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10-Q




|      |                                                                                                  
|----- | -------------------------------------------------------------------------------------------------
|[ X ] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES 
     EXCHANGE ACT OF 1934
|      | For the quarterly period ended June 30, 2006                                                     





|      |                                                                                                   
|----- | --------------------------------------------------------------------------------------------------
|[   ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES 
     EXCHANGE ACT OF 1934
|      | For the transition period
    from                          to                                    










|                                                |  |                                     
|----------------------------------------------- |  | ------------------------------------
|State of Delaware                               |  | 20-2471174                          
|                                                |  |                                     
|(State or other jurisdiction of                 |  | (I.R.S. Employer Identification No.)
|incorporation or organization)                  |  |                                     
|                                               
|12300 Liberty Boulevard
    Englewood, Colorado |  | 80112                               
|                                                |  |                                     
|(Address of principal executive offices)        |  | (Zip Code)                          



X


12b-2   X


12b-2  X










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TABLE OF CONTENTS



|                                                                                                                 |                                                                                               |  |  |  |  |  |  | 
|---------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|DISCOVERY HOLDING COMPANY Condensed Consolidated Balance Sheets (unaudited)                                     
|DISCOVERY HOLDING COMPANY Condensed Consolidated Statements of Operations and Comprehensive Earnings (unaudited)
|DISCOVERY HOLDING COMPANY Condensed Consolidated Statements of Cash Flows (unaudited)                           
|Condensed Consolidated Statement of Stockholders Equity                                                        
|Six months ended June 30, 2006                                                                                  
|                                                                                                                 | Item 2. Managements Discussion and Analysis of Financial Condition and Results Of Operations
|                                                                                                                 | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|                                                                                                                 | Item 4. Controls and Procedures                                                              
|PART II - OTHER INFORMATION                                                                                     
|                                                                                                                 | Item 1. Legal Proceedings                                                                    
|                                                                                                                 | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                                                                                                 | Item 6. Exhibits                                                                             
|SIGNATURES                                                                                                      
|EXHIBIT INDEX                                                                                                   
|Rule 13a-14(a)/15d-14(a) Certification                                                                          
|Rule 13a-14(a)/15d-14(a) Certification                                                                          
|Rule 13a-14(a)/15d-14(a) Certification                                                                          
|Section 1350 Certification                                                                                      



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|                                       |                                                                                                                                                                                          |                                            |           |            |              |  |           |            |           | 
|-------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ---------- | ------------ |  | --------- | ---------- | --------- | 
|                                       |                                                                                                                                                                                          | June 30,                                   |           |            | December 31, | 
|                                       |                                                                                                                                                                                          | 2006                                       |           |            | 2005         | 
|                                       |                                                                                                                                                                                          |                                            |           |            |              | 
|                                       |                                                                                                                                                                                          | amounts in thousands                       |          
|Assets                                 |                                                                                                                                                                                          |                                            |           |            |              |  |           |           
|Current assets:                        |                                                                                                                                                                                          |                                            |           |            |              |  |           |           
|                                       | Cash and cash equivalents                                                                                                                                                                |                                            | $         | 152,793    |              |  |           | 250,352    |          
|                                       | Trade receivables, net                                                                                                                                                                   |                                            |           | 137,750    |              |  |           | 134,615    |          
|                                       | Prepaid expenses                                                                                                                                                                         |                                            |           | 10,787     |              |  |           | 10,986     |          
|                                       | Other current assets                                                                                                                                                                     |                                            |           | 5,148      |              |  |           | 4,433      |          
|                                       |                                                                                                                                                                                          |                                            |           |            |              | 
|                                       |                                                                                                                                                                                          | Total current assets                       |           |            | 306,478      |  |           |            | 400,386   | 
|                                      
|                                       | Investments in marketable securities                                                                                                                                                     |                                            |           | 50,661     |              |  |           |           |          
|                                       | Investment in Discovery Communications, Inc.
    (Discovery or DCI) (note 8)                                                                                                         |                                            |           | 3,076,720  |              |  |           | 3,018,622  |          
|                                       | Property, plant, and equipment, net                                                                                                                                                      |                                            |           | 264,706    |              |  |           | 256,245    |          
|                                       | Goodwill (note 7)                                                                                                                                                                        |                                            |           | 2,166,709  |              |  |           | 2,133,518  |          
|                                       | Other assets, net                                                                                                                                                                        |                                            |           | 19,661     |              |  |           | 10,465     |          
|                                       |                                                                                                                                                                                          |                                            |           |            |              | 
|                                       |                                                                                                                                                                                          | Total assets                               |           | $          | 5,884,935    |  |           |            | 5,819,236 | 
|                                       |                                                                                                                                                                                          |                                            |           |            |              | 
|                                      
|Liabilities and Stockholders Equity   |                                                                                                                                                                                          |                                            |           |            |              |  |           |           
|Current liabilities:                   |                                                                                                                                                                                          |                                            |           |            |              |  |           |           
|                                       | Accounts payable                                                                                                                                                                         |                                            | $         | 30,660     |              |  |           | 26,854     |          
|                                       | Accrued payroll and related liabilities                                                                                                                                                  |                                            |           | 22,765     |              |  |           | 21,651     |          
|                                       | Other accrued liabilities                                                                                                                                                                |                                            |           | 27,074     |              |  |           | 23,949     |          
|                                       | Deferred revenue                                                                                                                                                                         |                                            |           | 17,850     |              |  |           | 17,491     |          
|                                       |                                                                                                                                                                                          |                                            |           |            |              | 
|                                       |                                                                                                                                                                                          | Total current liabilities                  |           |            | 98,349       |  |           |            | 89,945    | 
|                                      
|Deferred income tax liabilities        |                                                                                                                                                                                          |                                            | 1,154,601 |            |              |  | 1,131,505 |           
|Other liabilities                      |                                                                                                                                                                                          |                                            | 20,461    |            |              |  | 22,361    |           
|                                       |                                                                                                                                                                                          |                                            |           |            |              | 
|                                       |                                                                                                                                                                                          | Total liabilities                          |           |            | 1,273,411    |  |           |            | 1,243,811 | 
|                                       |                                                                                                                                                                                          |                                            |           |            |              | 
|                                      
|Commitments 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 268,125,906 shares at
    June 30, 2006 and 268,097,442 shares at December 31,
    2005 |                                            |           | 2,681      |              |  |           | 2,681      |          
|                                       | Series B common stock, $.01 par value. Authorized
    50,000,000 shares; issued and outstanding 12,075,056 shares at
    June 30, 2006 and 12,106,093 shares at December 31,
    2005    |                                            |           | 121        |              |  |           | 121        |          
|                                       | Series C common stock, $.01 par value. Authorized
    600,000,000 shares; no shares issued                                                                                               |                                            |           |           |              |  |           |           |          
|                                       | Additional paid-in capital                                                                                                                                                               |                                            |           | 5,713,282  |              |  |           | 5,712,304  |          
|                                       | Accumulated deficit                                                                                                                                                                      |                                            |           | (1,112,472 | )            |  |           | (1,137,821 | )        
|                                       | Accumulated other comprehensive earnings (loss)                                                                                                                                          |                                            |           | 7,912      |              |  |           | (1,860     | )        
|                                       |                                                                                                                                                                                          |                                            |           |            |              | 
|                                       |                                                                                                                                                                                          | Total stockholders equity                 |           |            | 4,611,524    |  |           |            | 4,575,425 | 
|                                       |                                                                                                                                                                                          |                                            |           |            |              | 
|                                       |                                                                                                                                                                                          | Total liabilities and stockholders equity |           | $          | 5,884,935    |  |           |            | 5,819,236 | 
|                                       |                                                                                                                                                                                          |                                            |           |            |              | 



