**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**


**(Mark
      One)**


**[X]**
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT****OF
                1934**




**For
      the quarterly period ended December 31, 2005**





**or**





**[ 
                ]**
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**




**For
      the transition period from**  **to**





**Commission
      File Number: 0-30364**





**NDS
      Group plc**


(Exact
      name of registrant as specified in its charter)




**England
                and Wales**
            **Not
                applicable**(State
                or other jurisdiction of incorporation or organization)
            (I.R.S.
                Employer Identification No.)





**One
                Heathrow Boulevard, 286 Bath Road, West Drayton,**
                **Middlesex,
                  United Kingdom**
            **UB7
                0DQ**(Address
                  of principal executive offices)
            (Zip
                Code)





**+44
      208 476 8000**


(Registrant’s
      telephone number, including area code)








Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.




**Yes**
            **[X]**
            **No**
            **[ 
                ]**










Indicate
      by check mark whether the registrant is 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**
            **[ 
                ]**
            **Accelerated
                filer**
            **[X]**
            **Non-accelerated
                filer**
            **[
                 ]**


**** ****





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


**Yes**
              **[ 
                  ]**
              **No**
              **[X]**




As
      of
      January 30, 2006, the following shares were outstanding: 14,119,171 Series
      A
      ordinary shares of $0.01 par value per share, 42,001,000 Series B ordinary
      shares of $0.01 par value per share and 42,000,002 deferred shares of £1 par
      value per share.









**NDS
        Group plc**
  **Table
        of contents**
  Page
 **PART
          I - Financial Information**
 Item
                        1.
                    Financial
                      StatementsUnaudited
                        Consolidated Statements of
                        Operations for the three and six month periodsended
                        December 31, 2005 and December 31,
                        2004
                    1Consolidated
                        Balance Sheets as of December 31, 2005
                        (unaudited) and June 30, 2005
                    2Unaudited
                        Consolidated Statements of Cash Flows for the
                        six month periodsended
                        December 31, 2005 and December 31,
                        2004
                    3Unaudited
                        Notes to the Consolidated Financial
                        Statements
                    4Item
                        2.
                    Management’s
                      Discussion and Analysis of Financial Condition
                      and Results of Operations
                    13Item
                        3.
                    Quantitative
                      and Qualitative Disclosures About Market
                      Risk
                    29Item
                        4.
                    Controls
                      and Procedures
                    29**PART
                        II - Other Information**Item
                        1.
                    Legal
                      Proceedings
                    30Item
                        2.
                    Unregistered
                      Sales of Equity Securities and Use of
                      Proceeds
                    30Item
                        3.
                    Defaults
                      Upon Senior Securities
                    30Item
                        4.
                    Submission
                      of Matters to a Vote of Security
                      Holders
                    30Item
                        5.
                    Other
                      Information
                    31Item
                        6.
                    Exhibits
                    31Signatures
                    
                    32
 **PART
              I - Financial Information**
  **Item
              1. Financial Statements**
  **NDS
              Group plc**
  **Unaudited
              Consolidated Statements of Operations**
  (in
              thousands, except per share amounts)
  **For
                          the three months**
                      
                      **For
                          the six months****ended
                          December 31,**
                      
                      **ended
                          December 31,****2005**
                      
                      **2004**
                      
                      **2005**
                      
                      **2004****Revenue:**Conditional
                          access
                      
                      $
                      87,619
                      
                      $
                      86,719
                      
                      $
                      170,764
                      
                      $
                      177,043Integration,
                          development & support
                      
                      
                      11,860
                      
                      
                      12,017
                      
                      
                      25,694
                      
                      
                      28,825License
                          fees & royalties
                      
                      
                      26,941
                      
                      
                      18,838
                      
                      
                      51,507
                      
                      
                      34,838New
                          technologies
                      
                      
                      23,047
                      
                      
                      21,540
                      
                      
                      43,906
                      
                      
                      38,510Other
                      
                      
                      2,736
                      
                      
                      2,509
                      
                      
                      4,827
                      
                      
                      3,686Total
                          revenue
                      
                      
                      152,203
                      
                      
                      141,623
                      
                      
                      296,698
                      
                      
                      282,902**Cost
                          of goods and services sold:**Smart
                          card costs
                      
                      
                      (23,082
                      )
                      
                      (32,543
                      )
                      
                      (44,707
                      )
                      
                      (71,342
                      )Operations
                      
                      
                      (34,902
                      )
                      
                      (17,056
                      )
                      
                      (68,581
                      )
                      
                      (32,609
                      )Royalties
                      
                      
                      (2,781
                      )
                      
                      (4,683
                      )
                      
                      (5,678
                      )
                      
                      (7,758
                      )Other
                      
                      
                      (1,011
                      )
                      
                      (104
                      )
                      
                      (2,633
                      )
                      
                      (244
                      )Total
                          cost of goods and services sold
                      
                      
                      (61,776
                      )
                      
                      (54,386
                      )
                      
                      (121,599
                      )
                      
                      (111,953
                      )**Gross
                          margin**
                      
                      
                      90,427
                      
                      
                      87,237
                      
                      
                      175,099
                      
                      
                      170,949**Operating
                          expenses:**Research
                          & development
                      
                      
                      (36,341
                      )
                      
                      (40,333
                      )
                      
                      (66,445
                      )
                      
                      (78,654
                      )Sales
                          & marketing
                      
                      
                      (6,734
                      )
                      
                      (6,053
                      )
                      
                      (14,005
                      )
                      
                      (12,119
                      )General
                          & administration
                      
                      
                      (9,197
                      )
                      
                      (15,183
                      )
                      
                      (17,774
                      )
                      
                      (27,285
                      )Amortization
                          of other intangibles
                      
                      
                      (2,458
                      )
                      
                      (3,189
                      )
                      
                      (4,796
                      )
                      
                      (6,290
                      )Other
                      
                      
                      (1,377
                      )
                      
                      1,652
                      
                      
                      (2,024
                      )
                      
                      2,814Total
                          operating expenses
                      
                      
                      (56,107
                      )
                      
                      (63,106
                      )
                      
                      (105,044
                      )
                      
                      (121,534
                      )**Operating
                          income**
                      
                      
                      34,320
                      
                      
                      24,131
                      
                      
                      70,055
                      
                      
                      49,415**Other
                          income:**Interest
                      
                      
                      3,508
                      
                      
                      2,797
                      
                      
                      6,384
                      
                      
                      4,787Other
                      
                      
                      ─
                      
                      
                      46
                      
                      
                      ─
                      
                      
                      46Total
                          other income
                      
                      
                      3,508
                      
                      
                      2,843
                      
                      
                      6,384
                      
                      
                      4,833Income
                          before income tax expense
                      
                      
                      37,828
                      
                      
                      26,974
                      
                      
                      76,439
                      
                      
                      54,248Income
                          tax expense
                      
                      
                      (11,868
                      )
                      
                      (9,090
                      )
                      
                      (23,374
                      )
                      
                      (18,747
                      )─**Net
                          income**
                      
                      $
                      25,960
                      
                      $
                      17,884
                      
                      $
                      53,065
                      
                      $
                      35,501**Net
                          income per share:**Basic
                          net income per share
                      
                      $
                      0.46
                      
                      $
                      0.33
                      
                      $
                      0.95
                      
                      $
                      0.65Diluted
                          net income per share
                      
                      $
                      0.45
                      
                      $
                      0.32
                      
                      $
                      0.92
                      
                      $
                      0.63
 The
                  accompanying notes form an integral part of these unaudited consolidated
                  financial statements.
  Page 1
 **NDS
                  Group plc**
  **Consolidated
                  Balance Sheets**
  (in
                  thousands, except share and per share amounts)
 **As
                          of**
                      
