**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 September 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, 286 Bath Road,
                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)








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 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 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 Exchange Act).


**Yes**o**No**x





As
      of
      October 29, 2006, the following shares were outstanding: 14,913,826 Series
      A
      ordinary shares, par value $0.01 per share; 42,001,000 Series B ordinary shares,
      par value $0.01 per share; and, 42,000,002 deferred shares, par value £1 per
      share.








**NDS
      Group plc**




**Table
      of contents**




Page**PART
                I - Financial Information**Item
                1.
            Financial
                StatementsUnaudited
                Consolidated Statements of Operations for the three month
                periodsended
                September 30, 2006 and September 30, 2005
            
            1Consolidated
                Balance Sheets as of September 30, 2006 (unaudited) and June 30,
                2006
            
            2Unaudited
                Consolidated Statements of Cash Flows for the three month
                periodsended
                September 30, 2006 and September 30, 2005
            
            3Notes
                to the Unaudited Consolidated Financial Statements
            
            4Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            12Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            
            20Item
                4.
            Controls
                and Procedures
            
            21**PART
                II - Other Information**Item
                1.
            Legal
                Proceedings
            
            22Item
                1A.
            Risk
                Factors
            
            22Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            27Item
                3.
            Defaults
                Upon Senior Securities
            
            27Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            
            27Item
                5.
            Other
                Information
            
            27Item
                6.
            Exhibits
            
            27Signatures
            
            
            28











**PART
      I - Financial Information**




**Item
      1. Financial Statements**




**NDS
      Group plc**


**Unaudited
      Consolidated Statements of Operations**


**For
                  the three months ended****September
                  30,**(in
                  thousands, except per-share amounts)
              
              **2006**
              
              **2005****Revenue:**Conditional
                  access
              
              $
              92,847
              
              $
              83,145Integration,
                  development & support
              
              
              18,412
              
              
              13,834License
                  fees & royalties
              
              
              24,350
              
              
              24,566New
                  technologies
              
              
              27,499
              
              
              20,859Other
              
              
              1,054
              
              
              2,091Total
                  revenue
              
              
              164,162
              
              
              144,495**Cost
                  of goods and services sold**(exclusive
                  of items shown separately below)**:**Smart
                  card costs
              
              
              (20,819
              )
              
              (21,625
              )Operations
                  & support
              
              
              (36,931
              )
              
              (33,679
              )Royalties
              
              
              (3,514
              )
              
              (2,897
              )Other
              
              
              (971
              )
              
              (1,622
              )Total
                  cost of goods and services sold
              
              
              (62,235
              )
              
              (59,823
              )**Gross
                  margin**
              
              
              101,927
              
              
              84,672**Operating
                  expenses:**Research
                  & development
              
              
              (34,666
              )
              
              (30,104
              )Sales
                  & marketing
              
              
              (7,977
              )
              
              (7,271
              )General
                  & administration
              
              
              (11,611
              )
              
              (8,577
              )Amortization
                  of other intangibles
              
              
              (2,417
              )
              
              (2,338
              )Other
              
              
              (666
              )
              
              (647
              )Total
                  operating expenses
              
              
              (57,337
              )
              
              (48,937
              )**Operating
                  income**
              
              
              44,590
              
              
              35,735**Other
                  income:**Interest,
                  net
              
              
              6,012
              
              
              2,876Income
                  before income tax expense
              
              
              50,602
              
              
              38,611Income
                  tax expense
              
              
              (15,514
              )
              
              (11,506
              )**Net
                  income**
              
              $
              35,088
              
              $
              27,105**Net
                  income per share:**Basic
                  net income per share
              
              $
              0.62
              
              $
              0.49Diluted
                  net income per share
              
              $
              0.61
              
              $
              0.47
  The
        accompanying notes form an integral part of these
        unaudited consolidated financial statements.
  Page
            1
 NDS
        Group plc
 Consolidated
        Balance
        Sheets
 **As
                  of**
              
              **As
                  of****September
                  30,**
              
              **June
                  30,****2006**
              
              **2006**(in
                  thousands, except share amounts)
              
              **(Unaudited)**
              
              **(See
                  Note
                  2)****ASSETS****Current
                  assets:**Cash
                  and cash equivalents
              
              $
              219,848
              
              $
              320,636Short-term
                  investments
              
              
              286,753
              
              
              184,401Accounts
                  receivable, net (inclusive of $88,204 and $74,295 due from related
                  parties)
              
              
              110,640
              
              
              97,716Accrued
                  income
              
              
              45,750
              
              
              37,050Income
                  tax receivable
              
              
              1,073
              
              
              1,411Inventories,
                  net
              
              
              46,318
              
              
              39,340Prepaid
                  expenses
              
              
              17,805
              
              
              17,031Other
                  current assets
              
              
              3,725
              
              
              3,650Total
                  current assets
              
              
              731,912
              
              
              701,235Property,
                  plant & equipment, net
              
              
              46,073
              
              
              46,239Goodwill
              
              
              67,435
              
              
              66,917Other
                  intangibles, net
              
              
              44,022
              
              
              43,299Deferred
                  tax assets
              
              
              7,971
              
              
              7,506Other
                  receivables
              
              
              13,450
              
              
              6,681Other
                  non-current assets
              
              
              26,219
              
              
              25,244**Total
                  assets**
              
              $
              937,082
              
              $
              897,121**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY****Current
                  liabilities:**Accounts
                  payable (inclusive of $5,882 and $4,228 due to related
                  parties)
              