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|                                                     |                                                                                       |                      |         |         |                  |  |         |         |   |  |         |         |  |  |         |         |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------- | -------------------- | ------- | ------- | ---------------- |  | ------- | ------- | - |  | ------- | ------- |  |  | ------- | ------- | -
|                                                     |                                                                                       | Three months ended   |         |         | Six months ended | 
|                                                     |                                                                                       | June 30,             |         |         | June 30,         | 
|                                                     |                                                                                       |                      |         |         |                  | 
|                                                     |                                                                                       | 2006                 |         |         | 2005             |  |         | 2006    |   |  | 2005    |        
|                                                     |                                                                                       |                      |         |         |                  |  |         |         |   |  |         |        
|                                                     |                                                                                       | amounts in thousands |        
|                                                    
|Net revenue                                          |                                                                                       | $                    | 165,789 |         |                  |  | 178,019 |         |   |  | 319,357 |         |  |  | 352,309 |        
|                                                    
|Operating expenses:                                  |                                                                                       |                      |         |         |                  |  |         |         |   |  |         |         |  |  |         |        
|                                                     | Cost of services                                                                      |                      |         | 109,623 |                  |  |         | 115,590 |   |  |         | 207,222 |  |  |         | 226,444 |  
|                                                     | Selling, general, and administrative, including stock-based
    compensation (note 3) |                      |         | 46,114  |                  |  |         | 47,168  |   |  |         | 89,285  |  |  |         | 90,966  |  
|                                                     | Depreciation and amortization                                                         |                      |         | 16,304  |                  |  |         | 20,243  |   |  |         | 31,959  |  |  |         | 37,004  |  
|                                                     |                                                                                       |                      |         |         |                  |  |         |         |   |  |         |        
|                                                     |                                                                                       |                      | 172,041 |         |                  |  | 183,001 |         |   |  | 328,466 |         |  |  | 354,414 |        
|                                                     |                                                                                       |                      |         |         |                  |  |         |         |   |  |         |        
|                                                    
|Operating loss                                       |                                                                                       |                      | (6,252  | )       |                  |  | (4,982  | )       |   |  | (9,109  | )       |  |  | (2,105  | )      
|                                                    
|Other income:                                        |                                                                                       |                      |         |         |                  |  |         |         |   |  |         |         |  |  |         |        
|                                                     | Share of earnings of Discovery (note 8)                                               |                      |         | 30,345  |                  |  |         | 15,396  |   |  |         | 51,518  |  |  |         | 38,210  |  
|                                                     | Other, net                                                                            |                      |         | 2,523   |                  |  |         | (305    | ) |  |         | 4,473   |  |  |         | 17      |  
|                                                     |                                                                                       |                      |         |         |                  |  |         |         |   |  |         |        
|                                                     |                                                                                       |                      | 32,868  |         |                  |  | 15,091  |         |   |  | 55,991  |         |  |  | 38,227  |        
|                                                     |                                                                                       |                      |         |         |                  |  |         |         |   |  |         |        
|                                                    
|                                                     | Earnings before income taxes                                                          |                      |         | 26,616  |                  |  |         | 10,109  |   |  |         | 46,882  |  |  |         | 36,122  |  
|                                                    
|Income tax expense                                   |                                                                                       |                      | (12,882 | )       |                  |  | (6,082  | )       |   |  | (21,533 | )       |  |  | (15,270 | )      
|                                                     |                                                                                       |                      |         |         |                  |  |         |         |   |  |         |        
|                                                    
|                                                     | Net earnings                                                                          |                      |         | 13,734  |                  |  |         | 4,027   |   |  |         | 25,349  |  |  |         | 20,852  |  
|                                                     |                                                                                       |                      |         |         |                  |  |         |         |   |  |         |        
|                                                    
|Other comprehensive earnings (loss), net of taxes:   |                                                                                       |                      |         |         |                  |  |         |         |   |  |         |         |  |  |         |        
|                                                    
|                                                     | Foreign currency translation adjustments                                              |                      |         | 6,451   |                  |  |         | (2,681  | ) |  |         | 9,088   |  |  |         | (8,022  | )
|                                                     | Unrealized holding gains (losses) arising during the period                           |                      |         | (103    | )                |  |         | 572     |   |  |         | 684     |  |  |         | 611     |  
|                                                     |                                                                                       |                      |         |         |                  |  |         |         |   |  |         |        
|                                                     | Other comprehensive earnings (loss)                                                   |                      |         | 6,348   |                  |  |         | (2,109  | ) |  |         | 9,772   |  |  |         | (7,411  | )
|                                                     |                                                                                       |                      |         |         |                  |  |         |         |   |  |         |        
|                                                    
|Comprehensive earnings                               |                                                                                       | $                    | 20,082  |         |                  |  | 1,918   |         |   |  | 35,121  |         |  |  | 13,441  |        
|                                                     |                                                                                       |                      |         |         |                  |  |         |         |   |  |         |        
|                                                    
|Basic and diluted earnings per common share (note 4) |                                                                                       | $                    | .05     |         |                  |  | .01     |         |   |  | .09     |         |  |  | .07     |        
|                                                     |                                                                                       |                      |         |         |                  |  |         |         |   |  |         |        



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|                                                 |                                                                                         |                                 |                                           |                                                  |      |         |          |         |    |         |         |  
|------------------------------------------------ | --------------------------------------------------------------------------------------- | ------------------------------- | ----------------------------------------- | ------------------------------------------------ | ---- | ------- | -------- | ------- | -- | ------- | ------- | -
|                                                 |                                                                                         | Six months ended                |                                          
|                                                 |                                                                                         | June 30,                        |                                          
|                                                 |                                                                                         |                                 |                                          
|                                                 |                                                                                         | 2006                            |                                           |                                                  | 2005 |        
|                                                 |                                                                                         |                                 |                                           |                                                  |      |        
|                                                 |                                                                                         | amounts in thousands            |                                          
|                                                 |                                                                                         | (note 5)                        |                                          
|Cash flows from operating activities:            |                                                                                         |                                 |                                           |                                                  |      |         |          |        
|                                                 | Net earnings                                                                            |                                 | $                                         | 25,349                                           |      |         |          | 20,852  |   
|                                                 | Adjustments to reconcile net earnings to net cash provided by
    operating activities: |                                 |                                           |                                                  |      |         |          |         |   
|                                                 |                                                                                         |                                 | Depreciation and amortization             |                                                  |      | 31,959  |          |         |    | 37,004  |        
|                                                 |                                                                                         |                                 | Stock-based compensation                  |                                                  |      | 987     |          |         |    | 3,617   |        
|                                                 |                                                                                         |                                 | Payments for stock-based compensation     |                                                  |      |        |          |         |    | (2,132  | )      
|                                                 |                                                                                         |                                 | Share of earnings of Discovery            |                                                  |      | (51,518 | )        |         |    | (38,210 | )      
|                                                 |                                                                                         |                                 | Deferred income tax expense               |                                                  |      | 20,176  |          |         |    | 14,291  |        
|                                                 |                                                                                         |                                 | Other non-cash charges (credits), net     |                                                  |      | 165     |          |         |    | (46     | )      
|                                                 | Changes in assets and liabilities, net of acquisitions:                                 |                                 |                                           |                                                  |      |         |          |         |   
|                                                 |                                                                                         |                                 | Trade receivables                         |                                                  |      | (162    | )        |         |    | 4,875   |        
|                                                 |                                                                                         |                                 | Prepaid expenses and other current assets |                                                  |      | 33      |          |         |    | 4,751   |        
|                                                 |                                                                                         |                                 | Payables and other liabilities            |                                                  |      | 5,054   |          |         |    | (14,003 | )      
|                                                 |                                                                                         |                                 |                                           |                                                  |      |        
|                                                
|                                                 |                                                                                         |                                 |                                           | Net cash provided by operating activities        |      |         | 32,043   |         |    |         | 30,999  |  
|                                                 |                                                                                         |                                 |                                           |                                                  |      |        
|                                                
|Cash flows from investing activities:            |                                                                                         |                                 |                                           |                                                  |      |         |          |        
|                                                 | Capital expenditures                                                                    |                                 |                                           | (32,400                                          | )    |         |          | (51,153 | ) 
|                                                 | Net purchases of marketable securities                                                  |                                 |                                           | (50,661                                          | )    |         |          |        |   
|                                                 | Cash paid for acquisitions, net of cash acquired                                        |                                 |                                           | (46,793                                          | )    |         |          |        |   
|                                                 | Other investing activities, net                                                         |                                 |                                           | 256                                              |      |         |          | 3,984   |   
|                                                 |                                                                                         |                                 |                                           |                                                  |      |        
|                                                
|                                                 |                                                                                         |                                 |                                           | Net cash used in investing activities            |      |         | (129,598 | )       |    |         | (47,169 | )
|                                                 |                                                                                         |                                 |                                           |                                                  |      |        
|                                                
|Cash flows from financing activities:            |                                                                                         |                                 |                                           |                                                  |      |         |          |        
|                                                 | Net cash transfers from Liberty Media Corporation                                       |                                 |                                           |                                                 |      |         |          | 5,365   |   
|                                                 |                                                                                         | Other financing activities, net |                                           |                                                  | (4   | )       |          |         | (5 | )      
|                                                 |                                                                                         |                                 |                                           |                                                  |      |        
|                                                
|                                                 |                                                                                         |                                 |                                           | Net cash provided (used) by financing activities |      |         | (4       | )       |    |         | 5,360   |  
|                                                 |                                                                                         |                                 |                                           |                                                  |      |        
|                                                
|                                                 |                                                                                         |                                 |                                           | Net decrease in cash and cash equivalents        |      |         | (97,559  | )       |    |         | (10,810 | )
|                                                
|Cash and cash equivalents at beginning of period |                                                                                         |                                 | 250,352                                   |                                                  |      |         | 21,641   |        
|                                                 |                                                                                         |                                 |                                           |                                                  |      |        
|                                                
|Cash and cash equivalents at end of period       |                                                                                         | $                               | 152,793                                   |                                                  |      |         | 10,831   |        
|                                                 |                                                                                         |                                 |                                           |                                                  |      |        



