**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, 2006**


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
                Heathrow Boulevard, West Drayton,
                Middlesex, United Kingdom**
            **UB7
                0DQ**(Address
                of principal executive
                offices)
            (Zip
                Code)




**+44
      20 8476 8000**


(Registrant’s
      telephone number, including area code)





**Securities
      registered pursuant to Section 12(b) of the Act:**  Series
      A ordinary shares, par value $0.01 per share





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





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


**Yes oNo
              x**





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


**Yes oNo
                x**





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 a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Securities Exchange Act.
      (Check one):


**Large
      accelerated filer o**  **Accelerated
      filer x**  **Non-accelerated
      filer o**





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act).  **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, 2005 was approximately $581,003,887 (based
      on
      the closing price on such date as reported on the NASDAQ National Market).





As
      of
      August 31, 2006, there were outstanding 14,894,580 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
      2006 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**




**PART
        I**


**Page**Item
                  1.
              Business
              1Item
                  1A
              Risk
                  Factors
              9Item
                  1B
              Unresolved
                  Staff Comments
              14Item
                  2.
              Properties
              14Item
                  3.
              Legal
                  Proceedings
              15Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              16**PART
                  II**Item
                  5.
              Market
                  for Registrant’s Common Equity, Related Stockholder Matters and
                  Issuer Purchases of Equity Securities.
              17Item
                  6.
              Selected
                  Financial Data
              18Item
                  7.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operation
              20Item
                  7A.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              35Item
                  8.
              Financial
                  Statements and Supplementary Data
              36Item
                  9.
              Changes
                  in and Disagreements With Accountants on Accounting and Financial
                  Disclosure
              67Item
                  9A.
              Controls
                  and Procedures
              67Item
                  9B.
              Other
                  Information
              69**PART
                  III**Item
                  10.
              Directors
                  and Executive Officers of the Registrant
              70Item
                  11.
              Executive
                  Compensation
              70Item
                  12.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              70Item
                  13.
              Certain
                  Relationships and Related Transactions
              70Item
                  14.
              Principal
                  Accounting Fees and Services
              70**PART
                  IV**Item
                  15.
              Exhibits
                  and Financial Statement Schedules
              71Signatures
              
              73









PART
      I





**ITEM
                1.**
            **BUSINESS**




**Background**




NDS
      Group
      plc is domiciled in the United Kingdom, 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, China, South
      Korea, Australia and the United States. As of June 30, 2006, we had
      approximately 3,000 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
      segment.





We
      are a
      majority owned subsidiary of News Corporation, a Delaware corporation (“News
      Corporation”), which is a diversified 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. 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 (“GAAP”). Prior to November 12, 2004, we published our
      financial information in accordance with U.K. generally accepted accounting
      practice (“UK GAAP”) in pounds sterling. Financial information for periods
      ending on, 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 GAAP and then translating that information
      into
      U.S. dollars.





Our
      principal executive offices are located at One Heathrow Boulevard, 286 Bath
      Road, West Drayton, Middlesex UB7 0DQ, England and our telephone number is
      +44 20 8476 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 100 F Street,
      N.E., Washington, DC 20549. The public may obtain information on the operation
      of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
      also
      maintains a website ( 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 in Item 1A: “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 and services are designed to enable our customers to profit from
      the secure distribution of digital information and entertainment to consumer
      devices which incorporate various technologies supplied by us. Our technologies
      and services include conditional access and microprocessor security, broadcast
      stream management, set-top box middleware, electronic program guides (“EPGs”),
      digital video recording (“DVR”) technologies and interactive infrastructure and
      applications. We provide technologies and services supporting both standard
      definition and high definition broadcast television and a variety of industry
      standards.





We
      consider that we operate as a single segment and our business is managed as
      such. We have no separate divisions or profit centers. We assess the financial
      performance of our business by reviewing specific revenue streams in the
      aggregate and by customer. We assess our costs by considering individual cost
      centers and their aggregation into general cost categories. An analysis and
      discussion of our various revenue streams and cost categories 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 17 to our audited consolidated
      financial statements, as is information about the location of our long-lived
      assets.





Our
      business has grown by a combination of acquisitions and new customer contracts.
      Our contracts typically have terms of several years and are frequently
      structured such that our revenues are related to the success of our customers
      in
      attracting and retaining subscribers and the use made of our software and
      services by our customers and their subscribers.





During
      fiscal 2006, three customers each accounted directly and indirectly for more
      than 10% of our revenues. These customers and the percentage of our fiscal
      2006
      revenues which they contributed were: DIRECTV in the United States (34%), BSkyB
      in the United Kingdom and Ireland (23%) and Sky Italia in Italy (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 12 to our audited consolidated financial
      statements.





**Customers**




Our
      main
      customers are the digital pay-television platform operators who utilize a
      broadcast infrastructure to deliver video and data to multiple subscribers.
      A
      broadcast distribution infrastructure consists of three main
      elements:





1)
            a*broadcast
                head-end*,
                which includes technologies which encrypt and package the video and
                other
                data into a broadcast stream;





2)
            a*distribution
                system*which transmits the broadcast stream (e.g. via satellite, broadband,
                cable, terrestrial) to an end-user. The distribution system may contain
                a
                “return path”, that is, a means for communications to be sent from the
                subscriber back to the broadcaster;
                and





3)
            a*set-top
                box*which converts the broadcast signal into television video. Conditional
                access technologies (which include a smart card inserted into the
                set-top
                box) ensure that subscribers can only decrypt content which they
                have been
                authorized by the platform operator to receive. The set-top box also
                contains the technologies, including middleware, which enable the
                consumer
                to use features such as EPGs, DVRs and interactive
                applications.





Viewers
      of a digital pay-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
      supply
      technologies which provide components within the broadcast head-end and in
      the
      set-top box. We supply smart cards for set-top boxes and provide security
      maintenance services to maintain the security of the broadcast platform. Our
      technologies have been implemented to be used on a variety of distribution
      systems.





A
      platform operator can broadcast to an increasing number of subscribers by adding
      additional set-top boxes and the associated smart cards, without the need to
      add
      additional components to the head-end. Therefore, a broadcast platform is
      scalable within the design parameters. Accordingly, we charge fees that are
      dependent on the number of subscribers to the broadcast platform and the extent
      to which our technologies are actually used by subscribers. A part of our
      revenue growth is derived from subscribers increasing the number of set-top
      boxes in their homes and upgrading their set-top boxes to newer models which
      contain additional functionality.





Page
          2




In
      addition to selling to platform operators, we may sell interactive applications
      to content providers. Such customers usually do not operate a broadcast
      platform, but provide content for transmission over a platform operator’s
      network. The applications we sell to content providers make use of the functions
      and capabilities of the broadcast infrastructure.





We
      work
      with suppliers of other components of a broadcast platform, such as broadcast
      equipment and set-top box manufacturers. We integrate our technologies with
      those of other suppliers to provide a platform operator with the functionality
      required. A particular platform operator may purchase some components from
      our
      competitors.





We
      are
      committed to developing industry co-operation by actively participating in
      many
      key standards organizations. We use these forums proactively to promote
      standards which maximize interoperability and enable broadcasters and platform
      operators to meet the challenge of integrating broadcast, information and
      telecommunications technologies.





Our
      technology is integrated into set-top boxes manufactured by most of the major
      consumer electronics manufacturers. In order to provide platform operators
      and
      subscribers with greater choice and security of supply, it is important that
      our
      technology be integrated into as many different types of set-top boxes, computer
      chips (which are incorporated into the set-top boxes) and other broadcast
      equipment as possible. This also aids price competition.





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.





**Competition**




We
      compete primarily with technologies such as NagraVision (developed by Kudelski
      SA), DigiCipher (developed by Motorola, Inc.), Power Key (developed by
      Scientific-Atlanta, Inc.), OpenTV (developed by OpenTV Corp.) and Microsoft
      TV
      Edition (developed by Microsoft Corporation) 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, through acquisitions or the development of
      their own resources, seek to enter and obtain significant market share in our
      current or planned business areas.





Competition
      is intense and, in addition to price and commercial terms, we consider our
      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 DVR, which allow a platform operator
                to
                provide additional services;





·
            the
                availability of set-top boxes offered by manufacturers with whom
                our
                technology is integrated; and





·
            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.





Page
          3




**Technologies
      and services**




We
      offer
      technologies and services in the following main areas:





·
            conditional
                access systems and services;





·
            middleware;





·
            DVR
                technologies;





·
            broadband
                and internet protocol television
                (“IPTV”);





·
            interactive
                television infrastructure and applications;
                and





·
            integration
                services.





The
      technologies deployed at the platform operator’s 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 that we provide 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.








**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 systems provide two primary functions;
      first, it protects content from unauthorized viewing, redistribution and piracy,
      and second, it enables our customers to charge subscribers for a selected
      content package or event.





Our
      conditional access systems are marketed 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, DVR functionality, 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, which are located in the United Kingdom and in the United States,
      and together are capable of embedding computer chips in up to 60 million smart
      cards per year. In fiscal 2006, we distributed 24.4 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, 2006, 65.0 million set-top boxes were in use with VideoGuard
      conditional access technology, an increase of 8.3 million since June 30,
      2005. Our largest conditional access customers and their region of operation
      include DIRECTV (United States), BSkyB (United Kingdom), Sky Italia (Italy),
      DIRECTV PanAmericana (Latin America), Sky Mexico (Mexico), Sky Brasil (Brazil),
      FOXTEL (Australia), SkyLife (South Korea), YES (Israel), HOT (Israel),
      Cablevision (U.S.), Shenzhen (China) and Viasat (Scandinavia).





Page
          4





**Middleware**




In
      distributed computing systems, “middleware” is the software layer that lies
      between the operating system and the applications. In the context of digital
      television set-top boxes, middleware provides a means for a single application
      to run on set-top boxes developed by different manufacturers. It therefore
      provides the pay-television platform operator with the ability to offer
      subscribers the same application and user experience irrespective of the model
      of set-top box used by that subscriber. 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, 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 various
      interactive services, such as EPGs, shopping, e-mail, games, banking,
      advertising and other 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 DVRs, 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.





Approximately
      21.2 million set-top boxes containing MediaHighway were deployed during fiscal
      2006, bringing the cumulative total number of June 30, 2006 to 41.6 million
      set-top boxes. MediaHighway is being used by the following customers: DIRECTV
      (United States), Canal Satellite (France), Digital Plus (Spain), Canal Digital
      (Scandinavia), Sky Mexico (Mexico), Sky Brasil (Brazil), Astro/Measat (Malaysia)
      and Yes (Israel). We are working on projects for deployment of our middleware
      to
      other customers in fiscal 2007.





**DVR**




We
      have
      developed a DVR 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 DVR, 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: DIRECTV (United
      States), BSkyB (United Kingdom), FOXTEL (Australia), Sky Brasil (Brazil), Sky
      Mexico (Mexico), Yes (Israel) and HOT (Israel). We are working on projects
      for
      deployment of our XTV technologies to other customers in fiscal
      2007.





Because
      of the way in which our XTV is tightly integrated with our conditional access
      technologies, we do not consider other DVR products to be direct
      competitors.





We
      also
      have a DVR technology that is an extension of our MediaHighway middleware but
      which is not integrated with our conditional access technologies. This
      technology is used by Canal Satellite in France.





As
      of
      June 30, 2006, we estimate that a cumulative 3.5 million set-top boxes
      containing our DVR technology have been shipped, an increase of 2.1 million
      since June 30, 2005.





Page
          5




**Broadband
      and IPTV**




Our
      technologies and systems for broadband and IPTV are marketed under the
“Synamedia” name. Synamedia incorporates our technologies for IPTV middleware,
      user interfaces, personalization, 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
      DVR-type functionality.





Based
      on
      our VideoGuard security, Synamedia protects content at all stages of delivery,
      from the broadband access point 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.





Our
      Synamedia technology provides content protection 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), Galaxy (Hong Kong), Telekom Austria (Austria)
      and SES-Americom (United States). Some of these systems are being trialed and
      there is no assurance that they will be widely deployed.





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” set of solutions provide a suite of tools supporting the creation,
      packaging, delivery and management of interactive content and applications
      for
      broadcast content. We also offer 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. Our Value@TV solutions
      are integrated with our VideoGuard technologies to enable secure communication
      from the set-top box to the head end via the return path where security is
      essential to the application, for example where purchase transactions are
      initiated.





Most
      of
      our major broadcast platform operator customers use aspects of our Value@TV
      solution. 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 offer games, which may be developed
      by us or by third parties. Different types of games can be offered, such as
      sports betting, casino games, lottery games and fantasy competitions. We
      expanded the range of casino games we offer following the acquisition in
      September 2005 of NT Media Limited.





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 include in our licensing arrangements appropriate measures to
      protect against bets being accepted from persons in jurisdictions where such
      activities may not be legal. This policy limits the potential market for
      OpenBet.





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          6


**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 provide 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.





**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 hardware or 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
      computer chip design team has developed a number of proprietary improvements
      to
      the security and functionality of computer 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,
      2006, 2005 and 2004 was $145.5 million, $166.5 million and $146.2 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 DVR
      technologies and the adaptation of these technologies for high definition
      services.





We
      are
      also investigating how aspects of our technology may be applied to content
      protection more generally. 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.





Page
          7




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 or storage devices. An SVP enabled
      chip
      controls both the content and the license to use that content.





Our
      technologies and systems for mobile digital rights’ management (“DRM”) solutions
      are marketed under the “VideoGuard Mobile” name. VideoGuard Mobile is a head-end
      to handset secure content solution for mobile phones, 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 main technology standards and support multiple delivery
      mechanisms, including downloading, streaming, unicasting, multicasting,
      broadcasting, secure billing and payments.





We
      are
      also developing hybrid set-top boxes which combine satellite or cable delivery
      with broadband IP connectivity in our “XSpace” technology solution. We consider
      XSpace to be an efficient way of combining broadcast television with on-demand
      video content and niche programming from the internet.





The
      market for technologies which extend the use of digital content in a secure
      way
      beyond broadcast television is in the early stages of development and we may
      be
      unsuccessful in earning significant revenues from our content protection
      technologies.





**Regulation**




Our
      technology is used by broadcasters and our customers may therefore be subject
      to
      regulation in the jurisdictions in which they offer their services. Applicable
      regulations, which differ from jurisdiction to jurisdiction, and future changes
      or additions to such regulations, may affect our ability to sell technologies
      and services.





We
      do not
      operate as a bookmaker. However, our OpenBet software is a betting and gaming
      application supplied to bookmakers. 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.





**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 computer chips to be
      manufactured and assembled by third party suppliers. 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 computer 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**




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. Therefore, we do not
      consider it meaningful to quantify order backlog.





**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.





Page
          8





**Working
      capital**




We
      hold
      inventory of smart cards and their components in anticipation of demand from
      our
      customers. Because smart cards supplied to different platform operators are
      unique or contain unique features, particular types of smart cards held in
      inventory may not be useable for any customer other than the one for which
      they
      were purchased. The lead times for smart card procurement are frequently much
      longer than the period covered by firm order commitments from our customers.
      Accordingly, we may have to make inventory purchases in anticipation of customer
      orders that may never be received and we may purchase inventory some months
      in
      advance of smart cards being supplied to our customers





Of
      our
      65.0 million authorized smart cards in use as of June 30, 2006, 55.9 million
      were covered by security maintenance contracts under which we have an obligation
      to replace the smart card at some future point. Revenue received but deferred
      in
      respect of this obligation amounted to $134.1 million as of June 30, 2006.
      We
      will make inventory purchases in future periods in order to satisfy our smart
      card supply obligations in respect of these cards.






**ITEM
                1A.**
            **RISK
                FACTORS**




Prospective
      investors should consider carefully the risk factors set out 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 are 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,
      DVR
      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
      business may suffer if we and our customers do not respond to commercial and
      technological changes affecting the business of delivering information and
      entertainment, especially the threat of the internet and IPTV
      technologies.**




Our
      customers are mainly pay-television platform operators. As technologies develop,
      other means of delivering information and entertainment to consumers’
televisions are evolving. In particular, telecommunication companies and
      internet service providers are competing with traditional television companies.
      Cable television companies are also marketing packages which combine television,
      telephone and high-speed internet access to consumers. As a result, our largest
      customers are facing increased competition which could affect their ability
      to
      attract and retain subscribers. If we and our customers do not respond to these
      commercial and technological changes, 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
      to
      our customers and ongoing 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
          9




**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 DVR functionality, games, gaming and other
      interactive applications, 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 DVRs, 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
          10




**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 are DIRECTV in the United States, BSkyB in the
      United Kingdom and Sky Italia in Italy. During the fiscal year ended June 30,
      2006, these three customers accounted directly and indirectly for approximately
      68% 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
      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 may replace their subscribers’ smart
      cards from time to time to maintain the security of their conditional access
      systems and this significantly affects our revenue in periods when we supply
      such replacement smart cards. 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 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.**




New
      accounting pronouncements or a change in how 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 consolidated financial statements and notes
      thereto.





**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.





Page
          11




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 payable by us could be based on the profits
      derived by our customers 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 computer 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.