                      **As
                          of****December
                          31,**
                      
                      **June
                          30,****2005**
                      
                      **2005****(Unaudited)**
                      
                      **(See
                          Note 2)****ASSETS****Current
                          assets:**Cash
                          and cash equivalents
                      
                      $
                      379,634
                      
                      $
                      339,791Accounts
                          receivable, net
                      
                      
                      112,210
                      
                      
                      73,588Accrued
                          income
                      
                      
                      36,680
                      
                      
                      25,391Inventories
                      
                      
                      32,963
                      
                      
                      41,508Prepaid
                          expenses
                      
                      
                      11,936
                      
                      
                      15,795Other
                          current assets
                      
                      
                      3,480
                      
                      
                      3,595Total
                          current assets
                      
                      
                      576,903
                      
                      
                      499,668Property,
                          plant and equipment, net
                      
                      
                      40,254
                      
                      
                      33,962Goodwill
                      
                      
                      63,064
                      
                      
                      64,236Other
                          intangibles, net
                      
                      
                      46,578
                      
                      
                      48,537Deferred
                          tax assets
                      
                      
                      5,319
                      
                      
                      5,121Other
                          receivables
                      
                      
                      6,191
                      
                      
                      ─Other
                          non-current assets
                      
                      
                      21,874
                      
                      
                      20,374**Total
                          assets**
                      
                      $
                      760,183
                      
                      $
                      671,898**LIABILITIES
                          AND SHAREHOLDERS’ EQUITY****Current
                          liabilities:**Accounts
                          payable
                      
                      $
                      13,903
                      
                      $
                      18,336Deferred
                          income
                      
                      
                      45,246
                      
                      
                      47,175Accrued
                          payroll costs
                      
                      
                      18,449
                      
                      
                      25,069Accrued
                          expenses
                      
                      
                      15,588
                      
                      
                      21,097Income
                          tax liabilities
                      
                      
                      18,503
                      
                      
                      4,070Other
                          current liabilities
                      
                      
                      12,322
                      
                      
                      13,498Total
                          current liabilities
                      
                      
                      124,011
                      
                      
                      129,245Accrued
                          expenses
                      
                      
                      31,141
                      
                      
                      28,547Deferred
                          income
                      
                      
                      111,564
                      
                      
                      87,353**Total
                          liabilities**
                      
                      
                      266,716
                      
                      
                      245,145**Shareholders’
                          equity:**Series
                          A ordinary shares, par value $0.01 per share: 48,000,000
                          shares
                          authorized;14,119,171
                          and 13,318,546 shares outstanding as of December 31, and
                          June 30, 2005,
                          respectively
                      
                      
                      141
                      
                      
                      133Series
                          B ordinary shares, par value $0.01 per share: 52,000,000
                          shares
                          authorized;42,001,000
                          shares outstanding as of December 31, and June 30, 2005,
                          respectively
                      
                      
                      420
                      
                      
                      420Deferred
                          shares, par value £1 per share: 42,000,002 shares
                          authorizedand
                          outstanding as of December 31, and June 30, 2005,
                          respectively
                      
                      
                      64,103
                      
                      
                      64,103Additional
                          paid-in capital
                      
                      
                      514,432
                      
                      
                      498,363Accumulated
                          deficit
                      
                      
                      (127,506
                      )
                      
                      (180,571
                      )Other
                          comprehensive income
                      
                      
                      41,877
                      
                      
                      44,305**Total
                          shareholders’ equity**
                      
                      
                      493,467
                      
                      
                      426,753**Total
                          liabilities and shareholders’ equity**
                      
                      $
                      760,183
                      
                      $
                      671,898
 The
              accompanying notes form an integral part of these unaudited consolidated
              financial statements.
  Page
                  2
  **NDS
          Group plc**
  **Unaudited
          Consolidated Statements of Cash Flows**
  (in
          thousands)
 **For
                      the six months****ended
                      December 31,****2005**
                  
                  **2004****Operating
                      activities:**Net
                      income
                  
                  $
                  53,065
                  
                  $
                  35,501Adjustments
                      to reconcile net income to net cash provided by operating
                      activities:Depreciation
                  
                  
                  7,838
                  
                  
                  6,917Amortization
                      of other intangibles
                  
                  
                  4,796
                  
                  
                  6,290Stock-based
                      compensation
                  
                  
                  1,712
                  
                  
                  3,390Other
                  
                  
                  ─
                  
                  
                  (46
                  )Change
                      in operating assets and liabilities, net of acquisitions
                  
                  
                  (22,964
                  )
                  
                  (23,324
                  )Net
                      cash provided by operating activities
                  
                  
                  44,447
                  
                  
                  (22,964
                  )**Investing
                      activities:**Capital
                      expenditure
                  
                  
                  (14,632
                  )
                  
                  (8,461
                  )Business
                      acquisitions, net of cash acquired
                  
                  
                  (3,121
                  )
                  
                  (17
                  )Proceeds
                      from sale of investments
                  
                  
                  ─
                  
                  
                  232Net
                      cash used in investing activities
                  
                  
                  (17,753
                  )
                  
                  (8,246
                  )**Financing
                      activities:**Issuance
                      of shares (inclusive of excess tax benefits of $4,578 and
                      $─)
                  
                  
                  14,365
                  
                  
                  6,850**Net
                      increase in cash and cash equivalents**
                  
                  
                  41,059
                  
                  
                  27,332Cash
                      and cash equivalents, beginning of period
                  
                  
                  339,791
                  
                  
                  228,620Exchange
                      movements
                  
                  
                  (1,216
                  )
                  
                  11,019**Cash
                      and cash equivalents, end of period**
                  
                  $
                  379,634
                  
                  $
                  266,971
 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 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.
 
 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 and six month
          periods
          ended December 31, 2005 are not necessarily indicative of results that
          may be
          expected for any other interim period or for the full fiscal year ending
          June
          30, 2006.
 
 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, 2005 included in the Company’s Annual
          Report on Form 10-K as filed with the Securities and Exchange Commission
          on
          September 8, 2005. Financial information as of June 30, 2005 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, 2005,
          which
          were prepared under U.K. generally accepted accounting practice and on
          which the
          auditors’ report was unqualified, have been delivered to the Registrar of
          Companies for England and Wales.
 
 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.
 
 Certain
          fiscal 2005 amounts have been reclassified to conform to fiscal 2006
          presentation.
 
 All
          amounts are presented in thousands, except share and per share amounts
          or unless
          otherwise noted.
 
 **Note
          3.**  **Summary
          of revenue accounting policies**
  Revenue
          is
          recognized when persuasive evidence of an arrangement exists, the fees
          are fixed
          or determinable, the product or service has been delivered and collectability
          is
          assured. The Company considers the terms of each arrangement to determine
          the
          appropriate accounting treatment.
 
 Where
          an
          arrangement includes more than incidental software elements, the Company
          follows
          Statement of Position 97-2: “Software Revenue Recognition” (“SOP 97-2”). Where
          an arrangement does not involve the supply of software and that arrangement
          is
          separate from an arrangement for the supply of software, the Company follows
          Staff Accounting Bulletin No. 104: “Revenue Recognition,” (“SAB 104”) and
          Emerging Issues Task Force Issue No. 00-21: “Revenue Arrangements with Multiple
          Deliverables” (“EITF 00-21”). As the Company’s business develops, other
          accounting guidance may become applicable.
 