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|                           |                              |                      |   |              |  |  |            |   |  |             |     |       |               |  |       |               |  |  |               |     |  |        |            |        |  |  |        |       |  |  |           |        | 
|-------------------------- | ---------------------------- | -------------------- | - | ------------ |  |  | ---------- | - |  | ----------- | --- | ----- | ------------- |  | ----- | ------------- |  |  | ------------- | --- |  | ------ | ---------- | ------ |  |  | ------ | ----- |  |  | --------- | ------ | 
|                           |                              |                      |   |              |  |  |            |   |  | Accumulated |     |       |              
|                           |                              |                      |   | Common stock |  |  | Additional |   |  |             |     | other |               |  | Total |              
|                           |                              | Preferred            |   |              |  |  | paid-in    |   |  | Accumulated |     |       | comprehensive |  |       | stockholders | 
|                           |                              | stock                |   | Series A     |  |  | Series B   |   |  | Series C    |     |       | capital       |  |       | deficit       |  |  | income (loss) |     |  | equity |           
|                           |                              |                      |   |              |  |  |            |   |  |             |     |       |               |  |       |               |  |  |               |     |  |        |           
|                           |                              | amounts in thousands |  
|Balance at January 1, 2006 |                              | $                    |  |              |  |  | 2,681      |   |  |             | 121 |       |               |  |      |               |  |  | 5,712,304     |     |  |        | (1,137,821 | )      |  |  | (1,860 | )     |  |  | 4,575,425 |       
|                           | Net earnings                 |                      |   |             |  |  |            |  |  |             |     |      |               |  |       |              |  |  |               |    |  |        |            | 25,349 |  |  |        |      |  |  |           | 25,349 | 
|                           | Other comprehensive earnings |                      |   |             |  |  |            |  |  |             |     |      |               |  |       |              |  |  |               |    |  |        |            |       |  |  |        | 9,772 |  |  |           | 9,772  | 
|                           | Stock compensation           |                      |   |             |  |  |            |  |  |             |     |      |               |  |       |              |  |  |               | 978 |  |        |            |       |  |  |        |      |  |  |           | 978    | 
|                           |                              |                      |   |              |  |  |            |   |  |             |     |       |               |  |       |               |  |  |               |     |  |        |            |       
|Balance at June 30, 2006   |                              | $                    |  |              |  |  | 2,681      |   |  |             | 121 |       |               |  |      |               |  |  | 5,713,282     |     |  |        | (1,112,472 | )      |  |  | 7,912  |       |  |  | 4,611,524 |       
|                           |                              |                      |   |              |  |  |            |   |  |             |     |       |               |  |       |               |  |  |               |     |  |        |            |       







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|    |                      
|--- | ---------------------
|(1) | Basis of Presentation



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The accompanying condensed consolidated financial statements of
    Discovery Holding Company (DHC or the
    Company) represent a combination of the historical
    financial information of (1) Ascent Media Group, LLC
    (Ascent Media), a wholly-owned subsidiary of Liberty
    Media Corporation (Liberty), and Libertys 50%
    ownership interest in Discovery for periods prior to the
    July 21, 2005 consummation of the spin off transaction (the
    Spin Off) described in note 2 and (2) DHC
    and its consolidated subsidiaries (including its 50% share of
    Discoverys earnings) for the periods following such date.
    The Spin Off has been accounted for at historical cost due to
    the pro rata nature of the distribution. Accordingly, DHCs
    historical financial statements are presented in a manner
    similar to a pooling of interests.                                                                                                                                                                                                                                                                                                                                                                                             
|
| | Ascent Media is comprised of three operating divisions or
    groups. Ascent Medias Creative Services group provides
    services necessary to complete the creation of original content,
    including feature films, mini-series, television shows,
    television commercials, music videos, promotional and identity
    campaigns, and corporate communications programming. The group
    manipulates or enhances original visual images or audio captured
    in principal photography or creates new three dimensional
    images, animation sequences, or sound effects. The Media
    Management Services group provides owners of content libraries
    with an entire complement of facilities and services necessary
    to optimize, archive, manage, and repurpose media assets for
    global distribution via freight, satellite, fiber and the
    Internet. The Networks Services group provides the facilities
    and services necessary to assemble and distribute programming
    content for cable and broadcast networks via fiber, satellite
    and the Internet to viewers in North America, Europe and Asia.
    Additionally, the Networks Services group provides systems
    integration, design, consulting, engineering and project
    management services.
|
| | Substantially all of the assets of AccentHealth, LLC were
    acquired by a subsidiary of DHC in January 2006. AccentHealth
    operates an advertising-supported captive audience television
    network in approximately 11,000 doctor office waiting rooms
    nationwide.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | Discovery is a global media and entertainment company that
    provides original and purchased cable and satellite television
    programming in the United States and over 160 other countries.
    Discovery also develops and sells branded commerce and
    educational product lines in the United States.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | The accompanying interim condensed consolidated financial
    statements are unaudited but, in the opinion of management,
    reflect all adjustments (consisting of normal recurring
    accruals) necessary for a fair presentation of the results for
    such periods. The results of operations for any interim period
    are not necessarily indicative of results for the full year.
    These condensed consolidated financial statements should be read
    in conjunction with the Companys consolidated financial
    statements and notes thereto included in its Annual Report on
    Form 10-K for the
    year ended December 31, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | The preparation of financial statements in conformity with
    U.S. generally accepted accounting principles
    (GAAP) requires management to make estimates and
    assumptions that affect the reported amounts of revenue and
    expenses for each reporting period. The significant estimates
    made in preparation of the Companys consolidated financial
    statements primarily relate to valuation of goodwill, other
    intangible assets,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | long-lived assets, deferred tax assets, and the amount of the
    allowance for doubtful accounts. Actual results could differ
    from the estimates upon which the carrying values were based.



|    |                     
|--- | --------------------
|(2) | Spin Off Transaction



