UNITED STATES SECURITIES AND
EXCHANGE COMMISSION

Washington, D.C. 20549 FORM 10-Q (Mark One) |X|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the quarterly
period ended December 31, 2004 or |_|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the transition
period from      to Commission File
Number: 0-30364 NDS Group plc (Exact name of
registrant as specified in its charter) England
        and Wales
    Not
      applicable(State
        or other jurisdiction of incorporation or organization)
    (I.R.S.
      Employer Identification No.)One
        London Road, Staines, Middlesex, United Kingdom
    TW18
      4EX(Address
        of principal executive offices)
    (Zip
      Code) +44 208 476 8000(Registrants
telephone number, including area code) Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes      |X|      No      |_| Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes      |_|      No      |X| As of February 6, 2005, the following
shares were outstanding: 12,966,513 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.    NDS Group plc


Table of contents


PART I 
Financial Information


PageIntroduction
    
    
    
    1Item
      1.   Financial StatementsUnaudited
      Condensed Consolidated Balance Sheets as of December 31, 2004and
      June 30, 2004
    
    
    
    2Unaudited
      Condensed Consolidated Statements of Operations for the threeand
      six month periods ended December 31, 2004 and December 31, 2003
    
    
    
    3Unaudited
      Condensed Consolidated Statements of Cash Flows for the six-monthperiods
      ended December 31, 2004 and December 31, 2003
    
    
    
    4Notes
      to Unaudited Condensed Consolidated Financial Statements
    
    
    
    5Item
      2.   Managements Discussion and Analysis of Financial Condition
      and Results of Operations
    
    
    
    11Item
      3.   Quantitative and Qualitative Disclosures About Market Risk
    
    
    
    20Item
      4.   Controls and Procedures
    
    
    
    20PART
      II - Other InformationItem
      1.   Legal Proceedings
    
    
    
    21Item
      2.   Changes in Securities and Use of Proceeds
    
    
    
    21Item
      3.   Defaults Upon Senior Securities
    
    
    
    21Item
      4.   Submission of Matters to a Vote of Security Holders
    
    
    
    22Item
      5.   Other Information
    
    
    
    22Item
      6.   Exhibits and Reports on Form 8-K
    
    
    
    23Signatures
    
    
    
    24
INTRODUCTION


As used in this Quarterly Report on
Form 10-Q, references to the Company are to NDS Group plc. References to
NDS, the Group, NDS Group, we and
our are to NDS Group plc and its subsidiaries.


The Company maintains a 52-53 week
fiscal year ending on the Sunday nearest to June 30. References to a year are, unless
otherwise indicated, references to the Companys fiscal year ending June 30 of such
year.


This Quarterly Report on Form 10-Q
should be read in conjunction with other documents which we have filed with the Securities
and Exchange Commission. In particular, details about our business and risk factors which
may affect investors are provided in our Annual Report on Form 20-F, which we filed
with the Securities and Exchange Commission on October 22, 2004.


NDS, VideoGuard, Value@TV,
MediaHighway, XTV, Synamedia, OpenBet, Visionik Games, Streamserver, Provider and
Streamshaper are either trademarks or registered trademarks of NDS Group plc and
subsidiaries in one or more countries worldwide. This Quarterly Report on Form 10-Q also
includes trade names and trademarks of companies other than NDS.


SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS


This document contains statements
that constitute forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended, 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 NDS Group plc (the Company), its
directors or its officers with respect to, among other things, trends affecting the
Companys 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. Those risks and uncertainties are
discussed under the heading Risk Factors, in the Companys Annual Report
on Form 20-F (SEC file no. 0-30364) as filed with the Securities and Exchange Commission
on October 22, 2004, 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. Readers should
carefully review other documents filed by the Company with the Securities and Exchange
Commission.


     Page 1




PART I  Financial
Information


Item 1. Financial
Statements


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


As
      of
      December 31, 2004
    
    As
      of
      June 30, 2004ASSETSCurrent
      assets:Cash
      and cash equivalents
    
    
    $
    266,971
    
    $
    228,620Accounts
      receivable, net of an allowance for doubtful accounts of $2,883 and $3,021
      as ofDecember
      31, 2004 and June 30, 2004, respectively
    
    
    
    98,473
    
    
    84,295Accrued
      income
    
    
    
    33,451
    
    
    21,845Inventories
    
    
    
    37,225
    
    
    35,972Prepaid
      expenses
    
    
    
    17,383
    
    
    15,843Other
      current assets
    
    
    
    6,700
    
    
    6,836Total current
      assets
    
    
    
    460,203
    
    
    393,411Plant, property
      & equipment, net
    
    
    
    31,730
    
    
    29,472Goodwill
    
    
    
    69,619
    
    
    66,296Other intangibles,
      net
    
    
    
    58,944
    
    
    61,681Deferred
      tax assets
    
    
    
    10,334
    
    
    9,153Other
      non-current assets
    
    
    
    19,187
    
    
    17,146Total
      assets
    
    
    $
    650,017
    
    $
    577,159LIABILITIES
      AND STOCKHOLDERS EQUITYCurrent
liabilities:Accounts
      payable
    
    
    $
    16,143
    
    $
    51,552Customer
      deposits & deferred income
    
    
    
    125,048
    
    
    97,864Accrued
      expenses
    
    
    
    39,434
    
    
    39,802Income
      tax liabilities
    
    
    
    18,454
    
    
    6,812Other
      current liabilities
    
    
    
    19,496
    
    
    15,393Total
      current liabilities
    
    
    
    218,575
    
    
    211,423Accrued
      expenses
    
    
    
    36,449
    
    
    32,392Total
      liabilities
    
    
    
    255,024
    
    
    243,815Stockholders
      equity:Series
      A ordinary shares of $0.01 par value per share: 48,000,000 shares authorized;12,833,769
      and 12,186,598 shares outstanding as of December 31, 2004 and June 30, 2004,
      respectively
    
    
    
    128
    
    
    122Series
      B ordinary shares of $0.01 par value per share: 52,000,000 shares authorized;42,001,000
      shares outstanding as of December 31, 2004 and June 30, 2004
    
    
    
    420
    
    
    420Deferred       shares of £1 par value per share: 42,000,002 shares authorized       and outstandingas
      of December 31, 2004 and June 30, 2004
    
    
    
    64,103
    
    
    64,103Additional
      paid-in capital
    
    
    
    488,833
    
    
    478,599Accumulated
      deficit and other comprehensive income
    
    
    
    (158,491
    )
    
    (209,900
    )Total
      stockholders equity
    
    
    
    394,993
    
    
    333,344Total
      liabilities and stockholders equity
    
    
    $
    650,017
    
    $
    577,159The accompanying notes form an
integral part of these unaudited condensed consolidated financial statements.