              $
              23,486
              
              $
              26,966Deferred
                  income
              
              
              47,400
              
              
              45,492Accrued
                  payroll costs
              
              
              19,383
              
              
              26,647Accrued
                  expenses
              
              
              26,157
              
              
              26,245Income
                  tax liabilities
              
              
              23,774
              
              
              19,039Other
                  current liabilities
              
              
              14,480
              
              
              16,762Total
                  current liabilities
              
              
              154,680
              
              
              161,151Accrued
                  expenses
              
              
              35,061
              
              
              33,747Deferred
                  income
              
              
              141,248
              
              
              134,529**Total
                  liabilities**
              
              
              330,989
              
              
              329,427Commitments
                  and contingencies**Shareholders’
                  equity:**Series
                  A ordinary shares, par value $0.01 per share: 48,000,000 shares
                  authorized;14,905,323
                  and 14,873,262 shares outstanding as of September 30, and June
                  30, 2006,
                  respectively
              
              
              149
              
              
              148Series
                  B ordinary shares, par value $0.01 per share: 52,000,000 shares
                  authorized;42,001,000
                  shares outstanding as of September 30, and June 30, 2006,
                  respectively
              
              
              420
              
              
              420Deferred
                  shares, par value £1 per share: 42,000,002 shares
                  authorizedand
                  outstanding as of September 30, and June 30, 2006,
                  respectively
              
              
              64,103
              
              
              64,103Additional
                  paid-in capital
              
              
              537,615
              
              
              534,668Accumulated
                  deficit
              
              
              (44,533
              )
              
              (79,621
              )Other
                  comprehensive income
              
              
              48,339
              
              
              47,976**Total
                shareholders’ equity**
              
              
              606,093
              
              
              567,694**Total
                liabilities and shareholders’ equity**
              
              $
              937,082
              
              $
              897,121
  The
        accompanying notes form an integral part of these unaudited consolidated
        financial statements.
  Page
            2
 NDS
        Group plc
  **Unaudited
          Consolidated Statements of Cash Flows**
 **For
                  the three months ended****September
                  30,**(in
                  thousands)
              
              **2006**
              
              **2005****Operating
                  activities:**Net
                  income
              
              $
              35,088
              
              $
              27,105Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation
              
              
              4,376
              
              
              3,837Amortization
                  of other intangibles
              
              
              2,417
              
              
              2,338Stock
                  option-based compensation
              
              
              2,315
              
              
              977Other
                  compensation cost
              
              
              176
              
              
              ─Change
                  in operating assets and liabilities, net of acquisitions:Inventories
              
              
              (6,978
              )
              
              2,455Receivables
                  and other assets
              
              
              (29,538
              )
              
              (31,498
              )Deferred
                  income
              
              
              8,627
              
              
              5,673Accounts
                  payable and other liabilities
              
              
              (8,205
              )
              
              (45
              )Net
                  cash provided by operating activities
              
              
              8,278
              
              
              10,842**Investing
                  activities:**Capital
                  expenditure
              
              
              (4,077
              )
              
              (9,049
              )Proceeds
                  from sale of property, plant and equipment
              
              
              27
              
              
              292Short-term
                  investments
              
              
              (102,352
              )
              
              ─Business
                  acquisitions, net of cash acquired
              
              
              (3,634
              )
              
              (2,922
              )Net
                  cash used in investing activities
              
              
              (110,036
              )
              
              (11,679
              )**Financing
                  activities:**Issuance
                  of shares (inclusive of realized excess tax benefits of $27 and
                  $─)
              
              
              634
              
              
              2,797**Net
                  (decrease) increase in cash and cash equivalents**
              
              
              (101,124
              )
              
              1,960Cash
                  and cash equivalents, beginning of period
              
              
              320,636
              
              
              339,791Exchange
                  movements
              
              
              336
              
              
              274**Cash
                  and cash equivalents, end of period**
              
              $
              219,848
              
              $
              342,025
  The
        accompanying notes form an integral part of these
        unaudited consolidated financial statements.
 
  Page
            3




**NDS
      Group plc**




**Notes
      to the Unaudited 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**




The
      accompanying unaudited consolidated financial statements have been prepared
      in
      accordance with U.S. generally accepted accounting principles (“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 GAAP have been condensed
      or omitted pursuant to such rules and regulations. In the opinion of management,
      the unaudited 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
      unaudited consolidated results of operations for the three month period ended
      September 30, 2006 are not necessarily indicative of results that may be
      expected for any other interim period or for the full fiscal year ending June
      30, 2007.





These
      interim unaudited 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, 2006 included in the Company’s Annual
      Report on Form 10-K as filed with the Securities and Exchange Commission on
      September 1, 2006. Financial information as of June 30, 2006 has been
      derived from those audited consolidated financial statements.





These
      interim consolidated financial statements are unaudited and do not constitute
      statutory results as defined in Section 240 of the Companies Act 1985 of Great
      Britain. U.K. statutory accounts for the fiscal year ended June 30, 2006, which
      include parent company financial statements prepared under U.K. generally
      accepted accounting practice and consolidated financial statements prepared
      under International Financial Reporting Standards, and on which the auditors’
reports were unqualified, have been distributed to shareholders.





The
      preparation of financial statements in conformity with GAAP requires that
      management make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities as of the date of the consolidated financial statements
      and the reported amounts of revenues and expenses during the reporting period.
      Because of the use of estimates inherent in the financial reporting process,
      actual results could differ from those estimates.