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On July 21, 2005 (the Spin Off Date), Liberty
    completed the spin off of the capital stock of DHC. The Spin Off
    was effected as a dividend by Liberty to holders of its
    Series A and Series B common stock of shares of DHC
    Series A and Series B common stock, respectively.
    Holders of Liberty common stock on July 15, 2005 received
    0.10 of a share of DHC Series A common stock for each share
    of Liberty Series A common stock owned and 0.10 of a share
    of DHC Series B common stock for each share of Liberty
    Series B common stock owned. Approximately
    268.1 million shares of DHC Series A common stock and
    12.1 million shares of DHC Series B common stock were
    issued in the Spin Off. The Spin Off did not involve the payment
    of any consideration by the holders of Liberty common stock and
    is intended to qualify as a tax-free transaction.                                                                                                                                                                                                                                                                                                                                                                                
|
| | In addition to Ascent Media and its investment in Discovery,
    Liberty transferred $200 million in cash to a subsidiary of
    DHC prior to the Spin Off.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | Following the Spin Off, the Company and Liberty operate
    independently, and neither has any stock ownership, beneficial
    or otherwise, in the other. In connection with the Spin Off, the
    Company and Liberty entered into certain agreements in order to
    govern certain of the ongoing relationships between the Company
    and Liberty after the Spin Off and to provide for an orderly
    transition. These agreements include a Reorganization Agreement,
    a Services Agreement and a Tax Sharing Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | The Reorganization Agreement provides for, among other things,
    the principal corporate transactions required to effect the Spin
    Off and cross indemnities. Pursuant to the Services Agreement,
    Liberty provides the Company with office space and certain
    general and administrative services including legal, tax,
    accounting, treasury and investor relations support. The Company
    reimburses Liberty for direct,
    out-of-pocket expenses
    incurred by Liberty in providing these services and for the
    Companys allocable portion of facilities costs and costs
    associated with any shared services or personnel. Liberty and
    DHC have agreed that they will review cost allocations every six
    months and adjust such charges, if appropriate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | Under the Tax Sharing Agreement, Liberty is generally
    responsible for U.S. federal, state, local and foreign
    income taxes reported on a consolidated, combined or unitary
    return that includes the Company or one of its subsidiaries and
    Liberty or one of its subsidiaries. The Company is responsible
    for all other taxes that are attributable to the Company or one
    of its subsidiaries, whether accruing before, on or after the
    Spin Off. The Tax Sharing Agreement requires that the Company
    will not take, or fail to take, any action where such action, or
    failure to act, would be inconsistent with or prohibit the Spin
    Off from qualifying as a tax-free transaction. Moreover, the
    Company has indemnified Liberty for any loss resulting from
    (i) such action or failure to act or (ii) any
    agreement, understanding, arrangement or substantial
    negotiations entered into by DHC prior to the day after the
    first anniversary of the Spin Off Date, with respect to any
    transaction pursuant to which any of the other stockholders in
    Discovery would acquire shares of, or other interests in
    DHCs capital stock, in each case relating to the
    qualification of the Spin Off as a tax-free transaction.

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|    |                         
|--- | ------------------------
|(3) | Stock-Based Compensation



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As a result of the Spin Off and related adjustments to
    Libertys stock incentive awards, options (Spin Off
    DHC Awards) to acquire an aggregate of approximately
    2.0 million shares of DHC Series A common stock and
    3.0 million shares of DHC Series B common stock were
    issued to employees of Liberty. In addition, employees of Ascent
    Media who held stock options or stock appreciation rights
    (SARs) to acquire shares of Liberty common stock
    prior to the Spin Off continue to hold such options. Pursuant to
    the Reorganization Agreement, DHC is responsible for all stock
    options related to DHC common stock, and Liberty is responsible
    for all incentive awards related to Liberty common stock.
    Notwithstanding the foregoing, the Company records stock-based
    compensation for all stock incentive awards held by DHCs
    and its subsidiaries employees regardless of whether such
    awards relate to DHC common stock or Liberty common stock. Any
    stock-based compensation recorded by DHC with respect to Liberty
    stock incentive awards is treated as a capital transaction with
    the offset to stock-based compensation expense reflected as an
    adjustment of additional paid-in capital.                                                                                                                                                                                                                    
|
| | In December 2004, the Financial Accounting Standards Board
    issued Statement of Financial Accounting Standards No. 123
    (revised 2004), Share-Based Payments
    (Statement 123R). Statement 123R, which is
    a revision of Statement of Financial Accounting Standards
    No. 123, Accounting for Stock-Based
    Compensation(Statement 123) and
    supersedes Accounting Principles Board Opinion No. 25,
    Accounting for Stock Issued to Employees(APB Opinion No. 25), establishes standards
    for the accounting for transactions in which an entity exchanges
    its equity instruments for goods or services, primarily focusing
    on transactions in which an entity obtains employee services.
    Statement 123R generally requires companies to measure the
    cost of employee services received in exchange for an award of
    equity instruments (such as stock options and restricted stock)
    based on the grant-date fair value of the award, and to
    recognize that cost over the period during which the employee is
    required to provide service (usually the vesting period of the
    award). Statement 123R also requires companies to measure
    the cost of employee services received in exchange for an award
    of liability instruments (such as stock appreciation rights that
    will be settled in cash) based on the current fair value of the
    award, and to remeasure the fair value of the award at each
    reporting date.
|
| | The Company adopted Statement 123R effective
    January 1, 2006. The provisions of Statement 123R
    allow companies to adopt the standard using the modified
    prospective method or to restate all periods for which
    Statement 123 was effective. The Company has adopted
    Statement 123R using the modified prospective method, and
    will continue to include in its financial statements for periods
    that begin after December 31, 2005 pro forma information as
    though the standard had been adopted for all periods presented.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | Liberty calculated the grant-date fair value for all of its
    awards using the Black-Scholes Model. Liberty calculated the
    expected term of the awards using the methodology included in
    SEC Staff Accounting Bulletin No. 107. The volatility used
    in the calculation is based on the implied volatility of
    publicly traded Liberty options with a similar term (generally
    20%  21%). Liberty uses the risk-free rate for
    Treasury Bonds with a term similar to that of the subject
    options. The Company has allocated the grant-date fair value of
    the Liberty awards to the Spin Off DHC Awards based on the
    relative trading prices of DHC and Liberty common stock after
    the Spin Off.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | On May 4, 2006, each of the non-employee directors of DHC
    was granted 10,000 options to purchase DHC Series A common
    stock with an exercise price of $14.48. Such op-                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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##### Table of Contents









| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | tions vest one year from the date of grant, terminate
    10 years from the date of grant and had a grant-date fair
    value of $4.47 per share.
|
| | As of June 30, 2006, the following DHC options were
    outstanding and vested:                                                                  

|            |  |          |           |          |          |   |       |          |          |  |           |  |  |   |       | 
|----------- |  | -------- | --------- | -------- | -------- | - | ----- | -------- | -------- |  | --------- |  |  | - | ----- | 
|            |  |          |           | Weighted |          |   |       |          | Weighted | 
|            |  |          |           | average  |          |   |       |          | average  | 
|            |  | DHC      |           |          | exercise |   |       | DHC      |          |  | exercise  | 
|            |  | Series A |           |          | price    |   |       | Series B |          |  | price     | 
|            |  |          |           |          |          |   |       |          |          |  |           | 
|Outstanding |  |          | 1,966,396 |          |          | $ | 15.42 |          |          |  | 2,996,525 |  |  | $ | 18.87 | 
|            |  |          |           |          |          |   |       |          |          |  |           | 
|Exercisable |  |          | 1,275,757 |          |          | $ | 16.54 |          |          |  | 2,876,465 |  |  | $ | 18.99 | 
|            |  |          |           |          |          |   |       |          |          |  |           | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of June 30, 2006, the total compensation cost related to
    unvested equity awards was $1.6 million. Such amount will
    be recognized in the Companys consolidated statements of
    operations through 2009.                                                                                                                                                                                                                                      
|
| | Prior to the adoption of Statement 123R, the Company
    applied the intrinsic-value-based method of accounting
    prescribed by APB Opinion No. 25, to account for its
    fixed-plan stock options. Under this method, compensation
    expense was recorded on the date of grant only if the current
    market price of the underlying stock exceeded the exercise price
    and was recognized on a straight-line basis over the vesting
    period.
|
| | The following table illustrates the effect on net earnings for
    the three and six months ended June 30, 2005 as if the
    fair-value-based method of Statement 123R had been applied
    to all outstanding and unvested awards. Compensation expense for
    SARs was the same under APB Opinion No. 25 and
    Statement 123R. Accordingly, no pro forma adjustment for
    such awards is included in the following table.                         

