The accompanying condensed consolidated financial statements include the accounts of Discovery Holding Company and its consolidated subsidiaries (“DHC” or the “Company”). DHC’s two wholly-owned operating subsidiaries are Ascent Media Group, LLC (“Ascent Media”) and AccentHealth,Ascent Media CANS, LLC (dba AccentHealth) (“AccentHealth”). DHC also has a 50%662/3% ownership interest in Discovery, previously a 50% interest through May 14, 2007, which it accounts for as an equity method investment.investment (see note 6). All significant intercompany accounts and transactions have been eliminated in consolidation.

Ascent Media is comprised of two operating segments. Ascent Media’s creative services group provides services necessary to complete the creation of original content, including feature films, mini-series, television shows, television commercials, music videos, promotional and identity campaigns, and corporate communications programming. The group manipulates or enhances original visual images or audio captured in principal photography orand creates new three dimensional images, animation sequences, or sound effects. In addition, the creative services group provides a full complement of facilities and services necessary to optimize, archive, manage, and repurpose completed media assets for global distribution via freight, satellite, fiber and the Internet. The network services group provides the facilities and services necessary to assemble and distribute programming content for cable and broadcast networks via fiber, satellite and the Internet to viewersprogramming providers in North America, Europe and Asia. Additionally, the network services group provides systems integration, design, consulting, engineering and project management services.

Substantially all of the assets of AccentHealth were acquired by a subsidiary of DHC in January 2006, and are included as part of the network services group for financial reporting purposes. AccentHealth operates an advertising-supported captive audience television network in doctor office waiting rooms nationwide.nationwide, and is included as part of the network services group for financial reporting purposes.

Discovery is a leading global media and entertainment company that provides original and purchased cable and satellite television programming across multiple platforms in the United States and overmore than 170 other countries.countries, including television networks offering customized programming in 35 languages. Discovery also develops and sells branded commerceconsumer and educational product linesproducts and services in the United States.States and internationally, and owns and operates a diversified portfolio of website properties and other digital services.

The accompanying interim condensed consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in its Annual Report onForm 10-K, as amended, for the year ended December 31, 2006.2007.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of revenue and expenses for each reporting period. The significant estimates made in preparation of the Company’s condensed consolidated financial statements primarily relate to valuation of goodwill, other intangible assets, long-lived assets, deferred tax assets, and the amount of the allowance for doubtful accounts. Actual results could differ from the estimates upon which the carrying values were based.

On July 21, 2005, Liberty Media Corporation (“Liberty”) completed the spin off of the capital stock of DHC (the “Spin Off”). The Spin Off was effected as a dividend by Liberty to holders of its Series A and Series B common stock of shares of DHC Series A and Series B common stock, respectively. Approximately 268.1 million shares of DHC Series A common stock and 12.1 million shares of DHC Series B common stock were issued in the Spin Off.

As of March 31, 2007,2008, the following DHC options were outstanding and vested:

As of March 31, 2007,2008, the total compensation cost related to unvested equity awards was $960,000.$379,000. Such amount will be recognized in the Company’s consolidated statements of operations over a weighted average period of approximately 1.31.1 years.

Effective August 3, 2006, Ascent Media adopted its 2006 Long-Term Incentive Plan (the “2006 Plan”). The 2006 Plan provides the terms and conditions for the grant of, and payment with respect to, Phantom Appreciation Rights (“PARs”) granted to certain officers and other key personnel of Ascent Media. The value of a single PAR (“PAR Value”) is calculated asequal to the positive amount (if any) of (a) the sum of (i) 6% of cumulative free cash flow (as defined in the 2006 Plan) over a period of up to six years, divided by 500,000500,000; plus (ii) 5% of the increase in the calculated value of Ascent Media, based on a formula set forth in the 2006 Plan, divided by 10,000,000; over (b) a

The Company has a 50% ownership interest in Discovery and accounts for its investment using the equity method of accounting. Discovery is a leading global media and entertainment company that provides original and purchased video programming across multiple platforms in the United States and in overmore than 170 other countries.countries, including television networks offering customized programming in 35 languages. Discovery also develops and sells branded commerceconsumer and educational product linesproducts and services in the United States.States and internationally, and owns and operates a diversified portfolio of website properties and other digital services.