 Page
              4
  Many
          of
          the Company’s contracts contain multiple deliverables. Where an arrangement is
          accounted for under SOP 97-2, revenue from delivered elements is deferred
          until
          such time as the Company has vendor specific objective evidence of the
          value of
          the undelivered elements. Where the only undelivered element is post-contract
          support and the Company does not have vendor specific objective evidence
          of the
          value of that post-contract support, the revenue from the entire arrangement
          is
          recognized over the term of the support period. Where an arrangement is
          accounted for under SAB 104 and EITF 00-21, the Company considers whether
          the
          various deliverables should be considered separate units of accounting.
          In such
          circumstances, revenues from these arrangements are recognized based on
          the
          relative fair values of all the elements. Where fair value of delivered
          items
          cannot be determined, but the fair value of the undelivered elements can
          be
          determined, the fair value of the undelivered elements is deferred and
          the
          residual revenue is allocated to delivered elements. Where it is not possible
          to
          allocate consideration to separate deliverables in the manner prescribed
          by the
          accounting literature, revenue is deferred until all items have been
          delivered.
 
 *Smart
          cards and security maintenance revenue*
  Most
          of
          the arrangements under which the Company generates revenue from the sale
          of
          smart cards and the provision of security maintenance services are accounted
          for
          under SAB 104 and EITF 00-21. Revenue derived from sales of smart cards
          is
          recognized upon delivery of the smart cards in accordance with contractual
          terms. Appropriate provision is made for warranty and similar arrangements
          agreed with customers. For some contracts, the Company receives fees from
          platform operators for the maintenance of security of the conditional access
          system for a specified duration. These revenues are recognized over the
          term of
          the security contract in the period in which the security maintenance activities
          are performed. In some instances, the maintenance of security includes
          a
          requirement to replace a population of smart cards with a supply of “changeover
          cards” which is considered a separate unit of accounting. In such instances, an
          amount of maintenance income is deferred and recognized when the changeover
          cards are delivered. The amount of revenue to be deferred is based on the
          fair
          value of the undelivered future changeover cards.
 
 *Software* *revenue*
  Apart
          from
          the arrangements for the supply of smart cards and security maintenance
          services
          referred to above, most of the other arrangements under which the Company
          generates revenue involve the supply of software and are accounted for
          under SOP
          97-2. Revenue is deferred until all elements have been delivered or until
          the
          Company has vendor specific objective evidence of the fair value of the
          undelivered elements. Set-top box royalty income may continue to arise
          after all
          elements of an arrangement have been delivered. Such revenue is recognized
          when
          it is fixed or determinable, and this is typically when the Company receives
          reports from the platform operator or the set-top box manufacturer of the
          number
          of units manufactured or deployed.
 
 Revenue
          billed but not recognized is recorded in the Company’s consolidated balance
          sheet as deferred income. Where the revenue is expected to be recognized
          within
          one year of the balance sheet date, the deferred income is classified as
          a
          current liability; otherwise it is classified as a non-current
          liability.
  **Note
          4.**  **Comprehensive
          income**
  Comprehensive
          income comprises net income, foreign currency translation adjustments,
          certain
          pension adjustments and unrealized holding gains and losses on investments
          available for sale. The components of comprehensive income were as
          follows:
 **For
                      the three months**
                  
                  **For
                      the six months****ended
                      December 31,**
                  
                  **ended
                      December 31,**(in
                      thousands)
                  
                  **2005**
                  
                  **2004**
                  
                  **2005**
                  
                  **2004**Net
                      income
                  
                  $
                  25,960
                  
                  $
                  17,884
                  
                  $
                  53,065
                  
                  $
                  35,501Currency
                      translation differences (no tax effect)
                  
                  
                  (2,407
                  )
                  
                  20,577
                  
                  
                  (2,428
                  )
                  
                  15,933Other
                  
                  
                  ─
                  
                  
                  (118
                  )
                  
                  ─
                  
                  
                  (25
                  )Comprehensive
                      income
                  
                  $
                  23,553
                  
                  $
                  38,343
                  
                  $
                  50,637
                  
                  $
                  51,409
 Page
              5
  **Note
          5.**  **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
          Series A ordinary shares and Series B ordinary shares have equal rights
          except
          in respect of voting and as such have equal weighting in the calculation
          of net
          income per share and equal net income per share.
 
 The
          numerator for the calculations of net income per share is net income. The
          denominator for the calculations is the weighted average numbers of ordinary
          shares, as follows:
  **For
                      the three months**
                  
                  **For
                      the six months****ended
                      December 31,**
                  
                  **ended
                      December 31,****2005**
                  
                  **2004**
                  
                  **2005**
                  
                  **2004**Weighted
                      average number of ordinary shares in issue
                  
                  
                  55,875,405
                  
                  
                  54,631,520
                  
                  
                  55,647,429
                  
                  
                  54,423,657Effect
                      of dilutive stock options
                  
                  
                  1,811,120
                  
                  
                  2,136,310
                  
                  
                  1,893,164
                  
                  
                  2,028,706Denominator
                      for dilutive net income per share
                  
                  
                  57,686,525
                  
                  
                  56,767,830
                  
                  
                  57,540,593
                  
                  
                  56,452,363
  **Note
              6.**  **Inventories**
  Inventories
              are categorized as work-in-progress and are stated net of reserves
              of $3,228 and
              $3,398 as of December 31, and June 30, 2005, respectively.
  **Note
              7.**  **Accounts
              receivable**
  Accounts
              receivable are stated net of valuation reserves of $1,198 and $1,427
              as of
              December 31, and June 30, 2005, respectively.
 
 **Note
              8.**  **Related
              party transactions**
  The
              Company conducts business transactions with News Corporation and its
              subsidiaries and affiliates. These entities are considered to be related
              parties. Agreements covering arrangements between News Corporation
              or its
              subsidiaries or affiliates and the Company are entered into in the
              context of
              two entities over which a third entity exercises significant influence
              or
              control. There can be no assurance therefore, that each of the agreements,
              or
              the transactions provided for therein, or any amendments thereof will
              be
              affected on terms at least as favorable to the Company as could have
              been
              obtained from unaffiliated third parties. Any new contracts with related
              parties
              or significant amendments to such contracts are approved by the Audit
              Committee
              of the Company’s Board of Directors.
 
 These
              transactions are of three main types: the provision by the Company
              of technology
              and services for digital pay-television systems; the payment by the
              Company of
              royalties for the use of certain intellectual property rights; and
              the receipt
              by the Company of some administration and finance services.
  **a)**  **Provision
              of technology and services**
  Technology
              and services for digital pay-television platform operators are supplied
              to
              affiliates and subsidiaries of News Corporation. The principal related
              parties
              supplied by the Company are BSkyB, DIRECTV, DIRECTV Latin America,
              Sky Brasil,
              Sky Mexico, DTH TechCo, Sky Colombia, Sky Chile, FOXTEL and Sky Network
              Television (all of which are affiliates of News Corporation), and Sky
              Italia and
              STAR TV (both of which are subsidiaries of News Corporation). Revenue
              recognized
              from such related parties was as follows:
  **For
                          the three months**
                      
                      **For
                          the six months****ended
                          December 31,**
                      
                      **ended
                          December 31,**(in
                          thousands)
                      
                      
                      **2005**
                      
                      
                      **2004**
                      
                      
                      **2005**
                      
                      
                      **2004**Revenue
                          from related parties
                      
                      $
                      118,077
                      
                      $
                      102,395
                      
                      $
                      229,399
                      
                      $
                      207,646






Page
          6




Included
        within accounts receivable are amounts of $91,194 and $51,909 as of December
        31,
        and June 30, 2005, respectively, which are due from related parties in
        respect of normal sales transactions.
 