|                                                |                                                                                                                     |                               |       |        |            |   |        |        |        | 
|----------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | ----------------------------- | ----- | ------ | ---------- | - | ------ | ------ | ------ | 
|                                                |                                                                                                                     | Three months                  |       |        | Six months |  
|                                                |                                                                                                                     | ended                         |       |        | ended      |  
|                                                |                                                                                                                     | June 30,                      |       |        | June 30,   |  
|                                                |                                                                                                                     | 2005                          |       |        | 2005       |  
|                                                |                                                                                                                     |                               |       |        |            |  
|                                                |                                                                                                                     | amounts in thousands,         |      
|                                                |                                                                                                                     | except per share amounts      |      
|Net earnings, as reported                       |                                                                                                                     | $                             | 4,027 |        |            |   | 20,852 |       
|Add:                                            |                                                                                                                     |                               |       |        |            |   |        |       
|                                                | Stock-based employee compensation expense included in reported
    net earnings, net of taxes                       |                               |       | 1,536  |            |   |        | 2,102  |       
|Deduct:                                         |                                                                                                                     |                               |       |        |            |   |        |       
|                                                | Stock-based employee compensation expense determined under fair
    value based method for all awards, net of taxes |                               |       | (5,852 | )          |   |        | (7,317 | )     
|                                                |                                                                                                                     |                               |       |        |            |  
|                                                |                                                                                                                     | Pro forma net earnings (loss) |       | $      | (289       | ) |        |        | 15,637 | 
|                                                |                                                                                                                     |                               |       |        |            |  
|Pro forma basic and diluted earnings per share: |                                                                                                                     |                               |       |        |            |   |        |       
|                                                | As reported                                                                                                         |                               | $     | .01    |            |   |        | .07    |       
|                                                |                                                                                                                     |                               |       |        |            |  
|                                                | Pro forma for fair value stock compensation                                                                         |                               | $     | --     |            |   |        | .06    |       
|                                                |                                                                                                                     |                               |       |        |            |  



|    |                          
|--- | -------------------------
|(4) | Earnings Per Common Share



| |                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Basic earnings per common share (EPS) is computed by
    dividing net earnings by the weighted average number of common
    shares outstanding for the period. The weighted average number
    of shares outstanding for each of the three and six month periods

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ended June 30, 2006 is 279,950,000, and the weighted
    average number of shares outstanding for periods prior to the
    Spin Off Date is 280,199,000 shares, which is the number of
    shares that were issued on the Spin Off Date. Dilutive EPS
    presents the dilutive effect on a per share basis of potential
    common shares as if they had been converted at the beginning of
    the periods presented. Due to the relative insignificance of the
    dilutive securities in 2006 and 2005, their inclusion does not
    impact the EPS amount as reported in the accompanying condensed
    consolidated statements of operations.



|    |                                                 
|--- | ------------------------------------------------
|(5) | Supplemental Disclosure of Cash Flow Information

|                            |                               |                                                  |   |        |        |  |  |   |   | 
|--------------------------- | ----------------------------- | ------------------------------------------------ | - | ------ | ------ |  |  | - | - | 
|                            |                               | Six months ended                                 |  
|                            |                               | June 30,                                         |  
|                            |                               |                                                  |  
|                            |                               | 2006                                             |   |        | 2005   | 
|                            |                               |                                                  |   |        |        | 
|                            |                               | amounts in                                       |  
|                            |                               | thousands                                        |  
|Cash 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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective January 27, 2006, a subsidiary of DHC acquired
    substantially all of the assets of AccentHealth, LLCs
    healthcare media business (AccentHealth) for cash
    consideration of $46,793,000, subject to potential post-closing
    adjustments. AccentHealth operates an advertising-supported
    captive audience television network in approximately 11,000
    doctor office waiting rooms nationwide. The Company recorded
    goodwill of $32,224,000 and other intangible assets of
    $9,800,000 in connection with this acquisition. Such amounts are
    preliminary and are subject to adjustment pending completion of
    the Companys purchase price allocation process. The excess
    purchase price over the fair value of assets acquired is
    attributable to the growth potential of AccentHealth and
    expected compatibility with Ascent Medias existing
    networks group.
|
| | For financial reporting purposes, the acquisition is deemed to
    have occurred on February 1, 2006. The results of
    operations of AccentHealth have been included in the
    consolidated results of DHC as part of the Network Services
    group since the date of acquisition. On a pro forma basis, the
    results of operations of AccentHealth are not significant to
    those of DHC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       



|    |         
|--- | --------
|(7) | Goodwill



| |                                        
| | ---------------------------------------
| | Goodwill is comprised of the following:

|         |                                 |                      |   |           |              |  |  |           |           | 
|-------- | ------------------------------- | -------------------- | - | --------- | ------------ |  |  | --------- | --------- | 
|         |                                 | June 30,             |   |           | December 31, | 
|         |                                 | 2006                 |   |           | 2005         | 
|         |                                 |                      |   |           |              | 
|         |                                 | amounts in thousands |  
|Goodwill |                                 |                      |   |           |              |  |  |          
|         | Creative Services Group         |                      | $ | 106,599   |              |  |  | 106,599   |          
|         | Media Management Services Group |                      |   | 93,402    |              |  |  | 93,402    |          
|         | Network Services Group          |                      |   | 195,708   |              |  |  | 162,517   |          
|         | Discovery                       |                      |   | 1,771,000 |              |  |  | 1,771,000 |          
|         |                                 |                      |   |           |              | 
|         |                                 | Total goodwill       |   | $         | 2,166,709    |  |  |           | 2,133,518 | 
|         |                                 |                      |   |           |              | 

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | GAAP requires companies to allocate enterprise-level goodwill to
    all reporting units, including equity method investments.
    Accordingly, the Company has allocated $1,771,000,000 of
    enterprise-level goodwill to its investment in Discovery. This
    allocation is performed for goodwill impairment testing purposes
    only and does not change the reported carrying value of the
    investment. However, to the extent the investment is disposed of
    in the future, the allocated goodwill will be relieved and
    included in the calculation of the gain or loss on disposal.



|    |                        
|--- | -----------------------
|(8) | Investment in Discovery



| |                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has a 50% ownership interest in Discovery and
    accounts for its investment using the equity method of
    accounting. Discovery is a global media and entertainment
    company, that provides original and purchased video programming
    in the United States and over 160 other countries. Discovery
    also develops and sells branded commerce and educational product
    lines in the United States.
|
| | DHCs carrying value for Discovery was $3,076,720,000 at
    June 30, 2006. In addition, as described in note 7,
    enterprise-level goodwill of $1,771,000,000 has been allocated
    to the investment in Discovery.                                                                                                                                                                                                     
|
| | Summarized financial information for DCI is as follows:                                                                                                                                                                                                                                                                                                                                                                     
|
| | Consolidated Balance Sheets                                                                                                                                                                                                                                                                                                                                                                                                 

|                                              |                                             |                      |           |           |              |  |           |           | 
|--------------------------------------------- | ------------------------------------------- | -------------------- | --------- | --------- | ------------ |  | --------- | --------- | 
|                                              |                                             | June 30,             |           |           | December 31, | 
|                                              |                                             | 2006                 |           |           | 2005         | 
|                                              |                                             |                      |           |           |              | 
|                                              |                                             | amounts in thousands |          
|Cash and cash equivalents                     |                                             | $                    | 77,511    |           |              |  | 34,491    |          
|Other current assets                          |                                             |                      | 877,771   |           |              |  | 796,878   |          
|Property and equipment, net                   |                                             |                      | 400,562   |           |              |  | 397,578   |          
|Goodwill and intangible assets                |                                             |                      | 451,753   |           |              |  | 397,927   |          
|Programming rights, long term                 |                                             |                      | 1,231,216 |           |              |  | 1,175,988 |          
|Other assets                                  |                                             |                      | 289,687   |           |              |  | 371,758   |          
|                                              |                                             |                      |           |           |              | 
|                                              | Total assets                                |                      | $         | 3,328,500 |              |  |           | 3,174,620 | 
|                                              |                                             |                      |           |           |              | 
|Current liabilities                           |                                             | $                    | 598,931   |           |              |  | 692,465   |          
|Long term debt                                |                                             |                      | 2,798,747 |           |              |  | 2,590,440 |          
|Other liabilities                             |                                             |                      | 104,984   |           |              |  | 101,571   |          
|Mandatorily redeemable equity in subsidiaries |                                             |                      | 191,999   |           |              |  | 272,502   |          
|Stockholders deficit                         |                                             |                      | (366,161  | )         |              |  | (482,358  | )        
|                                              |                                             |                      |           |           |              | 
|                                              | Total liabilities and stockholders deficit |                      | $         | 3,328,500 |              |  |           | 3,174,620 | 
|                                              |                                             |                      |           |           |              | 

