##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K


|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31, 2005                                                 
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the transition period
    from           to                                             

Commission File Number 000-51205


Discovery Holding Company


(Exact name of Registrant as specified in its charter)


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

Registrants telephone number, including area code:
(720) 875-4000


Securities registered pursuant to Section 12(b) of the
Act:


|                                                |  |                     |        | 
|----------------------------------------------- |  | ------------------- | ------ | 
|                                                |  | Name of exchange on
|Title of each class                             |  | which registered   
|                                                |  |                    
|Series A Common Stock, par value $.01 per share |  |                     | Nasdaq | 
|Series B Common Stock, par value $.01 per share |  |                     | Nasdaq | 

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


o þ


o þ


þ o


S-K 10-K 10-K. o


12b-2


o o þ


12b-2 o þ










DOCUMENTS INCORPORATED BY REFERENCE


10-K










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##### 










DISCOVERY HOLDING COMPANY


2005 ANNUAL REPORT ON
FORM 10-K


Table of Contents


|                                       |  |                                                                                                                      |  |      |       | 
|-------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | 
|                                       |  |                                                                                                                      |  | Page
|                                       |  |                                                                                                                      |  |     
|Part I                                
|Item 1.                                |  | Business                                                                                                             |  |      | I-1   | 
|Item 1A.                               |  | Risk Factors                                                                                                         |  |      | I-14  | 
|Item 1B.                               |  | Unresolved Staff Comments                                                                                            |  |      | I-21  | 
|Item 2.                                |  | Properties                                                                                                           |  |      | I-21  | 
|Item 3.                                |  | Legal Proceedings                                                                                                    |  |      | I-22  | 
|Item 4.                                |  | Submission of Matters to a Vote of Security
    Holders                                                              |  |      | I-22  | 
|                                      
|Part II                               
|Item 5.                                |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |  |      | II-1  | 
|Item 6.                                |  | Selected Financial Data                                                                                              |  |      | II-1  | 
|Item 7.                                |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |  |      | II-2  | 
|Item 7A.                               |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                       |  |      | II-15 | 
|Item 8.                                |  | Financial Statements and Supplementary
    Data                                                                      |  |      | II-15 | 
|Item 9.                                |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                             |  |      | II-15 | 
|Item 9A.                               |  | Controls and Procedures                                                                                              |  |      | II-15 | 
|Item 9B.                               |  | Other Information                                                                                                    |  |      | II-15 | 
|                                      
|Part III                              
|Item 10.                               |  | Directors and Executive Officers of the
    Registrant                                                               |  |      | III-1 | 
|Item 11.                               |  | Executive Compensation                                                                                               |  |      | III-1 | 
|Item 12.                               |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |  |      | III-1 | 
|Item 13.                               |  | Certain Relationships and Related
    Transactions                                                                   |  |      | III-1 | 
|Item 14.                               |  | Principal Accounting Fees and Services                                                                               |  |      | III-1 | 
|                                      
|Part IV                               
|Item 15.                               |  | Exhibits and Financial Statement
    Schedules                                                                       |  |      | IV-1  | 
|Subsidiaries                          
|Consent of KPMG LLP                   
|Consent of PricewaterhouseCoopers LLP 
|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            







---



##### Table of Contents






PART I.







|        |          
|------- | ---------
|Item 1. | Business.



|    |                                
|--- | -------------------------------
|(a) | General Development of Business





Todd-AO








10-K


I-1



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| |   |                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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;                                                                                                                                        
|
| |  | uncertainties inherent in the development and integration of new
    business lines, acquired operations and business strategies;                                                                                             
|
| |  | changes in the distribution and viewing of television
    programming, including the expanded deployment of personal video
    recorders and other technology, and their impact on television
    advertising revenue;        
|
| |  | rapid technological changes;                                                                                                                                                                                                  
|
| |  | uncertainties associated with product and service development
    and market acceptance, including the development and provision
    of programming for new television and telecommunications
    technologies;               
|
| |  | future financial performance, including availability, terms and
    deployment of capital;                                                                                                                                    
|
| |  | fluctuations in foreign currency exchange rates and political
    unrest in international markets;                                                                                                                            
|
| |  | 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
    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.                                                                                                                





|    |                                               
|--- | ----------------------------------------------
|(b) | Financial Information About Operating Segments



I-2



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|    |                                  
|--- | ---------------------------------
|(c) | Narrative Description of Business



| |             
| | ------------
| | ASCENT MEDIA







| |                  
| | -----------------
| | Creative Services



Company 3, Design
Music Group (DMG), Digital Symphony, Encore Hollywood, FilmCore,
Level 3 Post, Method, Modern Music, One Post, POP Sound,
R!OT, Rushes, Soho Images, Soundelux, Sound One, St. Annes
Post, Todd-AO.






| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Dailies. Clients require daily screening of their
    previous days recorded work in order to evaluate technical
    and aesthetic qualities of the production and to begin the
    creative editorial process. Ascent Media provides the film
    development, digital transfer from film to video and video
    processing necessary for clients to view principal photography
    on a daily basis, also known as dailies. For clients
    that record their productions on film, Ascent Media processes
    and prints film negatives for film projection. The company also
    delivers dailies that are transferred from film to digital media
    using telecine equipment. The transfer process is technically
    challenging and is used to integrate various forms of audio and
    encode the footage with feet and frame numbers from the original
    film. Dailies delivered as a digital file can be processed in
    high definition or standard definition video and can be screened
    in a nonlinear manner on a variety of playback equipment.
|
| | Telecine. Telecine is the process of transferring film
    into video (in either analog or digital medium). During this
    process, a variety of parameters can be manipulated, such as
    color and contrast. Because the color spectrum of film and
    digital media are different, Ascent Media has creative talent
    who utilize creative colorizing techniques, equipment and
    processes to enable its clients to achieve a desired visual look
    and feel for television commercials and music videos, as well as
    feature films and television shows. Ascent Media also provides
    live telecine services via satellite, using a secure closed
    network able                                                                                                                                                                                                                                                                                                                                                                                  

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | to accurately transmit subtle color changes to connect its
    telecine artists with client offices or other affiliated
    post-production facilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | Digital intermediates. Ascent Medias digital
    intermediates service provides customers with the ability to
    convert film to a high resolution digital master file for color
    correction, creative editorial and electronic assembly of
    masters in other formats. If needed, the digital file can then
    be converted back to film.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | Creative editorial. After principal photography has been
    completed, Ascent Medias editors assemble the various
    elements into a cohesive story consistent with the messaging,
    branding and creative direction by Ascent Medias
    advertising agency clients. Ascent Media provides the tools and
    talent required to support its clients through all stages of the
    editing process, beginning with the low-resolution digital
    images and off-line editing workstations used to create an edit
    decision list, through the high-resolution editorial process
    used to complete a final product suitable for broadcast. In
    addition, Ascent Media is able to offer expanded communications
    infrastructure to provide digital images directly from the
    film-to-tape transfer
    process to a workstation through dedicated data lines.
|
| | Visual effects. Visual effects are used to enhance the
    viewing audiences experience by supplementing images
    obtained in principal photography with computer-generated
    imagery and graphical elements. Visual effects are typically
    used to create images that cannot be created by any other
    cost-effective means. Ascent Media also provides services on an
    array of graphics and animation workstations using a variety of
    software to accomplish unique effects, including
    three-dimensional animation.                                                                                                                                                                                                                                                                                                                                     
|
| | Assembly, formatting and duplication. Ascent Media
    implements clients creative decisions, including decisions
    regarding the integration of sound and visual effects, to
    assemble source material into its final form. In addition,
    Ascent Media uses sophisticated computer graphics equipment to
    generate titles and character imagery and to format a given
    program to meet specific network requirements, including time
    compression and commercial breaks. Finally, Ascent Media creates
    multiple master videotapes for delivery to the network for
    broadcast, archival and other purposes designated by the
    customer.                                                                                                                                                                                                             
|
| | Distribution. Once a television commercial has been
    completed, Ascent Media provides broadcast and support services,
    including complete video and audio duplication, distribution,
    and storage and asset management, for advertising agencies,
    corporate advertisers and entertainment companies. Ascent Media
    uses domestic and international satellite, fiber and Integrated
    Services Digital Network, or ISDN, Internet access, and
    conventional air freight for the delivery of television and
    radio spots. Ascent Media currently houses over 85,000
    commercial production elements in its vaults for future use by
    its clients. Ascent Medias commercial television
    distribution facilities in Los Angeles and San Francisco,
    California enable Ascent Media to service any regional or
    national client.             
|
| | Sound supervision, sound design and sound editorial.
    Ascent Media provides creative talent, state of the art
    facilities and support services to create sound for feature
    films, television content, commercials and trailers, interactive
    multimedia games and special live venues. Sound supervisors
    ensure that all aspects of sound, dialogue, sound effects and
    music are properly coordinated. Ascent Medias sound
    services include, but are not limited to, sound editing, sound
    design, sound effect libraries, ADR (automated dialogue
    replacement, a process for recording dialogue in synchronization
    with previously recorded picture) and Foley (non-digital sound
    effects).                                                                                                                                           
|
| | Music services. Music services are an essential component
    of post-production sound. Ascent Media has the technology and
    talent to handle all types of music-related services, including
    original music composition, music supervision, music editing,
    scoring/recording, temporary sound tracks, composer support and
    preparing music for soundtrack album release.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | Re-recording/ Mixing. Once sound editors, sound
    designers, composers, music editors, ADR and Foley crews, and
    many others, have prepared the elements that will make up the
    finished product, the final component of the creative sound post
    production process is the mix (or re-recording). Mixing a film
    involves the process of combining multiple elements, such as
    tracks of sound effects, dialogue and music,                                                                                                                                                                                                                                                                                                                                                                                                                                   

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | to complete the final product. Ascent Media maintains a
    significant number of mixing stages, purpose-built and
    provisioned with advanced recording equipment, capable of
    handling any type of project, from major motion pictures to
    smaller independent films.                                                                                                                                                                                                                                                                                                                                            
|
| | Sound effects and music libraries. Through its Soundelux
    brand, Ascent Media maintains an extensive sound effects library
    with over 300,000 unique sounds, which editors and clients
    access through the companys intranet and remotely via the
    Internet. The company also owns several production music
    libraries through its Hollywood Edge brand. Ascent Medias
    clients use the sound effects and music libraries in feature
    films, television shows, commercials, interactive and multimedia
    games. The company actively continues to add new, original
    recordings to its library.



| |                          
| | -------------------------
| | Media Management Services









| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Negative developing and cutting. Ascent Medias film
    laboratories provide negative developing for television shows
    such as one-hour dramas and movie-length programming, including
    negative developing of dailies (the original
    negative shot during each production day), as well as the often
    complex and technically demanding commercial work and motion
    picture trailers. Ascent Media also provides negative cutting
    services for the distribution of commercials on film.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | Restoration, preservation and asset protection of existing
    and damaged content. Through its recently-acquired facility,
    Cinetech, and its other laboratory facilities, Ascent Media
    provides film restoration, preservation and asset protection
    services. Ascent Medias technicians use photochemical and
    digital processes to clean, repair and rebuild a films
    elements in order to return the content to its original and
    sometimes improved image quality. Ascent Media also protects
    film element content from future degradation by transferring the
    films image to newer archival film stocks. Ascent Media
    also provides asset protection services for its clients
    color library titles, which is a preservation process whereby B/
    W, silver image, polyester, positive and color separation
    masters are created, sufficiently protecting the images of new
    and older films.                                                                                                                                                                                                                    
|
| | Transferring film to analog video or digital media. A
    considerable amount of film content is ultimately distributed to
    the home video, broadcast, cable or pay-per-view television
    markets. This requires film images to be transferred to an
    analog video or digital file format. Each frame must be color
    corrected and adapted to the size and aspect ratio of a
    television screen in order to ensure the highest level of
    conformity to the original film version. Because certain film
    formats require transfers with special characteristics, it is
    not unusual for a motion picture to be mastered in many
    different versions. Technological developments, such as the
    domestic introduction of television sets with a 16 X 9
    aspect ratio and the implementation of advanced and high
    definition digital television systems for terrestrial and
    satellite broadcasting, are expected to contribute to the growth
    of Ascent Medias film transfer business. Ascent Media also
    digitally removes dirt and scratches from a damaged film master
    that is transferred to a digital file format.
|
| | Professional duplication and standards conversion. Ascent
    Media provides professional duplication, which is the process of
    creating broadcast quality and resolution independent
    sub-masters for distribution to professional end users. Ascent
    Media uses master elements to make sub-masters in                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | numerous domestic and international broadcast standards as well
    as up to 22 different tape formats. Ascent Media also provides
    standards conversion, which is the process of changing the frame
    rate of a video signal from one video standard, such as the
    United States standard (NTSC), to another, such as a European
    standard (PAL or SECAM). Content is regularly copied, converted
    and checked by quality control for use in intermediate
    processes, such as editing, on-air backup and screening and for
    final delivery to cable and pay-per-view programmers, broadcast
    networks, television stations, airlines, home video duplicators
    and foreign distributors. Ascent Medias duplication and
    standards conversion facilities are technically advanced with
    unique characteristics that significantly increase equipment
    capacity while reducing error rates and labor cost.
|
| | Syndicated television distribution. Ascent Medias
    syndication services provide AMOL-encoding and closed-captioned
    sub-mastering, commercial integration, library distribution,
    station list management and v-chip encoding. Ascent Media
    distributes syndicated television content by freight, satellite,
    fiber or the Internet, in formats ranging from low-resolution
    proxy streams to full-bandwidth high-definition television and
    streaming media.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | DVD compression and authoring and menu design. Ascent
    Media provides all stages of DVD production, including creative
    menu design, special feature production, project management,
    encoding, 5.1 surround editing and quality control. Ascent
    Media also prepares and optimizes content for evolving formats
    of digital distribution, such as
    video-on-demand and
    interactive television.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | Storage of original elements and working masters. Ascent
    Medias archives are designed to store working master
    videotapes and film elements in a highly controlled environment
    protected from temperature and humidity variation, seismic
    disturbance, fire, theft and other external events. In addition
    to the physical security of the archive, content owners require
    frequent and regular access to their libraries. Physical
    elements stored in Ascent Medias archive are uniquely
    bar-coded and maintained in a library management database
    offering rapid access to elements, concise reporting of element
    status and element tracking throughout its travel through Ascent
    Medias operations.                                                                                                                                                                                        



| |                 
| | ----------------
| | Network Services







| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Network origination and master control. The network
    services group provides videotape and file-based playback and
    origination to cable, satellite and pay-per-view programming
    networks. Ascent Media accepts daily program schedules,
    programs, promotional materials and advertising and transmits
    24 hours of seamless daily programming to cable operators,
    direct broadcast satellite systems and other destinations, over
    fiber and satellite, using automated systems for broadcast
    playback. Ascent Media also operates industry-standard
    encryption and/or compression systems as needed for customer
    satellite transmission and offers quality control, tape storage
    and trafficking services. Ascent Media operates television
    production studios with
    live-to-satellite
    interview services, cameras, production and audio control rooms,
    videotape playback and record, multi-language prompters,
    computerized lighting, dressing and makeup rooms and field and
    teleconferencing services. Ascent Media offers complete
    post-production services for
    on-air promotions,
    including graphics, editing, voice-over record, sound effects
    editing, sound mixing and music composition. For programming
    designed for export to other markets, Ascent Media provides
    language translation, subtitling and voice dubbing. Currently,
    over two hundred 24/ 7 programming feeds are supported by Ascent
    Medias facilities in the United States, London and
    Singapore.

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Satellite transport. Ascent Media operates satellite
    earth station facilities in Singapore, California, New York, New
    Jersey, Minnesota, Connecticut and Florida. Ascent Medias
    facilities are staffed 24 hours a day and may be used for
    uplink, downlink and turnaround services. Ascent Media accesses
    various satellite neighborhoods, including basic and
    premium cable, broadcast syndication,
    direct-to-home and DBS
    markets. Ascent Media resells transponder capacity for
    occasional and full-time use and bundles its transponder
    capacity with other broadcast and syndication services to
    provide a complete broadcast package at a fixed price. Ascent
    Medias teleports are high-bandwidth
    communications gateways with video switches and facilities for
    satellite, optical fiber and microwave transmission. Ascent
    Medias facilities offer satellite antennae capable of
    transmitting and receiving feeds in both
    C-Band and
    Ku-Band frequencies.
    Ascent Media also provides transportable services, including
    point-to-point
    microwave transmission, transportable up-link and downlink
    transmission and broadcast quality teleconference services.
|
| | Engineering and systems integration. Ascent Media
    designs, builds, installs and services advanced video systems
    for the broadcast, cable television and other broadband
    telecommunications industries and other professional and
    corporate markets. Ascent Medias engineering and systems
    integration clients include major broadcast networks, numerous
    cable channels, corporate television networks, a major
    telecommunications company as well as multiple production and
    post-production facilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         



| |         
| | --------
| | Strategy





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Increase scale of operations. Ascent Media intends to
    increase the scale of its operations through a combination of
    internal investment in facilities and capital expenditures plus
    external investment in companies and joint ventures. Its goal is
    to attract additional customers in its existing lines of
    business and expand its business operations geographically.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | Expand scope of services. Ascent Media intends to expand
    the scope of its services by applying its core capabilities to
    new business activities, providing content management and
    distribution services based on electronic data files rather than
    physical tapes, participating in emerging high
    revenue-generating services such as
    re-formatting content
    for distribution to new platforms, and gradually attracting new
    customers with unique service needs that are less susceptible to
    competitive threats. One growth initiative is to expand Ascent
    Medias service offerings for a growing number of
    non-traditional networks, also referred to as captive audience
    networks. DHCs acquisition of AccentHealth  a
    health media company with a captive audience network that
    reaches 19 million consumers per month in over 11,000
    physician waiting rooms nationwide  will be managed
    by Ascent Media and will help enhance Ascent Medias
    services to captive audience networks.
|
| | Optimize the organization. In order to reach the first
    two strategic goals described above, Ascent Media also plans to
    improve its internal organization. Specifically, Ascent Media
    intends to re-align its
    divisional structure to become more compatible with its
    diversified customer base and the integrated file-based
    solutions that they seek. Ascent Media also intends to focus on
    its content security initiative,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | creating greater efficiency when it provides parallel tape-based
    and file-based solutions, invest additional resources in its
    facilities, develop relationships with other companies and/or
    form joint ventures.



| |            
| | -----------
| | Seasonality





| |          
| | ---------
| | DISCOVERY





direct-to




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video-on IP-delivered




video-on




| |                        
| | -----------------------
| | Discovery Networks U.S.

video-on




| |                                 
| | --------------------------------
| | Discovery Networks International



I-9



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| |                                      
| | -------------------------------------
| | Discovery Commerce, Education & Other







| |                                  
| | ---------------------------------
| | Discovery Stockholders Agreement







I-10



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| |                   
| | ------------------
| | Regulatory Matters



| |             
| | ------------
| | Ascent Media





| |          
| | ---------
| | Discovery





I-11



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I-12



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| |                                 
| | --------------------------------
| | International Regulatory Matters



Competition






Employees






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|    |                                             
|--- | --------------------------------------------
|(d) | Financial Information About Geographic Areas





|    |                      
|--- | ---------------------
|(e) | Available Information

10-Ks, 10-Qs 8-Ks,











|         |              
|-------- | -------------
|Item 1A. | Risk Factors.



We are a holding company, and we could be unable in the
future to obtain cash in amounts sufficient to service our
financial obligations or meet our other commitments.


We do not have access to the cash that Discovery generates
from its operating activities.


We have limited operating history as a separate company upon
which you can evaluate our performance.


I-14



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##### Table of Contents





We do not have the right to manage Discovery, which means we
cannot cause Discovery to operate in a manner that is favorable
to us.




The liquidity and value of our interest in Discovery may be
adversely affected by a Stockholders Agreement to which we
are a party.






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##### Table of Contents



Because we do not control the business management practices
of Discovery, we rely on Discovery for the financial information
that we use in accounting for our ownership interest in
Discovery.


We cannot be certain that we will be successful in
integrating acquired businesses, if any.


A loss of any of Ascent Medias large customers would
reduce our revenue.


Ascent Medias business depends on certain client
industries. video-on


Changes in technology may limit the competitiveness of and
demand for our services.


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video-on


A labor dispute in our client industries may disrupt our
business.






Risk of loss from earthquakes or other catastrophic events
could disrupt Ascent Medias business.


Discovery is dependent upon advertising revenue. video-on


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Discoverys revenue is dependent upon the maintenance of
affiliation agreements with cable and satellite distributors on
acceptable terms. direct-to


Our businesses are subject to risks of adverse government
regulation.


Failure to obtain renewal of FCC licenses could disrupt our
business.


Our businesses operate in an increasingly competitive market,
and there is a risk that our businesses may not be able to
effectively compete with other providers in the future. Metro-Goldwyn


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in-house. in-house in-house


direct-to


direct-to


We have overlapping directors and management with Liberty and
Liberty Global, Inc., which may lead to conflicting
interests.


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We and Liberty or LGI may compete for business
opportunities.


If we are unable to satisfy the requirements of
Section 404 of the Sarbanes-Oxley Act of 2002, or our
internal control over financial reporting is not effective, the
reliability of our financial statements may be questioned and
our stock price may suffer. 10-K


It may be difficult for a third party to acquire us, even if
doing so may be beneficial to our shareholders.




| |   |                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | authorizing a capital structure with multiple series of common
    stock: a Series B that entitles the holders to ten votes
    per share, a Series A that entitles the holders to one vote
    per share and a Series C that, except as otherwise required
    by applicable law, entitles the holders to no voting rights;

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | authorizing the issuance of blank check preferred
    stock, which could be issued by our board of directors to
    increase the number of outstanding shares and thwart a takeover
    attempt;                                                                                                                                                                                                          
|
| |  | classifying our board of directors with staggered three-year
    terms, which may lengthen the time required to gain control of
    our board of directors;                                                                                                                                                                                                                                                 
|
| |  | limiting who may call special meetings of shareholders;                                                                                                                                                                                                                                                                                                                                                     
|
| |  | prohibiting shareholder action by written consent (subject to
    certain exceptions), thereby requiring shareholder action to be
    taken at a meeting of the shareholders;                                                                                                                                                                                                                               
|
| |  | establishing advance notice requirements for nominations of
    candidates for election to our board of directors or for
    proposing matters that can be acted upon by shareholders at
    shareholder meetings;                                                                                                                                                                                          
|
| |  | requiring shareholder approval by holders of at least 80% of our
    voting power or the approval by at least 75% of our board of
    directors with respect to certain extraordinary matters, such as
    a merger or consolidation of our company, a sale of all or
    substantially all of our assets or an amendment to our restated
    certificate of incorporation;                                 
|
| |  | requiring the consent of the holders of at least 75% of the
    outstanding Series B common stock (voting as a separate
    class) to certain share distributions and other corporate
    actions in which the voting power of the Series B common
    stock would be diluted by, for example, issuing shares having
    multiple votes per share as a dividend to holders of
    Series A common stock; and
|
| |  | the existence of authorized and unissued stock which would allow
    our board of directors to issue shares to persons friendly to
    current management, thereby protecting the continuity of its
    management, or which could be used to dilute the stock ownership
    of persons seeking to obtain control of us.                                                                                    



Holders of any single series of our common stock may not have
any remedies if any action by our directors or officers has an
adverse effect on only that series of our common stock.







|         |                           
|-------- | --------------------------
|Item 1B. | Unresolved Staff Comments.








|        |            
|------- | -----------
|Item 2. | Properties.





