlling stockholder, and our other
    stockholders, whose interests may differ with respect to, among
    other things, our strategic direction or significant corporate
    transactions;

20



---



##### Table of Contents





| |   |                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | conflicts related to corporate opportunities that
    could be pursued by us, on the one hand, or by Hallmark
    Entertainment Investments or its other affiliates, on the other
    hand; or
|
| |  | conflicts related to existing or new contractual
    relationships between us, on the one hand, and Hallmark
    Entertainment Investments and its affiliates, on the other hand.             

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



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

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



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

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



| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | If our Network Operations Center fails or its
    operations are disrupted, our 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 and the
Middle East and will, in 2003, also use the facility for
origination and playback of our domestic and Asian feeds. 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.

21



---



##### Table of Contents





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

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



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

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



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

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

The United States foreign relations and the war
with Iraq also can affect our revenue from foreign operations.
Distributors in the Middle East and possibly those outside of
that region may delay payments or attempt to use economic
uncertainties as a reason to delay or halt payments to us for
our channel.



| |                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

22



---



##### Table of Contents





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

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

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



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

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



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

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



| |                                   
| | ----------------------------------
| | Risks Relating to Our
    Industry



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

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

23



---



##### Table of Contents



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


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

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

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



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

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



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

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

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

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



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

24



---



##### Table of Contents



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


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

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






|        |           
|------- | ----------
|Item 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 June 2003 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               |  | Executive and administrative office                                                                           |  |             | 3,781  | 
|1177 Avenue of the Americas
    New York, New York               |  | Sales and administrative office                                                                               |  |             | 4,782  | 
|234 A Kings Road
    London, England                             |  | Sales and scheduling office                                                                                   |  |             | 11,400 | 
|10 F-1 Sung Chiang Road
    Taipei, Taiwan                       |  | Sales office                                                                                                  |  |             | 1,600  | 
|25 Canton Road
    Hong Kong                                     |  | Sales office                                                                                                  |  |             | 2,800  | 
|21 Nehru Place
    New Delhi                                     |  | Sales and administrative office                                                                               |  |             | 375    | 

25



---



##### Table of Contents



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

None.






|        |                                                        
|------- | -------------------------------------------------------
|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, 62,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.

William J. Aliber,
41,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 from June 1996 through May 2000.

Paul A. FitzPatrick,
56,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 C-SPAN during his
career.

Russel H. Givens,
56,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.

26



---



##### Table of Contents



Chris R. Moseley,
52,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,
57,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.




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 each
quarterly period in 2001 and 2002, as reported on the Nasdaq
National Market System.

|               |  |             |        |     |  |   |        | 
|-------------- |  | ----------- | ------ | --- |  | - | ------ | 
|               |  |            
|               |  | Price Range
|               |  |            
|Common Stock   |  | High        |        | Low
|               |  |             |        |    
|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  | 
|2002           |  |             |        |     |  |   |        | 
|First Quarter  |  | $           | 14.350 |     |  | $ | 8.850  | 
|Second Quarter |  | $           | 12.490 |     |  | $ | 6.850  | 
|Third Quarter  |  | $           | 8.150  |     |  | $ | 3.200  | 
|Fourth Quarter |  | $           | 5.700  |     |  | $ | 0.800  | 

Holders

As of March 3, 2003, there were
approximately 92 record holders of our Class A common stock
and one record holder of our 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.

27



---



##### Table of Contents



Securities Authorized for Issuance Under
Equity Compensation Plans

The following table provides as of
December 31, 2002, information for our only equity
compensation plan, which is the Amended and Restated 2000 Long
Term Incentive Plan and an option granted by a Hallmark Cards
subsidiary, Hallmark Entertainment Holdings, Inc.
(Hallmark Entertainment Holdings) to the Chairman of
Crown Media Holdings.

Equity Compensation Plan Information

|                                                               |       |                      |       |                      |  |                          |       |       |  |  |       |       | 
|-------------------------------------------------------------- | ----- | -------------------- | ----- | -------------------- |  | ------------------------ | ----- | ----- |  |  | ----- | ----- | 
|                                                               |       |                      |       |                      |  | Number of Securities    
|                                                               |       |                      |       |                      |  | Remaining Available     
|                                                               |       | Number of Securities |       |                      |  | for Future Issuance     
|                                                               |       | to be Issued         |       | Weighted-Average     |  | Under Equity            
|                                                               |       | Upon Exercise of     |       | Exercise Price of    |  | Compensation Plans      
|                                                               |       | Outstanding Options, |       | Outstanding Options, |  | (Excluding Securities   
|Plan Category                                                  |       | Warrants and Rights  |       | Warrants and Rights  |  | Reflected in Column (a))
|                                                               |       |                      |       |                      |  |                         
|                                                               |       | (In thousands)       |       |                      |  | (In thousands)          
|Equity compensation plans approved by security
    holders     |       |                      | 7,837 |                      |  | $                        | 12.38 |       |  |  | 1,879 |      
|Equity compensation plans not approved by
    security holders |       |                      | 3,400 | (1)                  |  | $                        | 11.13 | (1)   |  |  | N/A   |      
|                                                               |       |                      |       |                      |  |                          |       |       |  |  |       |      
|                                                               | Total |                      |       | 11,237               |  |                          | $     | 12.00 |  |  |       | 1,879 | 
|                                                               |       |                      |       |                      |  |                          |       |       |  |  |       |      



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Pursuant to a provision in an employment
    agreement between Hallmark Entertainment Holdings and Robert A.
    Halmi, Jr., dated October 1, 2001, Hallmark Entertainment
    Holdings agreed to grant Mr. Halmi stock options to
    purchase from Hallmark Entertainment Holdings up to
    3.4 million shares of Class A common stock of Crown
    Media Holdings at a price per share of $11.13. The employment
    agreement also contains put rights for Mr. Halmi. See item
    Option of Robert A. Halmi, Jr. in Item 13 below
    for additional information.

Recent Sales of Unregistered
Securities

On December 30, 2002, Crown Media Holdings,
Inc. issued 123,831 shares of its Class A common stock
to Hallmark Entertainment Holdings. These shares were issued as
payment of a portion of the commitment fee payable by Crown
Media Holdings under, and in accordance with the terms of, a
Promissory Note dated December 14, 2001, made by Crown
Media Holdings in favor of HC Crown. The amount of the
commitment fee owing and satisfied by this share issuance was
$843,750. The issuance of the shares were exempt from
registration under the Securities Act of 1933 as a non-public
offering pursuant to Section 4(2) of the Act. We based our
reliance upon this exemption on the facts of the transaction,
including that the issuance and offering of the shares were made
only to an affiliate of Hallmark Cards that owns more than a
majority of our shares.

28



---



##### Table of Contents








|        |                        
|------- | -----------------------
|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, 1998, 1999, 2000, 2001 and 2002, and the
consolidated balance sheet data as of December 31, 1998,
1999, 2000, 2001 and 2002 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, and
as part of this acquisition acquired the 22.5% common interests
in Crown Media United States and 50% common interests of H&H
Programming-Asia 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 Jim Henson Company). 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,                
|                                                      |                    |                                         
|                                                      |                    | 1998                                     |                        | 1999   |        | 2000    |        | 2001   |        | 2002   
|                                                      |                    |                                          |                        |        |        |         |        |        |        |        
|                                                      |                    |                                         
|                                                      |                    | (In thousands, except per share amounts)
|Statement of Operations Data:                         |                    |                                          |                        |        |        |         |        |        |        |         |        |        |        |          |        |        |        |          |        |       
|Revenue:                                              |                    |                                          |                        |        |        |         |        |        |        |         |        |        |        |          |        |        |        |          |        |       
|                                                      | Subscriber fees    |                                          | $                      | 20,648 |        |         | $      | 27,670 |        |         | $      | 47,921 |        |          | $      | 66,537 |        |          | $      | 67,913 |       
|                                                      | Advertising        |                                          |                        | 84     |        |         |        | 1,729  |        |         |        | 16,016 |        |          |        | 37,513 |        |          |        | 69,066 |       
|                                                      | Licensing fees     |                                          |                        |       |        |         |        |       |        |         |        |       |        |          |        | 2,267  |        |          |        | 23,950 |       
|                                                      | Other              |                                          |                        | 2,955  |        |         |        | 2,510  |        |         |        | 2,879  |        |          |        | 740    |        |          |        | 80     |       
|                                                      |                    |                                          |                        |        |        |         |        |        |        |         |        |        |        |          |        |        |        |          |        |       
|                                                      |                    |                                          | Total revenue          |        |        | 23,687  |        |        |        | 31,909  |        |        |        | 66,816   |        |        |        | 107,057  |        |        |        | 161,009  |  
|Cost of services:                                     |                    |                                          |                        |        |        |         |        |        |        |         |        |        |        |          |        |        |        |          |        |       
|                                                      | Programming costs: |                                          |                        |        |        |         |        |        |        |         |        |        |        |          |        |        |        |          |        |        |       
|                                                      |                    | Affiliates                               |                        |        | 12,307 |         |        |        | 12,331 |         |        |        | 31,307 |          |        |        | 55,027 |          |        |        | 67,689 |         
|                                                      |                    | Non-affiliates                           |                        |        | 14,187 |         |        |        | 10,452 |         |        |        | 18,933 |          |        |        | 62,158 |          |        |        | 70,314 |         
|Amortization of film library                          |                    |                                          |                       |        |        |         |       |        |        |         |       |        |        |          | 3,533  |        |        |          | 27,035 |       
|Subscriber acquisition fee expense                    |                    |                                          |                       |        |        |         |       |        |        |         | 4,801  |        |        |          | 6,415  |        |        |          | 44,220 |       
|Depreciation and amortization of technical
facilities |                    |                                          |                       |        |        |         |       |        |        |         |       |        |        |          | 4,738  |        |        |          | 4,742  |       
|Operating costs                                       |                    |                                          | 16,831                 |        |        |         | 18,796 |        |        |         | 35,643 |        |        |          | 57,059 |        |        |          | 60,877 |       
|                                                      |                    |                                          |                        |        |        |         |        |        |        |         |        |        |        |          |        |        |        |          |        |       
|                                                      |                    |                                          | Total cost of services |        |        | 43,325  |        |        |        | 41,579  |        |        |        | 90,684   |        |        |        | 188,930  |        |        |        | 274,877  |  
|Selling, general and administrative expense           |                    |                                          | 8,412                  |        |        |         | 20,472 |        |        |         | 46,271 |        |        |          | 70,709 |        |        |          | 60,223 |       
|Marketing expense                                     |                    |                                          | 1,634                  |        |        |         | 3,426  |        |        |         | 21,280 |        |        |          | 34,809 |        |        |          | 48,946 |       
|Reorganization expense                                |                    |                                          |                       |        |        |         |       |        |        |         |       |        |        |          | 4,629  |        |        |          | 28,801 |       
|Depreciation and amortization expense                 |                    |                                          | 1,504                  |        |        |         | 2,379  |        |        |         | 5,520  |        |        |          | 8,649  |        |        |          | 11,026 |       
|Amortization of goodwill                              |                    |                                          |                       |        |        |         |       |        |        |         | 8,639  |        |        |          | 20,032 |        |        |          |       |       
|                                                      |                    |                                          |                        |        |        |         |        |        |        |         |        |        |        |          |        |        |        |          |        |       
|                                                      |                    |                                          | Loss from operations   |        |        | (31,188 | )      |        |        | (35,947 | )      |        |        | (105,578 | )      |        |        | (220,701 | )      |        |        | (262,864 | )

29



---



##### Table of Contents



|                                                                      |                          |                                          |        |         |   |      |         |         |   |      |        |          |   |   |         |          |   |   |         |          |  
|--------------------------------------------------------------------- | ------------------------ | ---------------------------------------- | ------ | ------- | - | ---- | ------- | ------- | - | ---- | ------ | -------- | - | - | ------- | -------- | - | - | ------- | -------- | -
|                                                                      |                          |                                         
|                                                                      |                          | Years Ended December 31,                
|                                                                      |                          |                                         
|                                                                      |                          | 1998                                     |        | 1999    |   | 2000 |         | 2001    |   | 2002
|                                                                      |                          |                                          |        |         |   |      |         |         |   |     
|                                                                      |                          |                                         
|                                                                      |                          | (In thousands, except per share amounts)
|Equity in net losses of unconsolidated entities                       |                          |                                          | (4,918 | )       |   |      | (18,992 | )       |   |      | (9,328 | )        |   |   | (655    | )        |   |   |        |         
|Guaranteed preferred beneficial accretion                             |                          |                                          |       |         |   |      |        |         |   |      |       |          |   |   | (1,428  | )        |   |   | (25,508 | )       
|Interest income (expense) and other, net                              |                          |                                          | 1,273  |         |   |      | 798     |         |   |      | 523    |          |   |   | (10,392 | )        |   |   | (22,603 | )       
|                                                                      |                          |                                          |        |         |   |      |         |         |   |      |        |          |   |   |         |          |   |   |         |         
|                                                                      | Loss before income taxes |                                          |        | (34,833 | ) |      |         | (54,141 | ) |      |        | (114,383 | ) |   |         | (233,176 | ) |   |         | (310,975 | )
|Income tax (provision) benefit                                        |                          |                                          | (632   | )       |   |      | (2,556  | )       |   |      | (1,743 | )        |   |   | 3,344   |          |   |   | (2,054  | )       
|                                                                      |                          |                                          |        |         |   |      |         |         |   |      |        |          |   |   |         |          |   |   |         |         
|                                                                      | Net loss                 |                                          | $      | (35,465 | ) |      | $       | (56,697 | ) |      | $      | (116,126 | ) |   | $       | (229,832 | ) |   | $       | (313,029 | )
|                                                                      |                          |                                          |        |         |   |      |         |         |   |      |        |          |   |   |         |          |   |   |         |         
|Weighted average number of Class A and
    Class B shares outstanding |                          |                                          | 29,637 |         |   |      | 32,989  |         |   |      | 50,786 |          |   |   | 74,691  |          |   |   | 104,306 |         
|                                                                      |                          |                                          |        |         |   |      |         |         |   |      |        |          |   |   |         |          |   |   |         |         
|Net loss per share                                                    |                          | $                                        | (1.27  | )       |   | $    | (1.84   | )       |   | $    | (2.32  | )        |   | $ | (3.08   | )        |   | $ | (3.00   | )       
|                                                                      |                          |                                          |        |         |   |      |         |         |   |      |        |          |   |   |         |          |   |   |         |         

|                                                   |                                  |                    |         |       |  |      |         |        |  |      |         |        |  |   |           |        |  |   |           |        | 
|-------------------------------------------------- | -------------------------------- | ------------------ | ------- | ----- |  | ---- | ------- | ------ |  | ---- | ------- | ------ |  | - | --------- | ------ |  | - | --------- | ------ | 
|                                                   |                                  |                   
|                                                   |                                  | As of December 31,
|                                                   |                                  |                   
|                                                   |                                  | 1998               |         | 1999  |  | 2000 |         | 2001   |  | 2002
|                                                   |                                  |                    |         |       |  |      |         |        |  |     
|                                                   |                                  |                   
|                                                   |                                  | (In thousands)    
|Balance Sheet Data:                                |                                  |                    |         |       |  |      |         |        |  |      |         |        |  |   |           |        |  |   |           |       
|Cash and cash equivalents                          |                                  | $                  | 2,877   |       |  | $    | 3,865   |        |  | $    | 34,274  |        |  | $ | 13,859    |        |  | $ | 335       |       
|Goodwill                                           |                                  |                    |        |       |  |      |        |        |  |      | 240,141 |        |  |   | 314,033   |        |  |   | 314,033   |       
|Total assets                                       |                                  |                    | 117,674 |       |  |      | 80,003  |        |  |      | 530,078 |        |  |   | 1,626,358 |        |  |   | 1,492,262 |       
|Total long-term debt, excluding current maturities |                                  |                    | 10,000  |       |  |      |        |        |  |      |        |        |  |   | 205,894   |        |  |   | 382,206   |       
|Stockholders equity (deficit)                     |                                  |                    | (20,197 | )     |  |      | (62,967 | )      |  |      | 246,808 |        |  |   | 776,866   |        |  |   | 467,595   |       
|Other Data:                                        |                                  |                    |         |       |  |      |         |        |  |      |         |        |  |   |           |        |  |   |           |       
|Capital expenditures                               |                                  | $                  | 6,665   |       |  | $    | 2,569   |        |  | $    | 22,809  |        |  | $ | 11,150    |        |  | $ | 4,240     |       
|Total subscribers at year end:                     |                                  |                    |         |       |  |      |         |        |  |      |         |        |  |   |           |        |  |   |           |       
|                                                   | Hallmark Channel  International |                    |         | 8,710 |  |      |         | 20,794 |  |      |         | 33,531 |  |   |           | 44,412 |  |   |           | 49,523 | 
|                                                   | Hallmark Channel  U.S.          |                    |         |      |  |      |         |       |  |      |         | 26,488 |  |   |           | 43,532 |  |   |           | 48,815 | 
|                                                   |                                  |                    |         |       |  |      |         |        |  |      |         |        |  |   |           |        |  |   |           |       
|                                                   | Total subscribers                |                    |         | 8,710 |  |      |         | 20,794 |  |      |         | 60,019 |  |   |           | 87,944 |  |   |           | 98,338 | 

Please see Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations, for information regarding our reorganization in 2002.






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

Revenue

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

30



---



##### Table of Contents



Subscriber fees vary according to:



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

In some circumstances, international distributors
provide minimum revenue guarantees.

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

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

On November 7, 2002, we entered into an
amendment of a distribution agreement with a large distributor
in the United States. The amendment extends the distribution
agreement for two years to December 31, 2007, and provides
for the payment of a substantial cash amount in settlement of
the most favored nation clauses in regard to the
DirecTV terms and significantly increases the distributors
commitment to add full-time subscribers to our Channel. We paid
a portion of the amount upon execution and will make monthly
cash payments through December 1, 2003, for the balance. We
are also required to pay a substantial market support payment,
based on subscribers exceeding a final commitment number,
through December 31, 2004. In addition, if the final
commitment level of subscribers is achieved by the distributor,
subscriber fees will not apply to subscribers above a specified
number. The amendment also contains a most favored
nation provision relating to other distribution
agreements. A portion of the consideration given, totaling
$32.3 million, relating to new full-time subscribers and
term extension has been recorded as subscriber acquisition fees
that are amortized over the remaining life of the distribution
agreement. The marketing support payments under the amendment
will be marketing expenses when incurred. The remaining portion
of the consideration totaling $16.9 million is related to
the settlement of the most favored nation clause and
has been expensed as a component of subscriber acquisition fee
expense.

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

31



---



##### Table of Contents



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


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

Cost of Services

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

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

Discussion of Critical Accounting
Policies

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

In the ordinary course of business, our
management has made a number of judgments, estimates and
assumptions relating to the reporting of results of operations
and financial condition in the preparation of our financial
statements in conformity with accounting principles generally
accepted in the United States. Actual results could differ
significantly from those estimates under different assumptions
and conditions. The following discussion addresses certain
accounting policies involving 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, the
Company evaluates collectibility on a customer-by-customer
basis. Prior to any revenue recognition in foreign markets from
a new customer, the Company must generally receive 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
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 revenue 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.

32



---



##### Table of Contents





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

In the case of sales to third parties, we
amortize our film assets using the
individual-film-forecast-computation method, which amortizes
such assets in the same ratio that current period actual revenue
to estimated unrecognized ultimate revenues as of the beginning
of the current fiscal year. For anticipated internal use of the
film assets, we amortize our film assets using a 10-year
estimated useful life. 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 by an initial, external valuation of our
film assets at the time of acquisition. We also review the film
assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of any such
asset may not be recoverable. If the carrying value of the
individual film assets exceeds the fair value, the film assets
are written-down to their fair values. At least annually, we are
required by the covenants in our credit facility to have a
valuation expert perform a valuation of the film assets



| |                       
| | ----------------------
| | 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 our business model or changes
in our capital strategy can result in an impairment or a change
in the estimated useful lives. In those cases where we determine
that the useful life of property and equipment should be
shortened, we depreciate the net book value in excess of the
salvage value, over its revised remaining useful life thereby
increasing depreciation expense. Factors such as changes in the
planned use of equipment or facilities could also result in
shortened useful lives.



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

Subscriber acquisition fees are paid by us to
increase the carriage of the Hallmark Channel on cable
television and satellite 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. If the
amortization expense exceeds the revenue recognized on a per
distributor basis, the excess amortization is included as a
component of the cost of services. The Company assesses the
recoverability of these costs periodically, and when changes in
distributor relationships or other indicators indicate a
potential impairment.



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

In December 2001, Crown Media Holdings completed
a $265.0 million private placement by issuing trust
preferred securities with contingent appreciation certificates.
We recorded the trust preferred securities as guaranteed
preferred beneficial interest in our debentures held by Crown
Media Trust, while the contingent appreciation certificates are
recorded as convertible debt. The agreement also included
embedded derivatives, which are marked to fair value through
income (expense) over the term of the agreement or until
settlement, if earlier. A fair value allocation was performed by
the Company to record the trust preferred securities, the debt
and the derivative. This calculation is discussed in Note 9
to Notes of Consolidated Financial Statements in this Report.
The embedded derivatives are valued using a Black Scholes option
pricing model. This model requires estimation of the expected
volatility of our common stock and a risk-free rate of return.
The interest component of the private placement is also being
allocated between interest expense and guaranteed preferred
beneficial accretion in the consolidated statements of
operations to correspond to the allocation of the components on
the consolidated balance sheets.

On or after December 15, 2003, Crown Media
Holdings will have the right to redeem any and all of the
outstanding debentures at a redemption price equal to 100% of
the aggregate principal amount of the debentures, together with
any accrued and unpaid interest thereon. Since their issuance
and through September 30, 2002, the Company expected to
redeem the debentures during 2004. In light of the decline in

33



---



##### Table of Contents



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




| |         
| | --------
| | Goodwill

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

We completed a valuation of Crown Media United
States and H&H Programming  Asia to assist us in
our annual analysis of impairment of goodwill. Based on the
results of this valuation as of November 30, 2002, our
goodwill was not impaired. Valuation of goodwill requires
management estimation of projected discounted cash flows.
Changes to projected cash flows or the discount rate could lead
to the determination that our goodwill is impaired.

2002 Reorganization and Other
Charges

On October 7, 2002, the Company announced
its intention to reorganize its operations to localize and
concentrate its efforts on the Hallmark Channel in the U.S. and
in its most successful international markets. The Company has
made substantial progress reorganizing and localizing its
operating and non-technical support functions formally located
in the Companys U.S. based offices and has
transferred those responsibilities to regional staff and/or
outsourced them. The Company has entered into an agreement with
a local distribution partner, Pramer, who will perform the
day-to-day operations of the Hallmark Channel in Latin America
(Mexico, Central America and South America). We expect to
complete the reorganization by the end of the first quarter of
2003. Once completed, our workforce will be reduced by
approximately 30% or 130 positions.

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

In addition to and concurrently with the
reorganization, we recorded an impairment charge in the fourth
quarter of $56.0 million related to programming costs and
subtitling and dubbing costs, reflecting the refinement of our
programming strategy and projected usage. In the consolidated
statement of operations for the year ended December 31,
2002, this charge is reflected as $30.2 million of
affiliate programming costs, $17.9 million of non-affiliate
programming costs, and $7.9 million of operating costs. The
Company also wrote-down certain fixed assets in the amount of
$1.2 million, which were considered impaired as a result of
the reorganization of our facilities.