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| |                                      
| | -------------------------------------
| | Consolidated Statements of Operations

|                                    |                  |                           |           |         |      |  |           |         | 
|----------------------------------- | ---------------- | ------------------------- | --------- | ------- | ---- |  | --------- | ------- | 
|                                    |                  | Six months ended June 30, |          
|                                    |                  |                           |          
|                                    |                  | 2006                      |           |         | 2005 | 
|                                    |                  |                           |           |         |      | 
|                                    |                  | amounts in thousands      |          
|Revenue                             |                  | $                         | 1,392,606 |         |      |  | 1,261,367 |        
|Cost of revenue                     |                  |                           | (485,404  | )       |      |  | (441,400  | )      
|Selling, general and administrative |                  |                           | (571,730  | )       |      |  | (487,702  | )      
|Equity-based compensation           |                  |                           | (9,976    | )       |      |  | (45,820   | )      
|Depreciation and amortization       |                  |                           | (63,674   | )       |      |  | (59,859   | )      
|                                    |                  |                           |           |         |      | 
|                                    | Operating income |                           |           | 261,822 |      |  |           | 226,586 | 
|Interest expense                    |                  |                           | (99,805   | )       |      |  | (85,210   | )      
|Other income (expense), net         |                  |                           | 16,567    |         |      |  | (385      | )      
|Income tax expense                  |                  |                           | (75,549   | )       |      |  | (64,571   | )      
|                                    |                  |                           |           |         |      | 
|                                    | Net earnings     |                           | $         | 103,035 |      |  |           | 76,420  | 
|                                    |                  |                           |           |         |      | 



|    |                              
|--- | -----------------------------
|(9) | Commitments and Contingencies



| |                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company is involved in litigation and similar claims
    incidental to the conduct of its business. In managements
    opinion, none of the pending actions is likely to have a
    material adverse impact on the Companys financial position
    or results of operations.
|
| | The Company and its subsidiaries lease offices, satellite
    transponders and certain equipment under lease arrangements.                                                                                                                                                        



|     |                           
|---- | --------------------------
|(10) | Related Party Transactions



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Certain third-party general and administrative and spin off
    related costs were paid by Liberty on behalf of the Company
    prior to the Spin Off and reflected as expenses in the
    accompanying condensed consolidated statements of operations. In
    addition, certain general and administrative and other expenses
    are charged by Liberty to DHC pursuant to the Services
    Agreement. Such expenses aggregated $4,036,000 and $3,233,000
    for the six months ended June 30, 2006 and 2005,
    respectively.
|
| | Ascent Media provides services such as satellite uplink, systems
    integration, origination, and post-production to Discovery.
    Revenue recorded by Ascent Media for these services for the six
    months ended June 30, 2006 and 2005 aggregated $13,878,000
    and $17,095,000, respectively.                                                                                                                                                                                                                             



|     |                                     
|---- | ------------------------------------
|(11) | Information About Operating Segments



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys chief operating decision maker, or his
    designee (the CODM), has identified the
    Companys reportable segments based on (i) financial
    information reviewed by the CODM and (ii) those operating
    segments that represent more than 10% of the Companys
    consolidated revenue or earnings before taxes. In addition,
    those equity investments whose share of earnings represent more
    than 10% of the Companys earnings before taxes are
    considered reportable segments.
|
| | Based on the foregoing criteria, the Companys business
    units have been aggregated into five reportable segments: the
    Creative Services Group, the Media Management Services Group,
    and the Network Services Group, which are all operating segments
    of Ascent Media, Corporate and other, and Discovery, which is an
    equity affiliate.                                                                                                                                                         
|
| | The Creative Services Group provides post-production services,
    which are comprised of services necessary to complete the
    creation of original content including feature films, television
    shows, movies of the week/mini series, television commercials,
    music                                                                                                                                                                                                                                      

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | videos, promotional and identity campaigns and corporate
    communications programming. The Media Management Services Group
    provides (i) content storage services, which are comprised
    of facilities and services necessary to optimize, archive,
    manage and repurpose media assets for global distribution via
    freight, satellite, fiber and the Internet; (ii) access to
    all forms of content, duplication and formatting services;
    (iii) language conversions and laybacks;
    (iv) restoration and preservation of old or damaged
    content; (v) mastering from motion picture film to high
    resolution or data formats; (vi) digital audio and video
    encoding services; and (vii) digital media management
    services for global home video, broadcast, pay-per-view and
    emerging new media distribution channels. The Network Services
    Group provides broadcast services, which are comprised of
    services necessary to assemble and distribute programming for
    cable and broadcast networks via fiber and satellite to viewers
    in North America, Europe and Asia. AccentHealth is included in
    the Network Services Group broadcast services. Additionally, the
    Networks Services Group provides systems integration, design,
    consulting, engineering and project management services.
|
| | The accounting policies of the segments that are consolidated
    subsidiaries are the same as those described in the summary of
    significant accounting policies and are consistent with GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | The Company evaluates the performance of these operating
    segments based on financial measures such as revenue and
    operating cash flow. The Company defines operating cash flow as
    revenue less operating expenses and selling, general and
    administrative expense (excluding stock and other equity-based
    compensation). The Company believes this is an important
    indicator of the operational strength and performance of its
    businesses, including the ability to service debt and capital
    expenditures. In addition, this measure allows management to
    view operating results and perform analytical comparisons and
    identify strategies to improve performance. This measure of
    performance excludes depreciation and amortization and stock and
    other equity-based compensation that are included in the
    measurement of operating income pursuant to GAAP. Accordingly,
    operating cash flow should be considered in addition to, but not
    as a substitute for, operating income, cash flow provided by
    operating activities and other measures of financial performance
    prepared in accordance with GAAP.                                                                                                                                                                              
|
| | The Companys reportable segments are strategic business
    units that offer different products and services. They are
    managed separately because each segment requires different
    technologies, distribution channels and marketing strategies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

I-12



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##### Table of Contents









| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | Summarized financial information concerning the Companys
    reportable segments is presented in the following tables:

|                               |                                 |          |   |         |            |                      |  |           |  |  |           |         |  |              |        |           |            |  |  |           |  |  |  |           | 
|------------------------------ | ------------------------------- | -------- | - | ------- | ---------- | -------------------- |  | --------- |  |  | --------- | ------- |  | ------------ | ------ | --------- | ---------- |  |  | --------- |  |  |  | --------- | 
|                               |                                 |          |   | Media   |            |                      |  |           |  |  |           |         | 
|                               |                                 | Creative |   |         | Management |                      |  | Network   |  |  |           |         |  |              | Equity |          
|                               |                                 | Services |   |         | Services   |                      |  | Services  |  |  | Corporate |         |  | Consolidated |        |           | affiliate- | 
|                               |                                 | Group    |   |         | Group      |                      |  | Group (1) |  |  | and Other |         |  | total        |        |           | Discovery  | 
|                               |                                 |          |   |         |            |                      |  |           |  |  |           |         |  |              |        |           |            | 
|                               |                                 |          |   |         |            | amounts in thousands |  |           |  |  |          
|Six months ended June 30, 2006 |                                 |          |   |         |            |                      |  |           |  |  |           |         |  |              |        |           |            |  |  |           |  |  |  |          
|                               | Revenue from external customers |          | $ | 150,366 |            |                      |  | 52,704    |  |  |           | 116,287 |  |              |        |          |            |  |  | 319,357   |  |  |  | 1,392,606 | 
|                               | Operating cash flow (deficit)   |          | $ | 25,031  |            |                      |  | 1,809     |  |  |           | 20,319  |  |              |        | (23,322   | )          |  |  | 23,837    |  |  |  | 335,472   | 
|                               | Capital expenditures            |          | $ | 8,353   |            |                      |  | 4,101     |  |  |           | 18,656  |  |              |        | 1,290     |            |  |  | 32,400    |  |  |  | 25,775    | 
|                               | Total assets                    |          | $ | 300,664 |            |                      |  | 181,845   |  |  |           | 374,050 |  |              |        | 5,028,376 |            |  |  | 5,884,935 |  |  |  | 3,328,500 | 
|                              
|Six months ended June 30, 2005 |                                 |          |   |         |            |                      |  |           |  |  |           |         |  |              |        |           |            |  |  |           |  |  |  |          
|                               | Revenue from external customers |          | $ | 151,793 |            |                      |  | 60,049    |  |  |           | 140,467 |  |              |        |          |            |  |  | 352,309   |  |  |  | 1,261,367 | 
|                               | Operating cash flow (deficit)   |          | $ | 27,762  |            |                      |  | 8,447     |  |  |           | 26,774  |  |              |        | (24,467   | )          |  |  | 38,516    |  |  |  | 332,265   | 
|                               | Capital expenditures            |          | $ | 10,197  |            |                      |  | 11,877    |  |  |           | 26,450  |  |              |        | 2,629     |            |  |  | 51,153    |  |  |  | 60,629    | 