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|        |                   
|------- | ------------------
|Item 3. | Legal Proceedings.

Paul J. Dujardin v. Liberty Media Corporation and Ascent
Media. 10b-5 10b-5







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



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PART II.







|        |                                                                                                                      
|------- | ---------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity, Related
    Stockholder Matters and Issuer Purchases of Equity
    Securities.

Market Information




|     |                                          |          |   |       |          |  |   |       |  |  |     |       |  |  |   |       | 
|---- | ---------------------------------------- | -------- | - | ----- | -------- |  | - | ----- |  |  | --- | ----- |  |  | - | ----- | 
|     |                                          | Series A |   |       | Series B | 
|     |                                          |          |   |       |          | 
|     |                                          | High     |   |       | Low      |  |   | High  |  |  | Low |      
|     |                                          |          |   |       |          |  |   |       |  |  |     |      
|2005 |                                          |          |   |       |          |  |   |       |  |  |     |       |  |  |   |      
|     | July 21, 2005 through September 30, 2005 |          | $ | 16.30 |          |  | $ | 13.51 |  |  | $   | 16.77 |  |  | $ | 14.40 | 
|     | Fourth quarter                           |          | $ | 16.23 |          |  | $ | 13.69 |  |  | $   | 16.80 |  |  | $ | 13.59 | 

Holders




Dividends




Securities Authorized for Issuance Under Equity
Compensation Plans







Item 6.     Selected
Financial Data.






|                                             |  |                      |           |  |      |   |           |      |  |   |           |  |  |      |           |  |  |   |           | 
|-------------------------------------------- |  | -------------------- | --------- |  | ---- | - | --------- | ---- |  | - | --------- |  |  | ---- | --------- |  |  | - | --------- | 
|                                             |  | December 31,         |          
|                                             |  |                      |          
|                                             |  | 2005                 |           |  | 2004 |   |           | 2003 |  |   | 2002      |  |  | 2001 |          
|                                             |  |                      |           |  |      |   |           |      |  |   |           |  |  |      |          
|                                             |  | Amounts in thousands |          
|Summary Balance Sheet Data(1):               |  |                      |           |  |      |   |           |      |  |   |           |  |  |      |           |  |  |   |           | 
|Investment in Discovery Communications, Inc. |  | $                    | 3,018,622 |  |      | $ | 2,945,782 |      |  | $ | 2,863,003 |  |  | $    | 2,816,513 |  |  | $ | 2,899,824 | 
|Goodwill                                     |  | $                    | 2,133,518 |  |      | $ | 2,135,446 |      |  | $ | 2,130,897 |  |  | $    | 2,104,705 |  |  | $ | 2,034,102 | 
|Total assets                                 |  | $                    | 5,819,236 |  |      | $ | 5,564,828 |      |  | $ | 5,396,627 |  |  | $    | 5,373,150 |  |  | $ | 5,399,702 | 
|Long-term debt                               |  | $                    |          |  |      | $ |          |      |  | $ |          |  |  | $    | 401,984   |  |  | $ | 443,685   | 
|Subordinated notes payable to Liberty        |  | $                    |          |  |      | $ |          |      |  | $ |          |  |  | $    | 205,299   |  |  | $ | 183,685   | 
|Stockholders equity                         |  | $                    | 4,575,425 |  |      | $ | 4,347,279 |      |  | $ | 4,260,269 |  |  | $    | 3,617,417 |  |  | $ | 3,578,364 | 

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|                                                      |  |                                                |         |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   |          |  
|----------------------------------------------------- |  | ---------------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | -------- | - |  | - | -------- | -
|                                                      |  | Years Ended December 31,                       |        
|                                                      |  |                                                |        
|                                                      |  | 2005                                           |         |   | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |         
|                                                      |  |                                                |         |   |      |   |         |      |  |   |         |   |  |      |         
|                                                      |  | Amounts in thousands, except per share amounts |        
|Summary Statement of Operations Data:                 |  |                                                |         |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   |          |  
|Revenue                                               |  | $                                              | 694,509 |   |      | $ | 631,215 |      |  | $ | 506,103 |   |  | $    | 539,333  |   |  | $ | 592,732  |  
|Operating income (loss)(1)                            |  | $                                              | (1,402  | ) |      | $ | 16,935  |      |  | $ | (2,404  | ) |  | $    | (61,452  | ) |  | $ | (350,628 | )
|Share of earnings (losses) of Discovery(2)            |  | $                                              | 79,810  |   |      | $ | 84,011  |      |  | $ | 37,271  |   |  | $    | (32,046  | ) |  | $ | (277,919 | )
|Net earnings (loss)(1)                                |  | $                                              | 33,276  |   |      | $ | 66,108  |      |  | $ | (52,394 | ) |  | $    | (129,275 | ) |  | $ | (608,261 | )
|Basic and diluted earnings (loss) per common share(3) |  | $                                              | .12     |   |      | $ | 0.24    |      |  | $ | (0.19   | ) |  | $    | (0.46    | ) |  | $ | (2.17    | )






|    |                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes impairment of goodwill and other long-lived assets of
    $51,000, $562,000, $83,718,000 and $307,932,000 for the years
    ended December 31, 2004, 2003, 2002 and 2001, respectively.                                                                                                                                                                                                                        
|   
|(2) | Effective January 1, 2002, we adopted Statement of
    Financial Accounting Standards No. 142, Goodwill and
    Other Intangible Assets(Statement 142),
    which among other matters, provides that excess costs that are
    considered equity method goodwill no longer be amortized. Share
    of losses of Discovery includes excess basis amortization of
    $188,570,000 for the year ended December 31, 2001.
|   
|(3) | Basic and diluted net earnings (loss) per common share is based
    on (1) 280,199,000 shares, which is the number of shares
    issued in the spin off, for all periods prior to the spin off
    and (2) the actual number of outstanding shares for all
    periods subsequent to the spin off.                                                                                                                      




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




Overview








II-2



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##### Table of Contents







Acquisitions


Cinetech.


London Playout Centre.


Sony Electronics System Integration Center.


Operating Cash Flow




Results of Operations








II-3



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##### Table of Contents











|                                |  |                          |         |   |      |   |         |      |  |   |         |  
|------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                |  | Years Ended December 31, |        
|                                |  |                          |        
|                                |  | 2005                     |         |   | 2004 |   |         | 2003 | 
|                                |  |                          |         |   |      |   |         |      | 
|                                |  | Amounts in thousands     |        
|Segment Revenue                 |  |                          |         |   |      |   |         |      |  |   |         |  
|Creative services group         |  | $                        | 304,393 |   |      | $ | 295,841 |      |  | $ | 270,830 |  
|Media management services group |  |                          | 118,489 |   |      |   | 109,982 |      |  |   | 107,070 |  
|Network services group          |  |                          | 271,627 |   |      |   | 225,392 |      |  |   | 128,203 |  
|Corporate and other             |  |                          |        |   |      |   |        |      |  |   |        |  
|                                |  |                          |         |   |      |   |         |      | 
|                                |  | $                        | 694,509 |   |      | $ | 631,215 |      |  | $ | 506,103 |  
|                                |  |                          |         |   |      |   |         |      | 
|Segment Operating Cash Flow     |  |                          |         |   |      |   |         |      |  |   |         |  
|Creative services group         |  | $                        | 57,323  |   |      | $ | 55,847  |      |  | $ | 43,786  |  
|Media management services group |  |                          | 13,481  |   |      |   | 17,430  |      |  |   | 22,074  |  
|Network services group          |  |                          | 55,781  |   |      |   | 62,163  |      |  |   | 43,221  |  
|Corporate and other             |  |                          | (47,960 | ) |      |   | (37,645 | )    |  |   | (32,901 | )
|                                |  |                          |         |   |      |   |         |      | 
|                                |  | $                        | 78,625  |   |      | $ | 97,795  |      |  | $ | 76,180  |  
|                                |  |                          |         |   |      |   |         |      | 

Revenue.


II-4



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##### Table of Contents





Cost of Services.




Selling, General and Administrative.




Depreciation and Amortization.


Stock Compensation.


II-5



---



##### Table of Contents



in-the 5-year


in-the


Restructuring Charges.


Interest Expense.


Share of Earnings of Discovery.




Income Taxes.


II-6



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##### Table of Contents





Liquidity and Capital Resources








Off-Balance Sheet Arrangements and Contractual
Obligations




|                              |  |                        |        |  |           |   |        |           |  |   |         |  |  |       |        |  |  |   |         | 
|----------------------------- |  | ---------------------- | ------ |  | --------- | - | ------ | --------- |  | - | ------- |  |  | ----- | ------ |  |  | - | ------- | 
|                              |  | Payments Due by Period |       
|                              |  |                        |       
|                              |  | Less Than              |        |  |           |   | After  |           |  |  
|                              |  | 1 Year                 |        |  | 1-3 Years |   |        | 4-5 Years |  |   | 5 Years |  |  | Total |       
|                              |  |                        |        |  |           |   |        |           |  |   |         |  |  |       |       
|                              |  | Amounts in thousands   |       
|Operating leases              |  | $                      | 30,563 |  |           | $ | 54,677 |           |  | $ | 43,159  |  |  | $     | 47,033 |  |  | $ | 175,432 | 
|Other                         |  |                        |       |  |           |   | 6,100  |           |  |   |        |  |  |       |       |  |  |   | 6,100   | 
|                              |  |                        |        |  |           |   |        |           |  |   |         |  |  |       |       
|Total Contractual Obligations |  | $                      | 30,563 |  |           | $ | 60,777 |           |  | $ | 43,159  |  |  | $     | 47,033 |  |  | $ | 181,532 | 
|                              |  |                        |        |  |           |   |        |           |  |   |         |  |  |       |       



II-7



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Recent Accounting Pronouncements








Critical Accounting Estimates


Valuation of Long-lived Assets and Amortizable Other
Intangible Assets.


Valuation of Goodwill and Non-amortizable Other Intangible
Assets.


Valuation of Trade Receivables.


II-8



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##### Table of Contents





Valuation of Deferred Tax Assets.


Discovery








II-9



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##### Table of Contents





| |                                  
| | ---------------------------------
| | Consolidated Results of Discovery

|                                                               |                            |                          |            |           |      |   |           |           |  |   |           |           | 
|-------------------------------------------------------------- | -------------------------- | ------------------------ | ---------- | --------- | ---- | - | --------- | --------- |  | - | --------- | --------- | 
|                                                               |                            | Years Ended December 31, |           
|                                                               |                            |                          |           
|                                                               |                            | 2005                     |            |           | 2004 |   |           | 2003      | 
|                                                               |                            |                          |            |           |      |   |           |           | 
|                                                               |                            | Amounts in thousands     |           
|Revenue                                                        |                            |                          |            |           |      |   |           |           |  |   |           |          
|Advertising                                                    |                            | $                        | 1,187,823  |           |      | $ | 1,133,807 |           |  | $ | 1,010,585 |          
|Distribution                                                   |                            |                          | 1,198,686  |           |      |   | 976,362   |           |  |   | 747,927   |          
|Other                                                          |                            |                          | 285,245    |           |      |   | 255,177   |           |  |   | 236,535   |          
|                                                               |                            |                          |            |           |      |   |           |           | 
|                                                               | Total revenue              |                          |            | 2,671,754 |      |   |           | 2,365,346 |  |   |           | 1,995,047 | 
|                                                               |                            |                          |            |           |      |   |           |           | 
|Expenses                                                       |                            |                          |            |           |      |   |           |           |  |   |           |          
|Cost of revenue                                                |                            |                          | (979,765   | )         |      |   | (846,316  | )         |  |   | (751,578  | )        
|SG&A expense                                                   |                            |                          | (1,005,351 | )         |      |   | (856,340  | )         |  |   | (735,017  | )        
|                                                               |                            |                          |            |           |      |   |           |           | 
|                                                               | Operating cash flow        |                          |            | 686,638   |      |   |           | 662,690   |  |   |           | 508,452   | 
|                                                               |                            |                          |            |           |      |   |           |           | 
|Expenses arising from long-term incentive plans                |                            |                          | (49,465    | )         |      |   | (71,515   | )         |  |   | (74,119   | )        
|Depreciation & amortization                                    |                            |                          | (123,209   | )         |      |   | (129,011  | )         |  |   | (120,172  | )        
|Gain on sale of patents                                        |                            |                          |           |           |      |   | 22,007    |           |  |   |          |          
|                                                               |                            |                          |            |           |      |   |           |           | 
|                                                               | Operating income           |                          |            | 513,964   |      |   |           | 484,171   |  |   |           | 314,161   | 
|                                                               |                            |                          |            |           |      |   |           |           | 
|Other Income (Expense)                                         |                            |                          |            |           |      |   |           |           |  |   |           |          
|Interest expense, net                                          |                            |                          | (184,575   | )         |      |   | (167,420  | )         |  |   | (159,409  | )        
|Realized and unrealized gains from derivative instruments, net |                            |                          | 22,499     |           |      |   | 45,540    |           |  |   | 21,405    |          
|Minority interests in consolidated subsidiaries                |                            |                          | (43,696    | )         |      |   | (54,940   | )         |  |   | (35,965   | )        
|Other                                                          |                            |                          | 13,771     |           |      |   | 2,470     |           |  |   | (2,170    | )        
|                                                               |                            |                          |            |           |      |   |           |           | 
|                                                               | Income before income taxes |                          |            | 321,963   |      |   |           | 309,821   |  |   |           | 138,022   | 
|Income tax expense                                             |                            |                          | (162,343   | )         |      |   | (141,799  | )         |  |   | (74,785   | )        
|                                                               |                            |                          |            |           |      |   |           |           | 
|                                                               | Net income                 |                          | $          | 159,620   |      |   | $         | 168,022   |  |   | $         | 63,237    | 
|                                                               |                            |                          |            |           |      |   |           |           | 



| |                                      
| | -------------------------------------
| | Business Segment Results of Discovery

|                                      |                           |                          |           |           |      |   |           |           |  |   |           |           | 
|------------------------------------- | ------------------------- | ------------------------ | --------- | --------- | ---- | - | --------- | --------- |  | - | --------- | --------- | 
|                                      |                           | Years Ended December 31, |          
|                                      |                           |                          |          
|                                      |                           | 2005                     |           |           | 2004 |   |           | 2003      | 
|                                      |                           |                          |           |           |      |   |           |           | 
|                                      |                           | Amounts in thousands     |          
|Revenue                               |                           |                          |           |           |      |   |           |           |  |   |           |          
|U.S. networks                         |                           | $                        | 1,743,358 |           |      | $ | 1,599,678 |           |  | $ | 1,345,097 |          
|International networks                |                           |                          | 731,352   |           |      |   | 588,416   |           |  |   | 480,129   |          
|Discovery commerce, education & other |                           |                          | 197,044   |           |      |   | 177,252   |           |  |   | 169,821   |          
|                                      |                           |                          |           |           |      |   |           |           | 
|                                      | Total revenue             |                          | $         | 2,671,754 |      |   | $         | 2,365,346 |  |   | $         | 1,995,047 | 
|                                      |                           |                          |           |           |      |   |           |           | 
|Operating Cash Flow                   |                           |                          |           |           |      |   |           |           |  |   |           |          
|U.S. networks                         |                           | $                        | 643,366   |           |      | $ | 597,922   |           |  | $ | 482,747   |          
|International networks                |                           |                          | 108,543   |           |      |   | 99,105    |           |  |   | 72,272    |          
|Discovery commerce, education & other |                           |                          | (65,271   | )         |      |   | (34,337   | )         |  |   | (46,567   | )        
|                                      |                           |                          |           |           |      |   |           |           | 
|                                      | Total operating cash flow |                          | $         | 686,638   |      |   | $         | 662,690   |  |   | $         | 508,452   | 
|                                      |                           |                          |           |           |      |   |           |           | 






|      |                                                                                                                                                                                     
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note: | Discovery commerce, education & other includes
    intercompany eliminations. Certain prior period amounts have
    been reclassified to conform to the current period presentation.

Revenue.


II-10



---



##### Table of Contents









video-on






Cost of Revenue.


II-11



---



##### Table of Contents







SG&A Expenses.




Expenses Arising from Long-term Incentive Plans.


Depreciation and Amortization.


II-12



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Gain on Sale of Patents.




| |                         
| | ------------------------
| | Other Income and Expense

Interest Expense.


Unrealized Gains from Derivative Instruments, net.


Minority Interests in Consolidated Subsidiaries.


Income Taxes.




| |                              
| | -----------------------------
| | Liquidity & Capital Resources









II-13



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##### Table of Contents









Contractual Obligations.




|                     |       |                           |           |           |        |   |         |           |       |   |           |         |  |         |           |           |  |   |         |           | 
|-------------------- | ----- | ------------------------- | --------- | --------- | ------ | - | ------- | --------- | ----- | - | --------- | ------- |  | ------- | --------- | --------- |  | - | ------- | --------- | 
|                     |       | Payments Due by Period(2) |          
|                     |       |                           |          
|                     |       |                           |           | Less Than |        |   |         |           | After |  
|                     |       | Total                     |           |           | 1 Year |   |         | 1-3 Years |       |   | 4-5 Years |         |  | 5 Years |          
|                     |       |                           |           |           |        |   |         |           |       |   |           |         |  |         |          
|                     |       | Amounts in thousands      |          
|Long-term debt       |       | $                         | 2,573,000 |           |        | $ | 320,000 |           |       | $ | 242,500   |         |  | $       | 1,075,500 |           |  | $ | 935,000 |          
|Capital leases       |       |                           | 28,167    |           |        |   | 6,488   |           |       |   | 9,478     |         |  |         | 5,316     |           |  |   | 6,885   |          
|Operating leases     |       |                           | 435,414   |           |        |   | 63,403  |           |       |   | 125,634   |         |  |         | 76,992    |           |  |   | 169,385 |          
|Program license fees |       |                           | 620,403   |           |        |   | 357,728 |           |       |   | 121,101   |         |  |         | 97,632    |           |  |   | 43,942  |          
|Launch incentives    |       |                           | 71,520    |           |        |   | 36,156  |           |       |   | 33,219    |         |  |         | 2,145     |           |  |   |        |          
|Other(1)             |       |                           | 253,890   |           |        |   | 73,401  |           |       |   | 127,087   |         |  |         | 41,541    |           |  |   | 11,861  |          
|                     |       |                           |           |           |        |   |         |           |       |   |           |         |  |         |          
|                     | Total |                           | $         | 3,982,394 |        |   | $       | 857,176   |       |   | $         | 659,019 |  |         | $         | 1,299,126 |  |   | $       | 1,167,073 | 
|                     |       |                           |           |           |        |   |         |           |       |   |           |         |  |         |          






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents Discoverys obligations to purchase goods and
    services whereby the underlying agreements are enforceable,
    legally binding and specify all significant terms. The more
    significant purchase obligations include: agreements related to
    audience ratings, market research, contracts for entertainment
    talent and other education and service project agreements.                                                                                                                                                                                                              
|   
|(2) | The table above does not include certain long-term obligations
    reflected in the Discovery consolidated balance sheet as the
    timing of the payments cannot be predicted or the amounts will
    not be settled in cash. The most significant of these
    obligations is the $46.1 million accrued under
    Discoverys LTIP plans. In addition, amounts accrued in the
    Discovery consolidated balance sheet related to derivative
    financial instruments are not included in the table as such
    amounts may not be settled in cash or the timing of the payments
    cannot be predicted.





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##### Table of Contents










|         |                                                                
|-------- | ---------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures about Market
    Risk.

Foreign Currency Risk







Item 8.     Financial
Statements and Supplementary Data.


S-X 10-K.







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








|         |                         
|-------- | ------------------------
|Item 9A. | Controls and Procedures.

13a-15 15d-15,









|         |                   
|-------- | ------------------
|Item 9B. | Other Information.