The
      Company maintains a 52-53 week fiscal year ending on the Sunday nearest to
      each
      reporting date. As such, all references to September 30, 2006 and September
      30,
      2005 relate to the three month periods ended October 1, 2006 and October 2,
      2005, respectively. For convenience purposes, the Company continues to date
      its
      financial statements as of September 30th.





All
      amounts are presented in thousands, except share and per share amounts or unless
      otherwise noted.








*Recent* *accounting pronouncements*




In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
      No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FAS
      109, Accounting for Income Taxes,” (“FIN 48”), to create a single model to
      address accounting for uncertainty in tax positions. FIN 48 clarifies the
      accounting for income taxes, by prescribing a minimum recognition threshold
      a
      tax position is required to meet before being recognized in the financial
      statements. FIN 48 also provides guidance on derecognition, measurement,
      classification, interest and penalties, accounting in interim periods,
      disclosure and transition. FIN 48 is effective for fiscal years beginning after
      December 15, 2006. The Company will adopt FIN 48 as of July 1, 2007, as
      required. The cumulative effect of adopting FIN 48 will be recorded in retained
      earnings and other accounts as applicable. The Company has not determined the
      effect, if any; the adoption of FIN 48 will have on the Company's financial
      position and results of operations.




Page
          4





In
      September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
      No. 87, 88, 106 and 132(R)” (“SFAS No. 158”). SFAS No. 158 improves financial
      reporting by requiring an employer to recognize the overfunded or underfunded
      status of a defined benefit postretirement plan as an asset or liability in
      its
      statement of financial position and to recognize changes in that funded status
      in the year in which the changes occur through comprehensive income. SFAS No.
      158 will become effective for the Company as of the fiscal year ending June
      30,
      2007. The Company is currently evaluating what effects the adoption of SFAS
      No.
      158 will have on the Company’s results of operations and financial
      condition.








**Note
      3.**  **Comprehensive
      income**




Comprehensive
      income comprises net income, foreign currency translation adjustments and
      certain pension adjustments. The components of comprehensive income were as
      follows:


**For
                  the three months ended****September
                  30,**(in
                  thousands)
              
              **2006**
              
              **2005**Net
                  income
              
              $
              35,088
              
              $
              27,105Currency
                  translation differences (no tax effect)
              
              
              363
              
              
              (21
              )Comprehensive
                  income
              
              $
              35,451
              
              $
              27,084
  **Note
      4.**  **Net
      income per share**




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 stock method and as such, is a function of the average share price
      in
      each period. The Company’s Series A ordinary shares, par value $0.01 per share
      (“Series A Ordinary Shares”) and Series B ordinary shares, par value $0.01 per
      share (“Series B Ordinary Shares”) have equal rights except in respect of
      voting, and as such have equal weighting in the calculation of net income per
      share and equal net income per share.





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




**For
                  the three months ended****September
                  30,****2006**
              
              **2005**Weighted
                  average number of ordinary shares in issue
              
              
              56,889,675
              
              
              55,419,452Effect
                  of dilutive stock options
              
              
              886,532
              
              
              1,890,149Denominator
                  for dilutive net income per share
              
              
              57,776,207
              
              
              57,309,601





**Note
      5.**  **Short-term
      investments**




The
      short-term investment balance at September 30, 2006 and June 30, 2006 was
      comprised of cash deposits at banks with an original term of six months.




Page
          5


**Note
      6.**  **Inventories**


**As
                  of**
              
              **As
                  of****September
                  30,**
              
              **June
                  30,**(in
                  thousands)
              
              **2006**
              
              **2006**Unprocessed
                  smart cards and their components
              
              $
              45,073
              
              $
              37,579Other
                  smart card inventory
              
              
              2,095
              
              
              2,731Inventory
                  reserves
              
              
              (2,874
              )
              
              (2,511
              )44,294
              
              
              37,799Contract
                  work-in-progress
              
              
              2,024
              
              
              1,541Total
                  inventories
              
              $
              46,318
              
              $
              39,340






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.





**Note
      7.**  **Accounts
      receivable**


**As
                  of**
              
              **As
                  of****September
                  30,**
              
              **June
                  30,**(in
                  thousands)
              
              **2006**
              
              **2006**Gross
                  amount due
              
              $
              113,897
              
              $
              98,840Less
                  valuation reserves
              
              
              (3,257
              )
              
              (1,124$
              110,640
              
              $
              97,716





**Note
      8.**  **Deferred
      income**


**As
                  of**
              
              **As
                  of****September
                  30,**
              
              **June
                  30,**(in
                  thousands)
              
              **2006**
              
              **2006**Deferred
                  security fees
              
              $
              145,108
              
              $
              134,129Advance
                  receipts and other deferred income
              
              
              43,540
              
              
              45,892Total
                  deferred income
              
              $
              188,648
              
              $
              180,021Included
                  within current liabilities
              
              $
              47,400
              
              $
              45,492Included
                  within non-current liabilities
              
              
              141,248
              
              
              134,529$
              188,648
              
              $
              180,021





**Note
      9.**  **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,
      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
      (the “Audit Committee”) of the Company’s Board of Directors (the
“Board”).





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.




