UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

OR

Commission file number 000-51205

DISCOVERY HOLDING COMPANY

(Exact name of Registrant as specified in its charter)

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

          Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months or for such shorter period that the Registrant was required to file such reports and (2) has been subject to such filing requirements for the past 90 days. Yes      X      No            

          Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer as defined in Rule 12b-2 of the Exchange Act. Large accelerated filer             Accelerated filer             Non-accelerated filer      X     

          Indicate by check mark whether the Registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes             No      X     

          The number of outstanding shares of Discovery Holding Company’s common stock as of July 31, 2006 was:

Series A common stock 268,125,377 shares; and

Series B common stock 12,075,056 shares.

DISCOVERY HOLDING COMPANY

Condensed Consolidated Balance Sheets

(unaudited)

See accompanying notes to condensed consolidated financial statements.

DISCOVERY HOLDING COMPANY

Condensed Consolidated Statements of Operations and Comprehensive Earnings

(unaudited)

See accompanying notes to condensed consolidated financial statements.

DISCOVERY HOLDING COMPANY

Condensed Consolidated Statements of Cash Flows

(unaudited)

See accompanying notes to condensed consolidated financial statements

DISCOVERY HOLDING COMPANY

Condensed Consolidated Statement of Stockholders’ Equity

Six months ended June 30, 2006

(unaudited)

See accompanying notes to condensed consolidated financial statements.

I-4

DISCOVERY HOLDING COMPANY

Notes to Condensed Consolidated Financial Statements

June 30, 2006

(unaudited)

DISCOVERY HOLDING COMPANY

Notes to Condensed Consolidated Financial Statements, continued

DISCOVERY HOLDING COMPANY

Notes to Condensed Consolidated Financial Statements, continued

DISCOVERY HOLDING COMPANY

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DISCOVERY HOLDING COMPANY

Notes to Condensed Consolidated Financial Statements, continued

DISCOVERY HOLDING COMPANY

Notes to Condensed Consolidated Financial Statements, continued

DISCOVERY HOLDING COMPANY

Notes to Condensed Consolidated Financial Statements, continued

DISCOVERY HOLDING COMPANY

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DISCOVERY HOLDING COMPANY

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and $71,655,000 and systems integration revenue of $39,486,000 and $68,812,000 for the

six months ended June 30, 2006 and 2005, respectively.

and $35,744,000 and systems integration revenue of $23,738,000 and $33,438,000 for the

three months ended June 30, 2006 and 2005, respectively.

DISCOVERY HOLDING COMPANY

Notes to Condensed Consolidated Financial Statements, continued

          Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our business, marketing strategies, integration of acquired businesses, new service offerings, and anticipated sources and uses of capital. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but such statements necessarily involve risks and uncertainties, and there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished. The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:

          These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in its expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.

          The following discussion and analysis provides information concerning our results of operations and financial condition. This discussion should be read in conjunction with our accompanying condensed consolidated financial statements and the notes thereto; and our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2005.

Overview

          We are a holding company and our businesses and assets include Ascent Media and AccentHealth, which we consolidate, and a 50% ownership interest in Discovery, which we account for using the equity method of accounting. Accordingly, as described below, Discovery’s revenue is not reflected in the revenue we report in our consolidated financial statements. In addition to the foregoing assets, immediately prior to the Spin Off, Liberty transferred to a subsidiary of our company $200 million in cash. The Spin Off was effected on July 21, 2005 as a distribution by Liberty to holders of its Series A and Series B common stock of shares of our Series A and Series B common stock, respectively. The Spin Off did not involve the payment of any consideration by the holders of Liberty common stock and is intended to qualify as a tax-free spin off. The Spin Off has been accounted for at historical cost due to the pro rata nature of the distribution.

          Following the Spin Off, we and Liberty operate independently, and neither has any stock ownership, beneficial or otherwise, in the other.

          Ascent Media provides creative, media management and network services to the media and entertainment industries. Ascent Media’s clients include major motion picture studios, independent producers, broadcast networks, cable programming networks, advertising agencies and other companies that produce, own and/or distribute entertainment, news, sports, corporate, educational, industrial and advertising content. Ascent Media’s operations are organized into the following four groups: creative services, media management services, network services and corporate and other. Ascent Media has few long-term or exclusive agreements with its creative services and media management services customers.