 **b)**  **Royalty
        payments**
  A
        royalty
        is payable to a related party in respect of certain intellectual property
        rights
        which the Company has licensed for use in certain applications supplied to
        customers. The royalty expense payable to such related parties was as
        follows:
  **For
                    the three months**
                
                **For
                    the six months****ended
                    December 31,**
                
                **ended
                    December 31,**(in
                    thousands)
                
                
                **2005**
                
                
                **2004**
                
                
                **2005**
                
                
                **2004**Royalty
                    expense payable to related parties
                
                $
                428
                
                $
                875
                
                $
                1,384
                
                $
                1,275




**c)**  **Administration
        and finance services**
  News
        Corporation provides services under a Master Intercompany Agreement which
        provides, among other things, for arrangements governing the relationship
        between the Company and News Corporation. The consideration for each of the
        services and other arrangements set forth in the Master Intercompany Agreement
        is mutually agreed and based upon allocated costs. All such consideration
        and
        any material arrangements are subject to the approval of the Audit Committee
        of
        the Company’s Board of Directors. The services covered by the Master
        Intercompany Agreement include cash management and financing, services of
        News
        Corporation employees, facility arrangements, employee matters, including
        pensions and certain other services. Amounts charged in respect of these
        services were as follows:
  **For
                    the three months**
                
                **For
                    the six months****ended
                    December 31,**
                
                **ended
                    December 31,**(in
                    thousands)
                
                
                **2005**
                
                
                **2004**
                
                
                **2005**
                
                
                **2004**Administrative
                    expenses payable to related parties
                
                $
                43
                
                $
                66
                
                $
                86
                
                $
                130


Included
      within accounts payable are amounts of $2,696 and $3,124 as of December 31,
      and
      June 30, 2005, respectively, which were owed to News Corporation in respect
      of administrative services and other operating costs paid by News Corporation
      on
      behalf of the Company.





The
      Company has a short-term loan facility of £30 million (approximately $52
      million) from News Corporation. The facility has no expiry date and no amounts
      were drawn down as of December 31, or June 30, 2005. The facility is
      considered to be adequate for the Company’s needs.





The
      Company has entered into cross-guarantees with HSBC Bank plc providing mutual
      guarantees with other subsidiaries of News Corporation for amounts owed to
      the
      bank under a collective overdraft facility of £20 million (approximately
      $34 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 December 31, 2005 or June 30, 2005
      which would be covered by these guarantees.





**Note
      9.**  **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.





Page
          7




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 believes these surviving claims are
      without merit and intends to vigorously defend against them.





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 its Second Amended Answer with Counterclaims, which
      Echostar answered on December 27, 2005. The court has set this case to go to
      trial in April of 2008.





*Sogecable
      Litigation*




On
      July
      25, 2003, Sogecable, S.A. and its subsidiary Canalsatellite Digital, S.L.,
      Spanish satellite broadcasters and customers of Canal+ Technologies SA
      (together, “Sogecable”), filed an action against the Company in the United
      States District Court for the Central District of California. Sogecable filed
      an
      amended complaint on October 9, 2003, which purported to allege claims for
      violation of the DMCA and the federal RICO statute. The amended complaint also
      purported to allege claims for interference with contract and prospective
      business advantage. The complaint sought injunctive relief, unspecified
      compensatory and exemplary damages and restitution. On December 22, 2003, all
      of
      the claims were dismissed by the court. Sogecable filed a second amended
      complaint. The Company filed a motion to dismiss the second amended complaint
      on
      March 31, 2004. On July 23, 2004, the court heard oral argument on the motion
      and advised that a formal ruling should be issued by early August. On August
      4,
      2004, the court issued an order dismissing the second amended complaint in
      its
      entirety. Sogecable had until October 4, 2004 to file a third amended complaint.
      On October 1, 2004, Sogecable notified the court that it would not be filing
      a
      third amended complaint, but would appeal the court’s entry of final judgment
      dismissing the suit to the United States Ninth Circuit Court of Appeals.
      Sogecable has filed a brief on appeal, the Company’s opposition was filed on
      August 22, 2005, and Sogecable filed its reply on September 6, 2005. The Court
      of Appeals has not yet set a date for oral argument on Sogecable’s appeal.





*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.





Page
          8





**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 the Company’s 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’s management 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
      financial statements would materially affect the Company’s financial
      position.





**Note
      10.**  **Stock
      option plans**




The
      Company has three executive stock option schemes: The NDS 1997 Executive Share
      Option Scheme (the “1997 scheme”), The NDS 1999 Executive Share Option Scheme
      (the “1999 unapproved scheme”) and The NDS UK Approved Share Option Scheme (the
“1999 approved scheme”). The provisions of each scheme are substantially the
      same, except that the 1999 approved scheme is approved by the U.K. Inland
      Revenue for the purposes of granting U.K. employees options over shares in
      the
      Company which are free from income tax in the hands of the employee under
      certain circumstances. Following the creation of the 1999 unapproved scheme,
      no
      further options will be granted under the 1997 scheme. The schemes provide
      for
      the grant of options to purchase Series A ordinary shares in the Company with
      a
      maximum term of ten years. Options granted under the schemes vest over a
      four-year period. The schemes authorize options to be granted subject to a
      maximum of 10% of the ordinary shares of the Company in issue at the date of
      grant.





In
      addition, the Company has operated employee share ownership schemes in the
      United Kingdom, Israel and the United States. These enable employees to enter
      into a fixed-term savings contract with independent financial institutions
      linked to an option to subscribe for Series A ordinary shares in the Company.
      The option price was set at a discount of between 15% and 20% of the quoted
      closing price of the Series A ordinary shares on The NASDAQ Stock Market
      (“NASDAQ”) on the last trading day before the announcement of the schemes. These
      schemes have now matured and there are currently no unvested options outstanding
      under these employee share ownership schemes.





All
      employees are entitled to participate in the plans, however (with the exception
      of the employee share ownership schemes which are open to all), management
      determines to whom and how many options are granted. The Company’s obligations
      under these stock option plans have been settled by issuing new Series A
      ordinary shares.





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


**F
                  or the six months ended December 31, 2005****Weighted**
              
              **Remaining**
              
              **Aggregate****Average**
              
              **Contractual**
              
              **Intrinsic****Exercise**
              
              **Term**
              
              **Value****Number**
              
              **Price**
              
              **(in
                  years)**
              
              **(in
                  thousands)**Outstanding
                  at July 1, 2005
              
              
              4,337,513
              
              $
              18.17Granted
              
              
              ─
              
              
              ─Exercised
              
              
              (800,625
              )
              $
              11.99Forfeited
              
              
              (19,935
              )
              $
              15.79Expired
              
              
              ─
              
              
              ─Outstanding
                  at December 31, 2005
              
              
              3,516,953
              
              $
              19.59
              
              
              6.1
              
              $
              76,243Vested
                  or expected to vest at December 31, 2005
              
              
              3,500,769
              
              $
              19.59
              
              
              6.1
              
              $
              75,894Exercisable
                  at December 31, 2005
              
              
              2,918,056
              
              $
              19.88
              
              
              5.7
              
              $
              62,480






Page
          9




**For
                  the three months**
              
              **For
                  the six months****ended
                  December 31,**
              
              **ended
                  December 31,**(in
                  thousands, except per share amounts)
              
              
              **2005**
              
              
              **2004**
              
              
              **2005**
              
              
              **2004**Weighted
                  average fair value of stock options grantedin
                  period using the assumptions set out below
              
              
              ─
              
              $
              23.71
              
              
              ─
              
              $
              23.50Total
                  intrinsic value of options exercised
              
              $
              15,680
              
              $
              10,476
              
              $
              20,391
              
              $
              11,493Stock-based
                  compensation cost included within the statement of
                  operationsOperating
                  expenses
              
              $
              735
              
              $
              859
              
              $
              1,712
              
              $
              3,944Tax
                  benefit
              
              
              (151
              )
              
              ─
              
              
              (278
              )
              
              (554
              )Net
                  of tax amount
              
              $
              584
              
              $
              859
              
              $
              1,434
              
              $
              3,390Cash
                  received from exercise of stock options
              
              $
              6,990
              
              $
              6,070
              
              $
              9,787
              
              $
              6,850Tax
                  benefit from exercise of stock options
              
              $
              3,778
              
              $
              ─
              
              $
              4,578
              
              $
              ─


As
      of
      December 31, 2005, the total compensation cost related to non vested awards
      not
      yet recognized was approximately $2.6 million and the weighted average
      period over which it is expected to be recognized is 1.1 years. No stock options
      have been granted to date in fiscal 2006. However, management may grant options
      later in the fiscal year, which would result in additional operating expenses
      being recorded.