Effects of
Transactions with Related and Certain Other
Parties

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

34



---



##### Table of Contents





| |                      
| | ---------------------
| | Results of Operations



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2002 Compared to
    Year Ended December 31, 2001

Revenue.Total
revenue for the year ended December 31, 2002, increased to
$161.0 million from $107.1 million, which represents
an increase of $53.9 million, or 50%, over the comparable
period in 2001. Subscriber fee revenue increased to
$67.9 million for the year ended December 31, 2002,
from $66.5 million, which represents an increase of
$1.4 million, or 2%, over the comparable period in 2001.
The increased subscriber fee revenue resulted from expanded
worldwide distribution offset by reduced license fee rates and
increased subscriber acquisition fees in the United States. The
number of subscribers to the Hallmark Channel, as of
December 31, 2002, was 98.3 million compared to
87.9 million as of December 31, 2001, which represents
an increase of 10.4 million, or 12%. Subscribers to our
domestic channel increased from 43.5 million as of
December 31, 2001, to 48.8 million as of
December 31, 2002, which represents an increase of
5.3 million, or 12%. Subscribers to our service increased
at a higher rate than subscriber fee revenue due to a number of
factors such as adding new subscribers with free promotional
periods, initial discounted subscriber fees, waiver of
subscriber fees and bulk discounts from attaining certain
subscriber levels. Eighty percent of subscriber fees revenue for
the year ended December 31, 2002, and 79% of subscriber
fees revenue for the year ended December 31, 2001, were
earned internationally. The amount of subscriber fee revenue net
of the subscriber acquisition fee expense was $13.5 million
for the domestic Hallmark Channel for the year ended
December 31, 2002, and $54.4 million for the
international Hallmark Channel for the year ended
December 31, 2002. Increased subscriber acquisition costs
and other factors described above are expected to continue to
result in a decline in net domestic subscriber revenue. Certain
of our international subscriber fee rates have and will continue
to decrease as we renew distribution agreements, which may
provide for lower per subscriber rates than under previous
agreements. International fees per subscriber are also expected
to experience continuing downward pressure in the future due to
the competitive nature of the industry, the growth of digital
cable, the shift in the industry in certain more developed
countries from subscriber fees revenue to advertising revenue,
foreign currency devaluation associated with global economies
and the economic turbulence in certain of our markets.

Advertising revenue increased to
$69.1 million for the year ended December 31, 2002,
from $37.5 million, which represents an increase of
$31.6 million, or 84%, over the comparable period in 2001.
The increase in advertising revenue reflects the following
during 2002: our growth in both domestic and international
subscribers; higher ratings in the United States and in the
United Kingdom; higher advertising rates; and expanded sales of
advertising time primarily in the United States and the United
Kingdom. Advertising revenue from our domestic channel was
$46.0 million for the year ended December 31, 2002,
compared to $25.4 million for the year ended
December 31, 2001. Additionally, the number of advertisers
on our domestic channel rose from approximately 122 in December
2001 to approximately 220 in the December 2002. During the
fourth quarter of 2002, due to attainment of a contractual
maximum, the amount of advertising revenue for our United
Kingdom market substantially decreased.

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

During the fourth quarter of 2001, we began
earning film licensing fees revenue from our purchased film
assets. In addition to our use of these film assets on our
channels, we are generating film licensing fee revenue as we
establish ourselves in the program distribution market. For the
year ended December 31, 2002, we earned film licensing fee
revenue of $24.0 million as compared to $2.3 million
in the 2001. This level of licensing fees reflects what we
believe to be a temporary soft demand in the international
market for our film products.

Cost of services.Cost of services for the year ended
December 31, 2002, increased to $274.9 million from
$188.9 million, which represents an increase of
$86.0 million, or 45%, over the comparable period in 2001.
Cost of services as a percent of net revenue decreased to 171%
for the year ended December 31, 2002, as compared to 176%
for the year ended 2001. This decrease was primarily due to our
50% increase in net revenue discussed above, offset by the
effect of charges in 2002, discussed below.

35



---



##### Table of Contents



Total programming costs for the year ended
December 31, 2002, increased 18% as Crown Media Holdings
recorded a charge in the fourth quarter of $48.1 million
related to certain programming write-offs reflecting the
refinement of our programming strategy and projected usage. In
third quarter 2001, the Company recorded a charge of
$28.2 million related to the write-down of certain
programming contracts with EM.TV and The Jim Henson Company,
also reflecting refinement of our programming strategy and
projected usage. For the year ended December 31, 2002,
amortization of our film assets was $27.0 million, as
compared to $3.5 million in 2001.

Expanded distribution and new agreements in the
U.S. resulted in an increase in subscriber acquisition fee
expense of $37.8 million to $44.2 million for the year
ended December 31, 2002, as compared to $6.4 million
for the same period of 2001. As the result of the settlement and
adjustment of certain contractual matters with
U.S. distributors, expense of $21.6 million was
recorded during the fourth quarter of 2002. Operating costs for
the year ended December 31, 2002, which include playback,
dubbing and subtitling, transponder and interstitial expenses,
increased 7%, primarily as a result of the $7.9 million
write-down of certain subtitling and dubbing costs in our
international market.

Selling, general and administrative expense.Selling, general and administrative
expense for the year ended December 31, 2002, decreased to
$60.2 million from $70.7 million, which represents a
decrease of $10.5 million, or 15%, over the comparable
period in 2001. These decreases resulted from a reduction in
salary, benefit and travel expenses. Salary and benefit expenses
declined as a result of the termination of certain high-level
positions during 2001. Our continuing use of teleconferencing,
changes to our travel policy, and an overall decrease in
international travel lowered travel expenses. Selling, general
and administrative expense as a percent of total revenue
decreased to 37% for the year ended December 31, 2002, as
compared to 66% for the year ended December 31, 2001. This
decrease was partially due to the increase in total revenue of
50% noted above.

Marketing expense.Marketing expense for the year ended
December 31, 2002, increased to $48.9 million from
$34.8 million, which represents an increase of
$14.1 million, or 41%, over the comparable period in 2001.
Marketing expense was higher for year ended December 31,
2002, due primarily to expanded marketing efforts related to the
Hallmark Keepsake Sweepstakes campaign. The Hallmark Keepsake
Sweepstakes resulted in $15.1 million of expense in the
fourth quarter of 2002. Other marketing efforts in 2002 included
amplified efforts to promote the premiers of Adoption and
Stranded on our domestic channel and the relaunch of the
Hallmark Channel in Australia.

Reorganization expense.Reorganization expense for the year
ended December 31, 2002, was $28.8 million. This
charge was comprised of a charge of $5.5 million for
severance costs and charges of $23.3 million related to
satellite and facility exit costs. As a result of the
reorganization, the Company expects to reduce annual operating
costs by $25.0 million, comprised primarily of decreases in
expenditures for payroll, satellite and facilities, marketing
and programming, when compared to 2002. 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. In 2001, we recorded
$4.6 million of reorganization expense, comprised primarily
of severance benefits.

Depreciation and amortization expense.Depreciation and amortization expense
for the year ended December 31, 2002, increased to
$11.0 million from $8.6 million, which represents an
increase of $2.4 million, or 28%, over the comparable
period in 2001. Depreciation and amortization expense was higher
for the year ended December 31, 2002, due primarily to the
$1.2 million write-down of certain impaired fixed assets
during the fourth quarter of 2002.

Amortization of goodwill.Amortization of goodwill for the year
ended December 31, 2001, was $20.0 million. In
conjunction with the acquisition of an additional 55% common
interest in Crown Media United States on May 9, 2000, we
recorded goodwill in the amount of $248.8 million, which
was being amortized over 20 years. In conjunction with the
acquisition of EM.TV & Merchandising AGs
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 in the
amount of $93.9 million, which was being amortized over
10 years. The amortization of goodwill arising from past
acquisitions ceased as of January 1, 2002.

36



---



##### Table of Contents



Equity in net losses of unconsolidated
entities and investment expenses.Equity in net losses of unconsolidated entities and for the two
and one-half months ended March 15, 2001, was $655,000. We
acquired the remaining common interests in Crown Media United
States and H&H Programming  Asia on
March 15, 2001.

Guaranteed preferred beneficial accretion.Guaranteed preferred beneficial
accretion for the year ended December 31, 2002, was
$25.5 million as compared to $1.4 million in 2001.
This expense relates to future payments on our debentures issued
on December 17, 2001, in connection with the preferred
securities of Crown Media Trust. We recorded gains of
$11.7 million on marking our derivative liabilities to fair
value for the year ended December 31, 2002, as a component
of the accretion of guaranteed preferred beneficial interest. We
anticipate that this expense will further increase until the
Companys redemption of the trust preferred securities in
December 2007. Management has determined that the Company will
not make an early redemption of its trust preferred securities
prior to their maturity in December 2007. This determination had
the consequent impact of increasing the cumulative interest rate
from 14% to 18%.

Interest income (expense) and other, net.Net interest and other expense for the
year ended December 31, 2002, increased to
$22.6 million from $10.4 million, which represents an
increase of $12.2 million, over the comparable period in
2001. This increase was primarily due to increased borrowings
under our credit facility and interest on our convertible debt.
We anticipate that this expense will further increase until the
Companys redemption of the trust preferred securities in
December 2007. Accretion expense of $495,000 related to certain
discounted liabilities arising from the reorganization was also
recorded in the fourth quarter of 2002.

Income tax benefit (provision).Income tax provision for the year
ended December 31, 2002, increased to $2.1 million
from an income tax benefit of $3.3 million, which represent
an increase of $5.4 million, or 161%, over the comparable
period in 2001. This increase was due to a tax benefit from our
film assets transaction during the fourth quarter 2001 and also
to the tax on the foreign-based income resulting from increased
international subscriber fees and advertising revenue as
discussed above.



| |                                                                          
| | -------------------------------------------------------------------------
| | 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.

Revenue.Total
revenue 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.
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 the third
quarter of 2001, we completed a distribution agreement with
DirecTV, which added approximately five million new subscribers.

Our subscriber revenue is decreased by the amount
of the subscriber acquisition costs. This expense amount was
$6.6 million for the year ended December 31, 2001. See
Note 2 of Notes to Consolidated Financial Statements.

37



---



##### Table of Contents



Advertising revenue 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 revenue 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 revenue 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.

During the fourth quarter of 2001, we commenced
earning revenue through a new business segment, film
distribution, via our 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 $188.9 million from
$90.7 million, which represents an increase of
$98.2 million, or 108%, over the comparable period in 2000.
Cost of services as a percent of total revenue increased to 176%
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. From the date of the acquisition until
December 31, 2001, amortization of our film assets was
$3.5 million. 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
$84.0 million from $51.8 million, which represents an
increase of $32.2 million, or 62%, 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 were 78% for both of the years ended
December 31, 2001 and 2000.

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.

38



---



##### Table of Contents



Additionally, in an effort to strengthen our
domestic brand awareness, we incurred 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.Amortization of goodwill 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 $22.0 million
per year, which will significantly decrease our net loss
subsequent to December 31, 2001. However, goodwill and
other intangible assets are subject to periodic (at least
annual) tests for impairment and recognition of impairment
losses in the future could be required based on a methodology
for measuring impairments, prescribed by these pronouncements.

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 accretion.Guaranteed preferred beneficial
accretion 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.

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 our 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.



| |                                    
| | -----------------------------------
| | Liquidity and Capital
    Resources

Cash used in operating activities was
$169.9 million and $245.7 million for the years ended
December 31, 2002 and 2001, respectively. Cash was used
primarily to fund operating expenditures related to net losses
of $313.0 million and $229.8 million for the years
ended December 31, 2002 and 2001, respectively. The
decrease from 2001 to 2002 was primarily due to substantially
higher domestic and UK advertising revenue and related cash
receipts, and a decrease in programming purchased for our
international markets outside the UK. This decrease was
partially offset by increased programming purchased in our U.S.
and UK markets to meet our strategy and the demands of our
customers and higher subscriber acquisition fee payments as a
result of our expanded distribution in domestic markets.

Cash used in investing activities was
$4.1 million and $11.3 million for the years ended
December 31, 2002 and 2001, respectively. During the first
quarter of 2001, we completed and launched our Network

39



---



##### Table of Contents



Operations Center, which required substantial
capital expenditures in both 2000 and 2001. Capital expenditures
in 2002 were limited.


Cash provided by financing activities was
$160.1 million and $236.7 million for the years ended
December 31, 2002 and 2001, respectively. During 2001, we
borrowed $100.0 million through a term loan under our
credit facility to fund the film assets transaction and
$70.0 million under the credit facility revolver to repay
borrowings under our HC Crown notes. Additionally, we used the
proceeds from the private placement transaction to pay
$69.4 million of programming obligations under agreements
with Hallmark Entertainment Distribution and to repay
$33.5 million of borrowings under an HC Crown note. In
2002, we borrowed funds under the credit facility and the HC
Crown note to meet our operating demands.

Cash used in operating activities was
$245.7 million and $105.3 million for the years ended
December 31, 2001 and 2000, respectively. Cash was used
primarily to fund operating expenditures related to net losses
of $229.8 million and $116.1 million for the years
ended December 31, 2001 and 2000, respectively. The
increase in cash used during 2001 as compared to 2000 was the
result of new programming strategies, expanding distribution,
and the re-launch of our channels as the Hallmark Channel.

Cash used in investing activities was
$11.3 million and $14.1 million for the years ended
December 31, 2001 and 2000, respectively. 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. During 2000, we purchased a significant amount of
equipment to aid in the completion of our Network Operations
Center.

Cash provided by financing activities was
$236.7 million and $149.7 million for the years ended
December 31, 2001 and 2000, respectively. On
December 17, 2001, we completed a private placement
transaction of preferred securities, which generated cash
proceeds of $251.6 million. A portion of these net
proceeds, $111.6 million, was placed in escrow to pay the
current maturities of our credit facility on January 7,
2002. Additionally, we borrowed $263.1 million under our
credit facility and $116.2 million under our notes with HC
Crown to meet operating requirements and finance the film asset
transaction. On May 9, 2000, we completed an initial public
offering, which generated net proceeds of $125.4 million.
Prior to the initial public offering, we obtained
$24.1 million in borrowings from an affiliate and
$10.0 million in capital contributions to fund our
pre-acquisition obligation to Crown Media United States.

40



---



##### Table of Contents



The following table aggregates all of our
contractual commitments as of December 31, 2002.

|                                   |                                                                                 |                              |         |        |     |       |       |       |  |       |       |      |  |   |       |       |  |   |      |      | 
|---------------------------------- | ------------------------------------------------------------------------------- | ---------------------------- | ------- | ------ | --- | ----- | ----- | ----- |  | ----- | ----- | ---- |  | - | ----- | ----- |  | - | ---- | ---- | 
|                                   |                                                                                 |                             
|                                   |                                                                                 | Scheduled Payments by Period
|                                   |                                                                                 |                             
|                                   |                                                                                 |                              |         | Less   |     |       |       | After
|                                   |                                                                                 |                              |         | Than 1 |     | 2-3   |       | 4-5   |  | 5    
|Contractual Obligations            |                                                                                 | Total                        |         | Year   |     | Years |       | Years |  | Years
|                                   |                                                                                 |                              |         |        |     |       |       |       |  |      
|Long-Term Debt                     |                                                                                 | $                            | 373.2   |        |     | $     | 0.3   |       |  | $     |      |      |  | $ | 372.9 |       |  | $ |     |     
|Capital Lease Obligations          |                                                                                 |                              | 10.7    |        |     |       | 1.4   |       |  |       | 3.3   |      |  |   | 3.8   |       |  |   | 2.2  |     
|Operating Leases                   |                                                                                 |                              | 89.3    |        |     |       | 15.5  |       |  |       | 30.4  |      |  |   | 21.7  |       |  |   | 21.7 |     
|Other Long-Term Obligations        |                                                                                 |                              |         |        |     |       |       |       |  |       |       |      |  |   |       |       |  |   |      |     
|                                   | Program license fees payable to non-affiliates
    and NICC                     |                              |         | 90.0   |     |       |       | 50.8  |  |       |       | 39.2 |  |   |       |      |  |   |      |     | 
|                                   | Program license fees payable to Hallmark
    Entertainment Distribution         |                              |         | 68.2   | (a) |       |       | 8.0   |  |       |       |     |  |   |       | 60.2  |  |   |      |     | 
|                                   | Program license fees payable for future windows                                 |                              |         | 219.5  |     |       |       | 66.0  |  |       |       | 96.6 |  |   |       | 45.1  |  |   |      | 11.8 | 
|                                   | Subscriber acquisition fees(b)                                                  |                              |         | 48.5   |     |       |       | 45.9  |  |       |       | 2.6  |  |   |       |      |  |   |      |     | 
|                                   | Payable to Hallmark Entertainment Holdings                                      |                              |         | 52.1   | (c) |       |       |      |  |       |       |     |  |   |       | 52.1  |  |   |      |     | 
|                                   | Payable to Hallmark Entertainment                                               |                              |         | 47.9   | (c) |       |       |      |  |       |       |     |  |   |       | 47.9  |  |   |      |     | 
|                                   | Guaranteed preferred beneficial interests in
    Crown Media Trusts debentures |                              |         | 221.6  | (d) |       |       |      |  |       |       |     |  |   |       | 221.6 |  |   |      |     | 
|                                   | Preferred Minority Interest                                                     |                              |         | 25.0   |     |       |       |      |  |       |       | 25.0 |  |   |       |      |  |   |      |     | 
|                                   |                                                                                 |                              |         |        |     |       |       |       |  |       |       |      |  |   |       |       |  |   |      |     
|Total Contractual Cash Obligations |                                                                                 | $                            | 1,246.0 |        |     | $     | 187.9 |       |  | $     | 197.1 |      |  | $ | 825.3 |       |  | $ | 35.7 |     
|                                   |                                                                                 |                              |         |        |     |       |       |       |  |       |       |      |  |   |       |       |  |   |      |     



---



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

Our financial position and operations changed
significantly during 2001. Substantial revenue producing assets
were acquired through the issuance of debt and stock with funds
available under our credit facility. In August 2001, we issued
$80.1 million of common stock for additional carriage on a
U.S. pay television distributor. 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 revenue
for the foreseeable future. These acquisitions and our
continuing use of cash in operations required several financing
transactions during 2001. 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 preferred securities in a
private placement transaction for $265.0 million. During
2002 we did not enter into any additional financings, but did
borrow $168.5 million on the remainder of our credit
facility and were advanced $5.0 million under our line of
credit with HC Crown.

In connection with our growth strategy, we expect
that we will continue to make significant investments in
programming and distribution. Programming expenditures for 2003
are expected to be in the range of $175.0 million to
$185.0 million, and cash payments for subscriber
acquisition fees in 2003 are expected to be $50.0 million
to $60.0 million. We also expect that the reorganization
announced in October 2002 will reduce operating costs by
$25.0 million annually. Our principal uses of funds during
the next 12 months are expected to be the payment of
operating expenses (including but not limited to licensing
programming from third parties and subscriber acquisition fees)
and debt service payments of $30.0 million to
$33.0 million.

41



---



##### Table of Contents



Our principal sources of funds are currently
continuing cash inflows from operations (after expenditures for
programming and subscriber acquisition fees), cash on hand,
available borrowings under the $75.0 million HC Crown
line of credit, and periodic cash inflows expected under the new
tax sharing agreement described below. On December 31,
2002, we had an available cash balance of $335,000 and
$70.0 million available under the HC Crown line of
credit. We have been borrowing under the line of credit with
HC Crown in 2002 and 2003 in order to support the cash
needs of our operations. We expect that the tax sharing
agreement with Hallmark Cards will result in receiving a minimum
of $40.0 million to $50.0 million in cash during 2003.
Taking into account our projected revenues and expenditures, we
believe that cash inflows from operations, cash on hand, the HC
Crown line of credit and periodic payments received under the
tax sharing agreement will be sufficient for our liquidity needs
through at least March 31, 2004.

We project that advertising revenue and
subscriber revenue will increase in 2003, and that certain
operating expenses will decrease due to the reorganization in
the fourth quarter of 2002. Any decline in the popularity of the
Hallmark Channel, future modifications to our distribution
agreements, a decline in the advertising market, unexpected
increased competition or other adverse operating conditions
could impact our ability to achieve our projected operating
results. If projected operating results are not achieved, we
would need to obtain additional funding. In that event, we would
consider pursuing alternatives to raise additional cash, which
could include the issuance of additional equity or debt
securities. There can be no assurance, however, that additional
funding will be available, if at all, on terms acceptable to us.
Any new debt financing would require the agreement of existing
lenders and preferred securities holders.



| |                
| | ---------------
| | 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. We expect
subscriber revenue and advertising revenue will increase in
2003. In addition, we expect our reorganization in the fourth
quarter of 2002 will result in decreases in certain operating
expenses. Any unexpected decrease in projected subscriber
revenue or advertising revenue, or unanticipated expenses could
result in the need to raise additional cash externally. We have
no arrangements for any additional external financings of debt
or equity, and we are not certain whether any such financing
would be available on acceptable terms or whether it would be
permitted under our credit facility and preferred securities.



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



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

42



---



##### Table of Contents



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. 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, maintaining net worth, as defined, of
not less than specified base amounts plus income and 50% of
equity investments after December 17, 2001, which includes
a base amount of $602 million at December 31, 2002
decreasing to a base amount of $505 million at
December 31, 2003; 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 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; 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; or an event of default in relation to
our trust preferred securities. 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 (b) Hallmark
Entertainment Holdings, Inc. 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 (c) the majority of the Board is not comprised
of individuals who were either in office or who were nominated
by a two-thirds vote of individuals in office or so
nominated as at December 17, 2001, or (d) the
consummation by the Company of a Rule 13e-3 transaction (or
a going-private transaction) as defined in the
Securities Exchange Act. 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

43



---



##### Table of Contents



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 in 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 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) a right 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.

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

44



---



##### Table of Contents



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. 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.




| |                      
| | ---------------------
| | Tax Sharing Agreement

On March 11, 2003, Crown Media Holdings
became a member of Hallmark Cards consolidated federal tax group
and entered into a federal tax sharing agreement with Hallmark
Cards. Hallmark Cards will include Crown Media Holdings in its
consolidated federal income tax return. Accordingly, Hallmark
Cards will benefit from future tax losses, which may be
generated by Crown Media Holdings. Based on the tax sharing
agreement, Hallmark Cards will pay Crown Media Holdings all of
the benefits realized by Hallmark Cards as a result of
consolidation, 75% in cash on a quarterly basis and the balance
when Crown Media Holdings becomes a taxpayer. Under this federal
tax sharing agreement, at Hallmark Cards option, this 25%
balance may also be applied as an offset against any amounts
owed by Crown Media Holdings to any member of the Hallmark Cards
consolidation group under any loan, line of credit or other
payable, subject to any limitations under any loan indentures or
contracts restricting such offsets. For further information
regarding the tax sharing agreement, see
Part III  Item 13. Certain Relationships
and Related Transactions  Tax Sharing Agreement.






|         |                                                               
|-------- | --------------------------------------------------------------
|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, 2002, the decline of the fair value of the
fixed income portfolio would not be material.

As of December 31, 2002, our cash,
restricted cash, cash equivalents and short-term investments had
a fair value of $675,000, 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, 2002, all of our investments in this
category were in fixed rate instruments or money market type
accounts. A decrease in interest rates has the effect of
reducing our future annual interest income from this portfolio,
since funds would be reinvested at lower rates as the
instruments mature. Over time, any net percentage decrease in
our interest rates could be reflected in a corresponding net
percentage decrease in our interest income. For the year ended
December 31, 2002, the impact of interest rate
fluctuations, changed business prospects and all other factors
did not have a material impact on the fair value of this
portfolio, or on our income derived from this portfolio.

We have not used derivative financial instruments
for speculative purposes. As of December 31, 2002, we are
not hedged or otherwise protected against risks associated with
any of our investing or financing activities.

As of December 31, 2002, we estimated the
fair value of borrowings under our bank credit facility,
excluding accrued interest, to be approximately
$320.0 million and the fair value of borrowings under our
line of credit with HC Crown, excluding interest, to be
approximately $5.0 million. Because the interest rates on
these facilities are variable and are reset periodically, 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 $1.4 million. These calculations
include the assumption that the balance of our outstanding debt
as of December 31, 2002, would not change during the year
and that a yearly interest rate was used. To the extent interest
rates increase, our costs of financing will also increase
because of

45



---



##### Table of Contents



variable rates applicable to our outstanding
debt. A hypothetical increase in assumed interest rates of 10%
would have resulted in additional interest expense of
$1.4 million during the year ended December 31, 2002.


As of December 31, 2002, we estimated the
value of our preferred securities to be approximately
$269.5 million and the value of our derivative liability to
be $762,000 using quoted market prices where available, or
discounted cash flow analyses. The value of our derivative
liability is affected by fluctuations in our stock price and
interest rates. A hypothetical 10% increase in our stock price
would increase the value of our derivative liability by
approximately $118,000. A hypothetical 10% decrease in our stock
price would decrease the value of our derivative liability by
approximately $186,000. A hypothetical 10% increase in the
interest rate would decrease the value of our derivative
liability by approximately $30,000. A hypothetical 10% decrease
in the interest rate would decrease the value of our derivative
liability by approximately $49,000. These calculations include
the assumption that the balance of our derivative liability as
of December 31, 2002, would not change during the year and
that a yearly interest rate was used.