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##### Table of Contents






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM














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





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##### Table of Contents



DISCOVERY HOLDING COMPANY





Consolidated Balance Sheets


December 31, 2005 and 2004


|                                          |                                                                                                                                            |                                            |           |            |           |  |           |            |           | 
|----------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | --------- | ---------- | --------- |  | --------- | ---------- | --------- | 
|                                          |                                                                                                                                            | 2005                                       |           |            | 2004      | 
|                                          |                                                                                                                                            |                                            |           |            |           | 
|                                          |                                                                                                                                            | Amounts in thousands                       |          
|ASSETS                                   
|Current assets:                           |                                                                                                                                            |                                            |           |            |           |  |           |           
|                                          | Cash and cash equivalents                                                                                                                  |                                            | $         | 250,352    |           |  | $         | 21,641     |          
|                                          | Trade receivables, net                                                                                                                     |                                            |           | 134,615    |           |  |           | 151,120    |          
|                                          | Prepaid expenses                                                                                                                           |                                            |           | 10,986     |           |  |           | 17,399     |          
|                                          | Other current assets                                                                                                                       |                                            |           | 4,433      |           |  |           | 8,809      |          
|                                          |                                                                                                                                            |                                            |           |            |           | 
|                                          |                                                                                                                                            | Total current assets                       |           |            | 400,386   |  |           |            | 198,969   | 
|                                          | Investment in Discovery Communications, Inc.
    (Discovery) (note 5)                                                                    |                                            |           | 3,018,622  |           |  |           | 2,945,782  |          
|                                          | Property, plant, and equipment, net (note 6)                                                                                               |                                            |           | 256,245    |           |  |           | 258,741    |          
|                                          | Goodwill (note 7)                                                                                                                          |                                            |           | 2,133,518  |           |  |           | 2,135,446  |          
|                                          | Other assets, net                                                                                                                          |                                            |           | 10,465     |           |  |           | 25,890     |          
|                                          |                                                                                                                                            |                                            |           |            |           | 
|                                          |                                                                                                                                            | Total assets                               |           | $          | 5,819,236 |  |           | $          | 5,564,828 | 
|                                          |                                                                                                                                            |                                            |           |            |           | 
|                                         
|LIABILITIES AND STOCKHOLDERS EQUITY     
|Current liabilities:                      |                                                                                                                                            |                                            |           |            |           |  |           |           
|                                          | Accounts payable                                                                                                                           |                                            | $         | 26,854     |           |  | $         | 33,327     |          
|                                          | Accrued payroll and related liabilities                                                                                                    |                                            |           | 21,651     |           |  |           | 23,632     |          
|                                          | Other accrued liabilities                                                                                                                  |                                            |           | 23,949     |           |  |           | 29,606     |          
|                                          | Deferred revenue                                                                                                                           |                                            |           | 17,491     |           |  |           | 20,858     |          
|                                          | Due to Liberty Media Corporation (Liberty)                                                                                               |                                            |           |           |           |  |           | 1,104      |          
|                                          |                                                                                                                                            |                                            |           |            |           | 
|                                          |                                                                                                                                            | Total current liabilities                  |           |            | 89,945    |  |           |            | 108,527   | 
|Deferred income tax liabilities (note 11) |                                                                                                                                            |                                            | 1,131,505 |            |           |  | 1,083,964 |           
|Other liabilities                         |                                                                                                                                            |                                            | 22,361    |            |           |  | 25,058    |           
|                                          |                                                                                                                                            |                                            |           |            |           | 
|                                          |                                                                                                                                            | Total liabilities                          |           |            | 1,243,811 |  |           |            | 1,217,549 | 
|                                          |                                                                                                                                            |                                            |           |            |           | 
|Commitments and contingencies (note 16)   |                                                                                                                                            |                                            |           |            |           |  |           |           
|Stockholders equity (note 12):           |                                                                                                                                            |                                            |           |            |           |  |           |           
|                                          | 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
    268,097,442 shares at December 31, 2005                                          |                                            |           | 2,681      |           |  |           |           |          
|                                          | Series B common stock, $.01 par value. Authorized
    50,000,000 shares; issued and outstanding
    12,106,093 shares at December 31, 2005 |                                            |           | 121        |           |  |           |           |          
|                                          | Series C common stock, $.01 par value. Authorized
    600,000,000 shares; no shares issued                                                 |                                            |           |           |           |  |           |           |          
|                                          | Additional paid-in capital                                                                                                                 |                                            |           | 5,712,304  |           |  |           |           |          
|                                          | Parents investment                                                                                                                        |                                            |           |           |           |  |           | 5,506,066  |          
|                                          | Accumulated deficit                                                                                                                        |                                            |           | (1,137,821 | )         |  |           | (1,171,097 | )        
|                                          | Accumulated other comprehensive earnings (loss)                                                                                            |                                            |           | (1,860     | )         |  |           | 12,310     |          
|                                          |                                                                                                                                            |                                            |           |            |           | 
|                                          |                                                                                                                                            | Total stockholders equity                 |           |            | 4,575,425 |  |           |            | 4,347,279 | 
|                                          |                                                                                                                                            |                                            |           |            |           | 
|                                          |                                                                                                                                            | Total liabilities and stockholders equity |           | $          | 5,819,236 |  |           | $          | 5,564,828 | 
|                                          |                                                                                                                                            |                                            |           |            |           | 



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##### Table of Contents



DISCOVERY HOLDING COMPANY





Consolidated Statements of Operations and Comprehensive
Earnings (Loss)


Years ended December 31, 2005, 2004 and 2003


|                                                             |                                                           |                                                             |         |         |         |   |         |         |        |   |         |         |       | 
|------------------------------------------------------------ | --------------------------------------------------------- | ----------------------------------------------------------- | ------- | ------- | ------- | - | ------- | ------- | ------ | - | ------- | ------- | ----- | 
|                                                             |                                                           | 2005                                                        |         |         | 2004    |   |         | 2003    |       
|                                                             |                                                           |                                                             |         |         |         |   |         |         |       
|                                                             |                                                           | Amounts in thousands                                        |        
|Net revenue                                                  |                                                           | $                                                           | 694,509 |         |         | $ | 631,215 |         |        | $ | 506,103 |        
|Operating expenses:                                          |                                                           |                                                             |         |         |         |   |         |         |        |   |         |        
|                                                             | Cost of services                                          |                                                             |         | 445,839 |         |   |         | 380,290 |        |   |         | 301,005 |      
|                                                             | Selling, general, and administrative (SG&A)             |                                                             |         | 170,045 |         |   |         | 153,130 |        |   |         | 128,918 |      
|                                                             | Depreciation and amortization                             |                                                             |         | 76,377  |         |   |         | 77,605  |        |   |         | 70,526  |      
|                                                             | Stock compensation  SG&A                                 |                                                             |         | 4,383   |         |   |         | 2,775   |        |   |         | 2,602   |      
|                                                             | Restructuring and other charges                           |                                                             |         | 4,112   |         |   |         |        |        |   |         | 3,476   |      
|                                                             | Loss (gain) on sale of operating assets                   |                                                             |         | (4,845  | )       |   |         | 429     |        |   |         | 1,418   |      
|                                                             | Impairment of goodwill                                    |                                                             |         |        |         |   |         | 51      |        |   |         | 562     |      
|                                                             |                                                           |                                                             |         |         |         |   |         |         |       
|                                                             |                                                           |                                                             | 250,072 |         |         |   | 233,990 |         |        |   | 207,502 |        
|                                                             |                                                           |                                                             |         |         |         |   |         |         |       
|                                                             | Operating income (loss)                                   |                                                             |         | (1,402  | )       |   |         | 16,935  |        |   |         | (2,404  | )    
|Other income (expense):                                      |                                                           |                                                             |         |         |         |   |         |         |        |   |         |        
|                                                             | Share of earnings of Discovery                            |                                                             |         | 79,810  |         |   |         | 84,011  |        |   |         | 37,271  |      
|                                                             | Interest expense  third party                            |                                                             |         |        |         |   |         |        |        |   |         | (47,489 | )    
|                                                             | Interest to parent                                        |                                                             |         |        |         |   |         |        |        |   |         | (24,689 | )    
|                                                             | Other, net                                                |                                                             |         | 3,704   |         |   |         | 132     |        |   |         | 2,821   |      
|                                                             |                                                           |                                                             |         |         |         |   |         |         |       
|                                                             |                                                           |                                                             | 83,514  |         |         |   | 84,143  |         |        |   | (32,086 | )      
|                                                             |                                                           |                                                             |         |         |         |   |         |         |       
|                                                             | Earnings (loss) before income taxes and minority interest |                                                             |         | 82,112  |         |   |         | 101,078 |        |   |         | (34,490 | )    
|Income tax expense                                           |                                                           |                                                             | (48,836 | )       |         |   | (34,970 | )       |        |   | (20,156 | )      
|Minority interests in losses of subsidiaries                 |                                                           |                                                             |        |         |         |   |        |         |        |   | 2,252   |        
|                                                             |                                                           |                                                             |         |         |         |   |         |         |       
|                                                             | Net earnings (loss)                                       |                                                             | $       | 33,276  |         |   | $       | 66,108  |        |   | $       | (52,394 | )    
|                                                             |                                                           |                                                             |         |         |         |   |         |         |       
|Other comprehensive earnings (loss), net of taxes (note 14): |                                                           |                                                             |         |         |         |   |         |         |        |   |         |        
|                                                             |                                                           | Unrealized holding gains (losses) arising during the period |         |         | 651     |   |         |         | (1,162 | ) |         |         | 1,770 | 
|                                                             |                                                           | Foreign currency translation adjustments                    |         |         | (14,821 | ) |         |         | 6,797  |   |         |         | 7,528 | 
|                                                             |                                                           |                                                             |         |         |         |   |         |         |       
|                                                             |                                                           | Other comprehensive earnings (loss)                         |         |         | (14,170 | ) |         |         | 5,635  |   |         |         | 9,298 | 
|                                                             |                                                           |                                                             |         |         |         |   |         |         |       
|Comprehensive earnings (loss)                                |                                                           | $                                                           | 19,106  |         |         | $ | 71,743  |         |        | $ | (43,096 | )      
|                                                             |                                                           |                                                             |         |         |         |   |         |         |       
|Basic and diluted earnings (loss) per common share (note 3)  |                                                           | $                                                           | 0.12    |         |         | $ | 0.24    |         |        | $ | (0.19   | )      
|                                                             |                                                           |                                                             |         |         |         |   |         |         |       



II-18



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##### Table of Contents



DISCOVERY HOLDING COMPANY





Consolidated Statements of Cash Flows


Years ended December 31, 2005, 2004 and 2003


|                                               |                                                                                                |                                           |                                                      |         |         |         |        |         |         |          |        |          |         |         |  
|---------------------------------------------- | ---------------------------------------------------------------------------------------------- | ----------------------------------------- | ---------------------------------------------------- | ------- | ------- | ------- | ------ | ------- | ------- | -------- | ------ | -------- | ------- | ------- | -
|                                               |                                                                                                | 2005                                      |                                                      |         | 2004    |         |        | 2003    |        
|                                               |                                                                                                |                                           |                                                      |         |         |         |        |         |        
|                                               |                                                                                                | Amounts in thousands                      |                                                     
|                                               |                                                                                                | (see note 4)                              |                                                     
|Cash flows from operating activities:          |                                                                                                |                                           |                                                      |         |         |         |        |         |         |          |        |         
|                                               | Net earnings (loss)                                                                            |                                           | $                                                    | 33,276  |         |         | $      | 66,108  |         |          | $      | (52,394  | )      
|                                               | Adjustments to reconcile net earnings (loss) to net cash
    provided by operating activities: |                                           |                                                      |         |         |         |        |         |         |          |        |          |        
|                                               |                                                                                                | Depreciation and amortization             |                                                      |         | 76,377  |         |        |         | 77,605  |          |        |          | 70,526  |        
|                                               |                                                                                                | Stock compensation                        |                                                      |         | 4,383   |         |        |         | 2,775   |          |        |          | 2,602   |        
|                                               |                                                                                                | Payments for stock compensation           |                                                      |         | (2,139  | )       |        |         |        |          |        |          |        |        
|                                               |                                                                                                | Impairment of goodwill                    |                                                      |         |        |         |        |         | 51      |          |        |          | 562     |        
|                                               |                                                                                                | Noncash interest expense                  |                                                      |         |        |         |        |         |        |          |        |          | 26,218  |        
|                                               |                                                                                                | Amortization of debt discount             |                                                      |         |        |         |        |         |        |          |        |          | 19,044  |        
|                                               |                                                                                                | Share of earnings of Discovery            |                                                      |         | (79,810 | )       |        |         | (84,011 | )        |        |          | (37,271 | )      
|                                               |                                                                                                | Deferred income tax expense               |                                                      |         | 50,363  |         |        |         | 31,692  |          |        |          | 17,653  |        
|                                               |                                                                                                | Other non-cash charges (credits), net     |                                                      |         | (4,684  | )       |        |         | 706     |          |        |          | (3,149  | )      
|                                               | Changes in assets and liabilities (net of acquisitions):                                       |                                           |                                                      |         |         |         |        |         |         |          |        |          |        
|                                               |                                                                                                | Trade receivables                         |                                                      |         | 16,237  |         |        |         | (36,405 | )        |        |          | (4,040  | )      
|                                               |                                                                                                | Prepaid expenses and other current assets |                                                      |         | 10,804  |         |        |         | (6,631  | )        |        |          | (3,069  | )      
|                                               |                                                                                                | Payables and other liabilities            |                                                      |         | (19,516 | )       |        |         | 32,432  |          |        |          | (7,000  | )      
|                                               |                                                                                                |                                           |                                                      |         |         |         |        |         |        
|                                               |                                                                                                |                                           | Net cash provided by operating activities            |         |         | 85,291  |        |         |         | 84,322   |        |          |         | 29,682  |  
|                                               |                                                                                                |                                           |                                                      |         |         |         |        |         |        
|Cash flows from investing activities:          |                                                                                                |                                           |                                                      |         |         |         |        |         |         |          |        |         
|                                               | Capital expenditures                                                                           |                                           |                                                      | (90,526 | )       |         |        | (49,292 | )       |          |        | (25,863  | )      
|                                               | Cash paid for acquisitions                                                                     |                                           |                                                      |        |         |         |        | (44,238 | )       |          |        |         |        
|                                               | Net sales (purchases) of marketable securities                                                 |                                           |                                                      | 12,800  |         |         |        | (12,800 | )       |          |        |         |        
|                                               | Cash proceeds from dispositions                                                                |                                           |                                                      | 15,374  |         |         |        | 3,978   |         |          |        | 5,453    |        
|                                               | Other investing activities, net                                                                |                                           |                                                      | (394    | )       |         |        | 73      |         |          |        | 177      |        
|                                               |                                                                                                |                                           |                                                      |         |         |         |        |         |        
|                                               |                                                                                                |                                           | Net cash used in investing activities                |         |         | (62,746 | )      |         |         | (102,279 | )      |          |         | (20,233 | )
|                                               |                                                                                                |                                           |                                                      |         |         |         |        |         |        
|Cash flows from financing activities:          |                                                                                                |                                           |                                                      |         |         |         |        |         |         |          |        |         
|                                               | Net cash transfers from Liberty                                                                |                                           |                                                      | 206,044 |         |         |        | 30,999  |         |          |        |         |        
|                                               | Borrowings of long-term debt                                                                   |                                           |                                                      |        |         |         |        |        |         |          |        | 2,945    |        
|                                               | Payments of long-term debt and capital lease obligations                                       |                                           |                                                      | (12     | )       |         |        |        |         |          |        | (406,820 | )      
|                                               | Borrowings under convertible subordinated notes with Liberty                                   |                                           |                                                      |        |         |         |        |        |         |          |        | 391,027  |        
|                                               | Other financing activities                                                                     |                                           |                                                      | 134     |         |         |        |        |         |          |        |         |        
|                                               |                                                                                                |                                           |                                                      |         |         |         |        |         |        
|                                               |                                                                                                |                                           | Net cash provided by (used in) financing activities  |         |         | 206,166 |        |         |         | 30,999   |        |          |         | (12,848 | )
|                                               |                                                                                                |                                           |                                                      |         |         |         |        |         |        
|                                               |                                                                                                |                                           | Net increase (decrease) in cash and cash equivalents |         |         | 228,711 |        |         |         | 13,042   |        |          |         | (3,399  | )
|Cash and cash equivalents at beginning of year |                                                                                                |                                           | 21,641                                               |         |         |         | 8,599  |         |         |          | 11,998 |         
|                                               |                                                                                                |                                           |                                                      |         |         |         |        |         |        
|Cash and cash equivalents at end of year       |                                                                                                | $                                         | 250,352                                              |         |         | $       | 21,641 |         |         | $        | 8,599  |         
|                                               |                                                                                                |                                           |                                                      |         |         |         |        |         |        



II-19



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##### Table of Contents



DISCOVERY HOLDING COMPANY





Consolidated Statements of Stockholders Equity


Years ended December 31, 2005, 2004 and 2003


|                             |                                                                   |           |   |              |  |            |          |       |          |                      |     |             |       |   |               |       |  |               |           |           |                 |   |           |            |   |   |            |         |   |   |        |         |   |   |           |         |  
|---------------------------- | ----------------------------------------------------------------- | --------- | - | ------------ |  | ---------- | -------- | ----- | -------- | -------------------- | --- | ----------- | ----- | - | ------------- | ----- |  | ------------- | --------- | --------- | --------------- | - | --------- | ---------- | - | - | ---------- | ------- | - | - | ------ | ------- | - | - | --------- | ------- | -
|                             |                                                                   |           |   |              |  |            |          |       |          |                      |     | Accumulated |       |   |              
|                             |                                                                   |           |   | Common Stock |  | Additional |          |       |          |                      |     |             | Other |   |               | Total | 
|                             |                                                                   | Preferred |   |              |  | Paid-In    |          |       | Parents |                      |     | Accumulated |       |   | Comprehensive |       |  | Stockholders |          
|                             |                                                                   | Stock     |   | Series A     |  |            | Series B |       |          | Series C             |     | Capital     |       |   | Investment    |       |  | Deficit       |           |           | Earnings (Loss) |   |           | Equity     |  
|                             |                                                                   |           |   |              |  |            |          |       |          |                      |     |             |       |   |               |       |  |               |           |           |                 |   |           |            |  
|                             |                                                                   |           |   |              |  |            |          |       |          | Amounts in thousands |     |             |       |   |               |       | 
|Balance at January 1, 2003   |                                                                   | $         |  |              |  | $          |         |       |          | $                    |    |             |       | $ |              |       |  | $             |          |           |                 | $ | 4,804,212 |            |   | $ | (1,184,811 | )       |   | $ | (1,984 | )       |   | $ | 3,617,417 |        
|                             | Net loss                                                          |           |   |             |  |            |          |      |          |                      |     |            |       |   |               |      |  |               |           |          |                 |   |           |           |   |   |            | (52,394 | ) |   |        |        |   |   |           | (52,394 | )
|                             | Other comprehensive earnings                                      |           |   |             |  |            |          |      |          |                      |     |            |       |   |               |      |  |               |           |          |                 |   |           |           |   |   |            |        |   |   |        | 9,298   |   |   |           | 9,298   |  
|                             | Issuance of stock for interest on convertible subordinated notes  |           |   |             |  |            |          |      |          |                      |     |            |       |   |               |      |  |               |           |          |                 |   |           | 11,129     |   |   |            |        |   |   |        |        |   |   |           | 11,129  |  
|                             | Conversion of debt to equity                                      |           |   |             |  |            |          |      |          |                      |     |            |       |   |               |      |  |               |           |          |                 |   |           | 654,330    |   |   |            |        |   |   |        |        |   |   |           | 654,330 |  
|                             | Reallocation of enterprise level goodwill from Liberty            |           |   |             |  |            |          |      |          |                      |     |            |       |   |               |      |  |               |           |          |                 |   |           | 15,000     |   |   |            |        |   |   |        |        |   |   |           | 15,000  |  
|                             | Acquisition of Ascent Medias minority interest                   |           |   |             |  |            |          |      |          |                      |     |            |       |   |               |      |  |               |           |          |                 |   |           | 5,811      |   |   |            |        |   |   |        |        |   |   |           | 5,811   |  
|                             | Other                                                             |           |   |             |  |            |          |      |          |                      |     |            |       |   |               |      |  |               |           |          |                 |   |           | 317        |   |   |            |        |   |   |        | (639    | ) |   |           | (322    | )
|                             |                                                                   |           |   |              |  |            |          |       |          |                      |     |             |       |   |               |       |  |               |           |           |                 |   |           |            |   |   |           
|Balance at December 31, 2003 |                                                                   |           |  |              |  |            |         |       |          |                      |    |             |       |   |              |       |  |               |          |           |                 |   | 5,490,799 |            |   |   | (1,237,205 | )       |   |   | 6,675  |         |   |   | 4,260,269 |        
|                             | Net earnings                                                      |           |   |             |  |            |          |      |          |                      |     |            |       |   |               |      |  |               |           |          |                 |   |           |           |   |   |            | 66,108  |   |   |        |        |   |   |           | 66,108  |  
|                             | Other comprehensive earnings                                      |           |   |             |  |            |          |      |          |                      |     |            |       |   |               |      |  |               |           |          |                 |   |           |           |   |   |            |        |   |   |        | 5,635   |   |   |           | 5,635   |  
|                             | Stock compensation                                                |           |   |             |  |            |          |      |          |                      |     |            |       |   |               |      |  |               |           |          |                 |   |           | 2,268      |   |   |            |        |   |   |        |        |   |   |           | 2,268   |  
|                             | Reallocation of enterprise level goodwill from Liberty            |           |   |             |  |            |          |      |          |                      |     |            |       |   |               |      |  |               |           |          |                 |   |           | (18,000    | ) |   |            |        |   |   |        |        |   |   |           | (18,000 | )
|                             | Net cash transfers from Liberty                                   |           |   |             |  |            |          |      |          |                      |     |            |       |   |               |      |  |               |           |          |                 |   |           | 30,999     |   |   |            |        |   |   |        |        |   |   |           | 30,999  |  
|                             |                                                                   |           |   |              |  |            |          |       |          |                      |     |             |       |   |               |       |  |               |           |           |                 |   |           |            |   |   |           
|Balance at December 31, 2004 |                                                                   |           |  |              |  |            |         |       |          |                      |    |             |       |   |              |       |  |               |          |           |                 |   | 5,506,066 |            |   |   | (1,171,097 | )       |   |   | 12,310 |         |   |   | 4,347,279 |        
|                             | Net earnings                                                      |           |   |             |  |            |          |      |          |                      |     |            |       |   |               |      |  |               |           |          |                 |   |           |           |   |   |            | 33,276  |   |   |        |        |   |   |           | 33,276  |  
|                             | Other comprehensive loss                                          |           |   |             |  |            |          |      |          |                      |     |            |       |   |               |      |  |               |           |          |                 |   |           |           |   |   |            |        |   |   |        | (14,170 | ) |   |           | (14,170 | )
|                             | Stock compensation                                                |           |   |             |  |            |          |      |          |                      |     |            |       |   |               |      |  |               |           | 640       |                 |   |           | 2,222      |   |   |            |        |   |   |        |        |   |   |           | 2,862   |  
|                             | Net cash transfers from Liberty                                   |           |   |             |  |            |          |      |          |                      |     |            |       |   |               |      |  |               |           |          |                 |   |           | 206,044    |   |   |            |        |   |   |        |        |   |   |           | 206,044 |  
|                             | Change in capitalization in connection with Spin Off
    (note 2) |           |   |             |  |            |          | 2,681 |          |                      |     | 121         |       |   |               |      |  |               |           | 5,711,530 |                 |   |           | (5,714,332 | ) |   |            |        |   |   |        |        |   |   |           |        |  
|                             | Stock option exercises                                            |           |   |             |  |            |          |      |          |                      |     |            |       |   |               |      |  |               |           | 134       |                 |   |           |           |   |   |            |        |   |   |        |        |   |   |           | 134     |  
|                             |                                                                   |           |   |              |  |            |          |       |          |                      |     |             |       |   |               |       |  |               |           |           |                 |   |           |            |   |   |           
|Balance at December 31, 2005 |                                                                   | $         |  |              |  | $          | 2,681    |       |          | $                    | 121 |             |       | $ |              |       |  | $             | 5,712,304 |           |                 | $ |          |            |   | $ | (1,137,821 | )       |   | $ | (1,860 | )       |   | $ | 4,575,425 |        
|                             |                                                                   |           |   |              |  |            |          |       |          |                      |     |             |       |   |               |       |  |               |           |           |                 |   |           |            |   |   |           



II-20



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##### Table of Contents



DISCOVERY HOLDING COMPANY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2005, 2004 and 2003




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









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









II-21



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##### Table of Contents



DISCOVERY HOLDING COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


out-of






|    |                                           
|--- | ------------------------------------------
|(3) | Summary of Significant Accounting Policies



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





| |                  
| | -----------------
| | Trade Receivables





|     |  |                      |        |  |            |   |      |                |  |   |            |   |         |        |        |   |  |   |        | 
|---- |  | -------------------- | ------ |  | ---------- | - | ---- | -------------- |  | - | ---------- | - | ------- | ------ | ------ | - |  | - | ------ | 
|     |  | Balance              |        |  | Charged    |   |      | Acquired or    |  |   |            |   | Balance |       
|     |  | Beginning            |        |  | (Credited) |   |      | Charged to     |  |   | Write-Offs |   |         | End of |       
|     |  | of Year              |        |  | to Expense |   |      | Other Accounts |  |   | and Other  |   |         | Year   |       
|     |  |                      |        |  |            |   |      |                |  |   |            |   |         |        |       
|     |  | Amounts in thousands |       
|2005 |  | $                    | 12,104 |  |            | $ | (619 | )              |  | $ | (768       | ) |         | $      | (3,009 | ) |  | $ | 7,708  | 
|     |  |                      |        |  |            |   |      |                |  |   |            |   |         |        |       
|2004 |  | $                    | 11,580 |  |            | $ | 555  |                |  | $ | (403       | ) |         | $      | 372    |   |  | $ | 12,104 | 
|     |  |                      |        |  |            |   |      |                |  |   |            |   |         |        |       
|2003 |  | $                    | 9,013  |  |            | $ | (5   | )              |  | $ | 2,004      |   |         | $      | 568    |   |  | $ | 11,580 | 
|     |  |                      |        |  |            |   |      |                |  |   |            |   |         |        |       



| |                                                           
| | ----------------------------------------------------------
| | Concentration of Credit Risk and Significant
    Customers





| |                        
| | -----------------------
| | Investment in Discovery