On March 29,May 14, 2007, Discovery announced that it had entered into a non-binding Letter of Intent withand Cox Communications Holdings, Inc. (“Cox”), a completed an exchange of Cox’s 25% shareholder of Discovery, pursuant to which Discovery would redeem Cox’s ownership interest in Discovery for all of the capital stock of a subsidiary of Discovery that will holdheld Travel Channel, travelchannel.com Antenna Audio and approximately $1.275$1.3 billion in cash.cash (the “Cox Transaction”). Discovery expects to raiseraised the cash amountcomponent through additional debt financing, and expects to retireretired the equity sharesmembership interest previously owned by Cox. Completion of the transaction is subject to negotiation of definitive documents and various conditions, including regulatory clearances and approvals. Upon completion of thethis transaction, which is expected to close in the second quarter of 2007, the Company would ownDHC owns a 662/3% interest in Discovery and Advance/Newhouse owns a 331/3% interest in Discovery.

In connection with the Cox Transaction, DHC reallocated its excess basis related to its investment in Discovery. Such allocation process was completed in the first quarter of 2008 and resulted in approximately 48% of the excess basis created by the Cox Transaction being allocated to intangible assets with determinable useful lives. Amortization of such intangible assets aggregated $3,744,000 (net of related taxes) for the three months ended March 31, 2008 and is included in DHC’s share of earnings of Discovery.

DHC would continuecontinues to account for its investment in Discovery using the equity method of accounting due to governance rights possessed by Advance/Newhouse which would restrict DHC’s ability to control Discovery. From January 1, 2007 through May 14, 2007, DHC recorded its 50% share of the earnings of DCI. Subsequent to May 14, 2007, DHC has recorded its 662/3% share of the earnings of Discovery.

DHC’s carrying value for Discovery was $3,150,457,000 at March 31, 2007. In addition, as described in note 6, enterprise-level goodwill of $1,771,000,000 has been allocatedDHC does not have access to the investment in Discovery.cash Discovery generates from its operations, unless Discovery makes a distribution with respect to its membership interests or makes other payments or advances to its members. Prior to

Summarized financial information for DCIDiscovery is as follows:

Note: In the third quarter of 2007, Discovery closed its 103 mall-based and stand-alone Discovery Channel stores. As a result, Discovery’s consolidated statement of operations for the three months ended March 31, 2007 has been prepared to be takenreflect the retail store business as discontinued operations.

During the first quarter of 2008, Liberty reached an agreement with the IRS related to certain disputed tax items that arose in periods prior to DHC’s spin off from Liberty on July 21, 2005. The agreement resulted in a tax return.reduction to the initial amount of federal and California net operating losses by $28,554,000 and $49,667,000, respectively, that Liberty had allocated to DHC at the spin off date. In instances whereaddition, during the Company has taken or expectsfirst quarter of 2008, DHC reduced its reserve against the net operating losses allocated from Liberty from $11,877,000 to take$2,662,000 under FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”. However, since DHC had previously recorded a tax positionfull valuation allowance against these net operating losses, the reversal of the net operating losses, the decrease in its tax returnthe reserve on the net operating losses, and the Company believes it is more likely than not that such tax position will be upheld byreversal of the relevant taxing authority, the Company may record the benefits of such tax positioncorresponding valuation allowance resulted in itsno net impact to DHC’s condensed consolidated financial statements. Upon adoption of FIN 48, the Company’s wholly-owned subsidiary, Ascent Media, reversed $255,000 of tax liabilities included in the Company’s December 31, 2006 consolidated balance sheet with a corresponding decrease to accumulated deficit. The Company’s 50%-owned equity affiliate, Discovery, recorded a $5,011,000 net tax liability upon adoption of FIN 48, so the Company charged its 50% share, or $2,506,000, directly to accumulated deficit, net of a $991,000 deferred tax impact.

As of January 1, 2007,2008, the Company’s tax reserves related to unrecognized tax benefits for uncertain tax positions was not significant. The Company does not expect that the total amounts of unrecognized tax benefits will significantly increase or decrease during the year ended December 31, 2007.2008.

When the tax law requires interest to be paid on an underpayment of income taxes, the Company recognizes interest expense from the first period the interest would begin accruing according to the relevant tax law. Such interest expense is included in Otherother income, net in the accompanying condensed consolidated statements of operations. Any accrual of penalties related to underpayment of income taxes on uncertain tax positions is included in Otherother income, net in the accompanying condensed consolidated statements of operations. As of January 1, 2007,2008, accrued interest and penalties related to uncertain tax positions was not significant.

As of March 31, 2007,2008, the Company’s tax returns for the period July 21, 2005 through December 31, 20062007 remain subject to examination by the IRS for federal income tax purposes.