The
        fair
        value of each stock option grant is estimated on the date of grant using
        the
        Black-Scholes option-pricing model. No stock options were granted in the
        six
        months ended December 31, 2005. The weighted average of the assumptions used
        for
        stock options granted in the six months ended December 31, 2004 were as follows:
        Risk free interest rate ─ 4.22%; Dividend yield ─ nil; Expected volatility ─
80%; Expected life of stock options ─ 6.25 years. Expected volatility was based
        on historical volatility of the Company’s American Depositary Shares as quoted
        on NASDAQ. The expected life of stock options granted was derived from the
        historical activity of the Company’s stock options and represented the period of
        time that stock options granted were expected to be outstanding. The weighted
        average risk-free rate was the average interest rates of U.S. government
        bonds
        of comparable term to the stock options on the dates of the stock option
        grants.
        The dividend yield was assumed to be nil because the Company has not paid,
        and
        management does not currently expect to pay, a dividend. The stock options
        were
        granted at an exercise price equal to the closing market price on the last
        trading day before the date of grant. The terms of certain stock options
        were
        modified during the year ended June 30, 2005, as described
        below.
 
 In
        December 2004, the Financial Accounting Standards Board issued Statement
        of
        Financial Accounting Standards (“SFAS”) No. 123 (R), “Share-Based Payment”. This
        standard requires the cost of employee compensation paid with equity instruments
        to be measured based on grant date fair values. That cost is recognized over
        the
        vesting period. SFAS No. 123 (R) became effective for the Company on July
        1,
        2005. The Company has adopted the modified prospective method to transition
        to
        SFAS No. 123 (R). For all periods ending prior to July 1, 2005, stock-based
        compensation was accounted for by using the intrinsic value-based method
        in
        accordance with APB No. 25, “Accounting for Stock Issued to Employees” (“APB25”)
        and the Company followed the disclosure-only provisions of SFAS No. 123,
        “Accounting for Stock-Based Compensation.” As a result of adopting SFAS No. 123
        (R) on July 1, 2005, the Company’s income before income taxes and net income for
        the three and six month periods ended December 31, 2005 was approximately
        $128
        and $53 higher, respectively, than if it had continued to account for
        stock-based compensation under APB25.
 
 The
        following table reflects the effect on net income and earnings per share
        as if
        the Company had applied the fair value recognition provisions for stock
        option-based employee compensation using a Black-Scholes option valuation
        methodology, for periods prior to the adoption of
        SFAS No. 123 (R). These pro forma effects may not be
        representative of future stock option-based compensation expense since the
        estimated fair value of stock options on the date of grant is amortized to
        expense over the vesting period and additional stock options may be granted
        in
        future years. Additionally, the terms of certain stock options held by the
        Company’s previous Chief Financial Officer were modified on his departure, and
        the vesting of certain stock options was accelerated on June 27, 2005 (as
        discussed below).
  Page
            10


**For
                the three**
            
            **For
                the six****months
                ended**
            
            **months
                ended**(in
              thousands, except per share amounts)
            
            
            
            **December
                31, 2004**
            
            **December
                31, 2004**Net
                income, as reported
            
            
            
            
            $
            17,884
            
            $
            35,501Add:
                Stock option-based compensation cost included in the
                determinationof
                net income as reported (net of tax benefits of $─ and
                $554)
            
            
            
            
            
            859
            
            
            3,390Deduct:
                Total stock option-based compensation determined underfair
                value based method for all awards, (net of tax benefits of $509 and
                $570)
            
            
            
            
            
            (1,869
            )
            
            (4,071
            )Pro-forma
                net income
            
            
            
            
            $
            16,874
            
            $
            34,820Net
                income per shareBasic
                net income per share, as reported
            
            
            
            
            $
            0.33
            
            $
            0.65Diluted
                net income per share, as reported
            
            
            
            
            $
            0.32
            
            $
            0.63Pro-forma
                basic net income per share
            
            
            
            
            $
            0.31
            
            $
            0.64Pro-forma
                diluted net income per share
            
            
            
            
            $
            0.30
            
            $
            0.62


In
      recognition of his contribution to the Company, the Remuneration Committee
      of
      the Company’s Board of Directors (“the Remuneration Committee”) modified the
      terms of certain vested stock options held by the previous Chief Financial
      Officer such that those stock options could have been exercised at any time
      prior to September 20, 2005 rather than lapsing on his departure in October
      2004. The additional charge recorded in the statement of operations in the
      six
      months ended December 31, 2004 was $1,293, net of tax of $554.





On
      June
      27, 2005, the Remuneration Committee approved the acceleration of vesting of
      unvested out-of-the-money stock options granted under the Company’s stock option
      plans. The affected stock options were those with exercise prices greater than
      $32.50 per share, which was the closing price of the Company’s Series A ordinary
      shares (as traded on NASDAQ in the form of American Depositary Shares) on June
      21, 2005. As a result of this action, the vesting of approximately 551,000
      previously unvested stock options was accelerated and those stock options became
      immediately exercisable. The action did not accelerate the vesting of any of
      the
      unvested stock options held by Directors, the Chief Executive Officer or the
      Chief Financial Officer.





The
      Remuneration Committee’s decision to accelerate the vesting of these stock
      options was in anticipation of compensation expense to be recorded subsequent
      to
      the effective date of SFAS No. 123 (R) on July 1, 2005. The acceleration
      eliminated approximately $9.6 million ($8.8 million net of tax) from the
      Company’s future consolidated statements of operations, of which $5.1 million
      ($4.7 million net of tax), $2.7 million ($2.5 million net of tax), $1.4 million
      ($1.2 million net of tax), and $0.4 million ($0.4 million net of tax)
      would have been recognized in fiscal years 2006, 2007, 2008 and 2009, following
      the effective date of SFAS No. 123 (R).




**Note
      11.**  **Abandoned
      property leases**




In
      fiscal
      2001, the Company decided to abandon its leased premises at Heathrow, England
      which the Company vacated in September 2000. Additional accruals were made
      in
      fiscal 2003, in fiscal 2004, and again in the three months ended
      December 31, 2004, as the Company was unable to assign the lease back to a
      former tenant. During the three months ended March 31, 2005 (the third quarter
      of the fiscal year ended June 30, 2005), the Company committed to reoccupy
      most
      of the premises and the Company reversed a part of the accrual previously made
      in that period; a further reversal was made in the three months ended September
      30, 2005. The Company reoccupied part of the premises during the three months
      ended December 31, 2005; there are no plans to re-occupy the remaining part
      of
      the premises. All amounts accrued and reversed have been included within general
      and administrative expenses in the consolidated statement of operations, and
      within accrued expenses in the consolidated balance sheet. Additionally, during
      the three months ended December 31, 2005, the Company consolidated its U.S.
      operations at a single facility at Costa Mesa, California and abandoned its
      two
      previous premises in California. An accrual for obligations from the cease
      use
      date until the termination of the leases of those two abandoned properties
      was
      recorded during the three months ended December 31, 2005 in the consolidated
      statement of operations within cost of goods and services sold ─
operations.