II-22



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##### Table of Contents



DISCOVERY HOLDING COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










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



|                        |  |  |                                    | 
|----------------------- |  |  | ---------------------------------- | 
|Buildings               |  |  | 20 years                           | 
|Leasehold improvements  |  |  | 15 years or lease term, if shorter | 
|Furniture and fixtures  |  |  | 7 years                            | 
|Computers               |  |  | 3 years                            | 
|Machinery and equipment |  |  | 5 to 7 years                       | 





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

Goodwill and Other Intangible
Assets




| |                        
| | -----------------------
| | Other Intangible Assets

Accounting for Impairment or Disposal
of Long-Lived Assets




| |                  
| | -----------------
| | Long-Lived Assets



II-23



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##### Table of Contents



DISCOVERY HOLDING COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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





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







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

Accounting for
Income Taxes




| |                  
| | -----------------
| | Advertising Costs





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

Accounting for Stock Issued to Employees, Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25 Accounting for
Stock-Based Compensation,




II-24



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##### Table of Contents



DISCOVERY HOLDING COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                    |                                                                                                       |                               |        |        |        |   |        |        |        |   |         |        |         |  
|--------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | ----------------------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------- | ------ | ------- | -
|                                                    |                                                                                                       | Years Ended December 31,      |       
|                                                    |                                                                                                       |                               |       
|                                                    |                                                                                                       | 2005                          |        |        | 2004   |   |        | 2003   |       
|                                                    |                                                                                                       |                               |        |        |        |   |        |        |       
|                                                    |                                                                                                       | Amounts in thousands, except  |       
|                                                    |                                                                                                       | per share amounts             |       
|Net earnings (loss), as reported                    |                                                                                                       | $                             | 33,276 |        |        | $ | 66,108 |        |        | $ | (52,394 | )     
|Add:                                                |                                                                                                       |                               |        |        |        |   |        |        |        |   |         |       
|                                                    | Stock-based employee compensation expense included in reported
    net earnings (loss)                |                               |        | 2,309  |        |   |        | 2,268  |        |   |         | 2,452  |        
|Deduct:                                             |                                                                                                       |                               |        |        |        |   |        |        |        |   |         |       
|                                                    | Stock-based employee compensation expense determined under fair
    value based method for all awards |                               |        | (8,247 | )      |   |        | (6,247 | )      |   |         | (4,817 | )      
|                                                    |                                                                                                       |                               |        |        |        |   |        |        |       
|                                                    |                                                                                                       | Pro forma net earnings (loss) |        | $      | 27,338 |   |        | $      | 62,129 |   |         | $      | (54,759 | )
|                                                    |                                                                                                       |                               |        |        |        |   |        |        |       
|Basic and diluted earnings (loss) per common share: |                                                                                                       |                               |        |        |        |   |        |        |        |   |         |       
|                                                    | As reported                                                                                           |                               | $      | .12    |        |   | $      | .24    |        |   | $       | (.19   | )      
|                                                    | Pro forma                                                                                             |                               | $      | .10    |        |   | $      | .22    |        |   | $       | (.20   | )      



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





| |          
| | ---------
| | Estimates





| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements

Share-Based Payments


II-25



---



##### Table of Contents



DISCOVERY HOLDING COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|    |                                                 
|--- | ------------------------------------------------
|(4) | Supplemental Disclosure of Cash Flow Information

|                                            |                                                                            |                                                  |   |       |      |  |   |         |        |  |   |         |   | 
|------------------------------------------- | -------------------------------------------------------------------------- | ------------------------------------------------ | - | ----- | ---- |  | - | ------- | ------ |  | - | ------- | - | 
|                                            |                                                                            | Years Ended December 31,                         |  
|                                            |                                                                            |                                                  |  
|                                            |                                                                            | 2005                                             |   |       | 2004 |  |   | 2003    |       
|                                            |                                                                            |                                                  |   |       |      |  |   |         |       
|                                            |                                                                            | Amounts in thousands                             |  
|Cash paid for acquisitions:                 |                                                                            |                                                  |   |       |      |  |   |         |        |  |   |        
|                                            | Fair value of assets acquired                                              |                                                  | $ |      |      |  | $ | 60,950  |        |  | $ | 11,811  |  
|                                            | Net liabilities assumed                                                    |                                                  |   |      |      |  |   | (17,073 | )      |  |   | (6,000  | )
|                                            | Deferred tax liability                                                     |                                                  |   |      |      |  |   | 361     |        |  |   |        |  
|                                            | Issuance of Liberty common stock                                           |                                                  |   |      |      |  |   |        |        |  |   | (5,811  | )
|                                            |                                                                            |                                                  |   |       |      |  |   |         |       
|                                            |                                                                            | Cash paid for acquisitions, net of cash acquired |   | $     |     |  |   | $       | 44,238 |  |   | $       |  | 
|                                            |                                                                            |                                                  |   |       |      |  |   |         |       
|Cash paid during the year for:              |                                                                            |                                                  |   |       |      |  |   |         |        |  |   |        
|                                            | Interest                                                                   |                                                  | $ |      |      |  | $ |        |        |  | $ | 25,206  |  
|                                            |                                                                            |                                                  |   |       |      |  |   |         |       
|                                            | Income taxes                                                               |                                                  | $ | 1,190 |      |  | $ | 1,916   |        |  | $ | 731     |  
|                                            |                                                                            |                                                  |   |       |      |  |   |         |       
|Noncash investing and financing activities: |                                                                            |                                                  |   |       |      |  |   |         |        |  |   |        
|                                            | Stock issued for payment of interest on convertible
    subordinated notes |                                                  | $ |      |      |  | $ |        |        |  | $ | 11,129  |  
|                                            |                                                                            |                                                  |   |       |      |  |   |         |       
|                                            | Conversion of subordinated notes to parents investment                    |                                                  | $ |      |      |  | $ |        |        |  | $ | 654,330 |  
|                                            |                                                                            |                                                  |   |       |      |  |   |         |       



|    |                        
|--- | -----------------------
|(5) | Investment in Discovery







II-26



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##### Table of Contents



DISCOVERY HOLDING COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








Consolidated Balance Sheets


|                                              |                                             |                      |           |           |      |   |           |           | 
|--------------------------------------------- | ------------------------------------------- | -------------------- | --------- | --------- | ---- | - | --------- | --------- | 
|                                              |                                             | December 31,         |          
|                                              |                                             |                      |          
|                                              |                                             | 2005                 |           |           | 2004 |  
|                                              |                                             |                      |           |           |      |  
|                                              |                                             | Amounts in thousands |          
|Current assets                                |                                             | $                    | 831,369   |           |      | $ | 835,450   |          
|Property and equipment                        |                                             |                      | 397,578   |           |      |   | 380,290   |          
|Goodwill and intangible assets                |                                             |                      | 397,927   |           |      |   | 445,221   |          
|Programming rights, long term                 |                                             |                      | 1,175,988 |           |      |   | 1,027,379 |          
|Other assets                                  |                                             |                      | 371,758   |           |      |   | 547,346   |          
|                                              |                                             |                      |           |           |      |  
|                                              | Total assets                                |                      | $         | 3,174,620 |      |   | $         | 3,235,686 | 
|                                              |                                             |                      |           |           |      |  
|Current liabilities                           |                                             | $                    | 692,465   |           |      | $ | 880,561   |          
|Long-term debt                                |                                             |                      | 2,590,440 |           |      |   | 2,498,287 |          
|Other liabilities                             |                                             |                      | 101,571   |           |      |   | 165,197   |          
|Mandatorily redeemable equity in subsidiaries |                                             |                      | 272,502   |           |      |   | 319,567   |          
|Stockholders deficit                         |                                             |                      | (482,358  | )         |      |   | (627,926  | )        
|                                              |                                             |                      |           |           |      |  
|                                              | Total liabilities and stockholders deficit |                      | $         | 3,174,620 |      |   | $         | 3,235,686 | 
|                                              |                                             |                      |           |           |      |  

Consolidated Statements of Operations


|                                    |                  |                          |            |         |      |   |           |         |  |   |           |         | 
|----------------------------------- | ---------------- | ------------------------ | ---------- | ------- | ---- | - | --------- | ------- |  | - | --------- | ------- | 
|                                    |                  | Years Ended December 31, |           
|                                    |                  |                          |           
|                                    |                  | 2005                     |            |         | 2004 |   |           | 2003    | 
|                                    |                  |                          |            |         |      |   |           |         | 
|                                    |                  | Amounts in thousands     |           
|Revenue                             |                  | $                        | 2,671,754  |         |      | $ | 2,365,346 |         |  | $ | 1,995,047 |        
|Operating expenses                  |                  |                          | (979,765   | )       |      |   | (846,316  | )       |  |   | (751,578  | )      
|Selling, general and administrative |                  |                          | (1,005,351 | )       |      |   | (856,340  | )       |  |   | (735,017  | )      
|Equity-based compensation           |                  |                          | (49,465    | )       |      |   | (71,515   | )       |  |   | (74,119   | )      
|Depreciation and amortization       |                  |                          | (123,209   | )       |      |   | (129,011  | )       |  |   | (120,172  | )      
|Gain on sale of patent              |                  |                          |           |         |      |   | 22,007    |         |  |   |          |        
|                                    |                  |                          |            |         |      |   |           |         | 
|                                    | Operating income |                          |            | 513,964 |      |   |           | 484,171 |  |   |           | 314,161 | 
|Interest expense                    |                  |                          | (184,575   | )       |      |   | (167,420  | )       |  |   | (159,409  | )      
|Other expense                       |                  |                          | (7,426     | )       |      |   | (6,930    | )       |  |   | (16,730   | )      
|Income tax expense                  |                  |                          | (162,343   | )       |      |   | (141,799  | )       |  |   | (74,785   | )      
|                                    |                  |                          |            |         |      |   |           |         | 
|                                    | Net income       |                          | $          | 159,620 |      |   | $         | 168,022 |  |   | $         | 63,237  | 
|                                    |                  |                          |            |         |      |   |           |         | 

II-27



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##### Table of Contents



DISCOVERY HOLDING COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                       
|--- | ----------------------
|(6) | Property and Equipment



|                             |                          |                      |         |          |      |   |         |          |  
|---------------------------- | ------------------------ | -------------------- | ------- | -------- | ---- | - | ------- | -------- | -
|                             |                          | 2005                 |         |          | 2004 |  
|                             |                          |                      |         |          |      |  
|                             |                          | Amounts in thousands |        
|Property and equipment, net: |                          |                      |         |          |      |   |         |         
|                             | Land                     |                      | $       | 48,365   |      |   | $       | 58,048   |  
|                             | Buildings                |                      |         | 186,389  |      |   |         | 183,985  |  
|                             | Equipment                |                      |         | 215,595  |      |   |         | 226,188  |  
|                             | Accumulated depreciation |                      |         | (194,104 | )    |   |         | (209,480 | )
|                             |                          |                      |         |          |      |  
|                             |                          | $                    | 256,245 |          |      | $ | 258,741 |         
|                             |                          |                      |         |          |      |  



|    |                                     
|--- | ------------------------------------
|(7) | Goodwill and Other Intangible Assets









|                                 |                            |                      |         |       |            |   |        |          |  |   |           |        |   |       |           |         |   |   |           |         |  
|-------------------------------- | -------------------------- | -------------------- | ------- | ----- | ---------- | - | ------ | -------- |  | - | --------- | ------ | - | ----- | --------- | ------- | - | - | --------- | ------- | -
|                                 |                            |                      |         | Media |            |   |        |          |  |   |          
|                                 |                            | Creative             |         |       | Management |   |        | Network  |  |   |           |        |  
|                                 |                            | Services             |         |       | Services   |   |        | Services |  |   |           |        |  
|                                 |                            | Group                |         |       | Group      |   |        | Group    |  |   | Discovery |        |   | Total |          
|                                 |                            |                      |         |       |            |   |        |          |  |   |           |        |   |       |          
|                                 |                            | Amounts in thousands |        
|Net balance at January 1, 2004   |                            | $                    | 107,428 |       |            | $ | 88,025 |          |  | $ | 146,444   |        |   | $     | 1,789,000 |         |   | $ | 2,130,897 |        
|                                 | Acquisitions               |                      |         |      |            |   |        | 5,325    |  |   |           | 17,379 |   |       |           |        |   |   |           | 22,704  |  
|                                 | Foreign exchange and other |                      |         |      |            |   |        |         |  |   |           | (104   | ) |       |           | (18,000 | ) |   |           | (18,104 | )
|                                 | 2004 Impairment            |                      |         | (51   | )          |   |        |         |  |   |           |       |   |       |           |        |   |   |           | (51     | )
|                                 |                            |                      |         |       |            |   |        |          |  |   |           |        |   |       |          
|Net balance at December 31, 2004 |                            |                      | 107,377 |       |            |   | 93,350 |          |  |   | 163,719   |        |   |       | 1,771,000 |         |   |   | 2,135,446 |        
|                                 | Foreign exchange and other |                      |         | (778  | )          |   |        | 52       |  |   |           | (1,202 | ) |       |           |        |   |   |           | (1,928  | )
|                                 |                            |                      |         |       |            |   |        |          |  |   |           |        |   |       |          
|Net balance at December 31, 2005 |                            | $                    | 106,599 |       |            | $ | 93,402 |          |  | $ | 162,517   |        |   | $     | 1,771,000 |         |   | $ | 2,133,518 |        
|                                 |                            |                      |         |       |            |   |        |          |  |   |           |        |   |       |          

II-28



---



##### Table of Contents



DISCOVERY HOLDING COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|    |                      
|--- | ---------------------
|(8) | Restructuring Charges





|                      |                   |                      |       |       |           |   |       |            |        |   |         |        |   |   |       |       | 
|--------------------- | ----------------- | -------------------- | ----- | ----- | --------- | - | ----- | ---------- | ------ | - | ------- | ------ | - | - | ----- | ----- | 
|                      |                   | Opening              |       |       |           |   |       |            | Ending |  
|                      |                   | Balance              |       |       | Additions |   |       | Deductions |        |   | Balance |       
|                      |                   |                      |       |       |           |   |       |            |        |   |         |       
|                      |                   | Amounts in thousands |      
|Excess facility costs |                   | $                    | 2,227 |       |           | $ | 2,130 |            |        | $ | (980    | )      |   | $ | 3,377 |      
|Employee separations  |                   |                      |      |       |           |   | 1,170 |            |        |   | (1,170  | )      |   |   |      |      
|Contract exit costs   |                   |                      |      |       |           |   | 176   |            |        |   | (176    | )      |   |   |      |      
|                      |                   |                      |       |       |           |   |       |            |        |   |         |       
|                      | December 31, 2003 |                      | $     | 2,227 |           |   | $     | 3,476      |        |   | $       | (2,326 | ) |   | $     | 3,377 | 
|                      |                   |                      |       |       |           |   |       |            |        |   |         |       
|Excess facility costs |                   |                      |       |       |           |   |       |            |        |   |         |        |   |   |       |      
|                      | December 31, 2004 |                      | $     | 3,377 |           |   | $     |           |        |   | $       | (788   | ) |   | $     | 2,589 | 
|                      |                   |                      |       |       |           |   |       |            |        |   |         |       
|Excess facility costs |                   |                      |       |       |           |   |       |            |        |   |         |        |   |   |       |      
|                      | December 31, 2005 |                      | $     | 2,589 |           |   | $     | 4,112      |        |   | $       | (2,718 | ) |   | $     | 3,983 | 
|                      |                   |                      |       |       |           |   |       |            |        |   |         |       



|    |             
|--- | ------------
|(9) | Acquisitions



| |                       
| | ----------------------
| | London Playout Centre.





|                                                       |  |      |         |  |      |   |         |  
|------------------------------------------------------ |  | ---- | ------- |  | ---- | - | ------- | -
|                                                       |  | 2004 |         |  | 2003 |  
|                                                       |  |      |         |  |      |  
|Revenue                                                |  | $    | 639,718 |  |      | $ | 547,912 |  
|Net earnings (loss)                                    |  | $    | 65,317  |  |      | $ | (53,194 | )
|Basic and diluted net earnings (loss) per common share |  | $    | 0.23    |  |      | $ | (0.19   | )

II-29



---



##### Table of Contents



DISCOVERY HOLDING COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|     |               
|---- | --------------
|(10) | Long-Term Debt



| |                                      
| | -------------------------------------
| | Liberty Subordinated Credit Agreement





|     |             
|---- | ------------
|(11) | Income Taxes



|         |                   |                          |         |         |      |   |         |         |   |   |         |         |  
|-------- | ----------------- | ------------------------ | ------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|         |                   | Years Ended December 31, |        
|         |                   |                          |        
|         |                   | 2005                     |         |         | 2004 |   |         | 2003    |  
|         |                   |                          |         |         |      |   |         |         |  
|         |                   | Amounts in thousands     |        
|Current  |                   |                          |         |         |      |   |         |         |   |   |         |        
|Federal  |                   | $                        |        |         |      | $ |        |         |   | $ |        |        
|State    |                   |                          | (637    | )       |      |   | 502     |         |   |   | (1,100  | )      
|Foreign  |                   |                          | 2,164   |         |      |   | (3,780  | )       |   |   | (1,403  | )      
|         |                   |                          |         |         |      |   |         |         |  
|         | Current           |                          |         | 1,527   |      |   |         | (3,278  | ) |   |         | (2,503  | )
|         |                   |                          |         |         |      |   |         |         |  
|Deferred |                   |                          |         |         |      |   |         |         |   |   |         |        
|Federal  |                   |                          | (26,402 | )       |      |   | (25,221 | )       |   |   | (15,628 | )      
|State    |                   |                          | (20,743 | )       |      |   | (7,774  | )       |   |   | (3,494  | )      
|Foreign  |                   |                          | (3,218  | )       |      |   | 1,303   |         |   |   | 1,469   |        
|         |                   |                          |         |         |      |   |         |         |  
|         | Deferred          |                          |         | (50,363 | )    |   |         | (31,692 | ) |   |         | (17,653 | )
|         |                   |                          |         |         |      |   |         |         |  
|         | Total tax expense |                          | $       | (48,836 | )    |   | $       | (34,970 | ) |   | $       | (20,156 | )
|         |                   |                          |         |         |      |   |         |         |  



|         |  |                          |        |  |      |   |         |      |  |   |         |  
|-------- |  | ------------------------ | ------ |  | ---- | - | ------- | ---- |  | - | ------- | -
|         |  | Years Ended December 31, |       
|         |  |                          |       
|         |  | 2005                     |        |  | 2004 |   |         | 2003 | 
|         |  |                          |        |  |      |   |         |      | 
|         |  | Amounts in thousands     |       
|Domestic |  | $                        | 76,907 |  |      | $ | 96,470  |      |  | $ | (28,772 | )
|Foreign  |  |                          | 5,205  |  |      |   | 4,608   |      |  |   | (3,466  | )
|         |  |                          |        |  |      |   |         |      | 
|         |  | $                        | 82,112 |  |      | $ | 101,078 |      |  | $ | (32,238 | )
|         |  |                          |        |  |      |   |         |      | 

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##### Table of Contents



DISCOVERY HOLDING COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                          |                    |                          |         |         |      |   |         |         |   |   |         |         |  
|--------------------------------------------------------- | ------------------ | ------------------------ | ------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                                          |                    | Years Ended December 31, |        
|                                                          |                    |                          |        
|                                                          |                    | 2005                     |         |         | 2004 |   |         | 2003    |  
|                                                          |                    |                          |         |         |      |   |         |         |  
|                                                          |                    | Amounts in thousands     |        
|Computed expected tax benefit (expense)                   |                    | $                        | (28,739 | )       |      | $ | (35,377 | )       |   | $ | 11,283  |        
|State and local income taxes, net of federal income taxes |                    |                          | (3,976  | )       |      |   | (5,311  | )       |   |   | (2,986  | )      
|Change in valuation allowance affecting tax expense       |                    |                          | 1,630   |         |      |   | 3,575   |         |   |   | (14,719 | )      
|Change in estimated state tax rate                        |                    |                          | (15,263 | )       |      |   |        |         |   |   |        |        
|Disallowed interest expense                               |                    |                          |        |         |      |   |        |         |   |   | (13,963 | )      
|Other, net                                                |                    |                          | (2,488  | )       |      |   | 2,143   |         |   |   | 229     |        
|                                                          |                    |                          |         |         |      |   |         |         |  
|                                                          | Income tax expense |                          | $       | (48,836 | )    |   | $       | (34,970 | ) |   | $       | (20,156 | )
|                                                          |                    |                          |         |         |      |   |         |         |  



|                        |                                  |                      |            |            |      |  |            |            |  
|----------------------- | -------------------------------- | -------------------- | ---------- | ---------- | ---- |  | ---------- | ---------- | -
|                        |                                  | 2005                 |            |            | 2004 | 
|                        |                                  |                      |            |            |      | 
|                        |                                  | Amounts in thousands |           
|Current assets:         |                                  |                      |            |            |      |  |            |           
|                        | Accounts receivable reserves     |                      | $          | 2,350      |      |  | $          | 2,423      |  
|                        | Accrued liabilities              |                      |            | 14,676     |      |  |            | 11,987     |  
|                        |                                  |                      |            |            |      | 
|                        |                                  |                      | 17,026     |            |      |  | 14,410     |           
|                        |                                  |                      |            |            |      | 
|Noncurrent assets:      |                                  |                      |            |            |      |  |            |           
|                        | Net operating loss carryforwards |                      |            | 59,064     |      |  |            | 59,819     |  
|                        | Property and equipment           |                      |            | 4,771      |      |  |            |           |  
|                        | Intangible assets                |                      |            | 8,249      |      |  |            | 13,310     |  
|                        | Other                            |                      |            | 5,506      |      |  |            | 10,280     |  
|                        |                                  |                      |            |            |      | 
|                        |                                  |                      | 77,590     |            |      |  | 83,409     |           
|                        |                                  |                      |            |            |      | 
|                        | Total deferred tax assets, gross |                      |            | 94,616     |      |  |            | 97,819     |  
|                        | Valuation allowance              |                      |            | (91,235    | )    |  |            | (88,067    | )
|                        |                                  |                      |            |            |      | 
|                        | Total deferred tax assets, net   |                      |            | 3,381      |      |  |            | 9,752      |  
|                        |                                  |                      |            |            |      | 
|Current liabilities:    |                                  |                      |            |            |      |  |            |           
|                        | Prepaid expenses                 |                      |            | (818       | )    |  |            | (1,204     | )
|                        | Other                            |                      |            | (3,010     | )    |  |            | (2,802     | )
|                        |                                  |                      |            |            |      | 
|                        |                                  |                      | (3,828     | )          |      |  | (4,006     | )         
|                        |                                  |                      |            |            |      | 
|Noncurrent liabilities: |                                  |                      |            |            |      |  |            |           
|                        | Property and equipment           |                      |            |           |      |  |            | (2,760     | )
|                        | Investments                      |                      |            | (1,131,058 | )    |  |            | (1,086,950 | )
|                        |                                  |                      |            |            |      | 
|                        |                                  |                      | (1,131,058 | )          |      |  | (1,089,950 | )         
|                        |                                  |                      |            |            |      | 
|                        | Total deferred tax liabilities   |                      |            | (1,134,886 | )    |  |            | (1,093,716 | )
|                        |                                  |                      |            |            |      | 
|                        | Net deferred tax liability       |                      | $          | (1,131,505 | )    |  | $          | (1,083,964 | )
|                        |                                  |                      |            |            |      | 

