**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-K**
 (Mark
        One)
 **x**
              **ANNUAL
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
 **For
        the fiscal year ended June 30, 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: 0-30364**
  **NDS
        Group plc**
 (Exact
        name of registrant as specified in its charter)
 
 **England
                  and Wales**
              **Not
                  applicable**(State
                  or other jurisdiction of incorporation or organization)
              (I.R.S.
                  Employer Identification No.)**One
                  London Road, Staines, Middlesex, United Kingdom**
              **TW18
                  4EX**(Address
                  of principal executive offices)
              (Zip
                  Code)
 
 **+44
        208 476 8000**
 (Registrant’s
        telephone number, including area code)
 
 **Securities
        registered pursuant to Section 12(b) of the Act:**  None
 
 **Securities
        registered pursuant to Section 12(g) of the Act:**  Series
        A ordinary shares, par value $0.01 per share
 
 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
        **o****
 
 Indicate
        by check mark if disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-K is not contained herein, and will not be contained, to the
        best
        of registrant’s knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of this Form 10-K or any amendment
        to this
        Form 10-K. **x**
 
 Indicate
        by check mark whether the registrant is an accelerated filer (as defined
        in Rule
        12b-2 of the Securities Exchange Act of 1934). **Yes
        x** **No
        o**
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Securities Exchange Act of 1934). **Yes
        o** **No
        x**
 
 The
        aggregate market value of the Series A ordinary shares held by non-affiliates
        of
        the registrant as of December 31, 2004 was approximately $437,362,014 (based
        on
        the closing price on such date as reported on the NASDAQ National Market).
 
 As
        of
        September 5, 2005, there were outstanding 13465,148 Series A ordinary shares
        of
        $0.01 par value per share, 42,001,000 Series B ordinary shares of $0.01 par
        value per share and 42,000,002 deferred shares of £1 par value per
        share.
 
 **DOCUMENTS
        INCORPORATED BY REFERENCE**
 Certain
        information required for Part III of this Annual Report on Form 10-K is
        incorporated by reference to NDS Group plc’s definitive proxy statement for its
        2005 Annual Meeting of Shareholders, which shall be filed with the Securities
        and Exchange Commission, pursuant to Regulation 14A of the Securities Exchange
        Act of 1934, as amended, within 120 days of NDS Group plc’s fiscal year
        end.


**NDS
      Group plc**


**Table
      of Contents**




**Page**
 **PART
        I**


Item
                    1.
                Business
                1Item
                    2.
                Properties
                13Item
                    3.
                Legal
                    Proceedings
                14Item
                    4.
                Submission
                    of Matters to a Vote of Security Holders
                15**PART
                    II**Item
                    5.
                Market
                    for Registrant’s Common Equity, Related Stockholder
                    Mattersand
                    Issuer Purchases of Equity Securities.
                16Item
                    6.
                Selected
                    Financial Data
                16Item
                    7.
                Management’s
                    Discussion and Analysis of Financial Condition and Results of
                    Operation
                18Item
                    7A.
                Quantitative
                    and Qualitative Disclosures About Market Risk
                30Item
                    8.
                Financial
                    Statements and Supplementary Data
                32Item
                    9.
                Changes
                    in and Disagreements With Accountants on Accounting and Financial
                    Disclosure
                57Item
                    9A.
                Controls
                    and Procedures
                58Item
                    9B.
                Other
                    Information
                60**PART
                    III**Item
                    10.
                Directors
                    and Executive Officers of the Registrant
                61Item
                    11.
                Executive
                    Compensation
                61Item
                    12.
                Security
                    Ownership of Certain Beneficial Owners and Management and Related
                    Stockholder Matters
                61Item
                    13.
                Certain
                    Relationships and Related Transactions
                61Item
                    14.
                Principal
                    Accounting Fees and Services
                61**PART
                    IV**Item
                    15.
                Exhibits
                    and Financial Statement Schedules
                62Signatures
                
                64







**PART
        I**
  **ITEM
                  1.**
              **BUSINESS**
  **Background**
  NDS
        Group
        plc is incorporated in Great Britain and registered in England and Wales.
        As
        used in this Annual Report on Form 10-K, references to “NDS”, the “Company”,
“we”, “us” or “our” are to NDS Group plc and its subsidiaries. We are engaged in
        the business of supplying open end-to-end digital technology and services
        to
        digital pay-television platform operators and content providers. We have
        customers throughout the world and we have research and development facilities,
        customer support operations and administrative offices in the United Kingdom,
        Israel, France, Denmark, India, Hong Kong, China, Korea, Australia and the
        United States. As of June 30, 2005, we had approximately 2,500 employees.
        There
        is a common management structure across the Company, which ensures that our
        various subsidiary entities operate in a coordinated and complementary manner.
        We manage our business as a single operating unit or segment.
 
 We
        are a
        majority owned subsidiary of News Corporation, a Delaware corporation, which
        is
        a diversified international media and entertainment company, and we conduct
        business transactions with a number of affiliates and subsidiaries of News
        Corporation. Effective November 12, 2004, News Corporation changed its corporate
        domicile from Australia to the United States and as a result, we ceased to
        qualify as a foreign private issuer under U.S. securities laws. We have also
        changed our reporting currency from pounds sterling to U.S. dollars.
        Accordingly, the financial information presented in this Annual Report on
        Form
        10-K is stated in U.S. dollars, and has been prepared in accordance with
        U.S.
        generally accepted accounting principles (“US GAAP”). Prior to November 12,
        2004, we published our financial information in accordance with United Kingdom
        generally accepted accounting practice (“UK GAAP”) in pounds sterling. Financial
        information for periods ending, and as of, dates prior to the beginning of
        fiscal 2005, has been derived from previously audited UK GAAP financial
        information by adjusting for differences between UK GAAP and US GAAP and
        then
        translating that information into U.S. dollars.
 
 Our
        principal executive offices are located at One London Road, Staines, Middlesex
        TW18 4EX, England and our telephone number is +44 208 476 8000. Our website
        is www.nds.com .
        We make
        available, free of charge through our website, our annual reports on Form
        10-K,
        quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments
        to
        those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
        Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as
        reasonably practicable after such material is electronically filed with or
        furnished to the Securities and Exchange Commission (“SEC”.) Such documents may
        also be read by the public at the SEC’s Public Reference Room at 100F Street,
        N.E. Room 1580, Washington, DC 20549. The public may obtain information on
        the
        operation of the Public Reference Room by calling the SEC at (202) 551-5850.
        The
        SEC also maintains an internet site ( http://www.sec.gov )
        that
        contains reports, proxy and information statements, and other information
        regarding issuers, including the Company, that file electronically with the
        SEC.
 
 References
        to a year are, unless otherwise indicated, references to our fiscal year
        ending
        on the nearest Sunday to June 30 of each such year. In this Annual Report
        on
        Form 10-K, financial and statistical information is, unless otherwise indicated,
        stated on the basis of such fiscal year.
 
 NDS,
        VideoGuard, Value@TV, MediaHighway, XTV, Synamedia, OpenBet and Visionik
        Games
        are either trademarks or registered trademarks of NDS Group plc and subsidiaries
        in one or more countries worldwide. This Annual Report on Form 10-K also
        includes trade names and trademarks of companies other than NDS. For the
        convenience of the reader, our customers are referred to by their common
        trading
        names and not the names of the specific legal entities with which we contract,
        or the legal name of the parent entity of such party.
 
 
 **Special
        Note Regarding Forward-Looking Statements**
  This
        document and the documents incorporated by reference into this Annual Report
        on
        Form 10-K, including “Item 7: Management’s Discussion and Analysis of Financial
        Condition and Results of Operations,” contain statements that constitute
“forward-looking statements” within the meaning of Section 21E of the Exchange
        Act and Section 27A of the Securities Act of 1933, as amended. The words
        “expect,”“estimate,”“anticipate,”“predict,”“believe” and similar expressions
        and variations thereof are intended to identify forward-looking statements.
        These statements appear in a number of places in this document and include
        statements regarding the intent, belief or current expectations of the Company,
        our Directors or executive officers with respect to, among other things,
        trends
        affecting our financial condition or results of operations. The readers of
        this
        document are cautioned that any such forward-looking statements are not
        guarantees of future performance and involve risks and uncertainties. More
        information regarding these risks, uncertainties and other factors is set
        forth
        below under the heading “Risk Factors.” We do not ordinarily make projections of
        our future operating results and undertake no obligation (and expressly disclaim
        any obligation) to publicly update or revise any forward-looking statements,
        whether as a result of new information, future events or otherwise, except
        as
        required by law. Readers should carefully review this document and the other
        documents filed by us with the SEC. This section should be read in conjunction
        with our audited consolidated financial statements and related notes set
        forth
        elsewhere in this Annual Report on Form 10-K.
 
 Page
            1
 
 **Business
        Overview**
  Our
        business is the supply of open end-to-end digital technology and services
        to
        digital pay television platform operators and content providers. Our
        technologies include conditional access and microprocessor security, broadcast
        stream management, set-top box middleware, program guides (“EPGs”), personal
        video recording (“PVR”) technologies and interactive applications, which are
        supplied to pay-television platform operators and their content
        providers.
 
 We
        operate in a single market and manage our business as a single segment. An
        analysis and discussion of our various revenue streams is provided in Item
        7:
“Management’s Discussion and Analysis of Financial Condition and Results of
        Operations.” A geographic analysis of the sources of our revenues for each of
        the last three fiscal years is given in Note 16 to our audited consolidated
        financial statements, as is information about the location of our long-lived
        assets.
 
 Our
        business has grown through acquisition and through winning new contracts
        with
        customers. In December 2003, we acquired the MediaHighway middleware business
        from Thomson SA, which was previously part of the technology business of
        the
        French broadcaster Canal+ (the “MediaHighway acquisition”). This extended our
        presence in the middleware market as is explained below. Additionally, until
        August 2003, we provided conditional access services, including the supply
        of
        smart cards to DIRECTV in the United States. The contract with DIRECTV came
        to
        an end on August 13, 2003. In March 2004, we signed a new six-year contract
        with
        DIRECTV for conditional access services, and during fiscal 2005 we agreed
        to
        supply DIRECTV with middleware, interactive and PVR technologies.
 
 During
        fiscal 2005, three customers each accounted directly and indirectly for more
        than 10% of our revenues. These customers and the percentage of our fiscal
        2005
        revenues which they contributed were: DIRECTV (29%), BSkyB (22%) and Sky
        Italia
        (11%). These customers, as well as some others, are businesses in which News
        Corporation has an interest. Information about our business transactions
        with
        related parties is provided in Note 11 to our audited consolidated financial
        statements.
 
 Our
        software systems and systems integration services are focused on providing
        platform operators and content providers with technology to help them profit
        from the secure distribution of digital information and entertainment, by
        allowing them to gain new subscribers, provide new services and gain new
        revenue
        streams, increase revenue per subscriber and use software systems to operate
        more efficiently.
 
 We
        have
        identified three main categories of customers for our technologies and
        services:
 
 ·
              The
                  platform operator or broadcaster who typically operates the broadcast
                  infrastructure. The platform operator is a potential customer for
                  all of
                  our technologies and services. We support many delivery methods,
                  including
                  satellite, cable, terrestrial, fixed telecom networks (including
                  broadband
                  internet protocol television (“IPTV”)) and mobile telecom networks;
 
 ·
              The
                  content provider or channel, who will purchase transmission capacity
                  from
                  the platform operator in order to broadcast its programs and information.
                  These content providers or channels are potential buyers of our
                  interactive television infrastructure and applications. While these
                  customers do not comprise a separate business segment, we consider
                  them to
                  provide a complementary route to market for some of our technologies
                  and
                  services. An application developed for a channel on one platform
                  can be
                  transferred to another platform and thereby provide the customer
                  with some
                  economies of scale; and
 
 ·
              Set-top
                  box manufacturers and suppliers of other elements of the broadcast
                  infrastructure with whom we work to integrate those aspects of
                  our
                  technologies which reside in devices supplied by them. In some
                  instances
                  we receive payment from these customers; in other instances both
                  parties
                  work together for no immediate payment, but receive income as and
                  when the
                  device is sold.
 
 Viewers
        of a digital television service, who are customers (subscribers) of the platform
        operator or the content provider, are users of our technology but are not
        our
        customers because we have no direct commercial relationship with them. We
        are
        committed to developing industry co-operation by actively participating in
        over
        35 key standards bodies, consortia and working groups. We use these forums
        proactively to promote open interfaces, which maximize interoperability and
        enable broadcasters and platform operators to meet the challenge of integrating
        broadcast, information and telecommunications technologies.
 
 Page
            2
 Our
        technology is integrated into set-top boxes manufactured by most of the major
        consumer electronics manufacturers. It is important for us and for platform
        operators that our technology be integrated into many different set-top boxes,
        chips incorporated in set-top boxes and other broadcast equipment. This is
        because it provides platform operators and subscribers with greater choice
        and
        security of supply and because it aids price competition.
 
 We
        compete in a number of business areas and no single company competes with
        us in
        all our product lines. Competition is intense and, in addition to price and
        commercial terms, we consider the key differentiators to be:
 
 ·
              the
                  level of security that our technology offers to a platform operator
                  and
                  our ability to maintain that
                  security;
 
 ·
              the
                  quality and ease of use of our systems;
 
 ·
              the
                  availability of our other software elements, such as middleware,
                  interactive software, EPG and PVR, which allow a platform operator
                  to
                  provide additional services;
 
 ·
              the
                  level of integration that exists between the various elements of
                  our
                  technologies;
 
 ·
              the
                  availability of set-top boxes offered by manufacturers with whom
                  our
                  technology is integrated;
 
 ·
              the
                  availability and cost of chips incorporated into our smart
                  cards;
 
 ·
              the
                  complexity of the broadcast system requirements and the degree
                  of
                  adaptation and integration
                  required;
 
 ·
              the
                  degree of our compliance with the various international, national
                  and
                  regional standards that relate to broadcast
                  technology;
 
 ·
              the
                  ability of our conditional access technology to work alongside
                  that of a
                  competitor’s in a process known as “simulcrypt”, which allows a platform
                  operator to replace one conditional access system with another
                  in a
                  controlled manner without disabling a legacy population of set-top
                  boxes;
                  and
 
 ·
              the
                  ability to integrate our technology with broadcast equipment and
                  related
                  systems.
 
 Our
        sales
        teams operate in the United Kingdom, Europe and the Middle East, the United
        States, Latin America and the Asia-Pacific region. They are supported by
        regional marketing activity designed to promote awareness of our company
        and our
        technologies and services in each region. We may bid jointly for projects
        to
        implement a new platform with broadcast equipment manufacturers, system
        integrators and consumer electronics manufacturers.
 
 We
        offer
        technologies and services in the following main areas:
 
 ·
              conditional
                  access systems and services;
 
 ·
              content
                  protection;
 
 ·
              middleware;
 
 ·
              PVR
                  technologies;
 
 ·
              broadband
                  and IPTV;
 
 ·
              interactive
                  television infrastructure and applications;
                  and
 
 ·
              integration
                  services.
 
 The
        technologies deployed at the platform operator’s facilities (“head-end”) and in
        the consumer device are tightly integrated and are an essential component
        of a
        digital pay-television network and the channels and other content carried.
        Our
        customers may purchase technologies and services from us in one or more of
        these
        main areas. These technologies and services comprise a single business segment
        from which we derive a number of different revenue streams. A discussion
        of
        these revenue streams and a quantitative commentary on our business is given
        under Item 7: “Management’s Discussion and Analysis of Financial Condition and
        Results of Operations.” Our main technology solutions and services are discussed
        in more detail below.
 
 Page
            3
 **Conditional
        Access**
  Conditional
        access systems are an essential component of a pay-television platform.
        Conditional access systems enable our customers to manage and control the
        secure
        distribution of entertainment and information, whether distributed by broadcast
        or broadband media (including cable, satellite, terrestrial, telephone network,
        the internet, etc.). Conditional access provides two primary functions. Firstly,
        it protects content from unauthorized viewing, redistribution and piracy,
        and
        secondly it enables our customers to charge subscribers for a selected content
        package or event.
 
 Our
        conditional access systems are sold under the name “VideoGuard.” The VideoGuard
        family of systems is compatible with all internationally accepted digital
        television transmission standards. VideoGuard conditional access systems
        include:
 
 ·
              software
                  components that are installed on dedicated server systems at the
                  platform
                  operator’s head-end and which are responsible for interfacing with the
                  platform operator’s subscriber management system, back-office and billing
                  systems and play-out and transmission management
                  systems;
 
 ·
              technologies
                  that are integrated in the set-top box and which, if authorized,
                  permit
                  the decryption of content and which also support various functions
                  essential to the EPG, PVR functionality, secure return path communication
                  and interactive applications; and
 
 ·
              a
                  removable smart card which is inserted into each set-top box and
                  contains
                  an embedded computer chip that, if authorized, generates code words
                  used
                  by the set-top box to decrypt and display the relevant content.
                  The smart
                  card is manufactured under strict security conditions by third
                  party
                  manufacturers, based on proprietary designs provided by
                  us.
 
 All
        of
        our smart cards are tested, programmed and dispatched from one of our two
        facilities, one in the United Kingdom and one in the United States, which
        together are capable of processing up to 60 million cards per year. In fiscal
        2005, we distributed approximately 30.8 million smart cards.
 
 We
        maintain a pro-active security policy by implementing, when necessary,
        electronic over-the-air countermeasures altering authorized smart cards in
        a
        manner which then renders counterfeit smart cards obsolete. We also provide
        our
        customers with periodic replacement smart cards (“changeover cards”) which
        enable new features and up-to-date technology to be introduced. Our smart
        cards
        are customized to meet each of our customers’ requirements.
 
 As
        of
        June 30, 2005, approximately 56.7 million set-top boxes were in use with
        VideoGuard conditional access technology. Our largest conditional access
        customers and their region of operation include DIRECTV (U.S.), BSkyB (U.K.),
        Sky Italia (Italy), DIRECTV PanAmericana (Latin America), Sky Mexico (Mexico),
        Sky Brasil (Brazil), FOXTEL (Australia), SkyLife (Korea), YES (Israel), HOT
        (Israel), Cablevision (U.S.) and Viasat (Scandinavia).
 
 We
        consider our main conditional access competitors to be NagraVision (developed
        by
        Kudelski SA), DigiCypher (developed by Motorola, Inc.) and Power Key (developed
        by Scientific-Atlanta, Inc.).
 
 **Content
        Protection**
  Consumers
        are increasingly expecting more flexibility as to the place and time they
        view
        digital content. A key issue for content owners and distributors is that
        once
        the digital content is moved to an unprotected environment outside their
        control
        it can be copied, re-distributed and viewed in its original quality, illegally
        or without the content owners’ ability to generate revenues from such use. Our
        Secure Video Processor (“SVP”) technology addresses this issue by providing a
        rights management standard scheme using hardware based security such that
        content may be transferred to an authorized device which has an SVP chip
        in it.
        The SVP chip is created by incorporating SVP technologies into an existing
        video
        processor chip which can then be integrated into a consumer electronics device,
        such as a digital television, set-top box, personal video recorder, DVD or
        MP3
        player, mobile phone and other portable devices. An SVP enabled chip controls
        both the content and the license to use that content.
 
 We
        are
        promoting SVP as an open standard, available to all and any chipset
        manufacturer, consumer electronics manufacturer and broadcast platform operator
        on reasonable and non-discriminatory terms to ensure that the distribution
        of
        content to home networks and consumer devices can be achieved securely and
        at
        low cost, while supporting the needs and reasonable expectations of consumers.
        We established SVP Alliance, a group of interested parties who are working
        to
        promote the widespread use of SVP for the secure distribution of digital
        entertainment content.
 
 Page
            4
 Our
        technologies and systems for mobile digital rights’ management (“DRM”) solutions
        are sold under the “mVideoGuard” name. mVideoGuard is aimed at assisting
        companies who wish to distribute valuable content to mobile phones in protecting
        the content revenues from threats of piracy and providing flexible business
        models that raise revenues and increase network traffic. Our solutions are
        compliant with the “OMA DRM” technology standard and support multiple delivery
        mechanisms, including downloading, streaming, unicasting, multicasting,
        broadcasting, secure billing and payments.
 
 Numerous
        companies are developing content protection technologies that will compete
        with
        ours.
 
 **Middleware**
  Middleware
        is similar to operating system software, but is integrated in digital television
        set-top boxes. The combination of our conditional access technologies and
        set-top box middleware enables applications to be run on the set-top box
        in a
        standard, user friendly, controlled and secure manner. This allows our customers
        to enhance their subscribers’ experience by providing a user friendly, always
        on, fast audio and video environment capable of supplying EPGs, shopping,
        e-mail, games, banking, advertising and other interactive services.
 
 We
        provide a full range of middleware solutions, which include:
 
 ·
              MediaHighway
                  Core - an easily upgradeable middleware solution that allows platform
                  operators to deploy a wide range of services, including EPGs, interactive
                  applications and PVRs, quickly and cost effectively on low cost
                  set-top
                  boxes;
 
 ·
              MediaHighway
                  Advanced ─ a multi-tasking middleware solution that runs on fully featured
                  set-top boxes. The architecture and features of MediaHighway Advanced
                  support complex systems such as home networking with broadband
                  access.
                  MediaHighway Advanced complies with the major television and internet
                  open
                  standards, including DVB-MHP, HTML 4.0, OCAP and JavaScript.
 
 As
        of
        June 30, 2005, we estimate that a cumulative 20.4 million set-top
        boxes
        containing MediaHighway have been shipped, an increase of 2.0 million since
        June 30, 2004. MediaHighway is being used by the following customers:
        CanalSatellite (France), Canal Digital (Scandinavia), Sky Mexico (Mexico),
        Sky
        Brasil (Brazil), Astro/Measat (Malaysia) and Yes (Israel). During fiscal
        2005,
        we worked on the development of middleware for DIRECTV. The download of our
        middleware to DIRECTV set-top boxes started successfully in the latter part
        of
        the fourth quarter of fiscal 2005, however, our revenue recognition criteria
        were not met as of June 30, 2005. We expect to recognize revenue from
        this
        during fiscal 2006 and beyond.
 
 Our
        main
        competitor in middleware is OpenTV Corp.
 
 **PVR**
  We
        have
        developed a PVR technology called “XTV” which extends the television viewing
        experience by integrating mass-storage devices, such as hard drives, in set-top
        boxes. The XTV-enabled set-top boxes and head-end systems are tightly integrated
        with our conditional access technologies, ensuring that the content in the
        subscriber’s set-top box is stored in encrypted form so that viewing, copying or
        distribution can be controlled by the platform operator or content
        owner.
 
 XTV
        uses
“meta-data” (data about data) embedded in the broadcast stream to provide
        services and functionality that are not readily available in other products
        that
        focus only in managing the hard disk that is integrated in the set-top box
        or
        digital television. We do not manufacture or market the set-top box which
        forms
        the basis of the PVR, but we license our technology to platform operators
        and
        consumer electronics manufacturers who supply the markets in which our platform
        operator customers operate.
 
 Our
        XTV
        technology has been deployed by the following customers: BSkyB (United Kingdom),
        FOXTEL (Australia), NatSat (Brazil), Sky Mexico (Mexico), Yes (Israel) and
        HOT
        (Israel).
 
 Because
        of the way in which our XTV is tightly integrated with our conditional access
        technologies, we do not consider other PVR products to be direct
        competitors.
 
 **Broadband
        and IPTV**
  Our
        technologies and systems for broadband and IPTV are sold under the “Synamedia”
        name. Synamedia incorporates our technologies for personalization, meta-data
        synchronization and management, content protection and rights management.
        It
        provides a broadband platform operator with the ability to offer television
        services, such as video-on-demand (“VOD”), multi-cast television, video
        streaming, content guides, interactive applications, secure commerce and
        PVR-type functionality.
 
 Page
            5
 Based
        on
        our VideoGuard security, Synamedia protects content at all stages of delivery,
        from the broadband access point through to the set-top box in the home. Once
        content is received inside the home, VideoGuard protects the valuable digital
        content from piracy, whether it is stored locally or routed through a home
        network. VideoGuard uses content encryption and a secure key management system
        that allows IPTV set-top boxes to be used for viewing content on a television
        screen.
 
 Synamedia
        therefore ensures content protection and revenues for: telecommunications
        companies wanting to introduce new video and television services; content
        providers and broadband broadcasters considering IPTV broadcasting and VOD
        services; cable television companies considering phone networks or Fiber
        To The
        Home as an alternative to digital cable; and satellite or terrestrial
        broadcasters considering VOD over IPTV to complement their traditional broadcast
        business.
 
 Among
        our
        Synamedia customers are BB Cable / Softbank (Japan), CYTA (Cyprus), Sistema
        (Russia), Viasat (Scandinavia) and Galaxy (Hong Kong).
 
 Numerous
        companies offer competing technologies in the area of broadband and IPTV,
        including telecommunications companies and businesses which supply software
        to
        the personal computer market.
 
 **Interactive
        Television Infrastructure and Applications**
  Our
        “Value@TV” solution simplifies the business of interactive television for
        television platform operators, content providers and advertisers by offering
        a
        suite of tools supporting the creation, packaging, delivery and management
        of
        interactive content and applications, as well as a suite of standardized
        applications that can be licensed by, or customized for, a particular
        application. These applications include EPG, games and gaming (which are
        sold
        under the “Visionik Games “ and “Orbis” brand names), voting, sports
        applications, news, commerce, interactive advertising and other enhanced
        television applications. Apart from these standardized applications, we also
        develop stand-alone applications for platform operators and content providers.
 
 Among
        our
        Value@TV customers are the following platform operators: BSkyB (U.K.), DIRECTV
        (USA), DIRECTV PanAmericana (Latin America), Sky Mexico (Mexico), Sky Brasil
        (Brazil), Sky Italia (Italy), Viasat (Scandinavia), FOXTEL (Australia), Yes
        (Israel) and HOT (Israel). We also supply technology and applications to
        numerous channels and content providers operating on these platforms.
 
 Our
        “OpenBet” software is used by licensed bookmakers and gaming organizations as a
        platform for internet and television-based bookmaking and gaming operations.
        Although such bookmaking and gaming operations are highly restricted in the
        United States, their use is permitted in several jurisdictions, including
        the
        United Kingdom. OpenBet allows a single operator to create multiple betting
        sites (e.g., retail locations, internet, television) all powered by the same
        OpenBet server. It has two main elements: the OpenBet gambling engine and
        the
        OpenBet game framework. The OpenBet gambling engine is the core of the system.
        It contains all the central features required by any gambling site, including
        customer accounts, registration and identity validation, electronic payment,
        event management, liability management and monitoring, multi-currency and
        multi-lingual functions, regulatory compliance, administration and reports.
        The
        OpenBet game framework allows operators to develop their own games. Different
        types of games can be hosted by the OpenBet game framework, such as sports
        betting, casino games, lottery games and fantasy competitions. We are expanding
        the OpenBet product group to include our own casino-type games and
        person-to-person betting.
 
 OpenBet
        is used by many of the major bookmakers in the United Kingdom and some companies
        in the Asia-Pacific region. OpenBet is used by several bookmakers and gaming
        companies that operate specialist channels or applications on the BSkyB
        platform. We only sell OpenBet to companies that operate in tightly regulated
        markets and which take steps (including the use of specific functionality
        of
        OpenBet) to ensure that bets are not accepted from persons in jurisdictions
        where such activities may not be legal. This policy limits the potential
        market
        for OpenBet.
 