     Page 2




NDS Group plc 
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share amounts)

For
      the three months 
      ended December 31,
    
    For
      the six months 
      ended December 31,2004
    
    2003
    
    2004
    
    2003Revenue:Conditional
      access
    
    
    $
    86,719
    
    $
    41,478
    
    $
    177,043
    
    $
    87,258Integration,
      development & support
    
    
    
    12,017
    
    
    11,458
    
    
    28,825
    
    
    27,051License
      fees & royalties
    
    
    
    18,838
    
    
    7,770
    
    
    34,838
    
    
    14,757New
      technologies
    
    
    
    21,540
    
    
    13,915
    
    
    38,510
    
    
    25,049Other
    
    
    
    2,509
    
    
    1,867
    
    
    3,686
    
    
    3,324Total
      revenue
    
    
    
    141,623
    
    
    76,488
    
    
    282,902
    
    
    157,439Cost
      of goods and services sold:Smart
      card costs
    
    
    
    (32,543
    )
    
    (4,288
    )
    
    (71,342
    )
    
    (10,699
    )Operations
      & support
    
    
    
    (17,056
    )
    
    (11,194
    )
    
    (32,609
    )
    
    (21,209
    )Royalties
    
    
    
    (4,683
    )
    
    (1,359
    )
    
    (7,758
    )
    
    (2,576
    )Other
    
    
    
    (104
    )
    
    (2,077
    )
    
    (244
    )
    
    (2,724
    )Total
      cost of goods and services sold
    
    
    
    (54,386
    )
    
    (18,918
    )
    
    (111,953
    )
    
    (37,208
    )Gross
      margin
    
    
    
    87,237
    
    
    57,570
    
    
    170,949
    
    
    120,231Operating
      expenses:Sales
      & marketing
    
    
    
    (6,053
    )
    
    (6,094
    )
    
    (12,119
    )
    
    (12,098
    )Research
      & development
    
    
    
    (40,333
    )
    
    (32,271
    )
    
    (78,654
    )
    
    (60,576
    )General
      & administration
    
    
    
    (15,183
    )
    
    (8,466
    )
    
    (27,285
    )
    
    (17,133
    )Amortization
      of intangibles
    
    
    
    (3,189
    )
    
    (1,161
    )
    
    (6,290
    )
    
    (1,939
    )Total
      operating expenses
    
    
    
    (64,758
    )
    
    (47,992
    )
    
    (124,348
    )
    
    (91,746
    )Operating
income
    
    
    
    22,479
    
    
    9,578
    
    
    46,601
    
    
    28,485Other
income:Foreign
      exchange gains
    
    
    
    1,652
    
    
    3,219
    
    
    2,814
    
    
    3,799Interest
    
    
    
    2,797
    
    
    1,671
    
    
    4,787
    
    
    3,742Gains
      on investments
    
    
    
    46
    
    
    
    
    
    46
    
    
    Total
      other income
    
    
    
    4,495
    
    
    4,890
    
    
    7,647
    
    
    7,541Income
      before income tax expense andminority
      interests in subsidiaries, net of tax
    
    
    
    26,974
    
    
    14,468
    
    
    54,248
    
    
    36,026Income
      tax expense
    
    
    
    (9,090
    )
    
    (4,149
    )
    
    (18,747
    )
    
    (11,411
    )Minority
      interests in subsidiaries, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    93Net
      Income
    
    
    $
    17,884
    
    $
    10,319
    
    $
    35,501
    
    $
    24,708Net
      income per share:Basic
      net income per share
    
    
    $
    0.33
    
    $
    0.19
    
    $
    0.65
    
    $
    0.46Diluted
      net income per share
    
    
    $
    0.32
    
    $
    0.19
    
    $
    0.63
    
    $
    0.45Shares
      used in computing basic net income per share
    
    
    
    54,631,250
    
    
    54,071,254
    
    
    54,423,657
    
    
    54,033,078Shares
      used in computing diluted net income per share
    
    
    
    56,767,830
    
    
    55,375,930
    
    
    56,452,363
    
    
    55,419,157The accompanying notes form an
integral part of these unaudited condensed consolidated financial statements.


     Page 3

NDS Group plc 
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)

For
      the six months 
      ended December 31,2004
    
    2003Operating
      activities:Net
      income
    
    
    $
    35,501
    
    $
    24,708Adjustments
      to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    
    6,917
    
    
    5,736Amortization
      of other intangibles
    
    
    
    6,290
    
    
    1,939Stock-based
      compensation
    
    
    
    3,390
    
    
    3,246Profit
      on sale of investments
    
    
    
    (46
    )
    
    Minority
      interest in subsidiaries, net of tax
    
    
    
    
    
    
    (93
    )Change
      in operating assets and liabilities, net of acquisitions
    
    
    
    (23,324
    )
    
    3,903Net
      cash provided by operating activities
    
    
    
    28,728
    
    
    39,439Investing
      activities:Capital
      expenditure
    
    
    
    (8,461
    )
    
    (3,339
    )Proceeds
      from sale of investments
    
    
    
    232
    
    
    Business
      acquisitions, net of cash acquired
    
    
    
    (17
    )
    
    (65,475
    )Net
      cash used in investing activities
    
    
    
    (8,246
    )
    
    (68,814
    )Financing
      activities:Issuance
      of shares
    
    
    
    6,850
    
    
    830Other
    
    
    
    
    
    
    40Net
      cash provided by financing activities
    
    
    
    6,850
    
    
    870Net
      increase (decrease) in cash and cash equivalents
    
    
    
    27,332
    
    
    (28,505
    )Cash
      and cash equivalents, beginning of period
    
    
    
    228,620
    
    
    202,185Exchange
      movement of opening cash balance
    
    
    
    11,019
    
    
    11,201Cash
      and cash equivalents, end of period
    
    
    $
    266,971
    
    $
    184,881The accompanying notes
form an integral part of these unaudited condensed consolidated financial statements.


     Page 4


NDS Group plc 
Notes to Unaudited Condensed Consolidated Financial Statements



Note 1. Nature of
business


NDS Group plc (the
Company) is incorporated in Great Britain and registered in England and Wales. The
Company, together with its subsidiaries (NDS or the Group), is engaged
in the business of supplying digital technology and services, enabling and supporting
digital pay-TV platform operators and content providers.


NDS operates through a number of
subsidiaries. There is a common management structure across the Group, which ensures that
the various subsidiary companies operate in a coordinated and complementary manner. The
business is managed as a single operating unit or segment, being the supply of digital
technology and services enabling and supporting digital pay-TV platform operators and
content providers.


The Company is a majority owned
subsidiary of News Corporation, which taken together with its subsidiaries and
associates is referred to herein as the News Corporation.


Note 2. Basis of
preparation


The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with United
States generally accepted accounting principles (US GAAP) for interim
financial statements and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Information and footnote disclosures normally included in annual financial statements
prepared in accordance with US GAAP have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, the unaudited condensed consolidated
financial statements reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the consolidated financial position, the
consolidated operating results and the consolidated cash flows as of, and for the periods
shown. The consolidated results of operations for the three and six month periods ended
December 31, 2004 are not necessarily indicative of results that may be expected for
any other interim period or for the full fiscal year ending June 30, 2005.


The preparation of financial
statements 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.


Effective November 12, 2004, News
Corporation changed its corporate domicile from Australia to the United States and as a
result, NDS Group plc no longer qualifies as a foreign private issuer under US securities
laws. NDS has also changed its reporting currency from pounds sterling to US dollars.
Accordingly, these condensed consolidated financial statements are stated in US
dollars and have been prepared in accordance with US GAAP. Prior to November 12, 2004, NDS
published financial information in accordance with UK accounting practice (UK
GAAP) in pounds sterling.


These interim unaudited condensed
consolidated financial statements and notes thereto should be read in conjunction with the
audited consolidated financial statements and notes thereto for the fiscal year ended June
30, 2004 included in the Companys Annual Report on Form 20-F as filed with the
Securities and Exchange Commission on October 22, 2004.


     Page 5



Note 3. Stock-based
compensation expense


The Company accounts for employee
stock options using the intrinsic value method in accordance with Accounting Principles
Board Opinion (APB) No. 25: Accounting for stock issued to
employees, and has adopted the disclosure-only alternative of SFAS No. 123:
Accounting for stock-based compensation, as amended by SFAS No. 148:
Accounting for stock-based compensationtransition and disclosure. Under
the intrinsic value method, only stock-based compensation resulting from options granted
at below fair market value has been recorded.


The following table illustrates the
effect on net income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, as amended by SFAS No. 148, to stock-based
employee compensation data. These pro forma effects may not be representative of future
amounts since the estimated fair value of stock options on the date of grant is amortized
to expense over the vesting period and additional options may be granted in future years.