**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 euro. During the fiscal year ended June 30, 2006,
      approximately 28% of our revenues were denominated in pounds sterling and a
      further 19% were denominated in euro. Some of our smart card costs and our
      operating expenses are denominated in pounds sterling and euro. During the
      fiscal year ended June 30, 2006, we estimate that approximately 28% of our
      total
      cost of sales and operating expenses were denominated in pounds sterling and
      a
      further 22% were denominated in euro. 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.
      Therefore, we are 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. As a result of the current security situation in Israel, certain of our
      employees are currently engaged in active military duty. We have, in the past,
      operated effectively under these requirements. We cannot predict the effect
      of
      these obligations on us in the future.





Page
          12




**We
      are controlled by, and are dependent upon our relationship with, News
      Corporation.**




We
      are
      controlled by News Corporation. As of June 30, 2006, News Corporation
      beneficially owned approximately 73.9% 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 96.6%
      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. Five of
      our
      eight current Directors have been appointed by News Corporation, including
      Dr.
      Abe Peled, our Chairman and Chief Executive Officer, who 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 the fiscal year ended June 30, 2006, approximately 78% 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 Stock 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 Stock 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.





**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 and stock options we may grant to our
      Directors, executive officers and employees in the future.





Page
          13




In
      addition, our Board has been authorized by shareholders, pursuant to
      Section 80 of the Companies Act 1985 of Great Britain, 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, 2010 and, pursuant to Section 95 of the Companies Act 1985 of
      Great Britain, to allot equity securities for cash on a non-pre-emptive basis
      without first being required to offer them to existing shareholders. If the
      Board were to exercise such authority or if we issued equity securities in
      connection with possible future business acquisitions, existing shareholders
      interest may be diluted.





**ITEM
                1B.**
            **UNRESOLVED
                STAFF COMMENTS**




None.





**ITEM
                2.**
            **PROPERTIES**





We
      operate from a number of facilities, principally located in the United Kingdom,
      Israel, France, India and the United States. All of our facilities are leased.
      Our main facilities are as follows:





·
            Heathrow,
                England ─ Executive and administrative
                offices





·
            Staines,
                England ─ Set-top box software development and system
                integration;





·
            Maidenhead,
                England ─ Smart card processing and
                distribution;





·
            Chandlers’
                Ford, England ─ Set-top box software development and system
                integration;





·
            Chiswick,
                England ─ Development of betting
                applications;





·
            Jerusalem,
                Israel ─ Research and development, conditional access system
                support;





·
            Costa
                Mesa, California ─ Principal offices for our U.S. operations, including
                smart card processing and
                distribution;





·
            Issy-les-Moulineaux,
                France ─ Software development; and





·
            Bangalore,
                India ─ Software development.





In
      addition, we have leased premises in Hong Kong and Beijing, China; Copenhagen,
      Denmark; Seoul, South Korea; Miami, Florida; and Sydney, Australia.





In
      June
      2006, we leased additional premises in Bangalore, India and expect to occupy
      them, once the premises have been fitted-out, during fiscal 2007.





Page
          14


**ITEM
                3.**
            **LEGAL
                PROCEEDINGS**




*Echostar
      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 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 Echostar’s original complaint.





After
      Echostar filed a second amended complaint, we filed a motion to dismiss this
      complaint on March 31, 2004. On July 21, 2004, the court issued an
      order directing Echostar to, among other things, file a third amended complaint
      within ten days correcting various deficiencies noted in the second amended
      complaint. Echostar filed its 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 our motion to dismiss as a motion for a more
      definite statement, granting the motion and giving Echostar until March 30,
      2005 to file a fourth amended complaint correcting various deficiencies noted
      in
      the third amended complaint. On March 30, 2005, Echostar filed a fourth
      amended complaint, which we moved to dismiss. On July 27, 2005, the court
      granted in part and denied in part our motion to dismiss, and again limited
      Echostar’s surviving claims to acts allegedly occurring within three years of
      the filing of Echostar’s original complaint. We believe these surviving claims
      are without merit and intend to vigorously defend against them.





On
      October 24, 2005, we filed an Amended Answer with Counterclaims, alleging
      that Echostar misappropriated NDS’s trade secrets, violated the Computer Fraud
      and Abuse Act and engaged in unfair competition. On November 8, 2005,
      Echostar moved to dismiss our counterclaims for conversion and claim and
      delivery, arguing that these claims were preempted and time-barred. Echostar
      also moved for a more definite statement of our trade secret misappropriation
      claim. On December 8, 2005, the court granted in part and denied in part
      Echostar’s motion to dismiss and for a more definite statement, but granted us
      leave to file amended counterclaims. On December 13, 2005, we filed our
      Second Amended Answer with Counterclaims, which Echostar answered on
      December 27, 2005. The court has set this case to go to trial in April of
      2008.





*The
      International Electronic Technology Corp. Litigation*




On
      April 18, 1997, International Electronic Technology Corp. (“IETC”) filed
      suit in the United States District Court for the Central District of California
      against our customers, Hughes, 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, we have assumed the defense and agreed to indemnify
      the named defendants. The defendants have raised defenses, including
      non-infringement and invalidity. On September 22, 2005, the court issued an
      order construing certain terms in the patent as a matter of law, after an
      extensive delay due to the death of two judges previously assigned to the case.
      Following receipt of the claim construction order, defendants notified IETC that
      they intended to file a motion for summary judgment of non-infringement based
      on
      the claim construction. During a status conference with the court on
      January 9, 2006, IETC requested that defendants’ motion be deferred to
      permit it to seek additional document discovery. The court denied this request,
      and ordered IETC to make its request in response to defendants’ summary judgment
      motion. Defendants’ motion for summary judgment was filed on January 30,
      2006. On March 9, 2006, the court granted defendants’ motion, and judgment for
      defendants was entered on March 24, 2006. IETC has filed a notice of appeal
      to
      the United States Court of Appeals for the Federal Circuit, and served its
      appeal brief in late June 2006.





*Sogecable
      Litigation*




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. Our opposition
      was filed on August 22, 2005, and Sogecable filed its reply on
      September 6, 2005.





Page
          15





*Barry
      Thomas litigation*




On
      November 28, 2005, Barry W. Thomas filed a complaint alleging infringement
      of
      United States Patent No. 4,777,354 by DIRECTV, Inc., its parent The DIRECTV
      Group, Inc., and the National Rural Telecommunications Cooperative in the United
      States Distinct Court for the Western District of North Carolina, Charlotte
      Division, captioned “Barry W. Thomas v. DIRECTV, Inc., et al., No. 3:05CV496-K
      (W.D.N.C.).” Although not a party to this case, the Company has assumed a share
      in the cost of DIRECTV, Inc.’s defense.




On
      February 24, 2006, Mr. Thomas voluntarily dismissed his complaint against The
      DIRECTV Group, Inc., but not his complaint against DIRECTV, Inc. On February
      27,
      2006, DIRECTV, Inc. filed an Answer and Counterclaims where, among other things,
      DIRECTV, Inc. denied Mr. Thomas’s allegations of infringement and alleged that
      the patent is invalid, unenforceable, and that Mr. Thomas’s cause of action is
      barred by the equitable doctrine of laches. The case is currently in the
      discovery phase, with no schedule for pretrial proceedings or a trial date
      set
      by the Court. The Company believes  Mr. Thomas’s claims are without merit
      and intends to vigorously defend itself in this matter.





**ITEM
                4.**
            **SUBMISSION
                OF MATTERS TO A VOTE OF
                SHAREHOLDERS**




Not
      applicable.





Page
          16


**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 Stock 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 us, 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
                  2006**First
                  quarter
              
              $
              38.02
              
              $
              33.37Second
                  quarter
              
              $
              42.45
              
              $
              36.08Third
                  quarter
              
              $
              52.26
              
              $
              41.13Fourth
                  quarter
              
              $
              55.99
              
              $
              44.63**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 (“Euronext”). 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
      August 31, 2006, there were 38 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, 2006.





Page
          17


**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)
              
              
              **2006**
              
              
              **2005**
              
              
              **2004**
              
              
              **2003**
              
              
              **2002**Revenue
              
              $
              600,123
              
              $
              556,330
              
              $
              356,663
              
              $
              407,350
              
              $
              338,922Cost
                  of goods and services sold
              
              
              (242,622
              )
              
              (218,938
              )
              
              (84,387
              )
              
              (171,825
              )
              
              (113,748Gross
                  margin
              
              
              357,501
              
              
              337,392
              
              
              272,276
              
              
              235,525
              
              
              225,174Operating
                  expenses
              
              
              (226,772
              )
              
              (245,201
              )
              
              (223,851
              )
              
              (158,957
              )
              
              (167,204Operating
                  income
              
              
              130,729
              
              
              92,191
              
              
              48,425
              
              
              76,568
              
              
              57,970Other
                  income
              
              
              15,446
              
              
              9,160
              
              
              6,848
              
              
              3,397
              
              
              3,660Income
                  tax expense
              
              
              (45,225
              )
              
              (27,353
              )
              
              (19,061
              )
              
              (23,884
              )
              
              (20,262Minority
                  interests in subsidiaries, net of tax
              
              
              —
              
              
              —
              
              
              843
              
              
              162
              
              
              —Net
                  income
              
              $
              100,950
              
              $
              73,998
              
              $
              37,055
              
              $
              56,243
              
              $
              41,368Basic
                  net income per share
              
              $
              1.80
              
              $
              1.35
              
              $
              0.69
              
              $
              1.04
              
              $
              0.78Diluted
                  net income per share
              
              $
              1.74
              
              $
              1.29
              
              $
              0.67
              
              $
              1.04
              
              $
              0.76





────────


(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)
            The
                results of NT Media Limited have been consolidated from the date
                of
                acquisition on September 2, 2005.





(4)
            Operating
                expenses for the fiscal year ended June 30, 2004 include a goodwill
                impairment charge of $11.4 million.





(5)
            Operating
                expenses for the fiscal year ended June 30, 2002 include amortization
                of
                goodwill of $5.8 million, prior to the adoption by the Company on
                July 1,
                2002 of Statement of Financial Accounting Standard No. 142, “Goodwill and
                Other Intangible Assets.”





(6)
            Operating
                expenses for the fiscal year ended June 30, 2006 include stock option
                compensation costs of $6.6 million following our adoption on July
                1, 2005
                of Statement of Financial Accounting Standard No. 123 (R), “Share-Based
                Payment.”





Page
          18


**Balance
      sheet data**


**As
                  of June
                  30,**(in
                  thousands)
              
              **2006**
              ****
              **2005**
              
              **2004**
              
              **2003**
              
              **2002**Cash,
                  cash equivalents and short-terminvestments
              
              $
              505,037
              
              $
              339,791
              
              $
              228,620
              
              $
              202,185
              
              $
              150,846Other
                  current assets
              
              
              196,198
              
              
              159,877
              
              
              164,791
              
              
              72,538
              
              
              129,495Non-current
                  assets
              
              
              195,886
              
              
              172,230
              
              
              183,748
              
              
              112,796
              
              
              113,596Total
                  assets
              
              $
              897,121
              
              $
              671,898
              
              $
              577,159
              
              $
              387,519
              
              $
              393,937Current
                  loans
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —Other
                  current liabilities
              
              
              161,151
              
              
              129,245
              
              
              176,138
              
              
              96,452
              
              
              145,315Non-current
                  loans
              
              
              —
              
              
              —
              
              
              —
              
              
              609
              
              
              —Other
                  non-current liabilities
              
              
              168,276
              
              
              115,900
              
              
              67,677
              
              
              26,030
              
              
              55,937Minority
                  interests
              
              
              —
              
              
              —
              
              
              —
              
              
              97
              
              
              —Shareholders'
                  equity
              
              
              567,694
              
              
              426,753
              
              
              333,344
              
              
              264,331
              
              
              192,685Total
                  liabilities and shareholders' equity
              
              $
              897,121
              
              $
              671,898
              
              $
              577,159
              
              $
              387,519
              
              $
              393,937




Page
          19




**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 in Item 1A: “Risk factors” 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.***





**Introduction**




Management’s
      discussion and analysis of financial condition and results of operations is
      intended to help provide an understanding of the Company’s financial condition,
      changes in financial condition and results of operations, and is organized
      as
      follows:





·
            ***Overview
                of our business ─***This section provides a general description of our business and
                developments that have occurred during fiscal 2006 that we believe
                are
                important in understanding the results of operations and financial
                condition or to disclose known future
                trends.





·
            ***Critical
                accounting policies and estimates***─
                This section discusses our revenue and other accounting policies
                which we
                consider important to an understanding of our results of operations,
                and
                which require significant judgment and estimates on the part of management
                in application. Note 3 to the accompanying audited consolidated financial
                statements summarizes our significant accounting
                policies.





·
            ***Results
                of operations ─***This section provides an analysis of our results of operations for
                the
                three fiscal years ended June 30, 2006. 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, 2006. 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.





**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, electronic program guides (“EPGs”), digital video recording (“DVR”)
      technologies and interactive infrastructure and applications. We provide
      technologies and services supporting standard definition and high definition
      televisions and a variety of industry standards. 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
      main
      customers are the digital pay-television platform operators who utilize a
      broadcast infrastructure to deliver video and data to multiple subscribers.
      In
      addition, we may sell interactive applications to content providers. Such
      customers usually do not operate a broadcast platform, but provide content
      for
      transmission over a platform operator’s network. The applications we sell to
      content providers make use of the functions and capabilities of the broadcast
      infrastructure.





We
      work
      with suppliers of other components of a broadcast platform, such as broadcast
      equipment and set-top box manufacturers. A particular platform operator may
      purchase some components from our competitors. We integrate our technologies
      with those of other suppliers to provide a platform operator with the
      functionality required.





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, approximately 68% of our revenues in
      fiscal 2006. We expect that a limited number of customers will continue to
      contribute a significant portion of our revenues.





Page
          20




We
      compete primarily with technologies such as NagraVision (developed by Kudelski
      SA), DigiCipher (developed by Motorola, Inc.), Power Key (developed by
      Scientific-Atlanta, Inc.), OpenTV (developed by OpenTV Corp.) and Microsoft
      TV
      Edition (developed by Microsoft Corporation) 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, through acquisitions or the development of
      their own resources, seek to enter and obtain significant market share in our
      current or planned business areas.





A
      significant portion of our revenues is dependent upon our customers’ subscriber
      base, the growth in their subscriber base and the related quantities of set-top
      boxes deployed. 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. Our accounting
      policies often require us to defer revenue until after our technologies have
      been deployed by our customers.





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.





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 in the
      aggregate and by customer. We assess our costs by considering individual cost
      centers and their aggregation into the general cost categories as described
      below.





**Revenues**




We
      derive
      revenues from:





1)
            Fees
                for the supply of an initial system and subsequent additional
                functionality and maintenance services. These fees are typically
                based on
                the amount of manpower required to customize, integrate and install
                the
                system components and subsequently to maintain those components.
                We refer
                to such fees as “integration, development and support
                revenues.”





2)
            Fees
                from the sale of smart cards and the provision of security maintenance
                services. These fees are typically based on the number of smart cards
                supplied and the number of subscribers and/or smart cards authorized
                for a
                particular platform. Our fees may be reduced if the security of the
                system
                is compromised. We refer to fees from the sales of smart cards and
                the
                provision of security maintenance services as “conditional access
                revenues.”





3)
            Fees
                linked to the deployment and use of our technologies. These fees
                are
                typically based on the number of set-top boxes manufactured or deployed
                which contain the relevant technologies. Other fees may be based
                on the
                extent to which the technologies are used by subscribers. For example,
                we
                may receive a share of incremental revenues generated by a platform
                operator or content provider from an application which incorporates
                our
                technologies. We refer to such fees as “license fees and
                royalties.”





These
      different types of fees are presented as three separate revenue streams in
      our
      consolidated statement of operations because they are influenced by different
      external factors.





We
      distinguish between revenues from “established technologies” and revenues from
“new technologies”. We categorize as revenues from established technologies our
      revenue from conditional access, middleware and program guide technologies
      and
      fees from the customization and integration of those technologies into head-end
      systems and set-top boxes. Revenues from these technologies are allocated
      between the three different revenue streams identified above. We aggregate
      under
      our separate new technologies revenue stream all revenues which we derive from
      DVR technologies, technologies involving the distribution of video content
      over
      broadband networks (“IPTV”), interactive infrastructure and applications, and
      games and gaming. As our business develops, we will consider whether these
      groupings of revenue remain appropriate.





Page
          21




**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, being intellectual property rights which
      we
      have 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 computer chips embedded in the smart
      cards. We arrange for the computer chips to be manufactured and assembled by
      third party suppliers. 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, research
      and
      development, sales and marketing, and general and administration. We have
      employees and facilities in the United Kingdom, the United States, Israel,
      India, France, Denmark, South Korea, China and Australia.





We
      classify operations costs as part of cost of goods and services sold. Operations
      costs include the costs of personnel and related costs, including an allocation
      of facilities costs, associated with our customer support and with integration
      and development activities undertaken under a customer contract. Operations
      costs include the costs of operating our two smart card processing plants,
      including the depreciation of our smart card processing equipment.