 **Integration
        and Support Services**
  We
        complement our technologies with a wide range of services, including consulting,
        broadcast system design and integration, support and maintenance and, in
        some
        cases, on-site operation and management of systems we have supplied to our
        customers. Our experience in implementing large and complex systems has enabled
        us to sell services to assist companies in planning and designing new platforms.
        System integration involves both the selection of appropriate vendors and
        the
        integration of various components, including those of third party manufacturers,
        into a single operational broadcast system. In some cases we may act as prime
        integrator and subcontract aspects of the work to third parties. In other
        cases
        we may be a subcontractor to a third party prime integrator. Once our customers’
        systems are operational, we offer them after-sale services including ongoing
        support and maintenance. We also offer consulting services, including business
        consulting, technical assistance, and security design for interactive and
        other
        advanced services.
 
 Page
            6
 
 **Intellectual
        Property**
  Our
        technology is critical to our success. We need to protect our intellectual
        property rights, both in our proprietary technology and in technology which
        is
        licensed to us. We rely on a combination of patent, copyright and trademark
        laws, trade secrets, licenses, confidentiality agreements and contractual
        provisions to protect our proprietary rights. We generally enter into
        confidentiality and non-disclosure agreements with our employees, customers
        and
        suppliers.
 
 We
        are
        the exclusive worldwide licensee of various patents, patent applications
        and
        patentable inventions from Yeda Research & Development Company Limited
        (“Yeda”) in Israel in the area of digital identification and signature schemes,
        which have been invented by Professor Adi Shamir. We pay a royalty to Yeda
        based
        on a percentage of relevant revenues arising from our VideoGuard conditional
        access technologies. We have a worldwide non-exclusive license to use certain
        patents owned by Thomson SA which support our MediaHighway middleware
        technologies. We are also a non-exclusive licensee of intellectual property
        rights owned by various third parties. These rights have been acquired by
        the
        payment of a fixed sum or royalty.
 
 We
        work
        on the development of high security encryption algorithms. These are
        mathematical procedures implemented in software that are used to accomplish
        a
        specific function, such as encrypting or decrypting data, messages or video
        signals by means of secret keys and code words. Our security research team
        has
        developed a number of proprietary high-security encryption algorithms used
        in
        our conditional access systems.
 
 Our
        chip
        design team has developed a number of proprietary improvements to the security
        and functionality of chips that we integrate into our smart cards. Such
        improvements include, for example, functions that hinder the unauthorized
        duplication of our smart cards or the use of counterfeit smart cards in a
        set-top box.
 
 We
        have
        developed a number of techniques that allow us to send specially disguised
        and
        encoded messages that disable or alter the operating characteristics of our
        smart cards. These technologies allow our customers to disable the smart
        cards
        of delinquent subscribers. In addition, they allow our customers to combat
        signal theft more effectively by altering the operating characteristics of
        all
        valid smart cards in a way which makes counterfeit smart cards incompatible
        with
        the signals transmitted by our customers. We have developed sophisticated
        protocols for transmitting authorization, entitlement and other control messages
        to smart cards. These protocols allow control messages to be compressed in
        a way
        which consumes only a small fraction of the broadcaster’s bandwidth, allowing
        the broadcaster to transmit more programs and channels to its subscribers
        without having to compromise its ability to control each individual subscriber’s
        viewing entitlements.
 
 **Research
        and Development**
  Our
        total
        expenditure on research and development in the three fiscal years ended June
        30,
        2005, 2004 and 2003 was $166.5 million, $146.2 million and $99.8 million,
        respectively. This includes the cost of research into new technologies which
        may
        be of future benefit to us and our customers, the cost of developing prototype
        applications for demonstration to customers and potential customers, and
        the
        costs of adapting and integrating applications and new technologies to meet
        a
        particular customer’s requirements. The largest research and development
        projects have been on set-top box software, particularly the development
        of
        advanced middleware, program guide and PVR technologies and the development
        of
        games and gaming applications.
 
 **Regulation**
  We
        are
        not an operator of conditional access systems. However, our technology is
        used
        by broadcasters and operators of conditional access systems. Our customers
        may
        therefore be subject to regulation in the jurisdictions in which they offer
        their services. These regulations, which differ from jurisdiction to
        jurisdiction, and future changes or additions to such regulations, may affect
        our ability to sell our conditional access technologies and
        services.
 
 We
        do not
        operate as a bookmaker. However, our OpenBet software is a betting and gaming
        application. Our customers are therefore subject to regulation in the
        jurisdictions in which they offer their services. This may involve the
        independent certification of our software. In many jurisdictions, betting
        and
        gaming regulations are being reviewed, specifically to address betting and
        gaming on the internet and television. It is possible that our customers
        will
        become subject to new regulations in this area. The current regulations,
        which
        differ from jurisdiction to jurisdiction, and any future changes in such
        regulations, may affect our ability to sell our technologies and services
        related to betting and gaming.
 
 Page
            7
 
 **Raw
        Materials**
  We
        do not
        manufacture smart cards, but our engineers design the computer chips which
        are
        embedded in our smart cards. We arrange for the chips to be manufactured
        and
        assembled by third party suppliers. We then program the smart cards with
        our
        proprietary software. Smart card costs are dependent upon the costs of raw
        materials, including the cost of computer chips, plastic and assembly, and
        the
        quantity of smart cards purchased and processed in any period.
 
 We
        purchase the chips which are contained within our smart cards from third
        party
        manufacturers. There are very few companies with the manufacturing skills
        and
        capacity to supply our requirements for smart card chips, especially given
        the
        sophistication of our designs. Additionally, we often use a single manufacturer
        for a particular generation of smart card for a particular customer.
        Accordingly, any disruption to supply or lack of availability of manufacturing
        capacity at our chip suppliers could harm our ability to deliver smart cards
        to
        our customers or could negatively affect our operating margins.
 
 **Order
        Backlog**
  We
        do not
        consider it meaningful to quantify order backlog. Our customer contracts
        are
        typically long-term arrangements for the supply of smart cards, security
        and
        other services, initial systems, subsequent system enhancements and other
        aspects of our technologies.
 
 **Seasonality**
  Our
        business is not seasonal. However, demand for smart cards can be influenced
        by
        the consumer marketing activities of our broadcast platform customers and
        the
        timing of delivery of technology enhancements can also be influenced by such
        activities.
 
 **Risk
        Factors**
  Prospective
        investors should consider carefully the risk factors set forth below before
        making an investment in the Company’s securities.
 
 **Our
        business will suffer if we do not respond to commercial and technological
        changes affecting the broadcasting industry.**
  Our
        business and the market in which we operate is characterized by rapid commercial
        and technological change, evolving industry standards and frequent product
        enhancements. Many digital broadcasters are seeking more sophisticated software
        which will afford them greater flexibility in delivering content such as
        news,
        films and sports. They are also seeking to offer additional services such
        as
        middleware, EPGs, games, gaming and other interactive applications, PVR
        functionality, home networks services and other services.
 
 Our
        continued success will depend, in part, upon our ability to develop and market
        products and services that respond to technological changes and evolving
        industry standards in a timely and cost-effective manner. If the market in
        which
        we operate develops more slowly than we anticipate, or if we should fail
        to
        develop and introduce products and services that are compatible with industry
        standards, satisfy customer requirements and compete effectively with products
        and services offered by our competitors, our business, operating results
        and
        financial condition could be materially adversely affected.
 
 **Our
        operating results and growth could decline if our customers’ subscriber bases do
        not continue to increase.**
  A
        significant portion of our revenues is derived from the sale of smart cards
        and
        new technologies to our customers and ongoing subscriber fees paid by our
        customers on a monthly basis based on the number of active subscribers or
        authorized smart cards. We also receive royalties based on each set-top box
        manufactured or deployed which incorporates our technology. Therefore a
        significant portion of our revenues is dependent upon our customers’ subscriber
        numbers, the growth in those numbers, the degree to which set-top boxes are
        replaced with enhanced models and the number of set-top boxes in each
        subscriber’s home. If our customers’ subscriber numbers do not continue to
        increase, we may be unable to generate substantial revenue growth or sustain
        our
        current revenue levels and as a consequence our business, operating results
        and
        financial condition could be materially adversely affected.
 
 Page
            8
 **Our
        business could be harmed if the security provided by our conditional access
        systems and products is compromised.**
  We
        face
        risks relating to the failure of our conditional access systems to protect
        platform operators and content providers from signal theft. An important
        component of our conditional access systems is the smart cards we provide
        for
        the platform operators’ individual subscribers. Unauthorized viewing and use of
        content may be accomplished by counterfeiting the smart card or otherwise
        thwarting its security features. Any significant increase in the incidence
        of
        signal theft could require the replacement of a platform operator’s smart cards
        sooner than otherwise planned. In those cases where we have accepted specific
        responsibilities for maintaining the security of a platform operator’s
        conditional access system, significant costs could be imposed on us if a
        security breach requires an accelerated replacement of smart cards. To the
        extent that signal theft may result in the cessation of all, or some portion
        of,
        the per-subscriber fees paid to us by a broadcaster while the security breach
        is
        being remedied or, in the event of termination by the broadcaster of our
        agreement if the breach is not satisfactorily remedied, the resultant loss
        of
        revenues could have a material adverse effect on our business, operating
        results
        and financial condition. A significant increase in the level of signal theft,
        whether or not resulting from a failure of our conditional access systems,
        could
        also injure the reputation of our conditional access systems among our customers
        and potential customers and as a consequence, our business, operating results
        and financial condition could be materially adversely affected.
 
 **A
        substantial part of our expected future revenue and income growth is based
        on
        our aim to sell advanced technologies and services to our existing customers
        and
        to sell end-to-end systems to new customers.**
  We
        expect
        over the next several years to sell advanced technology solutions for the
        television market, including middleware, EPGs, games, gaming and other
        interactive applications, PVR functionality, home networks services and other
        services. The market for advanced television technology solutions is still
        new
        and evolving. Historically, we have derived only a relatively small percentage
        of our total revenue from these offerings. We cannot be certain that the
        demand
        for or the market acceptance of these technologies will develop as we
        anticipate, and even if they do, we cannot be certain that we will be able
        to
        market these solutions effectively and successfully respond to changes in
        consumer preferences. In addition, our ability to market those solutions
        will be
        affected to a large degree by platform operators. If platform operators
        determine that our solutions do not meet their business or operational
        expectations, they may choose not to offer our applications to their customers.
        To the extent that platform operators and content providers fail to renew
        or
        enter into new or expanded contracts with us for provision of advanced
        technologies, we will be unable to maintain or increase the associated revenue
        from those offerings. Moreover, due to global economic conditions, platform
        operators may slow the pace of their deployment of these advanced services
        and
        such action would negatively impact our revenues. Accordingly, our ability
        to
        generate substantial revenues from our advanced technology solutions offerings
        is uncertain.
 
 **Our
        business could be harmed if a defect in our software or technology interferes
        with, or causes any failure in, our customers’ systems.**
  Our
        software and technology are integrated into the broadcast infrastructure
        of our
        customers. Accordingly, a defect, error or performance problem with our software
        or technology could interfere with, or cause a critical component of, one
        or
        more of our customers’ systems to fail for a period of time. This could result
        in claims for substantial damages against us, regardless of whether we are
        responsible for such failure. Any claim brought against us could be expensive
        to
        defend and require the expenditure of a significant amount of resources,
        regardless of whether we prevail. Although we have not experienced any such
        material interference or failure in the past, any future problem could cause
        severe customer service and public relations problems for our customers and
        as a
        consequence, our business, operating results and financial condition could
        be
        materially adversely affected.
 
 **We
        depend upon key personnel, including our senior executives and technical
        and
        engineering staff, to operate our business effectively, and we may be unable
        to
        attract or retain such personnel.**
  Our
        future success depends largely upon the continued service of our senior
        executive officers and other key management and technical personnel. If certain
        of our senior executives were to leave the Company, we may be placed at a
        competitive disadvantage. In addition, we may also need to increase the number
        of our technical, consulting and support employees to support new customers
        and
        the expanding needs of our existing customers. We have, in the past, experienced
        difficulty in recruiting sufficient numbers of qualified personnel. If we
        are
        not successful in these recruiting efforts, our business may be adversely
        affected.
 
 **Intense
        competition could reduce our market share and harm our financial
        performance.**
  We
        compete with numerous companies both to attract new customers and to retain
        our
        existing customers. Such competition may cause us to lose market share and
        may
        result in reduced profit margins. It may also hinder our ability to develop
        our
        business in areas such as PVRs, middleware, interactive television services
        and
        IPTV. In addition, some of the companies that currently operate in the software
        business, but which have not historically been active competitors of ours
        may,
        in the future, through acquisitions or the development of their own resources,
        seek to enter and obtain significant market share in our current or planned
        business areas. Increased competition from existing or new competitors could
        result in price reductions, reduced margins or loss of market share, any
        of
        which could materially and adversely affect our business, operating results
        and
        financial condition.
 
 Page
            9
 **We
        derive a significant portion of our revenues from a limited number of large
        customers. Our revenues could decline significantly if any of these customers
        significantly reduces its purchases of our technology or services, or terminates
        its relationship with us.**
  Our
        growth has depended historically on large digital satellite broadcasters
        introducing, marketing and promoting products and services that utilize our
        technology. We currently derive, and we expect to continue to derive, a
        significant portion of our revenues from a limited number of large customers.
        Our three largest customers have been DIRECTV in the United States, BSkyB
        in the
        United Kingdom and Sky Italia in Italy. In fiscal 2005, these three customers
        accounted directly and indirectly for approximately 62% of our total revenues.
        We expect that we will continue to be dependent upon a limited number of
        customers for a significant portion of our revenues, although the particular
        customers may vary from period to period. If a large customer purchases
        significantly less of our products or services, defers or cancels orders,
        or
        terminates its relationship with us, our revenues could decline significantly
        and as a result, our business, operating results and financial condition
        could
        be materially adversely affected.
 
 **The
        adoption of industry-wide standards for interactive television could adversely
        affect our ability to sell our products and services or place downward pressure
        on our pricing.**
  Ongoing
        efforts to establish industry-wide standards for interactive television software
        include a commitment by cable network operators in the United States to deploy
        a
        uniform platform for interactive television based on a jointly developed
        specification known as the OpenCable Applications Platform and an initiative
        by
        European television industry participants to create a similar platform called
        Multimedia Home Platform. The establishment of these standards or other similar
        standards could adversely affect the pricing of our products and services,
        significantly reduce the value of our intellectual property and the competitive
        advantage our proprietary technology provides, cause us to incur substantial
        expenditures to adapt our products or services to respond to these developments
        or otherwise harm our business, particularly if our products require significant
        redevelopment in order to conform to the newly established
        standards.
 
 We
        are
        not currently a member of CableLabs, the research and development consortium
        managing the OpenCable initiative, or certain other standards setting
        organizations. While we are involved in the activity of CableLabs and while
        we
        continually assess our position with respect to any relevant standards setting
        organizations, and have joined several of them, our failure to participate
        in
        certain organizations may affect the willingness of their respective members
        to
        conduct business with us and this may adversely affect our ability to sell
        products or services cable network operators or other potential customers
        that
        are members of those organizations. If that were to be the case, our ability
        to
        continue to grow our business might be adversely affected.
 
 **The
        nature of our business is such that our operating results may fluctuate from
        period to period.**
  Our
        operating results have varied in the past from quarter to quarter and from
        year
        to year and are likely to vary from period to period in the future.
        Historically, our revenues have reflected a small number of relatively large
        orders for our technology and services, which generally have long sales and
        order cycles. Additionally, our customers replace their subscribers’ smart cards
        from time to time, either to upgrade the features of the smart cards or for
        security purposes. As a result, we believe that period-to-period comparisons
        of
        our operating results may not be a good indication of our future performance.
        Our actual results may differ from analyst expectations, which could adversely
        affect the price of our securities.
 
 **Changes
        to current accounting policies or in how such policies are interpreted or
        applied to our business could have a significant effect on our reported
        financial results.**
  We
        prepare our financial statements in conformity with US GAAP. New accounting
        pronouncements or a change in how US GAAP is interpreted or applied to our
        business could have a significant effect on our reported results. Our accounting
        policies that recently have been or may in the future be affected by changes
        in
        the accounting rules include revenue recognition, accounting for stock-based
        compensation and accounting for goodwill and other intangible
        assets.
 
 Our
        revenue recognition policy, in particular, is a key component of our results
        of
        operations and is based on complex rules that require us to make judgments
        and
        estimates. In applying our revenue recognition policy, we must determine
        what
        portions of our revenue are recognized currently and which portions must
        be
        deferred. Because different contracts may require different accounting
        treatment, it may be difficult for investors to properly assess our financial
        condition or operating results unless they carefully review all of our financial
        information, including our audited consolidated financial statements and
        notes
        thereto.
 
 Page
            10
 **Failure
        to protect the intellectual property rights upon which we depend could harm
        our
        business.**
  We
        rely
        primarily on a combination of patent, trademark and copyright laws, trade
        secrets, confidentiality procedures and contractual provisions to protect
        our
        intellectual property rights and the obligations we have to third parties
        from
        whom we license intellectual property rights. However, we may not be able
        to
        detect unauthorized use of, or take appropriate steps to enforce, our
        intellectual property rights and this could have a material adverse effect
        on
        our business, operating results and financial condition.
 
 **Defending
        against intellectual property infringement claims could harm our
        business.**
  We
        may be
        subject to an increased risk of infringement claims as the number of products
        and competitors grows and the functionality of products in different industry
        segments overlaps. It may be alleged that products that we have developed
        or
        technology that we have licensed from third parties infringes the rights
        of
        others. Intellectual property claims could be time consuming to defend, result
        in costly litigation, divert management’s attention and resources and cause
        product shipment delays. Such claims could also require us to seek to enter
        into
        royalty or license agreements, redesign our products or potentially cease
        using
        aspects of technology, which could have a material adverse effect on our
        business, operating results and financial condition.
 
 **We
        grant certain indemnification rights to our customers when we license our
        software technologies. We may, therefore, become subject to third party
        infringement claims through those commercial arrangements. In addition, the
        damages to which we are subject may be increased by the use of our technologies
        in our customers’ products.**
  Many
        of
        our agreements with customers contain an indemnification obligation, which
        could
        be triggered in the event that a customer is named in an infringement suit
        involving their products or involving the customer’s products or services that
        incorporate or use our products. If it is determined that our products infringe
        any of the asserted claims in such a suit, we may be prevented from distributing
        certain of our products and we may incur significant indemnification
        liabilities, which may adversely affect our business, operating results and
        financial condition.
 
 In
        addition, while damage claims in respect of an alleged infringement may,
        in many
        cases, be based upon a presumed royalty rate that the patent holder would
        have
        otherwise been entitled to, it is possible that our liability may increase
        as a
        result of the incorporation of our technology with our customer’s products. In
        some cases, potential damages against us could be based on the profits derived
        from a product that infringes through the use of our software even though
        we
        receive a relatively moderate economic benefit from the licensing
        arrangement.
 
 **Any
        significant disruption in our processing of smart cards could adversely affect
        our business.**
  We
        process all of our smart cards at two facilities, one located in England
        and the
        other in California. A significant disruption in the processing of smart
        cards
        at either facility could result in delays in the delivery of smart cards
        to our
        customers. The sale of smart cards which we have processed is a material
        portion
        of our business. Although our smart card processing facilities are designed
        to
        provide sufficient capacity to meet expected demand if one facility becomes
        inoperable for a limited period of time, any significant disruption to our
        smart
        card processing facilities could result in the loss of revenues, customers
        and
        future sales.
 
 **We
        may be unable to process sufficient quantities of smart cards because we
        obtain
        certain components from, and depend upon, a limited number of
        suppliers.**
  We
        currently obtain the chips used in our smart cards from a limited number
        of
        suppliers. In the event of a disruption of supply, including a shortage of
        manufacturing capacity, we may be unable to develop an alternative source
        in a
        timely manner or at favorable prices. Such failure could harm our ability
        to
        deliver smart cards to our customers or could negatively affect our operating
        margins. This could have a material adverse effect on our business, operating
        results and financial condition.
 
 **Political,
        regulatory and economic risks associated with our international customers
        could
        harm our business.**
  Our
        customers are located throughout the world. Inherent risks of doing business
        in
        international markets include changes in legal and regulatory requirements,
        export restrictions, exchange controls, tariffs and other trade barriers,
        longer
        payment cycles, political disruption, wars, acts of terrorism and civil unrest.
        We may incur substantial expense as a result of the imposition of new
        restrictions or changes in the existing legal and regulatory environments
        in the
        territories where we conduct our business or due to political and economic
        instability in these territories.
 
 The
        telecommunications, media, broadcast and cable television industries are
        subject
        to extensive regulation by governmental agencies. These governmental agencies
        continue to oversee and adopt legislation and regulation over these industries,
        particularly in the areas of user privacy, consumer protection, online content
        distribution and the characteristics and quality of online products and
        services, which may affect our business, the development of our products,
        the
        decisions by market participants to adopt our products and services or the
        acceptance of interactive television by the marketplace in general. In
        particular, governmental laws or regulations restricting or burdening the
        exchange of personally identifiable information could delay the implementation
        of interactive services or create liability for us or any other manufacturer
        of
        software that facilitates information exchange. These governmental agencies
        may
        also seek to regulate interactive television directly. Future developments
        relating to any of these regulatory matters may adversely affect our
        business.
 
 Page
            11
 **Fluctuations
        in foreign exchange rates could harm our financial
        condition.**
  A
        risk
        inherent in our international operations is the exposure to fluctuations
        in
        currency exchange rates. Certain of our customer contracts denominate prices
        in
        pounds sterling or in euros. In fiscal 2005, approximately 28% of our revenues
        were denominated in pounds sterling and a further 18% were denominated in
        euros.
        Some of our smart card costs and our operating expenses are denominated in
        pounds sterling and euros. In fiscal 2005, we estimate that approximately
        62% of
        our total cost of sales and operating expenses were denominated in pounds
        sterling or in euros. As a result, we are exposed to fluctuations in exchange
        rates which may have a material adverse effect on our business, operating
        results and financial condition.
 
 Additionally,
        although most of our contracts with customers in Latin America and the
        Asia-Pacific region are denominated in U.S. dollars, those customers are
        affected by fluctuations in their local currencies and by exchange control
        regulations which may restrict their ability to remit payments to
        us.
 
 **We
        are subject to certain risks relating to our operations in
        Israel.**
  We
        have
        research and development facilities in Israel and we have customers in Israel.
        We are therefore directly influenced by the political, economic and security
        conditions affecting Israel. Any major hostilities involving Israel, or the
        interruption or curtailment of trade or the movement of people within Israel
        or
        between Israel and other countries, could significantly harm our business,
        operating results and financial condition. Additionally, certain of our
        employees are currently required to perform annual reserve duty in the Israeli
        Defense Force and are subject to being called for active military duty at
        any
        time. We have, in the past, operated effectively under these requirements.
        We
        cannot predict the effect of these obligations on us in the future.
 
 **We
        are controlled by, and are dependent upon our relationship with, News
        Corporation.**
  We
        are
        controlled by News Corporation. As of the date hereof, News Corporation
        beneficially owns approximately 75.7% of our total issued and outstanding
        share
        capital. Because News Corporation beneficially owns 100% of our Series B
        ordinary shares, which have ten votes per share (as opposed to our Series
        A
        ordinary shares which have one vote per share), it controls approximately
        96.9%
        of our voting power. By reason of such ownership, News Corporation is able
        to
        control the composition of our entire Board of Directors and to control the
        votes on all other matters submitted to a vote of our shareholders. Three
        of our
        seven current Directors are directors of News Corporation. Additionally,
        Dr. Abe
        Peled, our President and Chief Executive Officer, is a member of News
        Corporation’s Executive Management Committee and from time to time is involved
        in matters pertaining to News Corporation’s wider business
        interests.
 
 Businesses
        in which News Corporation has an interest currently account for, and are
        expected to continue to account for, a significant portion of our revenues.
        During fiscal 2005, approximately 74% of our total revenues were derived
        directly from businesses in which News Corporation has an interest. Those
        businesses include our three largest customers. Although we believe the terms
        of
        our contracts with such related parties are no less favorable to us than
        those
        that we could obtain from unrelated third parties, we cannot assure you that
        this is the case.
 
 In
        addition, because a number of major broadcasters around the world are owned
        or
        controlled by entities that compete with News Corporation or entities in
        which
        News Corporation has an interest, our ability to attract customers in which
        News
        Corporation does not have an interest may be affected by their perception
        of our
        relationship with News Corporation.
 
 **Because
        we are controlled by News Corporation, we are exempt from certain listing
        requirements of the NASDAQ National Market relating to corporate governance
        matters.**
  Over
        the
        past several years, the National Association of Securities Dealers has adopted
        certain listing requirements for companies listed on the NASDAQ National
        Market.
        As a result of News Corporation’s beneficial ownership of our Series B ordinary
        shares, we are deemed to be a “controlled company” and accordingly are not
        subject to some of these requirements, including the requirement that a majority
        of our board of directors be “independent” under the guidelines established by
        the National Association of Securities Dealers and certain requirements
        regarding the determination of our Chief Executive Officer’s compensation and
        our director nominees. While we do not believe that our exemption from those
        requirements affects the manner and method by which we manage and operate
        the
        Company, investors should be aware that we are not subject to those provisions
        and may have no obligation to comply with those requirements in the future
        unless our ownership profile changes.
 
 Page
            12
 **Since
        we are** **a public limited company organized under the laws of England and Wales, your
        rights as a shareholder differ from the rights of shareholders under U.S.
        law.**
  NDS
        Group
        plc is a public limited company organized under the laws of England and Wales.
        The rights of holders of our ordinary shares and, indirectly, many of the
        rights
        of holders of our American Depositary Shares (“ADSs”) are governed by English
        law and by our Memorandum and Articles of Association. These rights differ
        from
        the rights of shareholders in U.S. companies. In particular, English law
        significantly limits the circumstances under which shareholders of English
        companies may bring derivative actions. Under English law generally, only
        the
        Company can be the proper plaintiff in proceedings in respect of wrongful
        acts
        committed against us. In addition, it may be difficult for you to enforce
        liabilities predicated upon U.S. securities laws.
 
 **Our
        share price could be affected by our ordinary shares becoming available for
        sale
        in the future or by the dilutive effect of the issue of new
        shares.**
  If
        investors or News Corporation sell substantial amounts of our ADSs or ordinary
        shares in the public market, the market price of our ADSs could fall. The
        negative effect of such sales on the market price of our ADSs could be more
        pronounced given the relatively small number of our ordinary shares in ADS
        form
        relative to the total number of shares outstanding. In addition, such sales
        could create the public perception of difficulties or problems with our
        technologies and services. These sales may also make it more difficult for
        us to
        sell equity or equity-related securities in the future at a time and price
        that
        we deem appropriate if we require additional financing.
 
 Interests
        of existing shareholders may also be diluted due to the existence of stock
        options granted to certain employees. We may grant further stock options
        to our
        Directors, executive officers and employees.
 