We are exposed to market risk.

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

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

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

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

Our material interest bearing assets consisted of
cash equivalents, restricted cash, and short-term investments.
The balance of our interest bearing assets was $675,000, or less
than 1% of total assets, as of December 31, 2002. Our
material liabilities subject to interest rate risk consisted of
a capital lease obligation, our bank credit facility, and our
private placement. The balance of those liabilities was
$384.5 million, or 49% of total liabilities, as of
December 31, 2002. The balance of our guaranteed preferred
beneficial interest in Crown Media Trusts debentures was
$221.6 million. Net interest expense for the year ended
December 31, 2002, was $22.4 million, or 14%, of our
total revenue. Our guaranteed preferred beneficial accretion for
the year ended December 31, 2002, was $25.5 million,
or 16%, of our total revenue. Our net interest expense and
preferred beneficial interest expense is sensitive to changes in
the general level of interest rates, primarily
U.S. interest rates, and the volatility of our Class A
common stock to the extent this volatility impacts the value of
the derivative liability in our preferred securities. In this
regard, changes in U.S. interest rates affect the interest
bearing assets and our borrowings as do changes in the price of
our Class A common stock.

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

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

46



---



##### Table of Contents



based revenue decreases; when the
U.S. dollar weakens, the U.S. dollar value of
non-U.S. dollar-based revenue increases. Accordingly,
changes in exchange rates, and in particular, a strengthening of
the U.S. dollar, may adversely affect our revenue as
expressed in U.S. dollars.







|        |                                                             
|------- | ------------------------------------------------------------
|Item 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

Not applicable.






PART III


The information required by this Part III is
incorporated by reference to information in the definitive proxy
statement for our 2003 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, 2003.






|         |                                                    
|-------- | ---------------------------------------------------
|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 June 10, 2003 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 and Related Stockholder
    Matters

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.

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.                                                                 

47



---



##### Table of Contents



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 were returned to us when the settlement
of a stockholder lawsuit relating to the transaction became
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 revenue 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 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
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

48



---



##### Table of Contents



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 years ended December 31, 2001 and
2002, Crown Media International paid $39.4 million and
$5.3 million in fees under its original program agreement
with Hallmark Entertainment Distribution, dated as of
July 1, 1999. As of December 31, 2001 and 2002, there
were $6.0 million and $11.9 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.

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 years ended December 31, 2001 and 2002, Crown Media
United States paid Hallmark Entertainment Distribution
$30.0 million and $19.7 million in fees under the
original program agreement dated as of November 13, 1998.
As of both December 31, 2001 and 2002, 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

49



---



##### Table of Contents



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
Corporation (VISN) and Henson Cable Networks, Inc.
signed an amended and restated company agreement governing the
operation of Crown Media United States. As of February 22,
2001, 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, a subsidiary of NICC, 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 NICC in relation to the provision of programming by NICC.
Prior to the February 2001 amendment, these payments were
$3.5 million annually and, so long as VISN owned the
preferred interest, $1.5 million multiplied by the quotient
of the preferred liquidation preference divided by
$25.0 million. For the year ended December 31, 2000,
Crown Media United States paid $5.1 million to NICC 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 NICC a total license fee
comprised of:



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

In addition, during 2000, Crown Media United
States was required to broadcast a minimum of 30 hours of
programming from NICC 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. In addition, NICC produces or co-produces for Crown
Media United States up to six dramatic or non-dramatic holiday
specials per year and a signature series. Crown Media United
States funds a portion of the production costs of this new
programming as described above. In addition, pursuant to the
February 2001 amendment, Crown Media United States is required
to assist NICC in launching and operating a new channel, which
will be distributed by digital satellite and cable. This
assistance will include the provision to NICC of management and
operation services, with some services at no cost and some
services for fees.

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

50



---



##### Table of Contents



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 years ended December 31, 2001 and
2002, Crown Media United States paid the National Interfaith
Cable Coalition $5.3 million and $9.3 million,
respectively, related to this agreement.


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

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 Item 7 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 the TOTAL CHOICE® tier of 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 $1.4 million
advertising commitment to Crown Media United States covering a
one-year period from the fourth quarter of 2002 through the
third quarter of 2003. Hallmark Cards purchased
$5.0 million advertising commitment to the Hallmark Channel
in the U.S. for both the 2000/2001 and 2001/2002 broadcast
years. During each of the years ended December 31, 2001 and
2002, Hallmark Cards purchased $5.0 million of advertising
on the Hallmark Channel in the United States at negotiated
market rates.

Marketing Agreement

Crown Media United States and Hallmark Cards
entered into an agreement to sponsor the Hallmark Keepsake
Sweepstakes, a national promotion in November and December 2002,
involving a watch-and-win contest, prize give-aways, and six
Hallmark Entertainment original productions. Crown Media United
States committed up to $15.1 million to this sponsorship
through the first quarter 2003 and Hallmark Cards and Hallmark
Entertainment Holdings also provided contest prizes and
marketing and promotional assistance up to a similar value. The
goal of this national promotion is to increase viewership and
ratings for the domestic Hallmark Channel.

51



---



##### Table of Contents



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. On December 17, 2001, the Company
paid HC Crown $37.1 million, in satisfaction of the
aggregate balance outstanding as of that date, including accrued
interest, under the notes. The notes were cancelled on
December 17, 2001.

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

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

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

On December 14, 2001, the Company executed a
promissory note, in the amount of $75.0 million payable to
HC Crown in replacement of the promissory note with HC Crown
dated September 28, 2001. This note may be borrowed against
or prepaid without penalty and has a final maturity date no
later than December 21, 2007. The line of credit is
subordinate to both the bank credit facility and the Crown Media
Trust preferred securities, and its availability may be reduced
dollar for dollar in an amount equal to additional capital
raised by Crown Media Holdings. The rate of interest under the
line of credit is equal to LIBOR plus three percent, payable
quarterly. HC Crowns obligation to make loans under this
line of credit is supported by an irrevocable letter of credit
from Credit Suisse First Boston. As of December 31, 2001,
the Company had no borrowings under this note to HC Crown. As of
December 31, 2002, the Company had borrowed
$5.0 million under this note. Under this note, the Company
is obligated to pay a commitment fee of 1.5% of the initial
maximum amount of the note, which may be paid by issuing common
stock valued at the average closing price of the common stock
for the 15 trading days prior to the date the fee is due. The
commitment fee is payable in arrears in four equal installments
on the last business day of each calendar quarter during 2002.
At December 31, 2001, the $1.1 million commitment fee
was included in payable to affiliates in the accompanying
consolidated balance sheets. In December 2002, we issued
123,831 shares as payment for a portion of the commitment
fee in the amount of $843,750. At December 31, 2002,
$281,250 was included in payable to affiliates in the
accompanying consolidated balance sheets. The line of credit was
required by the credit facility and was amended to its present
form in conjunction with the issuance of the Crown Media
Trusts preferred securities.

Hallmark Agreements Related to Bank Credit
Facility and Preferred Securities

Hallmark Cards and Hallmark Entertainment entered
into certain agreements in order to induce the bank syndicate to
enter into the Companys credit facility. Hallmark Cards,
Crown Media Holdings and the banks are parties to a
subordination and support agreement dated August 31, 2001.
Under the subordination and support agreement, the obligations
of Crown Media Holdings to pay (a) any borrowings under the
HC Crown line of credit, and (b) approximately
$100.0 million in accounts payable to Hallmark
Entertainment Distribution as provided by the purchase agreement
for the film assets, are subordinated in right of payment to
Crown Media Holdings obligations under its credit
facility. In the subordination and support agreement, Hallmark
Cards also agrees to cause HC Crown to advance up to
$75.0 million under the HC Crown line of credit to Crown
Media Holdings (less the amount of any reduction on the HC Crown
line of credit because of the application of net cash proceeds
from issuing debt or equity as permitted by the bank credit
agreement), to the extent necessary to enable Crown Media
Holdings to meet its cash needs including the repayment of the

52



---



##### Table of Contents



bank loans, provided that Crown Media Holdings
has borrowed the full amount then available under the credit
facility. Further, Hallmark Cards agreed that the HC Crown line
of credit will not be declared due and payable if any
obligations to the banks remain outstanding.


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

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. 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.

Stockholders Agreement And Registration
Rights



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

We are a party to a stockholders agreement,
amended and restated as of August 30, 2001, as amended with
VISN, Hughes Electronics Corporation (Hughes), and
Hallmark Entertainment Investments. The stockholders agreement
provides that our Board will consist of not less than
15 directors, with 12 nominated by Hallmark
Entertainment Investments, one nominated by VISN 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

53



---



##### Table of Contents



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. Hughes is entitled to
appoint an observer to the board of directors of Crown Media
Holdings until Hughes and its affiliates cease to own
beneficially in the aggregate at least 75% of the shares of our
common stock acquired by DirecTV, the predecessor holder of the
shares now held by Hughes, 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.

In addition, the stockholders agreement provides
that, in the event that Hallmark Entertainment Investments
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, except for Hughes.



| |                                                                  
| | -----------------------------------------------------------------
| | Hallmark Entertainment Investments Co.
    Stockholders Agreement

On March 11, 2003, Hallmark Entertainment
Holdings, Inc. (Hallmark Entertainment Holdings, a
subsidiary wholly owned indirectly by Hallmark Cards)
contributed 100% of the Crown Media Holdings shares owned by it
to Hallmark Entertainment Investments. Two of Crown Media
Holdings investors, Liberty Crown, Inc. (Liberty), a
subsidiary of Liberty Media, and J.P. Morgan, also
contributed 100% of their Crown Media Holdings Shares to
Hallmark Entertainment Investments and VISN contributed 10% of
its Crown Media Holdings shares to Hallmark Entertainment
Investments, all in return for Hallmark Entertainment
Investments shares. Prior to this Hallmark Entertainment
Investments transaction, J.P. Morgan and Liberty were
parties to the Crown Media Holdings stockholders agreement
described above. As a result of the Hallmark Entertainment
Investments transaction, J.P. Morgan and Liberty no longer
have any rights pursuant to such stockholders agreement.
However, Hallmark Entertainment Investments has advised Crown
Media Holdings that J.P. Morgan and Liberty will retain
similar rights with respect to Crown Media Holdings pursuant to
the Hallmark Entertainment Investments stockholders agreement
dated March 11, 2003, among Hallmark Entertainment
Investments, Hallmark Entertainment Holdings, Liberty, VISN, and
J.P. Morgan, including the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Liberty and J.P. Morgan each have the right
    to designate one person as one of the directors to the Crown
    Media Holdings Board that Hallmark Entertainment Investments is
    entitled to nominate under the Crown Media Holdings stockholders
    agreement described above;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Hallmark Entertainment Investments will not
    permit Crown Media Holdings or its subsidiaries to enter into
    any material transaction, except for specified transactions,
    with any affiliates involving an aggregate value of
    (a) $35.0 million or less, unless such transaction is
    approved by a majority of Crown Media Holdings independent
    directors and (b) more than $35.0 million, unless such
    transaction is approved by a majority of the members of Crown
    Media Holdings Board not nominated by any affiliate of
    Hallmark Entertainment Holdings (provided that directors
    designated by Liberty and J.P. Morgan will not be treated
    as being nominated by any affiliate of Hallmark Entertainment
    Holdings);
|
| |  | registration rights as provided for minority
    stockholders in the Crown Media Holdings stockholders agreement;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Hallmark Entertainment Investments may not take
    certain actions as specified in the Hallmark Entertainment
    Investments stockholder agreement without the consent of
    J.P. Morgan and Liberty; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | if Hallmark Entertainment Holdings proposes to
    transfer 20% or more of Hallmark Entertainment Investments
    common stock to an unaffiliated third party, each of
    J.P. Morgan, Liberty and VISN will have the right to
    participate on the same terms in the transaction on a
    proportional basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                    

54



---



##### Table of Contents





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

Under the stockholders agreement, Hallmark
Entertainment Investments 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 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
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 or a representative of NICC, 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s preferred interest in
    Crown Media United States or that relates to VISN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 or NICC. 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s preferred interest in

55



---



##### Table of Contents



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 a new intercompany services agreement,
effective January 1, 2003, with Hallmark Cards under which
Hallmark Cards has agreed for a term of three years, subject to
cancellation by either party after the first or second year, to
provide us with the following services:



| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | tax services;                                                                
|
| |  | risk management, health, safety and environmental
    services and insurance;
|
| |  | legal services;                                                              
|
| |  | treasury and cash management services; and                                   
|
| |  | real estate consulting services.                                             

We have agreed to pay Hallmark Cards
$515,000 per year for these services, plus out-of-pocket
expenses and third party fees, payable in arrears on the last
business day of each quarter. We made no payments to Hallmark
Cards in 2001 or 2002 for services, expenses and fees under the
previous intercompany services agreement. The fee under these
previous agreements was $500,000 per year. The balance of
the payable for services, expenses and fees under the previous
agreement as of December 31, 2001 and 2002, was
approximately $2.0 million and $2.5 million,
respectively. 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 report. We
reimbursed Hallmark Entertainment $3.6 million, for the
year ended December 31, 2001, and $1.4 million for the
year ended December 31, 2002. The balance of the payable as
of December 31, 2001 and 2002, was approximately
$1.8 million and $1.1 million, respectively.

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. This agreement was recently
extended through November 30, 2003. Under that agreement,
we may use the Hallmark and Hallmark Entertainment trademarks
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

56



---



##### Table of Contents



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.

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 through
November 30, 2003.

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,
which has also been extended through November 30, 2003. The
agreement permits the use of the Hallmark trademarks in the
United States 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

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

An independent member of the Board of Directors
of Crown Media Holdings, with advice of independent counsel
approved Crown Media Holdings entering into the tax
sharing agreement.

HEH contributed 100% of the Crown Media Holdings
shares owned by it to Hallmark Entertainment Investments. Two of
Crown Media Holdings investors, Liberty and
J.P. Morgan, also contributed 100% of their Crown Media
Holdings shares to Hallmark Entertainment Investments and VISN
contributed 10% of its Crown Media Holdings shares to Hallmark
Entertainment Investments, all in return for Hallmark Entertain-

57



---



##### Table of Contents



ment Investments shares. Crown Media Holdings
understands that Hallmark Entertainment Investments intends to
hold the Crown Media Holdings Shares and to evaluate media
investment opportunities in which Crown Media Holdings does not
have an interest. Hallmark Entertainment Holdings, as the more
than 80% owner of Hallmark Entertainment Investments, will have
voting power over all of the Crown Media Holdings shares. The
new structure does not change the control of Crown Media
Holdings.


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 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.

58



---



##### Table of Contents



Certain Business Relationships and Conflicts
of Interest

Hallmark Entertainment Investments controls all
of our outstanding shares of Class B common stock,
representing approximately 91% 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 Investments 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 Investments control
relationship with us also could give rise to conflicts of
interest, including:



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

In addition, our directors, who are also officers
or directors of Hallmark Entertainment Investments 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 Chairman of Hallmark Entertainment
Investments, which could create potential conflicts of interest.
As a result, it is possible that we may receive less favorable
contractual terms from Hallmark Entertainment Investments or its
affiliates than if none of our officers or directors had any
affiliation with Hallmark Entertainment Investments 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.                                                               

59



---



##### Table of Contents



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.

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 and 2002, JP Morgan Chase Bank had
outstanding loans to us under the line of credit of
$37.4 million and $45.0 million, respectively. 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. We paid a total of $1.7 million in
interest and $1.5 million in fees to JP Morgan Chase Bank
under the credit facility for the year ended December 31,
2002.

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 of $18,000 to JP Morgan Chase
Bank for these trustee services during the year ended
December 31, 2002.

Arnold L. Chavkin, one of our directors, and
J.P. Morgan, 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. J.P. Morgan is
an indirect non-bank subsidiary of JP Morgan Chase &
Co. JP Morgan Chase & Co. owns 100% of JPMP Capital
Corp., the sole general partner of JPMP Market Fund Manager
L.P., which in turn is the sole general partner of
J.P. Morgan. JP Morgan Chase & Co. also owns 100%
of Chatham Ventures, Inc., which is the sole limited partner of
J.P. Morgan. JPMP Master Fund Manager, L.P. is the sole
general partner of J.P. Morgan. JPMP Capital Corp. is the
sole general partner of JPMP Master Fund Manager, L.P., and

60



---



##### Table of Contents



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., 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 Partner 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.

Option of Robert A. Halmi, Jr.

Pursuant to a provision in an employment
agreement between Hallmark Entertainment Holdings and Robert A.
Halmi, Jr., dated October 1, 2001, Hallmark Entertainment
Holdings agreed to grant Mr. Halmi stock options to
purchase from Hallmark Entertainment Holdings up to
3.4 million shares of Class A common stock of the
issuer at a price per share of $11.13. The stock options will
vest on September 30, 2004, and will expire on
September 30, 2006. In the event of termination of the
employment of Mr. Halmi, depending on the circumstances,
all unvested stock options will either become vested or be
forfeited. By written notice delivered to Hallmark Entertainment
Holdings in October of 2004, 2005 or 2006, Mr. Halmi will
have the right to put to Hallmark Entertainment Holdings any
shares of common stock acquired by Mr. Halmi under the
stock options at a price per put share equal to fair market
value for common stock as of the date of Hallmark Entertainment
Holdings receipt of Mr. Halmis put notice. The
fair market value shall mean, as of any given date, the highest
average closing price of the common stock on NASDAQ, as of the
close of business hours of NASDAQ, without regard to any
after-hours trading, or if the Common Stock is not listed on
NASDAQ, on any national securities exchange on which the common
stock is listed, for (1) the five-day trading period ending
on the fifth trading date immediately preceding such date,
(2) the five-day trading period on the tenth trading date
immediately preceding such date, (3) the five-day trading period
ending on the fifteenth trading date immediately preceding such
date or (4) the five-day trading period ending on the
twentieth trading date immediately preceding such date. If there
is no regular public trading market for such common stock, the
put price shall be determined by the Board of Directors of
Hallmark Entertainment Holdings in good faith. The put price
(less $11.13) shall be reduced by 10% as to shares of common
stock for which Mr. Halmi exercises a put option in 2004
and by 5% as to shares of common stock for which Mr. Halmi
exercises a put option in 2005.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

Evaluation of disclosure controls and
procedures

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

Changes in internal controls

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

61



---



##### Table of Contents






PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | 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 KPMG LLP, Independent Public Accountants                                                                        
|
| | Report of Arthur Andersen LLP, Independent Public
    Accountants                                                         
|
| | Consolidated Balance Sheets as of
    December 31, 2001 and 2002                                                          
|
| | Consolidated Statements of Operations and
    Comprehensive Loss for the Years Ended December 31, 2000,
    2001, and 2002
|
| | Consolidated Statements of Stockholders
    Equity (Deficit) for the Years Ended December 31, 2000,
    2001, and 2002   
|
| | Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2000, 2001, and 2002                           



| |     |         
| | --- | --------
| | (2) | Exhibits

62



---



##### 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.
    (previously filed as Exhibit 10.2 to our Annual Report on
    Form 10-K filed on March 29, 2002 and incorporated
    herein by reference)                                                                                                                                                             
|        | 10.3  |  |  |              |  | Acknowledgment and Agreement to the Second
    Amended and Restated Stockholders Agreement, dated as of
    March 11, 2003, by Hallmark Entertainment Investments Co.                                                                                                                                                                                                                                                                                                             
|        | 10.4  |  |  |              |  | Acknowledgement to the Second Amended and
    Restated Stockholders Agreement, dated March 11, 2003, by
    JP Morgan Partners (BHCA), L.P.                                                                                                                                                                                                                                                                                                                                       
|        | 10.5  |  |  |              |  | Acknowledgement to the Second Amended and
    Restated Stockholders Agreement, dated March 11, 2003, by
    Liberty Crown, Inc. and Liberty Media Corporation.                                                                                                                                                                                                                                                                                                                    
|        | 10.6  |  |  |              |  | Consent and Waiver to Second Amendment and
    Restated Stockholders Agreement, dated March 11, 2003, by
    DirecTV Enterprises, Inc.                                                                                                                                                                                                                                                                                                                                            
|        | 10.7  |  |  |              |  | Consent and Waiver to Second Amendment and
    Restated Stockholders Agreement, dated March 11, 2003, by
    VISN Management Corp.                                                                                                                                                                                                                                                                                                                                                
|        | 10.8  |  |  |              |  | Consent and Waiver to Second Amendment and
    Restated Stockholders Agreement, dated March 11, 2003, by
    Crown Media Holdings, Inc.                                                                                                                                                                                                                                                                                                                                           
|        | 10.9  |  |  |              |  | Acknowledgment and Agreement to the Second
    Amended and Restated Stockholders Agreement, dated as of
    February 28, 2003, by Hughes Electronics Corporation.                                                                                                                                                                                                                                                                                                                 
|        | 10.10 |  |  |              |  | 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 JPMorgan 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).                                            
|        | 10.11 |  |  |              |  | 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 JPMorgan 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).
|        | 10.12 |  |  |              |  | 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 JPMorgan Chase Bank as
    Administrative Agent and as Issuing Bank. (previously filed as
    Exhibit 10.5 to our Annual Report on Form 10-K, filed
    on March 29, 2002 and incorporated herein by reference).   