Research
      and development costs consist mainly of personnel and related costs, including
      an allocation of facilities costs, attributable to our technical employees
      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 are net of the benefit
      of
      grants and other incentives.





Sales
      and
      marketing costs mainly consist of personnel and related costs, including an
      allocation of facilities 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.





General
      and administration costs consist primarily of executives and other personnel,
      facilities, legal and administration costs.





**Critical
      accounting policies and estimates**




Our
      discussion and analysis of our financial condition and results of operations
      is
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with U.S. generally accepted accounting principles (“GAAP”). The
      arrangements under which we supply technologies and services to our customers
      are complex and require us to make an assessment as to the most appropriate
      way
      to recognize revenue in accordance with GAAP.





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 our Board of Directors. For a summary of our significant accounting
      policies, see Note 3 to the accompanying audited consolidated financial
      statements.





**Revenue
      accounting policies**




Where
      an
      arrangement includes more than incidental software elements, we follow Statement
      of Position 97-2: “Software Revenue Recognition” (“SOP 97-2”). Where an
      arrangement does not involve the supply of software and that arrangement is
      separate from an arrangement for the supply of software, we follow Staff
      Accounting Bulletin No. 104: “Revenue Recognition,” (“SAB 104”) and Emerging
      Issues Task Force Issue No. 00-21: “Revenue Arrangements with Multiple
      Deliverables” (“EITF 00-21”). Many of our arrangements cover the supply of
      multiple deliverables. We have to make an assessment of the value of any
      undelivered elements of an arrangement in the manner required by GAAP and to
      defer revenue unless and until the criteria specified by GAAP have been met.
      As
      our business develops, other accounting guidance may become applicable. A
      summary of our revenue recognition accounting policies is set out in Note 3
      to
      the accompanying consolidated financial statements. We set out below how we
      apply the policies to our different types of commercial
      arrangements:





Page
          22




*Conditional
      access revenues*




Our
      conditional access revenue stream comprises revenues from the sale of smart
      cards and the provision of security maintenance services to customers using
      our
      established technologies. Most of the arrangements for the supply of smart
      cards
      and the provision of security services are separate from arrangements for the
      supply of the initial broadcast platform and do not involve the supply of
      software. Accordingly, they are accounted for under the principles of SAB 104
      and EITF 00-21.





*Conditional
      access ─ Smart cards*




Smart
      cards are hardware devices which we sell to platform operators for distribution
      to and use by their subscribers. Revenue derived from sales of smart cards
      is
      recognized upon delivery of the smart cards in accordance with contractual
      terms. Appropriate provision is made for warranty and similar arrangements
      agreed with customers.





*Conditional
      access ─ Security services*




For
      some
      contracts, we receive 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. Such services provide the platform operator
      with a greater level of security than would be obtained by simply relying on
      the
      security features contained within the smart card. 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
      some instances, the maintenance of security includes a requirement to replace
      a
      population of smart cards with a supply of “changeover cards” which is
      considered a separate unit of accounting. In such instances, an amount of
      maintenance income is deferred and recognized when the changeover cards are
      delivered. The amount of revenue to be deferred is based on the fair value
      of
      the undelivered future changeover cards. 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 the fair value
      per
      unit for those changeover cards.





There
      were no card changeovers during fiscal 2006, however, we have obligations to
      supply changeover cards in future periods. Accordingly the amount of revenue
      deferred under this type of arrangement has increased from $87.9 million as
      of
      June 30, 2005 to $134.1 million as of June 30, 2006.





*Integration,
      development and support revenues*




The
      arrangements under which we generate integration, development and support
      revenues typically involve the supply of software and are therefore accounted
      for in accordance with SOP 97-2. Such arrangements may involve multiple
      deliverables. In order to determine when we can recognize revenue under these
      arrangements, we have to assess whether we have delivered all the elements
      contained within the arrangement. If there are undelivered elements, we have
      to
      consider whether we have vendor specific objective evidence of the value of
      the
      undelivered elements. Where no such vendor specific objective evidence is
      available, we defer recognizing revenue until all items have been delivered.
      Where the only undelivered element relates to post-contract support, we
      recognize all revenue arising from the arrangement over the period over which
      post-contract support is provided. Revenue recognized is allocated to the
      appropriate revenue stream within our statement of operations. The assessment
      of
      these matters is complex and requires management to assess whether the value
      attributed to undelivered elements is supported by adequate vendor specific
      objective evidence. As a result of applying GAAP, revenue may be recognized
      after the technology has been deployed commercially by the platform operator
      or
      content owner.





*License
      fees and royalty revenues*




License
      fee and royalty revenue is earned from the supply of software and accordingly
      is
      accounted for in accordance with SOP 97-2. Royalties are generally a function
      of
      the quantity of set-top boxes manufactured or deployed, which in turn is
      dependent upon the ability of the platform operator or service provider to
      generate new subscribers. The arrangements under which we earn royalty income
      and the application of SOP 97-2 to those arrangements typically result in
      revenues being recognized over a period of several years after the underlying
      software has been delivered. Subject to the other criteria of SOP 97-2 having
      been met, revenues are recognized when we have sufficiently reliable evidence
      of
      the volumes of set-top boxes manufactured or deployed. This is typically one
      to
      three months after actual manufacture or deployment.





Page
          23


**Use
      of estimates**




The
      preparation of our consolidated financial statements in conformity with 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.
      Intangible assets are subject to an impairment test when indicators of
      impairment exist. 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)*  *Litigation
      and intellectual property claims*




Certain
      of our customers and other third parties have from time to time made allegations
      and/or 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.





*c)*  *Income
      taxes*




Our
      operations are subject to tax in various domestic and international
      jurisdictions. Estimating income tax liabilities and the recoverability of
      deferred tax assets requires us to make estimates of the outcome of pending
      tax
      matters and well as the positions taken in the tax returns for fiscal 2006
      which
      have not yet been prepared. We believe that we have appropriately accrued for
      the expected outcome of all pending tax matters and we do not currently
      anticipate that the ultimate resolution of pending tax matters will have a
      material adverse effect on our consolidated financial condition, future results
      of operations or liquidity.





*d)*  *Inventory*




We
      hold
      inventory of smart cards and their components in anticipation of demand from
      our
      customers. Because smart cards supplied to different platform operators are
      unique or contain unique features, particular types of smart cards held in
      inventory may not be useable for any customer other than the one for which
      they
      were purchased. The lead times for smart card procurement are frequently much
      longer than the period covered by firm order commitments from our customers.
      Accordingly, we may have to make inventory purchases in anticipation of customer
      orders that may never be received and we may purchase inventory some months
      in
      advance of smart cards being supplied to our customers. We assess the need
      for
      inventory reserves as of each balance sheet date based on anticipated customer
      demand. A shortfall in future demand compared with our expectations could
      materially affect our future results of operations.








**Recent
      accounting pronouncements**




*Share-based
      payments*




In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      statement of Financial Accounting Standard (“SFAS”) No. 123 (R): “Share-Based
      Payment” (“SFAS No. 123 (R)”), which became effective for the Company on July 1,
      2005. Total operating expenses for fiscal 2006 included a charge before income
      tax in respect of stock option expenses of $6.6 million. The equivalent
      charges before income tax in fiscal 2005 and fiscal 2004 amounted to $4.3
      million and $2.9 million, respectively. We have adopted the modified
      prospective method to transition to SFAS No. 123 (R), effective July 1, 2005.
      For all periods ending prior to July 1, 2005, stock-based compensation was
      accounted for by using the intrinsic value-based method in accordance with
      APB
      No. 25, “Accounting for Stock Issued to Employees” (“APB25”) and we followed the
      disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based
      Compensation.” As a result of adopting SFAS No. 123 (R) on July 1,
      2005, our income before income taxes for fiscal 2006 was approximately $4.2
      million lower, net income was approximately $3.6 million lower and basic and
      diluted net income per share were both approximately $0.06 lower than if we
      had
      continued to account for stock-based compensation under APB25.





Page
          24




Prior
      to
      the adoption of SFAS No. 123 (R), we presented all tax benefits resulting from
      the exercise of stock options as operating cash flows in the consolidated
      statement of cash flows. SFAS No. 123 (R) requires the cash flows resulting
      from
      the tax benefits resulting from tax deductions in excess of the compensation
      cost recognized from those options (“excess tax benefits”) to be classified as
      financing cash flows. Accordingly, the $7.8 million excess tax benefits
      classified as a financing cash inflow in fiscal 2006 would have been classified
      as an operating cash inflow if we had not adopted SFAS No. 123 (R).





In
      June
      2005, the Remuneration Committee of our Board of Directors modified the terms
      of
      certain unvested out-of-the-money stock options granted under our stock option
      plans. 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. Incremental
      expense of approximately $9.6 million ($8.8 million, net of tax) associated
      with
      the acceleration was recorded in the fiscal 2005 pro forma
      disclosure.





As
      of
      June 30, 2006, the total compensation cost related to non vested awards not
      yet
      recognized was approximately $26.9 million and the period over which it is
      expected to be recognized is 3.8 years. Our Board of Directors or Remuneration
      Committee may grant additional stock options in the future, which would result
      in additional operating expenses being recorded. Further information about
      the
      effect of adopting SFAS No. 123 (R) is provided in Note 3 to the accompanying
      consolidated financial statements.





*Income
      taxes*




On
      July
      13, 2006, FASB issued FIN No. 48: “Accounting for Uncertainty in Income Taxes”
(“FIN 48”). FIN 48 clarifies the accounting for income taxes by prescribing the
      minimum recognition threshold a tax position is required to meet before being
      recognized in the financial statements. FIN 48 also provides guidance on
      de-recognition, measurement, classification, interest and penalties, accounting
      in interim periods, disclosure and transition. FIN 48 is effective for our
      fiscal year beginning July 1, 2007. The Company is currently considering the
      impact, if any, on our consolidated financial statements.





**Results
      of operations**




**Commentary
      on fiscal 2006 versus fiscal 2005**




**Revenue**




Revenue
      for the periods under review was as follows:




**For
                  the years ended June
                  30,**(in
                  thousands)
              
              **2006**
              
              **2005**
              
              **Change**
              
              **%
                  Change**Conditional
                  access
              
              $
              350,667
              
              $
              339,414
              
              $
              11,253
              
              
              3
              %Integration,
                  development & support
              
              
              46,903
              
              
              52,636
              
              
              (5,733
              )
              
              (11
              %)License
                  fees & royalties
              
              
              88,686
              
              
              71,443
              
              
              17,243
              
              
              24
              %New
                  technologies
              
              
              106,193
              
              
              85,945
              
              
              20,248
              
              
              24
              %Other
              
              
              7,674
              
              
              6,892
              
              
              782
              
              
              11
              %Total
                  revenue
              
              $
              600,123
              
              $
              556,330
              
              $
              43,793
              
              
              8
              %





The
      increase in conditional access revenues was due to an increase in security
      fees
      which was partially offset by lower deliveries of smart cards.





Page
          25


Higher
      security fees arise from increases in the number of authorized smart cards
      in
      use at our broadcast platform customers, which have grown as
      follows:


**For
                    the years ended June
                    30,**(in
                    millions)
                
                
                **2006**
                
                
                **2005**Number
                    of authorized cards, beginning of period
                
                
                56.7
                
                
                44.0Net
                    additions
                
                
                8.3
                
                
                12.7Number
                  of authorized cards, end of period
                
                
                65.0
                
                
                56.7


There
      has
      been growth in authorized cards in use across most of our broadcast platform
      customers. However, the increase in fiscal 2006 was less than the increase
      in
      fiscal 2005, which was favorably impacted by the migration of Sky Italia
      subscribers to NDS technology.





The
      decrease in the number of smart cards delivered in fiscal 2006 compared to
      fiscal 2005 reflects lower demand from DIRECTV and Sky Italia offset in part
      by
      higher shipments to customers in China. The quantity of smart cards delivered
      in
      each period was as follows:




**For
                      the years ended June 30,**(in
                    millions)
                
                
                2006
                
                
                2005Number
                    of smart cards delivered
                
                
                24.4
                
                
                30.8




The
      volume of smart 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.





Integration,
      development and support revenues decreased by 11% in fiscal 2006 compared to
      fiscal 2005. Revenue in fiscal 2006 from integration, development and support
      reflected the delivery of a series of enhancements to our customers and
      middleware technology development revenue. Fiscal 2005 included higher revenue
      from the migration of Sky Italia subscribers to NDS technology.





License
      fee and royalty revenues increased by 24% in fiscal 2006 compared to fiscal
      2005. The increase was mainly due to middleware and program guide technology
      supplied to DIRECTV, who, in early summer 2005, commenced the download of our
      MediaHighway middleware and related technologies to certain models of set-top
      boxes in use by their subscribers. The increase in the cumulative number of
      MediaHighway-enabled set-top boxes in each period was as follows:




**For
                  the years ended June
                  30,**(in
                  millions)
              
              
              **2006**
              
              
              **2005**Number
                  of MediaHighway-enabled set-top boxes,beginning
                  of period
              
              
              20.4
              
              
              18.4Additions
              
              
              21.2
              
              
              2.0Number
                  of MediaHighway-enabled set-top boxes, end of period
              
              
              41.6
              
              
              20.4


The
      increase in revenues from new technologies of 24% in fiscal 2006 compared to
      fiscal 2005 was due to the increase in revenue from our Synamedia IPTV
      technologies, interactive infrastructure and gaming applications. This was
      due
      to the higher number of subscribers using this technology and the addition
      of
      our technology on new platforms. We also received higher development and royalty
      income related to the deployment of our advanced DVR technologies by several
      of
      our customers.





Page
          26


The
      increase in the cumulative number of DVR-enabled set-top boxes in each period
      was as follows:


**For
                    the years ended June 30,**(in
                    millions)
                
                **2006**
                
                **2005**Number
                    of DVR-enabled set-top boxes, beginning of period
                
                
                1.4
                
                
                0.4Additions
                
                
                2.1
                
                
                1.0Number
                    of DVR-enabled set-top boxes, end of period
                
                
                3.5
                
                
                1.4





The
      increase in the number of DVR-enabled set-top boxes using our technology is
      primarily due to DIRECTV, which commenced deployment of our DVR technology
      within their new generation set-top box in November 2005. Our revenues under
      our
      set-top box technology contract with DIRECTV are significantly influenced by
      the
      number of set-top boxes manufactured and deployed which use our DVR
      technologies.





In
      addition to the matters referred to above, comparisons of revenues for fiscal
      2006 compared to fiscal 2005 were also affected by the relative strength of
      the
      U.S. dollar over the course of the year. Approximately 48% of our revenues
      are
      denominated in currencies other than the U.S. dollar (principally pounds
      sterling and euro). We estimate that the stronger U.S. dollar has adversely
      impacted our total reported revenues by approximately 5%.








**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)
              
              **2006**
              
              **2005**
              
              **Change**
              
              **%
                  Change**Smart
                  card costs
              
              $
              83,021
              
              $
              131,466
              
              $
              (48,445
              )
              
              (37
              %)Operations
                  & support
              
              
              139,772
              
              
              72,254
              
              
              67,518
              
              
              93
              %Royalties
              
              
              15,035
              
              
              13,198
              
              
              1,837
              
              
              14
              %Other
              
              
              4,794
              
              
              2,020
              
              
              2,774
              
              
              137
              %Total
                  cost of goods and services sold
              
              $
              242,622
              
              $
              218,938
              
              $
              23,684
              
              
              11
              %Gross
                  margin
              
              $
              357,501
              
              $
              337,392
              
              
              20,109
              
              
              6
              %Gross
                  margin as a percentage of revenues
              
              
              59.6
              %
              
              60.6
              %
              
              (1.0
              %)
              
              **────────**:
                  Not meaningful.





We
      consider that gross margin, defined as revenues less costs and expenses
      associated with those revenues (i.e., cost of goods and services sold), 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. Cost of goods and services sold exclude charges in respect
      of
      the amortization of intellectual property rights and other finite-lived
      intangibles which we have acquired.





The
      decrease in smart card costs in fiscal 2006, compared to fiscal 2005, was due
      to
      the lower unit costs and lower deliveries of smart cards. Operations costs
      include employee and facilities costs related to smart card processing, customer
      support and development projects undertaken under customer contracts. The
      increase in operations and support costs over fiscal 2005 was due to an increase
      in the number of our employees working on development, integration and support
      activities for our customers. Royalty costs are a function of particular revenue
      items and the increase in royalty expense for fiscal 2006 compared to fiscal
      2005 was due to changes in the mix of revenues.