 At
        our
        annual general meeting held on November 3, 2004, shareholders authorized
        our
        Directors, pursuant to Section 80 of the U.K. Companies Act 1985, to allot
        relevant securities (including ordinary shares, other equity securities and
        the
        right to subscribe for or convert securities) for further issuance for a
        period
        expiring November 1, 2009. At the same time, our Directors were empowered,
        pursuant to Section 95 of the U.K. Companies Act 1985, to allot equity
        securities for cash without first being required to offer them to existing
        shareholders. Shareholders will be asked at our annual general meeting to
        be
        held on October 31, 2005 to renew these authorities until November
        1, 2010
        without further shareholder consent.
 
 We
        may
        issue equity securities in connection with possible future business
        acquisitions.
 
 **ITEM
                  2.**
              **PROPERTIES**
  We
        operate from a number of facilities, principally located in the United Kingdom,
        Israel, France and the United States. All of our facilities are leased. Our
        main
        facilities are as follows:
 
 ·
              Staines,
                  England ─ Executive and administrative offices and research and
                  development center, primarily for set-top box
                  software;
 
 ·
              Maidenhead,
                  England ─ Smart card processing and
                  distribution;
 
 ·
              Chandlers’
                  Ford, England ─ Software development and system
                  integration;
 
 ·
              Chiswick,
                  England ─ Development of betting
                  applications;
 
 ·
              Jerusalem,
                  Israel ─ Research and development, conditional access system
                  support;
 
 ·
              Newport
                  Beach, CA ─ Executive offices for our U.S.
                  operations;
 
 ·
              Lake
                  Forest, CA ─ Smart card processing and
                  distribution;
 
 ·
              Issy-les-Moulineaux,
                  France ─ Software development.
 
 In
        addition, we have leased premises in Hong Kong; Copenhagen, Denmark; Beijing,
        China; Bangalore, India; Seoul, South Korea; and Sydney, Australia.
 
 Page
            13
 In
        November 2004 we occupied a new building in Jerusalem, Israel and vacated
        a
        number of premises in the same area. We expect to occupy further space in
        the
        same development during fiscal 2006 and have budgeted approximately $0.7
        million
        to fit out the additional space.
 
 In
        May
        2005, we entered into a new lease for a building in Banaglore, India which
        gives
        us the space required to accommodate our increased number of employees in
        that
        city. We expect the costs of fitting out these premises to be approximately
        $2.2
        million. We expect to relocate from our existing premises in Banaglore, India
        in
        September 2005, when the current lease expires.
 
 In
        July
        2005, we commenced work on fitting out new premises in Orange County,
        California. We expect to occupy these premises in October 2005, at which
        point
        we will vacate our existing premises at Newport Beach and Lake Forest. We
        expect
        the costs of fit-out to be approximately $2.1 million. We expect to incur
        a
        charge of approximately $1 million during fiscal 2006 in respect of lease
        costs
        for the period from the cease-use date until termination of the current
        leases.
 
 In
        September 2000, we vacated premises near Heathrow, England. In order to
        accommodate our increased employee numbers, we have commenced work on
        refurbishing part of the building and expect to re-occupy the premises during
        the second quarter of fiscal 2006. We expect the costs of refurbishment to
        be
        approximately $2.2 million. We continue to be responsible for lease costs
        on
        part of the building but intend to exercise a put option to revert that lease
        to
        a former tenant during fiscal 2006. Further details about the lease costs
        of the
        Heathrow premises are provided in Note 10 to our audited consolidated financial
        statements.
 
 We
        are
        currently considering leasing additional space near to our existing premises
        in
        Chandlers’ Ford, England to accommodate increased headcount and have budgeted
        approximately $1.4 million for fit out costs to be incurred during fiscal
        2006.
 
 **ITEM
                  3.**
              **LEGAL
                  PROCEEDINGS**
  On
        June
        6, 2003, Echostar Communications Corporation, Echostar Satellite Corporation,
        Echostar Technologies Corporation and Nagrastar L.L.C. (collectively,
“Echostar”) filed an action against us in the United States District Court for
        the Central District of California. Echostar filed an amended complaint on
        October 8, 2003, which purported to allege claims for violation of the Digital
        Millennium Copyright Act (“DMCA”), the Communications Act of 1934 (“CA”), the
        Electronic Communications Privacy Act, The Computer Fraud and Abuse Act,
        California’s Unfair Competition statute and the federal RICO statute. The
        complaint also purported to allege claims for civil conspiracy, misappropriation
        of trade secrets and interference with prospective business advantage. The
        complaint sought injunctive relief, unspecified compensatory and exemplary
        damages and restitution. On December 22, 2003, all of the claims were dismissed
        by the court, except for the DMCA, CA and unfair competition claims, and
        the
        court limited these claims to acts allegedly occurring within three years
        of the
        filing of the complaint. Echostar filed a second amended complaint. We filed
        a
        motion to dismiss the second amended complaint on March 31, 2004.
        On July
        21, 2004, the court issued an order among other things directing Echostar
        to
        file a third amended complaint within ten days correcting various deficiencies
        in the second amended complaint noted by the court. Echostar filed a third
        amended complaint on August 4, 2004. On August 6, 2004, the court ruled that
        we
        were free to file a motion to dismiss the third amended complaint, which
        we did
        on September 20, 2004. The hearing occurred on January 3, 2005. On February
        28,
        2005, the court issued an order treating the motion as a motion for a more
        definite statement, granted the motion and gave Echostar until March 30,
        2005 to
        file a fourth amended compliant correcting various deficiencies in the third
        amended complaint noticed by the court. On March 30, 2005, Echostar filed
        a
        fourth amended complaint. We filed a motion to dismiss the fourth amended
        complaint which Echostar opposed. On July 27, 2005, the court granted the
        motion
        in part and denied the motion in part. We now have until September 26, 2005
        to
        answer the remaining claims in the complaint. We believe those claims are
        without merit and intend to vigorously defend against them.
 
 On
        July
        25, 2003, Sogecable, S.A. and its subsidiary Canalsatellite Digital, S.L.,
        Spanish satellite broadcasters and customers of Canal+ Technologies SA
        (together, “Sogecable”), filed an action against us in the United States
        District Court for the Central District of California. Sogecable filed an
        amended complaint on October 9, 2003, which purported to allege claims for
        violation of the DMCA and the federal RICO statute. The amended complaint
        also
        purported to allege claims for interference with contract and prospective
        business advantage. The complaint sought injunctive relief, unspecified
        compensatory and exemplary damages and restitution. On December 22, 2003,
        all of
        the claims were dismissed by the court. Sogecable filed a second amended
        complaint. We filed a motion to dismiss the second amended complaint on March
        31, 2004. On July 23, 2004, the court heard oral argument on the motion and
        advised that a formal ruling should be issued by early August. On August
        4,
        2004, the court issued an order dismissing the second amended complaint in
        its
        entirety. Sogecable had until October 4, 2004 to file a third amended
        complaint. On October 1, 2004, Sogecable notified the court that it would
        not be
        filing a third amended complaint, but would appeal the court’s entry of final
        judgment dismissing the suit to the United States Ninth Circuit Court of
        Appeals. Sogecable has filed a brief on appeal and our opposition was filed
        on
        August 22, 2005.
 
 Page
            14
  On
        April
        18, 1997, International Electronics Technology Corp. filed suit in the United
        States District Court for the Central District of California against our
        customers, DIRECTV, Inc. and Thomson Consumer Electronics, Inc., alleging
        infringement of one U.S. patent and seeking unspecified damages and injunction.
        Although we are not a party to this case, we have assumed the defense and
        agreed
        to indemnify the named defendants. The defendants have raised defenses of
        non-infringement and/or invalidity. On August 2, 2004, the court stayed the
        case
        indefinitely pending decision by the Federal Circuit in another case. The
        Federal Circuit’s decision was issued on July 12, 2005, and the court held a
        status conference on August 8, 2005.
 
 **ITEM
                  4.**
              **SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS**
  No
        matters were submitted to a vote of shareholders during the fourth fiscal
        quarter of 2005.
 
  Page
            15
  **PART
        II**
  **ITEM
                  5.**
              **MARKET
                  FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
                  PURCHASES OF EQUITY
                  SECURITIES.**
  **Market
        Information**
  American
        Depositary Shares (“ADSs”), each representing one of our Series A ordinary
        shares, par value $0.01 per share, are traded on the NASDAQ National Market.
        The
        ADSs are evidenced by American Depositary Receipts (“ADRs”) issued by The Bank
        of New York as depositary under a Deposit Agreement, dated November 26, 1999,
        by
        and among the Company, The Bank of New York and the owners and beneficial
        owners
        of ADRs.
 
 The
        high
        and low closing prices for our ADSs for each quarterly period within the
        two
        most recent fiscal years are as follows:


**High
                  Price**
              
              **Low
                  Price****per
                  ADS**
              
              **per
                  ADS****Fiscal
                  2004**First
                  quarter
              
              $
              18.31
              
              $
              13.75Second
                  quarter
              
              $
              23.19
              
              $
              17.12Third
                  quarter
              
              $
              32.02
              
              $
              22.05Fourth
                  quarter
              
              $
              27.61
              
              $
              23.10**Fiscal
                  2005**First
                  quarter
              
              $
              27.68
              
              $
              19.95Second
                  quarter
              
              $
              35.18
              
              $
              24.23Third
                  quarter
              
              $
              39.20
              
              $
              30.84Fourth
                  quarter
              
              $
              35.18
              
              $
              29.54


Since
        November 13, 2003, our ADSs have also been listed on the First Market -
        Continuous of the Euronext Brussels exchange in Belgium. Prior to November
        28,
        2003, our ADSs were listed on NASDAQ Europe in Belgium. The volume of ADSs
        traded on Euronext (and previously, on NASDAQ Europe) has been
        negligible.
 
 As
        of
        September 1, 2005, there were 41 holders of record of our ADSs.
 
 **Dividends**
  It
        has
        been our policy to retain profits for the future development of the business
        and
        accordingly no dividends have been paid since our initial public offering
        in
        November 1999, and none is proposed. We intend to keep this policy under
        review
        and will consider whether it is appropriate to pay dividends in the
        future.
 
 **Securities
        authorized for issuance under equity compensation plans**
  Information
        regarding the Company’s equity compensation plans is incorporated by reference
        from Item 12 in Part III of this Annual Report on Form 10-K.
 
 **Purchase
        of equity securities by the issuer and affiliated
        purchaser**
  Neither
        we, nor any purchaser affiliated with us, purchased any of our ADSs during
        the
        fourth quarter of the fiscal year ended June 30, 2005.
 
 Page
            16
 **ITEM
                  6.**
              **SELECTED
                  FINANCIAL DATA**
  These
        selected consolidated financial data have been derived from our audited
        consolidated financial statements and should be read in conjunction with
        Item 7:
“Management’s Discussion and Analysis of Financial Condition and Results of
        Operations” and Item 8: “Financial Statements and Supplementary Data” and the
        other financial information included elsewhere in this Annual
        Report.
 
 **Statement
        of operations data**


**For
                  the years ended June 30,**(in
                  thousands, except per share amounts)
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002**
              
              **2001**Revenue
              
              $
              556,330
              
              $
              356,663
              
              $
              407,350
              
              $
              338,922
              
              $
              300,716Cost
                  of goods and services sold
              
              
              (218,938
              )
              
              (84,387
              )
              
              (171,825
              )
              
              (113,748
              )
              
              (102,918
              )Gross
                  margin
              
              
              337,392
              
              
              272,276
              
              
              235,525
              
              
              225,174
              
              
              197,798Operating
                  expenses
              
              
              (245,201
              )
              
              (223,851
              )
              
              (158,957
              )
              
              (167,204
              )
              
              (155,412
              )Operating
                  income
              
              
              92,191
              
              
              48,425
              
              
              76,568
              
              
              57,970
              
              
              42,386Other
                  income
              
              
              9,160
              
              
              6,848
              
              
              3,397
              
              
              3,660
              
              
              3,061Income
                  tax expense
              
              
              (27,353
              )
              
              (19,061
              )
              
              (23,884
              )
              
              (20,262
              )
              
              (18,322
              )Minority
                  interests in subsidiaries, net of tax
              
              
              ─
              
              
              843
              
              
              162
              
              
              ─
              
              
              ─Net
                  income
              
              $
              73,998
              
              $
              37,055
              
              $
              56,243
              
              $
              41,368
              
              $
              27,125Basic
                  net income per share
              
              $
              1.35
              
              $
              0.69
              
              $
              1.04
              
              $
              0.78
              
              $
              0.51Diluted
                  net income per share
              
              $
              1.29
              
              $
              0.67
              
              $
              1.04
              
              $
              0.76
              
              $
              0.49


(1)
              The
                  results of the MediaHighway business have been consolidated from
                  the date
                  of acquisition on December 16,
                  2003.
 (2)
              The
                  results of the Visionik business have been consolidated from the
                  date of
                  acquisition on May 31, 2002.
 (3)
              Operating
                  expenses for the year ended June 30, 2004 include a goodwill impairment
                  charge of $11.4 million.
 (4)
              Operating
                  expenses for the years ended June 30, 2002 and 2001 include amortization
                  of goodwill of $5.8 million and $4.3 million, respectively, prior
                  to the
                  adoption by the Company on July 1, 2002 of Statement of Financial
                  Accounting Standard No. 142, “Goodwill and Other Intangible
                  Assets.”
 
 **Balance
        sheet data**


**As
                  of June 30,**(in
                  thousands)
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002**
              
              **2001**Cash
              
              $
              339,791
              
              $
              228,620
              
              $
              202,185
              
              $
              150,846
              
              $
              92,158Other
                  current assets
              
              
              159,877
              
              
              164,791
              
              
              72,538
              
              
              129,495
              
              
              102,547Non-current
                  assets
              
              
              172,230
              
              
              183,748
              
              
              112,796
              
              
              113,596
              
              
              101,760Total
                  assets
              
              $
              671,898
              
              $
              577,159
              
              $
              387,519
              
              $
              393,937
              
              $
              296,465Current
                  loans
              
              $
              ─
              
              $
              ─
              
              $
              ─
              
              $
              ─
              
              $
              20,315Other
                  current liabilities
              
              
              129,245
              
              
              176,138
              
              
              96,452
              
              
              145,315
              
              
              104,711Non-current
                  loans
              
              
              ─
              
              
              ─
              
              
              609
              
              
              ─
              
              
              ─Other
                  non-current liabilities
              
              
              115,900
              
              
              67,677
              
              
              26,030
              
              
              55,937
              
              
              36,046Minority
                  interests
              
              
              ─
              
              
              ─
              
              
              97
              
              
              ─
              
              
              ─Shareholders’
                  equity
              
              
              426,753
              
              
              333,344
              
              
              264,331
              
              
              192,685
              
              
              135,393Total
                  liabilities and shareholders’ equity
              
              $
              671,898
              
              $
              577,159
              
              $
              387,519
              
              $
              393,937
              
              $
              296,465




Page
          17


**ITEM
                  7.**
              **MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                  OPERATIONS**
  ***This
        document contains statements that constitute “forward-looking statements” within
        the meaning of Section 21E of the Exchange Act, and Section 27A of the
        Securities Act of 1933, as amended. The words “expect,”“estimate,”“anticipate,”“predict,”“believe” and similar expressions and variations
        thereof are intended to identify forward-looking statements. These statements
        appear in a number of places in this document and include statements regarding
        the intent, belief or current expectations of the Company, its Directors
        or its
        Executive Officers with respect to, among other things, trends affecting
        the
        Company’s financial condition or results of operations. Readers of this document
        are cautioned that any such forward-looking statements are not guarantees
        of
        future performance and involve risks and uncertainties. Those risks and
        uncertainties are discussed under the heading “Risk Factors” in Item 1 of this
        Annual Report on Form 10-K, as well as the information set forth below. The
        Company does not ordinarily make projections of its future operating results
        and
        undertakes no obligation to publicly update or revise any forward-looking
        statements, whether as a result of new information, future events or otherwise,
        except as required by law.***
 
 **Fiscal-year
        highlights**
  Our
        fiscal 2005 revenue was $556.3 million, a 56% increase over fiscal 2004 revenue.
        Revenue growth was driven by the large numbers of smart cards shipped to
        our
        customers, the growth in the number of our customers’ subscribers using our
        conditional access technology and increasing numbers of set-top boxes containing
        our middleware and program guides.
 
 Our
        fiscal 2005 consolidated operating income was $92.2 million, a 90% increase
        over
        fiscal 2004 consolidated operating income. Net income for fiscal 2005 was
        $74.0
        million, almost double the $37.1 million fiscal 2004 net income. This was
        due to
        the growth in the business, increased employee numbers and the full-year
        impact
        of the MediaHighway acquisition. Additionally, general and administrative
        costs
        include the effect of a release of an accrual for property costs of
        approximately $5.5 million in fiscal 2005 that substantially reversed an
        equivalent charge in fiscal 2004. Fiscal 2004 net income was adversely affected
        by a goodwill impairment charge of $11.4 million.
 
 **Significant
        developments**
  Effective
        November 12, 2004, News Corporation changed its corporate domicile from
        Australia to the United States and as a result, we no longer qualify as a
        foreign private issuer under U.S. securities laws. We have also changed our
        reporting currency from pounds sterling to U.S. dollars. Accordingly, the
        financial information presented in the Annual Report on Form 10-K is stated
        in
        U.S. dollars, and has been prepared in accordance with US GAAP. Prior to
        November 12, 2004, we published financial information in accordance with
        United
        Kingdom generally accepted accounting practice in pounds sterling.
 
 **Introduction**
  Management’s
        discussion and analysis of financial condition and results of operations
        (“MD&A”) is intended to help provide an understanding of our financial
        condition, changes in financial condition and results of operations. MD&A is
        organized as follows:
 
 ·
              ***Overview
                  of our Business -***This section provides a general description of our businesses,
                  as well as
                  recent developments that have occurred either during fiscal 2005
                  or early
                  in fiscal 2006 that we believe are important in understanding the
                  results
                  of operations and financial condition or to disclose known future
                  trends.
 
 ·
              ***Results
                  of Operations -***This section provides an analysis of our results of operations
                  for the
                  three fiscal years ended June 30, 2005. In addition, a brief
                  description is provided of significant transactions and events
                  that impact
                  the comparability of the results being
                  analyzed.
 
 ·
              ***Liquidity
                  and Capital Resources -***This section provides an analysis of our cash flows for the two
                  fiscal
                  years ended June 30, 2005. It includes a discussion of the
                  financial
                  capacity available to fund our future commitments and obligations,
                  as well
                  as a discussion of other financing
                  arrangements.
 
 ·
              ***Critical
                  Accounting Policies***-
                  This section discusses accounting policies that we consider important
                  to
                  our financial condition and results of operations, and which require
                  significant judgment and estimates on the part of management in
                  their
                  application. In addition, Note 3 to the accompanying audited consolidated
                  financial statements summarizes our significant accounting
                  policies.
 
 Page
            18
 
 **Overview
        of our Business**
  We
        supply
        open end-to-end digital technology and services to digital pay-television
        platform operators and content providers. Our technologies include conditional
        access and microprocessor security, broadcast stream management, set-top
        box
        middleware, EPGs, PVR technologies and interactive applications. Our software
        systems, consultancy and systems integration services are focused on providing
        platform operators and content providers with technology to help them profit
        from the secure distribution of digital information and entertainment to
        consumer devices which incorporate various technologies supplied by
        us.
 
 Our
        customers consist of a limited number of large digital pay-television platform
        operators who are introducing, marketing and promoting products and services
        that utilize our technology. We currently derive, and we expect to continue
        to
        derive, a significant portion of our revenues from a limited number of large
        customers. Our three largest customers are DIRECTV in the United States,
        BSkyB
        in the United Kingdom and Sky Italia in Italy. Together, these three customers
        contributed, directly and indirectly, 62% of our fiscal 2005 revenues. We
        expect
        that a limited number of customers will continue to contribute a significant
        portion of our revenues. If a large customer purchases significantly less
        of our
        products or services, defers or cancels orders, or terminates its relationship
        with us, our revenues could decline significantly and as a result, our business,
        operating results and financial condition could be materially adversely
        affected.
 
 We
        compete primarily with technologies such as NagraVision (developed by Kudelski
        SA), DigiCypher (developed by Motorola, Inc.), Power Key (developed by
        Scientific-Atlanta, Inc.), and OpenTV (developed by OpenTV Corp.) both to
        attract new customers and to retain our existing customers. In addition,
        some of
        the companies that currently operate in the software business, but which
        have
        not historically been active competitors of ours may, in the future, through
        acquisitions or the development of their own resources, seek to enter and
        obtain
        significant market share in our current or planned business areas.
 
 Inflation
        has not had a significant impact on our results of operations. The business
        in
        which we operate is subject to strong competition in which price is one factor.
        Additionally, our customers expect our prices to reflect the volume of business
        and as that volume grows we may be required to reduce our prices.
 
 A
        significant portion of our revenues is dependent upon our customers’ subscriber
        base and the growth in their subscribers. If our customers’ subscriber numbers
        decline or do not continue to increase, we are unlikely to be able to generate
        substantial revenue growth or sustain our current revenue levels and as a
        consequence our business, operating results and financial condition could
        be
        materially adversely affected.
 
 Unauthorized
        viewing and use of content may be accomplished by counterfeiting our technology
        or otherwise circumventing its security features. Any significant increase
        in
        the incidence of signal theft could require the replacement of a platform
        operator’s smart cards sooner than otherwise planned. In those cases where we
        have accepted specific responsibilities for maintaining the security of a
        platform operator’s conditional access system, significant costs could be
        imposed on us if a security breach requires an accelerated replacement of
        smart
        cards.
 
 Revenues
        can vary from period to period as our revenues reflect a small number of
        relatively large orders for our technology and services. These generally
        have
        long sales and order cycles, and delivery and acceptance of our products
        and
        services fluctuate over the course of these cycles.
 
 We
        consider that we operate as a single segment and our business is managed
        as
        such. There are no separate divisions or profit centers. We assess the financial
        performance of our business by reviewing specific revenue streams and cost
        categories as described below.
 
 **Conditional
        access revenues**
  Conditional
        access revenues consist of sales of smart cards and the receipt of security
        fees. Conditional access revenues from a particular platform operator are
        generally related to the number of subscribers to that platform and / or
        the
        quantity of smart cards authorized to decrypt content broadcast by that
        platform. Contracts with customers typically provide for the long-term supply
        of
        smart cards and the provision of conditional access services to preserve
        the
        security of the platform. From time to time we replace a population of smart
        cards for a particular broadcast platform. Where we have obligations to supply
        smart cards in the future as part of our support and maintenance obligations
        (“card changeover”), we are required to make estimates about the timing of
        supply of such changeover cards and to defer an appropriate amount of revenue
        from the security fees received from our platform operator customers and
        recognize an appropriate amount of revenue when such cards are supplied.
        These
        estimates include assessments of the likely timing of the card changeover,
        the
        quantity of smart cards to be supplied, the cost and fair value of those
        smart
        cards and the future receipt of security fees. The judgments made in determining
        the value of our liabilities to customers can significantly impact our reported
        operating income. The effect of changes in such estimates is recorded
        prospectively. The timing of card changeovers affects revenues from period
        to
        period as it significantly affects the volume of cards supplied in any period.
        We supplied approximately 1 million changeover cards in fiscal 2005. There
        were
        no card changeovers in fiscal 2004.
 
 Page
            19
 **Integration,
        development and support revenues**
  Integration,
        development and support revenues consist of activities such as software
        development and adaptation, design, implementation and project management
        for
        broadcast systems, and ongoing support and maintenance of software and broadcast
        systems. Integration, development and support fees depend on the amount of
        time
        required to manage the integration, customize or develop the software and
        also
        on the level of support and assistance required by the customer. These fees
        are
        generally recognized over the contract period and the contracts may contain
        customer acceptance and other terms which may affect the timing of revenue
        recognition.
 
 **License
        fees and royalty revenues**
  We
        derive
        license fees and royalties from licensing technology to broadcasters and
        platform operators for use in their head-end and manufacturers for use in
        set-top boxes. License fees and royalties are charged for different elements
        of
        our software, such as our VideoGuard conditional access, EPG and middleware
        (including, from December 2003, the MediaHighway middleware elements). License
        revenues are dependent upon our ability to obtain new customers and upon
        the
        ongoing needs of existing customers to expand their services or upgrade their
        systems to more sophisticated technology. Royalties are generally a function
        of
        the quantity of set-top boxes manufactured, which in turn is dependent upon
        the
        ability of the platform operator or service provider to generate new
        subscribers.
 
 **New
        technologies revenues**
  We
        have
        developed, and are marketing, new technologies which offer the platform operator
        or content provider the opportunity to increase the revenue per subscriber
        through enhancing the viewing experience and delivering more than just video.
        Examples include games and gaming, interactive applications, PVR technologies,
        OpenBet, and Synamedia (technology to manage and control the secure distribution
        of digital content via broadband networks). Revenues under this category
        are in
        the form of development fees, license fees or royalties per subscriber or
        user.
        These are typically earned on the successful deployment and acceptance of
        technology by end users or on the manufacture or deployment of the set-top
        box
        or device containing the technology. In some instances, an ongoing fee is
        payable for support and maintenance which is dependent upon the number of
        subscribers having access to, or making use of, the enhanced functionality.
        We
        have entered into several revenue-share arrangements whereby we receive a
        share
        of the incremental revenues earned by the operator from an application supplied
        by us.
 
 The
        new
        technologies revenue stream depends upon us developing and selling applications
        for use by platform operators and content providers, and the take-up by
        subscribers of new services, applications and functions offered by the service
        provider.
 
 **Costs
        and expenses**
  Our
        costs
        and expenses consist of the physical and processing costs of smart cards,
        personnel, travel and facilities’ costs, royalties paid for the right to use and
        sub-license certain intellectual property rights owned by third parties and
        the
        amortization of intangible assets which we acquired for incorporation within
        our
        technologies.
 
 The
        physical costs of smart cards include the costs of the integrated circuits
        manufactured by third party suppliers, the micro-module which houses the
        computer chips and the plastic body of the smart cards. We do not manufacture
        smart cards, but our engineers design the embedded computer chips. We arrange
        for the chips to be manufactured and assembled by third party suppliers.
        We then
        program the smart cards with our proprietary software. Smart card costs are
        dependent upon the costs of raw materials, including the cost of computer
        chips,
        plastic and assembly, and the quantity of smart cards purchased and processed
        in
        any period.
 
 Personnel
        and facilities’ costs are allocated to four categories: operations, sales and
        marketing, research and development, and general and
        administration.
 
 Operations
        costs include the costs of personnel and related costs associated with customer
        support and integration activities and the costs of operating our two smart
        card
        processing plants, including the depreciation of our smart card processing
        equipment.
 
 Sales
        and
        marketing costs mainly consist of personnel and related costs of our sales
        and
        marketing staff in the United Kingdom, Europe and the Middle East, the United
        States and the Asia-Pacific region. Marketing costs also include advertising,
        exhibitions, marketing communications and demonstration activities.
 
 Page
            20
 Research
        and development costs consist mainly of personnel and related costs attributable
        to employees in Israel, the United Kingdom, France, Denmark, China and India
        who
        are developing our technology and adapting it for specific customer
        requirements. These costs also include consumables and the depreciation of
        equipment used in development and test activities and the benefit of grants
        which we have received from the government of the State of Israel.
 
 General
        and administration costs consist primarily of personnel, facilities,
        infrastructure, legal and administration costs.
 