63



---



##### Table of Contents



|        |       |  |  |               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------- | ----- |  |  | ------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |              
|Number  |       |  |  | Exhibit Title
|        |       |  |  |              
|        | 10.13 |  |  |              |  | Amendment No. 3, dated as of March 29,
    2002, to the Credit, Security, Guaranty and Pledge Agreement,
    dated as of August 31, 2001, among Crown Media Holdings,
    Inc. as Borrower, the Guarantors named therein, the Lenders
    named therein and JPMorgan Chase Bank as Administrative Agent
    and as Issuing Bank (previously filed as Exhibit 10.1 to
    our Quarterly Report on Form 10-Q, filed on May 15,
    2002 and incorporated herein by reference).               
|        | 10.14 |  |  |              |  | Amendment No. 4, dated as of May 15,
    2002, to the Credit, Security, Guaranty and Pledge Agreement,
    dated as of August 31, 2001, among Crown Media Holdings,
    Inc. as Borrower, the Guarantors named therein, the Lenders
    named therein and JPMorgan Chase Bank as Administrative Agent
    and as Issuing Bank (previously filed as Exhibit 10.2 to
    our Quarterly Report on Form 10-Q, filed on May 15,
    2002 and incorporated herein by reference).                 
|        | 10.15 |  |  |              |  | Amendment No. 5, dated as of
    February 5, 2003, to the Credit, Security, Guaranty and
    Pledge Agreement, dated as of August 31, 2001, among Crown
    Media Holdings, Inc. as Borrower, the Guarantors named therein,
    the Lenders named therein and JPMorgan Chase Bank as
    Administrative Agent and as Issuing Bank.                                                                                                                                                         
|        | 10.16 |  |  |              |  | 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).                                                 
|        | 10.17 |  |  |              |  | 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 (previously filed as
    Exhibit 10.7 to our Annual Report on Form 10-K, filed
    on March 29, 2002 and incorporated herein by reference)
|        | 10.18 |  |  |              |  | 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).                                                                                                               
|        | 10.19 |  |  |              |  | 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).                                                                                                                                                                       
|        | 10.20 |  |  |              |  | 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).                                                                                                                                                                              
|        | 10.21 |  |  |              |  | 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).                                                                                                                                                                                            
|        | 10.22 |  |  |              |  | 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).                                                                                                                                      
|        | 10.23 |  |  |              |  | 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).                                                          
|        | 10.24 |  |  |              |  | Amended and Restated Program License Agreement,
    dated as of January 1, 2001, by and between Hallmark
    Entertainment Distribution, LLC, and Crown Media International,
    Inc. (previously filed as Exhibit 10.14 to our Annual
    Report on Form 10-K, filed on March 29, 2002 and
    incorporated herein by reference)                                                                                                                                                          

64



---



##### Table of Contents



|        |        |  |  |               |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|------- | ------ |  |  | ------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |  |  |              
|Number  |        |  |  | Exhibit Title
|        |        |  |  |              
|        | 10.25  |  |  |              |  | 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) (previously filed
    as Exhibit 10.15 to our Annual Report on Form 10-K,
    filed on March 29, 2002 and incorporated herein by
    reference)                                              
|        | 10.26  |  |  |              |  | Amendments, made as of May 15, 2002, to
    those certain Amended and Restated Program License agreements,
    dated as of January 1, 2001, between Hallmark Entertainment
    Distribution, LLC and Crown Media United States, LLC and Crown
    Media International, LLC (previously filed as Exhibit 10.1
    to our Quarterly Report on Form 10-Q filed on
    November 14, 2002 and incorporated herein by reference).
|        | 10.27  |  |  |              |  | 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).                                                                                                     
|        | 10.28  |  |  |              |  | Trademark License Extension Agreement, dated as
    of November 30, 2002, by and between Hallmark Cards,
    Incorporated and Crown Media International, LLC.                                                                                                                                                                                                                                                              
|        | 10.29  |  |  |              |  | 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).                               
|        | 10.30  |  |  |              |  | Trademark License Extension Agreement, dated as
    of November 30, 2002, by and between Hallmark Cards,
    Incorporated and Crown Entertainment Limited.                                                                                                                                                                                                                                                                 
|        | 10.31  |  |  |              |  | 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.)                                                                      
|        | 10.32  |  |  |              |  | Trademark License Extension Agreement, dated as
    of November 30, 2002, by and between Hallmark Licensing,
    Inc. and Crown Media United States, LLC.                                                                                                                                                                                                                                                                  
|        | 10.33  |  |  |              |  | 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).                                      
|        | 10.34  |  |  |              |  | 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.
    (previously filed as Exhibit 10.20 to our Annual Report on
    Form 10-K, filed on March 29, 2002 and incorporated
    herein by reference)                                                                                                    
|        | 10.35  |  |  |              |  | 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).                                                                                                                  
|        | 10.36  |  |  |              |  | Amendment to the Amended and Restated Company
    Agreement of Odyssey Holdings, LLC, dated March 15, 2001
    (previously filed as Exhibit 10.22 to our Annual Report on
    Form 10-K, filed on March 29, 2002 and incorporated
    herein by reference)                                                                                                                                                                 
|        | 10.37  |  |  |              |  | 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.)                                                                                                                       
|        | 10.38  |  |  |              |  | Intercompany Services Agreement, made as of
    December 23, 2002, by and between Hallmark Cards,
    Incorporated and Crown Media Holdings, Inc.                                                                                                                                                                                                                                                                          
|        | 10.39* |  |  |              |  | 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).                                                                                                                                                                                             

65



---



##### Table of Contents



|        |       |  |  |               |  |                                                                                                                                                                                                                                                                                                                                                                                                       
|------- | ----- |  |  | ------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |              
|Number  |       |  |  | Exhibit Title
|        |       |  |  |              
|        | 10.40 |  |  |              |  | 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).                                                                 
|        | 10.41 |  |  |              |  | 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).                                                                                                                  
|        | 10.42 |  |  |              |  | 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. (previously
    filed as Exhibit 10.28 to our Annual Report on
    Form 10-K, filed on March 29, 2002 and incorporated
    herein by reference)                        
|        | 10.43 |  |  |              |  | 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. (previously filed as Exhibit 10.29 to our Annual
    Report on Form 10-K, filed on March 29, 2002 and
    incorporated herein by reference)               
|        | 10.44 |  |  |              |  | Extension Agreement, dated as of March 1,
    2002, by and between Crown Media Holdings, Inc., Crown Media
    Distribution, LLC and Hallmark Entertainment Distribution, LLC.                                                                                                                                                                                                                        
|        | 10.45 |  |  |              |  | Federal Income Tax Sharing Agreement, dated
    March 11, 2003, by and between Hallmark Cards, Incorporated
    and Crown Media Holdings, Inc.                                                                                                                                                                                                                                                        
|        | 10.46 |  |  |              |  | 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).                                                                                
|        | 10.47 |  |  |              |  | 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).                            
|        | 10.48 |  |  |              |  | 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).                               
|        | 10.49 |  |  |              |  | 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).                                                                                                                         
|        | 10.50 |  |  |              |  | 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).                       
|        | 10.51 |  |  |              |  | 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).  
|        | 10.52 |  |  |              |  | 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).
|        | 10.53 |  |  |              |  | 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).                             

66



---



##### Table of Contents



|        |        |  |  |               |  |                                                                                                                                                                                                                                                                                                                                                         
|------- | ------ |  |  | ------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |  |  |              
|Number  |        |  |  | Exhibit Title
|        |        |  |  |              
|        | 10.54  |  |  |              |  | 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).            
|        | 10.55  |  |  |              |  | Fifth Amendment to Lease, dated as of
    February 12, 2002, by and between High Pointe 1 Development
    Group LLC and Crown Media International, Inc. (previously filed
    as Exhibit 10.39 to our Annual Report on Form 10-K,
    filed on March 29, 2002 and incorporated herein by
    reference)                                                 
|        | 10.56  |  |  |              |  | 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).                              
|        | 10.57* |  |  |              |  | 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).                                                                                       
|        | 10.58* |  |  |              |  | 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).                                                                                                
|        | 10.59* |  |  |              |  | 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).                                                                                  
|        | 10.60* |  |  |              |  | Employment Agreement, dated as of January 1,
    2001, by and between Crown Media Holdings, Inc. and William
    Aliber (previously filed as Exhibit 10.44 to our Annual
    Report on Form 10-K, filed on March 29, 2002 and
    incorporated herein by reference).                                                                                    
|        | 10.61* |  |  |              |  | 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 (previously filed as Exhibit 10.45 to our
    Annual Report on Form 10-K, filed on March 29, 2002
    and incorporated herein by reference).                               
|        | 10.62* |  |  |              |  | Employment Agreement, dated as of
    September 25, 2001, by and between Crown Media United
    States, LLC and Lana Corbi (previously filed as
    Exhibit 10.46 to our Annual Report on Form 10-K, filed
    on March 29, 2002 and incorporated herein by reference).                                                                                 
|        | 10.63* |  |  |              |  | Severance Agreement, dated December 26,
    2002, by and between Lana Corbi and Crown Media United States,
    LLC.                                                                                                                                                                                                                                     
|        | 10.64* |  |  |              |  | Employment Agreement, dated as of
    December 20, 2001, by and between Crown Media
    International, Inc. and Russel H. Givens, Jr. (previously filed
    as Exhibit 10.47 to our Annual Report on Form 10-K,
    filed on March 29, 2002 and incorporated herein by
    reference).                                                                  
|        | 10.65* |  |  |              |  | 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).
|        | 10.66  |  |  |              |  | $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).                                                                                
|        | 10.67  |  |  |              |  | $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).     
|        | 10.68  |  |  |              |  | $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.
    (previously filed as Exhibit 10.51 to our Annual Report on
    Form 10-K, filed on March 29, 2002 and incorporated
    herein by reference).                     

67



---



##### Table of Contents



|        |       |  |  |               |  |                                                                                                                                                                                                                                                         
|------- | ----- |  |  | ------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |              
|Number  |       |  |  | Exhibit Title
|        |       |  |  |              
|        | 10.69 |  |  |              |  | Reduction Certificate to $150,000,000 Irrevocable
    Standby Letter of Credit, dated December 21, 2001
    (previously filed as Exhibit 10.52 to our Annual Report on
    Form 10-K, filed on March 29, 2002 and incorporated
    herein by reference).
|        | 21.1  |  |  |              |  | List of our Subsidiaries.                                                                                                                                                                                                                               
|        | 23.1  |  |  |              |  | Consent of KPMG LLP.                                                                                                                                                                                                                                    
|        | 99.1  |  |  |              |  | Certification of 10-K Report.                                                                                                                                                                                                                           



---



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

(B) Reports on Form 8-K



| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | During the quarter ended December 31, 2002,
    we filed the following Form 8-K reports:



| |   |                                                           
| | - | ----------------------------------------------------------
| |  | Report filed October 7, 2002, regarding
    Items 5 and 7;
|
| |  | Report filed on December 4, 2002, regarding
    Item 5.   

68



---



##### Table of Contents






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 28, 2003

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

|                                                    |  |                                            |  |                |  | 
|--------------------------------------------------- |  | ------------------------------------------ |  | -------------- |  | 
|                                                    |  |                                            |  |               
|Signature                                           |  | Title                                      |  | Date          
|                                                    |  |                                            |  |               
|                                                   
|/s/ DAVID J. EVANS David J. Evans                   |  | Director and Principal Executive Officer   |  | March 28, 2003
|                                                   
|/s/ WILLIAM J. ALIBER William J. Aliber             |  | Principal Financial and Accounting Officer |  | March 28, 2003
|                                                   
|/s/ WILFORD V. BANE, JR. Wilford V. Bane, Jr.       |  | Director                                   |  | March 28, 2003
|                                                   
|/s/ ARNOLD L. CHAVKIN Arnold L. Chavkin             |  | Director                                   |  | March 28, 2003
|                                                   
|/s/ ROBERT J. DRUTEN Robert J. Druten               |  | Director                                   |  | March 28, 2003
|                                                   
|/s/ DONALD J. HALL, JR. Donald J. Hall, Jr.         |  | Director                                   |  | March 28, 2003
|                                                   
|/s/ ROBERT A. HALMI, JR. Robert A. Halmi, Jr.       |  | Director                                   |  | March 28, 2003
|                                                   
|/s/ IRVINE O. HOCKADAY, JR. Irvine O. Hockaday, Jr. |  | Director                                   |  | March 28, 2003
|                                                   
|/s/ DAVID B. KOFF David B. Koff                     |  | Director                                   |  | March 28, 2003
|                                                   
|/s/ PETER A. LUND Peter A. Lund                     |  | Director                                   |  | March 28, 2003
|                                                   
|/s/ JOHN P. MASCOTTE John P. Mascotte               |  | Director                                   |  | March 28, 2003

69



---



##### Table of Contents






CERTIFICATION

I, David J. Evans, certify that:

1. I have reviewed this annual report on
Form 10-K of Crown Media Holdings, Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:



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

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



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

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



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

Dated: March 28, 2003

70



---



##### Table of Contents



I, William J. Aliber, certify that:

1. I have reviewed this annual report on
Form 10-K of Crown Media Holdings, Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:



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

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



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

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



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

Dated:
March 28, 2003

71



---



##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                                          |  |      |      | 
|------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | 
|                                                                                                                          |  | Page
|                                                                                                                          |  |     
|Crown Media Holdings, Inc. and Subsidiaries                                                                               |  |      |      | 
|Report of KPMG LLP, Independent Public Accountants                                                                        |  |      | F-3  | 
|Report of Arthur Andersen LLP, Independent Public
    Accountants                                                         |  |      | F-4  | 
|Consolidated Balance Sheets as of
    December 31, 2001 and 2002                                                          |  |      | F-5  | 
|Consolidated Statements of Operations and
    Comprehensive Loss for the Years Ended December 31, 2000,
    2001 and 2002 |  |      | F-6  | 
|Consolidated Statements of Stockholders
    Equity (Deficit) for the Years Ended December 31, 2000,
    2001 and 2002    |  |      | F-7  | 
|Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2000, 2001 and 2002                            |  |      | F-8  | 
|Notes to Consolidated Financial Statements                                                                                |  |      | F-11 | 





---



##### Table of Contents





(This page intentionally left blank)

F-2



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board of Directors

Crown Media Holdings, Inc.:


We have audited the 2002 financial statements of
Crown Media Holdings, Inc. (a Delaware corporation) and
subsidiaries as listed in the accompanying index. 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. The
2000 and 2001 financial statements of Crown Media Holdings, Inc.
and subsidiaries as listed in the accompanying index were
audited by other auditors who have ceased operations. These
auditors expressed an unqualified opinion on those financial
statements in their report dated January 25, 2002 (except
with respect to certain matters as to which the date is
February 20, 2002).

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 2002 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, 2002, and the results of
their operations and their cash flows for the year ended
December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.



| |         
| | --------
| | KPMG LLP

Denver, Colorado

February 24, 2003, except as to Note 1
and 17,


which is as of March 11, 2003.


F-3



---



##### Table of Contents



REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

THE FOLLOWING REPORT IS A COPY OF THE PREVIOUSLY
ISSUED REPORT FROM ARTHUR ANDERSEN LLP (ANDERSEN).
ANDERSEN DID NOT PERFORM ANY PROCEDURES IN CONNECTION WITH THIS
ANNUAL REPORT ON FORM 10-K. ACCORDINGLY, THIS REPORT HAS NOT
BEEN REISSUED BY ANDERSEN.

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-4



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                                                                              |                                            |                       |           |           |  |   |           |           | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------------------- | --------- | --------- |  | - | --------- | --------- | 
|                                                                                                                                                                                                                                              |                                            |                      
|                                                                                                                                                                                                                                              |                                            | As of December 31,   
|                                                                                                                                                                                                                                              |                                            |                      
|                                                                                                                                                                                                                                              |                                            | 2001                  |           | 2002     
|                                                                                                                                                                                                                                              |                                            |                       |           |          
|                                                                                                                                                                                                                                              |                                            |                      
|                                                                                                                                                                                                                                              |                                            | (In thousands, except
|                                                                                                                                                                                                                                              |                                            | share amounts)       
|ASSETS                                                                                                                                                                                                                                       
|Cash and cash equivalents                                                                                                                                                                                                                     |                                            | $                     | 13,859    |           |  | $ | 335       |          
|Cash in escrow                                                                                                                                                                                                                                |                                            |                       | 111,625   |           |  |   |          |          
|Accounts receivable, less allowance for doubtful
    accounts of $7,361 and $7,516, respectively                                                                                                                                              |                                            |                       | 29,911    |           |  |   | 41,629    |          
|Program license fees  affiliates, net
    of accumulated amortization                                                                                                                                                                        |                                            |                       | 12,199    |           |  |   | 12,632    |          
|Program license fees  non-affiliates,
    net of accumulated amortization                                                                                                                                                                    |                                            |                       | 35,425    |           |  |   | 46,557    |          
|Subtitling and dubbing, net of accumulated
    amortization                                                                                                                                                                                   |                                            |                       | 2,584     |           |  |   | 3,265     |          
|Prepaids and other assets                                                                                                                                                                                                                     |                                            |                       | 11,364    |           |  |   | 12,837    |          
|                                                                                                                                                                                                                                              |                                            |                       |           |           |  |   |           |          
|                                                                                                                                                                                                                                              | Total current assets                       |                       |           | 216,967   |  |   |           | 117,255   | 
|Restricted cash                                                                                                                                                                                                                               |                                            |                       | 340       |           |  |   | 340       |          
|Accounts receivable, net of current portion                                                                                                                                                                                                   |                                            |                       | 6,253     |           |  |   |          |          
|Program license fees  affiliates, net
    of current portion                                                                                                                                                                                 |                                            |                       | 60,679    |           |  |   | 37,318    |          
|Program license fees  non-affiliates,
    net of current portion                                                                                                                                                                             |                                            |                       | 33,219    |           |  |   | 51,470    |          
|Subtitling and dubbing, net of current portion                                                                                                                                                                                                |                                            |                       | 4,795     |           |  |   | 1,051     |          
|Film assets, net of accumulated amortization                                                                                                                                                                                                  |                                            |                       | 808,138   |           |  |   | 786,826   |          
|Subscriber acquisition fees, net of accumulated
    amortization                                                                                                                                                                              |                                            |                       | 126,965   |           |  |   | 140,265   |          
|Property and equipment, net of accumulated
    depreciation                                                                                                                                                                                   |                                            |                       | 43,882    |           |  |   | 35,612    |          
|Goodwill                                                                                                                                                                                                                                      |                                            |                       | 314,033   |           |  |   | 314,033   |          
|Debt issuance costs, net of accumulated
    amortization                                                                                                                                                                                      |                                            |                       | 8,760     |           |  |   | 6,309     |          
|Prepaids and other assets, net of current portion                                                                                                                                                                                             |                                            |                       | 2,327     |           |  |   | 1,783     |          
|                                                                                                                                                                                                                                              |                                            |                       |           |           |  |   |           |          
|                                                                                                                                                                                                                                              | Total assets                               |                       | $         | 1,626,358 |  |   | $         | 1,492,262 | 
|                                                                                                                                                                                                                                              |                                            |                       |           |           |  |   |           |          
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                                                                                                                                     
|                                                                                                                                                                                                                                             
|LIABILITIES:                                                                                                                                                                                                                                  |                                            |                       |           |           |  |   |           |          
|Accounts payable and accrued liabilities                                                                                                                                                                                                      |                                            | $                     | 38,842    |           |  | $ | 47,425    |          
|Subscriber acquisition fees payable                                                                                                                                                                                                           |                                            |                       | 23,020    |           |  |   | 45,930    |          
|License fees payable to affiliates                                                                                                                                                                                                            |                                            |                       |          |           |  |   | 8,104     |          
|License fees payable to non-affiliates                                                                                                                                                                                                        |                                            |                       | 33,088    |           |  |   | 50,652    |          
|Payables to affiliates                                                                                                                                                                                                                        |                                            |                       | 5,952     |           |  |   | 6,680     |          
|Interest payable to HC Crown                                                                                                                                                                                                                  |                                            |                       |          |           |  |   | 10        |          
|Credit facility and interest payable                                                                                                                                                                                                          |                                            |                       | 111,905   |           |  |   | 871       |          
|Capital lease obligation                                                                                                                                                                                                                      |                                            |                       | 1,318     |           |  |   | 1,433     |          
|Deferred programming revenue                                                                                                                                                                                                                  |                                            |                       | 1,316     |           |  |   | 599       |          
|                                                                                                                                                                                                                                              |                                            |                       |           |           |  |   |           |          
|                                                                                                                                                                                                                                              | Total current liabilities                  |                       |           | 215,441   |  |   |           | 161,704   | 
|Accrued liabilities, net of current portion                                                                                                                                                                                                   |                                            |                       | 934       |           |  |   | 31,385    |          
|Subscriber acquisition fees payable, net of
    current portion                                                                                                                                                                               |                                            |                       | 5,262     |           |  |   | 2,624     |          
|License fees payable to affiliates, net of
    current portion                                                                                                                                                                                |                                            |                       | 62,299    |           |  |   | 60,229    |          
|License fees payable to non-affiliates, net of
    current portion                                                                                                                                                                            |                                            |                       | 23,127    |           |  |   | 39,206    |          
|Note payable to HC Crown                                                                                                                                                                                                                      |                                            |                       |          |           |  |   | 5,000     |          
|Payable to Hallmark Entertainment Holdings                                                                                                                                                                                                    |                                            |                       | 52,052    |           |  |   | 52,052    |          
|Payable to Hallmark
    Entertainment, Inc.                                                                                                                                                                                                   |                                            |                       | 47,948    |           |  |   | 47,948    |          
|Credit facility, net of current portion                                                                                                                                                                                                       |                                            |                       | 151,438   |           |  |   | 320,000   |          
|Capital lease obligation, net of current portion                                                                                                                                                                                              |                                            |                       | 10,723    |           |  |   | 9,290     |          
|Convertible debt                                                                                                                                                                                                                              |                                            |                       | 43,733    |           |  |   | 47,916    |          
|Derivative liability                                                                                                                                                                                                                          |                                            |                       | 12,495    |           |  |   | 762       |          
|                                                                                                                                                                                                                                              |                                            |                       |           |           |  |   |           |          
|                                                                                                                                                                                                                                              | Total liabilities                          |                       |           | 625,452   |  |   |           | 778,116   | 
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                 |                                            |                       |           |           |  |   |           |          
|GUARANTEED PREFERRED BENEFICIAL INTEREST IN CROWN
    MEDIA TRUSTS DEBENTURES                                                                                                                                                                |                                            |                       | 199,040   |           |  |   | 221,551   |          
|PREFERRED MINORITY INTEREST                                                                                                                                                                                                                   |                                            |                       | 25,000    |           |  |   | 25,000    |          
|STOCKHOLDERS EQUITY:                                                                                                                                                                                                                         |                                            |                       |           |           |  |   |           |          
|Class A common stock, $.01 par value;
    200,000,000 shares authorized; issued shares of 73,913,395
    and 73,794,606, respectively; outstanding shares of 73,488,395
    and 73,794,606 as of December 31, 2001 and 2002,
    respectively |                                            |                       | 735       |           |  |   | 738       |          
|Class B common stock, $.01 par value;
    120,000,000 shares authorized; issued and outstanding
    shares of 30,670,422 as of December 31, 2001 and 2002,
    respectively                                                                   |                                            |                       | 307       |           |  |   | 307       |          
|Paid-in capital                                                                                                                                                                                                                               |                                            |                       | 1,256,754 |           |  |   | 1,259,242 |          
|Accumulated other comprehensive income (loss)                                                                                                                                                                                                 |                                            |                       | (620      | )         |  |   | 647       |          
|Accumulated deficit                                                                                                                                                                                                                           |                                            |                       | (480,310  | )         |  |   | (793,339  | )        
|                                                                                                                                                                                                                                              |                                            |                       |           |           |  |   |           |          
|                                                                                                                                                                                                                                              | Total stockholders equity                 |                       |           | 776,866   |  |   |           | 467,595   | 
|                                                                                                                                                                                                                                              |                                            |                       |           |           |  |   |           |          
|                                                                                                                                                                                                                                              | Total liabilities and stockholders equity |                       | $         | 1,626,358 |  |   | $         | 1,492,262 | 
|                                                                                                                                                                                                                                              |                                            |                       |           |           |  |   |           |          

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,                
|                                                                                         |                                                       |                                         
|                                                                                         |                                                       | 2000                                     |                          | 2001   |        | 2002    
|                                                                                         |                                                       |                                          |                          |        |        |         
|                                                                                         |                                                       |                                         
|                                                                                         |                                                       | (In thousands, except per share amounts)
|Revenue:                                                                                 |                                                       |                                          |                          |        |        |          |         |        |        |          |         |       
|                                                                                         | Subscriber fees                                       |                                          | $                        | 47,921 |        |          | $       | 66,537 |        |          | $       | 67,913 |       
|                                                                                         | Advertising                                           |                                          |                          | 13,972 |        |          |         | 32,493 |        |          |         | 64,045 |       
|                                                                                         | Advertising by Hallmark Cards                         |                                          |                          | 2,044  |        |          |         | 5,020  |        |          |         | 5,021  |       
|                                                                                         | Licensing fees                                        |                                          |                          |       |        |          |         | 2,267  |        |          |         | 23,950 |       
|                                                                                         | Other revenue                                         |                                          |                          | 2,879  |        |          |         | 740    |        |          |         | 80     |       
|                                                                                         |                                                       |                                          |                          |        |        |          |         |        |        |          |         |       
|                                                                                         |                                                       |                                          | Total revenue            |        |        | 66,816   |         |        |        | 107,057  |         |        |        | 161,009  |  
|Cost of Services:                                                                        |                                                       |                                          |                          |        |        |          |         |        |        |          |         |       
|                                                                                         | Programming costs:                                    |                                          |                          |        |        |          |         |        |        |          |         |        |       
|                                                                                         |                                                       | Affiliates                               |                          |        | 31,307 |          |         |        | 55,027 |          |         |        | 67,689 |         
|                                                                                         |                                                       | Non-affiliates                           |                          |        | 18,933 |          |         |        | 62,158 |          |         |        | 70,314 |         
|                                                                                         | Amortization of film library                          |                                          |                          |       |        |          |         | 3,533  |        |          |         | 27,035 |       
|                                                                                         | Subscriber acquisition fee expense                    |                                          |                          | 4,801  |        |          |         | 6,415  |        |          |         | 44,220 |       
|                                                                                         | Depreciation and amortization of technical
facilities |                                          |                          |       |        |          |         | 4,738  |        |          |         | 4,742  |       
|                                                                                         | Operating costs                                       |                                          |                          | 35,643 |        |          |         | 57,059 |        |          |         | 60,877 |       
|                                                                                         |                                                       |                                          |                          |        |        |          |         |        |        |          |         |       
|                                                                                         |                                                       |                                          | Total cost of services   |        |        | 90,684   |         |        |        | 188,930  |         |        |        | 274,877  |  
|Selling, general and administrative expense                                              |                                                       |                                          | 46,271                   |        |        |          | 70,709  |        |        |          | 60,223  |       
|Marketing expense                                                                        |                                                       |                                          | 21,280                   |        |        |          | 34,809  |        |        |          | 48,946  |       
|Reorganization expense                                                                   |                                                       |                                          |                         |        |        |          | 4,629   |        |        |          | 28,801  |       
|Depreciation and amortization expense                                                    |                                                       |                                          | 5,520                    |        |        |          | 8,649   |        |        |          | 11,026  |       
|Amortization of goodwill                                                                 |                                                       |                                          | 8,639                    |        |        |          | 20,032  |        |        |          |        |       
|                                                                                         |                                                       |                                          |                          |        |        |          |         |        |        |          |         |       
|                                                                                         |                                                       |                                          | Loss from operations     |        |        | (105,578 | )       |        |        | (220,701 | )       |        |        | (262,864 | )
|Equity in net losses of unconsolidated entities                                          |                                                       |                                          | (9,328                   | )      |        |          | (655    | )      |        |          |        |       
|Guaranteed preferred beneficial accretion                                                |                                                       |                                          |                         |        |        |          | (1,428  | )      |        |          | (25,508 | )     
|Interest income (expense) and other, net                                                 |                                                       |                                          | 523                      |        |        |          | (10,392 | )      |        |          | (22,603 | )     
|                                                                                         |                                                       |                                          |                          |        |        |          |         |        |        |          |         |       
|                                                                                         |                                                       |                                          | Loss before income taxes |        |        | (114,383 | )       |        |        | (233,176 | )       |        |        | (310,975 | )
|Income tax (provision) benefit                                                           |                                                       |                                          | (1,743                   | )      |        |          | 3,344   |        |        |          | (2,054  | )     
|                                                                                         |                                                       |                                          |                          |        |        |          |         |        |        |          |         |       
|                                                                                         |                                                       |                                          | Net loss                 |        | $      | (116,126 | )       |        | $      | (229,832 | )       |        | $      | (313,029 | )
|                                                                                         |                                                       |                                          |                          |        |        |          |         |        |        |          |         |       
|Other comprehensive income (loss):                                                       |                                                       |                                          |                          |        |        |          |         |        |        |          |         |       
|                                                                                         | Gain (loss) on fair value of derivative               |                                          |                          |       |        |          |         | (204   | )      |          |         | 204    |       
|                                                                                         | Foreign currency translation adjustment               |                                          |                          | (12    | )      |          |         | (404   | )      |          |         | 1,063  |       
|                                                                                         |                                                       |                                          |                          |        |        |          |         |        |        |          |         |       
|                                                                                         |                                                       |                                          | Comprehensive loss       |        | $      | (116,138 | )       |        | $      | (230,440 | )       |        | $      | (311,762 | )
|                                                                                         |                                                       |                                          |                          |        |        |          |         |        |        |          |         |       
|Weighted average number of Class A and
    Class B shares outstanding, basic and diluted |                                                       |                                          | 50,786                   |        |        |          | 74,691  |        |        |          | 104,306 |       
|                                                                                         |                                                       |                                          |                          |        |        |          |         |        |        |          |         |       
|Net loss per share, basic and diluted                                                    |                                                       | $                                        | (2.32                    | )      |        | $        | (3.08   | )      |        | $        | (3.00   | )     
|                                                                                         |                                                       |                                          |                          |        |        |          |         |        |        |          |         |       

