##### Table of Contents



UNITED STATES
    SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
    20549
  Form 10-Q
   þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended
    September 30, 2006ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          
    to   Commission File Number
    000-51205
  DISCOVERY HOLDING
    COMPANY
 (Exact name of Registrant as
    specified in its charter)
  State of Delaware

20-2471174(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer
    Identification No.)12300 Liberty
    BoulevardEnglewood, Colorado

80112(Address of principal executive
    offices)

(Zip Code)   Registrants telephone number, including area code:
 (720) 875-4000
   þ o
  Rule 12b-2
 o o þ
  Rule 12b-2 o þ




---



TABLE OF CONTENTS  Condensed Consolidated Balance Sheets (unaudited)Condensed Consolidated Statements of Operations and Comprehensive Earnings (Loss) (unaudited)Condensed Consolidated Statements of Cash Flows (unaudited)Condensed Consolidated Statement of Stockholders EquityNotes to Condensed Consolidated Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures about Market RiskItem 4. Controls and ProceduresPART II  OTHER INFORMATIONItem 1. Legal ProceedingsItem 6. ExhibitsSIGNATURESEXHIBIT INDEXRule 13a-14(a)/15d-14(a) CertificationRule 13a-14(a)/15d-14(a) CertificationRule 13a-14(a)/15d-14(a) CertificationSection 1350 Certification    Table of Contents   DISCOVERY
    HOLDING COMPANY
  Condensed Consolidated Balance Sheets
 (unaudited)
  September 30,


December 31,2006


2005amounts in thousandsASSETSCurrent assets:Cash and cash equivalents

$
151,848



250,352Trade receivables, net


159,654



134,615Prepaid expenses


13,779



10,986Other current assets


5,571



4,433Total current assets


330,852



400,386Investments in marketable
    securities


51,052



Investment in Discovery
    Communications, Inc. (Discovery or DCI)
    (note 8)


3,109,736



3,018,622Property, plant, and equipment, net


270,838



256,245Goodwill (note 7)


2,074,132



2,133,518Other assets, net


18,332



10,465Total assets

$
5,854,942



5,819,236LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
39,733



26,854Accrued payroll and related
    liabilities


30,706



21,651Other accrued liabilities


27,042



23,949Deferred revenue


28,031



17,491Total current liabilities


125,512



89,945Deferred income tax liabilities


1,168,116



1,131,505Other liabilities


21,180



22,361Total liabilities


1,314,808



1,243,811Commitments and contingencies
    (note 9)Stockholders equity:Preferred stock, $.01 par
    value. Authorized 50,000,000 shares; no shares issued






Series A common stock,
    $.01 par value. Authorized 600,000,000 shares; issued
    and outstanding 268,125,377 shares at September 30,
    2006 and 268,097,442 shares at December 31, 2005


2,681



2,681Series B common stock,
    $.01 par value. Authorized 50,000,000 shares; issued
    and outstanding 12,075,056 shares at September 30,
    2006 and 12,106,093 shares at December 31, 2005


121



121Series C common stock,
    $.01 par value. Authorized 600,000,000 shares; no
    shares issued






Additional paid-in capital


5,713,492



5,712,304Accumulated deficit


(1,189,105
)


(1,137,821
)Accumulated other comprehensive
    earnings (loss)


12,945



(1,860
)Total stockholders equity


4,540,134



4,575,425Total liabilities and
    stockholders equity

$
5,854,942



5,819,236    I-1




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##### Table of Contents



DISCOVERY
    HOLDING COMPANY
  Condensed Consolidated Statements of Operations and
    Comprehensive Earnings (Loss)
 (unaudited)
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005amounts in thousands, except per share amountsNet revenue

$
169,876



167,934



489,233



520,243Operating expenses:Cost of services


111,503



109,323



318,725



335,767Selling, general, and
    administrative, including stock-based compensation (note 3)


42,652



41,834



131,607



132,679Restructuring and other charges


3,633



296



3,963



417Depreciation and amortization


16,036



17,884



47,995



54,888Impairment of goodwill
    (note 7)