 **Results
        of Operations ─ Fiscal 2005 versus Fiscal 2004**
  The
        results of fiscal 2005 in comparison with fiscal 2004 are significantly affected
        by business conducted with DIRECTV. Until August 13, 2003, we provided
        conditional access services, including the supply of smart cards to DIRECTV
        in
        the United States. The contract came to an end on August 13, 2003 and
        subsequently we received payments under post-termination support arrangements.
        Additionally, we realized revenue in fiscal 2004 from DIRECTV for the use
        of NDS
        technology contained within smart cards which DIRECTV had procured from a
        third
        party. In March 2004, we signed a new six-year contract to supply DIRECTV
        with
        conditional access services, which was effective from March 1, 2004. Under
        the
        new contract, we receive monthly fees for the provision of conditional access
        services, which includes NDS taking on the obligation to provide periodic
        replacement smart cards in the future as an integral part of our security
        maintenance activities. In June 2004, we also re-commenced the supply of
        new
        smart cards to DIRECTV.
 
 Comparisons
        are also affected by the full-year impact of the MediaHighway
        acquisition.
 
 **Revenue**
  Revenue
        for the periods under review was as follows:


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2005**
              
              **2004**
              
              **Change**
              
              **%
                  Change**Conditional
                  access
              
              $
              339,414
              
              $
              178,286
              
              $
              161,128
              
              
              90
              %Integration,
                  development & support
              
              
              52,636
              
              
              55,601
              
              
              (2,965
              )
              
              (5
              %)License
                  fees & royalties
              
              
              71,443
              
              
              51,673
              
              
              19,770
              
              
              38
              %New
                  technologies
              
              
              85,945
              
              
              64,942
              
              
              21,003
              
              
              32
              %Other
              
              
              6,892
              
              
              6,161
              
              
              731
              
              
              12
              %Total
                  revenue
              
              $
              556,330
              
              $
              356,663
              
              $
              199,667
              
              
              56
              %


The
        increase in conditional access revenues is due to a combination of an increase
        in the number of smart cards supplied and growth in the number of authorized
        smart cards in use.
 
 During
        fiscal 2005, we supplied 30.8 million smart cards compared to 8.0 million
        smart
        cards in fiscal 2004. The increase in smart card sales in fiscal 2005 compared
        to fiscal 2004 was principally due to demand from DIRECTV, to whom we sold
        virtually no smart cards in fiscal 2004. The increase was also due to higher
        volumes purchased by Sky Italia, which completed the migration of all their
        subscribers to NDS technology during fiscal 2005, and higher demand from
        our
        Latin America customers. Additionally, one of our customers undertook the
        changeover of approximately 1 million smart cards during fiscal 2005. There
        were
        no smart card changeovers in fiscal 2004.
 
 The
        number of authorized cards in use by our broadcast platform customers has
        grown
        from 44.0 million at June 2004 to 56.7 million at June 2005, an increase
        of
        29%. The growth in authorized cards in use reflects the higher demand for
        smart
        cards noted above. The volume of cards supplied exceeded the increase in
        authorized smart cards in use due to a mixture of churn (the replacement
        of a
        terminated subscriber by a new subscriber, resulting in no net increase in
        the
        total subscriber base) and by the build-up of inventory by platform operators.
        Fiscal 2004 included only four months of conditional access service fee income
        from DIRECTV, because the new contract became effective from March 1, 2004.
        Fiscal 2004 included conditional access revenues from a third party that
        used
        NDS technology within their smart cards, with no comparable amounts in the
        current fiscal year.
 
 Revenues
        from integration, development and support have decreased by 5% in fiscal
        2005
        compared to fiscal 2004. The full-year impact of the MediaHighway acquisition
        and revenue from work related to Sky Italia’s migration of its entire platform
        to our technology were lower than revenues in the corresponding period from
        FOXTEL and from our previous contract with DIRECTV.
 
 Page
            21
 Revenues
        from license fees and royalties increased by 38% in fiscal 2005 compared
        to
        fiscal 2004. In fiscal 2005, conditional access royalties were higher from
        Sky
        Italia and from other customers which experienced subscriber growth. The
        prior
        fiscal year included conditional access royalties reflecting high volumes
        of
        set-top boxes manufactured for DIRECTV which was terminated as part of our
        new
        agreement with DIRECTV. During fiscal 2005 we also received royalties from
        the
        download of our set-top box software as part of the Sky Italia migration
        of its
        entire platform to our technology and the results also reflect the full-year
        contribution from customers acquired with the MediaHighway middleware business.
        As of June 2005, we estimate that a cumulative number of 20.4 million set-top
        boxes containing NDS middleware had been shipped, an increase of 2.0 million
        since June 2004. During fiscal 2005, we worked on the development of middleware
        for DIRECTV. The download of our middleware to DIRECTV set-top boxes started
        successfully during the latter part of the fourth quarter of fiscal 2005.
        However, our revenue recognition criteria were not met as of June 30,
        2005.
        We expect to recognize revenue from this during fiscal 2006 and
        beyond.
 
 The
        increase in revenues from new technologies is due to higher development and
        royalty income related to the deployment of our advanced PVR technologies
        by
        several of our customers. In addition, revenue from interactive infrastructure,
        gaming applications and our IPTV technologies has increased due to the higher
        number of subscribers using our technology, the implementation of our technology
        on new platforms and initial revenues from new Synamedia contracts. We have
        recognized initial revenue from the supply of various interactive infrastructure
        components to DIRECTV.
 
 The
        comparison of reported revenues has been affected by the relative weakness
        of
        the U.S. dollar against the pound sterling and its relative strength against
        the
        euro in fiscal 2005 compared to fiscal 2004. Approximately 28% of our revenues
        were denominated in pounds sterling and a further 18% were denominated in
        euros.
        We estimate that the effect of exchange rate movements increased the reported
        value of our pound sterling-denominated revenues by approximately 7.5%, whereas
        our euro-denominated revenues were adversely affected by just under 7%. We
        estimate that the overall impact was to increase reported revenues in fiscal
        2005 by approximately $4 million in comparison to fiscal 2004. The U.S. dollar
        has strengthened in the first two months of fiscal 2006. If this trend
        continues, there will be an adverse effect on our reported revenues for fiscal
        2006.
 
 **Cost
        of goods and services sold and gross margin**
  Cost
        of
        goods and services sold and gross margin for the periods under review were
        as
        follows:


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2005**
              
              **2004**
              
              **Change**
              
              **%
                  Change**Smart
                  card costs
              
              $
              131,466
              
              $
              26,708
              
              $
              104,758
              
              
              392
              %Operations
                  & support
              
              
              72,254
              
              
              47,708
              
              
              24,546
              
              
              51
              %Royalties
              
              
              13,198
              
              
              7,160
              
              
              6,038
              
              
              84
              %Other
              
              
              2,020
              
              
              2,811
              
              
              (791
              )
              
              (28
              %)Total
                  cost of goods and services sold
              
              $
              218,938
              
              $
              84,387
              
              $
              134,551
              
              
              59
              %Gross
                  margin
              
              $
              337,392
              
              $
              272,276
              
              $
              65,116
              
              
              24
              %Gross
                  margin as a percentage of revenues
              
              
              60.6
              %
              
              76.3
              %
              
              (15.7
              %)
              
              **


**:
        Not
        meaningful.


We
        consider that gross margin, defined as revenues less costs and expenses
        associated with those revenues (being those costs identified above), is an
        important measure for our management and investors. We consider that it gives
        a
        measure of profitability that distinguishes between those costs which are
        broadly a function of direct revenue-earning activities and costs which are
        of a
        general nature or which are incurred in the expectation of being able to
        earn
        future revenues.
 
 The
        increase in smart card costs in fiscal 2005 was due to the volume increases
        noted above. Also, the unit cost of smart cards sold to DIRECTV was higher
        than
        those supplied to other customers due to specifications required by DIRECTV.
        Operations and support costs increased in fiscal 2005 due to the greater
        number
        of employees working on customer delivery and support activities and on smart
        card processing. Royalty costs are a function of particular revenue items
        and
        the increase in royalty expense was due to higher revenues and changes in
        the
        mix of revenues.
 
 Page
            22
 These
        factors have resulted in a decline in gross margins as a percentage of revenues
        in fiscal 2005 compared to fiscal 2004. Additionally, fiscal 2004 included
        conditional access revenues received from a third party that used NDS technology
        contained within its smart cards and set-top box royalties from DIRECTV,
        with no
        comparable amounts in fiscal 2005. No costs (apart from royalty expenses)
        were
        incurred in relation to these revenue items and hence gross margin as a
        percentage of revenues in fiscal 2004 was unusually high.
 
 **Operating
        expenses**
  Operating
        expenses for the periods under review may be analyzed as
        follows:


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2005**
              
              **2004**
              
              **Change**
              
              **%
                  Change**Sales
                  & marketing
              
              $
              25,820
              
              $
              25,145
              
              $
              675
              
              
              3
              %Research
                  & development
              
              
              166,504
              
              
              146,190
              
              
              20,314
              
              
              14
              %General
                  & administration
              
              
              43,352
              
              
              34,140
              
              
              9,212
              
              
              27
              %Amortization
                  of intangibles
              
              
              12,349
              
              
              8,177
              
              
              4,172
              
              
              51
              %Impairment
                  charge
              
              
              ─
              
              
              11,391
              
              
              (11,391
              )
              
              **Foreign
                  exchange (gains) losses
              
              
              (2,824
              )
              
              (1,192
              )
              
              (1,632
              )
              
              **Total
                  operating expenses
              
              $
              245,201
              
              $
              223,851
              
              $
              21,350
              
              
              10
              %


**:
        Not
        meaningful.
 
 Our
        main
        operating costs are employee costs, facilities costs, depreciation and travel
        costs. We had approximately 2,508 employees (including contractors) at June
        2005
        as compared to 2,004 at June 2004. Towards the end of calendar 2003, we
        commenced a program of hiring additional staff to increase our capabilities
        in
        set-top box middleware, to provide our customers with sufficient resources
        to
        develop new technologies and to improve our customer delivery and support.
        In
        December 2003, we added approximately 300 employees as part of the MediaHighway
        acquisition and we have continued to recruit across all areas of our
        business.
 
 Our
        research and development costs rose by 14% in fiscal 2005 primarily due to
        additional headcount. We expanded our research and development facilities
        in
        Israel, the United Kingdom, India and Korea. In November 2004, we occupied
        new
        premises in Jerusalem, Israel which increased research and development expenses.
        The costs of this relocation were approximately $1.2 million. The full year
        effect of the MediaHighway acquisition also contributed to the increase in
        costs. This increase has been partially offset as we have transferred some
        experienced staff from research and development to groups working on customer
        delivery, support and smart card processing. These transfers are the primary
        reason for the increase in the operations and support cost line as noted
        above.
 
 Sales
        and
        marketing costs have increased by 3% in fiscal 2005 due to attendance at
        an
        additional major trade show.
 
 General
        and administration costs increased by 27% in fiscal 2005. The increase was
        due
        primarily to higher employee bonuses, stock option charges, increased
        professional fees and the full year effect of the MediaHighway acquisition.
        In
        order to accommodate headcount growth, during fiscal 2005, management committed
        to reoccupy a building that we had previously abandoned. As a result of
        management’s commitment to re-occupy these premises, we reversed a charge of
        approximately $5.5 million. A charge in respect of this item of
        approximately $5.8 million had been accrued in fiscal 2004.
 
 Operating
        costs are mainly denominated in the currency of the economic environment
        in
        which they are incurred and as such we incur operating costs in a variety
        of
        currencies. Additionally, a substantial proportion of our smart card costs
        are
        currently denominated in euros. During fiscal 2005 there have been marked
        fluctuations in foreign exchange rates. We estimate that the weaker U.S.
        dollar
        has increased our total operating costs by approximately $1.4 million in
        comparison to fiscal 2004. The U.S. dollar has strengthened in the first
        two
        months of fiscal 2006. If this trend continues, there will be a favorable
        effect
        on our reported operating expenses for fiscal 2006.
 
 The
        increase in amortization expense for fiscal 2005 compared to fiscal 2004
        is due
        to the amortization of the fair value of intellectual property rights acquired
        as part of the MediaHighway acquisition. During fiscal 2004, we recorded
        an
        impairment charge of $11.4 million, being the cost of goodwill acquired as
        part
        of the MediaHighway acquisition.
 
 Page
            23
 
 **Operating
        income and other items**
  As
        a
        result of the factors outlined above, operating income was $92.2 million
        for
        fiscal 2005 compared to $48.4 million for fiscal 2004.
 
 **Interest**
  Interest
        income earned on cash deposits was $9.7 million for fiscal 2005 and $7.3
        million
        for fiscal 2004. The increase was due to higher average cash balances and
        slightly higher interest rates.
 
 **Tax**
  Our
        effective tax rate for fiscal 2005 was 27.0%, compared to 34.5% in fiscal
        2004.
        This was primarily due to the disallowance in fiscal 2004 of the goodwill
        impairment charge, which increased the effective tax rate by 6.1%. Other
        decreases were due to lower effective tax rates in our non-U.K. operations,
        and
        higher effective tax relief on stock option expenses.
 
 **Net
        income**
  As
        a
        consequence of all these factors, net income for fiscal 2005 was $74.0 million,
        or $1.35 per share ($1.29 on a diluted basis), compared to $37.1 million,
        or
        $0.69 per share ($0.67 on a diluted basis), for fiscal 2004.
 
 **Results
        of Operations ─ Fiscal 2004 versus Fiscal 2003**
  The
        results of fiscal 2004 and the comparison with fiscal 2003 are significantly
        affected by business conducted with DIRECTV. Until August 13, 2003, we provided
        conditional access services, including the supply of smart cards to DIRECTV
        in
        the United States. The contract came to an end on August 13, 2003 and
        subsequently we received payments under post-termination support arrangements.
        Additionally, we received payments from DIRECTV for the use of NDS technology
        contained within smart cards which DIRECTV had procured from a third party.
        In
        March 2004, we signed a new six-year contract to supply conditional access
        services to DIRECTV, which was effective from March 1, 2004. Under the new
        contract, we receive monthly fees for the provision of conditional access
        services, which includes NDS taking on the obligation to provide periodic
        replacement smart cards in the future as an integral part of the security
        maintenance activities. In June 2004, we also took on the supply of new smart
        cards.
 
 Comparisons
        are also affected by the results of the MediaHighway business which we acquired
        in December, 2003.
 
 **Revenue**
  Revenue
        for the periods under review was as follows:


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2004**
              
              **2003**
              
              **Change**
              
              **%
                  Change**Conditional
                  access
              
              $
              178,286
              
              $
              260,709
              
              $
              (82,423
              )
              
              (32
              %)Integration,
                  development & support
              
              
              55,601
              
              
              52,716
              
              
              2,885
              
              
              5
              %License
                  fees & royalties
              
              
              51,673
              
              
              35,299
              
              
              16,374
              
              
              46
              %New
                  technologies
              
              
              64,942
              
              
              51,474
              
              
              13,468
              
              
              26
              %Other
              
              
              6,161
              
              
              7,152
              
              
              (991
              )
              
              (14
              %)Total
                  revenue
              
              $
              356,663
              
              $
              407,350
              
              $
              (50,687
              )
              
              (12
              %)


The
        decline in conditional access revenues in fiscal 2004 was due to the business
        conducted with DIRECTV. In fiscal 2003, we shipped substantial volumes of
        smart
        cards to DIRECTV for their card changeover. These shipments ceased in May
        2003
        and resumed, following completion of transitional arrangements in the new
        contract, in June 2004. Conditional access services income from DIRECTV,
        based
        on the number of authorized smart cards and subscribers, ceased on expiration
        of
        the previous contract in August 2003 and resumed, at a higher level, in March
        2004 upon the execution of the new contract. We shipped a total of 8.0 million
        smart cards during fiscal 2004 across all our customers, compared to 19.3
        million in fiscal 2003. Subscriber growth occurred across most platforms.
        As of
        June 2004, 44.0 million authorized smart cards containing NDS technology
        were in
        use, a rise of 9.6 million or 28% over fiscal 2003. In addition to growth
        at
        DIRECTV, there were also substantial shipments of smart cards to, and growth
        in
        subscribers at, Sky Italia (which commenced the process of switching all
        its
        subscribers to our technology), Viasat in Scandinavia, where our conditional
        access replaced an incumbent supplier) and FOXTEL in Australia (which launched
        a
        full digital service in March 2004).
 
 Page
            24
 Integration,
        development and support revenues rose by 5% from fiscal 2003 to fiscal 2004.
        Major project deliveries in fiscal 2004 included FOXTEL, Sky Italia, Viasat,
        and
        Galaxy in Hong Kong. Additional system enhancements were provided to BSkyB
        in
        the United Kingdom, Cablevision in the United States, Sky Life in Korea and
        our
        customers in Latin America and Israel.
 
 License
        fee and royalty income increased by 46%. There has been a decline in license
        fee
        income (i.e., fees paid on delivery of a system), reflecting an evolution
        in our
        business model whereby a greater proportion of our revenues has become dependent
        on subscriber growth, and the nature of systems delivered in fiscal 2004.
        Royalty income (i.e. fees paid on deployment of set-top boxes) increased
        due to
        higher production volumes of set-top boxes reported by manufacturers across
        many
        platforms, reflecting the growth in subscribers. This revenue stream includes,
        from December 2003, royalties from set-top box manufacturers in respect of
        MediaHighway middleware, arising principally from the Canal+ platform
        family.
 
 Revenues
        from new technologies increased by 26% in fiscal 2004. The increase reflects
        an
        increase in the number of deployed set-top boxes that include our MediaHighway
        advanced middleware and our PVR technology.
 
 **Cost
        of goods and services sold and gross margin**
  Cost
        of
        goods and services sold and gross margin for the periods under review were
        as
        follows:
 **For
                    the years ended June 30,**(in
                    thousands)
                
                **2004**
                
                **2003**
                
                **Change**
                
                **%
                    Change**Smart
                    card costs
                
                $
                26,708
                
                $
                122,596
                
                $
                (95,888
                )
                
                (78
                %)Operations
                    & support
                
                
                47,708
                
                
                33,526
                
                
                14,182
                
                
                42
                %Royalties
                
                
                7,160
                
                
                7,144
                
                
                16
                
                
                ─Other
                
                
                2,811
                
                
                8,559
                
                
                (5,748
                )
                
                (67
                %)Total
                    cost of goods and services sold
                
                $
                84,387
                
                $
                171,825
                
                $
                (87,438
                )
                
                (51
                %)Gross
                    margin
                
                $
                272,276
                
                $
                235,525
                
                $
                36,751
                
                
                (16
                %)Gross
                    margin as a percentage of revenues
                
                
                76.3
                %
                
                57.8
                %
                
                18.5
                %
                
                **
  **:
          Not
          meaningful.
 
 As
          with
          revenues, comparative margins are materially affected by the DIRECTV contracts.
          In fiscal 2003, smart card sales to DIRECTV were very high and at a discounted
          price reflecting the size of the order which lowered the margin during
          fiscal
          2003 as a whole. Margins in fiscal 2004 were boosted by compensatory conditional
          access payments from DIRECTV which had no associated material cost of sales.
          Fiscal 2003 was also adversely affected by a bad debt expense, part of
          which was
          reversed in fiscal 2004 on the partial payment of debts previously written
          off,
          due to two customers emerging from bankruptcy protection.
  Page
              25
  **Operating
          expenses**
  Operating
          expenses for the periods under review may be analyzed as
          follows:
  **For
                    the years ended June 30,**(in
                    thousands)
                
                **2004**
                
                **2003**
                
                **Change**
                
                **%
                    change**Sales
                    & marketing
                
                $
                25,145
                
                $
                22,537
                
                
                2,608
                
                
                12
                %Research
                    & development
                
                
                146,190
                
                
                99,764
                
                
                46,426
                
                
                46
                %General
                    & administration
                
                
                34,140
                
                
                34,913
                
                
                (773
                )
                
                (2
                %)Amortization
                    of intangibles
                
                
                8,177
                
                
                3,000
                
                
                5,177
                
                
                **Impairment
                    charge
                
                
                11,391
                
                
                ─
                
                
                11,391
                
                
                **Foreign
                    exchange gains
                
                
                (1,192
                )
                
                (1,257
                )
                
                65
                
                
                **Total
                    operating expenses
                
                $
                223,851
                
                $
                158,957
                
                $
                64,894
                
                
                41
                %
  **:
          Not
          meaningful.
 
 We
          made a
          decision to increase the resources and capacity of our business in fiscal
          2004,
          as we believed that this would be fundamental to the positioning of the
          Company
          to take advantage of renewed economic growth and the plans of our major
          customers to further develop their businesses. As a result, headcount rose
          substantially. At June 2004 we had 2,004 employees (including contractors),
          compared to 1,470 at June 2003. We recruited 245 new employees during fiscal
          2004 and the MediaHighway acquisition added a further 300 employees, resulting
          in increased operating expenses. This was especially marked in research
          and
          development, where costs rose by 46% primarily due to the inclusion of
          the
          MediaHighway operations.
 The
          increase in sales and marketing costs is mostly due to the strength of
          the pound
          sterling. General and administrative expenses declined overall because
          a charge
          in respect of abandoned leased premises was offset by a reduction in costs
          incurred in connection with litigation.
 
 The
          increase in amortization expense for fiscal 2004 compared to fiscal 2003
          was due
          to the amortization of the fair value of intellectual property rights acquired
          as part of the MediaHighway acquisition. Following the acquisition, we
          obtained
          an independent valuation of the separable intangible assets acquired. We
          also
          examined in detail the plans and projections of the acquired business and
          the
          way in which it had been integrated quickly into the rest of the NDS
          organization. As a result of this assessment, we concluded that the value
          attributed to the intellectual property rights of the MediaHighway business
          of
          $60.8 million was supported by our business plans and cash flow
          projections. However, the projections of the incremental future cash flows
          attributable to the acquired business did not support the value of goodwill
          acquired. Accordingly, we recorded an impairment charge of $11.4 million
          to
          write the value of goodwill down to nil.
 
 **Operating
          income and other items**
  As
          a
          result of the factors outlined above, operating income was $48.4 million
          for
          fiscal 2004 compared to $76.6 million for fiscal 2003.
 
 **Interest**
  Interest
          income earned on cash deposits was $7.3 million for fiscal 2004 compared
          to $4.6
          million for fiscal 2003. The increase was due to higher average cash balances
          and slightly higher interest rates.
 
 **Tax**
  Our
          effective tax rate increased from 29.9% in fiscal 2003 to 34.5% in fiscal
          2004.
          This was due to the goodwill impairment charge, for which limited tax relief
          was
          available, other losses for which no relief was available, offset in part
          by the
          release of a deferred tax valuation reserve against operating losses, following
          the completion of a tax audit.
 
 **Net
          income**
  As
          a
          consequence of all these factors, net income for fiscal 2004 was $37.1
          million,
          or $0.69 per share ($0.67 on a diluted basis), compared to $56.2 million,
          or
          $1.04 per share ($1.04 on a diluted basis), for fiscal 2003.
 
 Page
              26
 
 **Liquidity
          and Capital Resources**
  **Current
          financial condition**
  Our
          principal source of liquidity is internally generated funds. We also have
          access
          to the worldwide capital markets.
 
 As
          of
          June 30, 2005, we had cash and cash equivalents of $339.8 million.
          Our
          accumulated cash is being held with the intention of using it for the future
          development of the business and there are currently no plans to pay any
          dividends to shareholders. We believe that we have sufficient working capital
          resources for our present requirements. Our internally generated funds
          are
          dependent on the continuing profitability of our business. As of June 30,
          2005, and as of the date hereof, we have an unused credit facility to borrow
          up
          to £30 million (equivalent to approximately $53 million) from a subsidiary
          of News Corporation. No amounts were drawn under this facility during fiscal
          2005.
 
 The
          principal uses of cash that affect the Company’s liquidity position include
          purchases of smart cards, operational expenditures, capital expenditures,
          acquisitions and income tax payments.
 
 **Sources
          and uses of cash**
  We
          had a
          net inflow of cash of $110.7 million for fiscal 2005 and a net cash inflow
          of
          $10.2 million in fiscal 2004.
 
 Net
          cash
          provided by operating activities was as follows:
  **For
                    the years ended June 30,**(in
                    thousands)
                
                **2005**
                
                **2004**Net
                    cash provided by operating activities
                
                $
                117,692
                
                $
                91,659
  The
          increase in net cash provided by operating activities in fiscal 2005 reflects
          higher receipts from customers, particularly in respect of conditional
          access
          income from DIRECTV and income from the MediaHighway business. In particular,
          we
          received higher monthly security fees and these include payment towards
          the
          future provision of smart cards. In future years, we expect inventory purchases
          to be higher as we satisfy this obligation to our customers. The increase
          in
          receipts in fiscal 2005was offset in part by higher payments to suppliers
          of
          smart cards and higher payments of payroll costs and travel expenses as
          a result
          of an increase in the number of our employees.
 
 Net
          cash
          used in investing activities was as follows:
  **For
                    the years ended June 30,**(in
                    thousands)
                
                **2005**
                
                **2004**Capital
                    expenditure
                
                $
                (20,545
                )
                $
                (17,206)
                )Proceeds
                    from sale of investments
                
                
                264
                
                
                ─Business
                    acquisitions, net of cash acquired
                
                
                (17
                )
                
                (65,644
                )Other
                
                
                ─
                
                
                (870
                )Net
                    cash used in investing activities
                
                $
                (20,298
                )
                $
                (83,720
                )
  Cash
          used
          in investing activities during fiscal 2005 was lower than fiscal 2004 due
          to the
          purchase of the MediaHighway middleware business in December 2003 for the
          equivalent of $65.0 million (net of cash acquired). The increase in capital
          expenditure payments related to higher purchases of technical development
          and
          test equipment used by our software development engineers and customer
          support
          employees and our new facility in Israel. We expect future payments of
          capital
          expenditure to be higher due to expansion of our facilities in India, the
          United
          Kingdom and the United States.
  Page
              27
  Net
          cash
          generated by financing activities was as follows:
  **For
                    the years ended June 30,**(in
                    thousands)
                
                **2005**
                
                **2004**Issuance
                    of ordinary shares
                
                $
                13,294
                
                $
                2,212Other
                
                
                ─
                
                
                40Net
                    cash generated by financing activities
                
                $
                13,294
                
                $
                2,252
  The
          increase in cash received from the issuance of ordinary shares was due
          to higher
          numbers of stock options exercised by employees during fiscal 2005 than
          in
          fiscal 2004.
 
 We
          have
          evaluated, and expect to continue to evaluate, possible acquisitions and
          dispositions of certain businesses. Such transactions may be material and
          may
          involve cash, our securities or the assumption of indebtedness.
 
 **Off-balance
          sheet arrangements**
  We
          have
          no off-balance sheet arrangements (as defined in Item 303 of Regulation
          S-K).
 