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

F-6



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY (DEFICIT)

|                            |                                                                                                          |                |        |         |  |         |     |         |  |         |        |               |  |             |     |               |  |   |           |         |  |   |      |       |   |   |          |          |   |   |         |          |  
|--------------------------- | -------------------------------------------------------------------------------------------------------- | -------------- | ------ | ------- |  | ------- | --- | ------- |  | ------- | ------ | ------------- |  | ----------- | --- | ------------- |  | - | --------- | ------- |  | - | ---- | ----- | - | - | -------- | -------- | - | - | ------- | -------- | -
|                            |                                                                                                          |                |        |         |  |         |     |         |  |         |        | Accumulated   |  |             |     |              
|                            |                                                                                                          |                |        |         |  |         |     |         |  |         |        | Other         |  |             |     | Total        
|                            |                                                                                                          |                |        | Class A |  |         |     | Class B |  |         |        | Comprehensive |  |             |     | Stockholders
|                            |                                                                                                          | Class A        |        | Common  |  | Class B |     | Common  |  | Paid-in |        | Income        |  | Accumulated |     | Equity       
|                            |                                                                                                          | Shares         |        | Stock   |  | Shares  |     | Stock   |  | Capital |        | (Loss)        |  | Deficit     |     | (Deficit)    
|                            |                                                                                                          |                |        |         |  |         |     |         |  |         |        |               |  |             |     |              
|                            |                                                                                                          |               
|                            |                                                                                                          | (In thousands)
|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 Jim Henson Company 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 |         
|                            | Issuance of stock for exercise of options                                                                |                |        | 183     |  |         |     | 2       |  |         |        |              |  |             |     |              |  |   |           | 1,627   |  |   |      |      |   |   |          |         |   |   |         | 1,629    |  
|                            | Issuance of stock for payment of debt issuance
    costs                                                 |                |        | 124     |  |         |     | 1       |  |         |        |              |  |             |     |              |  |   |           | 843     |  |   |      |      |   |   |          |         |   |   |         | 844      |  
|                            | Stock-based compensation                                                                                 |                |        |        |  |         |     |        |  |         |        |              |  |             |     |              |  |   |           | 18      |  |   |      |      |   |   |          |         |   |   |         | 18       |  
|                            | Foreign currency translation adjustment                                                                  |                |        |        |  |         |     |        |  |         |        |              |  |             |     |              |  |   |           |        |  |   |      | 1,063 |   |   |          |         |   |   |         | 1,063    |  
|                            | Gain on fair value of derivative                                                                         |                |        |        |  |         |     |        |  |         |        |              |  |             |     |              |  |   |           |        |  |   |      | 204   |   |   |          |         |   |   |         | 204      |  
|                            | Net loss                                                                                                 |                |        |        |  |         |     |        |  |         |        |              |  |             |     |              |  |   |           |        |  |   |      |      |   |   |          | (313,029 | ) |   |         | (313,029 | )
|                            |                                                                                                          |                |        |         |  |         |     |         |  |         |        |               |  |             |     |               |  |   |           |         |  |   |      |       |   |   |          |          |   |   |         |         
|Balances, December 31, 2002 |                                                                                                          |                | 73,795 |         |  | $       | 738 |         |  |         | 30,670 |               |  | $           | 307 |               |  | $ | 1,259,242 |         |  | $ | 647  |       |   | $ | (793,339 | )        |   | $ | 467,595 |         
|                            |                                                                                                          |                |        |         |  |         |     |         |  |         |        |               |  |             |     |               |  |   |           |         |  |   |      |       |   |   |          |          |   |   |         |         

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,                                 
|                                      |                                                                                 |                                                          
|                                      |                                                                                 | 2000                                                      |                                                           | 2001                                  |        | 2002    
|                                      |                                                                                 |                                                           |                                                           |                                       |        |         
|                                      |                                                                                 |                                                          
|                                      |                                                                                 | (In thousands)                                           
|CASH FLOWS FROM OPERATING ACTIVITIES: |                                                                                 |                                                           |                                                           |                                       |        |          |          |          |         |         |          |         
|                                      | Net loss                                                                        |                                                           | $                                                         | (116,126                              | )      |          | $        | (229,832 | )       |         | $        | (313,029 | )      
|                                      | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                           |                                                           |                                       |        |          |          |          |         |         |          |          |        
|                                      |                                                                                 | Loss on sale of property and equipment                    |                                                           |                                       | 5      |          |          |          | 740     |         |          |          | 1,168   |         
|                                      |                                                                                 | Loss on derivative asset                                  |                                                           |                                       |       |          |          |          |        |         |          |          | 458     |         
|                                      |                                                                                 | Depreciation and amortization                             |                                                           |                                       | 66,562 |          |          |          | 152,615 |         |          |          | 250,719 |         
|                                      |                                                                                 | Accretion on guaranteed preferred beneficial
    interest |                                                           |                                       |       |          |          |          | 1,428   |         |          |          | 37,240  |         
|                                      |                                                                                 | Gain on change in fair value of derivative
    liability  |                                                           |                                       |       |          |          |          |        |         |          |          | (11,732 | )       
|                                      |                                                                                 | Accretion on convertible debt                             |                                                           |                                       |       |          |          |          | 859     |         |          |          | 8,821   |         
|                                      |                                                                                 | Provision for allowance for doubtful accounts             |                                                           |                                       | 3,440  |          |          |          | 5,638   |         |          |          | 4,083   |         
|                                      |                                                                                 | Equity in net losses of unconsolidated
    subsidiaries   |                                                           |                                       | 9,328  |          |          |          | 655     |         |          |          |        |         
|                                      |                                                                                 | Stock-based compensation                                  |                                                           |                                       | 13,128 |          |          |          | 1,505   |         |          |          | 18      |         
|                                      |                                                                                 | Provision for deferred taxes                              |                                                           |                                       |       |          |          |          | (5,320  | )       |          |          |        |         
|                                      |                                                                                 | Changes in operating assets and liabilities:              |                                                           |                                       |        |          |          |          |         |         |          |          |         |         
|                                      |                                                                                 |                                                           | Increase in accounts receivable                           |                                       |        | (13,137  | )        |          |         | (20,463 | )        |          |         | (21,844  | )       
|                                      |                                                                                 |                                                           | Additions to program license fees                         |                                       |        | (105,151 | )        |          |         | (95,629 | )        |          |         | (162,433 | )       
|                                      |                                                                                 |                                                           | Increase in subtitling and dubbing                        |                                       |        | (3,278   | )        |          |         | (4,644  | )        |          |         | (5,334   | )       
|                                      |                                                                                 |                                                           | Additions to subscriber acquisition fees                  |                                       |        | (8,462   | )        |          |         | (30,187 | )        |          |         | (52,036  | )       
|                                      |                                                                                 |                                                           | (Increase) decrease in prepaids and other assets          |                                       |        | (2,606   | )        |          |         | (8,222  | )        |          |         | (2,040   | )       
|                                      |                                                                                 |                                                           | Increase in accounts payable and accrued
    liabilities  |                                       |        | 32,966   |          |          |         | 21,503  |          |          |         | 69,729   |         
|                                      |                                                                                 |                                                           | Increase (decrease) in interest payable                   |                                       |        | 700      |          |          |         | 187     |          |          |         | (3,388   | )       
|                                      |                                                                                 |                                                           | Increase in subscriber acquisition fees payable           |                                       |        | 560      |          |          |         | 512     |          |          |         | 20,272   |         
|                                      |                                                                                 |                                                           | Increase (decrease) in affiliate license fees
    payable |                                       |        | 20,563   |          |          |         | (36,613 | )        |          |         | 8,581    |         
|                                      |                                                                                 |                                                           | Increase (decrease) in payables to affiliates             |                                       |        | (2,220   | )        |          |         | (1,071  | )        |          |         | 1,557    |         
|                                      |                                                                                 |                                                           | Increase (decrease) in deferred programming
    revenue   |                                       |        | (1,536   | )        |          |         | 603     |          |          |         | (717     | )       
|                                      |                                                                                 |                                                           |                                                           |                                       |        |          |          |          |         |         |          |         
|                                      |                                                                                 |                                                           |                                                           | Net cash used in operating activities |        |          | (105,264 | )        |         |         | (245,736 | )        |         |          | (169,907 | )
|                                      |                                                                                 |                                                           |                                                           |                                       |        |          |          |          |         |         |          |         
|CASH FLOWS FROM INVESTING ACTIVITIES: |                                                                                 |                                                           |                                                           |                                       |        |          |          |          |         |         |          |         
|                                      | Purchases of property and equipment                                             |                                                           |                                                           | (22,809                               | )      |          |          | (11,150  | )       |         |          | (4,240   | )      
|                                      | Proceeds from disposition of property and
    equipment                         |                                                           |                                                           | 117                                   |        |          |          | 518      |         |         |          | 116      |        
|                                      | Investment in the Kermit Channel                                                |                                                           |                                                           | (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     | )       |         |          |         |        
|                                      |                                                                                 |                                                           |                                                           |                                       |        |          |          |          |         |         |          |         
|                                      |                                                                                 |                                                           |                                                           | Net cash used in investing activities |        |          | (14,135  | )        |         |         | (11,322  | )        |         |          | (4,124   | )
|                                      |                                                                                 |                                                           |                                                           |                                       |        |          |          |          |         |         |          |         

F-8



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH
FLOWS  (Continued)

|                                                             |                                                                                             |                                      |                                                          |         |        |         |        |          |       |         |        |          |   |         |  
|------------------------------------------------------------ | ------------------------------------------------------------------------------------------- | ------------------------------------ | -------------------------------------------------------- | ------- | ------ | ------- | ------ | -------- | ----- | ------- | ------ | -------- | - | ------- | -
|                                                             |                                                                                             |                                     
|                                                             |                                                                                             | Years Ended December 31,            
|                                                             |                                                                                             |                                     
|                                                             |                                                                                             | 2000                                 |                                                          | 2001    |        | 2002   
|                                                             |                                                                                             |                                      |                                                          |         |        |        
|                                                             |                                                                                             |                                     
|                                                             |                                                                                             | (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 upon
    exercise of stock options               |                                      |                                                          | 194     |        |         |        | 807      |       |         |        | 1,629    |  
|                                                             | Proceeds from the issuance of predecessor common
    stock                                  |                                      |                                                          | 10,000  |        |         |        |         |       |         |        |         |  
|                                                             | Proceeds from the issuance of trust preferred
    securities                                |                                      |                                                          |        |        |         |        | 251,625  |       |         |        |         |  
|                                                             | Borrowings from HC Crown note payable                                                       |                                      |                                                          | 24,138  |        |         |        | 116,220  |       |         |        | 5,000    |  
|                                                             | Borrowings from credit facility                                                             |                                      |                                                          |        |        |         |        | 263,070  |       |         |        | 168,458  |  
|                                                             | Payments on borrowings on HC Crown note payable                                             |                                      |                                                          |        |        |         |        | (153,021 | )     |         |        |         |  
|                                                             | Payments on borrowings from credit facility                                                 |                                      |                                                          |        |        |         |        | (123,763 | )     |         |        | (110,589 | )
|                                                             | Payments on Crown Media United States note payable                                          |                                      |                                                          | (10,000 | )      |         |        |         |       |         |        |         |  
|                                                             | (Increase) decrease in cash in escrow                                                       |                                      |                                                          |        |        |         |        | (111,625 | )     |         |        | 111,625  |  
|                                                             | Distribution to holders of guaranteed preferred
    beneficial interests                    |                                      |                                                          |        |        |         |        |         |       |         |        | (14,730  | )
|                                                             | Debt issuance costs                                                                         |                                      |                                                          |        |        |         |        | (5,467   | )     |         |        |         |  
|                                                             | Principal payments under capital lease obligation                                           |                                      |                                                          |        |        |         |        | (1,211   | )     |         |        | (1,318   | )
|                                                             |                                                                                             |                                      |                                                          |         |        |         |        |          |       |         |        |         
|                                                             |                                                                                             |                                      | Net cash provided by financing activities                |         |        | 149,683 |        |          |       | 236,689 |        |          |   | 160,075 |  
|                                                             | Effect of exchange rate changes on cash                                                     |                                      |                                                          | 125     |        |         |        | (46      | )     |         |        | 432      |  
|                                                             |                                                                                             |                                      |                                                          |         |        |         |        |          |       |         |        |         
|                                                             |                                                                                             |                                      | Net increase (decrease) in cash and cash
    equivalents |         |        | 30,409  |        |          |       | (20,415 | )      |          |   | (13,524 | )
|Cash and cash equivalents, beginning of period               |                                                                                             |                                      | 3,865                                                    |         |        |         | 34,274 |          |       |         | 13,859 |         
|                                                             |                                                                                             |                                      |                                                          |         |        |         |        |          |       |         |        |         
|Cash and cash equivalents, end of period                     |                                                                                             | $                                    | 34,274                                                   |         |        | $       | 13,859 |          |       | $       | 335    |         
|                                                             |                                                                                             |                                      |                                                          |         |        |         |        |          |       |         |        |         
|Supplemental disclosure of cash and non-cash
    activities: |                                                                                             |                                      |                                                          |         |        |         |        |          |       |         |        |         
|                                                             | Interest paid                                                                               |                                      | $                                                        | 3,039   |        |         | $      | 6,393    |       |         | $      | 13,058   |  
|                                                             | Interest paid on preferred securities                                                       |                                      | $                                                        |        |        |         | $      |         |       |         | $      | 17,778   |  
|                                                             | Income taxes paid                                                                           |                                      | $                                                        | 1,743   |        |         | $      | 1,976    |       |         | $      | 2,054    |  
|                                                             | Accretion related to predecessor Class B
    common stock subject to put and call           |                                      | $                                                        | 1,484   |        |         | $      |         |       |         | $      |         |  
|                                                             | 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    |       |         | $      |         |  
|                                                             | Issuance of Class A common stock for payment
    of debt issuance costs                     |                                      | $                                                        |        |        |         | $      |         |       |         | $      | 844      |  
|                                                             | Change in fair value of derivative asset                                                    |                                      | $                                                        |        |        |         | $      | 204      |       |         | $      | 1,117    |  
|                                                             | 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 |         |        |          |      |         |        |          |  |        

F-9



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH
FLOWS  (Continued)

|                                       |                                                  |                          |   |         |  |      |   |         |  |  |   |   | 
|-------------------------------------- | ------------------------------------------------ | ------------------------ | - | ------- |  | ---- | - | ------- |  |  | - | - | 
|                                       |                                                  |                         
|                                       |                                                  | Years Ended December 31,
|                                       |                                                  |                         
|                                       |                                                  | 2000                     |   | 2001    |  | 2002
|                                       |                                                  |                          |   |         |  |     
|                                       |                                                  |                         
|                                       |                                                  | (In thousands)          
|                                       | 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  |  |  |   |  | 
|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



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

For the Years Ended December 31, 2000,
2001 and 2002




|   |                          
|-- | -------------------------
|1. | Business and Organization



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

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

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



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

The Companys financial position and
operations changed significantly during 2001. Substantial
revenue producing assets were acquired through the issuance of
debt and stock and with funds available under the Companys
credit facility. In August 2001, the Company issued
$80.1 million of common stock for additional carriage on a
U.S. pay television distributor. In September 2001, the
Company acquired approximately 700 films for
$592.0 million in common stock and assumption of
$220.0 million of debt. The expectation is that these
additional assets will provide revenue for the foreseeable
future. These acquisitions and the Companys continuing use
of cash in operations required several financing transactions
during 2001. In September 2001, the Company established a bank
credit facility of $285.0 million, which was subsequently
increased in December 2001, to $320.0 million. In December
2001, the Company also issued preferred securities in a private
placement transaction for $265.0 million. During 2002 the
Company did not enter into any additional financings, but did
borrow $168.5 million on the remainder of its credit
facility and was advanced $5.0 million under its line of
credit with HC Crown.

In connection with the Companys growth
strategy, the Company expects to continue to make significant
investments in programming and distribution. Programming
expenditures for the year 2003 are expected to be in the range
of $175.0 million to $185.0 million, and cash payments
for subscriber acquisition fees in 2003 are expected to be
$50.0 million to $60.0 million. The Company also
expects that the reorganization announced in October 2002 will
reduce operating costs by $25.0 million annually. The
Companys principal uses of funds during the next
12 months are expected to be the payment of operating
expenses (including but not limited to licensing programming
from third parties and subscriber acquisition fees) and debt
service payments of $30.0 million to $33.0 million.

F-11



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The Companys principal sources of funds are
currently continuing cash inflows from operations (after
expenditures for programming and subscriber acquisition fees),
cash on hand, available borrowings under the $75.0 million
HC Crown line of credit, and periodic cash inflows expected
under the new tax sharing agreement with Hallmark Cards (see
Note 17). On December 31, 2002, the Company had an
available cash balance of $335,000 and $70.0 million
available under the HC Crown line of credit. Crown Media
Holdings has been borrowing under line of credit with
HC Crown in 2002 and 2003 in order to support the cash
needs of its operations. The Company expects that the tax
sharing agreement will result in receiving a minimum of
$40.0 million to $50.0 million during 2003. Taking
into account the Companys projected revenues and
expenditures, the Company believes that cash inflows from
operations, cash on hand, the HC Crown line of credit and
periodic payments received under the tax sharing agreement will
be sufficient for its liquidity needs through at least
March 31, 2004.

The Company projects that advertising revenue and
subscriber revenue will increase in 2003, and that certain
operating expenses will decrease due to the reorganization in
the fourth quarter of 2002. Any decline in the popularity of the
Hallmark Channel, future modifications to the Companys
distribution agreements, a decline in the advertising market,
unexpected increased competition or other adverse operating
conditions could impact the Companys ability to achieve
its projected operating results. If projected operating results
are not achieved, the Company would need to obtain additional
funding. In that event, Crown Media Holdings would consider
pursuing alternatives to raise additional cash, which could
include the issuance of additional equity or debt securities.
There can be no assurance, however, that additional funding will
be available, if at all, on terms acceptable to Crown Media
Holdings. Any new debt financing would require the agreement of
existing lenders and preferred securities holders.



|   |                                               
|-- | ----------------------------------------------
|2. | Summary of Significant Accounting
    Policies



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

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



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

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



| |               
| | --------------
| | 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 was used to reduce amounts under
the bank credit facility on January 7, 2002.



| |                
| | ---------------
| | Restricted Cash

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

F-12



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



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

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

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

Subscriber acquisition fees are comprised of the
following:

|                                     |                                  |                    |         |                    |  |   |         |         | 
|------------------------------------ | -------------------------------- | ------------------ | ------- | ------------------ |  | - | ------- | ------- | 
|                                     |                                  | As of December 31, |         | As of December 31,
|                                     |                                  | 2001               |         | 2002              
|                                     |                                  |                    |         |                   
|                                     |                                  |                   
|                                     |                                  | (In thousands)    
|Subscriber acquisition fees, at cost |                                  | $                  | 143,153 |                    |  | $ | 186,085 |        
|Accumulated amortization             |                                  |                    | (16,188 | )                  |  |   | (45,820 | )      
|                                     |                                  |                    |         |                    |  |   |         |        
|                                     | Subscriber acquisition fees, net |                    | $       | 126,965            |  |   | $       | 140,265 | 
|                                     |                                  |                    |         |                    |  |   |         |        

As of December 31, 2001 and 2002, the
consolidated balance sheets also reflected subscriber
acquisition fees payable of $28.3 million and
$48.6 million, respectively. For the years ended
December 31, 2000, 2001 and 2002, Crown Media United States
made cash payments of $8.5 million, $26.4 million, and
$31.7 million, respectively, reducing subscriber
acquisition fees payable. Additionally, $80.1 million of
common stock was issued in exchange for similar distribution
rights during 2001 (see Note 10).

On November 7, 2002, the Company entered
into an amendment of a distribution agreement with a large
distributor in the United States. The amendment extends the
distribution agreement for two years to December 31, 2007,
and provides for the payment of a substantial cash amount in
settlement of the most favored nation clauses in
regard to the DirecTV terms and for additional full-time
subscribers to the Hallmark Channel. The Company paid a portion
of the amount upon execution and will make monthly cash payments
through December 2003 for the balance. The Company may also be
required to pay substantial market support payments, if
subscribers exceed the final commitment number, through
December 31, 2004. In addition, if the distributor achieves
the final commitment level of subscribers, subscriber fees will
not apply to subscribers above a specified number. The amendment
also contains a most favored nation provision
relating to other distribution agreements. A portion of the
consideration given, totaling $32.3 million, relating to
new subscribers and term extension has been recorded as
subscriber acquisition fees that are amortized over the
remaining life of the distribution agreement. The marketing
support payments under the amendment will be accounted for as
marketing expenses when incurred. The remaining portion of the
consideration, totaling $16.9 million, is related to the
settlement of the most favored nation clause and has
been expensed as incurred as a component of subscriber
acquisition fee expense. The Company also recorded subscriber
acquisition fee expense of $4.7 million related to another
large distributor during the fourth quarter of 2002 as the
result of the contract settlement and its impact on the
most favored nation clause in the agreement with
that distributor.



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

F-13



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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 compared to the estimated future
revenues directly associated with the programming and related
expenses. Where an evaluation indicates that a programming
contract will ultimately result in a loss, additional
amortization is provided to currently recognize that loss.

SFAS No. 63 also requires an entity
providing licensed programming to report an asset and liability
for the rights licensed under a programming agreement only when
the license period has begun and when certain other defined
requirements are met. As such, the accompanying consolidated
balance sheets do not reflect both assets and liabilities of
$81.7 million and $219.5 million as of
December 31, 2001 and 2002, respectively, related to
committed program license fees payable to Hallmark Entertainment
Distribution, L.L.C. (Hallmark Entertainment
Distribution) and other third parties with airing windows
to begin subsequent to period-end.