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##### Table of Contents



DISCOVERY HOLDING COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|     |                     
|---- | --------------------
|(12) | Stockholders Equity



| |                
| | ---------------
| | Preferred Stock





| |             
| | ------------
| | Common Stock







|     |              
|---- | -------------
|(13) | Stock Options





II-32



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##### Table of Contents



DISCOVERY HOLDING COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                           |                                  |          |           |           |      |   |          |       |  |  |           |           |  |   |       |       | 
|-------------------------- | -------------------------------- | -------- | --------- | --------- | ---- | - | -------- | ----- |  |  | --------- | --------- |  | - | ----- | ----- | 
|                           |                                  | DHC      |           |           |      |   | DHC      |       |  | 
|                           |                                  | Series A |           |           |      |   | Series B |       |  | 
|                           |                                  | Common   |           |           |      |   | Common   |       |  | 
|                           |                                  | Stock    |           |           | WAEP |   |          | Stock |  |  | WAEP      |          
|                           |                                  |          |           |           |      |   |          |       |  |  |           |          
|Options issued in Spin Off |                                  |          | 1,954,275 |           |      | $ | 15.43    |       |  |  | 2,996,525 |           |  | $ | 18.87 |      
|Exercises                  |                                  |          | (11,381   | )         |      | $ | 11.77    |       |  |  |          |           |  |   |       |      
|Cancellations              |                                  |          | (5,278    | )         |      | $ | 15.05    |       |  |  |          |           |  |   |       |      
|                           |                                  |          |           |           |      |   |          |       |  |  |           |          
|                           | Outstanding at December 31, 2005 |          |           | 1,937,616 |      |   | $        | 15.43 |  |  |           | 2,996,525 |  |   | $     | 18.87 | 
|                           |                                  |          |           |           |      |   |          |       |  |  |           |          
|                           | Exercisable at December 31, 2005 |          |           | 1,116,354 |      |   | $        | 16.44 |  |  |           | 2,323,633 |  |   | $     | 19.06 | 
|                           |                                  |          |           |           |      |   |          |       |  |  |           |          



|     |                                    
|---- | -----------------------------------
|(14) | Other Comprehensive Earnings (Loss)





|                             |                              |                      |        |         |               |             |       |                  |   |   |        |         |  
|---------------------------- | ---------------------------- | -------------------- | ------ | ------- | ------------- | ----------- | ----- | ---------------- | - | - | ------ | ------- | -
|                             |                              |                      |        |         |               | Accumulated |      
|                             |                              | Foreign              |        |         | Unrealized    |             |       | Other            |  
|                             |                              | Currency             |        |         | Holding Gains |             |       | Comprehensive    |  
|                             |                              | Translation          |        |         | (Losses) on   |             |       | Earnings (Loss), |  
|                             |                              | Adjustments          |        |         | Securities    |             |       | Net of Taxes     |  
|                             |                              |                      |        |         |               |             |       |                  |  
|                             |                              | Amounts in thousands |       
|Balance at January 1, 2003   |                              | $                    | (2,034 | )       |               | $           | 50    |                  |   | $ | (1,984 | )      
|                             | Other comprehensive earnings |                      |        | 7,528   |               |             |       | 1,770            |   |   |        | 9,298   |  
|                             | Other activity               |                      |        | (258    | )             |             |       | (381             | ) |   |        | (639    | )
|                             |                              |                      |        |         |               |             |       |                  |  
|Balance at December 31, 2003 |                              |                      | 5,236  |         |               |             | 1,439 |                  |   |   | 6,675  |        
|                             | Other comprehensive earnings |                      |        | 6,797   |               |             |       | (1,162           | ) |   |        | 5,635   |  
|                             |                              |                      |        |         |               |             |       |                  |  
|Balance at December 31, 2004 |                              |                      | 12,033 |         |               |             | 277   |                  |   |   | 12,310 |        
|                             | Other comprehensive loss     |                      |        | (14,821 | )             |             |       | 651              |   |   |        | (14,170 | )
|                             |                              |                      |        |         |               |             |       |                  |  
|Balance at December 31, 2005 |                              | $                    | (2,788 | )       |               | $           | 928   |                  |   | $ | (1,860 | )      
|                             |                              |                      |        |         |               |             |       |                  |  

II-33



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##### Table of Contents



DISCOVERY HOLDING COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                              |  |                      |         |     |           |   |        |            |  |   |         |  
|------------------------------------------------------------- |  | -------------------- | ------- | --- | --------- | - | ------ | ---------- |  | - | ------- | -
|                                                              |  |                      |         | Tax |           |   |       
|                                                              |  | Before-Tax           |         |     | (Expense) |   |        | Net-of-Tax | 
|                                                              |  | Amount               |         |     | Benefit   |   |        | Amount     | 
|                                                              |  |                      |         |     |           |   |        |            | 
|                                                              |  | Amounts in thousands |        
|Year ended December 31, 2005:                                 |  |                      |         |     |           |   |        |            |  |   |         |  
|Foreign currency translation adjustments                      |  | $                    | (24,518 | )   |           | $ | 9,697  |            |  | $ | (14,821 | )
|Unrealized holding gains on securities arising during period  |  | $                    | 1,077   |     |           | $ | (426   | )          |  | $ | 651     |  
|                                                              |  |                      |         |     |           |   |        |            | 
|Other comprehensive loss                                      |  | $                    | (23,441 | )   |           | $ | 9,271  |            |  | $ | (14,170 | )
|                                                              |  |                      |         |     |           |   |        |            | 
|Year ended December 31, 2004:                                 |  |                      |         |     |           |   |        |            |  |   |         |  
|Foreign currency translation adjustments                      |  | $                    | 11,143  |     |           | $ | (4,346 | )          |  | $ | 6,797   |  
|Unrealized holding losses on securities arising during period |  | $                    | (1,905  | )   |           | $ | 743    |            |  | $ | (1,162  | )
|                                                              |  |                      |         |     |           |   |        |            | 
|Other comprehensive earnings                                  |  | $                    | 9,238   |     |           | $ | (3,603 | )          |  | $ | 5,635   |  
|                                                              |  |                      |         |     |           |   |        |            | 
|Year ended December 31, 2003:                                 |  |                      |         |     |           |   |        |            |  |   |         |  
|Foreign currency translation adjustments                      |  | $                    | 12,341  |     |           | $ | (4,813 | )          |  | $ | 7,528   |  
|Unrealized holding gains on securities arising during period  |  | $                    | 2,902   |     |           | $ | (1,132 | )          |  | $ | 1,770   |  
|                                                              |  |                      |         |     |           |   |        |            | 
|Other comprehensive earnings                                  |  | $                    | 15,243  |     |           | $ | (5,945 | )          |  | $ | 9,298   |  
|                                                              |  |                      |         |     |           |   |        |            | 



|     |                       
|---- | ----------------------
|(15) | Employee Benefit Plans





|     |                              
|---- | -----------------------------
|(16) | Commitments and Contingencies



|                        |            |  |   |        | 
|----------------------- | ---------- |  | - | ------ | 
|Year ended December 31: |            |  |   |       
|                        | 2006       |  | $ | 30,563 | 
|                        | 2007       |  | $ | 28,791 | 
|                        | 2008       |  | $ | 25,886 | 
|                        | 2009       |  | $ | 23,894 | 
|                        | 2010       |  | $ | 19,265 | 
|                        | Thereafter |  | $ | 47,033 | 



II-34



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##### Table of Contents



DISCOVERY HOLDING COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|     |                           
|---- | --------------------------
|(17) | Related Party Transactions







|     |                                     
|---- | ------------------------------------
|(18) | Information About Operating Segments











II-35



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##### Table of Contents



DISCOVERY HOLDING COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                             |                                 |                      |   |         |            |  |   |          |  |  |           |         |  |              |        |           |            |  |   |           |  |  |   |           | 
|---------------------------- | ------------------------------- | -------------------- | - | ------- | ---------- |  | - | -------- |  |  | --------- | ------- |  | ------------ | ------ | --------- | ---------- |  | - | --------- |  |  | - | --------- | 
|                             |                                 |                      |   | Media   |            |  |   |          |  |  |           |         | 
|                             |                                 | Creative             |   |         | Management |  |   | Network  |  |  |           |         |  |              | Equity |          
|                             |                                 | Services             |   |         | Services   |  |   | Services |  |  | Corporate |         |  | Consolidated |        |           | Affiliate- | 
|                             |                                 | Group                |   |         | Group      |  |   | Group(1) |  |  | and Other |         |  | Total        |        |           | Discovery  | 
|                             |                                 |                      |   |         |            |  |   |          |  |  |           |         |  |              |        |           |            | 
|                             |                                 | Amounts in thousands |  
|Year ended December 31, 2005 |                                 |                      |   |         |            |  |   |          |  |  |           |         |  |              |        |           |            |  |   |           |  |  |   |          
|                             | Revenue from external customers |                      | $ | 304,393 |            |  | $ | 118,489  |  |  | $         | 271,627 |  |              | $      |          |            |  | $ | 694,509   |  |  | $ | 2,671,754 | 
|                             | Operating cash flow             |                      | $ | 57,323  |            |  | $ | 13,481   |  |  | $         | 55,781  |  |              | $      | (47,960   | )          |  | $ | 78,625    |  |  | $ | 686,638   | 
|                             | Capital expenditures            |                      | $ | 22,795  |            |  | $ | 25,252   |  |  | $         | 37,608  |  |              | $      | 4,871     |            |  | $ | 90,526    |  |  | $ | 99,684    | 
|                             | Depreciation and amortization   |                      | $ | 30,951  |            |  | $ | 7,731    |  |  | $         | 27,008  |  |              | $      | 10,687    |            |  | $ | 76,377    |  |  | $ | 123,209   | 
|                             | Total assets                    |                      | $ | 297,664 |            |  | $ | 173,637  |  |  | $         | 322,470 |  |              | $      | 5,025,465 |            |  | $ | 5,819,236 |  |  | $ | 3,174,620 | 
|Year ended December 31, 2004 |                                 |                      |   |         |            |  |   |          |  |  |           |         |  |              |        |           |            |  |   |           |  |  |   |          
|                             | Revenue from external customers |                      | $ | 295,841 |            |  | $ | 109,982  |  |  | $         | 225,392 |  |              | $      |          |            |  | $ | 631,215   |  |  | $ | 2,365,346 | 
|                             | Operating cash flow             |                      | $ | 55,847  |            |  | $ | 17,430   |  |  | $         | 62,163  |  |              | $      | (37,645   | )          |  | $ | 97,795    |  |  | $ | 662,690   | 
|                             | Capital expenditures            |                      | $ | 18,677  |            |  | $ | 4,142    |  |  | $         | 23,114  |  |              | $      | 3,359     |            |  | $ | 49,292    |  |  | $ | 88,100    | 
|                             | Depreciation and amortization   |                      | $ | 31,026  |            |  | $ | 7,750    |  |  | $         | 27,074  |  |              | $      | 11,755    |            |  | $ | 77,605    |  |  | $ | 129,011   | 
|                             | Total assets                    |                      | $ | 298,613 |            |  | $ | 171,588  |  |  | $         | 294,328 |  |              | $      | 4,800,299 |            |  | $ | 5,564,828 |  |  | $ | 3,235,686 | 
|Year ended December 31, 2003 |                                 |                      |   |         |            |  |   |          |  |  |           |         |  |              |        |           |            |  |   |           |  |  |   |          
|                             | Revenue from external customers |                      | $ | 270,830 |            |  | $ | 107,070  |  |  | $         | 128,203 |  |              | $      |          |            |  | $ | 506,103   |  |  | $ | 1,995,047 | 
|                             | Operating cash flow             |                      | $ | 43,786  |            |  | $ | 22,074   |  |  | $         | 43,221  |  |              | $      | (32,901   | )          |  | $ | 76,180    |  |  | $ | 508,452   | 
|                             | Capital expenditures            |                      | $ | 13,132  |            |  | $ | 4,751    |  |  | $         | 5,207   |  |              | $      | 2,773     |            |  | $ | 25,863    |  |  | $ | 109,956   | 
|                             | Depreciation and amortization   |                      | $ | 28,975  |            |  | $ | 11,481   |  |  | $         | 22,171  |  |              | $      | 7,899     |            |  | $ | 70,526    |  |  | $ | 120,172   | 
|                             | Total assets                    |                      | $ | 305,576 |            |  | $ | 174,916  |  |  | $         | 239,939 |  |              | $      | 4,676,196 |            |  | $ | 5,396,627 |  |  | $ | 3,194,211 | 






|    |                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Included in Network Services Group revenue is broadcast services
    revenue of $148,483,000, $135,883,000 and $89,065,000 and
    systems integration revenue of $123,144,000, $89,509,000 and
    $39,138,000 in 2005, 2004 and 2003, respectively.

II-36



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##### Table of Contents



DISCOVERY HOLDING COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                          |  |                          |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                          |  | Years Ended December 31, |        
|                                                          |  |                          |        
|                                                          |  | 2005                     |         |   | 2004 |   |         | 2003 | 
|                                                          |  |                          |         |   |      |   |         |      | 
|                                                          |  | Amounts in thousands     |        
|Segment operating cash flow                               |  | $                        | 78,625  |   |      | $ | 97,795  |      |  | $ | 76,180  |  
|Stock compensation                                        |  |                          | (4,383  | ) |      |   | (2,775  | )    |  |   | (2,602  | )
|Depreciation and amortization                             |  |                          | (76,377 | ) |      |   | (77,605 | )    |  |   | (70,526 | )
|Share of earnings of Discovery                            |  |                          | 79,810  |   |      |   | 84,011  |      |  |   | 37,271  |  
|Interest expense                                          |  |                          |        |   |      |   |        |      |  |   | (72,178 | )
|Other, net                                                |  |                          | 4,437   |   |      |   | (348    | )    |  |   | (2,635  | )
|                                                          |  |                          |         |   |      |   |         |      | 
|Earnings (loss) before income taxes and minority interest |  | $                        | 82,112  |   |      | $ | 101,078 |      |  | $ | (34,490 | )
|                                                          |  |                          |         |   |      |   |         |      | 



|        |                 |                          |         |         |      |   |         |         |  |   |         |         | 
|------- | --------------- | ------------------------ | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|        |                 | Years Ended December 31, |        
|        |                 |                          |        
|        |                 | 2005                     |         |         | 2004 |   |         | 2003    | 
|        |                 |                          |         |         |      |   |         |         | 
|        |                 | Amounts in thousands     |        
|Revenue |                 |                          |         |         |      |   |         |         |  |   |         |        
|        | United States   |                          | $       | 525,288 |      |   | $       | 460,070 |  |   | $       | 390,220 | 
|        | United Kingdom  |                          |         | 149,928 |      |   |         | 148,002 |  |   |         | 92,523  | 
|        | Other countries |                          |         | 19,293  |      |   |         | 23,143  |  |   |         | 23,360  | 
|        |                 |                          |         |         |      |   |         |         | 
|        |                 | $                        | 694,509 |         |      | $ | 631,215 |         |  | $ | 506,103 |        
|        |                 |                          |         |         |      |   |         |         | 



|     |                                            
|---- | -------------------------------------------
|(19) | Quarterly Financial Information (Unaudited)

|      |                                                 |                                                |   |         |             |  |   |             |   |  |             |         |   |  |   |         | 
|----- | ----------------------------------------------- | ---------------------------------------------- | - | ------- | ----------- |  | - | ----------- | - |  | ----------- | ------- | - |  | - | ------- | 
|      |                                                 | 1st Quarter                                    |   |         | 2nd Quarter |  |   | 3rd Quarter |   |  | 4th Quarter |        
|      |                                                 |                                                |   |         |             |  |   |             |   |  |             |        
|      |                                                 | Amounts in thousands, except per share amounts |  
|2005: |                                                 |                                                |   |         |             |  |   |             |   |  |             |         |   |  |   |        
|      | Revenue                                         |                                                | $ | 174,290 |             |  | $ | 178,019     |   |  | $           | 167,934 |   |  | $ | 174,266 | 
|      |                                                 |                                                |   |         |             |  |   |             |   |  |             |        
|      | Operating income (loss)                         |                                                | $ | 2,877   |             |  | $ | (4,982      | ) |  | $           | (1,403  | ) |  | $ | 2,106   | 
|      |                                                 |                                                |   |         |             |  |   |             |   |  |             |        
|      | Net earnings                                    |                                                | $ | 16,825  |             |  | $ | 4,027       |   |  | $           | 1,189   |   |  | $ | 11,235  | 
|      |                                                 |                                                |   |         |             |  |   |             |   |  |             |        
|      | Basic and diluted net earnings per common share |                                                | $ | .06     |             |  | $ | .01         |   |  | $           |        |   |  | $ | .04     | 
|      |                                                 |                                                |   |         |             |  |   |             |   |  |             |        
|2004: |                                                 |                                                |   |         |             |  |   |             |   |  |             |         |   |  |   |        
|      | Revenue                                         |                                                | $ | 145,943 |             |  | $ | 160,477     |   |  | $           | 151,924 |   |  | $ | 172,871 | 
|      |                                                 |                                                |   |         |             |  |   |             |   |  |             |        
|      | Operating income                                |                                                | $ | 5,914   |             |  | $ | 5,663       |   |  | $           | 3,464   |   |  | $ | 1,894   | 
|      |                                                 |                                                |   |         |             |  |   |             |   |  |             |        
|      | Net earnings                                    |                                                | $ | 11,920  |             |  | $ | 22,257      |   |  | $           | 16,186  |   |  | $ | 15,745  | 
|      |                                                 |                                                |   |         |             |  |   |             |   |  |             |        
|      | Basic and diluted net earnings per common share |                                                | $ | .04     |             |  | $ | .08         |   |  | $           | .06     |   |  | $ | .06     | 
|      |                                                 |                                                |   |         |             |  |   |             |   |  |             |        

II-37



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##### Table of Contents






PART III.









|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation






|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions






|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accounting Fees and Services



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##### Table of Contents






PART IV.





Item 15.     Exhibits and
Financial Statement Schedules.


Financial Statements




|                           |                                                                                                                               |      |  |       | 
|-------------------------- | ----------------------------------------------------------------------------------------------------------------------------- | ---- |  | ----- | 
|                           |                                                                                                                               | Page | 
|                           |                                                                                                                               | No.  | 
|                           |                                                                                                                               |      | 
|Discovery Holding Company: |                                                                                                                               |      |  |      
|                           | Report of Independent Registered Public
    Accounting Firm                                                                   |      |  | II-16 | 
|                           | Consolidated Balance Sheets,
    December 31, 2005 and 2004                                                                   |      |  | II-17 | 
|                           | Consolidated Statements of Operations and
    Comprehensive Earnings (Loss), Years ended December 31,
    2005, 2004 and 2003 |      |  | II-18 | 
|                           | Consolidated Statements of Cash Flows,
    Years ended December 31, 2005, 2004 and 2003                                       |      |  | II-19 | 
|                           | Consolidated Statements of
    Stockholders Equity, Years ended December 31, 2005,
    2004 and 2003                         |      |  | II-20 | 
|                           | Notes to Consolidated Financial Statements,
    December 31, 2005, 2004 and 2003                                              |      |  | II-21 | 

Financial Statement Schedules






| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) All schedules have been omitted because they are not
    applicable, not material or the required information is set
    forth in the financial statements or notes thereto.
|
| | (ii) Separate financial statements for Discovery
    Communications, Inc.:                                                                                                      

|                                                                                                                  |  |  |      | 
|----------------------------------------------------------------------------------------------------------------- |  |  | ---- | 
|Report of Independent Registered Public
    Accounting Firm                                                       |  |  | IV-4 | 
|Consolidated Balance Sheets,
    December 31, 2005 and 2004                                                       |  |  | IV-5 | 
|Consolidated Statements of Operations,
    Years ended December 31, 2005, 2004 and 2003                           |  |  | IV-6 | 
|Consolidated Statements of Cash Flows,
    Years ended December 31, 2005, 2004 and 2003                           |  |  | IV-7 | 
|Consolidated Statements of Changes in
    Stockholders Deficit, Years ended December 31, 2005,
    2004 and 2003 |  |  | IV-8 | 
|Notes to Consolidated Financial
    Statements                                                                    |  |  | IV-9 | 

Exhibits


S-K):




| |     |  |  |                                                                                                                                                                                                                                                                                              
| | --- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2.1 |  |  | Reorganization Agreement among Liberty Media Corporation,
    Discovery Holding Company (DHC) and Ascent Media
    Group, Inc. (incorporated by reference to Exhibit 2.1 to
    DHCs Registration Statement on Form 10, dated
    July 15, 2005 (File No. 000-51205) (the
    Form 10)).



| |     |  |  |                                                                                                            
| | --- |  |  | -----------------------------------------------------------------------------------------------------------
| | 3.1 |  |  | Restated Certificate of Incorporation of DHC (incorporated by
    reference to Exhibit 3.1 to the Form 10).
| | 3.2 |  |  | Bylaws of DHC (incorporated by reference to Exhibit 3.2 to
    the Form 10).                               



| |     |  |  |                                                                                                                                                                  
| | --- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4.1 |  |  | Specimen Certificate for shares of the Series A common
    stock, par value $.01 per share, of DHC (incorporated by
    reference to Exhibit 4.1 to the Form 10).