 **Tabular
          disclosure of contractual obligations**
  We
          have
          commitments under certain firm contractual arrangements (“firm commitments”) to
          make future payments. These firm commitments secure the future rights to
          various
          assets and services to be used in the normal course of operations. The
          following
          table summarizes our material firm commitments as of June 30,
          2005.
  **As
                    of June 30,
                    2005****Payments
                    Due by
                    Period****Less
                    than**
                
                
                
                
                
                **After**(in
                    thousands)
                
                **Total**
                
                **1
                    year**
                
                **2-3
                    years**
                
                **4-5
                    years**
                
                **5
                    years**Long-term
                    debt obligations
                
                $
                ─
                
                $
                ─
                
                $
                ─
                
                $
                ─
                
                $
                ─Capital
                    lease obligations
                
                
                ─
                
                
                ─
                
                
                ─
                
                
                ─
                
                
                ─Operating
                    lease obligations (1)
                
                
                146,299
                
                
                17,028
                
                
                32,395
                
                
                30,390
                
                
                66,486Smart
                    card purchase obligations
                
                
                33,859
                
                
                33,859
                
                
                ─
                
                
                ─
                
                
                ─Capital
                    expenditure purchase obligations
                
                
                4,013
                
                
                4,013
                
                
                ─
                
                
                ─
                
                
                ─Other
                    long-term obligations reflected on the balance sheet (2)
                
                
                115,900
                
                
                ─
                
                
                61,985
                
                
                25,368
                
                
                28,547$
                300,071
                
                $
                54,900
                
                $
                94,380
                
                $
                55,758
                
                $
                95,033





(1)
              We
                  have accrued costs in respect of leased premises identified as
                  surplus to
                  requirements included in the above total of $1.1 million
                  as of
                  June 30, 2005 (see Note 10 to our audited consolidated financial
                  statements). Included in total operating lease obligations is an
                  amount of
                  $3.2 million, which is not expected to be incurred because we intend
                  to
                  exercise a put option to revert part of one leased property to
                  a former
                  tenant.
 
 (2)
              Comprising
                  deferred income of $87.4 million, severance pay liabilities of
                  $24.1
                  million and pension liabilities of $4.4
                  million.


In
        certain countries in which we have operations, we are required to make severance
        payments to dismissed employees and employees leaving employment in certain
        other circumstances, on the basis of the latest monthly salary for each year
        of
        service. This liability is provided for by payments of premiums to insurance
        companies under approved plans. The obligation in the consolidated balance
        sheet
        is $24.1 million. The value of insurance policies which substantially fund
        this
        obligation is $20.4 million and is included within the consolidated
        balance
        sheet as other non-current assets.
 
 In
        the
        normal course of business, we provide indemnification agreements of varying
        scopes, including limited product warranties and indemnification of customers
        against claims of intellectual property infringement made by third parties
        arising from the use of our products or services. The nature of these
        commitments has been considered in determining the revenues and costs recognized
        in our audited consolidated financial statements. Costs are accrued for known
        warranty and indemnification issues if a loss is probable and can be reasonably
        estimated. Historically, costs related to these warranties and indemnification
        agreements have not been significant, but because potential future costs
        are
        highly variable, we are unable to estimate the maximum potential impact of
        these
        guarantees on our future results of operations.
 
 Page
            28
 The
        nature of our business is such that we may be subject to claims by third
        parties
        alleging infringements of various intellectual property rights. Such claims
        are
        vigorously defended. Where a liability arising from these claims is probable,
        an
        accrual is made based on management’s best estimate. It is not considered that
        any resulting liability in excess of amounts recognized in these financial
        statements would materially affect our financial position.
 
 **Critical
        Accounting Policies**
  An
        accounting policy is considered to be critical if it is important to our
        financial condition and results, and if it requires significant judgment
        and
        estimates on the part of management in its application. By their nature,
        these
        judgments are subject to an inherent degree of uncertainty. These judgments
        are
        based on our historical experience, terms of existing contracts, our observance
        of trends in our industry, information provided by or customers and information
        from other outside sources, as appropriate. Actual results may differ from
        the
        judgments under different assumptions or conditions. The development and
        selection of these critical accounting policies have been determined by our
        management and the related disclosures have been reviewed with the Audit
        Committee of the Board of Directors. For a summary of our significant accounting
        policies, see Note 3 to the accompanying audited consolidated financial
        statements.
  **Use
        of Estimates**
  The
        preparation of our consolidated financial statements in conformity with US
        GAAP
        requires management to make estimates and assumptions that affect the amounts
        that are reported in the audited consolidated financial statements and
        accompanying disclosures. Although these estimates are based on management’s
        best knowledge of current events and actions that the company may undertake
        in
        the future, actual results may differ from the estimates.
 
 **a)**  **Goodwill
        and other intangible assets**
  We
        have
        significant intangible assets, primarily intellectual property rights and
        goodwill arising in connection with business combinations. We account for
        business combinations under the purchase method of accounting. The total
        cost of
        acquisitions is allocated to the underlying net assets acquired, based on
        their
        respective estimated fair market values. Goodwill is recorded as the difference
        between the cost of acquiring an entity and the estimated fair market values
        assigned to its tangible and identifiable intangible net assets at the date
        of
        acquisition. Determining the fair market value of assets acquired and
        liabilities assumed requires management’s judgment and often involves the use of
        significant estimates and assumptions, including assumptions with respect
        to
        future cash inflows and outflows, discount rates, asset lives, and market
        multiples. Goodwill is subject to an annual impairment test (or more often
        if
        circumstances dictate). Intangible assets are amortized over their expected
        useful lives and the remaining useful life is re-assessed from time to time.
        If
        we identify an impairment in value of goodwill or other intangible assets,
        we
        record an impairment charge in the period in which it is identified. The
        judgments made in determining the estimated fair market value assigned to
        each
        class of intangible assets acquired, as well as their useful lives and any
        potential impairment, can significantly impact our reported operating
        income.
 
 **b)**  **Revenue
        recognition and liabilities to customers**
  Revenue
        may only be recognized if persuasive evidence of an arrangement exists, the
        fees
        are fixed or determinable, the product or service has been delivered and
        collectability is assured. Judgment is required in assessing whether these
        criteria have been met. The technologies and services we supply to our customers
        are technically complicated and are frequently covered by long-term contracts.
        In assessing the amounts of revenue recognized in any period, we must make
        estimates about such matters as the future costs we will incur to complete
        our
        contractual obligations and, if these costs exceed estimated future revenues,
        make a provision for the estimated loss. We are also required to determine
        if an
        arrangement contains multiple deliverables and, if so, we must make assessments
        about the appropriate unit of accounting and the fair value of any undelivered
        elements.
 
 Where
        we
        have obligations to supply smart cards in the future as part of our support
        and
        maintenance obligations, we are required to make estimates about the timing
        of
        supply of such changeover cards and to defer an appropriate amount of revenue
        from the security fees received from our platform operator customers and
        recognize an appropriate amount of revenue when such smart cards are supplied.
        These estimates include assessments of the likely timing of the card changeover,
        the quantity of smart cards to be supplied, the costs of those smart cards
        and
        the future receipt of security fees. The judgments made in determining the
        value
        of our liabilities to customers can significantly impact our reported operating
        income. The effect of changes in such estimates is recorded prospectively.
        As of
        June 30, 2005, revenues deferred under these arrangements amounted
        to $87.9
        million, of which $87.4 million is included within non-current liabilities.
        During fiscal 2005, our assessment of the likely timing of card changeovers
        is
        that several of them will occur later than had been expected. Because a higher
        amount of security fees will be charged over the life of the current generation
        of smart cards, the proportion of revenue deferred in fiscal 2005 was lower
        than
        in fiscal 2004, but it is not possible to separate the impact on revenues
        of
        this change in assumption.
 
 Page
            29
 **c)**  **Litigation
        and intellectual property claims**
  Certain
        of our customers and other third parties have from time to time made allegations
        and filed claims against us. The existence of these matters require us to
        make
        estimates of the likely outcome of the actions or potential claims and to
        make a
        cost accrual for any liabilities where it is probable that we will make a
        settlement or be subject to an adverse court ruling. The judgments made in
        assessing the amount, if any, of cost accruals required can significantly
        impact
        our reported operating income.
 
 **Recent
        accounting pronouncements**
  In
        December 2004, the Financial Accounting Standards Board “FASB” issued Statement
        of Financial accounting Standard “SFAS” No. 123 (R): “Share-Based Payment.” This
        standard will require the cost of employee compensation paid with equity
        instruments to be measured based on grant-date fair values. That cost will
        be
        recognized over the vesting period. SFAS No. 123 (R)
        will become
        effective for us in the first quarter of fiscal 2006. Note 3l of our audited
        consolidated financial statements reflects the effect on net income and earnings
        per share as if we had applied the fair value recognition provisions for
        stock
        option-based employee compensation. These pro forma effects may not be
        representative of future stock option-based compensation expense since the
        estimated fair value of stock options on the date of grant is amortized to
        expense over the vesting period and additional options may be granted in
        future
        years. Additionally, the terms of certain options held by the previous Chief
        Financial Officer were modified on his departure, and the vesting of certain
        options was accelerated on June 27, 2005 (as discussed below).
 
 In
        recognition of his contribution to the Company, the Remuneration Committee
        of
        our Board of Directors (“the Remuneration Committee”) modified the terms of
        certain vested options held by the previous Chief Financial Officer such
        that
        the options may be exercised at any time prior to September 20, 2006 rather
        than
        lapsing on his departure. The additional charge under APB No. 25 of this
        modification is $1.3 million, net of tax of $0.6 million. The additional
        charge
        under SFAS No. 123 (R) of this modification is $0.1 million, net of
        tax.
 
 On
        June
        27, 2005, the Remuneration Committee of approved the acceleration of vesting
        of
        certain unvested out-of-the-money stock options granted under our stock option
        plans. The affected options are those with exercise prices greater than $32.50
        per ordinary share, which was the closing price of our Series A ordinary
        shares
        (as traded in the form of American Depositary Shares on the NASDAQ National
        Market) on June 21, 2005. As a result of this action, the vesting of
        approximately 551,000 previously unvested stock options was accelerated and
        these options are now immediately exercisable. The Remuneration Committee’s
        action did not accelerate the vesting of any of the unvested stock options
        held
        by Directors, the Chief Executive Officer, or the Chief Financial
        Officer.
 
 The
        Remuneration Committee’s decision to accelerate the vesting of these stock
        options was in anticipation of compensation expense to be recorded subsequent
        to
        the effective date of SFAS No. 123 (R) on July 1, 2005. The acceleration
        eliminates approximately $9.6 million ($8.8 million net of tax) from
        our
        future consolidated statements of operations, of which $5.1 million
        ($4.7
        million net of tax), $2.7 million ($2.5 million net of tax), $1.4 million
        ($1.2
        million net of tax), and $0.4 million ($0.4 million net of
        tax) would
        have been recognized in fiscal years 2006, 2007, 2008 and 2009, respectively,
        once SFAS No. 123 (R) becomes effective.
 
 Page
            30
 
 **ITEM 7A.**
              **QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK**
  The
        only
        significant financial market risk to which we are exposed is to changes in
        foreign exchange rates. We operate in international markets and have operational
        presence in several countries. Accordingly, our costs and revenues are
        denominated in a mixture of U.S. dollars, pounds sterling and euros.
        Historically, we have not entered into free-standing derivative contracts
        to
        hedge foreign exchange exposure arising from operating activities. We expect
        to
        review this policy from time to time as circumstances change. No derivative
        instruments were outstanding as of June 30, 2005.
 
 In
        certain countries in which we have operations, we are required to make severance
        payments to dismissed employees and employees leaving employment in certain
        other circumstances, on the basis of the latest monthly salary for each year
        of
        service. This liability is provided for by payments of premiums to insurance
        companies under approved plans. The obligation in the consolidated balance
        sheet
        is $24.1 million. The value of insurance policies which substantially fund
        this
        obligation is $20.4 million and is included within the consolidated
        balance
        sheet as other non-current assets. The bulk of the arrangements relates to
        our
        Israeli employees. Because the gross liability reflects the contracts of
        employment, it is denominated in U.S. dollars, whereas the amount funded
        by
        insurance policies is regulated by the Israeli Government and is denominated
        in
        Israeli shekels. Accordingly, the difference between the gross liability
        and the
        amount funded by insurance policies is subject to fluctuations depending
        on the
        relative values of the U.S. dollar and Israeli shekel.
 
 During
        fiscal 2005, the U.S. dollar was generally weaker against the pound sterling
        than was the case in fiscal 2004, although the exchange rate on June 30,
        2005 was stronger than on June 30, 2004. As a result, we have experienced
        gains on holding cash of $0.5 million and $16.2 million for the fiscal
        years ended June 30, 2005 and 2004, respectively.
 
 As
        of
        June 30, 2005, approximately 80% of our cash was held in U.S. dollars
        and
        15% in pounds sterling, with most of the rest being in euros. Our policy
        was to
        hold cash in pound sterling deposits of up to three month maturity because
        the
        pound sterling was our reporting currency. As a consequence of the change
        in our
        reporting currency to U.S. dollars, effective during fiscal 2005, and the
        fact
        that the majority of our revenues are now denominated in U.S. dollars, we
        re-evaluated our treasury policy. Since January 2005, our policy has been
        to
        hold the bulk of our cash in U.S. dollar deposits of up to three month maturity.
        During January 2005, we switched most of our pound sterling currency holdings
        above our foreseeable requirements into U.S. dollars. As a consequence of
        this,
        we expect our future interest income to be less as U.S. dollar interest rates
        are lower than pound sterling interest rates. However, our reported cash
        balances are expected to be less sensitive to fluctuations in foreign exchange
        rates. Additionally, we may place cash on deposit for longer than three month
        terms, which would introduce an exposure to the risks associated with fixed
        interest rates.
  Page
            31
  **ITEM
                  8.**
              **FINANCIAL
                  STATEMENTS AND SUPPLEMENTARY
                  DATA**
  **Index
        to the Audited Consolidated Financial Statements of NDS Group
        plc**


**Page**
 
 Report
                  of Independent Registered Public Accounting Firm
              33Report
                  of Independent Registered Public Accounting Firm
              34Consolidated
                  Statements of Operations for the fiscal years ended June 30, 2005,
                  2004
                  and 2003
              35Consolidated
                  Balance Sheets as of June 30, 2005 and 2004
              36Consolidated
                  Statements of Cash Flows for the fiscal years ended June 30, 2005,
                  2004
                  and 2003
              37Consolidated
                  Statements of Shareholders’ Equity and Other Comprehensive Income for the
                  fiscal yearsended
                  June 30, 2005, 2004 and 2003
              38Notes
                  to Consolidated Financial Statements
              40
 
 
 Page
            32




**Report
        of Independent Registered Public Accounting Firm**
  The
        Board
        of Directors and Shareholders of NDS Group plc:
 
 We
        have
        audited the accompanying consolidated balance sheets of NDS Group plc as
        of June
        30, 2005 and 2004, and the related consolidated statements of income,
        comprehensive income, shareholders’ equity, and cash flows for each of the three
        years in the period ended June 30, 2005. These financial statements are the
        responsibility of the Company’s management. Our responsibility is to express an
        opinion on these financial statements based on our audits. We did not audit
        the
        financial statements of NDS Technologies Israel Limited, a wholly-owned
        subsidiary, for each of the two years in the period ended June 30,
        2004,
        which statements reflect total assets of $69 million as of June 30, 2004,
        and
        total cost of sales of $62 million and $55 million and total operating expenses
        of $20 million and $17 million for years ended June 30, 2004 and 2003,
        respectively. Those financial statements, presented in accordance with
        accounting principles generally accepted in Israel, were audited by other
        auditors whose report has been furnished to us, and our opinion, insofar
        as it
        relates to the amounts utilized by the Company’s management (before conversion
        to accounting principles generally accepted in the United States) so as to
        include NDS Technologies Israel Limited in the consolidated financial statements
        of NDS Group plc, is based solely on the report of the other
        auditors.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts (including the Company’s conversion
        of the financial statements of NDS Technologies Israel Limited to accounting
        principles generally accepted in the United States for each of the two years
        in
        the period ended June 30, 2004) and disclosures in the financial statements.
        An
        audit also includes assessing the accounting principles used and significant
        estimates made by management, as well as evaluating the overall financial
        statement presentation. We believe that our audits provide a reasonable basis
        for our opinion.
 
 In
        our
        opinion, based on our audits and the report of other auditors, the financial
        statements referred to above present fairly, in all material respects, the
        consolidated financial position of NDS Group plc at June 30, 2005 and 2004,
        and
        the consolidated results of its operations and its cash flows for each of
        the
        three years in the period ended June 30, 2005, in conformity with accounting
        principles generally accepted in the United States.
 
 We
        also
        have audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the effectiveness of NDS Group plc’s internal
        control over financial reporting as of June 30, 2005, based on criteria
        established in Internal Control-Integrated Framework issued by the Committee
        of
        Sponsoring Organizations of the Treadway Commission, and our report dated
        September 8, 2005 expressed an unqualified opinion thereon.
 
 /s/
        Ernst
& Young LLP
 London,
        England
 September
        8, 2005
  Page
            33
  **R** **eport
        of Independent Registered Public Accounting Firm**
  Auditor’s
        Report to the Shareholders of NDS Technologies Israel Limited
 
 We
        have
        audited the balance sheets of NDS Technologies Israel Limited (“the Company”) as
        of 30 June 2004 and 2003, and the related statements of income, changes in
        shareholder’s equity and cash flows for each of the years then ended [not
        separately included herein]. These financial statements are the responsibility
        of the Company’s Board of Directors and of its Management. Our responsibility is
        to express an opinion on these financial statements based on our
        audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Oversight Board (United States). Those standards require that we plan and
        perform the audit to obtain reasonable assurance that the financial statements
        are free of material misstatement. An audit includes examining, on a test
        basis,
        evidence supporting the amounts and disclosures in the financial statements.
        An
        audit also includes assessing the accounting principles used and significant
        estimates made by the Board of Directors and by Management, as well as
        evaluating the overall financial statement presentation. We believe that
        our
        audits provide a reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of the Company as of 30 June 2004
        and
        2003 and the results of its operations, changes in shareholder’s equity and cash
        flows for each of the years then ended in conformity with generally accepted
        accounting principles in Israel.
 
 As
        explained in Note 1B1, the above mentioned financial statements are stated
        in
        U.S. dollar values adjusted for the changes in the US dollar / New Israeli
        Shekels exchange rate, in accordance with Opinions of the Institute of Certified
        Public Accountants in Israel.
 
 Somekh
        Chaikin
 Certified
        Public Accountants (Isr.)
 
 Jerusalem,
        Israel
 25
        July
        2004
  Page
            34
  **NDS
        Group plc**
 **Consolidated
        Statements of Operations**
 (in
        thousands, except per-share amounts)




**For
                  the years ended June 30,****2005**
              
              **2004**
              
              **2003****Revenue:**Conditional
                  access
              
              $
              339,414
              
              $
              178,286
              
              $
              260,709Integration,
                  development & support
              
              
              52,636
              
              
              55,601
              
              
              52,716License
                  fees & royalties
              
              
              71,443
              
              
              51,673
              
              
              35,299New
                  technologies
              
              
              85,945
              
              
              64,942
              
              
              51,474Other
              
              
              6,892
              
              
              6,161
              
              
              7,152Total
                  revenue (inclusive of $411,857, $202,095 and $155,740 from related
                  parties)
              
              
              556,330
              
              
              356,663
              
              
              407,350**Cost
                  of goods and services sold:**Smart
                  card costs
              
              
              (131,466
              )
              
              (26,708
              )
              
              (122,596
              )Operations
                  & support
              
              
              (72,254
              )
              
              (47,708
              )
              
              (33,526
              )Royalties
                  (inclusive of $3,682, $576 and $104 to related parties)
              
              
              (13,198
              )
              
              (7,160
              )
              
              (7,144
              )Other
              
              
              (2,020
              )
              
              (2,811
              )
              
              (8,559
              )Total
                  cost of goods and services sold
              
              
              (218,938
              )
              
              (84,387
              )
              
              (171,825
              )**Gross
                  margin**
              
              
              337,392
              
              
              272,276
              
              
              235,525**Operating
                  expenses:**Sales
                  & marketing
              
              
              (25,820
              )
              
              (25,145
              )
              
              (22,537
              )Research
                  & development
              
              
              (166,504
              )
              
              (146,190
              )
              
              (99,764
              )General
                  & administration (inclusive of $263, $230 and $206 to related
                  parties)
              
              
              (43,352
              )
              
              (34,140
              )
              
              (34,913
              )Amortization
                  of other intangibles
              
              
              (12,349
              )
              
              (8,177
              )
              
              (3,000
              )Impairment
                  charge
              
              
              ─
              
              
              (11,391
              )
              
              ─Foreign
                  exchange gains
              
              
              2,824
              
              
              1,192
              
              
              1,257Total
                  operating expenses
              
              
              (245,201
              )
              
              (223,851
              )
              
              (158,957
              )**Operating
                  income**
              
              
              92,191
              
              
              48,425
              
              
              76,568**Other
                  income:**Interest
              
              
              9,719
              
              
              7,294
              
              
              4,579Equity
                  loss of affiliate
              
              
              ─
              
              
              ─
              
              
              (349
              )Losses
                  on investments
              
              
              (559
              )
              
              (446
              )
              
              (833
              )Total
                  other income
              
              
              9,160
              
              
              6,848
              
              
              3,397Income
                  before income tax expense andminority
                  interests in subsidiaries, net of tax
              
              
              101,351
              
              
              55,273
              
              
              79,965Income
                  tax expense
              
              
              (27,353
              )
              
              (19,061
              )
              
              (23,884
              )Minority
                  interests in subsidiaries, net of tax
              
              
              
              
              
              843
              
              
              162**Net
                  income**
              
              $
              73,998
              
              $
              37,055
              
              $
              56,243**Net
                  income per share:**Basic
                  net income per share
              
              $
              1.35
              
              $
              0.69
              
              $
              1.04Diluted
                  net income per share
              
              $
              1.29
              
              $
              0.67
              
              $
              1.04
 
 The
        accompanying notes form an integral part of these consolidated financial
        statements.




Page
          35


**NDS
        Group plc**
 **Consolidated
        Balance Sheets**
 (in
        thousands, except share amounts)




**As
                  of June 30,****2005**
              
              **2004****ASSETS****Current
                  assets:**Cash
                  and cash equivalents
              
              $
              339,791
              
              $
              228,620Accounts
                  receivable, net (inclusive of $51,909 and $60,312 due from related
                  parties)
              
              
              73,588
              
              
              84,295Accrued
                  income
              
              
              25,391
              
              
              21,845Inventories
              
              
              41,508
              
              
              35,972Prepaid
                  expenses
              
              
              15,795
              
              
              15,843Other
                  current assets
              
              
              3,595
              
              
              6,836Total
                  current assets
              
              
              499,668
              
              
              393,411Property,
                  plant & equipment, net
              
              
              33,962
              
              
              29,472Goodwill
              
              
              64,236
              
              
              66,296Other
                  intangibles, net
              
              
              48,537
              
              
              61,681Deferred
                  tax assets
              
              
              5,121
              
              
              9,153Other
                  non-current assets
              
              
              20,374
              
              
              17,146**Total
                  assets**
              
              $
              671,898
              
              $
              577,159**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY****Current
                  liabilities:**Accounts
                  payable (inclusive of $3,124 and $3,107 due to related
                  parties)
              
              $
              18,336
              
              $
              51,552Deferred
                  income
              
              
              47,175
              
              
              62,579Accrued
                  payroll costs
              
              
              25,069
              
              
              21,554Accrued
                  expenses
              
              
              21,097
              
              
              18,248Income
                  tax liabilities
              
              
              4,070
              
              
              6,812Other
                  current liabilities
              
              
              13,498
              
              
              15,393Total
                  current liabilities
              
              
              129,245
              
              
              176,138Accrued
                  expenses
              
              
              28,547
              
              
              32,392Deferred
                  income
              
              
              87,353
              
              
              35,285**Total
                  liabilities**
              
              
              245,145
              
              
              243,815**Shareholders’
                  equity:**Series
                  A ordinary shares, par value $0.01 per share: 48,000,000 shares
                  authorized;13,318,546
                  and 12,186,598 shares outstanding as of June 30, 2005 and 2004,
                  respectively
              
              
              133
              
              
              122Series
                  B ordinary shares, par value $0.01 per share: 52,000,000 shares
                  authorized;42,001,000
                  shares outstanding as of June 30, 2005 and 2004,
                  respectively
              
              
              420
              
              
              420Deferred
                  shares, par value £1 per share: 42,000,002 shares
                  authorizedand
                  outstanding as of June 30, 2005 and 2004, respectively
              
              
              64,103
              
              
              64,103Additional
                  paid-in capital
              
              
              498,363
              
              
              478,599Accumulated
                  deficit
              
              
              (180,571
              )
              
              (254,569
              )Other
                  comprehensive income
              
              
              44,305
              
              
              44,669**Total
                  shareholders’ equity**
              
              
              426,753
              
              
              333,344**Total
                  liabilities and shareholders’ equity**
              
              $
              671,898
              
              $
              577,159


The
        accompanying notes form an integral part of these consolidated financial
        statements.
 