          Our most significant asset is Discovery, in which we do not have a controlling financial interest. Discovery is a global media and entertainment company that provides original and purchased video programming in the U.S. and over 160 other countries. Discovery also develops and sells branded commerce and educational product lines in the United States. We account for our interest in Discovery using the equity method of accounting. Accordingly, our share of the results of operations of Discovery is reflected in our consolidated results as earnings or losses of Discovery. To assist the reader in better understanding and analyzing our business, we have included a separate discussion and analysis of Discovery’s results of operations and liquidity below.

Acquisition

          Effective January 27, 2006, one of our subsidiaries acquired substantially all of the assets of AccentHealth, LLC’s healthcare media business for cash consideration of $46,793,000, subject to potential post-closing adjustments. AccentHealth operates an advertising-supported captive audience television network in approximately 11,000 doctor office waiting rooms nationwide. For financial reporting purposes, the acquisition is deemed to have occurred on February 1, 2006, and the results of operations of AccentHealth have been included in our consolidated results since the date of acquisition.

Operating Cash Flow

          We evaluate the performance of our operating segments based on financial measures such as revenue and operating cash flow. We define operating cash flow as revenue less cost of services and selling, general and administrative expense (excluding stock and other equity-based compensation). We believe this is an important indicator of the operational strength and

performance of our businesses, including their ability to invest in ongoing capital expenditures and service any debt. In addition, this measure allows management to view operating results and perform analytical comparisons and identify strategies to improve performance. This measure of performance excludes depreciation and amortization and stock and other equity-based compensation, that are included in the measurement of operating income pursuant to GAAP. Accordingly, operating cash flow should be considered in addition to, but not as a substitute for, operating income, cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP. See note 11 to the accompanying condensed consolidated financial statements for a reconciliation of operating cash flow to earnings before income taxes.

Results of Operations

          Our consolidated results of operations include general and administrative expenses incurred at the DHC corporate level, 100% of the results of Ascent Media and AccentHealth and our 50% share of earnings of Discovery.

          Ascent Media’s creative services group revenue is primarily generated from fees for video and audio post production, special effects and editorial services for the television, feature film and advertising industries. Generally, these services pertain to the completion of feature films, television programs and advertisements. These projects normally span from a few days to three months or more in length, and fees for these projects typically range from $10,000 to $1,000,000 per project. The media management services group provides owners of film libraries a broad range of restoration, preservation, archiving, professional mastering and duplication services. The scope of media management services vary in duration from one day to several months depending on the nature of the service, and fees typically range from less than $1,000 to $100,000 per project. Additionally, the media management services group includes Ascent Media’s digital services group, which is developing new products and services for studios, networks, producers, advertisers and distributors to create, repurpose and distribute digital media. The network services group’s revenue consists of fees relating to facilities and services necessary to assemble and transport programming for cable and broadcast networks across the world via freight, fiber, satellite and the Internet. AccentHealth is included in the network services group broadcast services. Additionally, the group earns revenue by providing systems integration and field support services, technology consulting services, design and implementation of advanced video systems, engineering project management, technical help desk and field service. Approximately 30% of the network services group’s revenue relates to systems integration and engineering services that are provided on a project basis over terms generally ranging from three to twelve months. Approximately 70% of the network services group’s revenue relates to broadcast services, satellite operations and fiber services that are earned monthly under long-term contracts ranging generally from one to seven years. Cost of services and operating expenses consists primarily of production wages, facility costs, materials and other direct costs and selling, general and administrative expenses.

          Corporate related items and expenses are reflected in Corporate and Other, below.