As
      a
      consequence of these factors, gross margin as a percentage of revenues was
      59.6%
      for fiscal 2006, compared to 60.6% for fiscal 2005





Page
          27





**Operating
      expenses**




Operating
      expenses for the periods under review may be analyzed as follows:




**For
                  the years ended June
                  30,**(in
                thousands)
              
              **2006**
              
              
              **2005**
              
              
              **Change**
              
              
              **%
                  Change**Research
                  & development
              $
              145,523
              
              $
              166,504
              
              $
              (20,981
              )
              
              (13
              %)Sales
                  & marketing
              
              30,713
              
              
              25,820
              
              
              4,893
              
              
              19
              %General
                  & administration
              
              42,456
              
              
              43,352
              
              
              (896
              )
              
              (2
              %)Amortization
                  of intangibles
              
              9,453
              
              
              12,349
              
              
              (2,896
              )
              
              (23
              %)Other
              
              (1,373
              )
              
              (2,824
              )
              
              1,451
              
              
              **Total
                  operating expenses
              $
              226,772
              
              $
              245,201
              
              $
              (18,429
              )
              
              (8
              %)────────
 **:
                    Not meaningful




Our
      main
      operating costs are employee costs, facilities costs, depreciation and travel
      costs.





Our
      employee numbers (including contractors) have increased over the period under
      review, as follows:




**For
                  the years ended June 30,****2006**
              
              
              **2005**Number
                  of employees, beginning of period
              
              
              2,508
              
              
              2,004Net
                  additions
              
              
              481
              
              
              504Number
                  of employees, end of period
              
              
              2,989
              
              
              2,508Average
                  number of employees during period
              
              
              2,765
              
              
              2,247


We
      have
      continued to recruit software development engineers and staff supporting
      customers. As a consequence of higher employee numbers, we have occupied
      additional facilities in the United Kingdom, the United States and India, and
      increased our infrastructure costs. Accordingly, our total operating costs
      (including that portion reported within cost of goods and services sold) have
      increased.





A
      higher
      proportion of our engineering activities have been involved in
      revenue-generating projects for our customers and this has resulted in a higher
      amount and proportion of the total costs of our technical employees being
      classified as cost of goods and services sold. The residual costs of our
      technical employees represent research and development expenses, being the
      cost
      of employees and related items associated with research activities and
      development activities undertaken at our risk. Such activities involve a mixture
      of internal research and software development projects focused on the digital
      broadcasting industry and projects focused on improving functionality to our
      existing product portfolio. Research and development expenses decreased by
      13%
      for fiscal 2006 compared to fiscal 2005 as a result of a lower proportion of
      development projects being undertaken at our risk. In addition, in fiscal 2006,
      we received a $5.3 million grant from the French government as a consequence
      of
      being engaged in eligible research projects.





During
      fiscal 2006, sales and marketing expenses increased by 19%, as a result of
      increased attendance at trade shows and corporate communications activities,
      particularly in Europe and Asia.





General
      and administrative expenses decreased by $0.9 million, or 2%, in fiscal 2006
      compared to fiscal 2005. During fiscal 2005, our management committed to
      reoccupy part of a property in Heathrow, England which we had abandoned in
      2000,
      resulting in a reversal of the abandoned property lease accrual of $5.5 million
      which was no longer needed; in fiscal 2006 there was a further reversal of
      $0.2
      million. Excluding the effect of the abandoned property lease accruals noted
      above, general and administrative expenses decreased by $6.2 million in fiscal
      2006 compared to fiscal 2005. Part of the decrease is a consequence of a lower
      proportion of the total number of our employees being engaged in general and
      administrative functions, which in turn, resulted in a reduction in the
      facilities and infrastructure costs included within general and administrative
      expenses. Additionally, legal expenses and that element of stock-based
      compensation expense which is classified as general and administrative expense,
      were both lower in fiscal 2006 compared to fiscal 2005.





Page
          28




Amortization
      of finite-lived intangible assets decreased by 23% in fiscal 2006 compared
      to
      fiscal 2005, as a consequence of certain intellectual property rights becoming
      fully amortized in May 2005.





Other
      income credited to operating expenses represents gains on the revaluation of
      cash and certain other monetary assets and liabilities which are denominated
      in
      currencies other than the functional currencies of the entities which hold
      them.





In
      addition to the matters referred to above, comparisons of expenses for fiscal
      2006 with fiscal 2005 were also affected by the relative strength of the U.S.
      dollar during fiscal 2006 compared to fiscal 2005. Approximately 49% of our
      total expenses are denominated in currencies other than the U.S. dollar
      (principally pounds sterling and euro). We estimate that the stronger U.S.
      dollar has favorably impacted our total reported expenses by approximately
      6%.





**Operating
      income and other items**




As
      a
      result of the factors outlined above, operating income was $130.7 million (or
      21.8% of revenue) for fiscal 2006, compared to $92.2 million (or 16.6% of
      revenue) for fiscal 2005.





Interest
      income earned on cash deposits was $15.9 million in fiscal 2006 compared to
      $9.8
      million in fiscal 2005 due to higher average cash balances and higher interest
      rates. We recorded a loss on investments of $0.6 million in fiscal 2005 with
      no
      comparable transaction in fiscal 2006.





Our
      effective tax rate was 30.9% for fiscal 2006 compared to 27.0% for fiscal 2005
      due to higher effective tax rates in our non-U.K. operations.





As
      a
      consequence of all these factors, net income for fiscal 2006 was $101.0 million,
      or $1.80 per share ($1.74 per share on a diluted basis), compared to $74.0
      million, or $1.35 per share ($1.29 per share on a diluted basis) for fiscal
      2005.








**Commentary
      on fiscal 2005 versus fiscal 2004**




The
      results of fiscal 2005 in comparison with fiscal 2004 were 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 acquisition in December 2003
      of
      the MediaHighway middleware business from Thomson SA, which was previously
      part
      of the technology business of the French broadcaster Canal+ (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
              %





Page
          29




The
      increase in conditional access revenues was 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 reflected the higher demand for
      smart
      cards noted above. 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.





Integration,
      development and support revenues 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.





License
      fee and royalty revenues 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 reflected the full-year
      contribution from customers acquired with the MediaHighway middleware business.
      As of June 30, 2005, we estimated that a cumulative number of 20.4 million
      set-top boxes containing NDS middleware had been shipped, an increase of 2.0
      million from 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.





The
      increase in revenues from new technologies was due to higher development and
      royalty income related to the deployment of our advanced DVR technologies by
      several of our customers. In addition, revenue from interactive infrastructure,
      gaming applications and our IPTV technologies 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 recognized
      initial revenue from the supply of various interactive infrastructure components
      to DIRECTV.





The
      comparison of reported revenues was 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 euro.
      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%.





Page
          30
 
  **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
              
              
              159
              %Gross
                  margin
              
              $
              337,392
              
              $
              272,276
              
              $
              65,116
              
              
              24
              %Gross
                  margin as a percentage of revenues
              
              
              60.6
              %
              
              76.3
              %
              
              (15.7
              %)
              
              **────────**:
                  Not meaningful.





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.





These
      factors 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**Research
                  & development
              
              $
              166,504
              
              $
              146,190
              
              $
              20,314
              
              
              14
              %Sales
                  & marketing
              
              
              25,820
              
              
              25,145
              
              
              675
              
              
              3
              %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
              )
              
              **Other
              
              
              (2,824
              )
              
              (1,192
              )
              
              (1,632
              )
              
              **Total
                  operating expenses
              
              $
              245,201
              
              $
              223,851
              
              $
              21,350
              
              
              10
              %────────**:
                  Not meaningful.





We
      had
      2,508 employees (including contractors) at June 30, 2005 as compared to 2,004
      at
      June 30, 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 South 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 was partially offset by the transfer of some experienced
      staff from research and development to groups working on customer delivery,
      support and smart card processing. These transfers were the primary reason
      for
      the increase in the operations and support cost line as noted above.




Page
          31





Sales
      and
      marketing costs increased by 3% in fiscal 2005 compared to fiscal 2004 due
      to
      attendance at an additional major trade show.





General
      and administration costs increased by 27% in fiscal 2005 compared to fiscal
      2004. 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.





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.





**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
      income earned on cash deposits was $9.8 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.





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.





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.




Page
          32


**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, 2006, we had cash, cash equivalents and short-term investments totaling
      $505.0 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 continued profitability of our business. As of June 30,
      2006, we had an unused credit facility to borrow up to £30 million
      (equivalent to approximately $55 million) from a subsidiary of News Corporation.
      No amounts were drawn under this facility during the two fiscal years ended
      June
      30, 2006.





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 outflow of cash and cash equivalents of $23.4 million in fiscal 2006,
      compared to a net cash inflow of $110.7 million in fiscal 2005. In
      addition, in fiscal 2006, we acquired short-term investments (being cash
      deposits with an initial term of more than 6 months) of $184.4
      million.





Net
      cash
      provided by operating activities was as follows:


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2006**
              
              **2005**Net
                  cash provided by operating activities
              
              $
              163,908
              
              $
              117,692





The
      increase in net cash provided by operating activities in fiscal 2006 reflects
      higher receipts from customers, lower payments for the purchase of smart cards
      and lower tax payments. These factors were offset in part by higher payments
      of
      payroll costs, travel expenses, rent and facilities costs, compared to previous
      fiscal year, as a result of an increase in the number of employees. Net cash
      provided by operating activities includes receipts under security maintenance
      contracts where we have assumed the liability to procure and supply changeover
      cards in future periods. These arrangements will result in higher cash payments
      for the purchase of smart cards in future periods.





Net
      cash
      used in investing activities was as follows:


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2006**
              
              **2005**Capital
                  expenditure
              
              $
              30,018
              
              $
              20,584Proceeds
                  from sale of property, plant and equipment
              
              
              (602
              )
              
              (39
              )Proceeds
                  from sale of investments
              
              
              ─
              
              
              (264
              )Business
                  acquisitions, net of cash acquired
              
              
              3,118
              
              
              17Increase
                  in short-term investments
              
              
              184,401
              
              
              ─Net
                  cash used in investing activities
              
              $
              216,935
              
              $
              20,298





The
      increase in capital expenditure was due to investment in new facilities in
      the
      United Kingdom, India and the United States, and higher purchases of technical
      equipment required to support our customers.





In
      fiscal
      2006, we acquired NT Media Limited for initial cash consideration and costs
      totaling $3.1 million, net of cash acquired. Further payments may be made under
      the terms of the acquisition agreement up to a maximum of approximately
      $4.3 million over the next three years. As of June 30, 2006, $2.2 million
      of this additional consideration was accrued but unpaid in respect of matters
      for which the contingencies had been resolved and is recorded as compensation
      cost within our consolidated statement of operations.





During
      fiscal 2006, we invested a portion of our cash with banks on deposit for terms
      of up to six months.




Page
          33








Net
      cash
      generated by financing activities was as follows:


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2006**
              
              **2005**Issuance
                  of shares
              
              $
              21,769
              
              $
              13,294Excess
                  tax benefits realized on exercise of stock options
              
              
              7,828
              
              
              ─Net
                  cash generated by financing activities
              
              $
              29,597
              
              $
              13,294





Higher
      numbers of stock options were exercised by employees during fiscal 2006 than
      in
      fiscal 2005. Certain stock option exercises result in a tax benefit higher
      than
      the amounts recorded in the consolidated statement of operations. Following
      the
      adoption of SFAS No. 123 (R) which became effective for us on July 1, 2005,
      such
      benefits are shown as a financing cash flow to the extent that they are
      realized, rather than as part of cash provided by operating activities as
      previously required.








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 and/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,
      2006.


**As
                  of June 30, 2006****Payments
                  Due by Period****Less
                  than**
              
              
              
              
              
              **After****(**in
                  thousands)
              
              **Total**
              
              **1
                  year**
              
              **2-3
                  years**
              
              **4-5
                  years**
              
              **5
                  years**Operating
                  lease obligations
              
              $
              130,503
              
              $
              18,987
              
              $
              35,894
              
              $
              28,322
              
              
              47,300Smart
                  card purchase obligations
              
              
              58,921
              
              
              52,921
              
              
              6,000
              
              
              ─
              
              
              ─Payments
                  to vendors of businesses acquired(1)
              
              
              2,295
              
              
              2,295
              
              
              ─
              
              
              ─
              
              
              ─Other
                  long-term obligations reflected on the balance sheet(2)
              
              
              168,276
              
              
              ─
              
              
              93,970
              
              
              40,559
              
              
              33,747$
              359,995
              
              $
              74,203
              
              $
              135,864
              
              $
              68,881
              
              $
              81,047





────────


(1)
            Amount
                represents accrued consideration payable to the vendors of NT Media
                Limited which we acquired during fiscal 2006. An additional amount
                of up
                to $2.2 million may be payable dependent of the revenue of the acquired
                business for periods up to September 1,
                2008.  (2)
            Comprising deferred income of $134.5 million, severance
              pay liabilities of $30.6 million and pension liabilities of $4.3
              million.





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 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 our future results of operations.





Page
          34




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.





Amounts
      payable by us under certain contracts are subject to audit rights held by third
      parties and the terms of such contracts may be open to subjective
      interpretation. We settle our liabilities under such contracts based on our
      assessment of the amounts due however it may be subject to claims that the
      amounts paid are incorrect. It is not considered that any resulting liability
      in
      excess of amounts recognized in these financial statements would materially
      affect our financial position.





The
      Company’s operations are subject to tax in various domestic and international
      jurisdictions. The Company believes it has appropriately accrued for the
      expected outcome of all pending tax matters and does not currently anticipate
      that the ultimate resolution of pending tax matters will have a material adverse
      effect on its consolidated financial condition, future results of operations
      or
      liquidity.





**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 euro.
      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, 2006.





In
      certain countries in which the Company has operations, principally Israel,
      the
      Company is obliged to make severance payments to employees leaving employment
      in
      most circumstances. The payment is based on the latest monthly salary for each
      year of service. The payment obligations are funded by payments to third party
      investment managers under approved plans. The liability is recorded gross and
      a
      separate asset is recorded equal to the market value of the funds held by third
      party investment managers. The obligation in the consolidated balance sheet
      was
      $30.6 million. The value of funds held by third party investment managers was
      $25.2 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 investment funds
      is
      regulated by the Israeli Government and is denominated in Israeli shekels.
      Accordingly, the difference between the gross liability and the investment
      fund
      assets is subject to fluctuations depending on the relative values of the U.S.
      dollar and Israeli shekel.





As
      of
      June 30, 2006, approximately 81% of our cash and short-term investments
      were held in U.S. dollars and 10% in pounds sterling, with most of the rest
      being in euro. Our policy is to hold cash in U.S. dollar bank deposits and
      to
      hold cash in other currencies to the extent that our cash flow projections
      indicate that we have need for those other currencies. Therefore, our reported
      cash balances are subject to fluctuations in foreign exchange rates. As a result
      of fluctuations in exchange rates, we have experienced gains on holding cash
      of
      $4.3 million and $0.5 million for the fiscal years ended June 30, 2006 and
      2005, respectively.





Page
          35


**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
              37Report
                  of Independent Registered Public Accounting Firm
              38Consolidated
                  Statements of Operations for the fiscal years ended June 30, 2006,
                  2005
                  and 2004
              39Consolidated
                  Balance Sheets as of June 30, 2006 and 2005
              40Consolidated
                  Statements of Cash Flows for the fiscal years ended June 30, 2006,
                  2005
                  and 2004
              41Consolidated
                  Statements of Shareholders’ Equity and Other Comprehensive Income for the
                  fiscal yearsended
                  June 30, 2006, 2005 and 2004
              42Notes
                  to Consolidated Financial Statements
              44


Page
          36


**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, 2006 and 2005, and the related consolidated statements of operations,
      comprehensive income, shareholders’ equity, and cash flows for each of the three
      years in the period ended June 30, 2006. 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 the year ended June 30, 2004, which statements reflect total
      cost of sales of $62 million and total operating expenses of $20 million. 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 the year 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, 2006 and 2005,
      and
      the consolidated results of its operations and its cash flows for each of the
      three years in the period ended June 30, 2006, 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, 2006, based on criteria
      established in Internal Control─Integrated Framework issued by the Committee of
      Sponsoring Organizations of the Treadway Commission, and our report dated August
      31, 2006 expressed an unqualified opinion thereon.





/s/
      ERNST & YOUNG LLP


Ernst
      & Young LLP





London,
      England


August
      31, 2006





Page
          37


**Report
      of Independent Registered Public Accounting Firm**




Auditor’s
      Report to the Shareholders of NDS Technologies Israel Limited





We
      have
      audited the statements of income, changes in shareholder’s equity and cash flows
      of NDS Technologies Israel Limited (“the Company”) for the year ended 30 June
      2004 [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 audit.





We
      conducted our audit in accordance with generally accepted auditing standards
      in
      the United States. Such 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 audit provides a fair
      basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the results of operations, changes in shareholder’s equity
      and cash flows of the Company for the year ended 30 June 2004 for the year
      ended
      30 June 2004 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.





/s/
      Somekh Chaikin


Somekh
      Chaikin


Certified
      Public Accountants (Isr.)