  Page
            36
  **NDS
        Group plc**
 **Consolidated
        Statements of Cash Flows**
 (in
        thousands)
 **For
                    the years ended June 30,****2005**
                
                **2004**
                
                **2003****Operating
                    activities:**Net
                    income
                
                $
                73,998
                
                $
                37,055
                
                $
                56,243Adjustments
                    to reconcile net income to net cash provided by operating
                    activities:Depreciation
                
                
                15,405
                
                
                13,526
                
                
                11,795Amortization
                    of other intangibles
                
                
                12,349
                
                
                8,177
                
                
                3,000Impairment
                    charge
                
                
                ─
                
                
                11,391
                
                
                ─Stock
                    option-based compensation
                
                
                4,327
                
                
                2,911
                
                
                899Other
                    stock-based compensation
                
                
                ─
                
                
                1,832
                
                
                3,047Equity
                    loss of affiliate
                
                
                ─
                
                
                ─
                
                
                349Losses
                    on investments
                
                
                559
                
                
                446
                
                
                833Minority
                    interest in subsidiaries, net of tax
                
                
                ─
                
                
                (843
                )
                
                (162
                )Change
                    in operating assets and liabilities, net of acquisitions:Inventories
                
                
                (5,536
                )
                
                (22,384
                )
                
                46,710Receivables
                    and other assets
                
                
                6,273
                
                
                (54,753
                )
                
                19,016Accounts
                    payable and other liabilities
                
                
                10,317
                
                
                94,301
                
                
                (88,434
                )Net
                    cash provided by operating activities (inclusive of $456,536,
                    $213,649and
                    $165,733 from related parties)
                
                
                117,692
                
                
                91,659
                
                
                53,296**Investing
                    activities:**Capital
                    expenditure
                
                
                (20,545
                )
                
                (17,206
                )
                
                (9,753
                )Proceeds
                    from sale of investments
                
                
                264
                
                
                ─
                
                
                3,437Business
                    acquisitions, net of cash acquired
                
                
                (17
                )
                
                (65,644
                )
                
                (7,703
                )Other
                
                
                ─
                
                
                (870
                )
                
                ─Net
                    cash used in investing activities
                
                
                (20,298
                )
                
                (83,720
                )
                
                (14,019
                )**Financing
                    activities:**Issuance
                    of shares
                
                
                13,294
                
                
                2,212
                
                
                ─Other
                
                
                ─
                
                
                40
                
                
                835Net
                    cash provided by financing activities
                
                
                13,294
                
                
                2,252
                
                
                835**Net
                    increase in cash and cash equivalents**
                
                
                110,688
                
                
                10,191
                
                
                40,112Cash
                    and cash equivalents, beginning of period
                
                
                228,620
                
                
                202,185
                
                
                150,846Exchange
                    movements
                
                
                483
                
                
                16,244
                
                
                11,227**Cash
                    and cash equivalents, end of period**
                
                $
                339,791
                
                $
                228,620
                
                $
                202,185


The
        accompanying notes form an integral part of these consolidated financial
        statements.
  Page
            37
  **NDS
        Group plc**
 **Consolidated
        Statements of Shareholders’ Equity and Other Comprehensive
        Income**
 (in
        thousands, except share amounts)


**For
                  the years ended June 30,****2005**
              
              **2004**
              
              **2003****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount****Series
                  A ordinary shares of $0.01 par value each:**Balance,
                  beginning of year
              
              
              12,186,598
              
              $
              122
              
              
              11,983,681
              
              $
              120
              
              
              11,677,033
              
              $
              117Shares
                  issued on exercise of employee stock options
              
              
              1,131,948
              
              
              11
              
              
              202,917
              
              
              2
              
              
              ─
              
              
              ─Shares
                  issued as consideration for business acquisition
              
              
              ─
              
              
              ─
              
              
              ─
              
              
              ─
              
              
              306,648
              
              
              3Balance,
                  end of year
              
              
              13,318,546
              
              
              133
              
              
              12,186,598
              
              
              122
              
              
              11,983,681
              
              
              120**Series
                  B ordinary shares of $0.01 par value each:**Balance,
                  beginning and end of year
              
              
              42,001,000
              
              
              420
              
              
              42,001,000
              
              
              420
              
              
              42,001,000
              
              
              420**Deferred
                  shares of £1 par value each:**Balance,
                  beginning and end of year
              
              
              42,000,002
              
              
              64,103
              
              
              42,000,002
              
              
              64,103
              
              
              42,000,002
              
              
              64,103**Additional
                  paid-in capital:**Balance,
                  beginning of year
              
              
              
              
              
              478,599
              
              
              
              
              
              473,478
              
              
              
              
              
              467,703Shares
                  issued on exercise of employee stock options
              
              
              
              
              
              13,283
              
              
              
              
              
              2,210
              
              
              
              
              
              ─Shares
                  issued as consideration for business acquisition
              
              
              
              
              
              ─
              
              
              
              
              
              ─
              
              
              
              
              
              4,876Stock
                  option-based compensation (inclusive oftax
                  benefit of $2,154, $─ and $─)
              
              
              
              
              
              6,481
              
              
              
              
              
              2,911
              
              
              
              
              
              899Balance,
                  end of year
              
              
              
              
              
              498,363
              
              
              
              
              
              478,599
              
              
              
              
              
              473,478**Deferred
                  stock-based compensation:**Balance,
                  beginning of year
              
              
              
              
              
              ─
              
              
              
              
              
              (1,832
              )
              
              
              
              
              ─Shares
                  issued
              
              
              
              
              
              ─
              
              
              
              
              
              ─
              
              
              
              
              
              (4,879
              )Stock-based
                  compensation (nil tax effect)
              
              
              
              
              
              ─
              
              
              
              
              
              1,832
              
              
              
              
              
              3,047Balance,
                  end of year
              
              
              
              
              
              ─
              
              
              
              
              
              ─
              
              
              
              
              
              (1,832
              )**Accumulated
                  deficit:**Balance,
                  beginning of year
              
              
              
              
              
              (254,569
              )
              
              
              
              
              (291,624
              )
              
              
              
              
              (347,867
              )Net
                  income
              
              
              
              
              
              73,998
              
              
              
              
              
              37,055
              
              
              
              
              
              56,243Balance,
                  end of year
              
              
              
              
              
              (180,571
              )
              
              
              
              
              (254,569
              )
              
              
              
              
              (291,624
              )**Accumulated
                  other comprehensive income:**Balance,
                  beginning of year
              
              
              
              
              
              44,669
              
              
              
              
              
              19,666
              
              
              
              
              
              8,209Other
                  comprehensive income (loss)
              
              
              
              
              
              (364
              )
              
              
              
              
              25,003
              
              
              
              
              
              11,457Balance,
                  end of year
              
              
              
              
              
              44,305
              
              
              
              
              
              44,669
              
              
              
              
              
              19,666Accumulated
                  deficit and accumulated othercomprehensive
                  income, end of year
              
              
              
              
              
              (136,266
              )
              
              
              
              
              (209,900
              )
              
              
              
              
              (271,958
              )**Total
                  Shareholders’ Equity**Balance,
                  beginning of year
              
              
              
              
              
              333,344
              
              
              
              
              
              264,331
              
              
              
              
              
              192,685Balance,
                  end of year
              
              
              
              
              $
              426,753
              
              
              
              
              $
              333,344
              
              
              
              
              $
              264,331


The
        accompanying notes form an integral part of these consolidated financial
        statements.
  Page
            38
  **Consolidated
        Statements of Shareholders’ Equity and Other Comprehensive Income
        (continued)**
 (in
        thousands)
 **For
                    the years ended June 30,**(in
                    thousands)
                
                **2005**
                
                **2004**
                
                **2003****Comprehensive
                    income:**Net
                    income
                
                $
                73,998
                
                $
                37,055
                
                $
                56,243**Other
                    comprehensive income (loss), net of tax:**Foreign
                    currency translation adjustments (nil tax effect)
                
                
                380
                
                
                23,599
                
                
                13,516Minimum
                    pension liability adjustment, net of tax of $336, ($599) and
                    $571
                
                
                (744
                )
                
                1,404
                
                
                (2,059
                )Total
                    other comprehensive income (loss), net of tax
                
                
                (364
                )
                
                25,003
                
                
                11,457**Total
                    comprehensive income**
                
                $
                73,634
                
                $
                62,058
                
                $
                67,700**Elements
                    of other comprehensive income:***Foreign
                    currency translation adjustments:*Balance,
                    beginning of year
                
                $
                47,002
                
                $
                23,403
                
                $
                9,887Fiscal
                    year activity (nil tax effect)
                
                
                380
                
                
                23,599
                
                
                13,516Balance,
                    end of year
                
                
                47,382
                
                
                47,002
                
                
                23,403*Minimum
                    pension liability adjustment:*Balance,
                    beginning of year
                
                
                (2,333
                )
                
                (3,737
                )
                
                (1,678
                )Fiscal
                    year activity, net of tax of $366, ($599) and $571
                
                
                (744
                )
                
                1,404
                
                
                (2,059
                )Balance,
                    end of year
                
                
                (3,077
                )
                
                (2,333
                )
                
                (3,737
                )**Total
                    other comprehensive income:**Total
                    other comprehensive income (loss) for year, net of tax
                
                
                (364
                )
                
                25,003
                
                
                11,457Total
                    accumulated other comprehensive income, net of tax, beginning
                    of
                    year
                
                
                44,669
                
                
                19,666
                
                
                8,209Total
                    accumulated other comprehensive income, net of tax, end of
                    year
                
                $
                44,305
                
                $
                44,669
                
                $
                19,666


The
        accompanying notes form an integral part of these consolidated financial
        statements.
  Page
            39
  **NDS
        Group plc**
  **Notes
        to Consolidated Financial Statements**
  **Note
        1.**  **Description
        of business**
  NDS
        Group
        plc is incorporated in Great Britain and registered in England and Wales.
        NDS
        Group plc with its subsidiaries (together, the “Company”), is engaged in the
        business of supplying digital technology and services, enabling and supporting
        digital pay-television platform operators and content providers.
 
 There
        is
        a common management structure across the Company, which ensures that the
        various
        subsidiary entities operate in a coordinated and complementary manner. The
        business is managed as a single operating unit or segment, being the supply
        of
        digital technology and services enabling and supporting digital pay-television
        platform operators and content providers.
 
 The
        Company is a majority owned subsidiary of News Corporation and conducts business
        transactions with a number of affiliates and subsidiaries of News
        Corporation.
 
 **Note
        2.**  **Basis
        of presentation**
  Effective
        November 12, 2004, News Corporation changed its corporate domicile from
        Australia to the United States and as a result, the Company no longer qualifies
        as a foreign private issuer under U.S. securities laws. The Company has also
        changed its reporting currency from pounds sterling to U.S. dollars.
        Accordingly, these consolidated financial statements are stated in U.S. dollars,
        and have been prepared in accordance with generally accepted accounting
        principles in the United States (“US GAAP”). Prior to November 12, 2004, the
        Company published financial information in accordance with UK generally accepted
        accounting practice (“UK GAAP”) in pounds sterling. Financial information
        for periods ending, and as of, dates prior to the beginning of fiscal 2005,
        has
        been derived from previously audited UK GAAP financial information by adjusting
        for differences between UK GAAP and US GAAP and then translating that
        information into U.S. dollars. Unless the text indicates otherwise, all
        financial information, except share and per share amounts, is stated in
        thousands of U.S. dollars.
 
 **Note
        3.**  **Summary
        of significant accounting policies**
  The
        significant accounting policies adopted by the Company are summarized
        below.
 
 **a)**  **Principles
        of consolidation**
  The
        consolidated financial statements include the accounts of all majority-owned
        and
        controlled subsidiaries. In addition, the Company evaluates its relationships
        with other entities to identify whether they are variable interest entities
        in
        accordance with Financial Accounting Standards Board (“FASB”) Interpretation No.
        (“FIN”) 46, “Consolidation of Variable Interest Entities, an Interpretation of
        ARB No. 51” as revised in December 2003 (“FIN 46R”), and to assess whether it is
        the primary beneficiary of such entities. If the determination is made that
        the
        Company is the primary beneficiary, then that entity is consolidated in
        accordance with FIN 46R.
 
 All
        intercompany transactions and balances have been eliminated on consolidation.
        Acquisitions of controlled entities are accounted for using the purchase
        method
        of accounting. The results and cash flows of businesses acquired or sold
        are
        consolidated for the periods from or to the date on which control passed
        to or
        from the Company.
 
 **b)**  **Use
        of estimates**
  The
        preparation of financial statements in conformity with US GAAP requires
        management to make estimates and assumptions that affect the reported amounts
        of
        assets and liabilities and disclosure of contingent assets and liabilities
        at
        the date of the financial statements, and the reported amounts of revenues
        and
        expenses during the reporting period. Actual results could differ from those
        estimates.
 
 **c)**  **Foreign
        currency**
  The
        reporting currency of the Company is the U.S. dollar. The functional currency
        of
        each of the entities which comprise the Company is the currency of the primary
        economic environment in which each entity operates.
 
 Normal
        trading activities denominated in foreign currencies are recorded in the
        functional currency of the relevant entity at actual exchange rates as of
        the
        date of the transaction. Monetary assets and liabilities denominated in foreign
        currencies are reported at the rates of exchange prevailing at the balance
        sheet
        date, with any resulting gain or loss being recorded in the statement of
        operations.
 
 Page
            40
 The
        results and cash flows of entities whose functional currency is not the U.S.
        dollar are translated into U.S. dollars at the average rates of exchange
        during
        the period and their balance sheets at the rates prevailing at the balance
        sheet
        date. Resulting foreign exchange differences are recorded in other comprehensive
        income.
 
 **d)**  **Cash
        and cash equivalents**
  Cash
        and
        cash equivalents consist of cash on hand and marketable securities with original
        maturities of three months or less.
 
 **e)**  **Concentration
        of credit risk**
  Cash
        and
        cash equivalents are maintained with several financial institutions. Deposits
        held with banks may exceed the amount of insurance provided on such deposits.
        Generally, these deposits may be redeemed upon demand and are maintained
        with
        financial institutions of reputable credit and therefore bear minimal credit
        risk.
 
 **f)**  **Inventories**
  Inventories
        are valued at the lower of cost (calculated on a first in, first out basis)
        and
        market value. Cost represents purchase price and, in respect of manufactured
        or
        processed items, includes an appropriate proportion of production overheads.
        Market value is based on estimated selling price, less further costs expected
        to
        be incurred to completion and disposal. A reserve is established for obsolete,
        slow-moving or defective items where appropriate
 
 Contract
        work-in-progress represents the cost of purchased goods and services and
        the
        direct labor cost of work undertaken for customer contracts, where such costs
        can be clearly related to development and integration work for which the
        associated revenue has not been recognized.
 
 **g)**  **Property,
        plant and equipment**
  Property,
        plant and equipment are stated at cost. Depreciation is recorded using the
        straight-line method over estimated useful lives of three to five years.
        Leasehold improvements are amortized using the straight-line method over
        the
        shorter of their useful lives or the life of the lease. Costs associated
        with
        the repair and maintenance of property are expensed as incurred. The Company
        has
        received grants from the government of the State of Israel towards the cost
        of
        certain plant, property and equipment. Such grants are treated as a reduction
        in
        the cost of the related asset.
 
 Changes
        in circumstances, such as technological advances, changes to the Company’s
        business model or capital strategy, could result in the actual useful lives
        differing from the Company’s estimates. In those cases where the Company
        determines that the useful life of buildings and equipment should be shortened,
        the Company would depreciate the asset over its revised remaining useful
        life
        thereby increasing depreciation expense. An impairment test is conducted
        if
        circumstances indicate that the carrying value may not be recoverable and
        any
        impairment is recorded in the statement of operations in the period in which
        it
        is identified.
 
 **h)**  **Goodwill
        and other intangible assets**
  The
        Company follows Statement of Financial Accounting Standard (“SFAS”) No. 142:
“Goodwill and Other Intangible Assets.” The standard requires that goodwill and
        indefinite-lived intangible assets should not be amortized. However, goodwill
        and indefinite-lived intangible assets are tested for impairment at least
        annually or more frequently if circumstances indicate that the carrying value
        is
        impaired. Any impairment is recorded in the statement of operations in the
        period in which it is identified.
 
 Intellectual
        property rights purchased by the Company are included at cost as other
        intangible assets and are amortized on a straight-line basis over their useful
        economic lives. The useful life of purchased intellectual property rights
        is
        considered on a case by case basis. The estimates of the periods over which
        benefits will accrue to the Company in respect of purchased intellectual
        property rights have ranged from three to ten years. An impairment test is
        conducted if circumstances indicate that the carrying value may not be
        recoverable and any impairment is recorded in the statement of operations
        in the
        period in which it is identified.
  Page
            41
  **i)**  **Revenue
        recognition**
  The
        Company follows Staff Accounting Bulletin No. 104: “Revenue Recognition,”
        Statement of Position (“SOP”) 97-2: “Software Revenue Recognition,” and Emerging
        Issues Task Force Issue No. 00-21: “Revenue Arrangements with Multiple
        Deliverables.” Revenue is recognized when persuasive evidence of an arrangement
        exists, the fees are fixed or determinable, the product or service has been
        delivered and collectability is assured.
 
 The
        Company derives revenues from the provision of conditional access, broadcast
        control, set-top box middleware, personal video recorder software, interactive
        software, systems and other services to pay-television platform operators
        and
        content providers. Conditional access systems enable such customers to manage
        and control the distribution of content and to protect such content from
        signal
        theft. Other software and systems provide platform operators and content
        providers with additional functionality and enable them to offer additional
        services. The systems that the Company sells include software that is installed
        at the platform operators’ facilities, as well as software and smart cards in
        set-top boxes, digital televisions and personal computers. The Company’s
        business gives rise to a number of revenue streams for which accounting policies
        are applied as follows:
 
 *Conditional
        access ─* *Smart
        cards*
  Smart
        cards are sold to platform operators for distribution to and use by their
        subscribers. The revenues derived from these sales are recognized upon delivery
        of the smart cards in accordance with the customers’ instructions. Appropriate
        provision is made for warranty and similar arrangements agreed with
        customers.
 
 *Conditional
        access ─* *Security
        fees*
  For
        some
        contracts, the Company receives fees from platform operators for the maintenance
        of security of conditional access systems for a specified duration which
        is
        typically between 24 and 48 months. Fees are received over the duration of
        the
        agreed service period and are related to the number of subscribers or authorized
        smart cards of the relevant broadcast platform. These revenues are recognized
        over the term of the security contract in the period in which the security
        services are performed. In some instances, the maintenance of security requires
        the replacement of a population of smart cards (“changeover cards”). In such
        instances, an amount of maintenance income is deferred and recognized when
        the
        changeover cards are delivered. The estimate of the amount of revenue to
        be
        deferred requires management to make assessments of the timing of the card
        changeover, the volume of changeover cards to be supplied and a fair unit
        revenue for those smart cards. To the extent that a card changeover is expected
        to commence within one year of the balance sheet date, the deferred revenue
        is
        classified as a current liability; otherwise it is classified as a non-current
        liability.
 
 *Integration,
        development and support*
  Contracts
        for development, integration and installation work are undertaken for customers
        on the basis of time and materials or by reference to a defined scope of
        work
        and related fixed price terms, or a combination of the two. The duration
        of such
        contracts has varied from a few weeks to approximately two years. Revenue
        for
        contracts negotiated on a time and materials basis is recognized as costs
        are
        incurred. Where there is uncertainty as to the scope of work or the fee payable,
        revenue is deferred until any uncertainties are resolved. For fixed price
        contracts involving significant adaptation of software, revenue and profit
        are
        recognized according to the proportion of the estimated contract value
        completed, ascertained by reference to percentage of technical completion,
        having regard to customer acceptance provisions in the contract. Where a
        contract has not sufficiently progressed for the outcome to be seen with
        reasonable certainty, but no loss is expected, then revenue is deferred until
        any uncertainties are resolved. All losses are recognized as soon as incurred
        or
        reasonably foreseen. Total contract revenue and profitability to date are
        reviewed periodically and the cumulative effects of changes are recognized
        in
        the period in which they are identified. Revenue from the supply of hardware
        and
        other items procured from third party suppliers, which are an integral part
        of
        an overall system, is recognized once customer acceptance is achieved, where
        this is a critical element of the contractual arrangements with the customer.
        Support and maintenance income is recognized over the term of the
        contract.
 
 *License
        fees and royalties*
  License
        fee income is recognized when the software is delivered to the customer unless
        the supply is closely linked to customization, integration and installation
        work, in which case revenue recognition is deferred until customer acceptance
        has occurred. Royalty income is typically receivable on the basis of the
        number
        of units manufactured or deployed by a licensee. Such income is recognized
        when
        it is fixed or determinable.
 
 *New
        technologies*
  Revenue
        categorized as arising from new technologies contains elements of conditional
        access revenue, development, integration and support revenue, and license
        fees
        and royalties.
 
 Page
            42
 **j)**  **Income
        taxes**
  The
        Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
        for Income Taxes.” SFAS No. 109 requires an asset and liability approach for
        financial accounting and reporting for income taxes. Under the asset and
        liability approach, deferred taxes are provided for the net tax effects of
        temporary differences between the carrying amounts of assets and liabilities
        for
        financial reporting purposes and the amounts used for income tax purposes.
        Valuation allowances are established when it is determined that it is more
        likely than not that some portion or all of the deferred tax assets will
        not be
        realized. Deferred taxes have not been provided on the cumulative undistributed
        earnings of foreign subsidiaries to the extent that amounts are expected
        to be
        reinvested indefinitely.
 
 **k)**  **Comprehensive
        income**
  The
        Company follows SFAS No. 130, “Reporting Comprehensive Income,” for the
        reporting and display of comprehensive income. Comprehensive income comprises
        net income, foreign currency translation adjustments and certain pension
        adjustments.
 
 **l)**  **Stock
        option-based compensation expense**
  Stock
        option-based compensation is accounted for by using the intrinsic value-based
        method in accordance with APB No. 25, “Accounting for Stock Issued to
        Employees.” The Company has adopted the disclosure-only provisions of SFAS No.
        123, “Accounting for Stock-Based Compensation.”
 
 The
        following table reflects the effect on net income and earnings per share
        as if
        the Company had applied the fair value recognition provisions for stock
        option-based employee compensation. These pro forma effects may not be
        representative of future stock option-based compensation expense since the
        estimated fair value of stock options on the date of grant is amortized to
        expense over the vesting period and additional stock options may be granted
        in
        future years. Additionally, the terms of certain stock options held by the
        previous Chief Financial Officer were modified on his departure, and the
        vesting
        of certain stock options was accelerated on June 27, 2005 (as discussed below).
 **For
                    the years ended June 30,**(in
                    thousands, except per share amounts)
                
                **2005**
                
                **2004**
                
                **2003**Net
                    income, as reported
                
                $
                73,998
                
                $
                37,055
                
                $
                56,243Add:
                    Stock option-based compensation cost included in the
                    determinationof
                    net income as reported (net of tax benefits of $1,701, $─ and
                    $─)
                
                
                2,626
                
                
                2,911
                
                
                899Deduct:
                    Total stock option-based compensation determined underfair
                    value based method for all awards, net of tax benefits of ($3,059,
                    $─ and
                    $─)
                
                
                (18,089
                )
                
                (9,369
                )
                
                1,231Pro-forma
                    net income
                
                $
                58,535
                
                $
                30,597
                
                $
                58,373Net
                    income per shareBasic
                    net income per share, as reported
                
                $
                1.35
                
                $
                0.69
                
                $
                1.04Diluted
                    net income per share, as reported
                
                $
                1.29
                
                $
                0.67
                
                $
                1.04Pro-forma
                    basic net income per share
                
                $
                1.07
                
                $
                0.57
                
                $
                1.08Pro-forma
                    diluted net income per share
                
                $
                1.02
                
                $
                0.55
                
                $
                1.08
  The
          fair
          value of each stock option grant is estimated on the date of grant using
          the
          Black-Scholes option-pricing model. The assumptions used were as
          follows:
  **For
                    the years ended June 30,**(in
                    thousands, except per share amounts)
                
                **2005**
                
                **2004**
                
                **2003**Risk
                    free interest rate
                
                
                4.24
                %
                
                4.38
                %
                
                3.15
                %Dividend
                    yield
                
                
                ─
                
                
                ─
                
                
                ─Expected
                    volatility
                
                
                80
                %
                
                87
                %
                
                93
                %Expected
                    life of options
                
                
                6.3
                    years
                
                
                5.0
                    years
                
                
                3.8
                    years
  Page
              43
  In
          December 2004, FASB issued SFAS No. 123 (R), “Share-Based Payment.” This
          standard will require the cost of employee compensation paid with equity
          instruments to be measured based on grant-date fair values. That cost will
          be
          recognized over the vesting period. SFAS No. 123 (R) will become effective
          for
          the Company in the first quarter of fiscal 2006.
 
 In
          recognition of his contribution to the Company, the Remuneration Committee
          of
          the Company’s Board of Directors (“the Remuneration Committee”) modified the
          terms of certain vested stock options held by the previous Chief Financial
          Officer such that those stock options may be exercised at any time prior
          to
          September 20, 2006 rather than lapsing on his departure. The additional
          charge
          under APB No. 25 of this modification, which is included in the consolidated
          statement of operations, is $1,293, net of tax of $554. The additional
          charge
          under SFAS No. 123 (R) of this modification is $144, net of tax of
          $62.
 
 On
          June
          27, 2005, the Remuneration Committee approved the acceleration of vesting
          of
          unvested out-of-the-money stock options granted under the Company’s stock option
          plans. The affected stock options are those with exercise prices greater
          than
          $32.50 per share, which was the closing price of the Company’s Series A ordinary
          shares (as traded in the form of American Depositary Shares on the NASDAQ
          National Market) on June 21, 2005. As a result of this action, the vesting
          of
          approximately 551,000 previously unvested stock options was accelerated
          and
          those stock options are now immediately exercisable. The action did not
          accelerate the vesting of any of the unvested stock options held by Directors,
          the Chief Executive Officer or the Chief Financial Officer.
 
 The
          Remuneration Committee’s decision to accelerate the vesting of these stock
          options was in anticipation of compensation expense to be recorded subsequent
          to
          the effect date of SFAS No. 123 (R) on July 1, 2005. The acceleration eliminates
          approximately $9.6 million ($8.8 million net of tax) from the Company’s
          future consolidated statements of operations, of which $5.1 million ($4.7
          million net of tax), $2.7 million ($2.5 million net of tax), $1.4 million
          ($1.2
          million net of tax), and $0.4 million ($0.4 million net of tax)
          would have
          been recognized in fiscal years 2006, 2007, 2008 and 2009, respectively,
          once
          SFAS No. 123 (R) becomes effective.
 
 **Note
          4.**  **Net
          income per share**
  Basic
          net
          income per share is calculated as net income divided by the weighted average
          number of ordinary shares in issue in each period. The interests of ordinary
          shareholders may be diluted due to the existence of stock options granted
          to
          employees. The dilutive effect of potential shares has been calculated
          using the
          treasury method and as such, is a function of the average share price in
          each
          period. The Series A and Series B ordinary shares have equal rights except
          in
          respect of voting and as such have equal weighting in the calculation of
          net
          income per share and equal net income per share.
 
 The
          numerator for the calculations of net income per share is net income. The
          denominator for the calculations is the weighted average numbers of shares,
          as
          follows:


**For
                  the years ended June 30,****2005**
              
              **2004**
              
              **2003**Weighted
                  average number of ordinary shares in issue
              
              
              54,758,479
              
              
              54,093,083
              
              
              53,856,141Effect
                  of dilutive stock options
              
              
              2,679,008
              
              
              1,553,088
              
              
              214,311Denominator
                  for dilutive net income per share
              
              
              57,437,487
              
              
              55,646,171
              
              
              54,070,452Antidilutive
                  options excluded from calculation
              
              
              55,042
              
              
              929,121
              
              
              2,307,284




Page
          44


**Note
        5.**  **Inventories**


**As
                  of June 30,**(in
                  thousands)
              
              **2005**
              
              **2004**Unprocessed
                  smart cards and their components
              
              $
              41,717
              
              $
              39,454Inventory
                  reserves
              
              
              (3,398
              )
              
              (4,242
              )38,319
              
              
              35,212Contract
                  work-in-progress
              
              
              3,189
              
              
              760Total
                  inventories
              
              $
              41,508
              
              $
              35,972


Unprocessed
        smart cards and their components are considered to be in the state of
        work-in-progress.
 
 **Note
        6.**  **Accounts
        receivable**


**As
                  of June 30,**(in
                  thousands)
              
              **2005**
              
              **2004**Gross
                  amount due
              
              $
              75,015
              
              $
              87,316Less
                  valuation reserves
              
              
              (1,427
              )
              
              (3,021
              )$
              73,588
              
              $
              84,295


**Note
        7.**  **Property,
        plant and equipment**


**Useful
                    lives**
                
                **As
                    of June 30,**(in
                    thousands)
                
                
                
                **2005**
                
                **2004**Leasehold
                    improvements
                
                
                3
                    to 7 years
                
                $
                14,157
                
                $
                19,037Plant
                    and equipment
                
                
                2
                    to 5 years
                
                
                86,864
                
                
                87,870101,021
                
                
                106,907Less
                    accumulated depreciation
                
                
                
                
                
                (67,059
                )
                
                (77,435
                )Total
                    property, plant and equipment, net
                
                
                
                
                $
                33,962
                
                $
                29,472


Depreciation
        related to property, plant and equipment was $15,405, $13,526 and $11,795
        for
        the years ended June 30, 2005, 2004, and 2003, respectively.
 