For the
      three months 
      ended December 31,
    
    For the
      six months 
      ended December 31,(in
      thousands, except per-share data)
    2004
    
    2003
    
    2004
    
    2003Net
      income, as reported
    $
    17,884
    
    $
    10,319
    
    $
    35,501
    
    $
    24,708Add:
      Stock-based compensation cost included in the determinationof
      net income as reported
    
    859
    
    
    663
    
    
    3,390
    
    
    1,414Deduct:
      Total stock-based compensation determined under fair valuebased
      method for all awards, net of related tax effects
    
    (1,869
    )
    
    (2,323
    )
    
    (4,071
    )
    
    (4,094
    )Pro-forma
      net income
    $
    16,874
    
    $
    8,659
    
    $
    34,820
    
    $
    22,028Net
      income per shareBasic
      net income per share, as reported
    $
    0.33
    
    $
    0.19
    
    $
    0.65
    
    $
    0.46Diluted
      net income per share, as reported
    $
    0.32
    
    $
    0.19
    
    $
    0.63
    
    $
    0.45Pro-forma
      basic net income per share
    $
    0.31
    
    $
    0.16
    
    $
    0.64
    
    $
    0.41Pro-forma
      diluted net income per share
    $
    0.30
    
    $
    0.16
    
    $
    0.62
    
    $
    0.40In December 2004, the Financial
Accounting Standards Board (FASB) issued a revision of SFAS No. 123(R):
Share-based payment. This standard will require the cost of employee
compensation paid with equity instruments to be measured based on grant-date fair values.
That cost will be recognized over the vesting period. SFAS No. 123(R) will become
effective for the Company in the first quarter of fiscal 2006. An illustration of the
impact on the Company using a Black-Scholes methodology is presented above.


Note 4. Comprehensive
income


Comprehensive income comprises net
income, foreign currency translation adjustments, certain pension adjustments and
unrealized holding losses on investments held for re-sale. The components of comprehensive
income were as follows:


For
      the three months
      ended December 31,
    
    For
      the six months 
      ended December 31,(in
      thousands)
    2004
    
    2003
    
    2004
    
    2003Net
      income
    
    
    $
    17,884
    
    $
    10,319
    
    $
    35,501
    
    $
    24,708Currency
      translation differences (no tax effect)
    
    
    
    20,577
    
    
    14,180
    
    
    15,933
    
    
    14,340Other
    
    
    
    (118
    )
    
    (77
    )
    
    (25
    )
    
    (149
    )Comprehensive
      income
    
    
    $
    38,343
    
    $
    24,422
    
    $
    51,409
    
    $
    38,899Page 6



Note 5. Net income per
share


Basic net income per share is
calculated as net income divided by the weighted average number of shares in issue in each
period. The interests of ordinary shareholders may be diluted due to the existence of
stock options granted to employees. The dilutive effect of potential shares has been
calculated using the treasury method and as such, is a function of the average share price
in each period. The Series A and Series B ordinary shares have equal rights except in
respect of voting and as such have equal weighting in the calculation of earnings per
share.


The numerator for the calculations of
net income per share is net income. The denominator for the calculations is the weighted
average numbers of shares, as follows:


For
      the three months 
      ended December 31,
    
    For
      the six months 
      ended December 31,2004
    
    2003
    
    2004
    
    2003Weighted
      average number of ordinary shares in issue
    
    
    
    54,631,520
    
    
    54,071,254
    
    
    54,423,657
    
    
    54,033,078Effect
      of dilutive stock options
    
    
    
    2,136,310
    
    
    1,304,676
    
    
    2,208,706
    
    
    1,389,079Denominator
      for dilutive net income per share
    
    
    
    56,767,830
    
    
    55,375,930
    
    
    56,452,363
    
    
    55,419,157Note 6. Inventories


Inventories comprise work-in-progress
and include unprocessed smart cards and their components. Inventories are stated net of
provisions of $4,516,000 and $4,242,000 as of December 31, 2004 and June 30, 2004,
respectively.


Note 7. Related party
transactions


NDS conducts business transactions
with News Corporation and its subsidiaries and affiliates in which News Corporation holds
investments. These entities are considered to be related parties. Agreements covering
arrangements between News Corporation and its subsidiaries or affiliates and the Company are
entered into in the context of two entities over which a third entity exercises
significant influence or control. There can be no assurance therefore, that each of the
agreements, or the transactions provided for therein, or any amendments thereof will be
effected on terms at least as favourable to NDS as could have been obtained from
unaffiliated third parties. Any new contracts or significant amendments to such contracts
are approved by the Companys Audit Committee.


These transactions are of three main
types: the provision by NDS of technology and services for digital pay-TV systems; the
payment by NDS of royalties for the use of certain intellectual property rights; and the
receipt by NDS of administrative services.


a)
Provision of integrated broadcast systemsTechnology and services for digital
pay-TV systems are supplied to affiliates and subsidiaries of News Corporation. The
principal related parties supplied by NDS are BSkyB, DIRECTV (from December 2003), DIRECTV
Latin America (from December 2003), Sky Brasil, Sky Mexico, DTH TechCo, Sky Colombia, Sky
Chile, Sky Italia, STAR TV, FoxTel and Sky Network Television. Revenue recognized from
such related parties was as follows:

For the
      three months
      ended December 31,
    
    For the
      six months 
      ended December 31,(in
      thousands)
    2004
    
    2003
    
    2004
    
    2003Revenue
      from related parties
    
    
    $
    102,394
    
    $
    72,310
    
    $
    207,646
    
    $
    34,600Included within accounts receivable
are amounts of $64,302,000 and $60,312,000 as of December 31, 2004 and June
30, 2004, respectively which are due from related parties in respect of normal sales
transactions. No allowances for doubtful accounts are associated with such amounts.


     Page 7




Related
party transactions (continued)b)
Royalty
paymentsA royalty is payable to a related
party in respect of certain intellectual property rights which NDS has licensed for use in
certain applications supplied to customers. The royalty expense was as follows:

For the
      three months
      ended December 31,
    
    For the
      six months 
      ended December 31,(in
      thousands)
    2004
    
    2003
    
    2004
    
    2003Royalty
      expense payable to related parties
    
    
    $
    875
    
    $
    94
    
    $
    1,275
    
    $
    94c)
Administration and finance servicesNews Corporation provides services
under a Master Intercompany Agreement which provides, among other things, for arrangements
governing the relationship between NDS and News Corporation. The consideration for each of
the services and other arrangements set forth in the Master Intercompany Agreement is
mutually agreed and based upon allocated costs. All such consideration and any material
arrangements are subject to the approval of the Companys Audit Committee. The
services covered by the Master Intercompany Agreement include cash management and
financing, services of News Corporation employees, facility arrangements, employee
matters, including pensions and certain other services.


Amounts charged in respect of these
services amounted to:

For the
      three months
      ended December 31,
    
    For the
      six months 
      ended December 31,(in
      thousands)
    2004
    
    2003
    
    2004
    
    2003Administrative
      expenses payable to related parties
    
    
    $
    66
    
    $
    56
    
    $
    130
    
    $
    109Included within accounts payable are
amounts of $2,687,000 and $3,107,000 as of December 31, 2004 and June 30, 2004,
respectively, which were owed to News Corporation in respect of administrative services
and operating costs paid on behalf of NDS.


The Group has a short-term loan
facility of £30 million from News Corporation. The facility has no expiry date
and no amounts were drawn down as of December 31, 2004 or June 30, 2004. The
facility is considered to be adequate for the Groups needs.


The Company and certain subsidiaries
have entered into cross-guarantees with HSBC Bank plc providing mutual guarantees with
other subsidiaries of News Corporation for amounts owed to the bank under a collective
overdraft facility of £20 million. The Company has been informed by News
Corporation that no amounts were owed to HSBC Bank plc as of December 31, 2004 which
would be covered by these guarantees.


d)
UK
Corporation TaxNDS Group plc has entered into a
Group Relief Agreement, with a UK subsidiary of News Corporation, which provides for the
mutual surrender of losses and other allowances by group relief. Subject to the terms of
the agreement, the party accepting such surrender shall pay or cause to be paid to the
surrendering party an amount equal to the amount of tax such accepting party would have
paid but for such surrender. Income tax expense includes such amounts and part of the
income tax liability may be settled by payments to News Corporation, rather than the UK
Inland Revenue.