Page
          6




**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
      to whom the Company supplied such services 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 three months ended****September
                  30,**(in
                  thousands)
              
              **2006**
              
              **2005**Revenue
                  from related parties
              
              $
              132,203
              
              $
              111,322


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


**As
                  of**
              
              **As
                  of****September
                  30,**
              
              **June
                  30,**(in
                  thousands)
              
              **2006**
              
              **2006**Accounts
                  receivable
              
              $
              88,204
              
              $
              74,295Accrued
                  income
              
              
              30,145
              
              
              25,434Deferred
                  income
              
              
              (162,875
              )
              
              (160,196
              )


**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 in respect of this related party arrangement was as
      follows:


**For
                  the three months ended****September
                  30,**(in
                  thousands)
              
              **2006**
              
              **2005**Royalty
                  expense payable to this related party, included within cost of
                  goods and
                  services sold
              
              $
              738
              
              $
              956






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




**As
                  of**
              
              **As
                  of****September
                  30,**
              
              **June
                  30,**(in
                  thousands)
              
              **2006**
              
              **2006**Accrued
                  expenses
              
              $
              1,488
              
              $
              750


**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.
      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.




Page
          7








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




**For
                  the three months ended****September
                  30,**(in
                  thousands)
              
              **2006**
              
              **2005**Administration
                  fees charged to the Company by related parties
              
              $
              59
              
              $
              64





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 sheets 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**
              
              **As
                  of****September
                  30,**
              
              **June
                  30,**(in
                  thousands)
              
              **2006**
              
              **2006**Accounts
                  payable
              
              $
              5,882
              
              $
              4,228




**d)** **Other**




The
      Company has a short-term loan facility of £30 million (approximately $56
      million) from News Corporation. The facility has no expiry date and no amounts
      were drawn down as of September 30, 2006 or June 30, 2006. 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 September 30, 2006 or June 30, 2006
      which would be covered by these guarantees.








**Note
      10.**  **Contingencies
      and commitments**




**a)** **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
          8





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 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. The defendants filed their brief in opposition on September
      6,
      2006 and IETC filed their reply brief on October 4, 2006. The oral hearing
      date
      has not yet been set.





*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 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. The court has scheduled oral arguments for November 14,
      2006.





*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. The asserted patent expired on January
      27, 2006.




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, although the Court has scheduled a patent claim construction
      hearing for November 17, 2006. The Company believes Mr. Thomas’s claims are
      without merit and intends to vigorously defend itself in this matter. DIRECTV
      Inc. filed a motion for summary judgment barring pre-suit damages based on
      its
      laches defense on September 12, 2006. On September 26, 2006, Mr. Thomas filed
      his opposition to DIRECTV, Inc.’s summary judgment motion. DIRECTV, Inc.
      has filed its reply memorandum in support of its laches summary judgment motion,
      and the matter now awaits decision by the Court.




Page
          9





**b)**  **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, the Company is unable to estimate the maximum potential impact of
      these guarantees on the Company’s future results of operations.





**c)**  **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
      consolidated 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 consolidated financial
      statements would materially affect the Company’s financial
      position.








**Note
      11.**  **Stock
      option plans**




The
      following amounts have been recorded in the consolidated financial statements
      concerning the Company’s stock option plans:




**For
                  the three months ended****September
                  30,**(in
                  thousands)
              
              **2006**
              
              **2005**Total
                  intrinsic value of options exercised
              
              $
              844
              
              $
              4,711Stock-based
                  compensation cost included within the consolidated statement of
                  operations:Operating
                  expenses
              
              $
              2,315
              
              $
              977Tax
                  benefit
              
              
              (361
              )
              
              (127Net
                  of tax amount
              
              $
              1,954
              
              $
              850Cash
                  received from exercise of stock options
              
              $
              607
              
              $
              2,797Excess
                  tax benefit from exercise of stock options
              
              $
              27
              
              $
              800





As
      of
      September 30, 2006, the total compensation cost related to non-vested stock
      option awards not yet recognized was approximately $24.4 million and the
      period over which it is expected to be recognized is 3.3 years. The Board may
      grant additional stock options or other equity-based compensation, which would
      result in additional operating expenses being recorded in future
      periods.




Page
          10





**Note
      12.**  **Pension
      expense**




The
      elements of expense related to the defined benefit scheme which the Company
      operates are as follows:


**For
                  the three months ended****September
                  30,**(in
                  thousands)
              
              **2006**
              
              **2005**Service
                  cost
              
              $
              51
              
              $
              45Interest
                  cost
              
              
              304
              
              
              245Expected
                  return on plan assets
              
              
              (251
              )
              
              (207
              )Amortization
                  of unrecognized net loss
              
              
              147
              
              
              146$
              251
              
              $
              229
 
 Page
            11


**Item
      2. 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 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.
      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 Item 1A. Risk Factors of
      Part
      II of this Quarterly Report on Form 10-Q, in the Company’s Annual Report on Form
      10-K for the fiscal year ended June 30, 2006 as filed with the Securities and
      Exchange Commission (“SEC”) on September 1, 2006 (SEC file no. 0-30364), as
      well as the information set forth elsewhere in this Quarterly Report. The
      Company does not ordinarily make projections of its future operating results
      and
      undertakes no obligation (and expressly disclaims 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 other documents filed by the Company with the SEC.
      This
      section should be read in conjunction with the unaudited consolidated financial
      statements of the Company and related notes set forth elsewhere
      herein.***





**Introduction**




Management’s
      discussion and analysis of financial condition and results of operations is
      intended to help provide an understanding of our 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 2007 that we believe
                are
                important in understanding the results of operations and financial
                condition or to disclose known future
                trends.