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

Subtitling and dubbing represent costs incurred
to prepare programming for airing in international markets.
These costs are capitalized as incurred and are amortized over
the shorter of the programs airing window for programming
licensed from unaffiliated third-parties or the programs
estimated life (in the case of programming licensed from
Hallmark Entertainment Distribution and the Companys film
assets). The Company wrote-down certain impaired subtitling and
dubbing assets related to Hallmark Entertainment Distribution
programming in 2002. The impairment of $7.9 million was
included as operating costs in the accompanying consolidated
statement of operations for the year ended December 31,
2002. Beginning 2003, costs related to programming licensed from
Hallmark Entertainment Distribution will be amortized over a
maximum period of 3 years. Amortization expense for
subtitling and dubbing costs was $1.2 million,
$3.0 million, and $8.4 million for the years ended
December 31, 2000, 2001, and 2002, respectively.

|                                       |                                    |                    |        |                    |  |   |        |       | 
|-------------------------------------- | ---------------------------------- | ------------------ | ------ | ------------------ |  | - | ------ | ----- | 
|                                       |                                    | As of December 31, |        | As of December 31,
|                                       |                                    | 2001               |        | 2002              
|                                       |                                    |                    |        |                   
|                                       |                                    |                   
|                                       |                                    | (In thousands)    
|Subtitling and dubbing assets, at cost |                                    | $                  | 12,234 |                    |  | $ | 8,343  |      
|Accumulated amortization               |                                    |                    | (4,855 | )                  |  |   | (4,027 | )    
|                                       |                                    |                    |        |                    |  |   |        |      
|                                       | Subtitling and dubbing assets, net |                    | $      | 7,379              |  |   | $      | 4,316 | 
|                                       |                                    |                    |        |                    |  |   |        |      



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

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



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

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

F-14



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



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

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

Crown Media Holdings owns 100% of the common
equity in Crown Media Trust. The preferred securities include
terms that allow the holder to earn a return above the stated
dividend rate on the securities under certain conditions. Based
on fair value calculations using discounted cash flows and
Black-Scholes models, a portion of the proceeds from the
preferred securities has been allocated and classified in Crown
Media Holdings balance sheet as guaranteed preferred
beneficial interest in Crown Media Trusts debentures and a
portion has been classified as convertible debt. Issuance costs
related to the guaranteed preferred beneficial interest portion
were netted against the guaranteed preferred beneficial interest
and accreted as additional expense in earnings. Issuance costs
related to the convertible debt portion were recorded as a
deferred debt issuance costs asset and are currently amortized
as additional interest expense, using the effective interest
method. See Note 9 for additional discussion of the terms
for the preferred securities and Crown Media Holdings
related subordinated debentures.



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

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

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

Advertising revenue and expenses in barter
transactions are recorded at the fair value of the advertising
to be provided, which is generally the value in the negotiated
barter contract. The fair value is determined based upon amounts
paid in cash for similar advertisements from buyers unrelated to
the other party in the barter transaction. When the barter
advertising revenue does not meet the requirements of EITF
No. 99-17, Accounting for Advertising Barter
Transactions, no revenue is recognized. For the years ended
December 31, 2000, 2001 and 2002, revenue from advertising
barter transactions of $2.2 million, $2.0 million, and
$1.7 million, respectively, and the corresponding barter
expenses were included as a component of both advertising
revenue and marketing expenses in the accompanying consolidated
statements of operations.

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

Revenues from foreign sources for the years ended
December 31, 2000, 2001 and 2002, represented 69%, 61% and
48% respectively, of total revenue. Such revenues, generally
denominated in United States dollars,

F-15



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

were primarily from sales to customers in
Australia, India, Malaysia, Mexico, Philippines, Poland,
Singapore, South Africa, South Korea, Taiwan, and the United
Kingdom, during all periods presented.



| |                 
| | ----------------
| | Cost of Services

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



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

In the case of sales to third parties, the
Company amortizes its film assets using the
individual-film-forecast-computation method, which amortizes
such assets in the same ratio that current period actual revenue
to estimated unrecognized ultimate revenues as of the beginning
of the current fiscal year. For anticipated internal use of the
film assets, the Company amortizes its film assets using a
10-year estimated useful life. The Companys projections
regarding sales to third parties and anticipated internal use
are based on the history of each film and similar films, sales
and marketing plans, and other factors, all of which require
significant judgment by management. The 10-year period used for
sales to third parties and internal use commences on the date of
acquisition and is the same time period used in the initial,
external valuation of the Companys film assets at the time
of acquisition. The Company also reviews the film assets for
impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable.
If the carrying value of the individual film assets exceeds the
fair value, the film assets are written-down to their fair
values. At least annually, the Company is required by the
covenants in its credit facility to have a valuation expert
perform a valuation of the film assets. Amortization expense for
the film library was $3.5 million and $27.0 million
for the years ended December 31, 2001, and 2002,
respectively.

|                         |                  |                    |         |                    |  |   |         |         | 
|------------------------ | ---------------- | ------------------ | ------- | ------------------ |  | - | ------- | ------- | 
|                         |                  | As of December 31, |         | As of December 31,
|                         |                  | 2001               |         | 2002              
|                         |                  |                    |         |                   
|                         |                  |                   
|                         |                  | (In thousands)    
|Film assets              |                  | $                  | 810,928 |                    |  | $ | 810,928 |        
|Residual assets          |                  |                    | 705     |                    |  |   | 5,244   |        
|Accumulated amortization |                  |                    | (3,495  | )                  |  |   | (29,346 | )      
|                         |                  |                    |         |                    |  |   |         |        
|                         | Film assets, net |                    | $       | 808,138            |  |   | $       | 786,826 | 
|                         |                  |                    |         |                    |  |   |         |        



| |         
| | --------
| | Goodwill

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

F-16



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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

|                                                                                         |  |                                          |          |      |  |      |          |   |  |   |          |  
|---------------------------------------------------------------------------------------- |  | ---------------------------------------- | -------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|                                                                                         |  |                                         
|                                                                                         |  | Years Ended December 31,                
|                                                                                         |  |                                         
|                                                                                         |  | 2000                                     |          | 2001 |  | 2002
|                                                                                         |  |                                          |          |      |  |     
|                                                                                         |  |                                         
|                                                                                         |  | (In thousands, except per share amounts)
|Net Loss                                                                                 |  | $                                        | (116,126 | )    |  | $    | (229,832 | ) |  | $ | (313,029 | )
|Add back: Amortization of goodwill                                                       |  |                                          | 8,639    |      |  |      | 20,032   |   |  |   |         |  
|                                                                                         |  |                                          |          |      |  |      |          |   |  |   |          |  
|Adjusted net loss                                                                        |  | $                                        | (107,487 | )    |  | $    | (209,800 | ) |  | $ | (313,029 | )
|                                                                                         |  |                                          |          |      |  |      |          |   |  |   |          |  
|Net loss per share, basic and diluted                                                    |  | $                                        | (2.32    | )    |  | $    | (3.08    | ) |  | $ | (3.00    | )
|Add back: Amortization of goodwill                                                       |  |                                          | 0.17     |      |  |      | 0.27     |   |  |   |         |  
|                                                                                         |  |                                          |          |      |  |      |          |   |  |   |          |  
|Adjusted net loss per share, basic and diluted                                           |  | $                                        | (2.15    | )    |  | $    | (2.81    | ) |  | $ | (3.00    | )
|                                                                                         |  |                                          |          |      |  |      |          |   |  |   |          |  
|Weighted average number of Class A and
    Class B shares outstanding, basic and diluted |  |                                          | 50,786   |      |  |      | 74,691   |   |  |   | 104,306  |  
|                                                                                         |  |                                          |          |      |  |      |          |   |  |   |          |  



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

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



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

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



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

Basic net loss per share is computed by dividing
the net loss for the period by the weighted average number of
common shares outstanding during the period. Diluted net loss
per share is computed based on the weighted average number of
common shares and potentially dilutive common shares
outstanding. The calculation of diluted net loss per share
excludes potential common shares if the effect is antidilutive.
Potential common shares consist of incremental common shares
issuable upon the exercise of stock options. Approximately
4.1 million, 6.9 million, and 7.8 million stock
options for the years ended December 31, 2000, 2001, and
2002, respectively, have been excluded from the calculations of
earnings per share because their effect would have been
antidilutive. Additionally, 10.1 million contingent
appreciation certificates have also been excluded from the
calculations of earnings per share for the years ended
December 31, 2001 and 2002, as their effect would have been
antidilutive.

F-17



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The computation of net loss per share is as
follows:

|                                                                                                      |                                               |                                          |          |        |   |      |          |        |   |   |          |         |  
|----------------------------------------------------------------------------------------------------- | --------------------------------------------- | ---------------------------------------- | -------- | ------ | - | ---- | -------- | ------ | - | - | -------- | ------- | -
|                                                                                                      |                                               |                                         
|                                                                                                      |                                               | Years Ended December 31,                
|                                                                                                      |                                               |                                         
|                                                                                                      |                                               | 2000                                     |          | 2001   |   | 2002
|                                                                                                      |                                               |                                          |          |        |   |     
|                                                                                                      |                                               |                                         
|                                                                                                      |                                               | (In thousands, except per share amounts)
|Net loss                                                                                              |                                               | $                                        | (116,126 | )      |   | $    | (229,832 | )      |   | $ | (313,029 | )      
|Accretion related to predecessor Class B
    common stock subject to put and call through May 9, 2000 |                                               |                                          | (1,484   | )      |   |      |         |        |   |   |         |        
|                                                                                                      |                                               |                                          |          |        |   |      |          |        |   |   |          |        
|                                                                                                      |                                               | $                                        | (117,610 | )      |   | $    | (229,832 | )      |   | $ | (313,029 | )      
|                                                                                                      |                                               |                                          |          |        |   |      |          |        |   |   |          |        
|Denominator:                                                                                          |                                               |                                          |          |        |   |      |          |        |   |   |          |        
|                                                                                                      | Weighted average common shares outstanding(1) |                                          |          | 50,786 |   |      |          | 74,691 |   |   |          | 104,306 |  
|                                                                                                      |                                               |                                          |          |        |   |      |          |        |   |   |          |        
|Net loss per share:                                                                                   |                                               |                                          |          |        |   |      |          |        |   |   |          |        
|                                                                                                      | Basic and diluted loss per share              |                                          | $        | (2.32  | ) |      | $        | (3.08  | ) |   | $        | (3.00   | )
|                                                                                                      |                                               |                                          |          |        |   |      |          |        |   |   |          |        



---



|    |                                                                                     
|--- | ------------------------------------------------------------------------------------
|(1) | Number of shares in 2000 recalculated to include
    initial public offering shares.



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

At December 31, 2002, the Company accounts
for its stock-based employee compensation plan using the
intrinsic value method under the recognition and measurement
principles of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. Accordingly,
compensation cost for stock options issued to employees is
measured as the excess, if any, of the quoted market price of
the Companys stock at the date of the grant over the
amount an employee must pay to acquire the stock. In December
2002, FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and
Disclosure  an amendment of
SFAS No. 123. SFAS No. 148 requires
certain additional disclosures related to stock-based
compensation plans. These additional disclosures are included in
Note 13. SFAS No. 123, Accounting for
Stock-Based Compensation, encourages, but does not require
companies to record compensation cost for stock-based employee
compensation plans at fair value.

Had compensation costs for these plans been
determined consistent with SFAS 123, Crown Media
Holdings net loss and loss per share would have been
increased to the following pro forma amounts for the years ended
December 31, 2000, 2001 and 2002:

Pro Forma Effects

|                                      |                                       |                                          |          |          |   |      |          |          |   |   |          |          |  
|------------------------------------- | ------------------------------------- | ---------------------------------------- | -------- | -------- | - | ---- | -------- | -------- | - | - | -------- | -------- | -
|                                      |                                       | 2000                                     |          | 2001     |   | 2002
|                                      |                                       |                                          |          |          |   |     
|                                      |                                       |                                         
|                                      |                                       | (In thousands, except per share amounts)
|Net loss before stock options expense |                                       | $                                        | (116,126 | )        |   | $    | (229,832 | )        |   | $ | (313,029 | )       
|Accretion                             |                                       |                                          | (1,484   | )        |   |      |         |          |   |   |         |         
|Stock options expense                 |                                       |                                          | (16,178  | )        |   |      | (10,834  | )        |   |   | (12,328  | )       
|                                      |                                       |                                          |          |          |   |      |          |          |   |   |          |         
|                                      | Net loss                              |                                          | $        | (133,788 | ) |      | $        | (240,666 | ) |   | $        | (325,357 | )
|                                      |                                       |                                          |          |          |   |      |          |          |   |   |          |         
|                                      | Weighted average shares               |                                          |          | 50,786   |   |      |          | 74,691   |   |   |          | 104,306  |  
|                                      |                                       |                                          |          |          |   |      |          |          |   |   |          |         
|                                      | Net loss per share, basic and diluted |                                          | $        | (2.63    | ) |      | $        | (3.22    | ) |   | $        | (3.12    | )
|                                      |                                       |                                          |          |          |   |      |          |          |   |   |          |         



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

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

F-18



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

balance sheet as either assets or liabilities
measured at fair value. Changes in fair value are recognized
immediately in earnings unless the derivatives qualify as hedges
of future cash flows. The Company discontinues hedge accounting
prospectively when it is determined that the derivative is no
longer effective in offsetting the cash flows of the hedged
item, the derivative expires or is sold, terminated or
exercised, or the derivative is no longer designated as a
hedging instrument. Changes in the fair value of the contingent
appreciation certificates in the private placement transaction
are recognized immediately in earnings. See Note 9 for a
discussion of the derivative liability related to the private
placement transaction.

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

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

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



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

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



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

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



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

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

F-19



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



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

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



|   |               
|-- | --------------
|3. | Reorganization

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

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

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

|                             |  |                |        |            |  |               |       |       |  |   |        |   |  |   |        |  
|---------------------------- |  | -------------- | ------ | ---------- |  | ------------- | ----- | ----- |  | - | ------ | - |  | - | ------ | -
|                             |  |                |        |            |  | Satellite and |       |      
|                             |  | Severance      |        | Facilities |  | Transponder   |       | Total
|                             |  |                |        |            |  |               |       |      
|                             |  |               
|                             |  | (In thousands)
|Balance at October 7, 2002   |  | $              | 5,492  |            |  | $             | 1,651 |       |  | $ | 21,658 |   |  | $ | 28,801 |  
|Deductions                   |  |                | (2,097 | )          |  |               |      |       |  |   | (545   | ) |  |   | (2,642 | )
|                             |  |                |        |            |  |               |       |       |  |   |        |   |  |   |        |  
|Balance at December 31, 2002 |  | $              | 3,395  |            |  | $             | 1,651 |       |  | $ | 21,113 |   |  | $ | 26,159 |  
|                             |  |                |        |            |  |               |       |       |  |   |        |   |  |   |        |  

Deductions reflect total cash payments of
$2.6 million through December 31, 2002, representing
termination benefits paid and satellite and transponder
contractual obligations paid.



|   |                     
|-- | --------------------
|4. | Program license fees

Program license fees are comprised of the
following:

|                                                               |  |                    |         |      |  |   |         |  
|-------------------------------------------------------------- |  | ------------------ | ------- | ---- |  | - | ------- | -
|                                                               |  |                   
|                                                               |  | As of December 31,
|                                                               |  |                   
|                                                               |  | 2001               |         | 2002
|                                                               |  |                    |         |     
|                                                               |  |                   
|                                                               |  | (In thousands)    
|Program license fees  Hallmark
    Entertainment Distribution |  | $                  | 103,539 |      |  | $ | 82,910  |  
|Program license fees  NICC                                    |  |                    | 287     |      |  |   |        |  
|Program license fees  other affiliates                        |  |                    | 13,821  |      |  |   | 8,341   |  
|Program license fees  non-affiliates                          |  |                    | 93,795  |      |  |   | 129,906 |  
|Prepaid program license fees                                   |  |                    | 6,750   |      |  |   | 10,250  |  
|                                                               |  |                    |         |      |  |   |         |  
|Program license fees, at cost                                  |  |                    | 218,192 |      |  |   | 231,407 |  
|Accumulated amortization                                       |  |                    | (76,670 | )    |  |   | (83,430 | )
|                                                               |  |                    |         |      |  |   |         |  
|Program license fees, net                                      |  | $                  | 141,522 |      |  | $ | 147,977 |  
|                                                               |  |                    |         |      |  |   |         |  

F-20



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

On May 9, 2000, Crown Media Holdings
recorded $84.1 million of program license fees as part of
its acquisition of Crown Media United States. Programming costs
for the years ended December 31, 2000, 2001, and 2002 were
$50.2 million, $117.2 million, and
$138.0 million, respectively. Amortization of program
license fees, included as a component of programming cost, was
$47.3 million, $101.1 million, and $152.1 million
for the years ended December 31, 2000, 2001 and 2002.

License fees payable are comprised of the
following:

|                                                               |                                |                    |         |         |  |   |         |         | 
|-------------------------------------------------------------- | ------------------------------ | ------------------ | ------- | ------- |  | - | ------- | ------- | 
|                                                               |                                |                   
|                                                               |                                | As of December 31,
|                                                               |                                |                   
|                                                               |                                | 2001               |         | 2002   
|                                                               |                                |                    |         |        
|                                                               |                                |                   
|                                                               |                                | (In thousands)    
|License fees payable  Hallmark
    Entertainment Distribution |                                | $                  | 62,299  |         |  | $ | 68,243  |        
|License fees payable  other affiliates                        |                                |                    |        |         |  |   | 90      |        
|License fees payable  non-affiliates                          |                                |                    | 56,215  |         |  |   | 89,858  |        
|                                                               |                                |                    |         |         |  |   |         |        
|                                                               | Total license fees payable     |                    |         | 118,514 |  |   |         | 158,191 | 
|Less current maturities                                        |                                |                    | (33,088 | )       |  |   | (58,756 | )      
|                                                               |                                |                    |         |         |  |   |         |        
|                                                               | Long-term license fees payable |                    | $       | 85,426  |  |   | $       | 99,435  | 
|                                                               |                                |                    |         |         |  |   |         |        

Crown Media United States recorded a charge in
the fourth quarter of 2002 of $47.0 million related to
certain programming write-downs reflecting refinement of the
Companys programming strategy and projected usage. In the
accompanying consolidated statement of operations for the year
ended December 31, 2002, write-downs of $29.3 million
is included in affiliate programming costs and write-downs of
$17.7 million is included in non-affiliate programming
costs. The mix of revenues for the domestic Hallmark Channel has
shifted more heavily to advertising revenues from subscriber
fees revenue. Certain of the programming identified and
written-down was not expected to generate sufficient future
advertising revenue to support the channel.

Crown Media International recorded a charge in
the fourth quarter of 2002 of $1.1 million in impairments
of program license fees related to New Zealand. In the
accompanying consolidated statement of operations for the year
ended December 31, 2002, $911,000 is included in affiliate
programming costs and $220,000 is included in non-affiliate
programming costs.

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 contract revisions replace all prior
obligations. Crown Media United States licenses only two series
from The Jim Henson Company. In connection with the 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.

F-21



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |                       
|-- | ----------------------
|5. | Property and Equipment

Property and equipment are comprised of the
following:

|                                          |                                 |                    |         |          |  |        |         |        |  |  |     |  | 
|----------------------------------------- | ------------------------------- | ------------------ | ------- | -------- |  | ------ | ------- | ------ |  |  | --- |  | 
|                                          |                                 |                    |         |         
|                                          |                                 | As of December 31, |         |         
|                                          |                                 |                    |         | Life (In
|                                          |                                 | 2001               |         | 2002     |  | years)
|                                          |                                 |                    |         |          |  |       
|                                          |                                 |                    |         |         
|                                          |                                 | (In thousands)     |         |         
|Technical equipment and computers         |                                 | $                  | 37,745  |          |  | $      | 38,584  |        |  |  | 3-5 | 
|Leased asset (see Note 8)                 |                                 |                    | 13,252  |          |  |        | 13,252  |        |  |  | 8   | 
|Furniture, fixtures and equipment         |                                 |                    | 2,025   |          |  |        | 2,162   |        |  |  | 5   | 
|Leasehold improvements                    |                                 |                    | 8,604   |          |  |        | 8,215   |        |  |  | 3-7 | 
|Construction-in-progress                  |                                 |                    | 424     |          |  |        | 1,520   |        |  |  |     | 
|                                          |                                 |                    |         |          |  |        |         |        |  |  |     | 
|                                          | Property and equipment, at cost |                    |         | 62,050   |  |        |         | 63,733 |  |  |     |  | 
|Accumulated depreciation and amortization |                                 |                    | (18,168 | )        |  |        | (28,121 | )      |  |  |     | 
|                                          |                                 |                    |         |          |  |        |         |        |  |  |     | 
|                                          | Property and equipment, net     |                    | $       | 43,882   |  |        | $       | 35,612 |  |  |     |  | 
|                                          |                                 |                    |         |          |  |        |         |        |  |  |     | 

Depreciation and amortization expense totaled
$5.2 million, $11.5 million, and $13.3 million,
respectively, for the years ended December 31, 2000, 2001
and 2002.



|   |                                                           
|-- | ----------------------------------------------------------
|6. | Investments in and Advances to Unconsolidated
    Entities



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

In May 1998, Crown Media International formed
H&H Programming  Asia, with The Jim Henson
Company, 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 $4.5 million for the year ended
December 31, 2000, and $655,000 for the two and one half
months ended March 15, 2001.

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 $2.9 million for the year ended
December 31, 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 to and/or conversion of
receivables from 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.



| |                                            
| | -------------------------------------------
| | 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 had been formed to

F-22



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

develop, own and operate the Hallmark Channel.
The purchase price for Crown Media Internationals interest
in Crown Media United States was $50.0 million. Pursuant to
the terms of the agreement, Crown Media International paid
$20.0 million of this purchase price in November 1998, an
additional $20.0 million in May 1999 and the final payment
of $10.0 million in February 2000.

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

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, which it did not own, for
$85.8 million (see note 1).



|   |                             
|-- | ----------------------------
|7. | Deferred Programming Revenue

In December 1997, Crown Media International
renegotiated a distribution agreement with a pay television
distributor, which was extended through December 2001. 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

F-23



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

was recognized in subscriber fees as services
were provided over the life of the contract. Remaining revenues
recognized under the renegotiated agreement were approximately
$1.5 million and $713,000 for the years ended
December 31, 2000 and 2001, respectively.

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 deferred revenue, which will be
recognized as licensing fees revenue as the windows open. At
December 31, 2001 and 2002, amounts deferred under these
agreements were approximately $1.3 million and $599,000.
Revenues recognized under the agreement was approximately
$717,000 for the year ended December 31, 2002.



|   |       
|-- | ------
|8. | Leases

Crown Media International leases uplink and
transponder space under a long-term lease agreement. In
accordance with SFAS No. 13, Accounting for
Leases, the lease was accounted for as a capital lease.
Future minimum lease payments under the agreement at
December 31, 2002 are as follows:

|                                            |                              |                |        |        | 
|------------------------------------------- | ---------------------------- | -------------- | ------ | ------ | 
|Years Ended                                 |                              |               
|December 31,                                |                              |               
|                                            |                              | (In thousands)
|2003                                        |                              | $              | 2,300  |       
|2004                                        |                              |                | 2,300  |       
|2005                                        |                              |                | 2,300  |       
|2006                                        |                              |                | 2,300  |       
|2007                                        |                              |                | 2,300  |       
|Thereafter                                  |                              |                | 2,300  |       
|                                            |                              |                |        |       
|                                            | Total minimum lease payments |                |        | 13,800 | 
|Less amount representing interest           |                              |                | (3,077 | )     
|                                            |                              |                |        |       
|Present value of net minimum lease payments |                              |                | 10,723 |       
|Less current maturities                     |                              |                | (1,433 | )     
|                                            |                              |                |        |       
|Long  term obligation                      |                              | $              | 9,290  |       
|                                            |                              |                |        |       

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



| |                            
| | ---------------------------
| | 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.