Page
          11


The
      total
      accrual of $510 as of December 31, 2005 represents the Company’s remaining
      obligations under the leases for all these abandoned properties.




**For
                  the three months**
              
              **For
                  the six months****ended
                  December 31,**
              
              **ended
                  December 31,**(in
                  thousands)
              
              
              **2005**
              
              
              **2004**
              
              
              **2005**
              
              
              **2004**Beginning
                  of period
              
              $
              402
              
              $
              8,053
              
              $
              1,141
              
              $
              8,727Additions
              
              
              652
              
              
              2,973
              
              
              652
              
              
              2,973Reversals
              
              
              ─
              
              
              ─
              
              
              (224
              )
              
              ─Used
              
              
              (531
              )
              
              (546
              )
              
              (1,049
              )
              
              (1,091
              )Foreign
                  exchange movements
              
              
              (13
              )
              
              652
              
              
              (10
              )
              
              523End
                  of period
              
              $
              510
              
              $
              11,132
              
              $
              510
              
              $
              11,132


The
      cumulative amount paid through December 31, 2005 was $10,408 and the total
      amount charged to the profit and loss net of releases up to December 31, 2005
      was $10,933.




**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**
              
              **For
                  the six months****ended
                  December 31,**
              
              **ended
                  December 31,**(in
                  thousands)
              
              
              **2005**
              
              
              **2004**
              
              
              **2005**
              
              
              **2004**Service
                  cost
              
              $
              43
              
              $
              43
              
              $
              88
              
              $
              85Interest
                  cost
              
              
              241
              
              
              224
              
              
              486
              
              
              443Expected
                  return on plan assets
              
              
              (203
              )
              
              (167
              )
              
              (410
              )
              
              (330
              )Amortization
                  of unrecognized net loss
              
              
              144
              
              
              112
              
              
              290
              
              
              221$
              225
              
              $
              212
              
              $
              454
              
              $
              419


During
      the
      three months ended December 31, 2005, the Company made an additional voluntary
      cash contribution of $0.9 million into the defined benefit
      scheme.




Page
          12


**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 the heading “Risk Factors”
below, in the Company’s Annual Report on Form 10-K as filed with the Securities
      and Exchange Commission (“SEC”) on September 8, 2005 (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 the Company’s financial condition,
      changes in financial condition and results of operations, and is organized
      as
      follows:





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





·
            ***Critical
                accounting policies and estimates***─
                This section discusses our revenue accounting policies which we consider
                important to an understanding of our results of operations, and which
                require significant judgment and estimates on the part of management
                in
                application.





·
            ***Results
                of operations ─***This section provides an analysis of our results of operations for
                the
                three and six month periods ended December 31, 2005 and 2004. 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 six months
                ended December 31, 2005 and 2004. 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. 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 invest in a
      broadcast infrastructure to deliver video and data to multiple subscribers.
      A
      broadcast distribution infrastructure consists of three main
      elements:





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





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





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





Page
          13




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





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





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





We
      work
      with suppliers of other components of a broadcast platform, such as broadcast
      equipment and set-top box manufacturers. 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 70% of our revenues in
      the
      six months ended December 31, 2005. We expect that a limited number of customers
      will continue to contribute a significant portion of our revenues. If a large
      customer purchases significantly less of our products or services, defers or
      cancels orders or terminates its relationship with us, our revenues could
      decline significantly and as a result, our business, operating results and
      financial condition could be materially adversely affected.





We
      compete
      primarily with technologies such as NagraVision (developed by Kudelski SA),
      DigiCypher (developed by Motorola, Inc.), Power Key (developed by
      Scientific-Atlanta, Inc.), OpenTV (developed by OpenTV Corp.) and MSTV
      (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, 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.





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. If our customers’ subscriber numbers decline or do not continue
      to increase, we are unlikely to be able to generate substantial revenue growth
      or sustain our current revenue levels and, as a consequence, our business,
      operating results and financial condition could be materially adversely
      affected.





Unauthorized
      viewing and use of content may be accomplished by counterfeiting our technology
      or otherwise circumventing its security features. A significant incidence of
      signal theft could require the replacement of a platform operator’s smart cards
      sooner than otherwise planned. In those cases where we have accepted specific
      responsibilities for maintaining the security of a platform operator’s
      conditional access system, significant costs could be imposed on us if a
      security breach requires an accelerated replacement of smart cards.





Revenues
      can vary from period to period as our revenues reflect a small number of
      relatively large orders for our technology and services. These generally have
      long sales and order cycles, and delivery and acceptance of our products and
      services fluctuate over the course of these cycles. Our accounting policies
      frequently 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.





Page
          14




**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
      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 revenues from established technologies as
      comprising revenue from conditional access, middleware and program guide
      technologies and fees from the customization and integration of those
      technologies into head-end systems and set-top boxes. Revenues from these
      technologies are allocated between the three different revenue streams
      identified above. We aggregate under our separate New technologies revenue
      stream all revenues which we derive from DVR technologies, technologies
      involving the distribution of video content over broadband networks (“IP-TV”),
      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 the physical and processing costs of smart cards,
      personnel, travel and facilities costs, royalties paid for the right to use
      and
      sub-license certain intellectual property rights owned by third parties and
      the
      amortization of intangible assets, being intellectual property rights which
      we
      have acquired for incorporation within our technologies.





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





Personnel
      and facilities costs are allocated to four categories: operations, research
      and
      development, sales and marketing, and general and administration. We have
      employees and facilities in the United Kingdom, the United States, Israel,
      India, France, Denmark, Korea, China, Hong Kong and Australia.





We
      classify operations costs as part of cost of goods and services sold. Operations
      costs include the costs of personnel and related costs, including an allocation
      of facilities costs, associated with our customer support and with integration
      and development activities undertaken under a customer contract. Operations
      costs include the costs of operating our two smart card processing plants,
      including the depreciation of our smart card processing equipment. Our
      operations costs have increased during the first six months of fiscal 2006
      as a
      result of a greater proportion of our total technical employees being deployed
      on customer projects, as well as an increase in the total number of our
      technical employees.





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. Our research and development costs have declined
      during the first six months of fiscal 2006. As a result of a greater proportion
      of our technical employees being deployed on customer projects (and the cost
      therefore being included within operations), a corresponding lower proportion
      of
      our technical employees have been deployed on developing our technology and
      adapting it for specific customer requirements.





Page
          15




Sales
      and
      marketing costs mainly consist of personnel and related costs, including an
      allocation of facilities costs, of our sales and marketing staff in the United
      Kingdom, Europe and the Middle East, the United States and the Asia-Pacific
      region. Marketing costs also include advertising, exhibitions, marketing
      communications and demonstration activities.





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





**Critical
      accounting policies and estimates**




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





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





**Conditional
      access revenues**




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





*Conditional
      access ─ Smart cards*




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





*Conditional
      access ─ Security services*




For
      some
      contracts, we receive fees from platform operators for the maintenance of
      security of conditional access systems for a specified duration which is
      typically between 24 and 48 months. Such services provide the platform operator
      with a greater level of security than would be obtained by simply relying on
      the
      security features contained within the smart card. Fees are received over the
      duration of the agreed service period and are related to the number of
      subscribers or authorized smart cards of the relevant broadcast platform. These
      revenues are recognized over the term of the security contract in the period
      in
      which the security maintenance activities are performed. In some instances,
      the
      maintenance of security includes a requirement to replace a population of smart
      cards with a supply of “changeover cards” which is considered a separate unit of
      accounting. In such instances, an amount of maintenance income is deferred
      and
      recognized when the changeover cards are delivered. The amount of revenue to
      be
      deferred is based on the fair value of the undelivered future changeover cards.
      The estimate of the amount of revenue to be deferred requires management to
      make
      assessments of the timing of the card changeover, the volume of changeover
      cards
      to be supplied and a fair unit revenue for those smart cards.