93,402







93,402



267,226



169,337



595,692



523,751Operating loss


(97,350
)


(1,403
)


(106,459
)


(3,508
)Other income:Share of earnings of Discovery
    (note 8)


32,051



33,233



83,569



71,443Other, net


2,581



1,680



7,054



1,69734,632



34,913



90,623



73,140Earnings (loss) before income taxes


(62,718
)


33,510



(15,836
)


69,632Income tax expense


(13,915
)


(32,321
)


(35,448
)


(47,591
)Net earnings (loss)


(76,633
)


1,189



(51,284
)


22,041Other comprehensive earnings
    (loss), net of taxes:Foreign currency translation
    adjustments


4,873



(2,714
)


13,961



(10,736
)Unrealized holding gains (losses)
    arising during the period


160



(399
)


844



212Other comprehensive earnings (loss)


5,033



(3,113
)


14,805



(10,524
)Comprehensive earnings (loss)

$
(71,600
)


(1,924
)


(36,479
)


11,517Basic and diluted earnings (loss)
    per common share (note 4)

$
(.27
)






(.18
)


.08    I-2




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##### Table of Contents



DISCOVERY
    HOLDING COMPANY
  Condensed Consolidated Statements of Cash Flows
 (unaudited)
  Nine Months EndedSeptember 30,2006


2005amounts in thousands (note 5)Cash flows from operating
    activities:Net earnings (loss)

$
(51,284
)


22,041Adjustments to reconcile net
    earnings (loss) to net cash provided by operating activities:Depreciation and amortization


47,995



54,888Stock-based compensation


1,200



3,743Payments for stock-based
    compensation






(2,139
)Impairment of goodwill


93,402



Share of earnings of Discovery


(83,569
)


(71,443
)Deferred income tax expense


33,649



46,669Other non-cash charges, net


135



323Changes in assets and liabilities,
    net of acquisitions:Trade receivables


(21,875
)


2,600Prepaid expenses and other current
    assets


(3,730
)


7,566Payables and other liabilities


33,213



(2,412
)Net cash provided by operating
    activities


49,136



61,836Cash flows from investing
    activities:Capital expenditures


(51,220
)


(74,509
)Net purchases of marketable
    securities


(51,052
)


Cash paid for acquisitions, net of
    cash acquired


(46,793
)


Other investing activities, net


1,431



12,498Net cash used in investing
    activities


(147,634
)


(62,011
)Cash flows from financing
    activities:Net cash transfers from Liberty
    Media Corporation






206,044Other financing activities, net


(6
)


(7
)Net cash provided (used) by
    financing activities


(6
)


206,037Net increase (decrease) in cash
    and cash equivalents


(98,504
)


205,862Cash and cash equivalents at
    beginning of period


250,352



21,641Cash and cash equivalents at end
    of period

$
151,848



227,503    I-3




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##### Table of Contents



DISCOVERY
    HOLDING COMPANY
  Condensed Consolidated Statement of Stockholders
    Equity
 Nine months ended September 30, 2006
 (unaudited)
  AccumulatedAdditional





Other


TotalPreferred


Common Stock


Paid-in


Accumulated


Comprehensive


StockholdersStock


Series A


Series B


Series C


Capital


Deficit


Earnings (loss)


Equityamounts in thousandsBalance at January 1, 2006






2,681



121







5,712,304



(1,137,821
)


(1,860
)


4,575,425Net loss






















(51,284
)






(51,284
)Other comprehensive earnings


























14,805



14,805Stock compensation


















1,188











1,188Balance at September 30, 2006

$




2,681



121







5,713,492



(1,189,105
)


12,945



4,540,134    I-4




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##### Table of Contents



DISCOVERY
    HOLDING COMPANY
  Notes to Condensed Consolidated Financial Statements
 September 30, 2006
 (unaudited)
  (1)  Basis
    of Presentation
          Form 10-K
      (2)  Spin
    Off Transaction
   I-5