|    |                                                                                            
|--- | -------------------------------------------------------------------------------------------
|(1) | Included in Network Services Group revenue is broadcast services
    revenue of $76,801,000





|                                 |                                 |                      |   |        |            |  |  |           |  |  |           |        |  |              |        |         |            |  |  |         |  |  |  |         | 
|-------------------------------- | ------------------------------- | -------------------- | - | ------ | ---------- |  |  | --------- |  |  | --------- | ------ |  | ------------ | ------ | ------- | ---------- |  |  | ------- |  |  |  | ------- | 
|                                 |                                 |                      |   | Media  |            |  |  |           |  |  |           |        | 
|                                 |                                 | Creative             |   |        | Management |  |  | Network   |  |  |           |        |  |              | Equity |        
|                                 |                                 | Services             |   |        | Services   |  |  | Services  |  |  | Corporate |        |  | Consolidated |        |         | affiliate- | 
|                                 |                                 | Group                |   |        | Group      |  |  | Group (1) |  |  | and Other |        |  | total        |        |         | Discovery  | 
|                                 |                                 |                      |   |        |            |  |  |           |  |  |           |        |  |              |        |         |            | 
|                                 |                                 | amounts in thousands |  
|Three months ended June 30, 2006 |                                 |                      |   |        |            |  |  |           |  |  |           |        |  |              |        |         |            |  |  |        
|                                 | Revenue from external customers |                      | $ | 76,884 |            |  |  | 27,102    |  |  |           | 61,803 |  |              |        |        |            |  |  | 165,789 |  |  |  | 733,005 | 
|                                 | Operating cash flow (deficit)   |                      | $ | 11,855 |            |  |  | 554       |  |  |           | 10,523 |  |              |        | (12,439 | )          |  |  | 10,493  |  |  |  | 190,561 | 
|                                 | Capital expenditures            |                      | $ | 4,472  |            |  |  | 2,387     |  |  |           | 11,053 |  |              |        | 686     |            |  |  | 18,598  |  |  |  | 18,431  | 
|                                
|Three months ended June 30, 2005 |                                 |                      |   |        |            |  |  |           |  |  |           |        |  |              |        |         |            |  |  |        
|                                 | Revenue from external customers |                      | $ | 77,564 |            |  |  | 31,273    |  |  |           | 69,182 |  |              |        |        |            |  |  | 178,019 |  |  |  | 659,896 | 
|                                 | Operating cash flow (deficit)   |                      | $ | 14,712 |            |  |  | 4,757     |  |  |           | 11,768 |  |              |        | (12,572 | )          |  |  | 18,665  |  |  |  | 183,810 | 
|                                 | Capital expenditures            |                      | $ | 5,697  |            |  |  | 6,616     |  |  |           | 16,201 |  |              |        | 1,718   |            |  |  | 30,232  |  |  |  | 25,170  | 




|    |                                                                                            
|--- | -------------------------------------------------------------------------------------------
|(1) | Included in Network Services Group revenue is broadcast services
    revenue of $38,065,000





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##### Table of Contents









| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | The following table provides a reconciliation of segment
    operating cash flow to earnings before income taxes.

|                               |  |                      |         |   |                  |  |         |      |  |  |         |   |  |  |         |  
|------------------------------ |  | -------------------- | ------- | - | ---------------- |  | ------- | ---- |  |  | ------- | - |  |  | ------- | -
|                               |  | Three months ended   |         |   | Six months ended | 
|                               |  | June 30,             |         |   | June 30,         | 
|                               |  |                      |         |   |                  | 
|                               |  | 2006                 |         |   | 2005             |  |         | 2006 |  |  | 2005    |  
|                               |  |                      |         |   |                  |  |         |      |  |  |         |  
|                               |  | amounts in thousands |        
|Segment operating cash flow    |  | $                    | 10,493  |   |                  |  | 18,665  |      |  |  | 23,837  |   |  |  | 38,516  |  
|Stock-based compensation       |  |                      | (441    | ) |                  |  | (3,404  | )    |  |  | (987    | ) |  |  | (3,617  | )
|Depreciation and amortization  |  |                      | (16,304 | ) |                  |  | (20,243 | )    |  |  | (31,959 | ) |  |  | (37,004 | )
|Share of earnings of Discovery |  |                      | 30,345  |   |                  |  | 15,396  |      |  |  | 51,518  |   |  |  | 38,210  |  
|Other, net                     |  |                      | 2,523   |   |                  |  | (305    | )    |  |  | 4,473   |   |  |  | 17      |  
|                               |  |                      |         |   |                  |  |         |      |  |  |         |  
|                              
|Earnings before income taxes   |  | $                    | 26,616  |   |                  |  | 10,109  |      |  |  | 46,882  |   |  |  | 36,122  |  
|                               |  |                      |         |   |                  |  |         |      |  |  |         |  



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | Information as to the Companys operations in different
    geographic areas is as follows:

|        |                 |                      |         |         |      |  |         |         | 
|------- | --------------- | -------------------- | ------- | ------- | ---- |  | ------- | ------- | 
|        |                 | Six months ended     |        
|        |                 | June 30,             |        
|        |                 |                      |        
|        |                 | 2006                 |         |         | 2005 | 
|        |                 |                      |         |         |      | 
|        |                 | amounts in thousands |        
|Revenue |                 |                      |         |         |      |  |         |        
|        | United States   |                      | $       | 245,808 |      |  |         | 268,199 | 
|        | United Kingdom  |                      |         | 62,446  |      |  |         | 74,967  | 
|        | Other countries |                      |         | 11,103  |      |  |         | 9,143   | 
|        |                 |                      |         |         |      | 
|        |                 | $                    | 319,357 |         |      |  | 352,309 |        
|        |                 |                      |         |         |      | 

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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of Financial
    Condition and Results Of Operations

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-15



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##### Table of Contents



10-K


Overview










Acquisition




Operating Cash Flow




I-16



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##### Table of Contents





Results of Operations






I-17



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##### Table of Contents





|                                |  |                      |         |   |                  |  |         |      |  |  |         |   |  |  |         |  
|------------------------------- |  | -------------------- | ------- | - | ---------------- |  | ------- | ---- |  |  | ------- | - |  |  | ------- | -
|                                |  | Three months ended   |         |   | Six months ended | 
|                                |  | June 30,             |         |   | June 30,         | 
|                                |  |                      |         |   |                  | 
|                                |  | 2006                 |         |   | 2005             |  |         | 2006 |  |  | 2005    |  
|                                |  |                      |         |   |                  |  |         |      |  |  |         |  
|                                |  | amounts in thousands |        
|Segment Revenue                 |  |                      |         |   |                  |  |         |      |  |  |         |   |  |  |         |  
|Creative services group         |  | $                    | 76,884  |   |                  |  | 77,564  |      |  |  | 150,366 |   |  |  | 151,793 |  
|Media management services group |  |                      | 27,102  |   |                  |  | 31,273  |      |  |  | 52,704  |   |  |  | 60,049  |  
|Network services group          |  |                      | 61,803  |   |                  |  | 69,182  |      |  |  | 116,287 |   |  |  | 140,467 |  
|Corporate and other             |  |                      |        |   |                  |  |        |      |  |  |        |   |  |  |        |  
|                                |  |                      |         |   |                  |  |         |      |  |  |         |  
|                                |  | $                    | 165,789 |   |                  |  | 178,019 |      |  |  | 319,357 |   |  |  | 352,309 |  
|                                |  |                      |         |   |                  |  |         |      |  |  |         |  
|Segment Operating Cash Flow     |  |                      |         |   |                  |  |         |      |  |  |         |   |  |  |         |  
|Creative services group         |  | $                    | 11,855  |   |                  |  | 14,712  |      |  |  | 25,031  |   |  |  | 27,762  |  
|Media management services group |  |                      | 554     |   |                  |  | 4,757   |      |  |  | 1,809   |   |  |  | 8,447   |  
|Network services group          |  |                      | 10,523  |   |                  |  | 11,768  |      |  |  | 20,319  |   |  |  | 26,774  |  
|Corporate and other             |  |                      | (12,439 | ) |                  |  | (12,572 | )    |  |  | (23,322 | ) |  |  | (24,467 | )
|                                |  |                      |         |   |                  |  |         |      |  |  |         |  
|                                |  | $                    | 10,493  |   |                  |  | 18,665  |      |  |  | 23,837  |   |  |  | 38,516  |  
|                                |  |                      |         |   |                  |  |         |      |  |  |         |  

Revenue.