     Page 8


Note 8. Contingencies


a)
LitigationOn June 6, 2003, Echostar
Communications Corporation, Echostar Satellite Corporation, Echostar Technologies
Corporation and Nagrastar L.L.C. (collectively, Echostar filed an action
against NDS 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, compensatory and exemplary damages and
restitution. On December 22, 2003, all of the claims were dismissed by the court,
except for the DMCA, CA and unfair competition claims, and the Court limited these claims
to acts allegedly occurring within three years of the filing of the complaint. Echostar
filed a second amended complaint. NDS filed a motion to dismiss the second amended
complaint on March 31, 2004. The motion was scheduled to be heard by the Court on
July 23, 2004. On July 21, 2004, the Court issued an order vacating the July
23, 2004 hearing date and ordering, among other things, Echostar to file a third
amended complaint within 10 days correcting various deficiencies in the second amended
complaint noted by the Court. Echostar filed its third amended complaint on August
4, 2004. On August 6, 2004, the Court ruled that NDS was free to file a motion
to dismiss the third amended complaint, which NDS did on September 20, 2004. The
hearing occurred on January 3, 2005. The parties are awaiting the Courts
decision.


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 NDS 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, 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. NDS 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 judgement dismissing
the suit to the Ninth Circuit Court of Appeals.


b)
Severance
payIn certain countries in which NDS
operates (principally Israel), it is required to make severance payments to dismissed
employees and employees leaving employment in certain other circumstances, on the basis of
the latest monthly salary for each year of service. This liability is substantially funded
by payments of premiums to insurance companies under approved plans.


The gross liability as of December
31, 2004 was $22,139,000 and at June 30, 2004 it was $19,587,000. These amounts
are included within non-current accrued expenses in the balance sheet. The amount funded
by insurance policies as of December 31, 2004 was $19,187,000 and at June
30, 2004 it was $17,146,000. These amounts are included within other non-current
assets in the balance sheet.


c)
Government
grantsA subsidiary company, NDS
Technologies Israel Limited, has received government grants 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 December 31, 2004 amounted to
approximately $11.9 million. The cumulative amount received and receivable to June
30, 2004 amounted to approximately $11.2 million. It is not anticipated that any
repayment will be required.


d)
Intellectual property rightsThe 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.


     Page 9


Contingencies
(continued)


e)
GuaranteesIn the normal course of business, NDS
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.


Note 10. Pension expense


The elements of expense related to
the defined benefit pension plan which NDS operates for the benefit of certain current and
former UK employees, are as follows:


For
      the three months 
      ended December 31,
    
    For the
      six months
      ended December 31,(in
      thousands)
    2004
    
    2003
    
    2004
    
    2003Service
      cost
    
    
    $
    43
    
    $
    40
    
    $
    85
    
    $
    78Interest
      cost
    
    
    
    224
    
    
    187
    
    
    443
    
    
    364Expected
      return on plan assets
    
    
    
    (167
    )
    
    (128
    )
    
    (330
    )
    
    (249
    )Amortization
      of unrecognized net loss
    
    
    
    112
    
    
    109
    
    
    221
    
    
    212$
    212
    
    $
    208
    
    $
    419
    
    $
    405Page 10


Item 2.
Managements Discussion and Analysis of Financial Condition and Resultsof Operations


This document
contains statements that constitute
forward-looking statements within the meaning
of Section 21E of the Securities Exchange
Act of 1934, as amended, 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 NDS Group plc (the
Company), its directors or its
officers with respect to, among other things,
trends affecting the Companys 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. Those risks and uncertainties are
discussed under the heading Risk Factors,
in the Companys Annual Report on
Form 20-F (SEC file no. 0-30364) as filed
with the Securities and Exchange Commission
on October 22, 2004, 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. Readers
should carefully review other documents filed
by the Company with the Securities and
Exchange Commission. This section should be
read in conjunction with the unaudited
consolidated condensed financial statements of the
Company and related notes set forth
elsewhere herein.


Recent Developments


Effective November 12, 2004, News
Corporation changed its corporate domicile from Australia to the United States and as a
result, NDS Group plc no longer qualifies as a foreign private issuer under US securities
laws. NDS also changed its reporting currency from pounds sterling to US dollars.
Accordingly, our accompanying interim unaudited condensed consolidated financial
statements and financial information in this discussion are stated in US dollars and
have been prepared in accordance with US generally accepted
accounting principles (US GAAP). Prior to November 12, 2004, NDS
published financial
information in accordance with UK accounting practice (UK GAAP) in pounds
sterling.


Introduction


Managements discussion and
analysis of financial condition and results of operations (MD&A) is
intended to help provide an understanding of NDS Group plcs (together with its
subsidiaries, the Company) financial condition, changes in financial condition
and results of operations. MD&A is organized as follows:



Overview of our Business - This
section provides a general description of the Companys businesses, as well as
recent developments that have occurred either during fiscal 2005 that the Company
believes are important in understanding the results of operations and financial condition
or to disclose known future trends.
Results of Operations - This
section provides an analysis of the Companys results of operations for the three
months and six months ended December 31, 2004 and 2003. 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 the Companys cash flows for the six months ended
December 31, 2004 and 2003. It includes a discussion of the financial capacity
available to fund the Companys 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, program guides (EPG),
personal video recorder (PVR) technologies, and interactive applications. Our
software systems, consultancy and systems integration services are focused on providing
platform operators and content providers with technology to help them profit from the
secure distribution of digital information and entertainment.


Our revenues were $141.6 million
for the quarter ended December 31, 2004 compared to $76.5 million for the
quarter ended December 31, 2003. First half-year revenues in fiscal 2005 were
$282.9 million compared to $157.4 million for the first half of fiscal 2004. Our
net income was $17.9 million for the quarter ended December 31, 2004 compared to
$10.3 million for the quarter ended December 31, 2003. Net income for the first
six months of fiscal 2005 was $35.5 million, compared to $24.7 million for the
first half of fiscal 2004.


     Page 11


We consider that we operate as a
single segment and our business is managed as such. There are no separate divisions or
profit centers. To assist in assessing the financial performance of our business, we have
identified a number of revenue streams and cost categories.


Conditional access
revenues


Conditional access revenues from a
particular platform operator are generally related to the number of subscribers to that
platform and / or the number of smart cards authorized to decrypt content broadcast by
that platform. Contracts with customers typically provide for the long-term supply of
smart cards and the provision of conditional access services to preserve the security of
the platform. The volume of smart cards supplied depends on demand by consumers for
set-top boxes, which enable the subscriber to receive a broadcasters programs and
services. The nature and extent of the security services vary by customer and are
reflected in the fees paid, which are typically determined by the number of smart cards in
use and authorized by the platform operator. Thus, a significant proportion of the growth
in conditional access revenues is driven by the growth in the underlying subscriber bases
of our pay-TV customers.


Conditional access revenues consist
of sales of smart cards and the receipt of security fees. Smart cards are sold to the
platform operator at an agreed unit price for use by their subscribers. In some
circumstances, we receive fees from broadcasters for the maintenance of the security of
conditional access systems for a specified duration which is typically between 24 and 48
months. Fees are received over the duration of the agreed service period and are related
to the number of subscribers to the platform and / or the number of smart cards authorized
to decrypt content broadcast by that platform. In some instances, the maintenance of
security requires us to replace a population of smart cards (changeover cards)
from time to time, at no additional cost to the platform operator. In such instances an
element of the security fee is deferred each month and recognized when the changeover
cards are supplied. In other cases, a platform operator may purchase separately new cards
for all its customers at an agreed price which may be discounted to reflect the size of an
order and the fact that the development of the replacement cards has been paid for
separately.