 Total
        operating lease expense was $15,267, $13,124 and $8,012 for the years ended
        June 30, 2005, 2004 and 2003, respectively.
 
 **Note
        8.**  **Goodwill
        and other intangible assets**
  The
        movement in goodwill during the year ended June 30, 2005 is due to
        foreign
        exchange translation.
 
 In
        December 2003, the Company acquired the MediaHighway middleware business
        from a
        subsidiary of Thomson SA and licensed certain related patents from Thomson
        SA
        for consideration in cash of the equivalent of $65.0 million (net of cash
        acquired). The Company commissioned an independent valuation of the separable
        intangible fixed assets acquired, together with an assessment of their expected
        useful lives.
 
  Page
            45
  The
        fair
        value of assets and liabilities acquired was as follows:


**Fair
                  Value**Cash
              
              $
              10,292Other
                  current assets
              
              
              8,163Goodwill
              
              
              11,391Other
                  intangibles
              
              
              60,797Property,
                  plant and equipment
              
              
              3,584Current
                  liabilities
              
              
              (18,929
              )Total
                  consideration
              
              $
              75,298


As
        of
        June 30, 2004, the Company examined in detail the plans and projections
        of
        the acquired business and the way in which it had been integrated into the
        rest
        of the organization. As a result of this assessment management concluded
        that
        the value of $60.8 million attributed to the intellectual property rights
        and
        products of the MediaHighway business were supported by the business plans
        and
        cash flow projections. These intangible assets are being amortized over their
        expected useful lives of three to ten years. However, the projections of
        the
        incremental future cash flows attributable to the acquired business did not
        support the value of the goodwill acquired. Accordingly an impairment charge
        was
        recorded to write down the acquired goodwill from its cost of $11,391 to
        nil and
        this impairment charge was recorded as part of operating expenses in the
        year
        ended June 30, 2004.
 
 Other
        intangible assets comprise intellectual property rights:


**Useful
                    lives**
              
              **As
                  of June 30,**(in
                  thousands)
              
              
              
              **2005**
              
              **2004**Cost
              
              
              3
                  to 10 years
              
              $
              72,191
              
              $
              73,952Less
                  accumulated amortization
              
              
              
              
              
              (23,654
              )
              
              (12,271
              )Other
                  intangibles, net
              
              
              
              
              $
              48,537
              
              $
              61,681


Amortization
        of other intangibles was $12,349. $8,177 and $3,000 for the years ended
        June 30, 2005, 2004, and 2003 respectively.
 
 Based
        on
        the current amount of intangible assets subject to amortization, the estimated
        amortization expense for each of the succeeding five fiscal years is as follows:
        2006 - $8,890; 2007 - $8,791; 2008 - $8,679; 2009 - $8,624; and 2010 -
        $8,624.
 
 **Note
        9.**  **Deferred
        income**


**As
                  of June 30,**(in
                  thousands)
              
              **2005**
              
              **2004**Deferred
                  security fees
              
              $
              87,941
              
              $
              36,960Advance
                  receipts and other deferred income
              
              
              46,587
              
              
              60,904Total
                  deferred income
              
              $
              134,528
              
              $
              97,864Included
                  within current liabilities
              
              $
              47,175
              
              $
              62,579Included
                  within non-current liabilities
              
              
              87,353
              
              
              35,285$
              134,528
              
              $
              97,864




Page
          46


**Note
        10.**  **Abandoned
        property leases**




**For
                  the years ended June 30,**(in
                  thousands)
              
              **2005**
              
              **2004**
              
              **2003**Beginning
                  of year
              
              $
              8,727
              
              $
              3,852
              
              $
              2,914Additions
                  (reversals)
              
              
              (5,521
              )
              
              5,812
              
              
              2,904Used
              
              
              (2,118
              )
              
              (1,526
              )
              
              (2,235
              )Foreign
                  exchange movements
              
              
              53
              
              
              589
              
              
              269End
                  of year
              
              $
              1,141
              
              $
              8,727
              
              $
              3,852




In
        fiscal
        2001, the Company decided to abandon its leased premises at Heathrow, England
        which the Company vacated in September 2000. An additional accrual was made
        in
        fiscal 2003 and again in fiscal 2004, as the Company was unable to assign
        the
        lease back to a former tenant. During the year ended June 30, 2005, the Company
        committed to reoccupy most of the premises, and the Company reversed a part
        of
        the accrual previously made. The accrual as of June 30, 2005 represents the
        Company’s best estimate of its remaining obligation in connection with this
        abandonment. All amounts accrued and reversed have been included within general
        and administrative expenses in the consolidated statement of operations,
        and
        within accrued expenses in the consolidated balance sheet. The cumulative
        amount
        paid through June 30, 2005 is $9,359 and the total amount charged to the
        profit
        and loss net of releases up to June 30, 2005 is $10,500.
 
 **Note
        11.**  **Related
        party transactions**
  The
        Company conducts business transactions with News Corporation and its
        subsidiaries and affiliates. These entities are considered to be related
        parties. Agreements covering arrangements between News Corporation and its
        subsidiaries or affiliates and the Company are entered into in the context
        of
        two entities over which a third entity exercises significant influence or
        control. There can be no assurance therefore, that each of the agreements,
        or
        the transactions provided for therein, or any amendments thereof will be
        affected on terms at least as favorable to the Company as could have been
        obtained from unaffiliated third parties. Any new contracts with related
        parties
        or significant amendments to such contracts are approved by the Audit Committee
        of the Company’s Board of Directors.
 
 These
        transactions are of three main types: the provision by the Company of technology
        and services for digital pay-television systems; the payment by the Company
        of
        royalties for the use of certain intellectual property rights; and the receipt
        by the Company of administrative services.
  **a)**  **Provision
        of technology and services**
  Technology
        and services for digital pay-television systems are supplied to affiliates
        and
        subsidiaries of News Corporation. The principal related parties supplied
        by the
        Company are BSkyB, DIRECTV ( a related party from December 2003), DIRECTV
        Latin
        America (a related party from December 2003), Sky Brasil, Sky Mexico, DTH
        TechCo, Sky Colombia, Sky Chile, FOXTEL and Sky Network Television (all of
        which
        are affiliates of News Corporation) and Sky Italia and STAR TV (both
        subsidiaries of News Corporation).
 
 Revenue
        recognized from such related parties was $411,857, $202,095 and $155,740
        for the
        years ended June 30, 2005, 2004 and 2003, respectively.
 
 Included
        within accounts receivable are amounts of $51,909 and $60,312 as of
        June 30, 2005 and 2004, respectively, which are due from related parties
        in
        respect of normal sales transactions.
 
 **b)**  **Royalty
        payments**
  A
        royalty
        is payable to a related party in respect of certain intellectual property
        rights
        which the Company has licensed for use in certain applications supplied to
        customers. The royalty expense payable to such related parties was $3,682,
        $576
        and $104 for the years ended June 30, 2005, 2004 and 2003,
        respectively.
 
 **c)**  **Administration
        and finance services**
  News
        Corporation provides services under a Master Intercompany Agreement which
        provides, among other things, for arrangements governing the relationship
        between the Company and News Corporation. The consideration for each of the
        services and other arrangements set forth in the Master Intercompany Agreement
        is mutually agreed and based upon allocated costs. All such consideration
        and
        any material arrangements are subject to the approval of the Company’s Audit
        Committee. The services covered by the Master Intercompany Agreement include
        cash management and financing, services of News Corporation employees, facility
        arrangements, employee matters, including pensions and certain other services.
        Amounts charged in respect of these services amounted to $263, $230 and $206
        for
        the years ended June 30, 2005, 2004 and 2003, respectively.
 
 Page
            47
 Included
        within accounts payable are amounts of $3,124 and $3,107 as of June 30,
        2005 and 2004, respectively, which were owed to News Corporation in respect
        of
        administrative services and operating costs paid on behalf of the
        Company.
 
 The
        Company has a short-term loan facility of £30 million from News Corporation. The
        facility has no expiry date and no amounts were drawn down as of June 30,
        2005 or June 30, 2004. The facility is considered to be adequate for
        the
        Company’s needs.
 
 The
        Company and certain subsidiaries have entered into cross-guarantees with
        HSBC
        Bank plc providing mutual guarantees with other subsidiaries of News Corporation
        for amounts owed to the bank under a collective overdraft facility of £20
        million. The Company has been informed by News Corporation that no amounts
        were
        owed to HSBC Bank plc as of June 30, 2005 or June 30, 2004
        which would
        be covered by these guarantees.
 
 **d)**  **U.K.
        Corporation Tax**
  The
        Company has entered into a Group Relief Agreement with a U.K. subsidiary
        of News
        Corporation, which provides for the mutual surrender of losses and other
        allowances by group relief. Subject to the terms of the agreement, the party
        accepting such surrender shall pay or cause to be paid to the surrendering
        party
        an amount equal to the amount of tax such accepting party would have paid
        but
        for such surrender. Income tax expense includes such amounts and part of
        the
        income tax liability may be settled by payments to News Corporation, rather
        than
        the U.K. Inland Revenue.
 
 **Note
        12.**  **Contingencies
        and commitments**
  **a)**  **Firm
        commitments**
  The
        Company has commitments under certain firm contractual arrangements (“firm
        commitments”) to make future payments. These firm commitments secure the future
        rights to various assets and services to be used in the normal course of
        operations. The following table summarizes the Company’s material firm
        commitments at June 30, 2005.


**As
                  of June 30, 2005****Payments
                  due by period****Less
                  than**
              
              
              
              
              
              **After**(in
                  thousands)
              
              **Total**
              
              **1
                  year**
              
              **2-3
                  years**
              
              **4-5
                  years**
              
              **5
                  years**Operating
                  lease obligations (1)
              
              $
              146,299
              
              $
              17,028
              
              $
              32,395
              
              $
              30,390
              
              $
              66,486Smart
                  card purchase obligations
              
              
              33,859
              
              
              33,859
              
              
              ─
              
              
              ─
              
              
              **─**Capital
                  expenditure purchase obligations
              
              
              4,013
              
              
              4,013
              
              
              ─
              
              
              ─
              
              
              **─**$
              184,171
              
              $
              54,900
              
              $
              32,395
              
              $
              30,390
              
              $
              66,486





(1)
              The
                  Company has accrued costs in respect of leased premises identified
                  as
                  surplus to requirements included in the above total of $1,141 as
                  of
                  June 30, 2005 (see Note 10). Included in total operating
                  lease
                  obligations is an amount of $3,245 which is not expected to be
                  incurred as
                  the Company intends to exercise a put option to revert part of
                  one leased
                  property to a former tenant.
 
 **b)**  **Litigation**
  On
        June
        6, 2003, Echostar Communications Corporation, Echostar Satellite Corporation,
        Echostar Technologies Corporation and Nagrastar L.L.C. (collectively,
“Echostar”) filed an action against the Company in the United States District
        Court for the Central District of California. Echostar filed an amended
        complaint on October 8, 2003, which purported to allege claims for violation
        of
        the Digital Millennium Copyright Act (“DMCA”), the Communications Act of 1934
        (“CA”), the Electronic Communications Privacy Act, The Computer Fraud and Abuse
        Act, California’s Unfair Competition statute and the federal RICO statute. The
        complaint also purported to allege claims for civil conspiracy, misappropriation
        of trade secrets and interference with prospective business advantage. The
        complaint sought injunctive relief, unspecified compensatory and exemplary
        damages and restitution. On December 22, 2003, all of the claims were dismissed
        by the court, except for the DMCA, CA and unfair competition claims, and
        the
        court limited these claims to acts allegedly occurring within three years
        of the
        filing of the complaint. Echostar filed a second amended complaint. The Company
        filed a motion to dismiss the second amended complaint on March 31,
        2004.
        On July 21, 2004, the court issued an order among other things directing
        Echostar to file a third amended complaint within ten days correcting various
        deficiencies in the second amended complaint noted by the court. Echostar
        filed
        its third amended complaint on August 4, 2004. On August 6, 2004, the court
        ruled that the Company was free to file a motion to dismiss the third amended
        complaint, which the Company did on September 20, 2004. The hearing occurred
        on
        January 3, 2005. On February 28, 2005, the court issued an order treating
        the
        motion as a motion for a more definite statement, granted the motion and
        gave
        Echostar until March 30, 2005 to file a fourth amended compliant correcting
        various deficiencies in the third amended complaint noticed by the court.
        On
        March 30, 2005, Echostar filed a fourth amended complaint. The Company filed
        a
        motion to dismiss the fourth amended complaint which Echostar opposed. On
        July
        27, 2005, the court granted the motion in part and denied the motion in part.
        The Company now has until September 26, 2005 to answer the remaining claims
        in
        the complaint. The Company believes those claims are without merit and intends
        to vigorously defend against them.




Page
          48


On
        July
        25, 2003, Sogecable, S.A. and its subsidiary Canalsatellite Digital, S.L.,
        Spanish satellite broadcasters and customers of Canal+ Technologies SA
        (together, “Sogecable”), filed an action against the Company in the United
        States District Court for the Central District of California. Sogecable filed
        an
        amended complaint on October 9, 2003, which purported to allege claims for
        violation of the DMCA and the federal RICO statute. The amended complaint
        also
        purported to allege claims for interference with contract and prospective
        business advantage. The complaint sought injunctive relief, unspecified
        compensatory and exemplary damages and restitution. On December 22, 2003,
        all of
        the claims were dismissed by the court. Sogecable filed a second amended
        complaint. The Company filed a motion to dismiss the second amended complaint
        on
        March 31, 2004. On July 23, 2004, the court heard oral argument on
        the
        motion and advised that a formal ruling should be issued by early August.
        On
        August 4, 2004, the court issued an order dismissing the second amended
        complaint in its entirety. Sogecable had until October 4, 2004 to
        file a
        third amended complaint. On October 1, 2004, Sogecable notified the court
        that
        it would not be filing a third amended complaint, but would appeal the court’s
        entry of final judgment dismissing the suit to the United States Ninth Circuit
        Court of Appeals. Sogecable has filed a brief on appeal and the Company’s
        opposition was filed on August 22, 2005.
 
 On
        April
        18, 1997, International Electronics Technology Corp. filed suit in the United
        States District Court for the Central District of California against the
        Company’s customers, DIRECTV, Inc. and Thomson Consumer Electronics, Inc.,
        alleging infringement of one U.S. patent and seeking unspecified damages
        and
        injunction. Although not a party to this case, the Company has assumed the
        defense and agreed to indemnify the named defendants. The defendants have
        raised
        defenses of non-infringement and/or invalidity. On August 2, 2004, the court
        stayed the case indefinitely pending decision by the Federal Circuit in another
        case. The Federal Circuit’s decision was issued on July 12, 2005, and the court
        held a status conference on August 8, 2005.
 
 **c)**  **Government
        grants**
  The
        Company has received grants from the government of the State of Israel towards
        the cost of certain capital expenditure. If the conditions of the grants
        are not
        complied with, the grants may be required to be refunded, in whole or in
        part,
        with interest from the date of receipt. The major conditions relating to
        a grant
        concern the maintenance of adequate non-distributable reserves and retention
        of
        the associated assets for a set period of time. The cumulative amount received
        and receivable to June 30, 2005 amounted to approximately $10 million.
        It
        is not anticipated that any repayment will be required. Property, plant and
        equipment situated in Israel with a net book value of $9,559 as of June 30,
        2005 is the subject of a floating charge to secure compliance with the terms
        of
        the grants.
 
 **d)**  **Guarantees**
  In
        the
        normal course of business, the Company provides indemnification agreements
        of
        varying scopes, including limited product warranties and indemnification
        of
        customers against claims of intellectual property infringement made by third
        parties arising from the use of our products or services. The nature of these
        commitments has been considered in determining the revenues and costs recognized
        in these financial statements. Costs are accrued for known warranty and
        indemnification issues if a loss is probable and can be reasonably estimated.
        Historically, costs related to these warranties and indemnification agreements
        have not been significant, but because potential future costs are highly
        variable, we are unable to estimate the maximum potential impact of these
        guarantees on the Company’s future results of operations.
 
 **e)**  **Other**
  The
        nature of the Company’s business is such that it may be subject to claims by
        third parties alleging infringements of various intellectual property rights.
        Such claims are vigorously defended. Where a liability arising from these
        claims
        is probable, an accrual is made based on management’s best estimate. It is not
        considered that any resulting liability in excess of amounts recognized in
        these
        financial statements would materially affect the Company’s financial
        position.
 
 As
        of
        June 30, 2005, $3.5 million was deposited with banks to secure guarantees
        issued
        by the banks in respect of certain leased premises. Should the cash be withdrawn
        from the banks, the terms of the guarantees would require
        amendment.
 
 Page
            49
 
 **13.**  **Stock
        option plans**
  The
        Company has three executive stock option schemes: The NDS 1997 Executive
        Share
        Option Scheme (the “1997 scheme”), The NDS 1999 Executive Share Option Scheme
        (the “1999 unapproved scheme”) and The NDS UK Approved Share Option Scheme (the
“1999 approved scheme”). The provisions of each scheme are substantially the
        same, except that the 1999 approved scheme is approved by the UK Inland Revenue
        for the purposes of granting UK employees options over shares in the Company
        which are free from income tax in the hands of the employee under certain
        circumstances. Following the creation of the 1999 unapproved scheme, no further
        options will be granted under the 1997 scheme. The schemes provide for the
        grant
        of options to purchase Series A ordinary shares in the Company with a maximum
        term of ten years. Options granted under the schemes vest over a four-year
        period. The schemes authorize options to be granted subject to a maximum
        of 10%
        of the ordinary shares of the Company in issue at the date of grant.
 
 In
        addition, the Company operates employee share ownership schemes in the United
        Kingdom, Israel and the United States. These enable employees to enter into
        a
        fixed-term savings contract with independent financial institutions linked
        to an
        option to subscribe for Series A ordinary shares in the Company. The option
        price is set at a discount of between 15% and 20% of the quoted closing price
        of
        the Series A ordinary shares on the Nasdaq National Market on the last trading
        day before the announcement of the schemes.
 
 All
        employees are entitled to participate in the plans, however (with the exception
        of the employee share ownership schemes which are open to all), management
        determines to whom and how many options are granted.
 
 The
        following table summarizes information about the Company’s stock option
        transactions:


**For
                  the years ended June 30,****2005**
              
              **2004**
              
              **2003****Weighted**
              
              
              
              **Weighted**
              
              
              
              **Weighted****Average**
              
              
              
              **Average**
              
              
              
              **Average****Exercise**
              
              
              
              **Exercise**
              
              
              
              **Exercise****Number**
              
              **Price**
              
              **Number**
              
              **Price**
              
              **Number**
              
              **Price**Outstanding
                  at beginning of year
              
              
              4,843,457
              
              $
              14.60
              
              
              4,207,909
              
              $
              14.06
              
              
              4,505,568
              
              $
              25.23Granted
              
              
              721,365
              
              $
              32.78
              
              
              863,616
              
              $
              17.12
              
              
              960,927
              
              $
              7.60Exercised
              
              
              (1,131,948
              )
              $
              11.92
              
              
              (202,917
              )
              $
              11.01
              
              
              ─
              
              
              ─Lapsed
              
              
              (95,361
              )
              $
              21.66
              
              
              (25,151
              )
              $
              39.66
              
              
              (306,771
              )
              $
              24.83Cancelled
              
              
              ─
              
              
              ─
              
              
              ─
              
              
              ─
              
              
              (951,815
              )
              $
              56.92Outstanding
                  at end of year
              
              
              4,337,513
              
              $
              18.17
              
              
              4,843,457
              
              $
              14.60
              
              
              4,207,909
              
              $
              14.06Exercisable
                  at end of year
              
              
              2,872,296
              
              $
              19.02
              
              
              2,728,529
              
              $
              14.53
              
              
              2,389,932
              
              $
              13.19Weighted
                  average fair value of stock options grantedusing
                  the assumptions set out in Note 4
              
              
              
              
              $
              23.59
              
              
              
              
              $
              11.94
              
              
              
              
              $
              5.14


All
        stock
        options granted during the year ended June 30, 2005 were granted at
        an
        exercise price equal to the market price. The terms of certain stock options
        were modified during the year ended June 30, 2005, as described in
        Note
        3l.




Page
          50


The
        following table summarizes information about the stock options outstanding
        as of
        June 30, 2005:


**Options
                  outstanding**
              
              **Options
                  exercisable****as
                  of June 30, 2005**
              
              **as
                  of June 30, 2005****Weighted**
              
              **Weighted**
              
              
              
              **Weighted****average**
              
              **average**
              
              
              
              **average****exercise**
              
              **remaining**
              
              
              
              **exercise****Range
                  of exercise prices**
              
              **Number**
              
              **price**
              
              **life**
              
              **Number**
              
              **price**Up
                  to $10.00
              
              
              1,472,825
              
              $
              8.27
              
              
              3.4
                  years
              
              
              1,006,772
              
              $
              8.56$10.01
                  to $20.00
              
              
              1,376,451
              
              $
              18.31
              
              
              6.7
                  years
              
              
              760,130
              
              $
              19.29$20.01
                  to $30.00
              
              
              765,945
              
              $
              22.01
              
              
              6.4
                  years
              
              
              528,102
              
              $
              21.94$30.01
                  to $40.00
              
              
              687,673
              
              $
              33.05
              
              
              9.5
                  years
              
              
              542,673
              
              $
              32.99$40.01
                  to $50.00
              
              
              11,500
              
              $
              43.00
              
              
              4.6
                  years
              
              
              11,500
              
              $
              43.00$50.01
                  to $60.00
              
              
              23,119
              
              $
              58.70
              
              
              5.2
                  years
              
              
              23,119
              
              $
              58.70All
                  options
              
              
              4,337,513
              
              $
              18.17
              
              
              6.0
                  years
              
              
              2,872,296
              
              $
              19.02


**Note
        14.**  **Income
        taxes**
  Significant
        components of the Company’s provisions for income taxes were as
        follows:


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2005**
              
              **2004**
              
              **2003**UK
                  current tax
              
              $
              18,476
              
              $
              16,121
              
              $
              20,294Overseas
                  current tax
              
              
              8,624
              
              
              5,869
              
              
              5,260Double
                  tax relief
              
              
              (4,073
              )
              
              (3,237
              )
              
              (3,532
              )Tax
                  of equity affiliate
              
              
              ─
              
              
              ─
              
              
              (119
              )Total
                  current tax
              
              
              23,027
              
              
              18,753
              
              
              21,903UK
                  deferred tax
              
              
              3,191
              
              
              3,105
              
              
              1,896Overseas
                  deferred tax
              
              
              1,135
              
              
              (2,797
              )
              
              85Total
                  deferred tax
              
              
              4,326
              
              
              308
              
              
              1,981Total
                  income tax expense
              
              $
              27,353
              
              $
              19,061
              
              $
              23,884Tax
                  benefits on stock options, credited to additional paid-in
                  capital
              
              $
              (2,154
              )
              $
              ─
              
              $
              ─Tax
                  (benefit) expense on additional pension liability,recorded
                  within other comprehensive income
              
              $
              (366
              )
              $
              599
              
              $
              (571
              )


Income
        before income taxes arose in the United Kingdom and overseas as
        follows:


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2005**
              
              **2004**
              
              **2003**UK
                  income before income taxes
              
              $
              80,207
              
              $
              63,158
              
              $
              66,205Overseas
                  income (loss) before income taxes
              
              
              21,144
              
              
              (7,885
              )
              
              13,760Total
                  income before income taxes
              
              $
              101,351
              
              $
              55,273
              
              $
              79,965




Page
          51


The
        reconciliation of income tax computed at the U.K. statutory rate to the income
        tax expense is as follows:


**For
                  the years ended June 30,****2005**
              
              **2004**
              
              **2003**Income
                  tax at UK statutory rate
              
              
              30.0
              %
              
              30.0
              %
              
              30.0
              %Effect
                  of different tax rates
              
              
              (1.4
              %)
              
              (3.0
              %)
              
              (2.6
              %)Goodwill
                  impairment
              
              
              0.0
              %
              
              6.1
              %
              
              0.0
              %Stock
                  options
              
              
              0.4
              %
              
              1.6
              %
              
              0.3
              %Other
                  permanent differences
              
              
              (1.2
              %)
              
              0.6
              %
              
              0.5
              %Losses
                  for which no relief is available
              
              
              0.2
              %
              
              1.0
              %
              
              0.8
              %Movement
                  in valuation reserve
              
              
              0.0
              %
              
              1.7
              %
              
              (2.0
              %)Adjustments
                  in respect of previous years’ accruals
              
              
              (1.0
              %)
              
              (3.5
              %)
              
              2.9
              %Effective
                  income tax rate
              
              
              27.0
              %
              
              34.5
              %
              
              29.9
              %


Deferred
        tax assets comprise:


**As
                  of June 30,**(in
                  thousands)
              
              **2005**
              
              **2004**Property,
                  plant and equipment
              
              $
              1,225
              
              $
              1,555Accrued
                  expenses
              
              
              2,137
              
              
              1,725Pension
                  liability
              
              
              1,318
              
              
              1,093Stock
                  options
              
              
              441
              
              
              —Deferred
                  income
              
              
              ─
              
              
              2,328Benefit
                  of operating losses carried forward
              
              
              3,455
              
              
              6,2438,576
              
              
              12,944Valuation
                  reserve
              
              
              (3,455
              )
              
              (3,791
              )Total
                  deferred tax assets
              
              $
              5,121
              
              $
              9,153


As
        of
        June 30, 2005, the Company had approximately $10 million of French
        net
        operating loss carryforwards available to offset future taxable income. These
        net operating losses may be carried forward indefinitely. In assessing the
        realizability of deferred tax assets, management evaluates a variety of factors
        in considering whether it is more likely than not that some portion or all
        of
        the deferred tax assets will ultimately be realized. Management considers
        earnings expectations, the existence of taxable temporary differences, tax
        planning strategies and the periods in which estimated losses can be utilized.
        Based upon this analysis, management has concluded that it is more likely
        than
        not that the Company will not realize all of the benefits of its deferred
        tax
        assets. Accordingly, valuation allowances of $3,455 and $3,791 have been
        established to reflect the expected realization of the deferred tax assets
        as of
        June 30, 2005 and 2004, respectively.
 
 The
        Company has not provided for possible U.K. taxes on the undistributed earnings
        of foreign subsidiaries that are considered to be reinvested indefinitely.
        Calculation of the unrecognized deferred tax liability for temporary differences
        related to these earnings is not practicable. Undistributed earnings of foreign
        subsidiaries considered to be indefinitely reinvested amounted to approximately
        $38 million as of June 30, 2005.
 
 **Note
        15.**  **Pension
        benefits**
  Most
        U.K.
        employees of the Company are eligible for membership of the News International
        Pension Plan, a defined contribution scheme operated for the benefit of certain
        U.K. employees of News Corporation. Company contributions amounted to $4,120,
        $2,921 and $2,000 for the years ended June 30, 2005, 2004 and 2003,
        respectively.
 