IV-1



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##### Table of Contents



| |     |  |  |                                                                                                                                                                  
| | --- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4.2 |  |  | Specimen Certificate for shares of the Series B common
    stock, par value $.01 per share, of DHC (incorporated by
    reference to Exhibit 4.2 to the Form 10).
| | 4.3 |  |  | Rights Agreement between DHC and EquiServe Trust Company, N.A.,
    as Rights Agent (incorporated by reference to Exhibit 4.3
    to the Form 10).               



| |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ----- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.1  |  |  | The Shareholders Agreement, dated as of November 30, 1991
    (the Stockholders Agreement), by and among
    Discovery Communications, Inc. (Discovery), Cox
    Discovery, Inc. (Cox), NewsChannels TDC Investments,
    Inc. (NewChannels), TCI Cable Education, Inc.
    (TCID) and John S. Hendricks (Hendricks)
    (incorporated by reference to Exhibit 10.1 to the Form 10).                                                                                      
| | 10.2  |  |  | First Amendment to the Stockholders Agreement, dated as of
    December 20, 1996, by and among Discovery, Cox
    Communications Holdings, Inc. (the successor to Cox), Newhouse
    Broadcasting Corporation ( the successor to NewChannels), TCID,
    Hendricks and for the purposes stated therein only, LMC Animal
    Planet, Inc. (LMC) and Liberty Media Corporation, a
    Colorado corporation (Liberty) (incorporated by
    reference to Exhibit 10.2 to the Form 10).
| | 10.3  |  |  | Second Amendment to the Stockholders Agreement, dated as
    of September 7, 2000, by and among Discovery, Cox
    Communications Holdings, Inc. (the successor to Cox),
    Advance/Newhouse Programming Partnership (the successor to
    NewChannels), LMC Discovery, Inc. (formerly known as TCID) and
    Hendricks (incorporated by reference to Exhibit 10.3 to the
    Form 10).                                                                                              
| | 10.4  |  |  | Third Amendment to the Stockholders Agreement, dated as of
    September, 2001, by and among Discovery, Cox, NewChannels, TCID,
    Hendricks and Advance Programming Holdings Corp. (incorporated
    by reference to Exhibit 10.4 to the Form 10).                                                                                                                                                                                                                                  
| | 10.5  |  |  | Fourth Amendment to the Stockholders Agreement, dated as
    of June 23, 2003, by and among Discovery, Cox NewChannels,
    TCID, Liberty Animal, Inc. (the successor in interest to LMC)
    for the purposes stated in the First Amendment to the
    Stockholders Agreement, and Hendricks (incorporated by
    reference to Exhibit 10.5 to the Form 10).                                                                                                                        
| | 10.6  |  |  | Form of Tax Sharing Agreement between Liberty Media Corporation
    and DHC (incorporated by reference to Exhibit 10.6 to the
    Form 10).                                                                                                                                                                                                                                                                                                                                            
| | 10.7  |  |  | Discovery Holding Company 2005 Incentive Plan (incorporated by
    reference to Exhibit 10.7 to the Form 10).                                                                                                                                                                                                                                                                                                                                                                          
| | 10.8  |  |  | Discovery Holding Company 2005 Non-Employee Director Plan
    (incorporated by reference to Exhibit 10.8 to the Form 10).                                                                                                                                                                                                                                                                                                                                                              
| | 10.9  |  |  | Discovery Holding Company Transitional Stock Adjustment Plan
    (incorporated by reference to Exhibit 10.9 to the Form 10).                                                                                                                                                                                                                                                                                                                                                           
| | 10.10 |  |  | Agreement between DHC and John C. Malone (incorporated by
    reference to Exhibit 10.10 to the Form 10).                                                                                                                                                                                                                                                                                                                                                                              
| | 10.11 |  |  | Agreement, dated June 24, 2005, between Discovery and DHC
    (incorporated by reference to Exhibit 10.11 to the Form 10).                                                                                                                                                                                                                                                                                                                                                             
| | 10.12 |  |  | Indemnification Agreement, dated as of June 24, 2005,
    between Cox and DHC (incorporated by reference to
    Exhibit 10.12 to the Form 10).                                                                                                                                                                                                                                                                                                                                         
| | 10.13 |  |  | Indemnification Agreement, dated as of June 24, 2005,
    between NewChannels and DHC (incorporated by reference to
    Exhibit 10.13 to the Form 10).                                                                                                                                                                                                                                                                                                                                 
| | 10.14 |  |  | Form of Indemnification Agreement with Directors and Executive
    Officers (incorporated by reference to Exhibit 10.14 to the
    Form 10).                                                                                                                                                                                                                                                                                                                                           

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##### Table of Contents



| |      |  |  |                                                           
| | ---- |  |  | ----------------------------------------------------------
| | 21   |  |  | Subsidiaries of Discovery Holding Company, filed herewith.
| | 23.1 |  |  | Consent of KPMG LLP, filed herewith.                      
| | 23.2 |  |  | Consent of PricewaterhouseCoopers LLP, filed herewith.    
| | 31.1 |  |  | Rule 13a-14(a)/15d-14(a) Certification, filed herewith.   
| | 31.2 |  |  | Rule 13a-14(a)/15d-14(a) Certification, filed herewith.   
| | 31.3 |  |  | Rule 13a-14(a)/15d-14(a) Certification, filed herewith.   
| | 32   |  |  | Section 1350 Certification, filed herewith.               

IV-3



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##### Table of Contents






Report of Independent Registered Public Accounting Firm
















IV-4



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##### Table of Contents



Discovery Communications, Inc.





Consolidated Balance Sheets


|                                                                                                                                                      |                                                             |                       |           |         |      |   |           |         | 
|----------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------- | --------------------- | --------- | ------- | ---- | - | --------- | ------- | 
|                                                                                                                                                      |                                                             | December 31,          |          
|                                                                                                                                                      |                                                             |                       |          
|                                                                                                                                                      |                                                             | 2005                  |           |         | 2004 |  
|                                                                                                                                                      |                                                             |                       |           |         |      |  
|                                                                                                                                                      |                                                             | (In thousands, except |          
|                                                                                                                                                      |                                                             | share data)           |          
|ASSETS                                                                                                                                               
|Current assets                                                                                                                                        |                                                             |                       |           |         |      |   |           |        
|                                                                                                                                                      | Cash and cash equivalents                                   |                       | $         | 34,491  |      |   | $         | 24,282  | 
|                                                                                                                                                      | Accounts receivable, less allowances of $35,079 and $24,375 |                       |           | 565,407 |      |   |           | 527,659 | 
|                                                                                                                                                      | Inventories                                                 |                       |           | 30,714  |      |   |           | 32,567  | 
|                                                                                                                                                      | Deferred income taxes                                       |                       |           | 88,765  |      |   |           | 144,606 | 
|                                                                                                                                                      | Content rights, net                                         |                       |           | 55,125  |      |   |           | 50,578  | 
|                                                                                                                                                      | Other current assets                                        |                       |           | 56,867  |      |   |           | 55,758  | 
|                                                                                                                                                      |                                                             |                       |           |         |      |  
|Total current assets                                                                                                                                  |                                                             |                       | 831,369   |         |      |   | 835,450   |        
|                                                                                                                                                      |                                                             |                       |           |         |      |  
|Property and equipment, net                                                                                                                           |                                                             |                       | 397,578   |         |      |   | 380,290   |        
|Content rights, net, less current portion                                                                                                             |                                                             |                       | 1,175,988 |         |      |   | 1,027,379 |        
|Deferred launch incentives                                                                                                                            |                                                             |                       | 255,259   |         |      |   | 314,601   |        
|Goodwill                                                                                                                                              |                                                             |                       | 254,989   |         |      |   | 257,460   |        
|Intangibles, net                                                                                                                                      |                                                             |                       | 142,938   |         |      |   | 187,761   |        
|Investments in and advances to unconsolidated affiliates                                                                                              |                                                             |                       | 11,528    |         |      |   | 74,450    |        
|Deferred income taxes                                                                                                                                 |                                                             |                       | 69,316    |         |      |   | 114,673   |        
|Other assets                                                                                                                                          |                                                             |                       | 35,655    |         |      |   | 43,622    |        
|                                                                                                                                                      |                                                             |                       |           |         |      |  
|TOTAL ASSETS                                                                                                                                          |                                                             | $                     | 3,174,620 |         |      | $ | 3,235,686 |        
|                                                                                                                                                      |                                                             |                       |           |         |      |  
|                                                                                                                                                     
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                                
|Current liabilities                                                                                                                                   |                                                             |                       |           |         |      |   |           |        
|                                                                                                                                                      | Accounts payable and accrued liabilities                    |                       | $         | 371,326 |      |   | $         | 333,390 | 
|                                                                                                                                                      | Launch incentives payable                                   |                       |           | 22,655  |      |   |           | 33,509  | 
|                                                                                                                                                      | Content rights payable                                      |                       |           | 97,075  |      |   |           | 94,969  | 
|                                                                                                                                                      | Current portion of long-term incentive plan liabilities     |                       |           | 20,690  |      |   |           | 261,627 | 
|                                                                                                                                                      | Current portion of long-term debt                           |                       |           | 6,470   |      |   |           | 9,736   | 
|                                                                                                                                                      | Income taxes payable                                        |                       |           | 51,226  |      |   |           | 21,123  | 
|                                                                                                                                                      | Unearned revenue                                            |                       |           | 89,803  |      |   |           | 95,585  | 
|                                                                                                                                                      | Other current liabilities                                   |                       |           | 33,220  |      |   |           | 30,622  | 
|                                                                                                                                                      |                                                             |                       |           |         |      |  
|Total current liabilities                                                                                                                             |                                                             |                       | 692,465   |         |      |   | 880,561   |        
|                                                                                                                                                      |                                                             |                       |           |         |      |  
|Long-term debt, less current portion                                                                                                                  |                                                             |                       | 2,590,440 |         |      |   | 2,498,287 |        
|Derivative financial instruments, less current portion                                                                                                |                                                             |                       | 18,592    |         |      |   | 46,541    |        
|Launch incentives payable, less current portion                                                                                                       |                                                             |                       | 21,910    |         |      |   | 34,328    |        
|Long-term incentive plan liabilities, less current portion                                                                                            |                                                             |                       | 25,380    |         |      |   | 60,735    |        
|Content rights payable, less current portion                                                                                                          |                                                             |                       | 4,380     |         |      |   | 8,027     |        
|Other liabilities                                                                                                                                     |                                                             |                       | 31,309    |         |      |   | 15,566    |        
|                                                                                                                                                      |                                                             |                       |           |         |      |  
|Total liabilities                                                                                                                                     |                                                             |                       | 3,384,476 |         |      |   | 3,544,045 |        
|                                                                                                                                                      |                                                             |                       |           |         |      |  
|Mandatorily redeemable interests in subsidiaries                                                                                                      |                                                             |                       | 272,502   |         |      |   | 319,567   |        
|                                                                                                                                                      |                                                             |                       |           |         |      |  
|Commitments and contingencies                                                                                                                         |                                                             |                       |           |         |      |   |           |        
|Stockholders deficit                                                                                                                                 |                                                             |                       |           |         |      |   |           |        
|Class A common stock; $.01 par value;
    100,000 shares authorized; 51,119 shares issued, less
    719 shares of treasury stock                      |                                                             |                       | 1         |         |      |   | 1         |        
|Class B common stock; $.01 par value;
    60,000 shares authorized; 50,615 shares issued and
    held in treasury stock at December 31, 2005 and 2004 |                                                             |                       |          |         |      |   |          |        
|Additional paid-in capital                                                                                                                            |                                                             |                       | 21,093    |         |      |   | 21,093    |        
|Accumulated deficit                                                                                                                                   |                                                             |                       | (513,311  | )       |      |   | (672,931  | )      
|Accumulated other comprehensive income                                                                                                                |                                                             |                       | 9,859     |         |      |   | 23,911    |        
|                                                                                                                                                      |                                                             |                       |           |         |      |  
|Total stockholders deficit                                                                                                                           |                                                             |                       | (482,358  | )       |      |   | (627,926  | )      
|                                                                                                                                                      |                                                             |                       |           |         |      |  
|TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                           |                                                             | $                     | 3,174,620 |         |      | $ | 3,235,686 |        
|                                                                                                                                                      |                                                             |                       |           |         |      |  



IV-5



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##### Table of Contents



Discovery Communications, Inc.





Consolidated Statements of Operations


|                                                               |  |                         |           |   |      |   |           |      |  |   |           |  
|-------------------------------------------------------------- |  | ----------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                               |  | Year Ended December 31, |          
|                                                               |  |                         |          
|                                                               |  | 2005                    |           |   | 2004 |   |           | 2003 | 
|                                                               |  |                         |           |   |      |   |           |      | 
|                                                               |  | (In thousands)          |          
|OPERATING REVENUE                                              |  |                         |           |   |      |   |           |      |  |   |           |  
|Advertising                                                    |  | $                       | 1,187,823 |   |      | $ | 1,133,807 |      |  | $ | 1,010,585 |  
|Distribution                                                   |  |                         | 1,198,686 |   |      |   | 976,362   |      |  |   | 747,927   |  
|Other                                                          |  |                         | 285,245   |   |      |   | 255,177   |      |  |   | 236,535   |  
|                                                               |  |                         |           |   |      |   |           |      | 
|Total operating revenue                                        |  |                         | 2,671,754 |   |      |   | 2,365,346 |      |  |   | 1,995,047 |  
|                                                               |  |                         |           |   |      |   |           |      | 
|Cost of revenue                                                |  |                         | 979,765   |   |      |   | 846,316   |      |  |   | 751,578   |  
|Selling, general & administrative                              |  |                         | 1,005,351 |   |      |   | 856,340   |      |  |   | 735,017   |  
|Long-term incentive plans                                      |  |                         | 49,465    |   |      |   | 71,515    |      |  |   | 74,119    |  
|Depreciation & amortization                                    |  |                         | 123,209   |   |      |   | 129,011   |      |  |   | 120,172   |  
|Gain on sale of long-lived asset                               |  |                         |          |   |      |   | (22,007   | )    |  |   |          |  
|                                                               |  |                         |           |   |      |   |           |      | 
|Total operating expenses                                       |  |                         | 2,157,790 |   |      |   | 1,881,175 |      |  |   | 1,680,886 |  
|                                                               |  |                         |           |   |      |   |           |      | 
|INCOME FROM OPERATIONS                                         |  |                         | 513,964   |   |      |   | 484,171   |      |  |   | 314,161   |  
|                                                               |  |                         |           |   |      |   |           |      | 
|OTHER INCOME (EXPENSE)                                         |  |                         |           |   |      |   |           |      |  |   |           |  
|Interest, net                                                  |  |                         | (184,575  | ) |      |   | (167,420  | )    |  |   | (159,409  | )
|Realized and unrealized gains from derivative instruments, net |  |                         | 22,499    |   |      |   | 45,540    |      |  |   | 21,405    |  
|Minority interests in consolidated subsidiaries                |  |                         | (43,696   | ) |      |   | (54,940   | )    |  |   | (35,965   | )
|Equity in earnings (losses) of unconsolidated affiliates       |  |                         | 4,660     |   |      |   | 171       |      |  |   | (4,477    | )
|Other, net                                                     |  |                         | 9,111     |   |      |   | 2,299     |      |  |   | 2,307     |  
|                                                               |  |                         |           |   |      |   |           |      | 
|Total other expense, net                                       |  |                         | (192,001  | ) |      |   | (174,350  | )    |  |   | (176,139  | )
|                                                               |  |                         |           |   |      |   |           |      | 
|INCOME BEFORE INCOME TAXES                                     |  |                         | 321,963   |   |      |   | 309,821   |      |  |   | 138,022   |  
|                                                               |  |                         |           |   |      |   |           |      | 
|Income tax expense                                             |  |                         | 162,343   |   |      |   | 141,799   |      |  |   | 74,785    |  
|                                                               |  |                         |           |   |      |   |           |      | 
|NET INCOME                                                     |  | $                       | 159,620   |   |      | $ | 168,022   |      |  | $ | 63,237    |  
|                                                               |  |                         |           |   |      |   |           |      | 



IV-6



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##### Table of Contents



Discovery Communications, Inc.





Consolidated Statements of Cash Flows


|                                                                       |                                                                            |                                          |            |         |          |   |            |         |          |   |          |         |          |  
|---------------------------------------------------------------------- | -------------------------------------------------------------------------- | ---------------------------------------- | ---------- | ------- | -------- | - | ---------- | ------- | -------- | - | -------- | ------- | -------- | -
|                                                                       |                                                                            | Year Ended December 31,                  |           
|                                                                       |                                                                            |                                          |           
|                                                                       |                                                                            | 2005                                     |            |         | 2004     |   |            | 2003    |         
|                                                                       |                                                                            |                                          |            |         |          |   |            |         |         
|                                                                       |                                                                            | (In thousands)                           |           
|OPERATING ACTIVITIES                                                   |                                                                            |                                          |            |         |          |   |            |         |          |   |          |        
|Net income                                                             |                                                                            | $                                        | 159,620    |         |          | $ | 168,022    |         |          | $ | 63,237   |        
|Adjustments to reconcile net income to cash provided by
    operations |                                                                            |                                          |            |         |          |   |            |         |          |   |          |        
|                                                                       | Depreciation and amortization                                              |                                          |            | 123,209 |          |   |            | 129,011 |          |   |          | 120,172 |         
|                                                                       | Amortization of deferred launch incentives and representation
    rights   |                                          |            | 83,411  |          |   |            | 107,757 |          |   |          | 131,980 |         
|                                                                       | Provision for losses on accounts receivable                                |                                          |            | 12,217  |          |   |            | 959     |          |   |          | 11,413  |         
|                                                                       | Expenses arising from long-term incentive plans                            |                                          |            | 49,465  |          |   |            | 71,515  |          |   |          | 74,119  |         
|                                                                       | Equity in (earnings) losses of unconsolidated affiliates                   |                                          |            | (4,660  | )        |   |            | (171    | )        |   |          | 4,477   |         
|                                                                       | Deferred income taxes                                                      |                                          |            | 109,383 |          |   |            | 105,522 |          |   |          | 42,280  |         
|                                                                       | Realized and unrealized gains on derivative financial
    instruments, net |                                          |            | (22,499 | )        |   |            | (45,540 | )        |   |          | (21,405 | )       
|                                                                       | Non-cash minority interest charges                                         |                                          |            | 43,696  |          |   |            | 54,940  |          |   |          | 35,965  |         
|                                                                       | Gain on sale of investments                                                |                                          |            | (12,793 | )        |   |            |        |          |   |          |        |         
|                                                                       | Gain on sale of long-lived assets                                          |                                          |            |        |          |   |            | (22,007 | )        |   |          |        |         
|                                                                       | Other non-cash (income) charges                                            |                                          |            | 9,675   |          |   |            | (2,681  | )        |   |          | 541     |         
|                                                                       | Changes in assets and liabilities, net of business
    combinations        |                                          |            |         |          |   |            |         |          |   |          |         |         
|                                                                       |                                                                            | Accounts receivable                      |            |         | (37,207  | ) |            |         | (60,841  | ) |          |         | (52,753  | )
|                                                                       |                                                                            | Inventories                              |            |         | 1,853    |   |            |         | 4,555    |   |          |         | 22,978   |  
|                                                                       |                                                                            | Other assets                             |            |         | (18,748  | ) |            |         | (3,711   | ) |          |         | (5,064   | )
|                                                                       |                                                                            | Content rights, net of payables          |            |         | (108,155 | ) |            |         | (122,433 | ) |          |         | (139,387 | )
|                                                                       |                                                                            | Accounts payable and accrued liabilities |            |         | 47,913   |   |            |         | 55,734   |   |          |         | 27,646   |  
|                                                                       |                                                                            | Representation rights                    |            |         | (6,000   | ) |            |         | (479     | ) |          |         | (11,250  | )
|                                                                       |                                                                            | Deferred launch incentives               |            |         | (35,731  | ) |            |         | (74,696  | ) |          |         | (99,630  | )
|                                                                       |                                                                            | Long-term incentive plan liabilities     |            |         | (325,756 | ) |            |         | (240,752 | ) |          |         | (51,023  | )
|                                                                       |                                                                            |                                          |            |         |          |   |            |         |         
|Cash provided by operations                                            |                                                                            |                                          | 68,893     |         |          |   | 124,704    |         |          |   | 154,296  |        
|                                                                       |                                                                            |                                          |            |         |          |   |            |         |         
|INVESTING ACTIVITIES                                                   |                                                                            |                                          |            |         |          |   |            |         |          |   |          |        
|Acquisition of property and equipment                                  |                                                                            |                                          | (99,684    | )       |          |   | (88,100    | )       |          |   | (109,956 | )      
|Business combinations, net of cash acquired                            |                                                                            |                                          | (400       | )       |          |   | (17,218    | )       |          |   | (46,541  | )      
|Purchase of intangibles                                                |                                                                            |                                          | (583       | )       |          |   |           |         |          |   |         |        
|Investments in and advances to unconsolidated affiliates               |                                                                            |                                          | (363       | )       |          |   | (17,433    | )       |          |   | (13,074  | )      
|Redemption of interests in subsidiaries                                |                                                                            |                                          | (92,874    | )       |          |   | (148,880   | )       |          |   |         |        
|Proceeds from sale of investments                                      |                                                                            |                                          | 14,664     |         |          |   |           |         |          |   |         |        
|Proceeds from sale of long-lived assets                                |                                                                            |                                          |           |         |          |   | 22,007     |         |          |   |         |        
|                                                                       |                                                                            |                                          |            |         |          |   |            |         |         
|Cash used by investing activities                                      |                                                                            |                                          | (179,240   | )       |          |   | (249,624   | )       |          |   | (169,571 | )      
|                                                                       |                                                                            |                                          |            |         |          |   |            |         |         
|FINANCING ACTIVITIES                                                   |                                                                            |                                          |            |         |          |   |            |         |          |   |          |        
|Proceeds from issuance of long-term debt                               |                                                                            |                                          | 1,785,955  |         |          |   | 1,848,000  |         |          |   |         |        
|Principal payments of long-term debt                                   |                                                                            |                                          | (1,697,068 | )       |          |   | (1,699,215 | )       |          |   | (12,638  | )      
|Deferred financing fees                                                |                                                                            |                                          | (4,810     | )       |          |   | (8,499     | )       |          |   | (56      | )      
|Contributions from minority shareholders                               |                                                                            |                                          | 603        |         |          |   | 3,146      |         |          |   | 21,652   |        
|Increase in note receivable from stockholder                           |                                                                            |                                          |           |         |          |   |           |         |          |   | (5,238   | )      
|Collection of note receivable from stockholder                         |                                                                            |                                          |           |         |          |   |           |         |          |   | 23,600   |        
|Repurchase of Class A common stock                                     |                                                                            |                                          |           |         |          |   |           |         |          |   | (55,334  | )      
|Other financing                                                        |                                                                            |                                          | 32,153     |         |          |   | (30,840    | )       |          |   | 42,325   |        
|                                                                       |                                                                            |                                          |            |         |          |   |            |         |         
|Cash provided by financing activities                                  |                                                                            |                                          | 116,833    |         |          |   | 112,592    |         |          |   | 14,311   |        
|                                                                       |                                                                            |                                          |            |         |          |   |            |         |         
|Effect of exchange rate changes on cash                                |                                                                            |                                          | 3,723      |         |          |   | 2,535      |         |          |   | 1,215    |        
|CHANGE IN CASH AND CASH EQUIVALENTS                                    |                                                                            |                                          | 10,209     |         |          |   | (9,793     | )       |          |   | 251      |        
|Cash and cash equivalents, beginning of year                           |                                                                            |                                          | 24,282     |         |          |   | 34,075     |         |          |   | 33,824   |        
|CASH AND CASH EQUIVALENTS, END OF YEAR                                 |                                                                            | $                                        | 34,491     |         |          | $ | 24,282     |         |          | $ | 34,075   |        
|                                                                       |                                                                            |                                          |            |         |          |   |            |         |         



IV-7



---



##### Table of Contents



Discovery Communications, Inc.