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##### Table of Contents



DISCOVERY
    HOLDING COMPANY
  Notes to
    Condensed Consolidated Financial
    Statements  (Continued)
        out-of-pocket
    (3)  Stock-Based
    Compensation
    Share-Based Payments Accounting for Stock-Based
    Compensation Accounting for Stock Issued to Employees
 I-6




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##### Table of Contents



DISCOVERY
    HOLDING COMPANY
  Notes to
    Condensed Consolidated Financial
    Statements  (Continued)
            Weighted





WeightedAverage





AverageDHC


Exercise


DHC


ExerciseSeries A


Price


Series B


PriceOutstanding


1,966,396


$
15.42



2,996,525


$
18.87Exercisable


1,449,886


$
16.15



2,876,465


$
18.99     intrinsic-value-based
 I-7




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##### Table of Contents



DISCOVERY
    HOLDING COMPANY
  Notes to
    Condensed Consolidated Financial
    Statements  (Continued)
  fair-value-based
  Three Months


Nine MonthsEnded


EndedSeptember 30,


September 30,2005


2005amounts in thousands, except per share amountsNet earnings, as reported

$
1,189



22,041Add:Stock-based employee compensation
    expense included in reported net earnings, net of taxes


119



2,222Deduct:Stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of taxes


(1,574
)


(8,890
)Pro forma net earnings (loss)

$
(266
)


15,373Pro forma basic and diluted
    earnings per share:As reported

$




.08Pro forma for fair value stock
    compensation

$




.05   (4)  Earnings
    Per Common Share
    (5)  Supplemental
    Disclosure of Cash Flow Information
  Nine Months EndedSeptember 30,2006


2005amounts in thousandsCash paid for acquisitions:Fair value of assets acquired

$
48,264



Net liabilities assumed


(1,471
)


Cash paid for acquisitions, net of
    cash acquired

$
46,793



   (6)  Acquisition
   I-8




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##### Table of Contents



DISCOVERY
    HOLDING COMPANY
  Notes to
    Condensed Consolidated Financial
    Statements  (Continued)
      (7)  Goodwill
    September 30,


December 31,2006


2005amounts in thousandsGoodwillCreative Services group

$
106,599



106,599Media Management Services group






93,402Network Services group


196,533



162,517Discovery


1,771,000



1,771,000Total goodwill

$
2,074,132



2,133,518         (8)  Investment
    in Discovery
   I-9




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##### Table of Contents



DISCOVERY
    HOLDING COMPANY
  Notes to
    Condensed Consolidated Financial
    Statements  (Continued)
      Consolidated
    Balance Sheets
  September 30,


December 31,2006


2005amounts in thousandsCash and cash equivalents

$
52,270



34,491Other current assets


911,974



796,878Property and equipment, net


397,409



397,578Goodwill and intangible assets


445,024



397,927Programming rights, long term


1,262,535



1,175,988Other assets


276,341



371,758Total assets

$
3,345,553



3,174,620Current liabilities

$
649,668



692,465Long term debt


2,639,146



2,590,440Other liabilities


167,619



101,571Mandatorily redeemable equity in
    subsidiaries


189,248



272,502Stockholders deficit


(300,128
)


(482,358
)Total liabilities and
    stockholders deficit

$
3,345,553



3,174,620   Consolidated
    Statements of Operations
  Nine Months EndedSeptember 30,2006


2005amounts in thousandsRevenue

$
2,114,544



1,900,549Cost of revenue


(744,063
)


(659,861
)Selling, general and administrative


(842,575
)


(737,843
)Equity-based compensation


(10,561
)


(18,786
)Depreciation and amortization


(95,051
)


(90,579
)Operating income


422,294



393,480Interest expense


(149,806
)


(130,212
)Other income, net


21,261



9,388Income tax expense


(126,610
)