A key performance measure for our
business is the number of subscribers to our platform customers and the potential of those
platform customers to grow their subscriber bases. As of December 31, 2004, there
were 51.8 million active set-top boxes using our conditional access technology, a
rise of 4.0 million in the quarter and 7.8 million in the six-month period. We
have recognized revenue on the sale of 8.1 million smart cards in the three months
ended December 31, 2004 and 17.0 million for the six month period then ended.
This compares to 1.2 million and 3.4 million respectively in the equivalent
periods of fiscal 2004.


Until August 13, 2003, we
provided conditional access services, including the supply of smart cards to DIRECTV in
the USA. 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
the first and second quarters of fiscal 2004 from DIRECTV for the use of NDS technology
contained within cards which DIRECTV had procured from a third party. In March 2004, NDS
and DIRECTV signed a new six-year contract for 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 the security
maintenance activities. In June 2004, we also took on the supply of new smart cards to
DIRECTV. Therefore fiscal 2004 was a year of transition as we moved from the end of one
DIRECTV contract to a new relationship with them and fiscal 2005 comparisons with fiscal
2004 are significantly affected.


Integration, development
and support revenues


Integration, development and support
consists of activities such as software development and adaptation; design, implementation
and project management of broadcasting systems; and, ongoing support and maintenance of
software and broadcast systems. Integration, development and support fees are related to
our ability to obtain new customers for systems and technology and to provide sufficient
resources to accept a new contract. Such revenues depend on the amount of time required to
manage the integration, customise or develop the software and also on the level of support
and assistance required by the customer.


Contracts for development,
integration and installation work are undertaken for customers on the basis of time and
materials, or according to fixed price terms, or a combination of the two. The duration of
such contracts has varied from a few weeks to approximately two years. Contracts for the
initial supply of a system are typically followed by separate contracts for system
enhancements and additional features. Support and maintenance contracts typically involve
negotiation of a fixed periodic fee over the term of the contract.


     Page 12


In December 2003 we acquired the
MediaHighway middleware business from Thomson SA in December 2003 for
60 million. This has increased the range of middleware functionality that we
can offer our customers. Therefore integration, development and support revenues are
higher in the three and six month periods in fiscal 2005 than in the equivalent periods in
fiscal 2004.


Licence fees and royalty
revenues


We derive licence fees and royalties
from licensing technology to broadcasters for use in their head-end and to set-top box
manufacturers. License fees and royalties are charged for different elements of our
software, such as conditional access, EPG and middleware (including, from December 2003,
the basic MediaHighway elements). Licence revenues are dependent upon our ability to
obtain new customers and upon the ongoing needs of existing customers to expand their
services or upgrade their systems to more sophisticated technology. Royalty income is
typically receivable on the basis of the number of units manufactured or deployed by a
licensee. Royalties are generally a function of the number of set-top boxes manufactured,
which in turn is dependent upon the ability of the broadcaster or service provider to
generate new subscribers.


New technologies revenues


We have developed, and are marketing,
new technologies which offer the platform operator or content provider the opportunity to
increase the revenue per subscriber through enhancing the viewing experience and
delivering more than just video. Examples include games and gaming, interactive
applications, PVR technologies, OpenBet, and Synamedia (technology to manage and control
the secure distribution of digital content via broadband networks). Revenues under this
category are in the form of development fees, licence fees or royalties per subscriber or
user. These are typically earned on the successful deployment of technology to a customer
or on the manufacture of the set-top box or device containing the technology. In some
instances, an ongoing fee is payable for support and maintenance which is dependent upon
the number of subscribers having access to, or making use of, the enhanced functionality.
We have entered into several revenue-share arrangements whereby we receive a share of the
incremental revenues earned by the operator from an application supplied by us.


The new technologies revenue stream
depends upon us developing and selling applications for use by platform operators and
content providers, and the take-up by subscribers of new services, applications and
functions offered by the service provider.


Costs and expenses


Our costs and expenses consist of the
physical and processing costs of smart cards, personnel and facilities costs,
royalties paid to owners of certain intellectual property rights which we have
incorporated within our technologies and the amortization of intangible assets which we
acquired for incorporation within our technologies.


The physical costs of smart cards
include the costs of the integrated circuits manufactured by third party suppliers, the
micro-module which houses the computer chips and the plastic body of the smart cards. We
do not manufacture smart cards, but our engineers design their embedded computer chips,
arrange for their manufacture and assembly by third party suppliers and then program the
smart cards with proprietary software. Smart card costs are dependent upon the costs of
raw materials, including the cost of computer chips, plastic and assembly, and the volume
of smart cards purchased and processed in any period.


Personnel and facilities costs
are allocated to four categories: operations, sales and marketing, research and
development, and general and adminstration. Facilities costs include the
depreciation of equipment used in customer support, development and test activities.


During fiscal 2005, we have continued
to increase our headcount and purchase additional technical equipment for use by our
research and development and operations staff. Therefore our operating cost base is higher
in the three and six month periods in fiscal 2005 than in the equivalent periods in fiscal
2004. The increase is due to the acquisition of MediaHighway in December 2003 and
additional personnel and equipment to support the new conditional access agreement with
DIRECTV. We have also increased the number of employees involved in the development of
applications which we characterise as new technologies. Much of this development has been
in advance of signing contracts with customers for such new applications.



     Page 13


Critical accounting
policies


Our discussion and analysis of our
financial condition and financial performance are based upon our consolidated financial
statements, which have been prepared in accordance with US GAAP. Our reported financial
results are dependent, amongst other things, on our choice of accounting policies, the
application of those policies, and on the use of estimates. The preparation of financial
statements requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements, and the amounts of reported revenues and expenses
for the fiscal period. Judgements involved in making estimates can significantly affect
our reported profits, assets and liabilities.


The policies and estimation
techniques which we consider are most critical relate to the valuation of assets
(principally goodwill and other intangible assets, accounts receivable and inventory) and
the recognition or de-recognition of liabilities (principally revenue recognition and cost
accruals). These critical accounting policies and estimation techniques are described in
detail in our Annual Report on Form 20-F for the year ended June 30, 2004, which was
prepared under UK GAAP. Summarized below is a description of the critical accounting
policies impacted by our change to US GAAP.


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 judgement and often involves the use of significant estimates
and assumptions, including assumptions with respect to future cash inflows and outflows,
discount rates, asset lives, and market multiples. Goodwill is subject to an annual
impairment test (or more often if circumstances dictate). Intangible assets are amortized
over their expected useful lives and the remaining useful life is re-assessed from time to
time. If we identify an impairment in value of goodwill or other intangible assets, we
record an impairment charge in the period in which it is identified. The judgements 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 on our reported operating income.


Revenue recognition and liabilities
to customers


Revenue may only be recognized if
persuasive evidence of an arrangement exists, the fees are fixed and determinable, the
product or service has been delivered and collectibility is assured. Judgement is required
in assessing whether these criteria have been met. The technologies and services we supply
to our customers are technically complicated and are frequently covered by long-term
contracts. In assessing the amounts of revenue recognized in any period, we must make
estimates about such matters as the future costs we will incur to complete our contractual
obligations and, if these costs exceed estimated future revenues, make a provision for the
estimated loss. Where we have obligations to supply smart cards in the future as part of
our support and maintenance obligations, we are required to make estimates about the
timing of supply of such changeover cards and to defer an appropriate amount of revenue
from the security fees received from our platform operator customers and recognize an
appropriate amount of revenue when such cards are supplied. These estimates include an
assessment of the likely timing of the card changeover, the number of smart cards to be
supplied, the costs of those smart cards and the future receipt of security fees. The
judgements made in determining the value of our liabilities to customers can significantly
impact our reported operating income.