The Company is involved in litigation and similar claims incidental to the conduct of its business. In management’s opinion, none of the pending actions is likely to have a material adverse impact on the Company’s financial position or results of operations.

The Company and its subsidiaries lease offices, satellite transponders and certain equipment under capital and operating lease arrangements.

On December 31, 2003, Ascent Media acquired the operations of Sony Electronic’s systems integration center business and related assets, which we refer to as SIC. In exchange, Sony received the right to be paid in 2008 an amount equal to 20% of the value of the combined business of Ascent Media’s wholly owned subsidiary, AF Associates, Inc. and SIC. The value of 20% of the combined business of AF Associates and SIC is estimated at $6,100,000, which liability is included in long-term Otherother accrued liabilities in the accompanying condensed consolidated balance sheets. SIC is included in Ascent Media’s network services group.

In connection with the 2005 Spin Off, DHC and Liberty entered into a Services Agreement. Pursuant to the Services Agreement, Liberty provides the Company with office space and certain general and administrative services including legal, tax, accounting, treasury and investor relations support. The Company reimburses Liberty for direct,out-of-pocket expenses incurred by Liberty in providing these services and for the Company’s allocable portion of facilities costs and costs associated with any shared services or personnel. Liberty and DHC have agreed that they will review cost allocations every six months and adjust such charges, if appropriate. Amounts charged to DHC by Liberty under the Services Agreement aggregated $552,000$499,000 and $565,000$552,000 for the three months ended March 31, 20072008 and 2006,2007, respectively.

Ascent Media provides services, such as satellite uplink, systems integration, origination, and post-production, to Discovery. Revenue recorded by Ascent Media for these services for the three months ended March 31, 2008 and 2007 aggregated $9,311,000 and 2006 aggregated $4,960,000, and $6,768,000, respectively.

The accounting policies of the segments that are consolidated entities are the same as those described in the summary of significant accounting policies and are consistent with GAAP.

The Company evaluates the performance of these operating segments based on financial measures such as revenue and operating cash flow. The Company defines operating cash flow as revenue less cost of services and selling, general and administrative expense (excluding stock and other equity-based compensation and accretion expense on asset retirement obligations). The Company believes this is an important indicator of the operational strength and performance of its businesses, including the businesses’ ability to service debt and capital expenditures. In addition, this measure allowsis used by management to view operating results and perform analytical comparisons and identify strategies to improve performance. This measure of performance excludes depreciation and amortization, stock and other equity-based compensation, accretion expense on asset retirement obligations and restructuring and impairment charges that are included in the measurement of operating income pursuant to GAAP. Accordingly, operating cash flow should be considered in addition to, but not as a substitute for, operating income, cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP.

The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because each segment requires different technologies, distribution channels and marketing strategies.

Information as to the Company’s operations in different geographic areas is as follows:

Certain statements in this Quarterly Report onForm 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our business, marketing and operating strategies, integration of acquired businesses, new service offerings, financial prospects, 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 there can be no assurance that the 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:

For additional risk factors, please see our Annual Report onForm 10-K, as amended, for the year ended December 31, 2007. 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 our expectations

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 and accretion expense on asset retirement obligations). 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 allowsis used by management to view operating results and perform analytical comparisons and identify strategies to improve performance. This measure of performance excludes depreciation and amortization, stock and other equity-based compensation, accretion expense on asset retirement obligations, restructuring and impairment charges that are included in the measurement of operating income pursuant to U.S. 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 1110 to the accompanying condensed consolidated financial statements for a reconciliation of operating cash flow to earnings before income taxes.

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

Restructuring Charges.  During the three months ended March 31, 2008, Ascent Media recorded restructuring charges of $1,257,000 related to severance and 2006, respectively,facility costs in conjunction with the decrease partially resulting from the restructuring which occurredclosing its operations in the third and fourth quarters of 2006, lowering headcount and personnel costs.Mexico. No such charges were recorded in 2007.

Depreciation and Amortization.  The decreaseincrease in depreciation and amortization expense for the three months ended March 31, 20072008 is due to a combination ofdepreciation on new assets placed in service partially offset by assets becoming fully depreciated partially offset by depreciation on new capital expenditures.depreciated.