Jerusalem,
      Israel


July
      25,
      2004


Page
          38


**NDS
      Group plc**




**Consolidated
      Statements of Operations**


**For
                  the years ended June 30,**(in
                  thousands, except per-share amounts)
              
              **2006**
              
              **2005**
              
              **2004****Revenue:**Conditional
                  access
              
              $
              350,667
              
              $
              339,414
              
              $
              178,286Integration,
                  development & support
              
              
              46,903
              
              
              52,636
              
              
              55,601License
                  fees & royalties
              
              
              88,686
              
              
              71,443
              
              
              51,673New
                  technologies
              
              
              106,193
              
              
              85,945
              
              
              64,942Other
              
              
              7,674
              
              
              6,892
              
              
              6,161Total
                  revenue (inclusive of $458,042, $411,857 and $202,095 from related
                  parties)
              
              
              600,123
              
              
              556,330
              
              
              356,663**Cost
                  of goods and services sold**(exclusive
                  of items shown separately below)**:**Smart
                  card costs
              
              
              (83,021
              )
              
              (131,466
              )
              
              (26,708
              )Operations
                  & support
              
              
              (139,772
              )
              
              (72,254
              )
              
              (47,708
              )Royalties
                  (inclusive of $2,138, $3,682 and $576 to related parties)
              
              
              (15,035
              )
              
              (13,198
              )
              
              (7,160
              )Other
              
              
              (4,794
              )
              
              (2,020
              )
              
              (2,811
              )Total
                  cost of goods and services sold
              
              
              (242,622
              )
              
              (218,938
              )
              
              (84,387
              )**Gross
                  margin**
              
              
              357,501
              
              
              337,392
              
              
              272,276**Operating
                  expenses:**Research
                  & development
              
              
              (145,523
              )
              
              (166,504
              )
              
              (146,190
              )Sales
                  & marketing
              
              
              (30,713
              )
              
              (25,820
              )
              
              (25,145
              )General
                  & administration (inclusive of $173, $263 and $230 to related
                  parties)
              
              
              (42,456
              )
              
              (43,352
              )
              
              (34,140
              )Amortization
                  of other intangibles
              
              
              (9,453
              )
              
              (12,349
              )
              
              (8,177
              )Impairment
                  charge
              
              
              ─
              
              
              ─
              
              
              (11,391
              )Other
              
              
              1,373
              
              
              2,824
              
              
              1,192Total
                  operating expenses
              
              
              (226,772
              )
              
              (245,201
              )
              
              (223,851
              )**Operating
                  income**
              
              
              130,729
              
              
              92,191
              
              
              48,425**Other
                  income:**Interest
                  income
              
              
              15,897
              
              
              9,773
              
              
              7,342Interest
                  expense
              
              
              (451
              )
              
              (54
              )
              
              (48
              )Losses
                  on investments
              
              
              ─
              
              
              (559
              )
              
              (446
              )Total
                  other income
              
              
              15,446
              
              
              9,160
              
              
              6,848Income
                  before income tax expense and minority interests in subsidiaries,
                  net of
                  tax
              
              
              146,175
              
              
              101,351
              
              
              55,273Income
                  tax expense
              
              
              (45,225
              )
              
              (27,353
              )
              
              (19,061
              )Minority
                  interests in subsidiaries, net of tax
              
              
              ─
              
              
              ─
              
              
              843**Net
                  income**
              
              $
              100,950
              
              $
              73,998
              
              $
              37,055**Net
                  income per share:**Basic
                  net income per share
              
              $
              1.80
              
              $
              1.35
              
              $
              0.69Diluted
                  net income per share
              
              $
              1.74
              
              $
              1.29
              
              $
              0.67




The
      accompanying notes form an integral part of these
      consolidated financial statements.




Page
          39


**NDS
      Group plc**




**Consolidated
      Balance Sheets**


**As
                  of June 30,**(in
                  thousands, except share amounts)
              
              **2006**
              
              **2005****ASSETS****Current
                  assets:**Cash
                  and cash equivalents
              
              $
              320,636
              
              $
              339,791Short-term
                  investments
              
              
              184,401
              
              
              ─Accounts
                  receivable, net (inclusive of $74,295 and $51,909 due from related
                  parties)
              
              
              97,716
              
              
              73,588Accrued
                  income
              
              
              37,050
              
              
              25,391Income
                  tax receivable
              
              
              1,411
              
              
              ─Inventories,
                  net
              
              
              39,340
              
              
              41,508Prepaid
                  expenses
              
              
              17,031
              
              
              15,795Other
                  current assets
              
              
              3,650
              
              
              3,595Total
                  current assets
              
              
              701,235
              
              
              499,668Property,
                  plant & equipment, net
              
              
              46,239
              
              
              33,962Goodwill
              
              
              66,917
              
              
              64,236Other
                  intangibles, net
              
              
              43,299
              
              
              48,537Deferred
                  tax assets
              
              
              7,506
              
              
              5,121Other
                  receivables
              
              
              6,681
              
              
              ─Other
                  non-current assets
              
              
              25,244
              
              
              20,374**Total
                  assets**
              
              $
              897,121
              
              $
              671,898**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY****Current
                  liabilities:**Accounts
                  payable (inclusive of $4,228 and $3,124 due to related
                  parties)
              
              $
              26,966
              
              $
              18,336Deferred
                  income
              
              
              45,492
              
              
              47,175Accrued
                  payroll costs
              
              
              26,647
              
              
              25,069Accrued
                  expenses
              
              
              26,245
              
              
              21,097Income
                  tax liabilities
              
              
              19,039
              
              
              4,070Other
                  current liabilities
              
              
              16,762
              
              
              13,498Total
                  current liabilities
              
              
              161,151
              
              
              129,245Accrued
                  expenses
              
              
              33,747
              
              
              28,547Deferred
                  income
              
              
              134,529
              
              
              87,353**Total
                  liabilities**
              
              
              329,427
              
              
              245,145Commitments
                  and contingencies**Shareholders’
                  equity:**Series
                  A ordinary shares, par value $0.01 per share: 48,000,000 shares
                  authorized;14,873,262
                  and 13,318,546 shares outstanding as of June 30, 2006 and 2005,
                  respectively
              
              
              148
              
              
              133Series
                  B ordinary shares, par value $0.01 per share: 52,000,000 shares
                  authorized;42,001,000
                  shares outstanding as of June 30, 2006 and 2005
              
              
              420
              
              
              420Deferred
                  shares, par value £1 per share: 42,000,002 shares
                  authorizedand
                  outstanding as of June 30, 2006 and 2005
              
              
              64,103
              
              
              64,103Additional
                  paid-in capital
              
              
              534,668
              
              
              498,363Accumulated
                  deficit
              
              
              (79,621
              )
              
              (180,571
              )Other
                  comprehensive income
              
              
              47,976
              
              
              44,305**Total
                  shareholders’ equity**
              
              
              567,694
              
              
              426,753**Total
                  liabilities and shareholders’ equity**
              
              $
              897,121
              
              $
              671,898




The
      accompanying notes form an integral part of these consolidated financial
      statements.




Page
          40


**NDS
      Group plc**




**Consolidated
      Statements of Cash Flows**


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2006**
              
              
              **2005**
              
              
              **2004****Operating
                  activities:**Net
                  income
              $
              100,950
              
              $
              73,998
              
              $
              37,055Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation
              
              17,058
              
              
              15,405
              
              
              13,526Amortization
                  of other intangibles
              
              9,453
              
              
              12,349
              
              
              8,177Impairment
                  charge
              
              ─
              
              
              ─
              
              
              11,391Stock
                  option-based compensation
              
              6,626
              
              
              4,327
              
              
              2,911Other
                  stock-based compensation
              
              ─
              
              
              ─
              
              
              1,832Other
                  compensation cost
              
              2,206
              
              
              ─
              
              
              ─Losses
                  on investments
              
              ─
              
              
              559
              
              
              446Minority
                  interest in subsidiaries, net of tax
              
              ─
              
              
              ─
              
              
              (843
              )Change
                  in operating assets and liabilities, net of acquisitions:Inventories
              
              2,168
              
              
              (5,536
              )
              
              (22,384
              )Receivables
                  and other assets
              
              (48,429
              )
              
              6,273
              
              
              (54,753
              )Deferred
                  income
              
              45,493
              
              
              36,664
              
              
              63,982Accounts
                  payable and other liabilities
              
              28,383
              
              
              (26,347
              )
              
              30,319Net
                  cash provided by operating activities (inclusive of $479,648,
                  $456,536and
                  $213,649 from related parties)
              
              163,908
              
              
              117,692
              
              
              91,659**Investing
                  activities:**Capital
                  expenditure
              
              (30,018
              )
              
              (20,584
              )
              
              (17,603
              )Proceeds
                  from sale of property, plant and equipment
              
              602
              
              
              39
              
              
              397Short-term
                  investments
              
              (184,401
              )
              
              ─
              
              
              ─Proceeds
                  from sale of investments
              
              ─
              
              
              264
              
              
              ─Business
                  acquisitions, net of cash acquired
              
              (3,118
              )
              
              (17
              )
              
              (65,644
              )Other
              
              ─
              
              
              ─
              
              
              (870
              )Net
                  cash used in investing activities
              
              (216,935
              )
              
              (20,298
              )
              
              (83,720
              )**Financing
                  activities:**Issuance
                  of shares (inclusive of realized excess tax benefits of $7,828,
                  $─and
                  $─)
              
              29,597
              
              
              13,294
              
              
              2,212Other
              
              ─
              
              
              ─
              
              
              40Net
                  cash provided by financing activities
              
              29,597
              
              
              13,294
              
              
              2,252**Net
                  (decrease) increase in cash and cash equivalents**
              
              (23,430
              )
              
              110,688
              
              
              10,191Cash
                  and cash equivalents, beginning of period
              
              339,791
              
              
              228,620
              
              
              202,185Exchange
                  movements
              
              4,275
              
              
              483
              
              
              16,244**Cash
                  and cash equivalents, end of period**
              $
              320,636
              
              $
              339,791
              
              $
              228,620





The
      accompanying notes form an integral part of these consolidated financial
      statements.





Page
          41


NDS
      Group plc




**Consolidated
        Statements of Shareholders’ Equity and Other Comprehensive
        Income**


**For
                  the years ended June
                  30,**(in
                  thousands, except share amounts)
              
              **2006**
              
              **2005**
              
              **2004****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount****Series
                     A ordinary shares of $0.01 par value each:**Balance,
                  beginning of year
              
              
              13,318,546
              
              $
              133
              
              
              12,186,598
              
              $
              122
              
              
              11,983,681
              
              $
              120Shares
                  issued on exercise of employee stock options
              
              
              1,554,716
              
              
              15
              
              
              1,131,948
              
              
              11
              
              
              202,917
              
              
              2Balance,
                  end of year
              
              
              14,873,262
              
              
              148
              
              
              13,318,546
              
              
              133
              
              
              12,186,598
              
              
              122**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
              
              
              
              
              
              498,363
              
              
              
              
              
              478,599
              
              
              
              
              
              473,478Shares
                  issued on exercise of employee stock options
              
              
              
              
              
              21,754
              
              
              
              
              
              13,283
              
              
              
              
              
              2,210Stock
                  option-based compensation (inclusive oftax
                  benefit of $7,925, $2,154 and $─)
              
              
              
              
              
              14,551
              
              
              
              
              
              6,481
              
              
              
              
              
              2,911Balance,
                  end of year
              
              
              
              
              
              534,668
              
              
              
              
              
              498,363
              
              
              
              
              
              478,599**Deferred
                  stock-based compensation:**Balance,
                  beginning of year
              
              
              
              
              
              ─
              
              
              
              
              
              ─
              
              
              
              
              
              (1,832
              )Stock-based
                  compensation (nil tax effect)
              
              
              
              
              
              ─
              
              
              
              
              
              ─
              
              
              
              
              
              1,832Balance,
                  end of year
              
              
              
              
              
              ─
              
              
              
              
              
              ─
              
              
              
              
              
              ─**Accumulated
                  deficit:**Balance,
                  beginning of year
              
              
              
              
              
              (180,571
              )
              
              
              
              
              (254,569
              )
              
              
              
              
              (291,624
              )Net
                  income
              
              
              
              
              
              100,950
              
              
              
              
              
              73,998
              
              
              
              
              
              37,055Balance,
                  end of year
              
              
              
              
              
              (79,621
              )
              
              
              
              
              (180,571
              )
              
              
              
              
              (254,569
              )**Accumulated
                  other comprehensive income:**Balance,
                  beginning of year
              
              
              
              
              
              44,305
              
              
              
              
              
              44,669
              
              
              
              
              
              19,666Other
                  comprehensive income (loss)
              
              
              
              
              
              3,671
              
              
              
              
              
              (364
              )
              
              
              
              
              25,003Balance,
                  end of year
              
              
              
              
              
              47,976
              
              
              
              
              
              44,305
              
              
              
              
              
              44,669Accumulated
                  deficit and accumulated othercomprehensive
                  income, end of year
              
              
              
              
              
              (31,645
              )
              
              
              
              
              (136,266
              )
              
              
              
              
              (209,900
              )**Total
                  Shareholders’ Equity**Balance,
                  beginning of year
              
              
              
              
              
              426,753
              
              
              
              
              
              333,344
              
              
              
              
              
              264,331Balance,
                  end of year
              
              
              
              
              $
              567,694
              
              
              
              
              $
              426,753
              
              
              
              
              $
              333,344


The
      accompanying notes form an integral part of these consolidated financial
      statements.




Page
          42


**NDS
        Group plc**
  **Consolidated
        Statements of Shareholders’ Equity and Other Comprehensive Income
        (continued)**
 **For
                      the years ended June 30,**(in
                      thousands)
                  
                  **2006**
                  
                  **2005**
                  
                  **2004****Comprehensive
                      income:**Net
                      income
                  
                  $
                  100,950
                  
                  $
                  73,998
                  
                  $
                  37,055**Other
                      comprehensive income (loss), net of tax:**Foreign
                      currency translation adjustments (nil tax effect)
                  
                  
                  2,832
                  
                  
                  380
                  
                  
                  23,599Minimum
                      pension liability adjustment, net of tax of ($361), $336 and
                      ($599)
                  
                  
                  839
                  
                  
                  (744
                  )
                  
                  1,404Total
                      other comprehensive income (loss), net of tax
                  
                  
                  3,671
                  
                  
                  (364
                  )
                  
                  25,003**Total
                      comprehensive income**
                  
                  **$**
                  **104,621**
                  
                  **$**
                  **73,634**
                  
                  **$**
                  **62,058****Elements
                      of other comprehensive income:***Foreign
                      currency translation adjustments:*Balance,
                      beginning of year
                  
                  $
                  47,382
                  
                  $
                  47,002
                  
                  $
                  23,403Fiscal
                      year activity (nil tax effect)
                  
                  
                  2,832
                  
                  
                  380
                  
                  
                  23,599Balance,
                      end of year
                  
                  
                  50,214
                  
                  
                  47,382
                  
                  
                  47,002*Minimum
                      pension liability adjustment:*Balance,
                      beginning of year
                  
                  
                  (3,077
                  )
                  
                  (2,333
                  )
                  
                  (3,737
                  )Fiscal
                      year activity, net of tax of ($361), $366 and ($599)
                  
                  
                  839
                  
                  
                  (744
                  )
                  
                  1,404Balance,
                      end of year
                  
                  
                  (2,238
                  )
                  
                  (3,077
                  )
                  
                  (2,333
                  )**Total
                      other comprehensive income:**Total
                      other comprehensive income (loss) for year, net of tax
                  
                  
                  3,671
                  
                  
                  (364
                  )
                  
                  25,003Total
                      accumulated other comprehensive income, net of tax, beginning
                      of
                      year
                  
                  
                  44,305
                  
                  
                  44,669
                  
                  
                  19,666Total
                      accumulated other comprehensive income, net of tax, end of
                      year
                  
                  $
                  47,976
                  
                  $
                  44,305
                  
                  $
                  44,669
  The
        accompanying notes form an integral part of these consolidated financial
        statements.
 
 Page
            43




**NDS
      Group plc**




**Notes
      to Consolidated Financial Statements**




**Note
      1.**  **Description
      of business**




NDS
      Group
      plc (the “Company”) is domiciled in the United Kingdom, incorporated in Great
      Britain and registered in England and Wales. The Company is engaged in the
      business of supplying open end-to-end digital technology and services to digital
      pay-television platform operators and content providers. The Company has
      customers and operations in several countries around the world. All the
      revenues, expenses, assets, liabilities and cash flows relate to the continuing
      operations of the Company.





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.





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, from that date the Company
      no
      longer qualified as a foreign private issuer under U.S. securities laws. The
      Company 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 (“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 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 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 are consolidated in these financial statements is
      the
      currency of the primary economic environment in which each entity
      operates.




Page
          44





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.





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, cash deposits with banks repayable
      on
      demand and fixed term cash deposits with banks with original maturities of
      three
      months or less.





**e)**  **Short-term
      investments**




Short-term
      investments consist of deposits with banks with original maturities of greater
      than three months.





**f)**  **Concentration
      of credit risk**




Cash,
      cash equivalents and term deposits are maintained with several financial
      institutions. Deposits held with banks may exceed the amount of insurance
      provided on such deposits. These deposits may be redeemed upon demand or have
      original terms of up to six months. They are maintained with financial
      institutions of reputable credit and therefore bear minimal credit
      risk.





**g)**  **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.





**h)**  **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 leases premises which it occupies under operating leases with third
      party landlords. Rentals, net of incentives, are recorded in the consolidated
      statement of operations on a straight-line basis over the primary term of the
      lease. Incentive payments related to leasehold improvements are deferred and
      recorded in the consolidated statement of operations on a straight-line basis
      over the primary term of the lease. Cash received under such incentive
      arrangements is included within net cash provided by operating
      activities.