Consolidated Statements of Changes in Stockholders
Deficit


|                                                                   |                                                                     |                |   |  |            |   |         |             |  |                                   |          |  |            |                |          |             |             |   |        |             |   |   |       |        |   |   |       |       |  |   |          |   | 
|------------------------------------------------------------------ | ------------------------------------------------------------------- | -------------- | - |  | ---------- | - | ------- | ----------- |  | --------------------------------- | -------- |  | ---------- | -------------- | -------- | ----------- | ----------- | - | ------ | ----------- | - | - | ----- | ------ | - | - | ----- | ----- |  | - | -------- | - | 
|                                                                   |                                                                     |                |   |  |            |   |         |             |  | Other Comprehensive Income (Loss) |          |  |           
|                                                                   |                                                                     |                |   |  |            |   |         |             |  |                                   |         
|                                                                   |                                                                     | Class A        |   |  | Additional |   |         |             |  | Foreign                           |          |  | Unrealized |                |          | Unamortized |             |   |       
|                                                                   |                                                                     |                |   |  | Paid-In    |   |         | Accumulated |  |                                   | Currency |  |            | Gain (Loss) on |          |             | Gain on     |   |        |            
|                                                                   |                                                                     | At Par         |   |  | Redeemable |   |         | Capital     |  |                                   | Deficit  |  |            | Translation    |          |             | Investments |   |        | Derivatives |   |   | Total |       
|                                                                   |                                                                     |                |   |  |            |   |         |             |  |                                   |          |  |            |                |          |             |             |   |        |             |   |   |       |       
|                                                                   |                                                                     | (In thousands) |  
|Balance, December 31, 2002                                         |                                                                     | $              | 1 |  |            | $ | 50,696  |             |  | $                                 | 21,093   |  |            | $              | (915,590 | )           |             | $ | 4,296  |             |   | $ |      |        |   | $ |      |       |  | $ | (839,504 | )
|                                                                   |                                                                     |                |   |  |            |   |         |             |  |                                   |          |  |            |                |          |             |             |   |        |             |   |   |       |       
|Comprehensive income                                               |                                                                     |                |   |  |            |   |         |             |  |                                   |          |  |            |                |          |             |             |   |        |             |   |   |       |        |   |   |       |       |  |   |          |  
|                                                                   | Net income                                                          |                |   |  |            |   |         |             |  |                                   |          |  |            |                |          | 63,237      |             |   |        |             |   |   |       |        |   |   |       |       |  |   |          |   | 
|                                                                   | Foreign currency translation, net of tax of $5.7 million            |                |   |  |            |   |         |             |  |                                   |          |  |            |                |          |             |             |   |        | 10,027      |   |   |       |        |   |   |       |       |  |   |          |   | 
|                                                                   | Unrealized gain on investments, net of tax of $2.4 million          |                |   |  |            |   |         |             |  |                                   |          |  |            |                |          |             |             |   |        |             |   |   |       | 3,771  |   |   |       |       |  |   |          |   | 
|Total comprehensive income                                         |                                                                     |                |   |  |            |   |         |             |  |                                   |          |  |            |                |          |             |             |   |        |             |   |   |       |        |   |   |       |       |  |   | 77,035   |  
|Decrease in loan to stockholder                                    |                                                                     |                |   |  |            |   | 18,362  |             |  |                                   |          |  |            |                |          |             |             |   |        |             |   |   |       |        |   |   |       |       |  |   | 18,362   |  
|Reduction of compensation from redeemable Class A common
    stock |                                                                     |                |   |  |            |   | (2,324  | )           |  |                                   |          |  |            |                |          |             |             |   |        |             |   |   |       |        |   |   |       |       |  |   | (2,324   | )
|Decretion of redeemable Class A common stock                       |                                                                     |                |   |  |            |   | (11,400 | )           |  |                                   |          |  |            |                | 11,400   |             |             |   |        |             |   |   |       |        |   |   |       |       |  |   |         |  
|Repurchase of Class A common stock treasury shares                 |                                                                     |                |   |  |            |   | (55,334 | )           |  |                                   |          |  |            |                |          |             |             |   |        |             |   |   |       |        |   |   |       |       |  |   | (55,334  | )
|                                                                   |                                                                     |                |   |  |            |   |         |             |  |                                   |          |  |            |                |          |             |             |   |        |             |   |   |       |       
|Balance, December 31, 2003                                         |                                                                     | $              | 1 |  |            | $ |        |             |  | $                                 | 21,093   |  |            | $              | (840,953 | )           |             | $ | 14,323 |             |   | $ | 3,771 |        |   | $ |      |       |  | $ | (801,765 | )
|                                                                   |                                                                     |                |   |  |            |   |         |             |  |                                   |          |  |            |                |          |             |             |   |        |             |   |   |       |       
|Comprehensive income                                               |                                                                     |                |   |  |            |   |         |             |  |                                   |          |  |            |                |          |             |             |   |        |             |   |   |       |        |   |   |       |       |  |   |          |  
|                                                                   | Net income                                                          |                |   |  |            |   |         |             |  |                                   |          |  |            |                |          | 168,022     |             |   |        |             |   |   |       |        |   |   |       |       |  |   |          |   | 
|                                                                   | Foreign currency translation, net of tax of $5.2 million            |                |   |  |            |   |         |             |  |                                   |          |  |            |                |          |             |             |   |        | 8,409       |   |   |       |        |   |   |       |       |  |   |          |   | 
|                                                                   | Unrealized loss on investments, net of tax of $1.7 million          |                |   |  |            |   |         |             |  |                                   |          |  |            |                |          |             |             |   |        |             |   |   |       | (2,592 | ) |   |       |       |  |   |          |   | 
|Total comprehensive income                                         |                                                                     |                |   |  |            |   |         |             |  |                                   |          |  |            |                |          |             |             |   |        |             |   |   |       |        |   |   |       |       |  |   | 173,839  |  
|                                                                   |                                                                     |                |   |  |            |   |         |             |  |                                   |          |  |            |                |          |             |             |   |        |             |   |   |       |       
|Balance, December 31, 2004                                         |                                                                     | $              | 1 |  |            | $ |        |             |  | $                                 | 21,093   |  |            | $              | (672,931 | )           |             | $ | 22,732 |             |   | $ | 1,179 |        |   | $ |      |       |  | $ | (627,926 | )
|                                                                   |                                                                     |                |   |  |            |   |         |             |  |                                   |          |  |            |                |          |             |             |   |        |             |   |   |       |       
|Comprehensive income                                               |                                                                     |                |   |  |            |   |         |             |  |                                   |          |  |            |                |          |             |             |   |        |             |   |   |       |        |   |   |       |       |  |   |          |  
|                                                                   | Net income                                                          |                |   |  |            |   |         |             |  |                                   |          |  |            |                |          | 159,620     |             |   |        |             |   |   |       |        |   |   |       |       |  |   |          |   | 
|                                                                   | Foreign currency translation, net of tax of $9.6 million            |                |   |  |            |   |         |             |  |                                   |          |  |            |                |          |             |             |   |        | (16,017     | ) |   |       |        |   |   |       |       |  |   |          |   | 
|                                                                   | Unrealized loss on investments, net of tax of $0.1 million          |                |   |  |            |   |         |             |  |                                   |          |  |            |                |          |             |             |   |        |             |   |   |       | (101   | ) |   |       |       |  |   |          |   | 
|                                                                   | Unamortized gain on cash flow hedge, net of tax of
    $1.3 million |                |   |  |            |   |         |             |  |                                   |          |  |            |                |          |             |             |   |        |             |   |   |       |        |   |   |       | 2,066 |  |   |          |   | 
|Total comprehensive income                                         |                                                                     |                |   |  |            |   |         |             |  |                                   |          |  |            |                |          |             |             |   |        |             |   |   |       |        |   |   |       |       |  |   | 145,568  |  
|                                                                   |                                                                     |                |   |  |            |   |         |             |  |                                   |          |  |            |                |          |             |             |   |        |             |   |   |       |       
|Balance, December 31, 2005                                         |                                                                     | $              | 1 |  |            | $ |        |             |  | $                                 | 21,093   |  |            | $              | (513,311 | )           |             | $ | 6,715  |             |   | $ | 1,078 |        |   | $ | 2,066 |       |  | $ | (482,358 | )
|                                                                   |                                                                     |                |   |  |            |   |         |             |  |                                   |          |  |            |                |          |             |             |   |        |             |   |   |       |       



IV-8



---



##### Table of Contents



Discovery Communications, Inc.





Notes to Consolidated Financial Statements




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





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



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







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









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



point-of


IV-9



---



##### Table of Contents



Discovery Communications, Inc.


Notes to Consolidated Financial
Statements  (Continued)






| |                  
| | -----------------
| | Advertising Costs





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





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





| |            
| | -----------
| | Inventories





| |               
| | --------------
| | Content Rights







IV-10



---



##### Table of Contents



Discovery Communications, Inc.


Notes to Consolidated Financial
Statements  (Continued)




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





| |                           
| | --------------------------
| | Capitalized Software Costs





| |                                                                         
| | ------------------------------------------------------------------------
| | Recoverability of Long-Lived Assets, Goodwill, and
    Intangible Assets







| |                           
| | --------------------------
| | Deferred Launch Incentives



IV-11



---



##### Table of Contents



Discovery Communications, Inc.


Notes to Consolidated Financial
Statements  (Continued)




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





| |                                
| | -------------------------------
| | Long-term Compensation Programs





mark-to






| |                                                 
| | ------------------------------------------------
| | Mandatorily Redeemable Interests in Subsidiaries





| |               
| | --------------
| | Treasury Stock





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



IV-12



---



##### Table of Contents



Discovery Communications, Inc.


Notes to Consolidated Financial
Statements  (Continued)






| |          
| | ---------
| | Revisions





|   |                                                                      
|-- | ---------------------------------------------------------------------
|3. | Supplemental Disclosures to Consolidated Statements of Cash
    Flows

|                            |                               |                                                  |         |     |      |  |         |        |        |  |         |        |        | 
|--------------------------- | ----------------------------- | ------------------------------------------------ | ------- | --- | ---- |  | ------- | ------ | ------ |  | ------- | ------ | ------ | 
|                            |                               | Year Ended December 31,                          |        
|                            |                               |                                                  |        
|                            |                               | 2005                                             |         |     | 2004 |  |         | 2003   |       
|                            |                               |                                                  |         |     |      |  |         |        |       
|                            |                               | (In thousands)                                   |        
|Cash paid for acquisitions: |                               |                                                  |         |     |      |  |         |        |        |  |         |       
|                            | Fair value of assets acquired |                                                  | $       | 400 |      |  | $       | 21,414 |        |  | $       | 50,509 |       
|                            | Net liabilities assumed       |                                                  |         |    |      |  |         | (4,196 | )      |  |         | (3,968 | )     
|                            |                               | Cash paid for acquisitions, net of cash acquired |         |     | 400  |  |         |        | 17,218 |  |         |        | 46,541 | 
|Cash paid for interest      |                               |                                                  | 171,151 |     |      |  | 166,584 |        |        |  | 162,904 |       
|Cash paid for income taxes  |                               |                                                  | 27,678  |     |      |  | 28,999  |        |        |  | 32,395  |       



|   |                      
|-- | ---------------------
|4. | Business Combinations







IV-13



---



##### Table of Contents



Discovery Communications, Inc.


Notes to Consolidated Financial
Statements  (Continued)




|   |               
|-- | --------------
|5. | Content Rights

|                                         |            |                |            |           |      |   |            |           | 
|---------------------------------------- | ---------- | -------------- | ---------- | --------- | ---- | - | ---------- | --------- | 
|                                         |            | December 31,   |           
|                                         |            |                |           
|Content Rights,                          |            | 2005           |            |           | 2004 |  
|                                         |            |                |            |           |      |  
|                                         |            | (In thousands) |           
|Produced content rights                  |            |                |            |           |      |   |            |          
|                                         | Completed  |                | $          | 1,339,705 |      |   | $          | 1,099,483 | 
|                                         | In process |                |            | 122,366   |      |   |            | 100,086   | 
|Co-produced content rights               |            |                |            |           |      |   |            |          
|                                         | Completed  |                |            | 792,184   |      |   |            | 698,758   | 
|                                         | In process |                |            | 53,704    |      |   |            | 38,575    | 
|Licensed content rights                  |            |                |            |           |      |   |            |          
|                                         | Acquired   |                |            | 225,769   |      |   |            | 189,662   | 
|                                         | Prepaid    |                |            | 3,371     |      |   |            | 4,232     | 
|                                         |            |                |            |           |      |  
|Content rights, at cost                  |            |                | 2,537,099  |           |      |   | 2,130,796  |          
|Accumulated amortization                 |            |                | (1,305,986 | )         |      |   | (1,052,839 | )        
|                                         |            |                |            |           |      |  
|Content rights, net                      |            |                | 1,231,113  |           |      |   | 1,077,957  |          
|Current portion, licensed content rights |            |                | (55,125    | )         |      |   | (50,578    | )        
|                                         |            |                |            |           |      |  
|Non-current portion                      |            | $              | 1,175,988  |           |      | $ | 1,027,379  |          
|                                         |            |                |            |           |      |  







|   |                       
|-- | ----------------------
|6. | Property and Equipment

|                                                      |  |                |          |   |      |   |          |  
|----------------------------------------------------- |  | -------------- | -------- | - | ---- | - | -------- | -
|                                                      |  | December 31,   |         
|                                                      |  |                |         
|Property and Equipment,                               |  | 2005           |          |   | 2004 |  
|                                                      |  |                |          |   |      |  
|                                                      |  | (In thousands) |         
|Equipment and software                                |  | $              | 347,667  |   |      | $ | 344,525  |  
|Land                                                  |  |                | 28,781   |   |      |   | 28,781   |  
|Buildings                                             |  |                | 157,896  |   |      |   | 136,088  |  
|Furniture, fixtures, leasehold improvements and other |  |                | 187,589  |   |      |   | 160,418  |  
|Assets in progress                                    |  |                | 16,824   |   |      |   | 60,806   |  
|                                                      |  |                |          |   |      |  
|Property and equipment, at cost                       |  |                | 738,757  |   |      |   | 730,618  |  
|Accumulated depreciation and amortization             |  |                | (341,179 | ) |      |   | (350,328 | )
|                                                      |  |                |          |   |      |  
|Property and equipment, net                           |  | $              | 397,578  |   |      | $ | 380,290  |  
|                                                      |  |                |          |   |      |  



IV-14



---



##### Table of Contents



Discovery Communications, Inc.


Notes to Consolidated Financial
Statements  (Continued)






|   |                                                 
|-- | ------------------------------------------------
|7. | Sale of Equity Investments and Long-lived Assets







|   |                               
|-- | ------------------------------
|8. | Goodwill and Intangible Assets

|                                                                  |  |                |         |  |      |   |         | 
|----------------------------------------------------------------- |  | -------------- | ------- |  | ---- | - | ------- | 
|                                                                  |  | December 31,   |        
|                                                                  |  |                |        
|Goodwill and Intangible Assets,                                   |  | 2005           |         |  | 2004 |  
|                                                                  |  |                |         |  |      |  
|                                                                  |  | (In thousands) |        
|Goodwill                                                          |  | $              | 254,989 |  |      | $ | 257,460 | 
|Trademarks                                                        |  |                | 12,327  |  |      |   | 13,383  | 
|Customer lists, net of amortization of $111,954 and $86,406       |  |                | 38,561  |  |      |   | 64,109  | 
|Non-compete and other, net of amortization of $41,107 and $43,021 |  |                | 24,207  |  |      |   | 33,068  | 
|Representation rights, net of amortization of $69,886 and $60,528 |  |                | 67,843  |  |      |   | 77,201  | 
|                                                                  |  |                |         |  |      |  
|Goodwill and intangible assets, net                               |  | $              | 397,927 |  |      | $ | 445,221 | 
|                                                                  |  |                |         |  |      |  











IV-15



---



##### Table of Contents



Discovery Communications, Inc.


Notes to Consolidated Financial
Statements  (Continued)




|   |            
|-- | -----------
|9. | Investments



|                                                                      |  |            |              | 
|--------------------------------------------------------------------- |  | ---------- | ------------ | 
|                                                                      |  | Accounting |             
|Affiliates:                                                           |  | Method     |             
|                                                                      |  |            |             
|Joint Ventures with the British Broadcasting Corporation
    (BBC): |  |            |              | 
|JV Programs LLC (JVP)                                               |  |            | Consolidated | 
|Joint Venture Network LLC (JVN)                                     |  |            | Consolidated | 
|Animal Planet United States (see Note 11)                             |  |            | Consolidated | 
|Animal Planet Europe                                                  |  |            | Consolidated | 
|Animal Planet Latin America                                           |  |            | Consolidated | 
|People & Arts Latin America                                           |  |            | Consolidated | 
|Animal Planet Asia                                                    |  |            | Consolidated | 
|Animal Planet Japan (APJ)                                           |  |            | Consolidated | 
|Animal Planet Canada                                                  |  |            | Equity       | 
|Other Ventures:                                                       |  |            |              | 
|Discovery Times Channel (see Note 11)                                 |  |            | Consolidated | 
|Discovery Canada                                                      |  |            | Equity       | 
|Discovery Japan                                                       |  |            | Equity       | 
|Discovery Health Canada                                               |  |            | Equity       | 
|Discovery Kids Canada                                                 |  |            | Equity       | 
|Discovery Civilization Canada                                         |  |            | Equity       | 
|Meteor Studios                                                        |  |            | Equity       | 



| |                            
| | ---------------------------
| | Joint Ventures with the BBC









| |                           
| | --------------------------
| | Variable Interest Entities



IV-16



---



##### Table of Contents



Discovery Communications, Inc.


Notes to Consolidated Financial
Statements  (Continued)






|                       |  |                         |         |  |      |   |         |      |  |   |         | 
|---------------------- |  | ----------------------- | ------- |  | ---- | - | ------- | ---- |  | - | ------- | 
|                       |  | Year Ended December 31, |        
|                       |  |                         |        
|Operating Results,     |  | 2005                    |         |  | 2004 |   |         | 2003 | 
|                       |  |                         |         |  |      |   |         |      | 
|                       |  | (In thousands)          |        
|Net Revenue            |  | $                       | 111,872 |  |      | $ | 163,630 |      |  | $ | 145,786 | 
|Income from operations |  |                         | 41,934  |  |      |   | 26,201  |      |  |   | 13,278  | 
|Net income             |  |                         | 24,634  |  |      |   | 8,688   |      |  |   | 1,155   | 

|                                                |  |                |        |  |      |   |         | 
|----------------------------------------------- |  | -------------- | ------ |  | ---- | - | ------- | 
|                                                |  | December 31,   |       
|                                                |  |                |       
|Balance Sheets,                                 |  | 2005           |        |  | 2004 |  
|                                                |  |                |        |  |      |  
|                                                |  | (In thousands) |       
|Current assets                                  |  | $              | 68,529 |  |      | $ | 68,554  | 
|Total assets                                    |  |                | 80,365 |  |      |   | 136,703 | 
|Current liabilities                             |  |                | 24,204 |  |      |   | 21,817  | 
|Total liabilities                               |  |                | 33,578 |  |      |   | 46,683  | 
|Total shareholders equity or partners capital |  |                | 46,787 |  |      |   | 90,020  | 



|    |               
|--- | --------------
|10. | Long-Term Debt

|                                                                |  |                |           |   |      |   |           |  
|--------------------------------------------------------------- |  | -------------- | --------- | - | ---- | - | --------- | -
|                                                                |  | December 31,   |          
|                                                                |  |                |          
|Long-Term Debt,                                                 |  | 2005           |           |   | 2004 |  
|                                                                |  |                |           |   |      |  
|                                                                |  | (In thousands) |          
|$1,000.0 Term Loan, due quarterly December 2008 to October 2010 |  | $              | 1,000,000 |   |      | $ |          |  
|$1,555.0 Revolving Loan, due October 2010                       |  |                | 103,000   |   |      |   |          |  
|$2,500.0 Term Loan and Revolving Loans, paid 2005               |  |                |          |   |      |   | 1,488,000 |  
|7.81% Senior Notes, semi annual interest, due March 2006        |  |                | 300,000   |   |      |   | 300,000   |  
|8.06% Senior Notes, semi annual interest, due March 2008        |  |                | 180,000   |   |      |   | 180,000   |  
|7.45% Senior Notes, semi annual interest, due September 2009    |  |                | 55,000    |   |      |   | 55,000    |  
|8.37% Senior Notes, semi annual interest, due March 2011        |  |                | 220,000   |   |      |   | 220,000   |  
|8.13% Senior Notes, semi annual interest, due September 2012    |  |                | 235,000   |   |      |   | 235,000   |  
|Senior Notes, semi annual interest, due December 2012           |  |                | 90,000    |   |      |   |          |  
|6.01% Senior Notes, semi annual interest, due December 2015     |  |                | 390,000   |   |      |   |          |  
|Obligations under capital leases                                |  |                | 23,910    |   |      |   | 25,125    |  
|Other notes payable                                             |  |                |          |   |      |   | 4,898     |  
|                                                                |  |                |           |   |      |  
|Total long-term debt                                            |  |                | 2,596,910 |   |      |   | 2,508,023 |  
|Current portion                                                 |  |                | (6,470    | ) |      |   | (9,736    | )
|                                                                |  |                |           |   |      |  
|Non-current portion                                             |  | $              | 2,590,440 |   |      | $ | 2,498,287 |  
|                                                                |  |                |           |   |      |  



IV-17



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##### Table of Contents



Discovery Communications, Inc.


Notes to Consolidated Financial
Statements  (Continued)














|    |                                                 
|--- | ------------------------------------------------
|11. | Mandatorily Redeemable Interests in Subsidiaries

|                                                                |  |                |         |  |      |   |         | 
|--------------------------------------------------------------- |  | -------------- | ------- |  | ---- | - | ------- | 
|                                                                |  | December 31,   |        
|                                                                |  |                |        
|Mandatorily Redeemable Interests in Subsidiaries,               |  | 2005           |         |  | 2004 |  
|                                                                |  |                |         |  |      |  
|                                                                |  | (In thousands) |        
|Discovery Times                                                 |  | $              | 106,862 |  |      | $ | 125,763 | 
|FitTV (f.k.a. The Health Network)                               |  |                |        |  |      |   | 92,874  | 
|Animal Planet LLC                                               |  |                | 80,000  |  |      |   | 50,000  | 
|Animal Planet LP                                                |  |                | 48,840  |  |      |   | 48,730  | 
|People & Arts Latin America and Animal Planet Channel
    Group |  |                | 36,800  |  |      |   | 2,200   | 
|                                                                |  |                |         |  |      |  
|Mandatorily redeemable interests in subsidiaries                |  | $              | 272,502 |  |      | $ | 319,567 | 
|                                                                |  |                |         |  |      |  



| |                
| | ---------------
| | Discovery Times



IV-18



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##### Table of Contents



Discovery Communications, Inc.