Stock-Based Compensation.  Stock-based compensation was a benefit of $116,000 and an expense of $966,000 for the three months ended March��31, 2008 and 2007, respectively. Effective August 3, 2006, Ascent Media adopted its 2006 Long-Term Incentive Plan (the “2006 Plan”). The 2006 Plan provides the terms and conditions for the grant of, and payment with respect to, Phantom Appreciation Rights (“PARs”) granted to certain officers and other key personnel of Ascent Media. The maximum number of PARs that may be granted under the 2006 Plan is 500,000, and there were 423,500483,500 PARs granted as of March 31, 2007. For the three months ended March 31, 2007,2008. Ascent Media recorded $841,000 of 2006 Plan expense.

As of March 31, 2007,2008, the total compensation cost related to unvested equity awards was $960,000.$379,000. Such amount will be recognized in our consolidated statements of operations over a weighted average period of approximately 1.31.1 years.

Share of Earnings of Discovery.  From January 1, 2007 through May 14, 2007, we recorded our 50% share of the earnings of DCI. Subsequent to May 14, 2007, we recorded our 662/3% share of the earnings of Discovery. Our share of earnings of Discovery was consistentincreased $44,845,000 for the three months ended March 31, 20072008 as compared to the corresponding prior year period. The increase is mainly due to Discovery’s performance in the first quarter of 2008 as compared to the prior year period. The increase also resulted from a $17,536,000 impact from our ownership interest in Discovery increasing from 50% to 662/3%.

In connection with the Cox Transaction, we reallocated our excess basis related to our investment in Discovery. Such allocation process was completed in the first quarter of 2008 and 2006, increasing $384,000 or 1.8%.resulted in approximately 48% of the excess basis created by the Cox Transaction being allocated to intangible assets with determinable useful lives. Amortization of such intangible assets aggregated $3,744,000 (net of related taxes) for the three months ended March 31, 2008 and is included in our share of earnings of Discovery.

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

Net Earnings.Earnings (Loss).  Our net earnings increased from $11,615,000 for the three months ended March 31, 2006 to $20,464,000 for the three months ended March 31, 2007.2007 to $33,991,000 for the three months ended March 31, 2008. Such increase is due to the other aforementioned fluctuations in revenue, expenses and expenses.other income.

Our primary sources of funds are cash on hand and cash flows from operating activities. During the three months ended March 31, 2007,2008, our primary use of cash was capital expenditures of $13,407,000. Of the foregoing 2007 capital expenditures, $3,338,000 relates$8,552,000 to the buildout of Ascent Media’s existing facilities for specific customer contracts. The remainder of our capital expenditures relate to purchases ofpurchase new equipment and the upgrade of existing facilities and equipment.equipment at Ascent Media and AccentHealth. We currently expect to spend up to an additional $69,500,000$40,000,000 for capital expenditures in 2007,2008, which we expect will be funded with Ascent Media’s and AccentHealth’s cash from operations and cash on hand. At March 31, 2007,2008, we have approximately $154.7$223 million of corporate cash, and short-term investments. Forfor the foreseeable future, we expect to have sufficient available cash balances and net cash from operating activities to meet our working capital needs and capital expenditure requirements. We intend to seek external equity or debt financing in the event any new investment opportunities, additional capital expenditures or our operations require additional funds, but there can be no assurance that we will be able to obtain equity or debt financing on terms that are acceptable to us.

We do not have access to the cash Discovery generates from its operations, unless Discovery paysmakes a dividend on its capital stock or otherwise distributes cashdistribution with respect to its stockholders. Historically, Discovery hasmembership interests or makes other payments or advances to its members. Prior to May 14, 2007, DCI did not paidpay any dividends on its capital stock, and since that date, Discovery has not made any distributions to its members, and we do not have sufficient voting control to cause Discovery to pay dividendsmake distributions or make other payments or advances to us.

We holdEffective May 15, 2007 and as a 50%result of the Cox Transaction, our ownership interest in Discovery increased from 50% to 662/3%, and we continue to account for this investment using the equity method of accounting.accounting due to governance rights which restrict our ability to control Discovery. Accordingly, in our condensed consolidated financial statements we record our share of Discovery’s net income or loss available to common shareholdersmembers and reflect this activity in one line item in our condensed consolidated statement of operations as “Share of earnings of Discovery.” The following financial information of Discovery for the three months ended March 31, 20072008 and 20062007 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 orderin two parts to provide aassist the reader in better understanding Discovery’s operations. The first section is an overall discussion of Discovery’s operations, we have also includedconsolidated operating results. The second section includes a summarized presentationmore detailed discussion of revenue and operating cash flow activity of Discovery’s three operating groups:divisions: Discovery networks U.S., or U.S. networks, Discovery networks international, or international networks, and Discovery commerce education and other.