There
      were
      no card changeovers during the three and six month periods ended December 31,
      2005 or 2004, although we have obligations to supply changeover cards in future
      periods. Accordingly the amount of revenue deferred under this type of
      arrangement has increased from $87.9 million as of June 30, 2005 to $111.6
      million as of December 31, 2005.





**Integration,
      development and support revenues**




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





Page
          16




**License
      fees and royalty revenues**




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





**Results
      of operations**




**Commentary
      on three and six month periods ended December 31, 2005**




**Revenue**




Revenue
      for the periods under review was as follows:


**For
                  the three months****ended
                  December 31,**(in
                  thousands)
              
              
              **2005**
              
              
              **2004**
              
              
              **Change**
              
              
              **%
                  Change**Conditional
                  access
              
              $
              87,619
              
              $
              86,719
              
              $
              900
              
              
              +1
              %Integration,
                  development & support
              
              
              11,860
              
              
              12,017
              
              
              (157
              )
              
              -1
              %License
                  fees & royalties
              
              
              26,941
              
              
              18,838
              
              
              8,103
              
              
              +43
              %New
                  technologies
              
              
              23,047
              
              
              21,540
              
              
              1,507
              
              
              +7
              %Other
              
              
              2,736
              
              
              2,509
              
              
              227
              
              
              +9
              %Total
                  revenue
              
              $
              152,203
              
              $
              141,623
              
              $
              10,580
              
              
              +7
              %**For
                  the six months****ended
                  December 31,**(in
                  thousands)
              
              
              **2005**
              
              
              **2004**
              
              
              **Change**
              
              
              **%
                  Change**Conditional
                  access
              
              $
              170,764
              
              $
              177,043
              
              $
              (6,279
              )
              
              -4
              %Integration,
                  development & support
              
              
              25,694
              
              
              28,825
              
              
              (3,131
              )
              
              -11
              %License
                  fees & royalties
              
              
              51,507
              
              
              34,838
              
              
              16,669
              
              
              +48
              %New
                  technologies
              
              
              43,906
              
              
              38,510
              
              
              5,396
              
              
              +14
              %Other
              
              
              4,827
              
              
              3,686
              
              
              1,141
              
              
              +31
              %Total
                  revenue
              
              $
              296,698
              
              $
              282,902
              
              $
              13,796
              
              
              +5
              %


The
      increase in conditional access revenues in the three months ended December
      31,
      2005 compared to the corresponding period in fiscal 2005 is due to higher
      security fees, offset in part by lower deliveries of smart cards. For the six
      months ended December 31, 2005, the increase in security fees was more than
      offset by lower deliveries of smart cards in the corresponding
      period.




Page
          17


The
      quantity of smart cards delivered in each period was as follows:


**For
                  the three months**
              
              **For
                  the six months****ended
                  December 31,**
              
              **ended
                  December 31,**(in
                  millions)
              
              
              **2005**
              
              
              **2004**
              
              
              **2005**
              
              
              **2004**Number
                  of smart cards delivered
              
              
              6.1
              
              
              8.1
              
              
              11.6
              
              
              17.0


The
      decrease in smart card sales in the three and six month periods ended December
      31, 2005 compared to the corresponding periods in fiscal 2005 reflects lower
      demand from DIRECTV and Sky Italia. In the prior fiscal year, shipments were
      exceptionally high due to a new DIRECTV contract and the migration of all Sky
      Italia customers to NDS technology.





The
      number
      of authorized smart cards in use at our broadcast platform customers has grown
      as follows:


**For
                  the three months**
              
              **For
                  the six months****ended
                  December 31,**
              
              **ended
                  December 31,**(in
                  millions)
              
              
              **2005**
              
              
              **2004**
              
              
              **2005**
              
              
              **2004**Number
                  of authorized cards, beginning of period
              
              
              58.5
              
              
              47.8
              
              
              56.7
              
              
              44.0Net
                  additions
              
              
              2.9
              
              
              4.0
              
              
              4.7
              
              
              7.8Number
                  of authorized cards, end of period
              
              
              61.4
              
              
              51.8
              
              
              61.4
              
              
              51.8


There
      has
      been growth in authorized cards in use across most of our broadcast platform
      customers. However, the increases in the three and six month periods ended
      December 31, 2005 were less than the increases in the corresponding respective
      periods of the previous fiscal year which were favorably impacted by the
      migration of Sky Italia subscribers to NDS technology.





Revenues
      from integration, development and support decreased by 1% in the three months
      ended December 31, 2005, compared to the corresponding quarter of the previous
      fiscal year, and by 11% in the six months ended December 31, 2005, compared
      to
      the corresponding period of the previous fiscal year. Revenue in the first
      six
      months of fiscal 2006 from integration, development and support related to
      the
      delivery of a series of enhancements to our customers and some middleware
      development revenue. The prior year included revenue from the migration of
      Sky
      Italia subscribers to NDS technology.





Revenues
      from license fees and royalties increased by 43% in the three months ended
      December 31, 2005 and by 48% in the six months then ended, compared to the
      corresponding respective periods in fiscal 2005. The increase was mainly due
      to
      middleware supplied to DIRECTV, who, in early summer 2005, commenced the
      download of our MediaHighway middleware to certain models of set-top boxes
      in
      use by their subscribers. The increase in the cumulative number of
      MediaHighway-enabled set-top boxes in each period was as follows:


**For
                  the three months**
              
              **For
                  the six months****ended
                  December 31,**
              
              **ended
                  December 31,**(in
                  millions)
              
              
              **2005**
              
              
              **2004**
              
              
              **2005**
              
              
              **2004**Number
                  of MediaHighway-enabled set-top boxes,beginning
                  of period
              
              
              26.7
              
              
              18.8
              
              
              20.4
              
              
              18.4Additions
              
              
              7.4
              
              
              0.5
              
              
              13.7
              
              
              0.9Number
                  of MediaHighway-enabled set-top, end of period
              
              
              34.1
              
              
              19.3
              
              
              34.1
              
              
              19.3


The
        increase in revenues from new technologies in the three and six month periods
        ended December 31, 2005, compared to the corresponding period of the previous
        fiscal year, was due to the increase in revenue from interactive infrastructure,
        gaming applications and our Synamedia IP-TV technologies. This was due to
        the
        higher number of subscribers using our technology and the addition of our
        technology on new platforms. We also received higher development and royalty
        income related to the deployment of our advanced DVR technologies by several
        of
        our customers.
  Page
            18


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


**For
                  the three months**
              
              **For
                  the six months****ended
                  December 31,**
              
              **ended
                  December 31,**(in
                  millions)
              
              
              **2005**
              
              
              **2004**
              
              
              **2005**
              
              
              **2004**Number
                  of DVR-enabled set-top boxes, beginning of period
              
              
              1.7
              
              
              0.7
              
              
              1.4
              
              
              0.4Additions
              
              
              0.3
              
              
              0.2
              
              
              0.6
              
              
              0.5Number
                  of DVR-enabled set-top, end of period
              
              
              2.0
              
              
              0.9
              
              
              2.0
              
              
              0.9


During
      the
      quarter DIRECTV commenced deployment of our DVR technology within their new
      generation set-top box. Our revenues under our set-top box technology contract
      with DIRECTV are substantially dependent upon the number of DVR set-top boxes
      manufactured and deployed. We expect such revenues to increase in the
      future.