          Revenue. Total revenue decreased 6.9% and 9.4% for the three and six months ended June 30, 2006, respectively, as compared to the corresponding prior year periods. The creative services group revenue decreased $680,000 and $1,427,000 for the three and six month periods, respectively. The decrease from prior year is due to the decline in television and feature film services in the U.K., lower feature visual effects due to a large one-time project in the prior year and the unfavorable changes in foreign currency exchange rates of $225,000 for the quarter and $1,121,000 for the year to date. The decline was partially offset by higher feature and television post production and feature sound editorial services in the U.S. The media management services group revenue decreased $4,171,000 and $7,345,000 for the three and six month periods, respectively. The decrease in revenue was primarily a result of lower traditional media, DVD and lab services in the U.S. from Ascent Media’s major customers. The decline in revenue was partially offset by higher syndication services in the U.S. and library services in the U.K. The network services group revenue decreased $7,379,000 and $24,180,000 for the three and six month periods, respectively. These decreases reflect a fewer number and smaller scope contracts in the systems integration group, a decline in services revenue due to a large one-time project in 2005, combined with the impact of content distribution contract terminations in the U.K. The decline in revenue was partially offset by higher revenue due to the acquisition of AccentHealth of $5,559,000 for the quarter and $8,449,000 for the year, as well as increased content distribution activity in the U.S. and Singapore.

          Cost of Services. Cost of services decreased $5,967,000 or 5.2% and $19,222,000 or 8.5% for the three and six months ended June 30, 2006, respectively, as compared to the corresponding prior year periods. These decreases are attributable to the revenue declines, which resulted in lower materials costs. Labor costs were relatively consistent from 2005 to 2006. The decrease in cost of services was offset by the AccentHealth acquisition which contributed $1,440,000 for the three month period and $2,732,000 for the six month period. As a percent of revenue, cost of services increased from 64.9% to 66.1% for the three month period and from 64.3% to 64.9% for the six month period. Labor costs as a percent of revenue were higher for all groups in 2006 due to the revenue mix. Projects in the creative services group shifted to more labor intensive feature film services in 2006. In the network services group, certain new contracts incurred higher production and support labor costs. Ascent is currently negotiating the potential reimbursement of certain of these higher costs. In the media management services group, the projects have become increasingly more integrated, with complex work flows requiring higher level of production and support labor. This increase in labor costs has resulted in higher cost of services and decreasing operating cash flow margin.

          Selling, General and Administrative. Ascent Media’s selling, general and administrative expenses (“SG&A”) increased $1,054,000 or 2.2% and $1,680,000 or 1.8% for the three and six months ended June 30, 2006, respectively, as compared to the corresponding prior year periods. This increase is primarily due to the acquisition of AccentHealth which added $1,793,000 of SG&A expenses for the quarter and $2,383,000 for the year to date and the effect of changes in foreign exchange rates of $173,000 for the quarter and $1,082,000 for the year to date. The increase in expenses was offset by lower facility costs and professional fees. As a percent of revenue, SG&A increased from 25.8% to 28.0% due to the acquisition of AccentHealth and the fixed-cost nature of a large percentage of these expenses.

          Corporate and Other operating cash flow (which includes DHC corporate general and administrative expenses of $4,036,000 and $3,233,000 for the six months ended June 30, 2006 and 2005, respectively) improved $1,145,000 in 2006 primarily due to lower Ascent Media corporate expenses.

          Depreciation and Amortization. The decrease in depreciation and amortization expense for the three and six months ended June 30, 2006 is due to a combination of assets becoming fully depreciated partially offset by capital expenditures and acquisitions.

          Stock-Based Compensation. In 2001, Ascent Media granted to certain of its officers and employees stock options (the “Ascent Media Options”) with exercise prices that were less than the market price of Ascent Media common stock on the date of grant. The Ascent Media Options became exercisable for Liberty shares in connection with Liberty’s 2003 acquisition of the Ascent Media outstanding common stock that it did not already own. Prior to January 1, 2006, we amortized the “in-the-money” value of these options over the 5-year vesting period. Certain Ascent Media employees also hold options and stock appreciation rights granted by companies acquired by Ascent Media in the past several years and exchanged for Liberty options and SARs. Prior to January 1, 2006 we recorded compensation expense for the SARs based on the underlying stock price and vesting of such awards.