(129,770
)Net earnings

$
167,139



142,886   (9)  Commitments
    and Contingencies
     I-10




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##### Table of Contents



DISCOVERY
    HOLDING COMPANY
  Notes to
    Condensed Consolidated Financial
    Statements  (Continued)
  (10)  Related
    Party Transactions
      (11)  Information
    About Operating Segments
      pay-per-view
     I-11




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##### Table of Contents



DISCOVERY
    HOLDING COMPANY
  Notes to
    Condensed Consolidated Financial
    Statements  (Continued)
      Consolidated Reportable SegmentsMediaCreative


Management


Network








EquityServices


Services


Services


Corporate


Consolidated


Affiliate-group


group


group(1)


and other


Total


Discoveryamounts in thousandsNine months ended
    September 30, 2006Revenue from external customers

$
224,482



80,656



184,095







489,233



2,114,544Operating cash flow (deficit)

$
35,812



710



36,364



(32,785
)


40,101



527,906Capital expenditures

$
11,949



7,845



28,930



2,496



51,220



40,109Total assets

$
311,427



94,953



387,250



5,061,312



5,854,942



3,345,553Nine months ended
    September 30, 2005Revenue from external customers

$
225,008



87,778



207,457







520,243



1,900,549Operating cash flow (deficit)

$
40,363



9,739



41,101



(35,663
)


55,540



502,845Capital expenditures

$
19,678



19,605



31,440



3,786



74,509



77,609     (1)
    
    Included in Network Services group revenue is broadcast services
    revenue of $117,478,000 and $110,436,000 and systems integration
    revenue of $66,617,000 and $97,021,000 for the nine months ended
    September 30, 2006 and 2005, respectively.  Consolidated Reportable SegmentsMediaCreative


Management


Network








EquityServices


Services


Services


Corporate


Consolidated


Affiliate-group


group


group(1)


and other


Total


Discoveryamounts in thousandsThree months ended
    September 30, 2006Revenue from external customers

$
74,119



27,950



67,807







169,876



721,937Operating cash flow (deficit)

$
10,780



(1,099
)


16,046



(9,791
)


15,936



192,433Capital expenditures

$
3,596



3,744



10,274



1,206



18,820



14,334Three months ended
    September 30, 2005Revenue from external customers

$
73,215



27,730



66,989







167,934



639,182Operating cash flow (deficit)

$
12,483



1,291



14,327



(11,198
)


16,903



170,580Capital expenditures

$
9,481



7,728



4,990



1,157



23,356



16,980  I-12




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##### Table of Contents



DISCOVERY
    HOLDING COMPANY
  Notes to
    Condensed Consolidated Financial
    Statements  (Continued)
    (1)
    
    Included in Network Services group revenue is broadcast services
    revenue of $40,676,000 and $38,781,000 and systems integration
    revenue of $27,131,000 and $28,208,000 for the three months
    ended September 30, 2006 and 2005, respectively.    Three Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005amounts in thousandsSegment operating cash flow

$
15,936



16,903



40,101



55,540Stock-based compensation


(215
)


(126
)


(1,200
)


(3,743
)Depreciation and amortization


(16,036
)


(17,884
)


(47,995
)


(54,888
)Impairment of goodwill


(93,402
)






(93,402
)


Share of earnings of Discovery


32,051



33,233



83,569



71,443Other, net


(1,052
)


1,384



3,091



1,280Earnings (loss) before income taxes

$
(62,718
)


33,510



(15,836
)


69,632     Nine Months EndedSeptember 30,2006


2005amounts in thousandsRevenueUnited States

$
373,697



392,562United Kingdom


98,976



113,537Other countries


16,560



14,144$
489,233



520,243  I-13




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results Of
    Operations  Form 10-Q
  