Commentary on three months and six
months ended December 31, 2004


The results of the fiscal 2005
periods and the comparisons with fiscal 2004 are significantly affected by business
conducted with DIRECTV. Until August 13, 2003, we provided conditional access
services, including the supply of smart cards to DIRECTV in the United States. The
contract came to an end on August 13, 2003 and subsequently we received payments
under post-termination support arrangements. Additionally, we realized revenue in the
first and second quarters of fiscal 2004 from DIRECTV for the use of NDS technology
contained within cards which DIRECTV had procured from a third party.


In March 2004, NDS and DIRECTV signed
a new six-year contract for 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.


     Page 14


Comparisons are also affected by the
results of the MediaHighway business which we acquired on December 16, 2003.


Revenue


Revenues for the periods under review
were as follows:

For
      the three months ended December 31,(in
      thousands)
    2004
    
    2003
    
    Change
    
    % changeConditional
      access
    
    
    $
    86,719
    
    $
    41,478
    
    $
    45,241
    
    
    109
    %Integration,
      development & support
    
    
    
    12,017
    
    
    11,458
    
    
    559
    
    
    5
    %License fees
      & royalties
    
    
    
    18,838
    
    
    7,770
    
    
    11,068
    
    
    142
    %New technologies
    
    
    
    21,540
    
    
    13,915
    
    
    7,625
    
    
    55
    %Other
    
    
    
    2,509
    
    
    1,867
    
    
    642
    
    
    34
    %Total revenue
    
    
    $
    141,623
    
    $
    76,488
    
    $
    65,135
    
    
    85
    %For
      the six months ended December 31,(in
      thousands)
    
    
    2004
    
    2003
    
    Change
    
    %
      changeConditional
      access
    
    
    $
    177,043
    
    $
    87,258
    
    $
    89,785
    
    
    103
    %Integration,
      development & support
    
    
    
    28,825
    
    
    27,051
    
    
    1,774
    
    
    7
    %License fees
      & royalties
    
    
    
    34,838
    
    
    14,757
    
    
    20,081
    
    
    136
    %New technologies
    
    
    
    38,510
    
    
    25,049
    
    
    13,461
    
    
    54
    %Other
    
    
    
    3,686
    
    
    3,324
    
    
    362
    
    
    11
    %Total revenue
    
    
    $
    282,902
    
    $
    157,439
    
    $
    125,463
    
    
    80
    %Conditional access revenues have
increased by 109% for the quarter and by 103% for the six month period. We have recognized
revenue on the sale of 8. 1 million smart cards in the three months ended December
31, 2004 and 17.0 million for the six month period. This compares to
1.2 million and 3.4 million respectively in the equivalent periods of fiscal
2004. The increase in revenue is directly related to three factors: higher volume of smart
cards purchased by DIRECTV, in connection with our new contract; higher purchases from Sky
Italia, which recently completed the migration of all their subscribers to NDS technology;
and, higher demand from our Latin America customers. The number of authorized cards in use
at our broadcast platform customers as of December 31, 2004 was
51.8 million compared to 47.8 million at September 30, 2004 and
44.0 million at June 30, 2004. At December 31, 2003, the equivalent number
was 38.8 million. Again, the growth is primarily from the volume increases noted
above. This volume increase is due to consumers up-grading their set-top boxes, a
deliberate build-up of inventory by our platform customers, and a migration of consumers
from one platform to another. We do not currently expect conditional access revenues to be
as high in the third and fourth quarters of fiscal 2005 as they have been in the first and
second quarters. The prior year periods included conditional access revenues from a third
party that used NDS technology within their smart cards, with no comparable amounts in the
current fiscal year.


Revenues from integration,
development and support have increased by 5% for the quarter and by 7% for the six month
period. There have been no major system deliveries or upgrades in either period, but a
large number of small system enhancements have been delivered over the course of both
periods of both fiscal years. Such revenue is dependent upon when such enhancements are
delivered to customers. This revenue stream includes revenues related to middleware
development following our acquisition of the MediaHighway business in December 2003. As
well as revenues from Canal Plus, we also received development revenue related to Sky
Italias migration. Partially off-setting this is the fact that this revenue stream
for both the three and six month periods in fiscal 2004 included system support income
under our old contract with DIRECTV; there is no equivalent in our new contract.


The growth in revenues from license
fees and royalties from the three and six month periods of fiscal 2004 as compared to the
equivalent periods of fiscal 2005 is due to royalties earned from the MediaHighway
business which we acquired on December 16, 2003. Royalties for the use of
conditional access, middleware and program guide software included within set-top boxes
have also increased from the three and six month periods of fiscal 2004 to the equivalent
periods in fiscal 2005. This is due to an increase in the number of set-top boxes
manufactured which includes our software or the download of such software for use on
several of our customers platforms. We no longer receive conditional access
royalties from the manufacture of set-top boxes for the DIRECTV platform.



     Page 15


The increase in revenue from new
technologies is due to higher development and royalty income related to the accelerating
deployment of our advanced PVR technologies by several of our customers. In addition,
higher revenue from interactive infrastructure has increased due to the higher number of
subscribers using our technology and the addition of our technology on new platforms.


Cost of goods and
services sold and gross margin


Cost of goods and services sold and
gross margin for the period under review were as follows:

For the
      three months ended December 31,(in
      thousands)
    2004
    
    2003
    
    Change
    
    %
      changeSmart
      card costs
    
    
    $
    32,543
    
    $
    4,288
    
    $
    28,255
    
    
    659
    %Operations
      & support
    
    
    
    17,056
    
    
    11,194
    
    
    5,862
    
    
    52
    %Royalties
    
    
    
    4,683
    
    
    1,359
    
    
    3,324
    
    
    245
    %Other
    
    
    
    104
    
    
    2,077
    
    
    (1,973
    )
    
    **Total cost
      of goods and services sold
    
    
    $
    54,386
    
    $
    18,918
    
    $
    35,468
    
    
    187
    %Gross margin
    
    
    $
    87,237
    
    $
    57,570
    
    $
    29,667
    
    
    52
    %Gross margin
      as a percentage of revenues
    
    
    
    61.6%
    
    
    75.3%
    
    
    -13.7%
    
    
    ****: Not meaningfulFor the
      six months ended December 31,(in
      thousands)
    2004
    
    2003
    
    Change
    
    %
      changeSmart card
      costs
    
    
    $
    71,342
    
    $
    10,699
    
    $
    60,643
    
    
    567
    %Operations
      & support
    
    
    
    32,609
    
    
    21,209
    
    
    11,400
    
    
    54
    %Royalties
    
    
    
    7,758
    
    
    2,576
    
    
    5,182
    
    
    201
    %Other
    
    
    
    244
    
    
    2,724
    
    
    (2,480
    )
    
    **Total cost
      of goods and services sold
    
    
    $
    111,953
    
    $
    37,208
    
    $
    74,745
    
    
    201
    %Gross margin
    
    
    $
    170,949
    
    $
    120,231
    
    
    50,718
    
    
    42
    %Gross margin
      as a percentage of revenues
    
    
    
    60.4%
    
    
    76.4%
    
    
    -16%
    
    
    ****: Not meaningfulWe consider that gross margin,
defined as revenues less costs and expenses associated with those revenues (being those
costs identified above), is an important measure for our management and investors. We
consider that it gives a measure of profitability that distinguishes between those costs
which are broadly a function of direct revenue-earning activities and costs which are of a
general nature or which are incurred in the expectation of being able to earn future
revenues.