          Effective January 1, 2006, we adopted Statement No. 123R. Statement No. 123R requires that we amortize the grant date fair value of our stock option and SAR Awards that qualify as equity awards as stock compensation expense over the vesting period of such Awards. Statement No. 123R also requires that we record the liability for our liability awards at fair value each reporting period and that the change in fair value be reflected as stock compensation expense in our condensed consolidated statement of operations. Prior to adoption of Statement No. 123R, the amount of expense associated with stock-based compensation was generally based on the vesting of the related stock options and stock appreciation rights and the market price of the underlying common stock. The expense reflected in our condensed consolidated financial statements was based on the market price of the underlying common stock as of the date of the financial statements.

          As of June 30, 2006, the total compensation cost related to unvested equity awards was $1.6 million. Such amount will be recognized in our consolidated statements of operations through 2009.

          Share of Earnings of Discovery. Our share of earnings of Discovery increased $14,949,000 or 97.1% and $13,308,000 or 34.8% for the three and six months ended June 30, 2006, respectively. These increases are due to higher operating income partially offset by higher interest expense and income tax expense for Discovery in 2006.

          We have provided a more detailed discussion of Discovery’s results of operations below.

          Income Taxes. Our effective tax rate was 45.9% and 42.3% for the six months ended June 30, 2006 and 2005, respectively. Our income tax expense was higher than the federal income tax rate of 35% in 2006 due to state and foreign tax expense. In 2005, the effects of state and foreign tax expense were offset by a reduction in our valuation allowance.

          Net Earnings. Our net earnings increased from $20,852,000 for the six months ended June 30, 2005 to $25,349,000 for the six months ended June 30, 2006. Such increase is due to the aforementioned fluctuations in revenue and expenses.

Liquidity and Capital Resources

          Our primary sources of funds are cash on hand and cash flows from operating activities. During the six months ended June 30, 2006, our primary uses of cash were capital expenditures ($32,400,000) and cash paid for acquisitions ($46,793,000). Of the foregoing 2006 capital expenditures, $11,724,000 relates to the buildout of Ascent Media’s existing facilities for specific customer contracts. The remainder of Ascent Media’s capital expenditures relates to purchases of new equipment and the upgrade of existing facilities and equipment. Ascent Media currently expects to spend an additional $25,000,000 for capital expenditures in 2006, which we expect will be funded with Ascent Media’s cash from operations. At June 30, 2006, we have approximately $155 million of corporate cash and short-term investments. We expect that these funds will be sufficient to meet our working capital needs, capital expenditure requirements and other investing activities for the foreseeable future.

          We do not have access to the cash Discovery generates from its operations, unless Discovery pays a dividend on its capital stock or otherwise distributes cash to its stockholders. Historically, Discovery has not paid any dividends on its capital stock, and we do not have sufficient voting control to cause Discovery to pay dividends or make other payments or advances to us.

Discovery

          We hold a 50% ownership interest in Discovery and account for this investment using the equity method of accounting. Accordingly, in our consolidated financial statements we record our share of Discovery’s net income or loss available to common shareholders and reflect this activity in one line item in our consolidated statement of operations as “Share of earnings of Discovery.” The following financial information of Discovery for the six months ended June 30, 2006 and 2005 and related discussion is presented to provide the reader with additional analysis of the operating results and financial position of Discovery. Because we do not control the decision-making process or business management practices of Discovery, we rely on Discovery to provide us with financial information prepared in accordance with GAAP that we use in the application of the equity method. The following discussion and analysis of Discovery’s operations and financial position has been prepared based on information that we receive from Discovery and represents our views and understanding of its operating performance and financial position based on such information. Discovery is not a separately traded public company, and we do not have the ability to cause Discovery’s management to prepare its own management’s discussion and analysis for our purposes. Accordingly, we note that the material presented in this section might be different if Discovery’s management had prepared it.

          The following discussion of Discovery’s results of operations is presented on a consolidated basis. In order to provide a better understanding of Discovery’s operations, we have also included a summarized presentation of revenue and operating cash flow of Discovery’s three operating groups: Discovery networks U.S., or U.S. networks, Discovery networks international, or international networks, and Discovery commerce, education and other.