    general economic and business conditions and industry trends
    including the timing of, and spending on, feature film and
    television production;
    spending on domestic and foreign television advertising and
    spending on domestic and foreign first-run and existing content
    libraries;
    the regulatory and competitive environment of the industries in
    which we, and the entities in which we have interests, operate;
    continued consolidation of the broadband distribution and movie
    studio industries;
    fluctuations in foreign currency exchange rates and political
    unrest in international markets;
    uncertainties inherent in the development and integration of new
    business lines, acquired businesses and business strategies;
    uncertainties associated with product and service development
    and market acceptance, including the development and provision
    of programming for new television and telecommunications
    technologies;
    changes in distribution and viewing of television programming,
    including the expanded deployment of personal video recorders,
    video on demand and IP television and their impact on television
    advertising revenue;
    rapid technological changes;
    future financial performance, including availability, terms and
    deployment of capital;
    the ability of suppliers and vendors to deliver products,
    equipment, software and services;
    the outcome of any pending or threatened litigation;
    availability of qualified personnel;
    the possibility of an industry-wide strike or other job action
    by or affecting a major entertainment industry union;
    changes in, or failure or inability to comply with, government
    regulations, including, without limitation, regulations of the
    Federal Communications Commission, and adverse outcomes from
    regulatory proceedings;
    changes in the nature of key strategic relationships with
    partners and joint venturers;
    competitor responses to our products and services, and the
    products and services of the entities in which we have
    interests; and
    threatened terrorists attacks and ongoing military action in the
    Middle East and other parts of the world.     I-14




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##### Table of Contents



Form 10-K




Overview












and/or




Day-to-day








Acquisition






I-15



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##### Table of Contents



Operating
    Cash Flow








Results
    of Operations










I-16



---



##### Table of Contents



Three Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005amounts in thousandsSegment RevenueCreative Services group

$
74,119



73,215



224,482



225,008Media Management Services group


27,950



27,730



80,656



87,778Network Services group


67,807



66,989



184,095



207,457Corporate and other














$
169,876



167,934



489,233



520,243Segment Operating Cash FlowCreative Services group

$
10,780



12,483



35,812



40,363Media Management Services group


(1,099
)


1,291



710



9,739Network Services group


16,046



14,327



36,364



41,101Corporate and other


(9,791
)


(11,198
)


(32,785
)


(35,663
)$
15,936



16,903



40,101



55,540   Revenue.
      Cost of Services.
 I-17




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##### Table of Contents



Selling, General and Administrative.
    Restructuring Charges.
  Depreciation and Amortization.
  Stock-Based Compensation. in-the-money 5-year
      Impairment of Goodwill.
 I-18




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##### Table of Contents



Share of Earnings of Discovery.
    Income Taxes.
  Net Earnings.
  Liquidity
    and Capital Resources
      Discovery
   I-19




---



##### Table of Contents















Consolidated
    Results of Discovery




|                                                         |  |                      |           |   |      |  |           |  
|-------------------------------------------------------- |  | -------------------- | --------- | - | ---- |  | --------- | -
|                                                         |  | Nine Months Ended    |          
|                                                         |  | September 30,        |          
|                                                         |  | 2006                 |           |   | 2005 | 
|                                                         |  | amounts in thousands |          
|                                                        
|Revenue:                                                 |  |                      |           |   |      |  |           |  
|Advertising                                              |  | $                    | 887,627   |   |      |  | 875,565   |  
|Distribution                                             |  |                      | 1,063,138 |   |      |  | 879,428   |  
|Other                                                    |  |                      | 163,779   |   |      |  | 145,556   |  
|                                                         |  |                      |           |   |      |  |           |  
|Total revenue                                            |  |                      | 2,114,544 |   |      |  | 1,900,549 |  
|                                                         |  |                      |           |   |      |  |           |  
|Expenses:                                                |  |                      |           |   |      |  |           |  
|Cost of revenue                                          |  |                      | (744,063  | ) |      |  | (659,861  | )
|Selling, general and
    administrative (SG&A) expense |  |                      | (842,575  | ) |      |  | (737,843  | )
|                                                         |  |                      |           |   |      |  |           |  
|Operating cash flow                                      |  |                      | 527,906   |   |      |  | 502,845   |  
|Expenses arising from long-term
    incentive plans      |  |                      | (10,561   | ) |      |  | (18,786   | )
|Depreciation and amortization                            |  |                      | (95,051   | ) |      |  | (90,579   | )
|                                                         |  |                      |           |   |      |  |           |  
|Operating income                                         |  |                      | 422,294   |   |      |  | 393,480   |  
|Other income (expense):                                  |  |                      |           |   |      |  |           |  
|Interest expense, net                                    |  |                      | (149,806  | ) |      |  | (130,212  | )
|Unrealized gains from derivative
    instruments, net    |  |                      | 11,562    |   |      |  | 16,018    |  
|Minority interests in consolidated
    subsidiaries      |  |                      | 3,077     |   |      |  | (23,754   | )
|Other                                                    |  |                      | 6,622     |   |      |  | 17,124    |  
|                                                         |  |                      |           |   |      |  |           |  
|Earnings before income taxes                             |  |                      | 293,749   |   |      |  | 272,656   |  
|Income tax expense                                       |  |                      | (126,610  | ) |      |  | (129,770  | )
|                                                         |  |                      |           |   |      |  |           |  
|Net earnings                                             |  | $                    | 167,139   |   |      |  | 142,886   |  
|                                                         |  |                      |           |   |      |  |           |  