Notes to Consolidated Financial
Statements  (Continued)








| |                                  
| | ---------------------------------
| | FitTV (f.k.a. The Health Network)





| |                  
| | -----------------
| | Animal Planet LLC





| |                 
| | ----------------
| | Animal Planet LP





| |                                                                
| | ---------------------------------------------------------------
| | People & Arts Latin America and Animal Planet
    Channel Group



IV-19



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##### Table of Contents



Discovery Communications, Inc.


Notes to Consolidated Financial
Statements  (Continued)




| |                               
| | ------------------------------
| | Discovery Health Channel (DHC)





|    |                      
|--- | ---------------------
|12. | Stockholder Put Right







|    |                              
|--- | -----------------------------
|13. | Commitments and Contingencies

|                         |       |                          |         |         |         |   |         |         |  |   |        |         |  |   |         |           | 
|------------------------ | ----- | ------------------------ | ------- | ------- | ------- | - | ------- | ------- |  | - | ------ | ------- |  | - | ------- | --------- | 
|                         |       | Year Ending December 31, |        
|                         |       |                          |        
|Future Minimum Payments, |       | Leases                   |         |         | Content |   |         | Other   |  |   | Total  |        
|                         |       |                          |         |         |         |   |         |         |  |   |        |        
|                         |       | (In thousands)           |        
|2006                     |       | $                        | 63,403  |         |         | $ | 260,653 |         |  | $ | 73,401 |         |  | $ | 397,457 |          
|2007                     |       |                          | 64,818  |         |         |   | 59,762  |         |  |   | 74,308 |         |  |   | 198,888 |          
|2008                     |       |                          | 60,816  |         |         |   | 56,959  |         |  |   | 52,779 |         |  |   | 170,554 |          
|2009                     |       |                          | 42,610  |         |         |   | 52,488  |         |  |   | 22,711 |         |  |   | 117,809 |          
|2010                     |       |                          | 34,382  |         |         |   | 45,144  |         |  |   | 18,830 |         |  |   | 98,356  |          
|Thereafter               |       |                          | 169,385 |         |         |   | 43,942  |         |  |   | 11,861 |         |  |   | 225,188 |          
|                         |       |                          |         |         |         |   |         |         |  |   |        |        
|                         | Total |                          | $       | 435,414 |         |   | $       | 518,948 |  |   | $      | 253,890 |  |   | $       | 1,208,252 | 
|                         |       |                          |         |         |         |   |         |         |  |   |        |        







IV-20



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##### Table of Contents



Discovery Communications, Inc.


Notes to Consolidated Financial
Statements  (Continued)










|    |                       
|--- | ----------------------
|14. | Employee Savings Plans





|    |                          
|--- | -------------------------
|15. | Long-term Incentive Plans







IV-21



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##### Table of Contents



Discovery Communications, Inc.


Notes to Consolidated Financial
Statements  (Continued)








|                           |  |       |       |          |       |   |       |       |          |  |       |   |  |          |       |  |       |  |      |   |  |   |       | 
|-------------------------- |  | ----- | ----- | -------- | ----- | - | ----- | ----- | -------- |  | ----- | - |  | -------- | ----- |  | ----- |  | ---- | - |  | - | ----- | 
|                           |  | 2005  |       |          | 2004  |   |       | 2003  |         
|                           |  |       |       |          |       |   |       |       |         
|                           |  |       |       | Weighted |       |   |       |       | Weighted |  |       |   |  | Weighted |      
|                           |  |       |       | Average  |       |   |       |       | Average  |  |       |   |  | Average  |      
|                           |  |       |       | Exercise |       |   |       |       | Exercise |  |       |   |  | Exercise |      
|                           |  | Units |       |          | Price |   |       | Units |          |  | Price |   |  | Units    |       |  | Price | 
|                           |  |       |       |          |       |   |       |       |          |  |       |   |  |          |       |  |       | 
|Outstanding at January 1   |  |       | 25.6  |          |       | $ | 24.10 |       |          |  | 19.1  |   |  | $        | 18.18 |  |       |  | 17.2 |   |  | $ | 15.12 | 
|Units exchanged            |  |       | (7.8  | )        |       |   | 34.31 |       |          |  |      |   |  |          |      |  |       |  |     |   |  |   |      | 
|Units granted              |  |       | 0.5   |          |       |   | 37.35 |       |          |  | 8.7   |   |  |          | 34.22 |  |       |  | 4.1  |   |  |   | 29.02 | 
|Units redeemed/cancelled   |  |       | (18.3 | )        |       |   | 20.53 |       |          |  | (2.2  | ) |  |          | 13.49 |  |       |  | (2.2 | ) |  |   | 14.18 | 
|                           |  |       |       |          |       |   |       |       |          |  |       |   |  |          |       |  |       | 
|Outstanding at December 31 |  |       |      |          |       |   |      |       |          |  | 25.6  |   |  |          | 24.10 |  |       |  | 19.1 |   |  |   | 18.18 | 
|                           |  |       |       |          |       |   |       |       |          |  |       |   |  |          |       |  |       | 
|Vested at December 31      |  |       |      |          |       | $ |      |       |          |  | 17.5  |   |  | $        | 19.76 |  |       |  | 16.5 |   |  | $ | 16.65 | 
|                           |  |       |       |          |       |   |       |       |          |  |       |   |  |          |       |  |       | 









IV-22



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##### Table of Contents



Discovery Communications, Inc.


Notes to Consolidated Financial
Statements  (Continued)




|           |  |             |      |                  |                    |  |      |           |                  |  |                    |  |  |  |      | 
|---------- |  | ----------- | ---- | ---------------- | ------------------ |  | ---- | --------- | ---------------- |  | ------------------ |  |  |  | ---- | 
|           |  | Outstanding |      |                  | Vested             | 
|           |  |             |      |                  |                    | 
|           |  |             |      | Weighted Average |                    |  |      |           | Weighted Average | 
|           |  | Number of   |      |                  | Remaining Years of |  |      | Number of |                  |  | Remaining Years of | 
|Unit Price |  | Units       |      |                  | Contractual Life   |  |      | Units     |                  |  | Contractual Life   | 
|           |  |             |      |                  |                    |  |      |           |                  |  |                    | 
|$3.48      |  |             | 0.1  |                  |                    |  | 4.75 |           |                  |  | 0.1                |  |  |  | 4.75 | 
|$7.06      |  |             | 0.6  |                  |                    |  | 4.75 |           |                  |  | 0.3                |  |  |  | 2.75 | 
|$12.52     |  |             | 5.2  |                  |                    |  | 4.75 |           |                  |  | 1.6                |  |  |  | 3.75 | 
|$15.81     |  |             | 18.3 |                  |                    |  | 4.74 |           |                  |  |                   |  |  |  |     | 
|           |  |             |      |                  |                    |  |      |           |                  |  |                    | 
|Total      |  |             | 24.2 |                  |                    |  | 4.74 |           |                  |  | 2.0                |  |  |  | 3.60 | 
|           |  |             |      |                  |                    |  |      |           |                  |  |                    | 



| |                                          
| | -----------------------------------------
| | Unit Appreciation and Incentive Agreement

10-year 10-year




|    |             
|--- | ------------
|16. | Income Taxes

|                                   |         |                         |         |        |      |   |         |        |   |   |        |        | 
|---------------------------------- | ------- | ----------------------- | ------- | ------ | ---- | - | ------- | ------ | - | - | ------ | ------ | 
|                                   |         | Year Ended December 31, |        
|                                   |         |                         |        
|Income Tax Expense,                |         | 2005                    |         |        | 2004 |   |         | 2003   |  
|                                   |         |                         |         |        |      |   |         |        |  
|                                   |         | (In thousands)          |        
|Current                            |         |                         |         |        |      |   |         |        |   |   |        |       
|                                   | Federal |                         | $       | (1,479 | )    |   | $       | (231   | ) |   | $      | 2,813  | 
|                                   | State   |                         |         | (3,205 | )    |   |         | 3,952  |   |   |        | 6,722  | 
|                                   | Foreign |                         |         | 57,644 |      |   |         | 32,556 |   |   |        | 22,970 | 
|                                   |         |                         |         |        |      |   |         |        |  
|Total current income tax provision |         |                         | 52,960  |        |      |   | 36,277  |        |   |   | 32,505 |       
|                                   |         |                         |         |        |      |   |         |        |  
|Deferred                           |         |                         |         |        |      |   |         |        |   |   |        |       
|                                   | Federal |                         |         | 95,098 |      |   |         | 95,761 |   |   |        | 33,963 | 
|                                   | State   |                         |         | 16,298 |      |   |         | 7,723  |   |   |        | 5,175  | 
|                                   | Foreign |                         |         | (3,851 | )    |   |         |       |   |   |        |       | 
|                                   |         |                         |         |        |      |   |         |        |  
|Total deferred income tax expense  |         |                         | 107,545 |        |      |   | 103,484 |        |   |   | 39,138 |       
|                                   |         |                         |         |        |      |   |         |        |  
|Change in valuation allowance      |         |                         | 1,838   |        |      |   | 2,038   |        |   |   | 3,142  |       
|                                   |         |                         |         |        |      |   |         |        |  
|Total income tax expense           |         | $                       | 162,343 |        |      | $ | 141,799 |        |   | $ | 74,785 |       
|                                   |         |                         |         |        |      |   |         |        |  

IV-23



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##### Table of Contents



Discovery Communications, Inc.


Notes to Consolidated Financial
Statements  (Continued)


|                                           |                                  |                |        |        |             |   |          |          |   |   |             |         |   |   |         |         |  
|------------------------------------------ | -------------------------------- | -------------- | ------ | ------ | ----------- | - | -------- | -------- | - | - | ----------- | ------- | - | - | ------- | ------- | -
|                                           |                                  | December 31,   |       
|                                           |                                  |                |       
|                                           |                                  | 2005           |        |        | 2004        |  
|                                           |                                  |                |        |        |             |  
|Deferred Income Tax Assets and Liabilities |                                  | Current        |        |        | Non-Current |   |          | Current  |   |   | Non-Current |        
|                                           |                                  |                |        |        |             |   |          |          |   |   |             |        
|                                           |                                  | (In thousands) |       
|Assets                                     |                                  |                |        |        |             |   |          |          |   |   |             |         |   |   |         |        
|                                           | Loss carryforwards               |                | $      | 43,470 |             |   | $        | 61,974   |   |   | $           | 1,148   |   |   | $       | 20,090  |  
|                                           | Compensation                     |                |        | 15,185 |             |   |          | 12,432   |   |   |             | 102,595 |   |   |         | 22,745  |  
|                                           | Accrued expenses                 |                |        | 17,769 |             |   |          |         |   |   |             | 26,474  |   |   |         |        |  
|                                           | Reserves and allowances          |                |        | 10,392 |             |   |          | 463      |   |   |             | 8,720   |   |   |         | 10,132  |  
|                                           | Tax credits                      |                |        |       |             |   |          | 3,823    |   |   |             | 4,330   |   |   |         |        |  
|                                           | Derivative financial instruments |                |        |       |             |   |          | 7,052    |   |   |             |        |   |   |         | 16,979  |  
|                                           | Investments                      |                |        |       |             |   |          | 86,039   |   |   |             |        |   |   |         | 69,729  |  
|                                           | Intangibles                      |                |        |       |             |   |          | 41,401   |   |   |             |        |   |   |         | 31,627  |  
|                                           | Other                            |                |        | 3,689  |             |   |          | 11,732   |   |   |             | 3,066   |   |   |         | 8,342   |  
|                                           |                                  |                |        |        |             |   |          |          |   |   |             |        
|                                           |                                  |                | 90,505 |        |             |   | 224,916  |          |   |   | 146,333     |         |   |   | 179,644 |        
|                                           | Valuation allowance              |                |        |       |             |   |          | (21,392  | ) |   |             |        |   |   |         | (19,554 | )
|                                           |                                  |                |        |        |             |   |          |          |   |   |             |        
|Total deferred income tax assets           |                                  |                | 90,505 |        |             |   | 203,524  |          |   |   | 146,333     |         |   |   | 160,090 |        
|                                           |                                  |                |        |        |             |   |          |          |   |   |             |        
|Liabilities                                |                                  |                |        |        |             |   |          |          |   |   |             |         |   |   |         |        
|                                           | Accelerated depreciation         |                |        |       |             |   |          | (11,948  | ) |   |             |        |   |   |         | (20,908 | )
|                                           | Programming costs                |                |        |       |             |   |          | (109,009 | ) |   |             |        |   |   |         |        |  
|                                           | Foreign currency translation     |                |        |       |             |   |          | (4,103   | ) |   |             |        |   |   |         | (13,687 | )
|                                           | Unrealized gains on investments  |                |        |       |             |   |          | (1,920   | ) |   |             |        |   |   |         | (720    | )
|                                           | Other                            |                |        | (1,740 | )           |   |          | (7,228   | ) |   |             | (1,727  | ) |   |         | (10,102 | )
|                                           |                                  |                |        |        |             |   |          |          |   |   |             |        
|Total deferred income tax liabilities      |                                  |                | (1,740 | )      |             |   | (134,208 | )        |   |   | (1,727      | )       |   |   | (45,417 | )      
|                                           |                                  |                |        |        |             |   |          |          |   |   |             |        
|Deferred income tax assets, net            |                                  | $              | 88,765 |        |             | $ | 69,316   |          |   | $ | 144,606     |         |   | $ | 114,673 |        
|                                           |                                  |                |        |        |             |   |          |          |   |   |             |        

|                                              |                                              |                         |      |     |      |  |      |      |  |  |      |      |  
|--------------------------------------------- | -------------------------------------------- | ----------------------- | ---- | --- | ---- |  | ---- | ---- |  |  | ---- | ---- | -
|                                              |                                              | Year Ended December 31, |     
|                                              |                                              |                         |     
|Reconciliation of Effective Tax Rate,         |                                              | 2005                    |      |     | 2004 |  |      | 2003 | 
|                                              |                                              |                         |      |     |      |  |      |      | 
|Federal statutory rate                        |                                              |                         | 35.0 | %   |      |  | 35.0 | %    |  |  | 35.0 | %   
|Increase (decrease) in tax rate arising from: |                                              |                         |      |     |      |  |      |      |  |  |      |     
|                                              | State income taxes, net of Federal benefit   |                         |      | 3.0 |      |  |      | 2.4  |  |  |      | 7.9  |  
|                                              | Foreign income taxes, net of Federal benefit |                         |      | 9.3 |      |  |      | 6.4  |  |  |      | 12.2 |  
|                                              | Other                                        |                         |      | 3.1 |      |  |      | 2.0  |  |  |      | (0.9 | )
|                                              |                                              |                         |      |     |      |  |      |      | 
|Effective income tax rate                     |                                              |                         | 50.4 | %   |      |  | 45.8 | %    |  |  | 54.2 | %   
|                                              |                                              |                         |      |     |      |  |      |      | 





IV-24



---



##### Table of Contents



Discovery Communications, Inc.


Notes to Consolidated Financial
Statements  (Continued)




|    |                      
|--- | ---------------------
|17. | Financial Instruments



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











| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments







IV-25



---



##### Table of Contents



Discovery Communications, Inc.


Notes to Consolidated Financial
Statements  (Continued)






| |                      
| | ---------------------
| | Credit Concentrations







|    |                           
|--- | --------------------------
|18. | Related Party Transactions





|    |                 
|--- | ----------------
|19. | Subsequent event

free-to 


IV-26



---



##### Table of Contents



SIGNATURES






| |                              
| | -----------------------------
| | DISCOVERY HOLDING COMPANY    
|
| | By: /s/ Charles Y. Tanabe    
| |                              
| | Charles
    Y. Tanabe        
| | Senior
    Vice President and
| | General
    Counsel          





|                                             |  |                                                                         |  |                |  | 
|-------------------------------------------- |  | ----------------------------------------------------------------------- |  | -------------- |  | 
|Signature                                    |  | Title                                                                   |  | Date          
|                                             |  |                                                                         |  |               
|                                            
|/s/ John C. MaloneJohn C. Malone             |  | Chairman of the Board, Director and Chief Executive Officer             |  | March 23, 2006
|                                            
|/s/ Robert R. BennettRobert R. Bennett       |  | Director and President                                                  |  | March 23, 2006
|                                            
|/s/ Paul A. GouldPaul A. Gould               |  | Director                                                                |  | March 23, 2006
|                                            
|/s/ M. LaVoy RobisonM. LaVoy Robison         |  | Director                                                                |  | March 23, 2006
|                                            
|/s/ J. David WargoJ. David Wargo             |  | Director                                                                |  | March 23, 2006
|                                            
|/s/ David J.A. FlowersDavid J.A. Flowers     |  | Senior Vice President and Treasurer (Principal Financial Officer)       |  | March 23, 2006
|                                            
|/s/ Christopher W. SheanChristopher W. Shean |  | Senior Vice President and Controller (Principal Accounting
    Officer) |  | March 23, 2006

IV-27



---



##### Table of Contents



INDEX TO EXHIBITS




| |     |  |  |                                                                                                                                                                                                                                                                                              
| | --- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2.1 |  |  | Reorganization Agreement among Liberty Media Corporation,
    Discovery Holding Company (DHC) and Ascent Media
    Group, Inc. (incorporated by reference to Exhibit 2.1 to
    DHCs Registration Statement on Form 10, dated
    July 15, 2005 (File No. 000-51205) (the
    Form 10)).



| |     |  |  |                                                                                                            
| | --- |  |  | -----------------------------------------------------------------------------------------------------------
| | 3.1 |  |  | Restated Certificate of Incorporation of DHC (incorporated by
    reference to Exhibit 3.1 to the Form 10).
| | 3.2 |  |  | Bylaws of DHC (incorporated by reference to Exhibit 3.2 to
    the Form 10).                               



| |     |  |  |                                                                                                                                                                  
| | --- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4.1 |  |  | Specimen Certificate for shares of the Series A common
    stock, par value $.01 per share, of DHC (incorporated by
    reference to Exhibit 4.1 to the Form 10).
| | 4.2 |  |  | Specimen Certificate for shares of the Series B common
    stock, par value $.01 per share, of DHC (incorporated by
    reference to Exhibit 4.2 to the Form 10).
| | 4.3 |  |  | Rights Agreement between DHC and EquiServe Trust Company, N.A.,
    as Rights Agent (incorporated by reference to Exhibit 4.3
    to the Form 10).               



| |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ----- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.1  |  |  | The Shareholders Agreement, dated as of November 30, 1991
    (the Stockholders Agreement), by and among
    Discovery Communications, Inc. (Discovery), Cox
    Discovery, Inc. (Cox), NewsChannels TDC Investments,
    Inc. (NewChannels), TCI Cable Education, Inc.
    (TCID) and John S. Hendricks (Hendricks)
    (incorporated by reference to Exhibit 10.1 to the Form 10).                                                                                      
| | 10.2  |  |  | First Amendment to the Stockholders Agreement, dated as of
    December 20, 1996, by and among Discovery, Cox
    Communications Holdings, Inc. (the successor to Cox), Newhouse
    Broadcasting Corporation ( the successor to NewChannels), TCID,
    Hendricks and for the purposes stated therein only, LMC Animal
    Planet, Inc. (LMC) and Liberty Media Corporation, a
    Colorado corporation (Liberty) (incorporated by
    reference to Exhibit 10.2 to the Form 10).
| | 10.3  |  |  | Second Amendment to the Stockholders Agreement, dated as
    of September 7, 2000, by and among Discovery, Cox
    Communications Holdings, Inc. (the successor to Cox),
    Advance/Newhouse Programming Partnership (the successor to
    NewChannels), LMC Discovery, Inc. (formerly known as TCID) and
    Hendricks (incorporated by reference to Exhibit 10.3 to the
    Form 10).                                                                                              
| | 10.4  |  |  | Third Amendment to the Stockholders Agreement, dated as of
    September, 2001, by and among Discovery, Cox, NewChannels, TCID,
    Hendricks and Advance Programming Holdings Corp. (incorporated
    by reference to Exhibit 10.4 to the Form 10).                                                                                                                                                                                                                                  
| | 10.5  |  |  | Fourth Amendment to the Stockholders Agreement, dated as
    of June 23, 2003, by and among Discovery, Cox NewChannels,
    TCID, Liberty Animal, Inc. (the successor in interest to LMC)
    for the purposes stated in the First Amendment to the
    Stockholders Agreement, and Hendricks (incorporated by
    reference to Exhibit 10.5 to the Form 10).                                                                                                                        
| | 10.6  |  |  | Form of Tax Sharing Agreement between Liberty Media Corporation
    and DHC (incorporated by reference to Exhibit 10.6 to the
    Form 10).                                                                                                                                                                                                                                                                                                                                            
| | 10.7  |  |  | Discovery Holding Company 2005 Incentive Plan (incorporated by
    reference to Exhibit 10.7 to the Form 10).                                                                                                                                                                                                                                                                                                                                                                          
| | 10.8  |  |  | Discovery Holding Company 2005 Non-Employee Director Plan
    (incorporated by reference to Exhibit 10.8 to the Form 10).                                                                                                                                                                                                                                                                                                                                                              
| | 10.9  |  |  | Discovery Holding Company Transitional Stock Adjustment Plan
    (incorporated by reference to Exhibit 10.9 to the Form 10).                                                                                                                                                                                                                                                                                                                                                           
| | 10.10 |  |  | Agreement between DHC and John C. Malone (incorporated by
    reference to Exhibit 10.10 to the Form 10).                                                                                                                                                                                                                                                                                                                                                                              



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##### Table of Contents



| |       |  |  |                                                                                                                                                       
| | ----- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.11 |  |  | Agreement, dated June 24, 2005, between Discovery and DHC
    (incorporated by reference to Exhibit 10.11 to the Form 10).                            
| | 10.12 |  |  | Indemnification Agreement, dated as of June 24, 2005,
    between Cox and DHC (incorporated by reference to
    Exhibit 10.12 to the Form 10).        
| | 10.13 |  |  | Indemnification Agreement, dated as of June 24, 2005,
    between NewChannels and DHC (incorporated by reference to
    Exhibit 10.13 to the Form 10).
| | 10.14 |  |  | Form of Indemnification Agreement with Directors and Executive
    Officers (incorporated by reference to Exhibit 10.14 to the
    Form 10).          
| | 21    |  |  | Subsidiaries of Discovery Holding Company, filed
herewith.                                                                                            
| | 23.1  |  |  | Consent of KPMG LLP, filed herewith.                                                                                                                  
| | 23.2  |  |  | Consent of PricewaterhouseCoopers LLP, filed herewith.                                                                                                
| | 31.1  |  |  | Rule 13a-14(a)/15d-14(a) Certification, filed herewith.                                                                                               
| | 31.2  |  |  | Rule 13a-14(a)/15d-14(a) Certification, filed herewith.                                                                                               
| | 31.3  |  |  | Rule 13a-14(a)/15d-14(a) Certification, filed herewith.                                                                                               
| | 32    |  |  | Section 1350 Certification, filed herewith.