          The U.S. networks is Discovery’s largest division which owns and operates 12 cable and satellite channels and provides distribution and advertising sales services for BBC America and BBC World News. International networks manages a portfolio of channels, led by the Discovery Channel and Animal Planet brands, that are distributed in virtually every pay-television market in the world via an infrastructure that includes major operational centers in London, Singapore, New Delhi and Miami. Discovery commerce, education and other includes Discovery’s retail chain store operations and other direct consumer marketing activities, as

well as Discovery education, which was formed to manage Discovery’s distribution of education content.

Consolidated Results of Discovery

Business Segment Results of Discovery

Note: Discovery commerce, education and other includes intercompany eliminations.

          Revenue. Discovery’s consolidated revenue increased 10% for the six months ended June 30, 2006, as compared to the corresponding prior year period. Increased revenue was primarily due to a 21% increase in distribution revenue combined with a 9% increase in other

revenue during the same period. Other revenue increased primarily due to growth in Discovery’s education business. Advertising revenue was relatively consistent as a 2% decline in the U.S. Networks advertising sales was offset by a 14%, or $14,074,000 increase in advertising sales internationally.

          Distribution revenue grew 19% at the U.S. networks and 23% at the international networks. The increase in distribution revenue at the U.S. networks is due to an 11% increase in paying subscription units combined with contractual rate increases at most networks. Much of the growth in paying subscription units is occurring at networks that are carried on the digital tier due to the expiration of free viewing periods. Launch amortization at the U.S. networks was relatively consistent during the six months ended June 30, 2006, increasing from $36,601,000 during the first half of 2005 to $37,822,000 in 2006. Increases in distribution revenue at the international networks were driven principally by a 16% increase in paying subscription units. Growth in paying subscription units in Europe, Latin America and Asia has been particularly good, increasing 29% on a combined basis.

          Advertising revenue, which includes revenue from paid programming, remained consistent primarily due to a 2% decrease at the U.S. Networks, offset by a 14% increase at the international networks. The increase in international networks advertising revenue was due primarily to higher viewership in Europe and Latin America combined with an increased subscriber base in most markets worldwide. The reduction in advertising revenue at the U.S. networks was due primarily to lower advertising sell-out rates. Paid programming, where Discovery sells blocks of time primarily for infomercials that are aired during the overnight hours on certain networks, represented 6% of total advertising revenue for each of the six-month periods ended June 30, 2006 and 2005.

          The change in other revenue is the net effect of a 25% increase or $3,383,000 in education revenue offset by a 5% or $2,533,000 decrease in commerce revenue. The decrease in commerce revenue was due primarily to a 3% decrease in store revenue resulting from a 5% decrease in the weighted average number of stores, as Discovery has closed unprofitable stores. The 25%, or $3,383,000, increase in education revenue is due to a $3,100,000 increase in streaming service revenue resulting from a 47% increase in the number of schools paying for the streaming service.

          Cost of Revenue. Cost of revenue increased 10% for the six months ended June 30, 2006, as compared to the corresponding prior year period. As a percent of revenue, cost of revenue was consistent at 35% for both the six months ended June 30, 2006 and 2005. The increase over the prior year period primarily resulted from higher programming expense due to continued investment across the U.S. networks combined with increases in Europe associated with the lifestyles initiative.

          SG&A Expenses. SG&A expenses increased 17% for the six months ended June 30, 2006, as compared to the corresponding prior year period. SG&A expenses were relatively consistent at the U.S. networks and within the commerce group, but increased 23% at the international networks and more than doubled ($32,393,000 increase) at the education group. As a percent of revenue, International SG&A expenses were 43% for the six months ended June 30, 2006 compared to 42% in 2005. The increase at the international networks was caused by increases in personnel expense resulting from adding headcount as the business expands particularly in the U.K. and Europe combined with an increase in marketing expense associated with branding and awareness efforts, particularly in Europe, in association with the lifestyles category initiative. The increase at Discovery education is due to increases in personnel, overhead and marketing expenses to accommodate the growth of the business and drive awareness and demand for the new consumer product offering, Cosmeo.