Changes
      in circumstances, such as technological advances, changes to the Company’s
      business model or capital strategy or changes to business plans in different
      locations, 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.





**i)**  **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.





Page
          45




Intellectual
      property rights purchased or licensed 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 or licensed 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
      or licensed 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.





**j)**  **Revenue
      recognition**




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 reasonably assured. The Company considers the terms of each
      arrangement to determine the appropriate accounting treatment.





Where
      an
      arrangement includes more than incidental software elements, the Company follows
      Statement of Position 97-2: “Software Revenue Recognition” (“SOP 97-2”). Where
      an arrangement does not involve the supply of software and that arrangement
      is
      separate from an arrangement for the supply of software, the Company follows
      Staff Accounting Bulletin No. 104: “Revenue Recognition,” (“SAB 104”) and
      Emerging Issues Task Force Issue No. 00-21: “Revenue Arrangements with Multiple
      Deliverables” (“EITF 00-21”). As the Company’s business develops, other
      accounting guidance may become applicable.





Many
      of
      the Company’s contracts contain multiple deliverables. Where an arrangement is
      accounted for under SOP 97-2, revenue from delivered elements is deferred until
      such time as the Company has vendor specific objective evidence of the value
      of
      the undelivered elements. Where the only undelivered element is post-contract
      support and the Company does not have vendor specific objective evidence of
      the
      value of that post-contract support, the revenue from the entire arrangement
      is
      recognized over the term of the support period. Where an arrangement is
      accounted for under SAB 104 and EITF 00-21, the Company considers whether the
      various deliverables should be considered separate units of accounting. In
      such
      circumstances, revenues from these arrangements are recognized based on the
      relative fair values of all the elements. Where fair value of delivered items
      cannot be determined, but the fair value of the undelivered elements can be
      determined, the fair value of the undelivered elements is deferred and the
      residual revenue is allocated to delivered elements. Where it is not possible
      to
      allocate consideration to separate deliverables in the manner prescribed by
      the
      accounting literature, revenue is deferred until all items have been
      delivered.





*Smart
      cards and security maintenance revenue*




Most
      of
      the arrangements under which the Company generates revenue from the sale of
      smart cards and the provision of security maintenance services are accounted
      for
      under SAB 104 and EITF 00-21. Revenue derived from sales of smart cards is
      recognized upon delivery of the smart cards in accordance with contractual
      terms. Appropriate provision is made for warranty and similar arrangements
      agreed with customers. For some contracts, the Company receives fees from
      platform operators for the maintenance of security of the conditional access
      system for a specified duration. These revenues are recognized over the term
      of
      the security contract in the period in which the security maintenance activities
      are performed. In some instances, the maintenance of security includes a
      requirement to replace a population of smart cards with a supply of “changeover
      cards” which is considered a separate unit of accounting. In such instances, an
      amount of the maintenance income is deferred and is recognized when the
      changeover cards are delivered. The amount of such maintenance revenue to be
      deferred is based on the fair value of the undelivered future changeover
      cards.





*Software* *revenue*




Apart
      from the arrangements for the supply of smart cards and security maintenance
      services referred to above, most of the other arrangements under which the
      Company generates revenue involve the supply of software and are accounted
      for
      under SOP 97-2. Revenue is deferred until all elements have been delivered
      or
      until the Company has vendor specific objective evidence of the fair value
      of
      the undelivered elements. Set-top box royalty income may continue to arise
      after
      all elements of an arrangement have been delivered. Such revenue is recognized
      when it is fixed or determinable, and this is typically when the Company
      receives reports from the platform operator or the set-top box manufacturer
      of
      the number of units manufactured or deployed.





*Deferred
      income*




Revenue
      billed but not recognized is recorded in the Company’s consolidated balance
      sheet as deferred income. Where the revenue is expected to be recognized within
      one year of the balance sheet date, the deferred income is classified as a
      current liability; otherwise it is classified as a non-current
      liability.





Page
          46




**k)**  **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.





**l)**  **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.





**m)**  **Stock
      option-based compensation expense**




In
      December 2004, the Financial Accounting Standards Board issued SFAS No. 123
      (R),
“Share-Based Payment” (“SFAS No. 123 (R)”). This standard requires the cost of
      employee compensation paid with equity instruments to be measured based on
      grant
      date fair values. That cost is recognized over the vesting period. SFAS No.
      123
      (R) became effective for the Company on July 1, 2005. The Company has adopted
      the modified prospective method to transition to SFAS No. 123 (R). The
      compensation cost attributable to awards which were unvested as of July 1,
      2005
      is recognized in the income statement using the accelerated attribution method
      and the same estimates of grant date fair value as had previously been disclosed
      in the Company’s financial statements. For awards granted after July 1, 2005,
      the compensation cost is recognized ratably over the vesting period using
      estimates of fair value made as of the grant date.





For
      all
      periods ending prior to July 1, 2005, stock-based compensation was accounted
      for
      by using the intrinsic value-based method in accordance with APB No. 25,
“Accounting for Stock Issued to Employees” (“APB25”) and the Company followed
      the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based
      Compensation.” As a result of adopting SFAS No. 123 (R) on July 1, 2005, the
      Company’s income before income taxes for fiscal 2006 was approximately $4.2
      million lower, net income was approximately $3.6 million lower and basic and
      diluted net income per share were both approximately $0.06 lower than if the
      Company had continued to account for stock-based compensation under
      APB25.





Prior
      to
      the adoption of SFAS No. 123 (R), the Company presented all tax benefits
      resulting from the exercise of stock options as operating cash flows in the
      consolidated statement of cash flows. SFAS No. 123 (R) requires the cash flows
      resulting from the tax benefits resulting from tax deductions in excess of
      the
      compensation cost recognized from those options (“excess tax benefits”) to be
      classified as financing cash flows. Accordingly, the $7.8 million excess tax
      benefits classified as a financing cash inflow in fiscal 2006 would have been
      classified as an operating cash inflow if the Company had not adopted SFAS
      No.
      123 (R).





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 using a Black-Scholes option valuation
      methodology, for periods prior to the adoption of
      SFAS No. 123 (R). 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
      Company’s 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).





Page
          47


**For
                  the years ended June 30,**(in
                  thousands, except per share amounts)
              
              **2005**
              
              **2004**Net
                  income, as reported
              
              $
              73,998
              
              $
              37,055Add:
                  Stock option-based compensation cost included in the
                  determinationof
                  net income as reported (net of tax benefits of $1,701 and
                  $─)
              
              
              2,626
              
              
              2,911Deduct:
                  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
              )Pro-forma
                  net income
              
              $
              58,535
              
              $
              30,597Net
                  income per shareBasic
                  net income per share, as reported
              
              $
              1.35
              
              $
              0.69Diluted
                  net income per share, as reported
              
              $
              1.29
              
              $
              0.67Pro-forma
                  basic net income per share
              
              $
              1.07
              
              $
              0.57Pro-forma
                  diluted net income per share
              
              $
              1.02
              
              $
              0.55





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 APB25 of this modification, which is included in the consolidated
      statement of operations, is $1.3 million net of tax of $0.6
      million.





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. Incremental expense of
      approximately $9.6 million ($8.8 million, net of tax) associated with the
      acceleration was recorded in the fiscal 2005 pro forma disclosure.





**n)**  **Government
      incentives**




The
      Company benefits from various government incentives in certain countries in
      which it operates. 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. The Company
      has received grants from the French Government and the European Union towards
      the cost of certain research and development projects. Such grants are treated
      as a reduction in research and development costs in the consolidated statement
      of operations. In certain jurisdictions, the Company benefits from reduced
      income tax rates and/or the benefit of certain tax allowances. Such benefits
      reduce the Company’s income tax expense.





**o)**  **New
      accounting pronouncements**




On
      July
      13, 2006, FASB issued FIN No. 48: “Accounting for Uncertainty in Income Taxes”
(“FIN 48”). FIN 48 clarifies the accounting for income taxes by prescribing the
      minimum recognition threshold a tax position is required to meet before being
      recognized in the financial statements. FIN 48 also provides guidance on
      de-recognition, measurement, classification, interest and penalties, accounting
      in interim periods, disclosure and transition. FIN 48 is effective for the
      Company’s fiscal year beginning July 1, 2007. The Company is currently
      considering the impact, if any, on the Company’s consolidated financial
      statements.





**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 Company’s 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.




Page
          48





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,****2006**
              
              **2005**
              
              **2004**Weighted
                  average number of ordinary shares in issue
              
              
              56,082,819
              
              
              54,758,479
              
              
              54,093,083Effect
                  of dilutive stock options
              
              
              1,917,352
              
              
              2,679,008
              
              
              1,553,088Denominator
                  for dilutive net income per share
              
              
              58,000,171
              
              
              57,437,487
              
              
              55,646,171Anti-dilutive
                  options excluded from calculation
              
              
              971,168
              
              
              55,042
              
              
              929,121





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


**As
                  of June 30,**(in
                  thousands)
              
              **2006**
              
              **2005**Unprocessed
                  smart cards and their components
              
              $
              37,579
              
              $
              40,047Other
                  smart card inventory
              
              
              2,731
              
              
              1,670Inventory
                  reserves
              
              
              (2,511
              )
              
              (3,398
              )37,799
              
              
              38,319Contract
                  work-in-progress
              
              
              1,541
              
              
              3,189Total
                  inventories
              
              $
              39,340
              
              $
              41,508





Unprocessed
      smart cards and their components are considered to be in the state of
      work-in-progress. Other smart card inventory represents smart cards shipped
      to
      customers but for which revenue had not been recognized as of the balance sheet
      date.





The
      chips
      used in smart cards are purchased from a limited number of suppliers. In the
      event of a disruption of supply, including a shortage of manufacturing capacity,
      the Company may be unable to develop an alternative source in a timely manner
      or
      at favorable prices. Such failure could harm the Company’s ability to deliver
      smart cards to its customers or could negatively affect operating margins.





Certain
      chips and smart cards have no use other than for the customer for whom they
      were
      purchased. On occasions, the Company purchases inventory in excess of amounts
      covered by firm customer orders. The Company often bears the risk of surplus
      inventory in these circumstances. Provision is made for surplus or obsolete
      inventory and historically, amounts written off in excess of reserves have
      not
      been significant.





Page
          49


**Note
      6.**  **Accounts
      receivable**


**As
                  of June 30,**(in
                  thousands)
              
              **2006**
              
              **2005**Gross
                  amount due
              
              $
              98,840
              
              $
              75,015Less
                  valuation reserves
              
              
              (1,124
              )
              
              (1,427
              )$
              97,716
              
              $
              73,588





Three
      customers, all of whom are related parties, account for 68% of gross accounts
      receivable as of June 30, 2006. No other customers individually accounted for
      more than 5% of gross accounts receivable.





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


**Useful
                  lives**
              
              **As
                  of June 30,**(in
                  thousands)
              
              
              
              **2006**
              
              **2005**Leasehold
                  improvements
              
              
              3
                  to 7 years
              
              $
              22,380
              
              $
              14,157Plant
                  and equipment
              
              
              2
                  to 5 years
              
              
              100,843
              
              
              86,864123,223
              
              
              101,021Less
                  accumulated depreciation
              
              
              
              
              
              (76,984
              )
              
              (67,059
              )Total
                  property, plant and equipment, net
              
              
              
              
              $
              46,239
              
              $
              33,962




**For
                  the years ended June 30,****2006**
              
              **2005**
              
              **2004**Depreciation
                  related to property, plant and equipment
              
              $
              17,058
              
              $
              15,405
              
              $
              13,526Operating
                  lease expense
              
              $
              16,118
              
              $
              15,267
              
              $
              13,124





Estimated
      future minimum rental payments under operating lease arrangements existing
      as of
      June 30, 2006 were as follows:


(in
                  thousands)
              
              **Minimum****Rental****Payments**Fiscal
                  2007
              
              $
              18,987Fiscal
                  2008
              
              
              18,925Fiscal
                  2009
              
              
              16,969Fiscal
                  2010
              
              
              14,194Fiscal
                  2011
              
              
              14,128Thereafter
              
              
              47,300Total
                  minimum rental payments
              
              $
              130,503


Certain
      of the Company’s property leases contain terms which permit upwards-only rent
      reviews. It is not possible to quantify the effect, if any, that such reviews
      may have on future rental payments.





Page
          50





**Note
      8.**  **Goodwill
      and other intangible assets**




*Goodwill*




The
      movement in goodwill during the fiscal year ended June 30, 2006 was as
      follows:


(in
                  thousands)
              
              **Goodwill**Beginning
                  of year
              
              $
              64,236Additions
              
              
              916Foreign
                  exchange movement
              
              
              1,765End
                  of year
              
              $
              66,917




*Fiscal
      2006 transactions*




In
      September 2005, the Company acquired NT Media Limited, whose business is the
      development of gaming applications, for initial consideration of $3.2 million
      paid in cash. The fair value of assets and liabilities acquired was as
      follows:


(in
                  thousands)
              
              **Fair
                  Value**Cash
              
              $
              67Other
                  current assets
              
              
              347Goodwill
              
              
              916Other
                  intangibles
              
              
              3,054Property,
                  plant and equipment
              
              
              21Current
                  liabilities
              
              
              (303
              )Other
                  liabilities
              
              
              (917
              )Total
                  consideration
              
              $
              3,185





The
      intangible assets acquired comprise intellectual property rights which are
      being
      amortized over their expected useful lives of five years. The purchase
      agreements provided that additional consideration of up to $4.3 million may
      be
      payable in cash, contingent upon the business achieving certain targets through
      September 1, 2008. Of this contingent consideration, $2.2 million has been
      recognized as a liability within the consolidated balance sheet as of June
      30,
      2006 and recorded as an expense within the consolidated statement of operations
      for the fiscal year ended June 30, 2006. It is expected that any further amounts
      of additional contingent consideration will be recorded within the consolidated
      statement of operations when the contingencies have been resolved.





*Fiscal
      200* *4
      transactions*




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). 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 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
      fiscal year ended June 30, 2004.





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          51





*Other* *intangibles*




Other
      intangible assets comprise intellectual property rights:


**Useful
                  lives**
              
              **As
                  of June 30,**(in
                  thousands)
              
              
              
              **2006**
              
              **2005**Cost
              
              
              3
                  to 10 years
              
              $
              76,509
              
              $
              72,191Less
                  accumulated amortization
              
              
              
              
              
              (33,210
              )
              
              (23,654
              )Other
                  intangibles, net
              
              
              
              
              $
              43,299
              
              $
              48,537**For
                  the years ended June 30,****2006**
              
              
              **2005**
              
              
              **2004**Amortization
                  of other intangibles
              
              $
              9,453
              
              $
              12,349
              
              $
              8,177





Based
      on
      the current amount of intangible assets subject to amortization, the estimated
      amortization expense for each of the succeeding five fiscal years was as
      follows: 2007 - $9.6 million; 2008 - $9.5 million; 2009 - $9.5 million; 2010
      -
      $9.5 million; and 2011 ─ $4.5 million.





**Note
      9.**  **Deferred
      income**


**As
                  of June 30,**(in
                  thousands)
              
              **2006**
              
              **2005**Deferred
                  security fees
              
              $
              134,129
              
              $
              87,941Advance
                  receipts and other deferred income
              
              
              45,892
              
              
              46,587Total
                  deferred income
              
              $
              180,021
              
              $
              134,528Included
                  within current liabilities
              
              $
              45,492
              
              $
              47,175Included
                  within non-current liabilities
              
              
              134,529
              
              
              87,353$
              180,021
              
              $
              134,528




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


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2006**
              
              **2005**
              
              **2004**Beginning
                  of year
              
              $
              1,141
              
              $
              8,727
              
              $
              3,852Additions
              
              
              652
              
              
              ─
              
              
              5,812Reversals
              
              
              (225
              )
              
              (5,521
              )
              
              ─Used
              
              
              (1,572
              )
              
              (2,118
              )
              
              (1,526
              )Foreign
                  exchange movements
              
              
              4
              
              
              53
              
              
              589End
                  of year
              
              $
              ─
              
              $
              1,141
              
              $
              8,727





In
      fiscal
      2001, the Company decided to abandon its leased premises at Heathrow, England
      which the Company vacated in September 2000. Additional accruals were made
      in
      the years through in fiscal 2004, as the Company was unable to assign the lease
      back to a former tenant. During fiscal 2005, the Company committed to reoccupy
      most of the premises and the Company reversed a part of the accrual previously
      made. The Company reoccupied part of the premises in October 2005; the remaining
      part of the premises was assigned to a third party in fiscal 2006 and the
      remaining part of the accrual was reversed. 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. Additionally, in November 2005, the Company
      consolidated its U.S. operations at a single facility at Costa Mesa, California
      and abandoned its two previous premises in California. An accrual for
      obligations from the cease use date until the termination of the leases of
      those
      two abandoned properties was recorded during fiscal 2006 in the consolidated
      statement of operations within cost of goods and services sold ─
operations.