·
            ***Results
                of operations ─***This section provides an analysis of our results of operations for
                the
                three month periods ended September 30, 2006 and 2005. In addition,
                a
                brief description is provided of significant transactions and events
                that
                impact the comparability of the results being
                analyzed.





·
            ***Liquidity
                and capital resources ─***This section provides an analysis of our cash flows for the three
                month
                periods ended September 30, 2006 and 2005. It includes a discussion
                of the
                financial capacity available to fund our future commitments and
                obligations, as well as a discussion of other financing
                arrangements.








**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 65% of our revenues in
      the
      three month period ended September 30, 2006. We expect that a limited number
      of
      customers will continue to contribute a significant portion of our
      revenues.




Page
          12





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.





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
      digital video recording (“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.





**Costs
      and expenses**




Our
      costs
      and expenses consist of: 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, such as 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 which are embedded into
      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.




Page
          13





Personnel
      and facilities costs are allocated into 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 the
      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 executive and other personnel,
      facilities, legal and administration costs.








**Recent
      accounting pronouncements**




*Income
      taxes*




In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
      No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FAS
      109, Accounting for Income Taxes,” (“FIN 48”), to create a single model to
      address accounting for uncertainty in tax positions. FIN 48 clarifies the
      accounting for income taxes, by prescribing a minimum recognition threshold
      a
      tax position is required to meet before being recognized in the financial
      statements. FIN 48 also provides guidance on derecognition, measurement,
      classification, interest and penalties, accounting in interim periods,
      disclosure and transition. FIN 48 is effective for fiscal years beginning after
      December 15, 2006. The Company will adopt FIN 48 as of July 1, 2007, as
      required. The cumulative effect of adopting FIN 48 will be recorded in retained
      earnings and other accounts as applicable. The Company has not determined the
      effect, if any; the adoption of FIN 48 will have on the Company's financial
      position and results of operations.





*Defined
      benefit pension plan obligations*




In
      September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
      No. 87, 88, 106 and 132(R)” (“SFAS No. 158”). SFAS No. 158 improves financial
      reporting by requiring an employer to recognize the overfunded or underfunded
      status of a defined benefit postretirement plan as an asset or liability in
      its
      statement of financial position and to recognize changes in that funded status
      in the year in which the changes occur through comprehensive income. SFAS No.
      158 will become effective for the Company as of the fiscal year ending June
      30,
      2007. The Company is currently evaluating what effects the adoption of SFAS
      No.
      158 will have on the Company’s results of operations and financial
      condition.




Page
          14


**Results
      of operations**




**Commentary
      on the three month period ended September 30, 2006**




**Revenue**




Revenue
      for the periods under review was as follows:


**For
                  the three months ended****September
                  30,**(in
                  thousands)
              
              **2006**
              
              **2005**
              
              **Change**
              
              **%
                  Change**Conditional
                  access
              
              $
              92,847
              
              $
              83,145
              
              $
              9,702
              
              
              12
              %Integration,
                  development & support
              
              
              18,412
              
              
              13,834
              
              
              4,578
              
              
              33
              %License
                  fees & royalties
              
              
              24,350
              
              
              24,566
              
              
              (216
              )
              
              (1
              %)New
                  technologies
              
              
              27,499
              
              
              20,859
              
              
              6,640
              
              
              32
              %Other
              
              
              1,054
              
              
              2,091
              
              
              (1,037
              )
              
              **Total
                  revenue
              
              $
              164,162
              
              $
              144,495
              
              $
              19,667
              
              
              14
              %





────────


**:
      Not
      meaningful.





The
      increase in conditional access revenues was due to higher security fees and
      a
      higher volume of smart cards delivered to customers. 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 three months ended****September
                  30,**(in
                  millions)
              
              **2006**
              
              **2005**Number
                  of authorized cards, beginning of period
              
              
              65.0
              
              
              56.7Net
                  additions
              
              
              1.6
              
              
              1.8Number
                  of authorized cards, end of period
              
              
              66.6
              
              
              58.5


The
      increase in the number of smart cards delivered in the three month period ended
      September 30, 2006, compared to the corresponding period in the previous fiscal
      year, reflects higher demand from customers in Asia and the United States and
      deliveries to new customers in Europe and India. The quantity of smart cards
      delivered in each period was as follows:


**For
                  the three months ended****September
                  30,**(in
                  millions)
              
              **2006**
              
              **2005**Number
                  of smart cards delivered
              
              
              6.7
              
              
              5.5


The
      volume of smart cards supplied exceeded the increase in authorized smart cards
      in use due to a mixture of churn and by the build-up of inventory by platform
      operators.





Integration,
      development and support revenues increased by 33% in the three month period
      ended September 30, 2006, compared to the corresponding period of the previous
      fiscal year. This increase was primarily due to revenues from our contract
      with
      Tata-Sky, which commenced broadcasting to subscribers in India in August 2006.
      The increase was also due to revenues from new customers in Europe and from
      the
      delivery of conditional access and middleware enhancements to several of our
      major customers.