          Expenses Arising from Long-term Incentive Plans. Expenses arising from long-term incentive plans are related to Discovery’s unit-based, long-term incentive plan, or LTIP, for its employees who meet certain eligibility criteria. Units are awarded to eligible employees and generally vest at a rate of 25% per year. In August 2005, Discovery discontinued one of its

LTIPs and settled all amounts with cash. Discovery established a new LTIP in October 2005 (the “2005 LTIP Plan”) for certain eligible employees pursuant to which participants in Discovery’s remaining plan could elect to (1) continue in such plan or (2) redeem vested units and convert partially vested units to the 2005 LTIP Plan. Substantially all participants in the remaining plan redeemed their vested units and received partially vested units in the 2005 LTIP Plan. Certain eligible employees were also granted new units in the 2005 LTIP Plan. The value of units in the 2005 LTIP Plan is indexed to the value of DHC Series A common stock, and upon redemption, participants receive a cash payment based on the change in market price of DHC Series A common stock. Under the old plans, upon exercise, participants received a cash payment for the increase in value of the units from the unit value on the date of issuance determined by the year over year change in Discovery’s aggregate equity value, using a consistent methodology. The change in unit value of LTIP awards outstanding is recorded as compensation expense over the period outstanding. Compensation expense aggregated $9,976,000 for the six months ended June 30, 2006 compared to $45,820,000 for the same period in 2005. The decrease is primarily the result of the change in unit value determination for the 2005 LTIP Plan units. If the remaining vested LTIP awards at June 30, 2006 were redeemed, the aggregate cash payments by Discovery would be approximately $8,946,000.

          Depreciation and Amortization. The increase in depreciation and amortization for the six months ended June 30, 2006 is due to an increase in new assets placed in service during 2005, combined with acquisition activity occurring during the first six months of 2006.

Other Income and Expense

          Interest Expense. The increase in interest expense for the six months ended June 30, 2006 is primarily due to an increase in interest rates during 2005 and 2006 combined with an increase in the company’s average debt balance.

          Unrealized Gains from Derivative Instruments, net. Unrealized gains from derivative transactions relate primarily to Discovery’s use of derivative instruments to modify its exposure to interest rate fluctuations on its debt. These instrument contracts include a combination of swaps, caps, collars and other structured instruments. As a result of unrealized mark to market adjustments, Discovery recognized $12,221,000 and $10,101,000 in unrealized gains on these instruments during the six months ended June 30, 2006 and 2005, respectively. The foreign exchange hedging instruments used by Discovery are spot, forward and option contracts. Additionally, Discovery enters into non-designated forward contracts to hedge non-dollar denominated cash flows and foreign currency balances.

          Minority Interests in Consolidated Subsidiaries. Minority interest represents increases and decreases in the estimated redemption value of mandatory redeemable interests in subsidiaries which are initially recorded at fair value.

          Other. Other income in 2005 relates primarily to the gain on sale of one of Discovery’s investments.

          Income Taxes. Discovery’s effective tax rate was 42% and 46% for the six months ended June 30, 2006 and 2005, respectively. Discovery’s effective tax rate differed from the federal income tax rate of 35% primarily due to foreign and state taxes.

Liquidity and Capital Resources

          Discovery generated $159,285,000 and $117,289,000 of cash from operations during the six months ended June 30, 2006 and 2005, respectively. Discovery’s cash provided by operations during the six months ended June 30, 2006 and 2005 resulted from its operating cash flow offset by interest expense of $99,805,000 and $85,210,000, respectively, and working capital fluctuations in both periods.

          During the six months ended June 30, 2006, Discovery spent $25,775,000 on capital expenditures, paid $180,137,000 for business combinations, net of the cash acquired and paid $80,000,000 to acquire mandatorily redeemable securities related to minority interests in

certain subsidiaries. During the six months ended June 30, 2005, Discovery paid $92,874,000 to acquire mandatorily redeemable securities related to minority interests in certain subsidiaries and spent $60,629,000 on capital expenditures.