F-24



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Rent expense under these agreements was
$16.1 million, $17.3 million, and $19.7 million,
respectively, for the years ended December 31, 2000, 2001,
and 2002. At December 31, 2002, the minimum annual rental
commitments under the leases (excluding the effects of
unexecuted sublease agreements) are as follows:

|                       |  |                |        |  
|---------------------- |  | -------------- | ------ | -
|Years Ended            |  |               
|December 31,           |  |               
|                       |  | (In thousands)
|2003                   |  | $              | 15,458 |  
|2004                   |  |                | 15,032 |  
|2005                   |  |                | 15,355 |  
|2006                   |  |                | 10,973 |  
|2007                   |  |                | 10,728 |  
|Thereafter             |  |                | 21,741 |  
|                       |  |                |        |  
|                       |  |                | 89,287 |  
|Less: Sublease rentals |  |                | (92    | )
|                       |  |                |        |  
|                       |  | $              | 89,195 |  
|                       |  |                |        |  

As of part of the reorganization, the Company
subleased its Coral Gables sales and administrative office space
in fourth quarter 2002.



|   |                                          
|-- | -----------------------------------------
|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, a five-year $320.0 million secured credit
facility. At December 31, 2001, $111.9 million of the
amount payable under the credit facility is included as a
current liability (including accrued interest of approximately
$936,000), to be paid on January 7, 2002, from the proceeds
of the issuance of the preferred securities, and
$151.4 million was included as a long-term liability. At
December 31, 2002, an amount outstanding under the credit
facility of $320.0 million is included as a long-term
liability. The entire balance is due in 2006. This loan is
guaranteed by Crown Media Holdings subsidiaries and is
secured by all tangible and intangible property of Crown Media
Holdings and its subsidiaries. A portion of the borrowings under
the credit facility were used to pay $120.0 million of debt
assumed as part of the consideration for acquiring the film
assets and to repay $84.2 million outstanding under a
$150.0 million line of credit provided by HC Crown. At
December 31, 2002, Crown Media Holdings had borrowed all
funds available under the credit facility. 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

F-25



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

then in effect. The Library Credit is defined as
50% of the most recent valuation of the film assets, which is
required to be delivered after the end of each quarter. This
valuation of the film assets is based upon the net present value
of future cash flows expected to be generated by sales of film
licenses. As of the most recent valuation, the library credit
was in excess of the maximum amount of the credit facility.

The credit facility contains a number of
affirmative and negative covenants, which were amended on
February 20, 2003. 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, as
defined not be less than specified amounts for each quarter
through December 31, 2003 and specified amounts for each
fiscal year thereafter; 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 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.

Since the inception of the credit facility, Crown
Media Holdings has elected the monthly Eurodollar rate. For
2001, amounts under the revolver accrued interest at rates from
5.00% to 5.59% and amounts under the term loan accrued interest
at rates from 5.11% to 5.59%. For 2002 amounts under the
revolver have accrued interest at rates from 4.38% to 5.14% and
amounts under the term loan have accrued interest at rates from
4.38% to 5.11%. Interest expense on borrowings under the credit
facility for the years ended December 31, 2001 and 2002,
was $3.1 million and $11.7 million. At
December 31, 2001 and 2002, accrued interest of $936,000
and $596,000, respectively, was reflected in the current portion
of the credit facility in the accompanying consolidated balance
sheet.



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

On December 17, 2001, Crown Media Holdings
completed a $265.0 million private placement to a group of
institutional investors. Under the terms of the private
placement, Crown Media Holdings issued units to the investors,
each unit consisted of one preferred security of Crown Media
Trust, and one contingent appreciation certificate, issued by
Crown Media Holdings.

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

F-26



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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

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

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

On or after December 15, 2003, Crown Media
Holdings will have the right to redeem any and all of the
outstanding debentures at a redemption price equal to 100% of
the aggregate principal amount of the debentures, together with
any accrued and unpaid interest thereon. Since their issuance
and through September 30, 2002, the Company had expected to
redeem the debentures on December 15, 2004, and was
accreting its convertible debt and guaranteed preferred
beneficial interest to the amount expected to be paid, either in
cash or common stock, in satisfaction of the minimum return, at
a rate of return of 14%. In light of the decline in the market
price of the Companys Class A common stock, which
affects the desirability of offering stock in the future to
redeem the preferred securities, management determined that the
Company will not make an optional early redemption of its trust
preferred securities, but will wait until their final redemption
date in December 2007. Consequently, under the applicable terms
of the preferred securities and related contingent appreciation
certificates, the cumulative interest rate is expected to be
18%, an increase of 4% from the 14% cumulative rate, which would
have been payable if the securities were redeemed at the
previously anticipated date of December 2004. The change in the
interest rate from 14% to 18% will result in higher interest
expense and accretion of guaranteed preferred beneficial
interest that will negatively impact the Companys results
of operations for all future periods until these securities are
redeemed. The required quarterly cash payments on the preferred
securities remain unchanged, although the final redemption
amount will be higher. In the event of a change of control, the
Company must either exercise its right to redeem all or offer to
purchase any and all of the outstanding debentures at a price
equal to 110% of the aggregate principal amount of the
debentures, together with any accrued and unpaid interest
thereon.

The financing was recorded at $265.0 million
and required the allocation of fair value to the various
components based on the terms of the private placement
agreement. Crown Media Holdings calculated the guaranteed
preferred beneficial interest portion of the preferred
securities using an internal rate of return analysis (cumulative
present value of expected future cash flows) on the preferred
securities. The carrying value of the guaranteed preferred
beneficial interest as determined on December 17, 2001, was
$197.7 million,

F-27



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

on December 31, 2001, was
$199.0 million, and on December 31, 2002, was
$221.6 million, net of offering costs.

Crown Media Holdings calculated the initial value
of the contingent appreciation certificate portion of the
preferred securities by using Black-Scholes models and by using
a combination of put and call options that would provide the
same future payout as the convertible debt portion. The
resulting value of the contingent appreciation certificates, net
of embedded derivatives, was $43.5 million on
December 17, 2001, $43.7 million as of
December 31, 2001, and $47.9 million as of
December 31, 2002, which has been classified as convertible
debt on the accompanying consolidated balance sheets. The
transaction also resulted in a net derivative liability on
December 17, 2001, of $12.1 million, on
December 31, 2001, of $12.5 million, and on
December 31, 2002, of $762,000.

The following table summarizes the transaction as
at the transaction date, as of December 31, 2001, and as of
December 31, 2002. The summary also reflects the allocation
of transaction costs between the various components of the
financing.

|                                                                               |                                                                                                           |                                                                            |         |              |         |              |         |         |         |   |         |         |         | 
|------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ------- | ------------ | ------- | ------------ | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                               |                                                                                                           | Initial                                                                    |         | As of        |         | As of       
|                                                                               |                                                                                                           | Fair Value                                                                 |         | December 31, |         | December 31,
|                                                                               |                                                                                                           | Allocation                                                                 |         | 2001         |         | 2002        
|                                                                               |                                                                                                           |                                                                            |         |              |         |             
|                                                                               |                                                                                                           |                                                                           
|                                                                               |                                                                                                           | (In thousands)                                                            
|Convertible debt                                                               |                                                                                                           |                                                                            |         |              |         |              |         |         |         |   |         |        
|                                                                               | Value of contingent appreciation certificates                                                             |                                                                            | $       | 93,682       |         |              |         |         |         |   |         |         |        
|                                                                               | Value of embedded derivative                                                                              |                                                                            |         | (50,212      | )       |              |         |         |         |   |         |         |        
|                                                                               |                                                                                                           |                                                                            |         |              |         |              |         |         |         |   |         |        
|                                                                               |                                                                                                           | Total carrying amount of convertible debt(a)(b)                            |         |              | 43,470  |              |         | $       | 43,733  |   |         | $       | 47,916  | 
|                                                                               |                                                                                                           |                                                                            |         |              |         |              |         |         |         |   |         |        
|Derivative liability(c)                                                        |                                                                                                           |                                                                            | 12,083  |              |         | $            | 12,495  |         |         | $ | 762     |        
|                                                                               |                                                                                                           |                                                                            |         |              |         |              |         |         |         |   |         |        
|Allocable offering costs included in debt
    issuance costs(d)                |                                                                                                           |                                                                            | (2,444  | )            |         | $            | (2,427  | )       |         | $ | (2,020  | )      
|                                                                               |                                                                                                           |                                                                            |         |              |         |              |         |         |         |   |         |        
|Guaranteed preferred beneficial interest in Crown
    Media Trusts debentures |                                                                                                           |                                                                            | 209,447 |              |         | $            | 210,699 |         |         | $ | 245,241 |        
|                                                                               | Distribution to holders of guaranteed preferred
    beneficial interest in Crown Media Trusts debentures |                                                                            |         |             |         |              |         |        |         |   |         | (14,730 | )      
|                                                                               | Allocable offering costs(e)                                                                               |                                                                            |         | (11,771      | )       |              |         | (11,659 | )       |   |         | (8,960  | )      
|                                                                               |                                                                                                           |                                                                            |         |              |         |              |         |         |         |   |         |        
|                                                                               |                                                                                                           | Total carrying value of guaranteed preferred
    beneficial interest(b)(f) |         |              | 197,676 |              |         | $       | 199,040 |   |         | $       | 221,551 | 
|                                                                               |                                                                                                           |                                                                            |         |              |         |              |         |         |         |   |         |        
|                                                                               | Net proceeds allocated to securities sold                                                                 |                                                                            | $       | 250,785      |         |              |         |         |         |   |         |         |        
|                                                                               |                                                                                                           |                                                                            |         |              |         |              |         |         |         |   |         |        
|Gross proceeds from private placement                                          |                                                                                                           | $                                                                          | 265,000 |              |         |              |         |         |         |   |         |        
|Offering costs                                                                 |                                                                                                           |                                                                            | (14,215 | )            |         |              |         |         |         |   |         |        
|                                                                               |                                                                                                           |                                                                            |         |              |         |              |         |         |         |   |         |        
|                                                                               | Net proceeds allocated to securities sold                                                                 |                                                                            | $       | 250,785      |         |              |         |         |         |   |         |         |        
|                                                                               |                                                                                                           |                                                                            |         |              |         |              |         |         |         |   |         |        



---



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

F-28



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |  |                                                                                                                                 
|--- |  | --------------------------------------------------------------------------------------------------------------------------------
|(e) |  | Accreting to guaranteed preferred beneficial
    interest over six years.                                                       
|   
|(f) |  | Accreting principal to $219.4 million and
    additional 11.25% interest to meet minimum return requirements
    over six years.



|    |                           
|--- | --------------------------
|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. On December 17, 2001, the Company
paid HC Crown $37.1 million, in satisfaction of the
aggregate balance outstanding as of that date, including accrued
interest, under the notes. The notes were cancelled on
December 17, 2001.

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

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

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

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



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

Hallmark Cards and Hallmark Entertainment entered
into certain agreements in order to induce the bank syndicate to
enter into the Companys credit facility. Hallmark Cards,
Crown Media Holdings and the

F-29



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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

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

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.
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. 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.



| |                                                   
| | --------------------------------------------------
| | 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, 2000, 2001 and 2002,
respectively, $3.8 million, $3.6 million, and
$1.4 million, respectively,

F-30



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

were paid to Hallmark Entertainment. Unreimbursed
costs of $1.8 million and $1.1 million are included in
the item payable to affiliates in the accompanying consolidated
balance sheets as of December 31, 2001 and 2002,
respectively.



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

Hallmark Cards, its subsidiaries and various
affiliates, provide Crown Media Holdings with services that
include payroll, legal, financial, tax and other general
corporate services. This service agreement has a term of three
years, commencing January 1, 2000. Crown Media Holdings
signed a new intercompany services agreement, effective
January 1, 2003, with Hallmark Cards under which Hallmark
Cards has agreed for a term of three years, subject to
cancellation by either party after the first or second year.
Under the new agreement, the Company has agreed to pay Hallmark
Cards $515,000 per year for these services, plus
out-of-pocket expenses and third party fees, payable in arrears
on the last business day of each quarter. Additionally, Hallmark
Cards made a payment on Crown Media Holdings behalf for
certain expenses in the amount of $500,000 during first quarter
2002. For each of the years ended December 31, 2000, 2001
and 2002, Crown Media Holdings had accrued $500,000,
respectively, under the agreement. At December 31, 2001 and
2002, unpaid accrued service fees of $3.1 million and
$5.0 million, respectively, were included in payable to
affiliates in the accompanying consolidated balance sheets.



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

Hallmark Entertainment provides Crown Media
Holdings with services related to the administration,
distribution and other exploitation of the Companys film
assets. This service agreement has a term of three years,
commencing January 1, 2001, with the right of either party
to terminate the agreement after the first year upon
60 days written notice. In consideration for the services
provided by Hallmark Entertainment, Crown Media Holdings is
obligated to pay a service fee of $1.5 million per year,
paid in quarterly installments of $375,000. Crown Media Holdings
paid $1.9 million to Hallmark Entertainment for these
services in April 2002. At December 31, 2001 and 2002,
unpaid accrued service fees of $1.5 million and $375,000,
respectively, were included in payable to affiliates in the
accompanying consolidated balance sheet.



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

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

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

F-31



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

in Crown Media Holdings, and if, at that time,
the remaining term of the program agreement is less than two
years, then the remaining term of the program agreement will be
extended to the date two years after the date on which Hallmark
Entertainment Distribution ceased to own a 35% interest in
Crown Media Holdings.

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

Programming costs related to the Hallmark program
agreements were $36.9 million, $43.9 million, and
$47.3 million, respectively, for the years ended
December 31, 2000, 2001 and 2002. As of December 31,
2001 and 2002, $62.3 million and $68.2 million,
respectively, are included in license fees payable to affiliates
in the accompanying consolidated balance sheets. In fourth
quarter 2002, Crown Media Holdings paid $25.0 million to
Hallmark Entertainment Distribution for license fees. 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 Holdings controls all of
the Companys outstanding shares of Class B common
stock, which, together with the shares of Class A common
stock it owns, represents approximately 91% of the voting power
on all matters submitted to the Companys stockholders.
Each share of Class B common stock is convertible at the
option of the holder into one share of Class A common
stock. Shares of Class B common stock are generally
automatically convertible into Class A common stock upon
sale or other transfer by the selling stockholder. In addition,
Class B common stockholders are entitled to 10 votes per
share as compared to one vote per share of Class A common
stock. With the exception of the voting and conversion rights,
shares of Class A common stock and shares of Class B
common stock are identical.



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

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

F-32



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

received a fairness opinion from its financial
advisor. Additionally, the stockholders of Crown Media Holdings,
other than Hallmark Cards and its affiliates, approved the
transaction at a meeting on July 17, 2001.

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

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



| |                                          
| | -----------------------------------------
| | Hallmark Trademark License
    Agreements

Crown Media Holdings is 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. This agreement was recently extended through
November 30, 2003. Under that agreement, the Company may
use the Hallmark and Hallmark Entertainment trademarks 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, the Company is
not permitted to use the Hallmark name alone or with any other
names.

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 through
November 30, 2003.

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,
which has also been extended through November 30, 2003. The
agreement permits the use of the Hallmark trademarks in the
United States 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.

F-33



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                    
| | -------------------
| | Marketing Agreement

Crown Media United States and Hallmark Cards
entered into an agreement to sponsor the Hallmark Keepsake
Sweepstakes, a national promotion in November and December 2002,
involving a watch-and-win contest, prize give-aways, and six
Hallmark Entertainment original productions. Through
December 31, 2002, the Company incurred $15.1 million
of costs related to this sponsorship.



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

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

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

Pursuant to a February 2001 amendment in
conjunction with our acquisition of the remaining ownership of
Crown Media United States, the Company committed to annual
advances, in the amount of $5.3 million subject to annual
escalations, initially treated as a license fee for certain
existing programming provided by NICC to Crown Media United
States. In addition, Crown Media United States will fund a
portion of the costs of new programming produced by or with
NICC. Crown Media United States will also assist 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, the Company issued
approximately 5.4 million shares of its Class A common
stock with a then market value of $80.1 million as
consideration for entering into a distribution agreement for
carriage of the Hallmark Channel by DirecTV.



|    |             
|--- | ------------
|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.

F-34



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

From May 2000 through December 31, 2002,
Crown Media Holdings was not included in the consolidated
federal income tax return of Hallmark. Crown Media Holdings was
included in certain combined state income tax returns of
Hallmark or Hallmark Entertainment. Consequently, Hallmark
Entertainment and Crown Media Holdings entered into a state tax
sharing agreement. Under the state tax sharing agreement,
Hallmark Entertainment and Crown Media Holdings filed
consolidated, combined or unitary state tax returns, Crown Media
Holdings made tax-sharing payments to (or received 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 were computed based
on Crown Media Holdings income (loss) and other tax items
beginning the day following the May 9, 2000, reorganization.

Crown Media Holdings has 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. Crown Media Holdings had provided a full valuation
allowance on the net deferred tax asset because of uncertainty
regarding its realizability.

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

|          |                 |                          |   |       |       |      |   |        |        |   |   |       |       | 
|--------- | --------------- | ------------------------ | - | ----- | ----- | ---- | - | ------ | ------ | - | - | ----- | ----- | 
|          |                 |                         
|          |                 | Years Ended December 31,
|          |                 |                         
|          |                 | 2000                     |   | 2001  |       | 2002
|          |                 |                          |   |       |       |     
|          |                 |                         
|          |                 | (In thousands)          
|Current:  |                 |                          |   |       |       |      |   |        |        |   |   |      
|          | Federal         |                          | $ |      |       |      | $ |       |        |   | $ |      |      
|          | Foreign         |                          |   | 1,743 |       |      |   | 1,976  |        |   |   | 2,054 |      
|          | State and local |                          |   |      |       |      |   |       |        |   |   |      |      
|          |                 |                          |   |       |       |      |   |        |        |   |   |      
|          |                 | Total current            |   |       | 1,743 |      |   |        | 1,976  |   |   |       | 2,054 | 
|Deferred: |                 |                          |   |       |       |      |   |        |        |   |   |      
|          | Federal         |                          |   |      |       |      |   | (4,655 | )      |   |   |      |      
|          | State and local |                          |   |      |       |      |   | (665   | )      |   |   |      |      
|          |                 |                          |   |       |       |      |   |        |        |   |   |      
|          |                 | Total deferred           |   |       |      |      |   |        | (5,320 | ) |   |       |      | 
|          |                 |                          |   |       |       |      |   |        |        |   |   |      
|          |                 | Total                    |   | $     | 1,743 |      |   | $      | (3,344 | ) |   | $     | 2,054 | 
|          |                 |                          |   |       |       |      |   |        |        |   |   |      

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,
|                                                                                                                                            |                                |                         
|                                                                                                                                            |                                | 2000                     |         | 2001  |  | 2002
|                                                                                                                                            |                                |                          |         |       |  |     
|                                                                                                                                            |                                |                         
|                                                                                                                                            |                                | (In thousands)          
|Taxes computed at 35%                                                                                                                       |                                | $                        | (40,034 | )     |  | $    | (81,612 | )      |   | $ | (108,841 | )    
|Net operating losses not benefiting Crown Media
    Holdings                                                                                |                                |                          | 8,441   |       |  |      |        |        |   |   |         |      
|Goodwill amortization                                                                                                                       |                                |                          |        |       |  |      | 7,027   |        |   |   |         |      
|Other                                                                                                                                       |                                |                          |        |       |  |      |        |        |   |   | 4,451    |      
|Increase in federal valuation allowance,
    exclusive of reduction of $95.3 million in 2001 as a result
    of the transfer of film assets |                                |                          | 31,593  |       |  |      | 69,265  |        |   |   | 104,390  |      
|Additional tax on foreign income                                                                                                            |                                |                          | 1,743   |       |  |      | 1,976   |        |   |   | 2,054    |      
|                                                                                                                                            |                                |                          |         |       |  |      |         |        |   |   |          |      
|                                                                                                                                            | Income tax provision (benefit) |                          | $       | 1,743 |  |      | $       | (3,344 | ) |   | $        | 2,054 | 
|                                                                                                                                            |                                |                          |         |       |  |      |         |        |   |   |          |      

F-35



---



##### 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,            
|                          |                              |                               
|                          |                              | 2001                           |   | 2002   
|                          |                              |                                |   |        
|                          |                              |                               
|                          |                              | (In thousands)                
|Deferred tax assets:      |                              |                                |   |         |         |   |   |         
|                          | Deferred revenue             |                                | $ | 47      |         |   | $ | 227      |         
|                          | Bad debt reserve             |                                |   | 2,987   |         |   |   | 3,020    |         
|                          | Accrued compensation         |                                |   | 2,351   |         |   |   | 3,187    |         
|                          | Net operating loss           |                                |   | 107,023 |         |   |   | 254,089  |         
|                          | Unconsolidated entity losses |                                |   | 2,834   |         |   |   | 1,449    |         
|                          | Other                        |                                |   | 637     |         |   |   | 18,816   |         
|                          | Valuation allowance          |                                |   | (15,985 | )       |   |   | (134,236 | )       
|                          |                              |                                |   |         |         |   |   |         
|                          |                              | Total deferred tax assets      |   |         | 99,894  |   |   |          | 146,552  |  
|Deferred tax liabilities: |                              |                                |   |         |         |   |   |         
|                          | Depreciation                 |                                |   | (385    | )       |   |   | (3,548   | )       
|                          | Film inventory               |                                |   | (99,509 | )       |   |   | (143,004 | )       
|                          | Unconsolidated entity losses |                                |   |        |         |   |   |         |         
|                          | Other                        |                                |   |        |         |   |   |         |         
|                          |                              |                                |   |         |         |   |   |         
|                          |                              | Total deferred tax liabilities |   |         | (99,894 | ) |   |          | (146,552 | )
|                          |                              |                                |   |         |         |   |   |         
|                          |                              | Net deferred taxes             |   | $       |        |   |   | $        |         |  
|                          |                              |                                |   |         |         |   |   |         

As of December 31, 2002, cumulative net tax
operating losses are approximately $635.2 million and
expire in 2020 through 2022.



|    |                              
|--- | -----------------------------
|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. In
accordance with the agreement, a payment of $2.0 million
was made in January 2000, a payment of $1.0 million was
made in February 2001, and a final payment of $1.0 million
was made in February 2002. 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.



|    |                                                          
|--- | ---------------------------------------------------------
|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 accrue 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

F-36



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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.

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, $1.5 million, and
$18,000, respectively, was recognized for the years ended
December 31, 2000, 2001 and 2002. Compensation cost for
stock options issued to employees represented the excess 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

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, 3.3 million shares and
1.8 million shares, respectively, during 2000, 2001 and
2002. 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, 2001, and 2002, and changes during the
years then ended is presented in the table and narrative below

|                           |                   |                |       |                |   |           |   |             |  |   |       |       | 
|-------------------------- | ----------------- | -------------- | ----- | -------------- | - | --------- | - | ----------- |  | - | ----- | ----- | 
|                           |                   |                |       |                |   | Weighted 
|                           |                   |                |       |                |   | Average  
|                           |                   |                |       |                |   | Exercise 
|                           |                   |                |       | Exercise Price |   | Price Per
|                           |                   | Shares         |       | Per Option     |   | 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 |      
|                           |                   |                |       |                |   |           |   |             |  |   |       |      
|                           | Options granted   |                |       | 1,806          |   |           | $ | 9.76-12.50  |  |   | $     | 12.19 | 
|                           | Options exercised |                |       | (182           | ) |           | $ | 8.33-8.94   |  |   | $     | 8.93  | 
|                           | Options canceled  |                |       | (678           | ) |           | $ | 12.50-20.77 |  |   | $     | 15.62 | 
|                           |                   |                |       |                |   |           |   |             |  |   |       |      
|Balance, December 31, 2002 |                   |                | 7,837 |                |   |           |   |             |  | $ | 12.38 |      
|                           |                   |                |       |                |   |           |   |             |  |   |       |      

F-37



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                    |  |                     |       |                  |  |                |     |                  |  |                |       |  |  |  |       |  |  |   |       | 
|------------------- |  | ------------------- | ----- | ---------------- |  | -------------- | --- | ---------------- |  | -------------- | ----- |  |  |  | ----- |  |  | - | ----- | 
|                    |  |                    
|Options Outstanding |  | Options Exercisable
|                    |  |                    
|Range of            |  | Weighted Average    |       | Weighted Average |  |                |     | Weighted Average
|Exercise Prices     |  | Shares              |       | Remaining        |  | Exercise Price |     | Exercisable      |  | Exercise Price
|Per Option          |  | Outstanding         |       | Contractual Life |  | Per Option     |     | Shares           |  | Per Option    
|                    |  |                     |       |                  |  |                |     |                  |  |               
|                    |  | (In thousands)      |       |                  |  |                |     | (In thousands)   |  |               
|$ 6.30-10.50        |  |                     | 2,278 |                  |  |                | 5.0 |                  |  | $              | 8.67  |  |  |  | 2,097 |  |  | $ | 8.64  | 
|$10.51-12.60        |  |                     | 1,851 |                  |  |                | 8.8 |                  |  | $              | 12.10 |  |  |  | 134   |  |  | $ | 11.06 | 
|$12.61-14.70        |  |                     | 2,099 |                  |  |                | 7.4 |                  |  | $              | 13.64 |  |  |  | 973   |  |  | $ | 13.75 | 
|$14.71-21.00        |  |                     | 1,609 |                  |  |                | 7.3 |                  |  | $              | 16.32 |  |  |  | 502   |  |  | $ | 16.28 | 
|                    |  |                     |       |                  |  |                |     |                  |  |                |       |  |  |  |       |  |  |   |       | 
|                    |  |                     | 7,837 |                  |  |                |     |                  |  |                |       |  |  |  | 3,706 |  |  |   |       | 
|                    |  |                     |       |                  |  |                |     |                  |  |                |       |  |  |  |       |  |  |   |       | 

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.