License
      fee and royalty revenues decreased by 1% in the three month period ended
      September 30, 2006, compared to the corresponding period of the previous fiscal
      year. The increase in the cumulative number of MediaHighway-enabled set-top
      boxes in each period was as follows:




Page
          15


**For
                    the three months
                    ended****September
                    30,**(in
                    millions)
                
                **2006**
                
                **2005**Number
                    of MediaHighway-enabled set-top boxes, beginning of period
                
                
                41.6
                
                
                20.4Additions
                
                
                3.1
                
                
                6.3Number
                    of MediaHighway-enabled set-top boxes, end of period
                
                
                44.7
                
                
                26.7




The
      volume of MediaHighway set-top boxes enabled in the three month period ended
      September 30, 2006 relates to new set-top boxes deployed by our customers.
      The
      volume of MediaHighway set-top boxes enabled during the first quarter of fiscal
      2006 was unusually high, as DIRECTV commenced the initial download of our
      MediaHighway middleware and related technologies to certain models of set-top
      boxes in use by their subscribers. The decline in royalty revenues was offset
      in
      part by the recognition of license revenue following the launch of the Tata-Sky
      broadcast platform in India in August 2006.





The
      increase in revenues from new technologies of 32% in the three month period
      ended September 30, 2006, compared to the corresponding period of the previous
      fiscal year, was due to higher revenues from our DVR technologies, as well
      as an
      increase in revenue from our Synamedia IPTV technologies, interactive
      infrastructure and gaming applications. The increase in the cumulative number
      of
      DVR-enabled set-top boxes in each period was as follows:




**For
                  the three months ended****September
                  30,**(in
                  millions)
              
              **2006**
              
              **2005**Number
                  of DVR-enabled set-top boxes, beginning of period
              
              
              3.5
              
              
              1.4Additions
              
              
              0.7
              
              
              0.3Number
                  of DVR-enabled set-top boxes, end of period
              
              
              4.2
              
              
              1.7







In
      addition to the matters referred to above, comparisons of revenues for the
      three
      month period ended September 30, 2006 to the three month period ended September
      30, 2005 were also affected by the relative weakness of the U.S. dollar over
      the
      course of the three month period ended September 30, 2006. Approximately 45%
      of
      our revenues were denominated in currencies other than the U.S. dollar
      (principally pounds sterling and the euro). We estimate that the weaker U.S.
      dollar has favorably impacted our total reported revenues for the three month
      period ended September 30, 2006 by approximately 2%, compared to the three
      month
      period ended September 30, 2005.





Page
          16


**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 three months ended****September
                  30,**(in
                  thousands)
              
              **2006**
              
              **2005**
              
              **Change**
              
              **%
                  Change**Smart
                  card costs
              
              $
              20,819
              
              $
              21,625
              
              $
              (806
              )
              
              (4
              %)Operations
                  & support
              
              
              36,931
              
              
              33,679
              
              
              3,252
              
              
              10
              %Royalties
              
              
              3,514
              
              
              2,897
              
              
              617
              
              
              21
              %Other
              
              
              971
              
              
              1,622
              
              
              (651
              )
              
              **Total
                  cost of goods and services sold
              
              $
              62,235
              
              $
              59,823
              
              $
              2,412
              
              
              4
              %Gross
                  margin
              
              $
              101,927
              
              $
              84,672
              
              $
              17,255
              
              
              20
              %Gross
                  margin as a percentage of revenues
              
              
              62.1
              %
              
              58.6
              %
              
              3.5
              %


────────


**:
      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 excludes 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 the three month period ended September 30,
      2006,
      compared to the corresponding period of the previous fiscal year, was due to
      the
      lower unit costs, offset in part by higher 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 in the three month period ended
      September 30, 2006, compared to the corresponding period of the previous fiscal
      year, was due to an increase in the number of our employees working on
      development, integration and support activities for our customers. Royalty
      costs
      are amounts we pay to third parties for the use of their technology and are
      calculated based on revenues derived from certain technologies. The increase
      in
      royalty expense for fiscal 2007, compared to fiscal 2006, was due to changes
      in
      the mix of revenues from different types of applications, principally an
      increase in revenues from conditional access applications.





As
      a
      consequence of these factors, gross margin as a percentage of revenues was
      62.1%
      for the three month period ended September 30, 2006, compared to 58.6% in
      the corresponding period of the previous fiscal year.








**Operating
      expenses**




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


**For
                  the three months ended****September
                  30,**(in
                  thousands)
              
              **2006**
              
              **2005**
              
              **Change**
              
              **%
                  Change**Research
                  & development
              
              $
              34,666
              
              $
              30,104
              
              $
              4,562
              
              
              15
              %Sales
                  & marketing
              
              
              7,977
              
              
              7,271
              
              
              706
              
              
              10
              %General
                  & administration
              
              
              11,611
              
              
              8,577
              
              
              3,034
              
              
              35
              %Amortization
                  of intangibles
              
              
              2,417
              
              
              2,338
              
              
              79
              
              
              3
              %Other
              
              
              666
              
              
              647
              
              
              19
              
              
              3
              %Total
                  operating expenses
              
              $
              57,337
              
              $
              48,937
              
              $
              8,400
              
              
              17
              %


Page
            17




Our
      main
      operating costs are employee costs (including the cost of stock option awards),
      facilities costs, depreciation and travel costs. These have increased due to
      the
      higher number of employees and the facilities occupied by those employees,
      and
      include the impact of investments made in new facilities and infrastructure
      during the latter part of fiscal 2006.