          In addition to cash provided by operations, Discovery funds its activities with proceeds borrowed under various debt facilities, including a term loan, two revolving loan facilities and various senior notes payable. During the six months ended June 30, 2006 and 2005, net borrowings under debt facilities were $191,815,000 and $32,000,000 respectively. Total commitments of these facilities were $4,059,000,000 at June 30, 2006. Debt outstanding on these facilities aggregated $2,771,900,000 at June 30, 2006, providing excess debt availability of $1,287,100,000. Discovery’s ability to borrow the unused capacity is dependent on its continuing compliance with its covenants at the time of, and after giving effect to, a requested borrowing.

          All term and revolving loans and senior notes are unsecured. The debt facilities contain covenants that require Discovery to meet certain financial ratios and place restrictions on the payment of dividends, sale of assets, additional borrowings, mergers, and purchases of capital stock, assets and investments. Discovery has indicated it is in compliance with all debt covenants at June 30, 2006.

          During 2006, including amounts discussed above, Discovery expects to spend up to $100,000,000 for capital expenditures and $190,000,000 for interest expense. Payments to satisfy LTIP obligations are not expected to be significant in 2006. Discovery believes that its cash flow from operations and borrowings available under its credit facilities will be sufficient to fund its working capital requirements.

          Discovery has agreements covering leases of satellite transponders, facilities and equipment. These agreements expire at various dates through 2020. Discovery is obligated to license programming under agreements with content suppliers that expire over various dates. Discovery also has other contractual commitments arising in the ordinary course of business.

          In connection with the execution of long-term distribution agreements for certain of its European cable networks, Discovery is committed to pay a distributor a percentage increase in the value of these networks, if any. The value of the networks has not yet been determined. Discovery adjusts its recorded liability for changes in the value of these networks each period. However, Discovery is currently unable to predict the likelihood or the terms and conditions of any renewal of the distribution agreements. Discovery will record the effect of a renewed distribution agreement when such terms are in place. The effect of a renewed agreement could result in a payment for an amount significantly greater than the amount currently accrued.

Foreign Currency Risk

          We continually monitor our economic exposure to changes in foreign exchange rates and may enter into foreign exchange agreements where and when appropriate. Substantially all of our foreign transactions are denominated in foreign currencies, including the liabilities of our foreign subsidiaries. Although our foreign transactions are not generally subject to significant foreign exchange transaction gains or losses, the financial statements of our foreign subsidiaries are translated into United States dollars as part of our consolidated financial reporting. As a result, fluctuations in exchange rates affect our financial position and results of operations.

          In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company carried out an evaluation, under the supervision and with the participation of management, including its chief executive officer, principal accounting officer and principal financial officer (the “Executives”), of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Executives concluded that the

Company’s disclosure controls and procedures were effective as of June 30, 2006 to provide reasonable assurance that information required to be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

          There has been no change in the Company’s internal controls over financial reporting identified in connection with the evaluation described above that occurred during the three months ended June 30, 2006 that has materially affected, or is reasonably likely to materially affect, its internal controls over financial reporting.

DISCOVERY HOLDING COMPANY

PART II - OTHER INFORMATION

          For information regarding institution of, or material changes in, material legal proceedings that have been reported this fiscal year, reference is made to Part II, Item 1 of our Quarterly Report on Form 10-Q filed on May 10, 2006 and Part I, Item 3 of our Annual Report on Form 10-K filed on March 23, 2006.

          At the Company’s annual meeting of stockholders held on May 31, 2006, the following matters were voted on and approved by the stockholders of the Company:

1.     Election of the following to the Company’s Board of Directors:

          The foregoing nominee also served on the Company’s board of directors prior to the annual meeting. The term of the following directors continued following the annual meeting: Robert R. Bennett, Paul A. Gould, John C. Malone and M. LaVoy Robison. Broker non-votes had no effect on voting for the election of directors, and abstentions and unreturned proxies have been treated as votes withheld.

There were 48,759,572 broker non-votes with respect to proposal 2.

Included in abstentions for proposals 2 and 3 are 40,349,307 votes for which proxies were not returned.

          (a)     Exhibits

SIGNATURES

          Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:       August 11, 2006

Date:       August 11, 2006

Date:       August 11, 2006

EXHIBIT INDEX

Listed below are the exhibits which are filed as a part of this Report (according to the number assigned to them in Item 601 of Regulation S-K):