The increase in smart card costs for
the three and six month periods is due to the volume increases noted above. Also, the unit
cost of smart cards sold to DIRECTV is higher than those supplied to other customers, due
to specifications required by DIRECTV. Operations and support costs have increased due to
the greater number of NDS employees working on customer delivery and support and on smart
card processing. Royalties are paid to certain third parties for use of technology we have
licensed. Such royalties are typically a function of particular revenue items,
predominantly conditional access income. Hence the royalty expense has increased both
because of the increase in revenues and the mix of revenues being weighted towards
conditional access in current fiscal year periods.


     Page 16


These factors have resulted in a
decline in gross margins as a percentage of revenues from the three and six month periods
ended December 31, 2004 compared to the equivalent periods of the prior fiscal year.
Additionally, the prior year periods include conditional access revenues from a third
party that used NDS technology contained within their smart cards, with no comparable
amounts in the current periods. No costs were directly incurred in relation to this
revenue item and hence gross margin as a percentage of revenues in the three and six month
periods ended December 31, 2004 was unusually high.


Operating expenses


Operating expenses may be analyzed as
follows:


For the
      three months ended December 31,(in
      thousands)
    2004
    
    2003
    
    Change
    
    %
      changeSales
      & marketing
    
    
    $
    6,053
    
    $
    6,094
    
    $
    (41
    )
    
    
    %Research
      & development
    
    
    
    40,333
    
    
    32,271
    
    
    8,062
    
    
    25
    %General &
      administration
    
    
    
    15,183
    
    
    8,466
    
    
    6,717
    
    
    79
    %Amortization
      of intangibles
    
    
    
    3,189
    
    
    1,161
    
    
    2,028
    
    
    175
    %Total operating
      expenses
    
    
    $
    64,758
    
    $
    47,992
    
    $
    16,776
    
    
    35
    %For the
      six months ended December 31,(in
      thousands)
    2004
    
    2003
    
    Change
    
    %
      changeSales & marketing
    
    
    $
    12,119
    
    $
    12,098
    
    $
    21
    
    
    
    %Research
      & development
    
    
    
    78,654
    
    
    60,576
    
    
    18,078
    
    
    30
    %General &
      administration
    
    
    
    27,285
    
    
    17,133
    
    
    10,152
    
    
    59
    %Amortization
      of intangibles
    
    
    
    6,290
    
    
    1,939
    
    
    4,351
    
    
    224
    %Total operating
      expenses
    
    
    $
    124,348
    
    $
    91,746
    
    $
    32,602
    
    
    36
    %Our main operating costs are employee costs,
facilities costs (including depreciation of sophisticated equipment used by our
engineers) and travel costs reflecting the fact that our employees, customers and
potential customers are located throughout the world. Our employee numbers have increased
over the period, as follows:


June
      2003
    
    
    September
      2003
    
    
    December
      2003
    
    
    June
      2004
    
    
    September
      2004
    
    
    December
      2004Number
      of employees
    
    
    
    1,362
    
    
    1,528
    
    
    1,872
    
    
    2,004
    
    
    2,119
    
    
    2,234The primary reason for the increase
in operating expenses is due to the addition of approximately 300 employees in connection
with the acquisition of MediaHighway business in December, 2003 and the expansion of
our workforce. The Company continues to add additional employees in order to develop new
products and to improve our customer delivery and support. There has also been an increase
in the number of NDS employees working on customer delivery and support and on smart card
processing and their costs are included within the operations line within cost of goods
and services sold. Therefore, the trend in the increase from the three and six month
periods of fiscal 2004 to the equivalent periods of fiscal 2005, is reflected in the
increase in operating costs.


Approximately a quarter of our
research and development employees and almost all of our general and administration
employees are based in the UK. The costs of these employees is denominated in UK pounds
sterling so the reported US dollar amounts are higher in the current fiscal year periods
due to the weaker US dollar. The weaker US dollar has increased our employee costs by
approximately 9% and 11% for the three and six month periods ended December 31, 2004,
respectively. Certain other of our general and administrative costs are also denominated
in UK pounds sterling and the reported US dollar amounts are similarly adversely affected.


     Page 17


In the quarter ended December
31, 2004, general and administrative costs include additional facility charges
related to a leased property in the UK, which has been abandoned, in the amount of $2.8
million and also include costs of approximately $1.2 million related to the
relocation of most of our employees in Jerusalem to new premises. Other items impacting
the three and six months ended December 31, 2004 were the weaker US Dollar, higher
employee costs, as noted above, and higher legal costs.


The increase in amortization expense
for the periods of fiscal 2005 compared to the equivalent periods of fiscal 2004 is due to
the amortization of the fair value of intellectual property rights acquired as part of the
MediaHighway transaction.


Operating income and
other items


As a result of the factors outlined
above, operating income was $22.5 million for the three months ended December
31, 2004 and $46.6 million for the six months then ended. Equivalent figures for
fiscal 2004 were $9.6 million and $28.5 million respectively.


Foreign exchange gains have arisen in
the three and six month periods ended December 31, 2004 due to the volatility in exchange
rates causing differences to arise between the amounts at which revenues and expenses are
translated into the functional currency of the entity in which they are recorded and the
amount paid or received in cash. During the three months ended December 31, 2003 we
realized a gain of approximately $1.9 million arising from a euro forward exchange
contract entered into to fix the pound sterling purchase price of the MediaHighway
acquisition between signing the acquisition agreement and the completion of the
transaction.


Interest income earned on cash
deposits was $2.8 million for the three months ended December 31, 2004 and
$4.8 million for the six months then ended. Equivalent figures for fiscal 2004 were
$1.7 million and $3.7 million respectively. The increase is due to higher
average cash balances and slightly higher interest rates.


Our effective tax rate is
approximately 34% for the reported periods of fiscal 2005. This is higher than in the
equivalent periods of the prior fiscal year and higher than the UK statutory tax rate of
30% due to an increase in expenses for which we do not expect to receive effective relief.


As a consequence of all these
factors, net income for the three months ended December 31, 2004 was
$17.9 million or $0.33 per share ($0.32 on a diluted basis) compared to
$10.3 million or $0.19 per share ($0.19 on a diluted basis) for the three months
ended December 31, 2003. For the six months ended December 31, 2004 net income
was $35.5 million or $0.65 per share ($0.63 on a diluted basis) compared to
$24.7 million or $0.46 per share ($0.45 on a diluted basis) for the six months ended
December 31, 2003.


Liquidity and capital
resources


Current financial
condition


The Companys principal source
of liquidity is internally generated funds; however, the Company also has access to the
worldwide capital markets. As of December 31, 2004, and as of the date hereof, we
have an unused facility to borrow up to £30 million from a subsidiary of News
Corporation. No amounts have been drawn under this facility during fiscal 2005.


As of December 31, 2004 we had
cash of $267.0 million. Cash accumulated 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.


The Companys internally
generated funds are dependent on the continuing profitability of our business. We grant
our customers normal credit terms in respect of sales transactions, typically 30 to 60
days from date of invoice. The principal uses of cash that affect the Companys
liquidity position include the following: purchases of smart cards, operational
expenditures, capital expenditures and income tax payments. In some instances, we receive
monthly security fees which includes payment towards the future provision of smart cards.
This causes an increase in deferred income and in cash, until such time when we purchase
smart cards to meet our card changeover obligations and the deferred income is recognized
as revenue. During fiscal 2005 we are experiencing an increase in cash which will be spent
on inventory purchases in future years.


     Page 18


The Company has evaluated, and
expects to continue to evaluate, possible acquisitions and dispositions of certain
businesses. Such transactions may be material and may involve cash, the Companys
securities or the assumption of additional indebtedness.


Sources and uses of cash


We had a net in-flow of cash of
$27.3 million for the six months ended December 31, 2004 and a net cash outflow
of $28.5 million in the six months ended December 31, 2003.


Cash generated from
operating activities


Cash of $28.7 million was
generated from operating activities in the six months ended December 31, 2004. This
represents 81% of net income. For the six months ended December 31, 2003, cash
generated from operating activities was $39.4 million or 160% of net income.