I-20



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##### Table of Contents



Business
    Segment Results of Discovery
  Nine Months EndedSeptember 30,2006


2005amounts in thousandsRevenue:U.S. networks

$
1,409,671



1,299,389International networks


623,148



520,040Discovery commerce, education and
    other


81,725



81,120Total revenue

$
2,114,544



1,900,549Operating Cash Flow:U.S. networks

$
545,365



494,583International networks


92,694



73,062Discovery commerce, education and
    other


(110,153
)


(64,800
)Total operating cash flow

$
527,906



502,845     Note:
  Revenue.
        Cost of Revenue.
 I-21




---



##### Table of Contents



SG&A Expenses. Cosmeo.
  Expenses Arising from Long-term Incentive
    Plans.
  Depreciation and Amortization.
  Other
    Income and Expense
  Interest Expense.
  Unrealized Gains from Derivative Instruments,
    net.
  Minority Interests in Consolidated
    Subsidiaries.
  Other.
 I-22




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##### Table of Contents



Income Taxes.
  Liquidity
    and Capital Resources
               
  Item 3.
    Quantitative
    and Qualitative Disclosures about Market Risk  Foreign
    Currency Risk
   I-23




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##### Table of Contents



Item 4.
    Controls
    and Procedures  Rules 13a-15 15d-15,
   I-24




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##### Table of Contents



DISCOVERY
    HOLDING COMPANY
 
  PART II 
    OTHER INFORMATION
 
  Item 1.
    Legal
    Proceedings  Form 10-Q Form 10-Q Form 10-K
 
  Item 6.
    Exhibits  (a)
    Exhibits  31
.1

Rule 13a-14(a)/15d-14(a)
    Certification.31
.2

Rule 13a-14(a)/15d-14(a)
    Certification.31
.3

Rule 13a-14(a)/15d-14(a)
    Certification.32


Section 1350 Certification  II-1




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##### Table of Contents



SIGNATURES
    DISCOVERY HOLDING COMPANYDate: November 13, 2006

By:

/s/  Charles
    Y. TanabeCharles
    Y. Tanabe
    Senior Vice President and
    General CounselDate: November 13, 2006

By:

/s/  David
    J.A. FlowersDavid
    J.A. Flowers
    Senior Vice President and Treasurer
    (Principal Financial Officer)Date: November 13, 2006

By:

/s/  Christopher
    W. SheanChristopher
    W. Shean
    Senior Vice President and Controller
    (Principal Accounting Officer) II-2




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##### Table of Contents



EXHIBIT INDEX
  Regulation S-K):
  31
.1

Rule 13a-14(a)/15d-14(a)
    Certification.31
.2

Rule 13a-14(a)/15d-14(a)
    Certification.31
.3

Rule 13a-14(a)/15d-14(a)
    Certification.32


Section 1350 Certification