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 2002:
risk-free interest rate of 4.24% for the options with a four
year vesting period; no expected dividend yield; expected lives
of six years; and expected volatility of 35.21%. Expected
volatility was calculated using the average volatilities of
comparable public companies.



|    |              
|--- | -------------
|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.
Crown Media Holdings contributed $557,000 for the year ended
December 31, 2002.

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
$54,000 and $77,000 for the years ended December 31, 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

F-38



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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

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

Information relating to Crown Media
Holdings continuing operations is set forth in the
following table (operating loss is defined as total revenues
less cost of services; selling, general and administrative
expenses; marketing expenses; and amortization of goodwill
(through December 31, 2001) and other intangibles. United
States based administration 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, 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                                        |                           |       |              |  |           |     |              |  |   |        |        |   |  |         | 240.1 |      
|                                  |                                                 |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|                                  |                                                 | Consolidated total assets |       |              |  |           |     |              |  |   |        |        |   |  |         | $     | 530.0 | 
|                                  |                                                 |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|Year ended December 31, 2001:     |                                                 |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|                                  | Domestic                                        |                           | $     | 34.5         |  |           | $   | 5.0          |  |   | $      | (186.0 | ) |  | $       | 258.9 |      
|                                  | International                                   |                           |       | 65.3         |  |           |     |             |  |   |        | (31.8  | ) |  |         | 79.8  |      
|                                  | Film Distribution                               |                           |       | 2.3          |  |           |     |             |  |   |        | (2.9   | ) |  |         | 812.0 |      
|                                  |                                                 |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|                                  |                                                 | $                         | 102.1 |              |  | $         | 5.0 |              |  | $ | (220.7 | )      |   |  | 1,150.7 |      
|                                  |                                                 |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      

F-39



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                  |                           |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |       |         | 
|--------------------------------- | ------------------------- | ------------------------- | ----- | ------------ |  | --------- | --- | ------------ |  | - | ------ | ------ | - |  | ------- | ----- | ------- | 
|                                  |                           | Revenue from              |       | Revenue from |  | Operating |     |             
|                                  |                           | Unrelated                 |       | Related      |  | Income    |     | Identifiable
|                                  |                           | Entities                  |       | Entities     |  | (Loss)    |     | Assets      
|                                  |                           |                           |       |              |  |           |     |             
|                                  |                           |                          
|                                  |                           | (In millions)            
|Assets not allocated to segments: |                           |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|                                  | Cash and cash equivalents |                           |       |              |  |           |     |              |  |   |        |        |   |  |         | 13.9  |        
|                                  | Cash in escrow            |                           |       |              |  |           |     |              |  |   |        |        |   |  |         | 111.6 |        
|                                  | Accounts receivable       |                           |       |              |  |           |     |              |  |   |        |        |   |  |         | 36.2  |        
|                                  | Goodwill                  |                           |       |              |  |           |     |              |  |   |        |        |   |  |         | 314.0 |        
|                                  |                           |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|                                  |                           | Consolidated total assets |       |              |  |           |     |              |  |   |        |        |   |  |         | $     | 1,626.4 | 
|                                  |                           |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|Year ended December 31, 2002:     |                           |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|                                  | Domestic                  |                           | $     | 54.5         |  |           | $   | 5.0          |  |   | $      | (145.9 | ) |  | $       | 274.7 |        
|                                  | International             |                           |       | 77.5         |  |           |     |             |  |   |        | (108.3 | ) |  |         | 72.1  |        
|                                  | Film Distribution         |                           |       | 24.0         |  |           |     |             |  |   |        | (8.7   | ) |  |         | 789.6 |        
|                                  |                           |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|                                  |                           | $                         | 156.0 |              |  | $         | 5.0 |              |  | $ | (262.9 | )      |   |  | 1,136.4 |      
|                                  |                           |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|Assets not allocated to segments: |                           |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|                                  | Cash and cash equivalents |                           |       |              |  |           |     |              |  |   |        |        |   |  |         | 0.3   |        
|                                  | Accounts receivable       |                           |       |              |  |           |     |              |  |   |        |        |   |  |         | 41.6  |        
|                                  | Goodwill                  |                           |       |              |  |           |     |              |  |   |        |        |   |  |         | 314.0 |        
|                                  |                           |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      
|                                  |                           | Consolidated total assets |       |              |  |           |     |              |  |   |        |        |   |  |         | $     | 1,492.3 | 
|                                  |                           |                           |       |              |  |           |     |              |  |   |        |        |   |  |         |      

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

British Sky Broadcasting accounted for 17% of our
consolidated revenues for the year ended December 31, 2002.
No individual pay television distributor accounted for 10% of
our consolidated subscribers for the year ended
December 31, 2002.

F-40



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                                  
|--- | ---------------------------------
|16. | Quarterly Information (Unaudited)

The following tables contain unaudited quarterly
financial data (in thousands, except per share amounts) for the
years ended December 31, 2001 and 2002.

|                                                            |                                           |                      |         |      |         |      |         |       |         |           |         |   |         |   |         |        |         |   |          |        |          |  
|----------------------------------------------------------- | ----------------------------------------- | -------------------- | ------- | ---- | ------- | ---- | ------- | ----- | ------- | --------- | ------- | - | ------- | - | ------- | ------ | ------- | - | -------- | ------ | -------- | -
|                                                            |                                           |                     
|                                                            |                                           | Quarters Ended      
|                                                            |                                           |                     
|2001                                                        |                                           | 3/31(A)              |         | 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                                             |                                           |                      | (14,866 | )    |         |      | (14,950 | )     |         |           | (19,440 | ) |         |   | (18,956 | )      |         |   | (68,212  | )     
|Selling, marketing, general and administrative
    expenses |                                           |                      | (27,799 | )    |         |      | (28,130 | )     |         |           | (28,981 | ) |         |   | (33,886 | )      |         |   | (118,796 | )     
|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 accretion |                      |         |     |         |      |         |      |         |           |         |  |         |   |         | (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    | )
|                                                            |                                           |                      |         |      |         |      |         |       |         |           |         |   |         |   |         |        |         |   |          |       



---



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

|                                                            |                      |                    |         |         |         |      |         |         |         |           |         |         |         |   |         |          |          |   |          |          |          |  
|----------------------------------------------------------- | -------------------- | ------------------ | ------- | ------- | ------- | ---- | ------- | ------- | ------- | --------- | ------- | ------- | ------- | - | ------- | -------- | -------- | - | -------- | -------- | -------- | -
|                                                            |                      |                   
|                                                            |                      | Quarters Ended    
|                                                            |                      |                   
|2002                                                        |                      | 3/31               |         | 6/30    |         | 9/30 |         | 12/31   |         | Full Year
|                                                            |                      |                    |         |         |         |      |         |         |         |          
|Total revenues                                              |                      | $                  | 39,469  |         |         | $    | 39,307  |         |         | $         | 40,133  |         |         | $ | 42,100  |          |          | $ | 161,009  |         
|Programming costs                                           |                      |                    | (23,751 | )       |         |      | (22,235 | )       |         |           | (23,350 | )       |         |   | (68,667 | )        |          |   | (138,003 | )       
|Amortization of library assets                              |                      |                    | (7,248  | )       |         |      | (5,467  | )       |         |           | (7,042  | )       |         |   | (7,278  | )        |          |   | (27,035  | )       
|Operating costs                                             |                      |                    | (18,658 | )       |         |      | (22,756 | )       |         |           | (20,029 | )       |         |   | (48,396 | )        |          |   | (109,839 | )       
|Selling, marketing, general and administrative
    expenses |                      |                    | (28,581 | )       |         |      | (25,404 | )       |         |           | (25,215 | )       |         |   | (69,796 | )        |          |   | (148,996 | )       
|                                                            |                      |                    |         |         |         |      |         |         |         |           |         |         |         |   |         |          |          |   |          |         
|                                                            | Loss from operations |                    |         | (38,769 | )       |      |         | (36,555 | )       |           |         | (35,503 | )       |   |         | (152,037 | )        |   |          | (262,864 | )       
|Guaranteed preferred beneficial accretion                   |                      |                    | (10,602 | )       |         |      | (1,176  | )       |         |           | (2,987  | )       |         |   | (10,743 | )        |          |   | (25,508  | )       
|Interest income (expense) and other, net                    |                      |                    | (6,090  | )       |         |      | (5,673  | )       |         |           | (4,547  | )       |         |   | (6,293  | )        |          |   | (22,603  | )       
|Income tax provision                                        |                      |                    | (549    | )       |         |      | (643    | )       |         |           | (470    | )       |         |   | (392    | )        |          |   | (2,054   | )       
|                                                            |                      |                    |         |         |         |      |         |         |         |           |         |         |         |   |         |          |          |   |          |         
|                                                            |                      | Net loss           |         | $       | (56,010 | )    |         | $       | (44,047 | )         |         | $       | (43,507 | ) |         | $        | (169,465 | ) |          | $        | (313,029 | )
|                                                            |                      |                    |         |         |         |      |         |         |         |           |         |         |         |   |         |          |          |   |          |         
|                                                            |                      | Net loss per share |         | $       | (0.54   | )    |         | $       | (0.42   | )         |         | $       | (0.42   | ) |         | $        | (1.62    | ) |          | $        | (3.00    | )
|                                                            |                      |                    |         |         |         |      |         |         |         |           |         |         |         |   |         |          |          |   |          |         

F-41



---



##### Table of Contents



CROWN MEDIA HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                  
|--- | -----------------
|17. | Subsequent Events

Subsequent to December 31, 2002, Hallmark
Entertainment Holdings, Inc. (Hallmark Entertainment
Holdings, a subsidiary wholly owned indirectly by Hallmark
Cards) contributed 100% of the Crown Media Holdings shares owned
by it to Hallmark Entertainment Investments. Two of Crown Media
Holdings investors, Liberty Crown, Inc.
(Liberty), a subsidiary of Liberty Media and JP
Morgan, also contributed 100% of their Crown Media Holdings
shares to Hallmark Entertainment Investments and VISN,
contributed 10% of its Crown Media Holdings shares to Hallmark
Entertainment Investments, all in return for Hallmark
Entertainment Investments shares. Crown Media Holdings
understands that Hallmark Entertainment Investments intends to
hold the Crown Media Holdings Shares and to evaluate media
investment opportunities in which Crown Media Holdings does not
have an interest. Hallmark Entertainment Holdings, as the more
than 80% owner of Hallmark Entertainment Investments, will have
voting power over all of the Crown Media Holdings shares.

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

F-42



---



##### 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.
    (previously filed as Exhibit 10.2 to our Annual Report on
    Form 10-K filed on March 29, 2002 and incorporated
    herein by reference)                                                                                                                                                             
|        | 10.3  |  |  |              |  | Acknowledgment and Agreement to the Second
    Amended and Restated Stockholders Agreement, dated as of
    March 11, 2003, by Hallmark Entertainment Investments Co.                                                                                                                                                                                                                                                                                                             
|        | 10.4  |  |  |              |  | Acknowledgement to the Second Amended and
    Restated Stockholders Agreement, dated March 11, 2003, by
    JP Morgan Partners (BHCA), L.P.                                                                                                                                                                                                                                                                                                                                       
|        | 10.5  |  |  |              |  | Acknowledgement to the Second Amended and
    Restated Stockholders Agreement, dated March 11, 2003, by
    Liberty Crown, Inc. and Liberty Media Corporation.                                                                                                                                                                                                                                                                                                                    
|        | 10.6  |  |  |              |  | Consent and Waiver to Second Amendment and
    Restated Stockholders Agreement, dated March 11, 2003, by
    DirecTV Enterprises, Inc.                                                                                                                                                                                                                                                                                                                                            
|        | 10.7  |  |  |              |  | Consent and Waiver to Second Amendment and
    Restated Stockholders Agreement, dated March 11, 2003, by
    VISN Management Corp.                                                                                                                                                                                                                                                                                                                                                
|        | 10.8  |  |  |              |  | Consent and Waiver to Second Amendment and
    Restated Stockholders Agreement, dated March 11, 2003, by
    Crown Media Holdings, Inc.                                                                                                                                                                                                                                                                                                                                           
|        | 10.9  |  |  |              |  | Acknowledgment and Agreement to the Second
    Amended and Restated Stockholders Agreement, dated as of
    February 28, 2003, by Hughes Electronics Corporation.                                                                                                                                                                                                                                                                                                                 
|        | 10.10 |  |  |              |  | 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 JPMorgan 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).                                            
|        | 10.11 |  |  |              |  | 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 JPMorgan 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).
|        | 10.12 |  |  |              |  | 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 JPMorgan Chase Bank as
    Administrative Agent and as Issuing Bank. (previously filed as
    Exhibit 10.5 to our Annual Report on Form 10-K, filed
    on March 29, 2002 and incorporated herein by reference).   



---



##### Table of Contents



|        |       |  |  |               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------- | ----- |  |  | ------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |              
|Number  |       |  |  | Exhibit Title
|        |       |  |  |              
|        | 10.13 |  |  |              |  | Amendment No. 3, dated as of March 29,
    2002, to the Credit, Security, Guaranty and Pledge Agreement,
    dated as of August 31, 2001, among Crown Media Holdings,
    Inc. as Borrower, the Guarantors named therein, the Lenders
    named therein and JPMorgan Chase Bank as Administrative Agent
    and as Issuing Bank (previously filed as Exhibit 10.1 to
    our Quarterly Report on Form 10-Q, filed on May 15,
    2002 and incorporated herein by reference).               
|        | 10.14 |  |  |              |  | Amendment No. 4, dated as of May 15,
    2002, to the Credit, Security, Guaranty and Pledge Agreement,
    dated as of August 31, 2001, among Crown Media Holdings,
    Inc. as Borrower, the Guarantors named therein, the Lenders
    named therein and JPMorgan Chase Bank as Administrative Agent
    and as Issuing Bank (previously filed as Exhibit 10.2 to
    our Quarterly Report on Form 10-Q, filed on May 15,
    2002 and incorporated herein by reference).                 
|        | 10.15 |  |  |              |  | Amendment No. 5, dated as of
    February 5, 2003, to the Credit, Security, Guaranty and
    Pledge Agreement, dated as of August 31, 2001, among Crown
    Media Holdings, Inc. as Borrower, the Guarantors named therein,
    the Lenders named therein and JPMorgan Chase Bank as
    Administrative Agent and as Issuing Bank.                                                                                                                                                         
|        | 10.16 |  |  |              |  | 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).                                                 
|        | 10.17 |  |  |              |  | 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 (previously filed as
    Exhibit 10.7 to our Annual Report on Form 10-K, filed
    on March 29, 2002 and incorporated herein by reference)
|        | 10.18 |  |  |              |  | 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).                                                                                                               
|        | 10.19 |  |  |              |  | 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).                                                                                                                                                                       
|        | 10.20 |  |  |              |  | 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).                                                                                                                                                                              
|        | 10.21 |  |  |              |  | 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).                                                                                                                                                                                            
|        | 10.22 |  |  |              |  | 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).                                                                                                                                      
|        | 10.23 |  |  |              |  | 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).                                                          
|        | 10.24 |  |  |              |  | Amended and Restated Program License Agreement,
    dated as of January 1, 2001, by and between Hallmark
    Entertainment Distribution, LLC, and Crown Media International,
    Inc. (previously filed as Exhibit 10.14 to our Annual
    Report on Form 10-K, filed on March 29, 2002 and
    incorporated herein by reference)                                                                                                                                                          



---



##### Table of Contents



|        |       |   |  |               |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|------- | ----- | - |  | ------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |   |  |              
|Number  |       |   |  | Exhibit Title
|        |       |   |  |              
|        | 10.25 |   |  |              |  | 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) (previously filed
    as Exhibit 10.15 to our Annual Report on Form 10-K,
    filed on March 29, 2002 and incorporated herein by
    reference)                                              
|        | 10.26 |   |  |              |  | Amendments, made as of May 15, 2002, to
    those certain Amended and Restated Program License agreements,
    dated as of January 1, 2001, between Hallmark Entertainment
    Distribution, LLC and Crown Media United States, LLC and Crown
    Media International, LLC (previously filed as Exhibit 10.1
    to our Quarterly Report on Form 10-Q filed on
    November 14, 2002 and incorporated herein by reference).
|        | 10.27 |   |  |              |  | 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).                                                                                                     
|        | 10.28 |   |  |              |  | Trademark License Extension Agreement, dated as
    of November 30, 2002, by and between Hallmark Cards,
    Incorporated and Crown Media International, LLC.                                                                                                                                                                                                                                                              
|        | 10.29 |   |  |              |  | 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).                               
|        | 10.30 |   |  |              |  | Trademark License Extension Agreement, dated as
    of November 30, 2002, by and between Hallmark Cards,
    Incorporated and Crown Entertainment Limited.                                                                                                                                                                                                                                                                 
|        | 10.31 |   |  |              |  | 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.)                                                                      
|        | 10.32 |   |  |              |  | Trademark License Extension Agreement, dated as
    of November 30, 2002, by and between Hallmark Licensing,
    Inc. and Crown Media United States, LLC.                                                                                                                                                                                                                                                                  
|        | 10.33 |   |  |              |  | 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).                                      
|        | 10.34 |   |  |              |  | 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.
    (previously filed as Exhibit 10.20 to our Annual Report on
    Form 10-K, filed on March 29, 2002 and incorporated
    herein by reference)                                                                                                    
|        | 10.35 |   |  |              |  | 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).                                                                                                                  
|        | 10.36 |   |  |              |  | Amendment to the Amended and Restated Company
    Agreement of Odyssey Holdings, LLC, dated March 15, 2001
    (previously filed as Exhibit 10.22 to our Annual Report on
    Form 10-K, filed on March 29, 2002 and incorporated
    herein by reference)                                                                                                                                                                 
|        | 10.37 |   |  |              |  | 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.)                                                                                                                       
|        | 10.38 |   |  |              |  | Intercompany Services Agreement, made as of
    December 23, 2002, by and between Hallmark Cards,
    Incorporated and Crown Media Holdings, Inc.                                                                                                                                                                                                                                                                          
|        | 10.39 | * |  |              |  | 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).                                                                                                                                                                                             



---



##### Table of Contents



|        |       |  |  |               |  |                                                                                                                                                                                                                                                                                                                                                                                                       
|------- | ----- |  |  | ------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |              
|Number  |       |  |  | Exhibit Title
|        |       |  |  |              
|        | 10.40 |  |  |              |  | 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).                                                                 
|        | 10.41 |  |  |              |  | 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).                                                                                                                  
|        | 10.42 |  |  |              |  | 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. (previously
    filed as Exhibit 10.28 to our Annual Report on
    Form 10-K, filed on March 29, 2002 and incorporated
    herein by reference)                        
|        | 10.43 |  |  |              |  | 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. (previously filed as Exhibit 10.29 to our Annual
    Report on Form 10-K, filed on March 29, 2002 and
    incorporated herein by reference)               
|        | 10.44 |  |  |              |  | Extension Agreement, dated as of March 1,
    2002, by and between Crown Media Holdings, Inc., Crown Media
    Distribution, LLC and Hallmark Entertainment Distribution, LLC.                                                                                                                                                                                                                        
|        | 10.45 |  |  |              |  | Federal Income Tax Sharing Agreement, dated
    March 11, 2003, by and between Hallmark Cards, Incorporated
    and Crown Media Holdings, Inc.                                                                                                                                                                                                                                                        
|        | 10.46 |  |  |              |  | 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).                                                                                
|        | 10.47 |  |  |              |  | 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).                            
|        | 10.48 |  |  |              |  | 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).                              
|        | 10.49 |  |  |              |  | 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).                                                                                                                        
|        | 10.50 |  |  |              |  | 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).                       
|        | 10.51 |  |  |              |  | 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).  
|        | 10.52 |  |  |              |  | 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).
|        | 10.53 |  |  |              |  | 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).                             



---



##### Table of Contents



|        |       |   |  |               |  |                                                                                                                                                                                                                                                                                                                                                         
|------- | ----- | - |  | ------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |   |  |              
|Number  |       |   |  | Exhibit Title
|        |       |   |  |              
|        | 10.54 |   |  |              |  | 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).            
|        | 10.55 |   |  |              |  | Fifth Amendment to Lease, dated as of
    February 12, 2002, by and between High Pointe 1
    Development Group LLC and Crown Media International, Inc.
    (previously filed as Exhibit 10.39 to our Annual Report on
    Form 10-K, filed on March 29, 2002 and incorporated
    herein by reference)                                                 
|        | 10.56 |   |  |              |  | 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).                              
|        | 10.57 | * |  |              |  | 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).                                                                                       
|        | 10.58 | * |  |              |  | 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).                                                                                                
|        | 10.59 | * |  |              |  | 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).                                                                                  
|        | 10.60 | * |  |              |  | Employment Agreement, dated as of January 1,
    2001, by and between Crown Media Holdings, Inc. and William
    Aliber (previously filed as Exhibit 10.44 to our Annual
    Report on Form 10-K, filed on March 29, 2002 and
    incorporated herein by reference).                                                                                    
|        | 10.61 | * |  |              |  | 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 (previously filed as Exhibit 10.45 to our
    Annual Report on Form 10-K, filed on March 29, 2002
    and incorporated herein by reference).                               
|        | 10.62 | * |  |              |  | Employment Agreement, dated as of
    September 25, 2001, by and between Crown Media United
    States, LLC and Lana Corbi (previously filed as
    Exhibit 10.46 to our Annual Report on Form 10-K, filed
    on March 29, 2002 and incorporated herein by reference).                                                                                 
|        | 10.63 | * |  |              |  | Severance Agreement, dated December 26,
    2002, by and between Lana Corbi and Crown Media United States,
    LLC.                                                                                                                                                                                                                                     
|        | 10.64 | * |  |              |  | Employment Agreement, dated as of
    December 20, 2001, by and between Crown Media
    International, Inc. and Russel H. Givens, Jr. (previously
    filed as Exhibit 10.47 to our Annual Report on
    Form 10-K, filed on March 29, 2002 and incorporated
    herein by reference).                                                                  
|        | 10.65 | * |  |              |  | 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).
|        | 10.66 |   |  |              |  | $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).                                                                                
|        | 10.67 |   |  |              |  | $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).     
|        | 10.68 |   |  |              |  | $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. (previously filed as Exhibit 10.51 to our
    Annual Report on Form 10-K, filed on March 29, 2002
    and incorporated herein by reference).                     



---



##### Table of Contents



|        |       |  |  |               |  |                                                                                                                                                                                                                                                         
|------- | ----- |  |  | ------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |              
|Number  |       |  |  | Exhibit Title
|        |       |  |  |              
|        | 10.69 |  |  |              |  | Reduction Certificate to $150,000,000 Irrevocable
    Standby Letter of Credit, dated December 21, 2001
    (previously filed as Exhibit 10.52 to our Annual Report on
    Form 10-K, filed on March 29, 2002 and incorporated
    herein by reference).
|        | 21.1  |  |  |              |  | List of our Subsidiaries.                                                                                                                                                                                                                               
|        | 23.1  |  |  |              |  | Consent of KPMG LLP.                                                                                                                                                                                                                                    
|        | 99.1  |  |  |              |  | Certification of 10-K Report.                                                                                                                                                                                                                           



---



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