Page
          52




There
      was
      no remaining accrual as of June 30, 2006. The cumulative amount charged to
      the
      consolidated statement of operations and paid through June 30, 2006 was $10.9
      million.





**Note
      11.**  **Shareholders’
      equity**




The
      Company has two classes of ordinary shares: Series A and Series B. The Series
      B
      ordinary shares are all owned by News Corporation. Substantially all of the
      Series A ordinary shares are held by The Bank of New York as depositary to
      support American Depositary Shares which are traded on NASDAQ. News Corporation
      has no interest in any of the Series A ordinary shares.





The
      two
      classes of ordinary shares entitle the holder to the same rights except that
      the
      Series A and Series B ordinary shares are entitled to one vote and ten votes
      per
      share respectively. The Series B ordinary shares may be converted by the
      shareholder into Series A ordinary shares, at the instigation of the shareholder
      at any time. Automatic conversion will occur if any sale, transfer or other
      disposal results in the cessation of the ultimate beneficial ownership of the
      Series B ordinary shares being retained by entities controlled by News
      Corporation.





The
      Company also has outstanding 42,000,002 Deferred Shares of £1 each, all of which
      are owned by News Corporation. The Deferred Shares do not entitle the holders
      thereof to receive notice of, or attend or vote at, meetings of shareholders
      of
      the Company, or to receive dividends. Upon liquidation of the Company, the
      Deferred Shares entitle the holders to repayment of the capital paid up on
      those
      shares, but only after each holder of ordinary shares has received (i) the
      amount paid up on his shares and (ii) an additional sum of $1 million per
      share.





**Note
      12.**  **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 or 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
      effected 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 some administration and finance services.


**a)**  **Provision
      of technology and services**




Technology
      and services for digital pay-television platform operators are supplied to
      affiliates and subsidiaries of News Corporation. The principal related parties
      supplied by the Company are BSkyB, DIRECTV, DIRECTV Latin America, Sky Brasil,
      Sky Mexico, FOXTEL, Sky Network Television and Tata Sky (all of which are
      affiliates of News Corporation), and Sky Italia and STAR TV (both of which
      are
      subsidiaries of News Corporation).





Revenue
      recognized from such related parties was as follows:


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2006**
              
              **2005**
              
              **2004**Revenue
                  from related parties
              
              $
              458,042
              
              $
              411,857
              
              $
              202,095





Page
          53





Included
      within the consolidated balance sheet are the following amounts in respect
      of
      normal sales transactions with related parties:


**As
                  of June 30,**(in
                  thousands)
              
              **2006**
              
              **2005**Accounts
                  receivable
              
              $
              74,295
              
              $
              51,909Accrued
                  income
              
              
              25,434
              
              
              18,806Deferred
                  income
              
              
              (160,196
              )
              
              (109,576
              )





**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 the related party was as follows:


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2006**
              
              **2005**
              
              **2004**Royalties
                  payable to related party
              
              $
              2,138
              
              $
              3,682
              
              $
              576




Included
      within the consolidated balance sheet are the following amounts in respect
      of
      royalties payable to a related party:


**As
                  of June 30,**(in
                  thousands)
              
              **2006**
              
              **2005**Accrued
                  expenses
              
              $
              750
              
              $
              3,162





**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 Audit Committee
      of
      the Company’s Board of Directors. The services covered by the Master
      Intercompany Agreement include cash management and financing, services of News
      Corporation employees, facility arrangements, and employee matters, including
      pensions and certain other services.





Administration
      fees charged in respect of these services were as follows:


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2006**
              
              **2005**
              
              **2004**Administration
                  fees charged by related parties
              
              $
              173
              
              $
              263
              
              $
              230




As
      part
      of these administration and finance services, News Corporation pays certain
      costs (principally certain payroll, legal and property expenses) on behalf
      of
      the Company. The Company reimburses News Corporation for such payments,
      typically the month following that in which the payment was made by News
      Corporation. Included within the consolidated balance sheet are the following
      amounts which were owed to News Corporation in respect of administrative
      services and other costs paid by News Corporation on behalf of the
      Company:


**As
                  of June 30,**(in
                  thousands)
              
              **2006**
              
              **2005**Accounts
                  payable
              
              $
              4,228
              
              $
              3,124





Page
          54




**d)**  **Other**




The
      Company has a short-term loan facility of £30 million (approximately $55
      million) from News Corporation. The facility has no expiry date and no amounts
      were drawn down as of June 30, 2006 or June 30, 2005. The facility is considered
      to be adequate for the Company’s needs.





The
      Company has 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 (approximately
      $37 million). News Corporation has indemnified the Company against any
      liabilities which the Company may be required to pay under these
      cross-guarantees. Management has been informed by News Corporation that no
      amounts were owed to HSBC Bank plc as of June 30, 2006 or June 30, 2005
      which would be covered by these guarantees.





**Note
      13.**  **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, 2006.




**As
                  of June 30, 2006****Payments
                  due by period****Less
                  than**
              
              
              
              
              
              **After****(**in
                  thousands)
              
              **Total**
              
              **1
                  year**
              
              **2-3
                  years**
              
              **4-5
                  years**
              
              **5
                  years**Operating
                  lease obligations
              
              $
              130,503
              
              $
              18,987
              
              $
              35,894
              
              $
              28,322
              
              $
              47,300Smart
                  card purchase obligations
              
              
              58,921
              
              
              52,921
              
              
              6,000
              
              
              ─
              
              
              ─$
              189,424
              
              $
              71,908
              
              $
              41,894
              
              $
              28,322
              
              $
              47,300





**b)**  **Litigation**




*Echostar
      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 Echostar’s original complaint.





After
      Echostar filed a second amended complaint, the Company filed a motion to dismiss
      this complaint on March 31, 2004. On July 21, 2004, the court issued an order
      directing Echostar to, among other things, file a third amended complaint within
      ten days correcting various deficiencies noted in the second amended complaint.
      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 Company’s motion to dismiss as a motion for a more definite
      statement, granting the motion and giving Echostar until March 30, 2005 to
      file
      a fourth amended compliant correcting various deficiencies noted in the third
      amended complaint. On March 30, 2005, Echostar filed a fourth amended complaint,
      which the Company moved to dismiss. On July 27, 2005, the court granted in
      part
      and denied in part the Company’s motion to dismiss, and again limited Echostar’s
      surviving claims to acts allegedly occurring within three years of the filing
      of
      Echostar’s original complaint. The Company’s management believe these surviving
      claims are without merit and intends to vigorously defend against them.




Page
          55




On
      October 24, 2005, the Company filed its Amended Answer with Counterclaims,
      alleging that Echostar misappropriated the Company’s trade secrets, violated the
      Computer Fraud and Abuse Act and engaged in unfair competition. On November
      8,
      2005, Echostar moved to dismiss the Company’s counterclaims for conversion and
      claim and delivery, arguing that these claims were preempted and time-barred.
      Echostar also moved for a more definite statement of the Company’s trade secret
      misappropriation claim. On December 8, 2005, the court granted in part and
      denied in part Echostar’s motion to dismiss and for a more definite statement,
      but granted the Company leave to file amended counterclaims. On December 13,
      2005, the Company filed a Second Amended Answer with Counterclaims, which
      Echostar answered on December 27, 2005. The court has set this case to go to
      trial in April of 2008.





*The
      International Electronic Technology Corp. Litigation*




On
      April
      18, 1997, International Electronic Technology Corp. (“IETC”) filed suit in the
      United States District Court for the Central District of California against
      the
      Company’s customers, Hughes, 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, including
      non-infringement and invalidity. On September 22, 2005, the court issued an
      order construing certain terms in the patent as a matter of law, after an
      extensive delay due to the death of two judges previously assigned to the case.
      Following receipt of the claim construction order, defendants notified IETC
      that
      they intended to file a motion for summary judgment of non-infringement based
      on
      the claim construction. During a status conference with the court on January
      9,
      2006, IETC requested that defendants’ motion be deferred to permit it to seek
      additional document discovery. The court denied this request, and ordered IETC
      to make its request in response to defendants’ summary judgment motion.
      Defendants’ motion for summary judgment was filed on January 30, 2006. On March
      9, 2006, the court granted defendants’ motion, and judgment for defendants was
      entered on March 24, 2006. IETC has filed a notice of appeal to the United
      States Court of Appeals for the Federal Circuit, and served its appeal brief
      in
      late June 2006.





*Sogecable
      Litigation*




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. The Company’s
      opposition was filed on August 22, 2005, and Sogecable filed its reply on
      September 6, 2005.





*Barry
      Thomas litigation*




On
      November 28, 2005, Barry W. Thomas filed a complaint alleging infringement
      of
      United States Patent No. 4,777,354 by DIRECTV, Inc., its parent The DIRECTV
      Group, Inc., and the National Rural Telecommunications Cooperative in the United
      States Distinct Court for the Western District of North Carolina, Charlotte
      Division, captioned “Barry W. Thomas v. DIRECTV, Inc., et al., No. 3:05CV496-K
      (W.D.N.C.).” Although not a party to this case, the Company has assumed a share
      in the cost of DIRECTV, Inc.’s defense.




On
      February 24, 2006, Mr. Thomas voluntarily dismissed his complaint against The
      DIRECTV Group, Inc., but not his complaint against DIRECTV, Inc. On February
      27,
      2006, DIRECTV, Inc. filed an Answer and Counterclaims where, among other things,
      DIRECTV, Inc. denied Mr. Thomas’s allegations of infringement and alleged that
      the patent is invalid, unenforceable, and that Mr. Thomas’s cause of action is
      barred by the equitable doctrine of laches. The case is currently in the
      discovery phase, with no schedule for pretrial proceedings or a trial date
      set
      by the Court. The Company believes  Mr. Thomas’s claims are without merit
      and intends to vigorously defend itself in this matter.





**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, 2006 amounted to approximately $11 million. It
      is not anticipated that any repayment will be required. Property, plant and
      equipment situated in Israel with a net book value of $11 million as of
      June 30, 2006 is the subject of a floating charge to secure compliance with
      the terms of the grants.





Page
          56





**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.





Amounts
      payable by the Company under certain contracts are subject to audit rights
      held
      by third parties and the terms of such contracts may be open to subjective
      interpretation. The Company settles its liabilities under such contracts based
      on its assessment of the amounts due however it may be subject to claims that
      the amounts paid are incorrect. 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.





**14.**  **Stock
      option plans**




The
      Company has three executive stock option schemes under which stock options
      have
      been granted to certain Directors, Executive Officers and employees: 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
      U.K. Inland Revenue for the purposes of granting U.K. employees stock 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 have been 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. Stock options granted
      under the schemes vest in equal portions 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 has operated employee share ownership schemes in the
      United Kingdom, Israel and the United States. These enabled 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 was set at a discount of between 15% and 20% of the quoted
      closing price of the Series A ordinary shares on The NASDAQ Stock Market
      (“NASDAQ”) on the last trading day before the announcement of the schemes. These
      schemes have now matured and as of June 30, 2006 there are no options
      outstanding under these employee share ownership 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 Company’s obligations
      under all stock option schemes have been settled by issuing new Series A
      ordinary shares.





Page
          57





The
      following table summarizes information about the Company’s stock option
      transactions:


**For
                  the year ended June 30, 2006****Weighted**
              
              **Remaining**
              
              **Aggregate****Average**
              
              **Contractual**
              
              **Intrinsic****Exercise**
              
              **Term**
              
              **Value****Number**
              
              **Price**
              
              **(in
                  years)**
              
              **(in
                  thousands)**Outstanding
                  at July 1, 2005
              
              
              4,337,513
              
              $
              18.17Granted
              
              
              941,666
              
              $
              43.13Exercised
              
              
              (1,554,716
              )
              $
              14.00Forfeited
              
              
              (33,702
              )
              $
              20.05Expired
              
              
              ─
              
              
              ─Outstanding
                  at June 30, 2006
              
              
              3,690,761
              
              $
              26.28
              
              
              6.9
              
              $
              75,090Vested
                  or expected to vest at June 30, 2006
              
              
              3,669,632
              
              $
              26.24
              
              
              6.9
              
              $
              74,826Exercisable
                  at June 30, 2006
              
              
              2,150,299
              
              $
              21.01
              
              
              5.6
              
              $
              55,206
  **For
                  the years ended June 30,**(in
                  thousands, except per share amounts)
              
              **2006**
              
              **2005**
              
              **2004**Weighted
                  average fair value of stock options grantedin
                  period using the assumptions set out below
              
              $
              29.42
              
              $
              23.59
              
              $
              11.94Total
                  intrinsic value of options exercised
              
              $
              45,975
              
              $
              21,856
              
              $
              2,365Stock-based
                  compensation cost included within the statement of
                  operations:Operating
                  expenses
              
              $
              6,626
              
              $
              4,327
              
              $
              2,911Tax
                  benefit
              
              
              (1,179
              )
              
              (1,701
              )
              
              ─Net
                  of tax amount
              
              $
              5,447
              
              $
              2,626
              
              $
              2,911Cash
                  received from exercise of stock options
              
              $
              21,769
              
              $
              13,294
              
              $
              2,212Excess
                  tax benefit from exercise of stock options
              
              $
              7,925
              
              $
              2,154
              
              $
              ─







As
      of
      June 30, 2006, the total compensation cost related to non-vested stock option
      awards not yet recognized was approximately $26.9 million and the period
      over which it is expected to be recognized is 3.8 years. The Company’s Board of
      Directors may grant additional stock options or other equity-based compensation,
      which would result in additional operating expenses being recorded in future
      periods.





Page
          58





The
      fair
      value of each stock option grant is estimated on the date of grant using the
      Black-Scholes option-pricing model, using the following
      assumptions:


**For
                  the years ended June 30,****2006**
              
              **2005**
              
              **2004**Risk
                  free interest rate
              
              
              4.5
              %
              
              4.2
              %
              
              4.4
              %Dividend
                  yield
              
              
              ─
              
              
              ─
              
              
              ─Expected
                  volatility
              
              
              72
              %
              
              80
              %
              
              87
              %Expected
                  life of stock options
              
              
              6.3
                  years
              
              
              6.3
                  years
              
              
              5.0
                  years





The
      weighted average risk-free rate is the average interest rates of U.S. government
      bonds of comparable term to the stock options on the dates of the stock option
      grants. The dividend yield is assumed to be nil because the Company has not
      paid, and management does not currently expect to pay, a dividend. Expected
      volatility is derived from historical volatility of the Company’s American
      Depositary Shares as quoted on NASDAQ. The expected life of stock options
      granted is derived from the historical activity of the Company’s stock options
      and represents the period of time that stock options granted are expected to
      be
      outstanding. The stock options were granted at an exercise price equal to the
      closing market price on the last trading day before the date of
      grant.





The
      terms
      of certain stock options were modified during the fiscal year ended June 30,
      2005, as described in Note 3m.





**Note
      15.**  **Income
      taxes**




Significant
      components of the Company’s provisions for income taxes were as
      follows:


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2006**
              
              **2005**
              
              **2004**UK
                  current tax
              
              $
              39,323
              
              $
              18,476
              
              $
              16,121Overseas
                  current tax
              
              
              9,816
              
              
              8,624
              
              
              5,869Double
                  tax relief
              
              
              (3,557
              )
              
              (4,073
              )
              
              (3,237
              )Total
                  current tax
              
              
              45,582
              
              
              23,027
              
              
              18,753UK
                  deferred tax
              
              
              (105
              )
              
              3,191
              
              
              3,105Overseas
                  deferred tax
              
              
              (252
              )
              
              1,135
              
              
              (2,797
              )Total
                  deferred tax
              
              
              (357
              )
              
              4,326
              
              
              308Total
                  income tax expense
              
              $
              45,225
              
              $
              27,353
              
              $
              19,061Tax
                  benefits on stock options, credited to additional paid-in
                  capital
              
              $
              (7,925
              )
              $
              (2,154
              )
              $
              ─Tax
                  (benefit) expense on additional pension liability,recorded
                  within other comprehensive income
              
              $
              361
              
              $
              (366
              )
              $
              599




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


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2006**
              
              **2005**
              
              **2004**U.K.
                  income before income taxes
              
              $
              132,176
              
              $
              80,207
              
              $
              63,158Overseas
                  income (loss) before income taxes
              
              
              13,999
              
              
              21,144
              
              
              (7,885
              )Total
                  income before income taxes
              
              $
              146,175
              
              $
              101,351
              
              $
              55,273




Page
          59





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,****2006**
              
              **2005**
              
              **2004**Income
                  tax at UK statutory rate
              
              
              30.0
              %
              
              30.0
              %
              
              30.0
              %Effect
                  of different tax rates
              
              
              (0.4
              %)
              
              (1.4
              %)
              
              (3.0
              %)Goodwill
                  impairment
              
              
              0.0
              %
              
              0.0
              %
              
              6.1
              %Stock
                  options
              
              
              0.6
              %
              
              0.4
              %
              
              1.6
              %Other
                  permanent differences
              
              
              (0.2
              %)
              
              (1.2
              %)
              
              0.6
              %Losses
                  for which no relief is available
              
              
              0.0
              %
              
              0.2
              %
              
              1.0
              %Movement
                  in valuation reserve
              
              
              0.9
              %
              
              0.0
              %
              
              1.7
              %Adjustments
                  in respect of previous years’ accruals
              
              
              0.0
              %
              
              (1.0
              %)
              
              (3.5
              %)Effective
                  income tax rate
              
              
              30.9
              %
              
              27.0
              %
              
              34.5
              %





Deferred
      tax assets comprise:


**As
                  of June 30,**(in
                  thousands)
              
              **2006**
              
              **2005**Property,
                  plant and equipment
              
              $
              2,417
              
              $
              1,225Other
                  intangibles
              
              
              (767
              )
              
              ─Accrued
                  expenses
              
              
              3,782
              
              
              2,137Pension
                  liability
              
              
              935
              
              
              1,318Stock
                  options
              
              
              1,139
              
              
              441Benefit
                  of operating losses carried forward
              
              
              7,507
              
              
              3,455Benefit
                  of capital losses carried forward
              
              
              608
              
              
              ─15,621
              
              
              8,576Valuation
                  reserve
              
              
              (8,115
              )
              
              (3,455
              )Total
                  deferred tax assets
              
              $
              7,506
              
              $
              5,121





As
      of
      June 30, 2006, the Company had approximately $22 million of net operating
      loss carry-forwards related to operations in France available to offset future
      taxable income. These net operating losses may be carried forward indefinitely.
      Additionally, the Company had approximately $2 million of U.K. capital losses
      available to offset future capital gains. These capital 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, specifically amounts
      related to net operating loss carry-forwards and available capital losses.
      Accordingly, valuation allowances of $8.1 million and $3.5 million have been
      established to reflect the expected realization of the deferred tax assets
      as of
      June 30, 2006 and 2005, 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
      $80 million as of June 30, 2006.