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




**For
                  the three months ended****September
                  30,****2006**
              
              **2005**Number
                  of employees, beginning of period
              
              
              2,989
              
              
              2,508Net
                  additions
              
              
              100
              
              
              132Number
                  of employees, end of period
              
              
              3,089
              
              
              2,640







Higher
      employee numbers have resulted in higher operating expenses in the three month
      period ended September 30, 2006, compared to the corresponding period in the
      previous fiscal year, due to higher payroll, travel and facilities costs. Research
      and development expenses increased for the three month period ended September
      30, 2006, compared to the corresponding period of the previous fiscal year,
      due
      to higher employee costs and infrastructure costs which was partially offset
      by
      a $5.5 million grant from the French government as a consequence of being
      engaged in certain eligible research projects. In the corresponding period
      of
      the previous period, the Company received an equivalent grant of $5.3 million.





Sales
      and
      marketing expenses increased by 10% in the three month period ended September
      30, 2006 compared to the corresponding period of the previous fiscal year as
      a
      result of increased attendance at trade shows and corporate communications
      activities.





General
      and administrative expenses increased by 35% for the three month period ended
      September 30, 2006, compared to the corresponding period of the previous fiscal
      year. This is due to higher costs in respect of stock options, higher legal
      expenses and higher facilities and infrastructure costs.





Amortization
      of finite-lived intangible assets increased by 3% for the three month period
      ended September 30, 2006, to the corresponding period of the previous fiscal
      year. Other income credited to operating expenses represents gains on the
      revaluation of foreign currency cash holdings





In
      addition to the matters referred to above, comparisons of expenses for the
      three
      month period ended September 30, 2006, compared to the three month period ended
      September 30, 2005, were also affected by the relative weakness of the U.S.
      dollar. Approximately 49% of our total expenses were denominated in currencies
      other than the U.S. dollar (principally pounds sterling and the euro). We
      estimate that the weaker U.S. dollar has adversely impacted our total reported
      expenses in the three month period ended September 30, 2006 by
      approximately 2%, compared to the three month period ended September 30,
      2005.





**Operating
      income and other items**




As
      a
      result of the factors outlined above, operating income was $44.6 million, or
      27.2% of revenue, for the three month period ended September 30, 2006, compared
      to $35.7 million, or 24.7% of revenue, for the corresponding period of the
      previous fiscal year. We estimate that the weaker U.S. dollar has favorably
      impacted our operating income in the three month period ended September 30,
      2006
      by approximately 2%, compared to the three month period ended September 30,
      2005.





Interest
      income earned on cash deposits was $6.0 million in the three month period ended
      September 30, 2006, compared to $2.9 million in the corresponding period of
      the
      previous fiscal year. This was due to higher average cash balances and higher
      interest rates.




Our
      effective tax rate was 30.7% for the three month period ended September 30,
      2006, compared to 29.8% for the corresponding period in the previous fiscal
      year. This increase in the effective rate was due to higher foreign taxes.





As
      a
      consequence of all these factors, net income for the three month period ended
      September 30, 2006 was $35.1 million, or $0.62 per share ($0.61 per share on
      a
      diluted basis), compared to $27.1 million, or $0.49 per share ($0.47 per share
      on a diluted basis), for the corresponding period of the previous fiscal
      year.





Page
          18


**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
      September 30, 2006, we had cash, cash equivalents and short-term investments
      totaling $506.6 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 September 30, 2006, we had an unused credit facility to borrow
      up to £30 million (approximately $56 million) from a subsidiary of News
      Corporation. No amounts have been drawn under this facility.





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**




During
      the three month period ended September 30, 2006, we invested $102.4 million
      in
      bank deposits with an initial maturity of more than three months. As a result
      of
      this, we had a net outflow of cash and cash equivalents of $101.1 million,
      compared to a net cash inflow of $2.0 million in the corresponding period of
      the
      previous fiscal year.





Net
      cash
      provided by operating activities was as follows:


**For
                  the three months ended****September
                  30,**(in
                  thousands)
              
              **2006**
              
              **2005**Net
                  cash provided by operating activities
              
              $
              8,278
              
              $
              10,842






The
      decrease in net cash provided by operating activities in the three month period
      ended September 30, 2006, compared to the corresponding period of the previous
      fiscal year, reflects higher payments for the purchase of smart cards, higher
      payments for operating expenses and higher tax payments, offset in part by
      higher receipts from customers. 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.


**For
                  the three months ended****September
                  30,**(in
                  thousands)
              
              **2006**
              
              **2005**Capital
                  expenditure
              
              $
              4,077
              
              $
              9,049Proceeds
                  from sale of property, plant and equipment
              
              
              (27
              )
              
              (292
              )Payments
                  for business acquisitions
              
              
              3,634
              
              
              2,922Increase
                  in short-term investments
              
              
              102,352
              
              
              ─Net
                  cash used in investing activities
              
              $
              110,036
              
              $
              11,679







The
      decrease in capital expenditure was as a result of higher payments in the
      corresponding period of the previous fiscal year relating to investment in
      new
      facilities in the United Kingdom, India and the United States.





On
      September 29, 2006, we acquired Interactive Television Entertainment ApS, a
      company based in Copenhagen, Denmark, which specializes in the development
      of
      video games published on multiple gaming platforms, for cash consideration
      of
      approximately $1.8 million. We also assumed debt of approximately $1.2 million,
      which we repaid in early October 2006. In addition, during the three month
      period ended September 30, 2006, we paid approximately $1.8 million of
      additional consideration related to the acquisition of NT Media Limited (“NT
      Media”). In fiscal 2006, we acquired NT Media 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 September 30
      2006, we have paid a total of $1.8 million in conditional consideration and
      accrued a further $0.6 million.