The reason for the difference between
the two six-month periods is working capital movements, primarily driven by the transition
to the new contract with DIRECTV and in particular the resumption of the supply of smart
cards to DIRECTV towards the end of June 2004. In the six months ended December 31, 2003,
cash receipts were greater than revenue as amounts owed to us by DIRECTV in respect of
earlier periods were paid. In the six months ended December 31, 2004, receipts were less
than revenue reflecting the increase in receivables from DIRECTV for the sale of smart
cards. Additionally, cash payments for inventory purchases were higher than amounts
recorded within cost of goods sold, due to the timing of payments to suppliers. Partially
offsetting these two items is the fact that receipts from security fees were higher than
revenues as a result of deferring that part of security fees received from customers which
relates to future supply of changeover smart cards.


Cash used in investing
activities


Cash used in investing activities was
$8.3 million in the six months ended December 31, 2004 and $68.8 million in the equivalent
period of the prior financial year. Cash payments for capital expenditure amounted to
$8.5 million during the six months ended December 31, 2004, compared to
$3.3 million during the six months ended December 31, 2003. The increase in
expenditure relates to the purchase of technical development and test equipment used by
our software development engineers and customer support employees. During the six months
ended December 31, 2003 we acquired the MediaHighway business and this involved a net cash
outflow of $65.5 million.


Cash generated from
financing activities


During the six months ended December
31, 2004 we received $6.9 million from the exercise by employees of stock
options compared to $0.8 million in the six months ended December 31, 2003.


Commitments and
contractual obligations


There has been no material change to
our commitments since June 30, 2004.


     Page 19


Item 3. Quantitative and
Qualitative Disclosures About Market Risk


The only significant 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 US dollars, UK pounds sterling and euros.
Historically, we have not entered into free-standing derivative contracts to hedge foreign
exchange exposure from trading transactions. We expect to review this policy from time to
time as circumstances change. No such derivative instruments were outstanding as of
December 31, 2004.


As of December 31, 2004
approximately 79% of our cash was held in pounds sterling and 16% in US dollars, with most
of the remainder being held in euros. As a result of the weakening in the US dollar during
the six-month periods of both fiscal years, we experienced foreign exchange gains on
holding cash of $11.0 million in the six months ended December 31, 2004 and
$11.2 million in the six months ended December 31, 2003.


Our policy has been to hold the bulk
of our cash reserves in pounds sterling because that was our reporting currency. As a
consequence of the change in our reporting currency to US dollars and the fact that the
majority of our revenues are now denominated in US dollars, we have re-evaluated our
treasury policy. Our policy now is to hold the bulk of our cash reserves in US dollars.
During January 2005, we have switched most of our sterling currency holdings above our
foreseeable requirements into US dollars. As a consequence of this, we expect our future
interest income to be less as US dollar interest rates are lower than sterling interest
rates. However our reported cash balances are expected to be less sensitive to
fluctuations in foreign exchange rates.


Item 4. Controls and
Procedures


The Companys Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of the Companys
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this quarterly
report and, based on this evaluation, have concluded that the disclosure controls and
procedures were effective as of December 31, 2004.


There have been no changes in the
Companys internal control over financial reporting that occurred during the
Companys second fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting.



     Page 20


PART II  Other
Information


Item 1.Legal Proceedings


On June 6, 2003, Echostar
Communications Corporation, Echostar Satellite Corporation, Echostar Technologies
Corporation and Nagrastar L.L.C. (collectively, Echostar filed an action
against NDS 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, compensatory and exemplary damages and
restitution. On December 22, 2003, all of the claims were dismissed by the court,
except for the DMCA, CA and unfair competition claims, and the Court limited these claims
to acts allegedly occurring within three years of the filing of the complaint. Echostar
filed a second amended complaint. NDS filed a motion to dismiss the second amended
complaint on March 31, 2004. The motion was scheduled to be heard by the Court
on July 23, 2004. On July 21, 2004, the Court issued an order vacating the July
23, 2004 hearing date and ordering, among other things, Echostar to file a third
amended complaint within 10 days correcting various deficiencies in the second amended
complaint noted by the Court. Echostar filed its third amended complaint on August
4, 2004. On August 6, 2004, the Court ruled that NDS was free to file a motion
to dismiss the third amended complaint, which NDS did on September 20, 2004. The
hearing occurred on January 3, 2005. The parties are awaiting the Courts
decision.


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 NDS 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, 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. NDS 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
judgement dismissing the suit to the Ninth Circuit Court of Appeals.


Item 2. Changes in
Securities and Use of Proceeds


Not applicable.


Item 3. Defaults Upon
Senior Securities


Not applicable.




     Page 21



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


Our Annual General Meeting was held
on November 3, 2004. The following resolutions were voted upon, with the results as
shown below:


For
    
    Against
    
    Non-VotingResolution
      1The
      audited accounts for the year ended June 30, 2004, together with thedirectors
      and auditors reports, be received and adopted.
    
    
    
    424,084,340
    
    
    1,310
    
    
    8,196,396Resolution
      2The
      Directors Remuneration Report for the year ended June 30, 2004, be approved.
    
    
    
    422,726,209
    
    
    1,359,441
    
    
    8,196,396Resolution
      3Ernst
      & Young LLC be re-appointed as auditors and the directors (or the directorscomprising
      the audit committee) be authorized to fix their remuneration.
    
    
    
    424,084,234
    
    
    1,416
    
    
    8,196,396Resolution
      4To
      appoint Nathan Gantcher as a Director of the Company.
    
    
    
    424,081,779
    
    
    3,871
    
    
    8,196,396Resolution
      5To
      re-appoint Peter Powers as a Director of the Company.
    
    
    
    424,081,859
    
    
    3,791
    
    
    8,196,396Resolution
      6To
      amend Article 78 of the Companys Articles of Association to increase themaximum
      amount that the Company may pay as fees to the Directors toUS$1,000,000
      effective from 1st January 2004.
    
    
    
    422,767,613
    
    
    1,318,037
    
    
    8,196,396Resolution
      7That:
      (i) in accordance with article 6 of the Companys Articles of Association,the
      directors be authorized to allot relevant securities up to a maximum nominalamount
      of US$409,680; (ii) this authority shall expire on 1 November, 2009; and(iii)
      all previous authorities under section 80 of the Companies Act 1985 be revoked.
    
    
    
    422,808,699
    
    
    1,276,951
    
    
    8,196,396Resolution
      8That:
      (i) in accordance with article 7 of the Companys Articles of Association,the
      Directors be given power to allot equity securities for cash; and (ii) this
      powershall
      expire on 1 November, 2009.
    
    
    
    422,683,329
    
    
    1,402,321
    
    
    8,196,396David DeVoe, Lachlan Murdoch, Abraham
Peled and Arthur Siskind continued as directors of the Company without a vote of
shareholders.


Item 5. Other Information


Not applicable.



     Page 22


Item 6. Exhibits and
Reports on Form 8-K


Exhibits


3
Amended
Articles of Association of the Company*10.1
Non-Executive
Director Compensation Summary Sheet*10.2
Employment
Agreement dated as of November 11, 2004 between the Company and Alexander
Gersh***31.1
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*31.2
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*32.1
Certification
of the Chief Executive Officer pursuant to U.S.C section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002**32.2
Certification
of the Chief Financial Officer pursuant to U.S.C section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002***
Filed
herewith**
Furnished
herewith***
Incorporated by
reference to Exhibit 10 to the Current Report of the Company on Form 8-K (File
No. 0-30364) filed with the Securities and Exchange Commission on January 5,
2005.Reports on Form 8-K


Not applicable.




     Page 23


Signatures


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



Date: February 8, 2005


NDS Group plc


by




_______________________/s/ Alexander Gersh


Alexander Gersh Chief
Financial Officer


     Page 24