**Note
      16.**  **Pension
      and other post-employment benefits**




*Defined
      contribution arrangements*




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. The Company also makes contributions to
      other defined contribution pension plans. Aggregate Company contributions to
      defined contribution plans amounted to $7.9 million, $8.6 million and $5.0
      million for the years ended June 30, 2006, 2005 and 2004,
      respectively.





Page
          60





*Multi-* *employer
      arrangements*




Certain
      employees are eligible for membership of the News America Incorporated
      Employees’ Pension and Retirement Plan and other defined benefit pension schemes
      which are operated by News Corporation for the benefit of certain of its
      controlled subsidiaries. As such, and so far as they relate to the Company,
      they
      are multi-employer defined benefit schemes. It is not possible to determine
      the
      assets and liabilities of these schemes relating to the obligations of the
      Company to current and former employees. Accordingly, the expense recorded
      in
      the consolidated statement of operations equates to the contributions payable
      in
      the year, as determined by third party actuaries. Company contributions amounted
      to $0.9 million, $0.8 million and $0.5 million for the years ended
      June 30, 2006, 2005 and 2004, respectively.





*Severance
      pay arrangements*




In
      certain countries in which the Company has operations, principally Israel,
      it is
      obliged to make severance payments to employees leaving employment in most
      circumstances. The payment is based on the latest monthly salary for each year
      of service. The payment obligations are funded by payments to funds held by
      third party investment managers under approved plans. The liability is recorded
      gross and a separate asset is recorded equal to the market value of the funds
      held by investment managers. The costs associated with these arrangements
      included within the consolidated statement of operations amounted to $5.6
      million, $4.7 million and $4.0 million for the years ended June 30, 2006, 2005
      and 2004, respectively. The following amounts are included in the consolidated
      balance sheets in respect of these arrangements are as follows:


**As
                  of June 30,**(in
                  thousands)
              
              **2006**
              
              **2005**Investment
                  funds, included within other non-current assets
              
              $
              25,244
              
              $
              20,374Liability,
                  included within non-current accrued expenses
              
              
              (30,631
              )
              
              (24,155
              )





*Defined
      benefit arrangements*




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)
              
              **2006**
              
              **2005**
              
              **2004**Service
                  cost
              
              $
              178
              
              $
              172
              
              $
              164Interest
                  cost
              
              
              978
              
              
              893
              
              
              764Expected
                  return on assets
              
              
              (825
              )
              
              (706
              )
              
              (540
              )Net
                  amortization of loss
              
              
              583
              
              
              446
              
              
              445Net
                  periodic pension expense
              
              $
              914
              
              $
              805
              
              $
              833





The
      following assumptions were used in accounting for the plan:


**For
                  the years ended June 30,****2006**
              
              **2005**
              
              **2004**Assumed
                  discount rate
              
              
              5.25
              %
              
              5.00
              %
              
              5.75
              %Expected
                  long-term rate of return on plan assets
              
              
              7.00
              %
              
              7.50
              %
              
              7.50
              %Rate
                  of increase in pensions
              
              
              3.00
              %
              
              3.00
              %
              
              3.00
              %Rate
                  of compensation increase
              
              
              4.50
              %
              
              4.25
              %
              
              4.50
              %





Page
          61




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)
              
              **2006**
              
              **2005**Accumulated
                  vested obligation (“ABO”)
              
              $
              16,786
              
              $
              15,237Effect
                  of projected future salary increases
              
              
              4,799
              
              
              4,169Projected
                  benefit obligation (“PBO”)
              
              
              21,585
              
              
              19,406Fair
                  value of plan assets
              
              
              13,670
              
              
              10,845Plan
                  assets less than PBO
              
              
              (7,915
              )
              
              (8,561
              )Unrecognized
                  net loss
              
              
              9,101
              
              
              9,485Prepaid
                  pension cost
              
              
              1,186
              
              
              924Additional
                  liability recognized through other comprehensive income
              
              
              (4,303
              )
              
              (5,316
              )Total
                  amount recorded in consolidated balance sheet
              
              $
              (3,117
              )
              $
              (4,392
              )
  The
          following table is a reconciliation of PBO:
  **For
                  the years ended June 30,**(in
                  thousands)
              
              **2006**
              
              **2005**PBO,
                  beginning of year
              
              $
              19,406
              
              $
              15,936Service
                  cost
              
              
              178
              
              
              172Interest
                  on PBO
              
              
              978
              
              
              893Actuarial
                  (gain) loss
              
              
              201
              
              
              3,176Benefits
                  paid
              
              
              (256
              )
              
              (231
              )Employee
                  contributions
              
              
              171
              
              
              135Foreign
                  exchange movements
              
              
              907
              
              
              (675
              )PBO,
                  end of year
              
              $
              21,585
              
              $
              19,406




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


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2006**
              
              **2005**Plan
                  assets at fair value, beginning of year
              
              $
              10,845
              
              $
              8,548Employer
                  contributions
              
              
              1,127
              
              
              1,392Employee
                  contributions
              
              
              171
              
              
              135Benefits
                  paid
              
              
              (256
              )
              
              (231
              )Return
                  on assets
              
              
              1,214
              
              
              1,382Foreign
                  exchange movements
              
              
              569
              
              
              (381
              )Plan
                  assets at fair value, end of year
              
              $
              13,670
              
              $
              10,845








Page
          62





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**2007
              
              $
              2742008
              
              
              2832009
              
              
              3162010
              
              
              3032011
              
              
              3382012
                  to 2016
              
              
              3,589





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.





The
      Company’s benefit plan weighted-average asset allocations as of June 30,
      2006 and 2005, by asset category, are as follows:


**As
                  of June 30,**(in
                  thousands)
              
              **2006**
              
              **2005**Equities
              
              $
              8,065
              
              $
              6,432Debt
                  securities
              
              
              5,605
              
              
              4,353Cash
              
              
              ─
              
              
              60Total
                  amount recorded in consolidated balance sheet
              
              $
              13,670
              
              $
              10,845




The
      Company’s committed minimum contributions in fiscal 2007 are expected to be $1.0
      million.





**Note
      17.**  **Segment
      information**




The
      business is managed as a single operating unit or segment, being the supply
      of
      open end-to-end digital technology and services to 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)
              
              **2006**
              
              **2005**
              
              **2004**United
                  Kingdom
              
              $
              163,804
              
              $
              151,083
              
              $
              130,339Europe
                  and the Middle East
              
              
              126,157
              
              
              108,454
              
              
              59,714North
                  America
              
              
              215,856
              
              
              183,420
              
              
              87,744Latin-America
              
              
              37,395
              
              
              59,224
              
              
              37,745Asia-Pacific
              
              
              56,911
              
              
              54,149
              
              
              41,121$
              600,123
              
              $
              556,330
              
              $
              356,663




Revenues
      from North America include $215.7 million, $182.5 million and $87.4 million
      from
      customers in the United States in fiscal 2006, 2005 and 2004, respectively.
      Revenues from Latin America include $14.8 million, $28.1 million and $10.1
      million from customers in Mexico in fiscal 2006, 2005 and 2004, respectively.
      Revenues from Europe and the Middle East include $72.1 million, $60.5 million
      and $33.0 million from customers in Italy in fiscal 2006, 2005 and 2004,
      respectively. No other country accounted for more than 5% of revenues in any
      of
      the three fiscal years in the period ended June 30, 2006.





Page
          63




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, 2006:


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2006**
              
              **2005**
              
              **2004**DIRECTV
              
              $
              202,630
              
              $
              163,006
              
              $
              69,401BSkyB
              
              
              140,364
              
              
              123,165
              
              $
              103,522Sky
                  Italia
              
              
              68,251
              
              
              59,895
              
              
              32,959





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.





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)
              
              **2006**
              
              **2005**United
                  Kingdom
              
              $
              122,694
              
              $
              119,495Europe
              
              
              14,784
              
              
              8,107Israel
              
              
              36,361
              
              
              29,934United
                  States
              
              
              8,720
              
              
              5,387Asia-Pacific
              
              
              5,821
              
              
              4,186Total
                  long-lived assets (other than deferred tax assets)
              
              $
              188,380
              
              $
              167,109





Long-lived
      assets in Europe included $14.6 million and $7.9 million of long-lived assets
      in
      France as of June 30, 2006 and 2005, respectively.





**Note
      18.**  **Valuation
      and qualifying accounts**




**a)**  **Accounts
      receivable reserves**


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2006**
              
              **2005**
              
              **2004**Beginning
                  of year
              
              $
              1,427
              
              $
              3,021
              
              $
              9,252Additions
                  (reversals)
              
              
              172
              
              
              (1,165
              )
              
              (1,611
              )Used
              
              
              (475
              )
              
              (379
              )
              
              (5,189
              )Foreign
                  exchange movements
              
              
              ─
              
              
              (50
              )
              
              569End
                  of year
              
              $
              1,124
              
              $
              1,427
              
              $
              3,021





Page
          64





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


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2006**
              
              **2005**
              
              **2004**Beginning
                  of year
              
              $
              3,398
              
              $
              4,242
              
              $
              4,582Additions
                  (reversals)
              
              
              (887
              )
              
              (183
              )
              
              148Used
              
              
              ─
              
              
              (560
              )
              
              (901
              )Foreign
                  exchange movements
              
              
              ─
              
              
              (101
              )
              
              413End
                  of year
              
              $
              2,511
              
              $
              3,398
              
              $
              4,242





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


**For
                  the years ended June 30,**(in
                  thousands)
              
              **2006**
              
              **2005**
              
              **2004**Beginning
                  of year
              
              $
              3,455
              
              $
              3,791
              
              $
              2,863Additions
                  (reversals)
              
              
              4,216
              
              
              (173
              )
              
              928Foreign
                  exchange movements
              
              
              444
              
              
              (163
              )
              
              ─End
                  of year
              
              $
              8,115
              
              $
              3,455
              
              $
              3,791




**Note
      19.**  **Supplementary
      cash flow disclosures**


**For
                  the years ended June
                  30,**(in
                thousands)
              
              
              **2006**
              
              
              **2005**
              
              
              **2004****Cash
                  receipts and payments:**Interest
                  received in cash
              
              $
              13,226
              
              $
              9,510
              
              $
              6,926Interest
                  paid in cash
              
              
              188
              
              
              54
              
              
              48Cash
                  payments for income taxes
              
              
              27,955
              
              
              23,379
              
              
              24,608Cash
                  paid in respect of initial consideration for acquisitions
              
              
              3,185
              
              
              ─
              
              
              75,298Cash
                  paid in respect of deferred consideration for acquisitions
              
              
              ─
              
              
              17
              
              
              638Cash
                  payments in respect of abandoned property leases
              
              
              1,572
              
              
              2,118
              
              
              1,526**Supplemental
                information on businesses acquired:**Fair
                  value of non-cash assets acquired
              
              $
              4,338
              
              $
              ─
              
              $
              75,772Cash
                  acquired
              
              
              67
              
              
              ─
              
              
              10,292Less:
                  liabilities assumed
              
              
              (1,220
              )
              
              ─
              
              
              (10,766
              )Fair
                  value of assets acquired by way of acquisitions
              
              $
              3,185
              
              $
              ─
              
              $
              75,298





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


**For
                  the three months ended**(in
                  thousands, expect per share amounts)
              
              **September
                  30**
              
              **December
                  31**
              
              **March
                  31**
              
              **June
                  30****Fiscal
                2006**Revenue
              
              $
              144,495
              
              $
              152,203
              
              $
              149,204
              
              $
              154,221Gross
                  margin
              
              
              84,672
              
              
              90,427
              
              
              91,244
              
              
              91,158Operating
                  income
              
              
              35,735
              
              
              34,320
              
              
              35,412
              
              
              25,262Net
                  income
              
              
              27,105
              
              
              25,960
              
              
              28,139
              
              
              19,746Basic
                  earnings per share
              
              $
              0.49
              
              $
              0.46
              
              $
              0.50
              
              $
              0.35Diluted
                  earnings per share
              
              $
              0.47
              
              $
              0.45
              
              $
              0.49
              
              $
              0.34




Page
          65


**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





Page
          66





**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 were 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 Exchange Act. 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, 2006. 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, 2006, the Company
      maintained effective internal control over financial reporting.





Page
          67


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.





**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,
      2006, 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, 2006, 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, 2006, based on the COSO
      criteria.





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the 2006 consolidated financial statements
      and
      our report dated August 31, 2006 expressed an unqualified opinion
      thereon.











/s/
      ERNST & YOUNG LLP


Ernst
      & Young LLP





London,
      England


August
      31, 2006





Page
          68





**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 2006 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
          69





**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 2006 Annual Meeting of
      Shareholders to be filed with the SEC (the “Proxy Statement”) under the headings
“Proposal No. 4” and “Directors continuing in office”, 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
          70





**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 Firms 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
                in
                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 November
                7,
                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, 2004






Page
          71




10.3
            
            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 on January
                5,
                200510.4
            
            Letter
                Agreement dated October 20, 2002 between Raffi Kesten and NDS Technologies
                Israel Limited *
            
            Incorporated
                by reference to Exhibit 10.1 to the Current Report on Form 8-K filed
                by
                NDS Group plc with the Securities and Exchange Commission on April
                10,
                200610.5
            
            Letter
                Agreement dated June 22, 2004 between Raffi Kesten and NDS Group
                plc
                *
            
            Incorporated
                by reference to Exhibit 10.2 to the Current Report on Form 8-K filed
                by
                NDS Group plc with the Securities and Exchange Commission on April
                10,
                200610.6
            
            Non-Executive
                Director Compensation Summary Sheet*
            
            Incorporated
                by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q
                filed by
                NDS Group plc with the Securities and Exchange Commission on May
                8,
                200612
            
            Computation
                of Ratio of Earnings to Fixed Charges
            
            Filed
                herewith, page E-121
            
            Subsidiaries
            
            Filed
                herewith, page E-223.1
            
            Consent
                of Ernst & Young LLP
            
            Filed
                herewith, page E-323.2
            
            Consent
                of Somekh Chaikin regarding NDS Technologies Israel
                Limited
            
            Filed
                herewith, page E-431.1
            
            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
                herewith, page E-531.2
            
            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
                herewith, page E-632.1
            
            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, page E-7





────────


*
      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
          72





**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)Date:
            By:
            /s/ 
              Alexander GershAlexander Gersh
              Chief Financial Officer andCompany
                Secretary(Principal
              Financial and Accounting Officer)





Date:
      September 1, 2006








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
              
              Chairman
                  and Chief Executive Officer
              September
                  1,
                  2006Abraham
                  Peled
              
              (Principal
                  Executive Officer)/s/
              David
                  DeVoe
              
              Director
              September1,
                  2006David
                  F. DeVoe/s/
              Roger
                  Einiger
              
              Director
              September1,
                  2006Roger
                  I. Einiger/s/
              Nathan
                  Gantcher
              
              Director
              September1,
                  2006Nathan
                  Gantcher/s/
              Lawrence
                  Jacobs
              
              Director
              September1,
                  2006Lawrence
                  A. Jacobs/s/
              Peter
                  Powers
              
              Director
              September1,
                  2006Peter
                  J. Powers/s/
              Arthur
                  Siskind
              
              Director
              September1,
                  2006Arthur
                  M. Siskind/s/
              Richard
                  Yanowitch
              
              Director
              September1,
                  2006Richard
                  Yanowitch
  Page
            73