Cost of Services.


I-18



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##### Table of Contents



Selling, General and Administrative.




Depreciation and Amortization.


Stock-Based Compensation. in-the 5-year






Share of Earnings of Discovery.




Income Taxes.


I-19



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##### Table of Contents



Net Earnings.


Liquidity and Capital Resources






Discovery








I-20



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##### Table of Contents





Consolidated Results of Discovery


|                        |                                                          |                      |                            |          |           |         |  |          |           |         | 
|----------------------- | -------------------------------------------------------- | -------------------- | -------------------------- | -------- | --------- | ------- |  | -------- | --------- | ------- | 
|                        |                                                          | Six months ended     |                           
|                        |                                                          | June 30,             |                           
|                        |                                                          |                      |                           
|                        |                                                          | 2006                 |                            |          | 2005      |        
|                        |                                                          |                      |                            |          |           |        
|                        |                                                          | amounts in thousands |                           
|Revenue:                |                                                          |                      |                            |          |           |         |  |         
|                        | Advertising                                              |                      | $                          | 593,307  |           |         |  | 589,781  |          
|                        | Distribution                                             |                      |                            | 696,545  |           |         |  | 577,191  |          
|                        | Other                                                    |                      |                            | 102,754  |           |         |  | 94,395   |          
|                        |                                                          |                      |                            |          |           |        
|                        |                                                          | Total revenue        |                            |          | 1,392,606 |         |  |          | 1,261,367 |        
|                        |                                                          |                      |                            |          |           |        
|Expenses:               |                                                          |                      |                            |          |           |         |  |         
|                        | Cost of revenue                                          |                      |                            | (485,404 | )         |         |  | (441,400 | )        
|                        | Selling, general and administrative (SG&A)
    expense |                      |                            | (571,730 | )         |         |  | (487,702 | )        
|                        |                                                          |                      |                            |          |           |        
|                        |                                                          |                      | Operating cash flow        |          |           | 335,472 |  |          |           | 332,265 | 
|                        | Expenses arising from long-term incentive plans          |                      |                            | (9,976   | )         |         |  | (45,820  | )        
|                        | Depreciation and amortization                            |                      |                            | (63,674  | )         |         |  | (59,859  | )        
|                        |                                                          |                      |                            |          |           |        
|                        |                                                          |                      | Operating income           |          |           | 261,822 |  |          |           | 226,586 | 
|Other income (expense): |                                                          |                      |                            |          |           |         |  |         
|                        | Interest expense, net                                    |                      |                            | (99,805  | )         |         |  | (85,210  | )        
|                        | Unrealized gains from derivative instruments, net        |                      |                            | 12,221   |           |         |  | 10,101   |          
|                        | Minority interests in consolidated subsidiaries          |                      |                            | 268      |           |         |  | (25,859  | )        
|                        | Other                                                    |                      |                            | 4,078    |           |         |  | 15,373   |          
|                        |                                                          |                      |                            |          |           |        
|                        |                                                          |                      | Income before income taxes |          |           | 178,584 |  |          |           | 140,991 | 
|                        | Income tax expense                                       |                      |                            | (75,549  | )         |         |  | (64,571  | )        
|                        |                                                          |                      |                            |          |           |        
|                        |                                                          |                      | Net income                 |          | $         | 103,035 |  |          |           | 76,420  | 
|                        |                                                          |                      |                            |          |           |        

Business Segment Results of Discovery


|                     |                                         |                           |   |         |           |  |  |         |           | 
|-------------------- | --------------------------------------- | ------------------------- | - | ------- | --------- |  |  | ------- | --------- | 
|                     |                                         | Six months ended          |  
|                     |                                         | June 30,                  |  
|                     |                                         |                           |  
|                     |                                         | 2006                      |   |         | 2005      | 
|                     |                                         |                           |   |         |           | 
|                     |                                         | amounts in thousands      |  
|Revenue:             |                                         |                           |   |         |           |  |  |        
|                     | U.S. networks                           |                           | $ | 940,705 |           |  |  | 871,239 |          
|                     | International networks                  |                           |   | 400,634 |           |  |  | 337,940 |          
|                     | Discovery commerce, education and other |                           |   | 51,267  |           |  |  | 52,188  |          
|                     |                                         |                           |   |         |           | 
|                     |                                         | Total revenue             |   | $       | 1,392,606 |  |  |         | 1,261,367 | 
|                     |                                         |                           |   |         |           | 
|Operating Cash Flow: |                                         |                           |   |         |           |  |  |        
|                     | U.S. networks                           |                           | $ | 357,605 |           |  |  | 330,146 |          
|                     | International networks                  |                           |   | 56,496  |           |  |  | 43,417  |          
|                     | Discovery commerce, education and other |                           |   | (78,629 | )         |  |  | (41,298 | )        
|                     |                                         |                           |   |         |           | 
|                     |                                         | Total operating cash flow |   | $       | 335,472   |  |  |         | 332,265   | 
|                     |                                         |                           |   |         |           | 




Note:


Revenue.


I-21



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##### Table of Contents











Cost of Revenue.


SG&A Expenses. Cosmeo


Expenses Arising from Long-term Incentive Plans.


I-22



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##### Table of Contents





Depreciation and Amortization.


Other Income and Expense


Interest Expense.


Unrealized Gains from Derivative Instruments, net.


Minority Interests in Consolidated Subsidiaries.


Other.


Income Taxes.


Liquidity and Capital Resources






I-23



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##### Table of Contents




















|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures about Market
    Risk

Foreign Currency Risk









|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

13a-15 15d-15,


I-24



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##### Table of Contents







I-25



---



##### Table of Contents








PART II - OTHER INFORMATION







|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings

10-Q 10-K







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





|               |  |           |             |  |                |  |            | 
|-------------- |  | --------- | ----------- |  | -------------- |  | ---------- | 
|               |  | Votes for |             |  | Votes withheld | 
|               |  |           |             |  |                | 
|J. David Wargo |  |           | 333,686,300 |  |                |  | 55,170,372 | 



|                                                                      |  |           |             |  |               |  |            |             |  |  |            | 
|--------------------------------------------------------------------- |  | --------- | ----------- |  | ------------- |  | ---------- | ----------- |  |  | ---------- | 
|                                                                      |  | Votes for |             |  | Votes against |  |            | Abstentions | 
|                                                                      |  |           |             |  |               |  |            |             | 
|2.  Approval of the Discovery Holding Company 2005
    Incentive Plan |  |           | 210,294,779 |  |               |  | 88,383,031 |             |  |  | 41,419,290 | 



|                                                                                                                                                                                         |  |           |             |  |               |  |         |             |  |  |            | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------- | ----------- |  | ------------- |  | ------- | ----------- |  |  | ---------- | 
|                                                                                                                                                                                         |  | Votes for |             |  | Votes against |  |         | Abstentions | 
|                                                                                                                                                                                         |  |           |             |  |               |  |         |             | 
|3.  Ratification of KPMG LLP as the Companys
    independent auditors for the fiscal year ended December 31,
    2006. There were no broker non-votes with respect to this
    proposal |  |           | 347,063,591 |  |               |  | 785,863 |             |  |  | 41,007,218 | 








|        |         
|------- | --------
|Item 6. | 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



---



##### Table of Contents












| |                          
| | -------------------------
| | DISCOVERY HOLDING COMPANY



| |     |                       
| | --- | ----------------------
| | By: | /s/  Charles Y. Tanabe

| |                              
| | -----------------------------
| |                              
| | Charles Y. Tanabe            
| | Senior
    Vice President and
| | General
    Counsel          



| |     |                        
| | --- | -----------------------
| | By: | /s/  David J.A. Flowers

| |                                  
| | ---------------------------------
| |                                  
| | David J.A. Flowers               
| | Senior
    Vice President        
| | and
    Treasurer                
| | (Principal
    Financial Officer)



| |     |                          
| | --- | -------------------------
| | By: | /s/  Christopher W. Shean

| |                                   
| | ----------------------------------
| |                                   
| | Christopher W. Shean              
| | Senior
    Vice President         
| | and
    Controller                
| | (Principal
    Accounting Officer)

II-2



---



##### Table of Contents








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