 Most
        U.S.
        employees of the Company are eligible for membership of the News America
        Incorporated Employees’ Pension and Retirement Plan which is operated for the
        benefit of certain U.S. employees of News Corporation. As such, and so far
        as it
        relates to the Company, it is a multi-employer defined benefit scheme. It
        is not
        possible to determine the assets and liabilities of this scheme relating
        to the
        obligations of the Company to current and former employees. Accordingly,
        the
        expense is the contributions payable in the year, as determined by third
        party
        actuaries. Company contributions amounted to $646, $281 and $236 for the
        years
        ended June 30, 2005, 2004 and 2003, respectively.
  Page
            52
 The
        Company has certain liabilities to a small number of current and former
        employees who are members of a U.K. defined benefit pension scheme. The scheme
        is closed and the age profile of the active membership is rising significantly
        and therefore the service cost is likely to increase over the coming years.
        The
        trustees of the scheme, the actuaries and the Company have agreed to make
        additional lump sum payments into the scheme and the contribution rates of
        employed members have been set individually. The Company uses a June 30
        measurement date for the defined benefit pension scheme.
 
 The
        elements of net periodic pension expense are as follows:


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2005**
              
              **2004**
              
              **2003**Service
                  cost
              
              $
              172
              
              $
              164
              
              $
              143Interest
                  cost
              
              
              893
              
              
              764
              
              
              641Expected
                  return on assets
              
              
              (706
              )
              
              (540
              )
              
              (549
              )Net
                  amortization of loss
              
              
              446
              
              
              445
              
              
              241Net
                  periodic pension expense
              
              $
              805
              
              $
              833
              
              $
              476


The
        following assumptions were used in accounting for the plan:


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2005**
              
              **2004**
              
              **2003**Assumed
                  discount rate
              
              
              5.00
              %
              
              5.75
              %
              
              5.30
              %Expected
                  long-term rate of return on plan assets
              
              
              7.50
              %
              
              7.50
              %
              
              7.50
              %Rate
                  of increase in pensions
              
              
              3.00
              %
              
              3.00
              %
              
              3.00
              %Rate
                  of compensation increase
              
              
              4.25
              %
              
              4.50
              %
              
              4.50
              %


Overall
        asset returns were based upon the target asset allocation and return estimates
        for equity and debt securities. The expected rate of return for equities
        was
        based upon the long-term equity risk premium over the risk-free rate, which
        was
        then adjusted downward from the historical rate to reflect recent market
        conditions. The expected return on debt securities was based upon an analysis
        of
        current and historical yields on portfolios of similar quality and
        duration.
 
 The
        funding of the Company’s defined benefit pension plan is as
        follows:


**As
                  of June 30,**(in
                  thousands)
              
              **2005**
              
              **2004**Accumulated
                  vested obligation (“ABO”)
              
              $
              15,237
              
              $
              12,626Effect
                  of projected future salary increases
              
              
              4,169
              
              
              3,310Projected
                  benefit obligation (“PBO”)
              
              
              19,406
              
              
              15,936Fair
                  value of plan assets
              
              
              10,845
              
              
              8,548Plan
                  assets less than PBO
              
              
              (8,561
              )
              
              (7,388
              )Unrecognized
                  net loss
              
              
              9,485
              
              
              7,762Prepaid
                  pension cost
              
              
              924
              
              
              374Additional
                  liability recognized through other comprehensive income
              
              
              (5,316
              )
              
              (4,452
              )Total
                  amount recorded in consolidated balance sheet
              
              $
              (4,392
              )
              $
              (4,078
              )




Page
          53


The
        following table is a reconciliation of PBO:


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2005**
              
              **2004**
              
              **2003**PBO,
                  beginning of year
              
              $
              15,936
              
              $
              13,728
              
              $
              10,265Service
                  cost
              
              
              172
              
              
              164
              
              
              143Interest
                  on PBO
              
              
              893
              
              
              764
              
              
              641Actuarial
                  (gain) loss
              
              
              3,176
              
              
              (77
              )
              
              1,737Benefits
                  paid
              
              
              (231
              )
              
              (171
              )
              
              (189
              )Employee
                  contributions
              
              
              135
              
              
              134
              
              
              124Foreign
                  exchange movements
              
              
              (675
              )
              
              1,394
              
              
              1,007PBO,
                  end of year
              
              $
              19,406
              
              $
              15,936
              
              $
              13,728


The
        following table is a reconciliation of the fair value of plan
        assets:


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2005**
              
              **2004**
              
              **2003**Plan
                  assets at fair value, beginning of year
              
              $
              8,548
              
              $
              6,712
              
              $
              6,418Employer
                  contributions
              
              
              1,392
              
              
              419
              
              
              489Employee
                  contributions
              
              
              135
              
              
              134
              
              
              124Benefits
                  paid
              
              
              (231
              )
              
              (171
              )
              
              (189
              )Return
                  on assets
              
              
              1,382
              
              
              736
              
              
              (673
              )Foreign
                  exchange movements
              
              
              (381
              )
              
              718
              
              
              543Plan
                  assets at fair value, end of year
              
              $
              10,845
              
              $
              8,548
              
              $
              6,712


The
        following table sets forth the estimated benefit payments for the next five
        fiscal years, and in aggregate for the five fiscal years thereafter. The
        expected benefits are estimated based on the same assumptions used to measure
        the Company’s benefit obligation at the end of the fiscal year and include
        benefits attributable to estimated future employee service:


(in
                  thousands)
              
              **Expected****pension****payments**2006
              
              $
              2282007
              
              
              2362008
              
              
              2432009
              
              
              2732010
              
              
              2602011
                  to 2015
              
              
              3,037Total
              
              $
              4,277


The
        Company’s investment strategy for its pension plans is to maximize the long-term
        rate of return on plan assets within an acceptable level of risk in order
        to
        minimize the cost of providing pension benefits while maintaining adequate
        funding levels. The Company’s practice is to conduct a strategic review of its
        asset allocation strategy every year. The Company’s current broad strategic
        targets are to have a pension asset portfolio comprising of 60% equity
        securities and 40% fixed income securities. The Company’s equity portfolios are
        managed in such a way as to achieve optimal diversity. The Company’s fixed
        income portfolio is investment grade in the aggregate. The Company does not
        manage any assets internally, does not have any passive investments in index
        funds and does not utilize hedging, futures or derivative instruments. No
        investments are held in stock of the Company or of News
        Corporation.




Page
          54


The
        Company’s benefit plan weighted-average asset allocations as of June 30,
        2005 and 2004, by asset category, are as follows:


**As
                  of June 30,**(in
                  thousands)
              
              **2005**
              
              **2004**Equities
              
              $
              6,432
              
              $
              5,143Debt
                  securities
              
              
              4,353
              
              
              3,294Cash
              
              
              60
              
              
              111Total
                  amount recorded in consolidated balance sheet
              
              $
              10,845
              
              $
              8,548


The
        Company’s committed minimum contributions in fiscal 2006 are expected to be
        $253. An additional voluntary contribution of approximately $885 is also
        expected to be made.
 
 **Note
        16.**  **Segment
        information**
  The
        business is managed as a single operating unit or segment, being the supply
        of
        digital technology and services enabling and supporting digital pay-television
        platform operators and content providers.
  Revenue
        analyzed by geographical destination (i.e. the country of operations of the
        customer) was as follows:


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2005**
              
              **2004**
              
              **2003**United
                  Kingdom
              
              $
              151,083
              
              $
              130,339
              
              $
              153,872Europe
                  and the Middle East
              
              
              108,454
              
              
              59,714
              
              
              23,666North
                  America
              
              
              183,420
              
              
              87,744
              
              
              166,718Latin-America
              
              
              59,224
              
              
              37,745
              
              
              31,750Asia-Pacific
              
              
              54,149
              
              
              41,121
              
              
              31,344$
              556,330
              
              $
              356,663
              
              $
              407,350


Revenues
        from North America include $182,451, $87,436 and $166,718 from customers
        in the
        United States in fiscal 2005, 2004 and 2003, respectively. Revenues from
        Latin
        America include $28,175, $10,062 and $7,302 from customers in Mexico in fiscal
        2005, 2004 and 2003, respectively. Revenues from Europe and the Middle East
        include $60,544, $32,959 and $7,316 from customers in Italy in fiscal 2005,
        2004
        and 2003, respectively. No other country accounted for more than 5% of revenues
        in any of the three fiscal years in the period ended June 30, 2005.
 
 The
        following major customers contributed directly and indirectly to more than
        10%
        of the Company’s revenues in any of the three fiscal years in the period ended
        June 30, 2005:


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2005**
              
              **2004**
              
              **2003**BSkyB
              
              $
              123,165
              
              $
              103,522
              
              $
              131,085DIRECTV
              
              
              163,006
              
              
              69,401
              
              
              155,212Sky
                  Italia
              
              
              59,895
              
              
              32,959
              
              
              7,316


The
        Company’s operations are situated in the United Kingdom, Europe, Israel, the
        United States and the Asia-Pacific region. Most of the Company’s contracts with
        customers are entered into with the principal operating company, a U.K. entity.
        Many of the costs of the overseas operations are recharged to the Company’s U.K.
        subsidiaries.
  Page
            55
  The
        contribution of each region to the long-lived assets (other than deferred
        tax
        assets) of the Company is as follows:


**As
                  of June 30,**(in
                  thousands)
              
              **2005**
              
              **2004**United
                  Kingdom
              
              $
              119,495
              
              $
              134,305Europe
              
              
              8,107
              
              
              9,835Israel
              
              
              29,934
              
              
              24,058United
                  States
              
              
              5,387
              
              
              4,694Asia-Pacific
              
              
              4,186
              
              
              1,703Total
                  long-lived assets (other than deferred tax assets)
              
              $
              167,109
              
              $
              174,595


Long-lived
        assets in Europe included $7,944 and $9,700 of long-lived assets in France
        as of
        June 30, 2005 and 2004, respectively.
 
 **Note
        17.**  **Valuation
        and qualifying accounts**
  **a)**
              **Accounts
                  receivable reserves**


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2005**
              
              **2004**
              
              **2003**Beginning
                  of year
              
              $
              3,021
              
              $
              9,252
              
              $
              7,118Additions
                  (reversals)
              
              
              (1,165
              )
              
              (1,611
              )
              
              8,194Used
              
              
              (379
              )
              
              (5,189
              )
              
              (6,746
              )Foreign
                  exchange movements
              
              
              (50
              )
              
              569
              
              
              686End
                  of year
              
              $
              1,427
              
              $
              3,021
              
              $
              9,252


**b)**
              **Inventory
                  reserves**


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2005**
              
              **2004**
              
              **2003**Beginning
                  of year
              
              $
              4,242
              
              $
              4,582
              
              $
              4,279Additions
                  (reversals)
              
              
              (183
              )
              
              148
              
              
              1,356Used
              
              
              (560
              )
              
              (901
              )
              
              (1,420
              )Foreign
                  exchange movements
              
              
              (101
              )
              
              413
              
              
              367End
                  of year
              
              $
              3,398
              
              $
              4,242
              
              $
              4,582


**c)**
              **Deferred
                  tax valuation
                  reserve**


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2005**
              
              **2004**
              
              **2003**Beginning
                  of year
              
              $
              3,791
              
              $
              2,863
              
              $
              4,436Additions
                  (reversals)
              
              
              (173
              )
              
              928
              
              
              (1,573
              )Foreign
                  exchange movements
              
              
              (163
              )
              
              ─
              
              
              ─End
                  of year
              
              $
              3,455
              
              $
              3,791
              
              $
              2,863




Page
          56


**Note
        18.**  **Supplementary
        cash flow disclosures**


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2005**
              
              **2004**
              
              **2003****Cash
                  receipts and payments:**Interest
                  received in cash
              
              $
              9,456
              
              $
              6,878
              
              $
              4,635Cash
                  payments for income taxes
              
              
              23,379
              
              
              24,608
              
              
              23,144Cash
                  paid in respect of initial consideration for acquisitions
              
              
              ─
              
              
              75,298
              
              
              ─Cash
                  paid in respect of deferred consideration for acquisitions
              
              
              17
              
              
              638
              
              
              7,703**Supplemental
                  information on businesses acquired:**Fair
                  value of non-cash assets acquired
              
              $
              ─
              
              $
              75,772
              
              $
              ─Cash
                  acquired
              
              
              ─
              
              
              10,292
              
              
              ─Less:
                  liabilities assumed
              
              
              ─
              
              
              (10,766
              )
              
              ─Fair
                  value of assets acquired by way of acquisitions
              
              $
              ─
              
              $
              75,298
              
              $
              ─Fair
                  value of shares issued in respect of acquisitions
              
              $
              ─
              
              $
              ─
              
              $
              4,879


**Note
        19.**  **Quarterly
        Data (Unaudited)**


**For
                  the three months ended**(in
                  thousands, expect per share amounts)
              
              **September
                  30**
              
              **December
                  31**
              
              **March
                  31**
              
              **June
                  30****Fiscal
                  2005**Revenue
              
              $
              141,279
              
              $
              141,623
              
              $
              126,594
              
              $
              146,834Gross
                  margin
              
              
              83,712
              
              
              87,237
              
              
              78,633
              
              
              87,810Operating
                  income
              
              
              25,284
              
              
              24,131
              
              
              22,630
              
              
              20,146Net
                  income
              
              
              17,617
              
              
              17,884
              
              
              16,590
              
              
              21,907Basic
                  earnings per share
              
              $
              0.32
              
              $
              0.33
              
              $
              0.30
              
              $
              0.40Diluted
                  earnings per share
              
              $
              0.31
              
              $
              0.32
              
              $
              0.29
              
              $
              0.38**Fiscal
                  2004**Revenue
              
              $
              80,951
              
              $
              76,489
              
              $
              97,936
              
              $
              101,288Gross
                  margin
              
              
              62,661
              
              
              57,570
              
              
              77,244
              
              
              74,801Operating
                  income (loss)
              
              
              19,487
              
              
              12,797
              
              
              17,173
              
              
              (1,032
              )Net
                  income
              
              
              14,389
              
              
              10,319
              
              
              12,296
              
              
              51Basic
                  earnings per share
              
              $
              0.27
              
              $
              0.19
              
              $
              0.23
              
              $
              0.00Diluted
                  earnings per share
              
              $
              0.26
              
              $
              0.19
              
              $
              0.22
              
              $
              0.00




Page
          57





**ITEM
                9.**
            **CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE**




None.





**ITEM
                9A.**
            **CONTROLS
                AND PROCEDURES**




**Disclosure
      Controls**




The
      Company’s management, with the participation of the Company’s Chairman and Chief
      Executive Officer and Chief Financial Officer, has evaluated the effectiveness
      of the Company’s disclosure controls and procedures (as such term is defined in
      Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the
      period covered by this Annual Report on Form 10-K. Based on such evaluation,
      the
      Company’s Chairman and Chief Executive Officer and Chief Financial Officer have
      concluded that, as of the end of such period, the Company’s disclosure controls
      and procedures are effective in recording, processing, summarizing and reporting
      on a timely basis, information required to be disclosed by the Company in the
      reports that it files or submits under the Exchange Act and are effective in
      ensuring that information required to be disclosed by the Company in the reports
      that it files or submits under the Exchange Act is accumulated and communicated
      to the Company’s management, including the Company’s Chairman and Chief
      Executive Officer and Chief Financial Officer, as appropriate to allow timely
      decisions regarding required disclosure.





**Management’s
      Report on Internal Control over Financial Reporting**




Management
      of NDS Group plc (the “Company”) is responsible for establishing and maintaining
      adequate internal control over financial reporting as defined in Rules 13a-15(f)
      and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal
      control over financial reporting is a process designed to provide reasonable
      assurance regarding the reliability of financial reporting and the preparation
      of financial statements for external purposes in accordance with accounting
      principles generally accepted in the United States. Internal control over
      financial reporting includes those policies and procedures that:





·
            pertain
                to the maintenance of records that, in reasonable detail, accurately
                and
                fairly reflect the transactions and dispositions of the assets of
                the
                Company;





·
            provide
                reasonable assurance that transactions are recorded as necessary
                to permit
                preparation of financial statements in accordance with accounting
                principles generally accepted in the United
                States;




·
            provide
                reasonable assurance that receipts and expenditures of the Company
                are
                being made only in accordance with authorization of management and
                Directors of the Company; and




·
            provide
                reasonable assurance regarding prevention or timely detection of
                unauthorized acquisition, use or disposition of assets that could
                have a
                material effect on the consolidated financial
                statements.





Internal
      control over financial reporting includes the controls themselves, monitoring
      and internal auditing practices and actions taken to correct deficiencies as
      identified.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





Management
      assessed the effectiveness of the Company’s internal control over financial
      reporting as of June 30, 2005. Management based this assessment on criteria
      for
      effective internal control over financial reporting described in “Internal
      Control — Integrated Framework” issued by the Committee of Sponsoring
      Organizations of the Treadway Commission. Management’s assessment included an
      evaluation of the design of the Company’s internal control over financial
      reporting and testing of the operational effectiveness of its internal control
      over financial reporting. Management reviewed the results of its assessment
      with
      the Audit Committee of our Board of Directors.





Based
      on
      this assessment, management determined that, as of June 30, 2005, the Company
      maintained effective internal control over financial reporting.





Ernst
      & Young LLP, our independent registered public accounting firm who audited
      and reported on our consolidated financial statements included in this report,
      has issued an attestation report on management’s assessment of internal control
      over financial reporting, which is reproduced below.





Page
          58





**Report
      of Independent Registered Public Accounting Firm**




The
      Board
      of Directors and Shareholders of NDS Group plc





We
      have
      audited management’s assessment, included in the accompanying “Management’s
      Report on Internal Control Over Financial Reporting”, that NDS Group plc
      maintained effective internal control over financial reporting as of
      June 30, 2005 based on criteria established in Internal
      Control—Integrated Framework issued by the Committee of Sponsoring Organizations
      of the Treadway Commission (the COSO criteria). NDS Group plc’s management is
      responsible for maintaining effective internal control over financial reporting
      and for its assessment of the effectiveness of internal control over financial
      reporting. Our responsibility is to express an opinion on management’s
      assessment and an opinion on the effectiveness of the company’s internal control
      over financial reporting based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, evaluating management’s assessment, testing and evaluating
      the design and operating effectiveness of internal control, and performing
      such
      other procedures as we considered necessary in the circumstances. We believe
      that our audit provides a reasonable basis for our opinion.





A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made only in accordance with authorizations of management and Directors
      of
      the company; and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use, or disposition of the company’s
      assets that could have a material effect on the financial
      statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





In
      our
      opinion, management’s assessment that NDS Group plc maintained effective
      internal control over financial reporting as of June 30, 2005, is fairly stated,
      in all material respects, based on the COSO criteria. Also, in our opinion,
      NDS
      Group plc maintained, in all material respects, effective internal control
      over
      financial reporting as of June 30, 2005, based on the COSO
      criteria.





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the 2005 consolidated financial statements
      of
      June 30, 2005 of NDS Group plc and our report, dated September 8, 2005,
      expressed an unqualified opinion thereon.








/s/
      Ernst
& Young LLP


London,
      England


September
      8, 2005





Page
          59





**Changes
      in Internal Control over Financial Reporting**




There
      have been no changes in the Company’s internal control over financial reporting
      (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
      Act) during the Company’s fourth quarter of fiscal 2005 that have materially
      affected, or are reasonably likely to materially affect, the Company’s internal
      control over financial reporting.





**ITEM
                9B.**
            **OTHER
                INFORMATION**




None.







Page
          60





**PART
      III**




**ITEM
                10.**
            **DIRECTORS
                AND EXECUTIVE OFFICERS OF THE
                REGISTRANT**




The
      information required by this item with respect to the Company’s Directors is
      contained in the proxy statement for the Company’s 2005 Annual Meeting of
      Shareholders to be filed with the SEC (the “Proxy Statement”) under the heading
“Election of Director” and is incorporated herein by reference in this Annual
      Report on Form 10-K.





The
      information required by this item with respect to compliance with Section 16(a)
      of the Exchange Act is contained in the Proxy Statement under the heading
“Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated by
      reference in this Annual Report on Form 10-K.





The
      information required by this item with respect to the Company’s Audit Committee,
      including the Audit Committee’s members and its financial experts is contain in
      the Proxy Statement under the heading “Audit Committee” and is incorporated by
      reference in this Annual Report on Form 10-K.





The
      information required by this item with respect to the Company’s Standards of
      Business Conduct and Code of Ethics governing the Company’s employees, including
      its Chief Executive Officer, senior financial officer and members of the
      Company’s Board of Directors is contained in the Proxy Statement under the
      heading “Standards of Business Conduct and Code of Ethics” and is incorporated
      by reference in this Annual Report on Form 10-K.





The
      information required by this item with respect to the Company executive officers
      is contained in the Proxy Statement under the heading “Executive Officers of the
      Company” and is incorporated by reference in this Annual Report on Form
      10-K.





**ITEM
                11.**
            **EXECUTIVE
                COMPENSATION**




The
      information required by this item is contained in the Proxy Statement under
      the
      heading “Executive Compensation and Other Information” and is incorporated by
      reference in this Annual Report on Form 10-K.





**ITEM
                12.**
            **SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                STOCKHOLDER MATTERS**




The
      information required by this item is contained in the Proxy Statement under
      the
      heading “Security Ownership of the Company” and is incorporated by reference in
      this Annual Report on Form 10-K.





**ITEM
                13.**
            **CERTAIN
                RELATIONSHIPS AND RELATED
                TRANSACTIONS**




The
      information required by this item is contained in the Proxy Statement under
      the
      heading “Certain Relationships and Related Transactions” and is incorporated by
      reference in this Annual Report on Form 10-K.





**ITEM
                14.**
            **PRINCIPAL
                ACCOUNTING FEES AND
                SERVICES**




The
      information required by this item is contained in the Proxy Statement under
      the
      headings “Disclosure of Auditor Fees” and “Audit Committee Pre-Approval Policies
      and Procedures” and is incorporated by reference in this Annual Report on Form 10-K.





Page
          61





**PART
      IV**




**ITEM
                15.**
            **EXHIBITS
                AND FINANCIAL STATEMENT
                SCHEDULES**




The
      following documents are filed as part of this report:





1.
            The
                Company’s Consolidated Audited Financial Statements required to be filed
                as part of this Annual Report and the Reports of Independent Registered
                Public Accounting Firm are included in Part II, Item 8: Financial
                Statements and Supplementary Data.





2.
            All
                financial statement schedules are omitted because the required information
                is not applicable, or because the information called for is included
                the
                Company’s Consolidated Audited Financial Statements or the Notes to the
                Consolidated Audited Financial
                Statements.





3.
            Exhibits
                - The exhibits listed on the accompanying Exhibit Index filed or
                incorporated by references as part of this Annual Report and such
                Exhibit
                Index is incorporated herein by reference. On the Exhibit Index,
                a “*”
                identifies each management contract or compensatory plan or arrangement
                required to be filed as an exhibit to this Annual Report, and such
                listing
                is incorporated herein by
                reference.





**Index
      to exhibits**


**Exhibit**
              **Description**
              **Location**3
              Memorandum
                  and Articles of Association
              Incorporated
                  by reference to Exhibit 3 to the Quarterly Report on Form 10-Q
                  filed by
                  NDS Group plc with the Securities and Exchange Commission on February
                  9,
                  20054.1
              Specimen
                  Series A ordinary share certificate
              Incorporated
                  by reference to Exhibit 4.1 to the Registration Statement on Form
                  F-1
                  filed by NDS Group plc with the Securities and Exchange Commission
                  (File
                  No. 333-11086) on November 19, 19994.2
              Form
                  of American Depositary Receipt
              Incorporated
                  by reference to Exhibit 4.3 to the Registration Statement on Form
                  F-1
                  filed by NDS Group plc with the Securities and Exchange Commission
                  (File
                  No. 333-11086) on November 19, 19994.3
              Deposit
                  Agreement
              Incorporated
                  by reference to Exhibit 4.2 to the Registration Statement on Form
                  F-1
                  filed by NDS Group plc with the Securities and Exchange Commission
                  (File
                  No. 333-11086) on November 19, 199910.1
              Master
                  Intercompany Agreement
              Incorporated
                  by reference to Exhibit 10.1 to the Registration Statement on Form
                  F-1
                  filed by NDS Group plc with the Securities and Exchange Commission
                  (File
                  No. 333-11086) on November 19, 199910.2
              Agreement
                  between the Company and Abraham Peled, dated December 1, 1999
                  *
              Incorporated
                  by reference to Exhibit 4.4 to the Annual Report on Form 20-F filed
                  by NDS
                  Group plc with the Securities and Exchange Commission (File No.
                  333-11086)
                  on October 22, 200410.3
              Agreement
                  between the NDS Limited and Alexander Gersh, dated November 11,
                  2004
                  *
              Incorporated
                  by reference to Exhibit 10 to the Current Report on Form 8-K filed
                  by NDS
                  Group plc with the Securities and Exchange Commission (File No.
                  333-11086)
                  on January 5, 2005   Page
              62
  **Exhibit**
                **Description**
                **Location**10.4
                Resolution
                    of Board of Directors of NDS Group plc held on January 31, 2005
                    concerning
                    the remuneration payable to the independent Directors of the
                    Company for
                    fiscal 2005 *
                Incorporated
                    by reference to the Current Report on Form 8-K filed by NDS Group
                    plc with
                    the Securities and Exchange Commission (File No. 333-11086) on
                    February 4,
                    200521
                Subsidiaries
                Filed
                    herewith31.1
                Certification
                    by the Chief Executive Officer pursuant to SEC Rule 13a-14(a)
                    / 15d-14(a),
                    as adopted pursuant to section 302 of the Sarbanes-Oxley Act
                    of
                    2002
                Filed
                    herewith31.2
                Certification
                    by the Chief Financial Officer pursuant to SEC Rule 13a-14(a)
                    / 15d-14(a),
                    as adopted pursuant to section 302 of the Sarbanes-Oxley Act
                    of
                    2002
                Filed
                    herewith32.1
                Certification
                    of the Chief Executive Officer and Chief Financial Officer pursuant
                    to
                    U.S.C section 1350, as adopted pursuant to section 906 of the
                    Sarbanes-Oxley Act of 2002
                Furnished
                    herewith
  *
            Management contract or compensatory plan required to be filed as an exhibit
            to
            the Annual Report on From 10-K pursuant to Item 15(b)
  Page
              63
 **SIGNATURES**
  Pursuant
            to the requirements of Section 13 or 15(d) 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.
  NDS
                      GROUP PLC
                    (Registrant)By:
                  /s/
                    Alexander GershAlexander
                    GershChief
                      Financial Officer and
                    Company
                      Secretary
                    (Principal
                      Financial and Accounting
                      Officer)
 Date:
            September 8, 2005
  Pursuant
            to the requirements of the Securities Exchange Act 1934, this report
            has been
            signed below by the following persons on behalf of the registrant and
            in the
            capacities and on the dates indicated:


**Signature**
              **Title**
              **Date**/s/
                  Abraham Peled
              President
                  and Chief Executive Officer
              September
                  8, 2005Abraham
                  Peled
              (Principal
                  Executive Officer)/s/
                  David DeVoe
              Director
              September
                  8, 2005David
                  F. DeVoe/s/
                  Roger Einiger
              Director
              September
                  8, 2005Roger
                  I. Einiger/s/
                  Nathan Gantcher
              Director
              September
                  8, 2005Nathan
                  Gantcher/s/
                  Lawrence Jacobs
              Director
              September
                  8, 2005Lawrence
                  A. Jacobs/s/
                  Peter Powers
              Director
              September
                  8, 2005Peter
                  J. Powers/s/
                  Arthur Siskind
              Director
              September
                  8, 2005Arthur
                  M. Siskind






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