Page
          19





During
      the three month period ended September 30, 2006, we invested a further portion
      of our cash with banks on deposit for terms of up to six months, bringing the
      total amount invested as bank deposits with an initial term of more than three
      months to $286.8 million as of September 30, 2006.





Net
      cash
      generated by financing activities was as follows:


**For
                  the three months ended****September
                  30,**(in
                  thousands)
              
              **2006**
              
              **2005**Issuance
                  of shares
              
              $
              607
              
              $
              2,797Excess
                  tax benefits realized on exercise of stock options
              
              
              27
              
              
              ─Net
                  cash generated by financing activities
              
              $
              634
              
              $
              2,797







During
      the three month period ended September 30, 2006, 32,061 of our Series A ordinary
      shares, par value $0.01 per share (“Series A Ordinary Shares”), were issued to
      employees upon the exercising of their stock options. This compares to 207,676
      Series A Ordinary Shares issued to employees upon the exercising of their stock
      options in the corresponding period of the previous fiscal year. Certain stock
      option exercises result in a tax benefit higher than the amounts recorded in
      the
      consolidated statement of operations. Such tax benefits are shown as a financing
      cash flow to the extent that they are realized.





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.








**Commitments
      and contractual obligations**




There
      has
      been no material change to our commitments since June 30, 2006.








**Item
      3. 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 the 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. We had no
      derivative instruments outstanding as of September 30, 2006.





In
      certain countries in which we have operations, principally Israel, we are
      obligated to make severance payments to employees leaving employment in most
      circumstances. The amount of the severance payment is based on the latest
      monthly salary for each year of service. The severance 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 as of September 30, 2006 was $31.7 million.
      The
      value of funds held by third party investment managers as of September 30,
      2006
      was $26.2 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
      September 30, 2006, approximately 83% of our cash and short-term investments
      were held in U.S. dollars and 8% 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
      $0.3 million in both of the three month periods ended September 30, 2006 and
      2005.




Page
          20





**Item
      4. Controls and Procedures**




**a)** **Disclosure
      controls and procedures**




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 15(d)-15(e) under the Securities Exchange Act of 1934,
      as
      amended (the “Exchange Act”)) as of the end of the period covered by this
      quarterly report. 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 were 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 it files
      or
      submits under the Exchange Act is accumulated and communicated to the Company’s
      management, including the Company’s Chief Executive Officer and Chief Financial
      Officer, as appropriate to allow timely decisions regarding required
      disclosure.








**b)** **Internal
      control over financial reporting**




There
      have not been any changes in the Company’s internal control over financial
      reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under
      the
      Exchange Act) during the Company’s first quarter of fiscal 2007 that materially
      affected, or are reasonably likely to materially affect, the Company’s internal
      control over financial reporting.





Page
          21


**PART
      II - Other Information**




**Item
      1. Legal Proceedings**




See
      Note
      10a to the accompanying unaudited consolidated financial statements, which
      is
      incorporated herein by reference.








**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.





**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.




Page
          22





**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.





**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 three month period ended
      September 30, 2006, these three customers accounted directly and indirectly
      for
      approximately 65% 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.




Page
          23





**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, accounting for income taxes and accounting for pension
      and other postretirement plans.





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.





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.




Page
          24





**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 customers have contracts denominated
      in
      pounds sterling or in euro. During the three month period ended September 30,
      2006, approximately 27% of our revenues were denominated in pounds sterling
      and
      a further 17% were denominated in euro. Some of our smart card costs and our
      operating expenses are denominated in pounds sterling and euro. During the
      three
      month period ended September 30, 2006, we estimate that approximately 31% of
      our
      total cost of sales and operating expenses were denominated in pounds sterling
      and a further 18% 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, India 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. We have, in the past, operated effectively under these requirements.
      We
      cannot predict the effect of these obligations on us in the future.





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




We
      are
      controlled by News Corporation. As of September 30, 2006, News Corporation
      beneficially owned approximately 73.8% of our total issued and outstanding
      share
      capital. Because News Corporation beneficially owns 100% of our Series B
      ordinary shares, par value $0.01 per share (“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.




Page
          25





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 three month period ended September 30, 2006, approximately 80% 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.





In
      addition, our Board of Directors 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 our
      Board of Directors were to exercise such authority or if we issued equity
      securities in connection with possible future business acquisitions, existing
      shareholders interest may be diluted.




Page
          26





**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds**




Not
      applicable.








**Item
      3. Defaults Upon Senior Securities**




Not
      applicable.








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




Not
      applicable.








**Item
      5. Other Information**




Not
      applicable.








**Item
      6. Exhibits**




12
            
            Computation
                of Ratio of Earnings to Fixed Charges.(1)





31.1
            
            Chairman
                and Chief Executive Officer Certification required by Rules 13a-14
                and
                15d-14 under the Securities Exchange Act of 1934, as amended.(1)





31.2
            
            Chief
                Financial Officer Certification required by Rules 13a-14 and 15d-14
                under
                the Securities Exchange Act of 1934, as amended.(1)





32
            
            Certification
                of Chairman and Chief Executive Officer and Chief Financial Officer
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                Sarbanes Oxley Act of 2002.(1)





──────────


(1)  Filed
      herewith.




Page
          27


**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.




NDS
              GROUP
              PLC(Registrant)By:
            /s/ Alexander
              GershAlexander
              GershChief
              Financial Officer





Date:  October
      31, 2006





Page
          28