In
      addition to the matters referred to above, comparisons of revenues for the
      three
      and six month periods ended December 31, 2005 to the corresponding periods
      of
      the previous fiscal year were also affected by the relative strength of the
      U.S.
      dollar in the first six months of fiscal 2006 compared to the first six months
      of fiscal 2005. Approximately 50% of our revenues are denominated in currencies
      other than the U.S. dollar (principally pounds sterling and euros). We estimate
      that the stronger U.S. dollar has adversely impacted our total reported revenues
      by approximately 2%.





**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
                  December 31,**(in
                thousands)
              
              
              
              **2005**
              
              **2004**
              
              **Change**
              
              **%
                  Change**Smart
                  card costs
              
              
              
              
              $
              23,082
              
              $
              32,543
              
              $
              (9,461
              )
              
              -29
              %Operations
              
              
              
              
              
              34,902
              
              
              17,056
              
              
              17,846
              
              
              **Royalties
              
              
              
              
              
              2,781
              
              
              4,683
              
              
              (1,902
              )
              
              -41
              %Other
              
              
              
              
              
              1,011
              
              
              104
              
              
              907
              
              
              **Total
                  cost of goods and services sold
              
              
              
              
              $
              61,776
              
              $
              54,386
              
              $
              7,390
              
              
              +14
              %Gross
                  margin
              
              
              
              
              $
              90,427
              
              $
              87,237
              
              $
              3,190
              
              
              +4
              %Gross
                  margin as a percentage of revenues
              
              
              
              
              
              59.4
              %
              
              61.6
              %
              
              -2.2
              %
              
              ****:
                  Not meaningful.**For
                  the six months****ended
                  December 31,**(in
                  thousands)
              
              
              
              
              
              **2005**
              
              
              **2004**
              
              
              **Change**
              
              
              **%
                  Change**Smart
                  card costs
              
              
              
              
              $
              44,707
              
              $
              71,342
              
              $
              (26,635
              )
              
              -37
              %Operations
              
              
              
              
              
              68,581
              
              
              32,609
              
              
              35,972
              
              
              **Royalties
              
              
              
              
              
              5,678
              
              
              7,758
              
              
              (2,080
              )
              
              -27
              %Other
              
              
              
              
              
              2,633
              
              
              244
              
              
              2,389
              
              
              **Total
                  cost of goods and services sold
              
              
              
              
              $
              121,599
              
              $
              111,953
              
              $
              9,646
              
              
              +9
              %Gross
                  margin
              
              
              
              
              $
              175,099
              
              $
              170,949
              
              $
              4,150
              
              
              +2
              %Gross
                  margin as a percentage of revenues
              
              
              
              
              
              59.0
              %
              
              60.4
              %
              
              -1.4
              %
              
              ****:
                  Not meaningful.






Page
          19


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.





The
      decrease in smart card costs in the three and six month periods ended December
      31, 2005 compared to the corresponding periods of the previous fiscal year
      was
      due to the lower volume of smart cards delivered in the periods as noted above.
      Operations costs include employee and facilities costs related to smart card
      processing, customer support and development projects undertaken under customer
      contracts. The increase over the corresponding period of the prior 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 a
      function of particular revenue items and the change in royalty expense for
      the
      periods was due to changes in the mix of revenues.





As
      a
      consequence of these factors, gross margin as a percentage of revenues was
      59.4%
      for the three months ended December 31, 2005, compared to 61.6% for the
      corresponding period of the prior fiscal year. For the six months ended December
      31, 2005, gross margin as a percentage of revenues was 59.0%, compared to 60.4%
      for the corresponding period of the prior fiscal year.





**Operating
      expenses**




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


**For
                  the three months****ended
                  December 31,**(in
                  thousands)
              
              
              **2005**
              
              
              **2004**
              
              
              **Change**
              
              
              **%
                  Change**Research
                  & development
              
              $
              36,341
              
              $
              40,333
              
              $
              (3,992
              )
              
              -10
              %Sales
                  & marketing
              
              
              6,734
              
              
              6,053
              
              
              681
              
              
              +11
              %General
                  & administration
              
              
              9,197
              
              
              15,183
              
              
              (5,986
              )
              
              -39
              %Amortization
                  of intangibles
              
              
              2,458
              
              
              3,189
              
              
              (731
              )
              
              -23
              %Other
              
              
              1,377
              
              
              (1,652
              )
              
              3,029
              
              
              **Total
                  operating expenses
              
              $
              56,107
              
              $
              63,106
              
              $
              (6,999
              )
              
              -11
              %**:
                  Not meaningful.**For
                  the six months****ended
                  December 31,**(in
                  thousands)
              
              
              **2005**
              
              
              **2004**
              
              
              **Change**
              
              
              **%
                  Change**Research
                  & development
              
              $
              66,445
              
              $
              78,654
              
              $
              (12,209
              )
              
              -16
              %Sales
                  & marketing
              
              
              14,005
              
              
              12,119
              
              
              1,886
              
              
              +16
              %General
                  & administration
              
              
              17,774
              
              
              27,285
              
              
              (9,511
              )
              
              -35
              %Amortization
                  of intangibles
              
              
              4,796
              
              
              6,290
              
              
              (1,494
              )
              
              -24
              %Other
              
              
              2,024
              
              
              (2,814
              )
              
              4,838
              
              
              **Total
                  operating expenses
              
              $
              105,044
              
              $
              121,534
              
              $
              (16,490
              )
              
              -14
              %**:
                  Not meaningful.


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




Page
          20


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


**For
                  the three months**
              
              **For
                  the six months****ended
                  December 31,**
              
              **ended
                  December 31,****2005**
              
              **2004**
              
              **2005**
              
              **2004**Number
                  of employees, beginning of period
              
              
              2,640
              
              
              2,119
              
              
              2,508
              
              
              2,004Additions
              
              
              85
              
              
              115
              
              
              217
              
              
              230Number
                  of employees, end of period
              
              
              2,725
              
              
              2,234
              
              
              2,725
              
              
              2,234


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





A
      higher
      proportion of our engineering activities have been involved in
      revenue-generating projects for our customers and this has resulted in a higher
      amount and proportion of the total costs of our technical employees being
      classified as cost of goods and services sold ─ operations. The residual costs
      of our technical employees represent research and development expenses, being
      the cost of employees and related items associated with research activities
      and
      development activities undertaken at our risk. Such activities involve a mixture
      of internal research and software development projects focused on the digital
      broadcasting industry and projects focused on improving functionality to our
      existing product portfolio. Research and development expenses decreased by
      10%
      and 16% for the three and six month periods ended December 31, 2005,
      respectively, compared to the corresponding periods of the prior fiscal year
      as
      a result of a lower proportion of development projects being undertaken at
      our
      risk. In addition, in the six months ended December 31, 2005, we received a
      $5.3
      million grant from the French government as a consequence of being engaged
      in
      eligible research projects.





During
      the
      three and six month periods ended December 31, 2005, sales and marketing
      expenses increased by 11% and 16%, respectively, as a result of increased
      activity, particularly in Europe and Asia.





During
      the
      three and six month periods ended December 31, 2005, general and administrative
      expenses decreased by 39% and 24%, respectively. During the three months ended
      December 31, 2004, we recorded an accrual of $3.0 million in respect of
      lease commitments for a property at Heathrow, England which we had abandoned
      in
      2000. Subsequent to December 31, 2004 management committed to reoccupy part
      of these premises and the accrual was reversed in the three months ended March
      31, 2005 (the third quarter of fiscal 2005). Additionally, legal expenses and
      stock-based compensation expenses were lower in the three and six month periods
      ended December 31, 2005 than in the corresponding periods of the prior fiscal
      year.





In
      addition to the matters referred to above, comparisons of expenses for the
      three
      and six month periods ended December 31, 2005 to the corresponding periods
      of
      the previous fiscal year were also affected by the relative strength of the
      U.S.
      dollar in the first six months of fiscal 2006 compared to the first six months
      of fiscal 2005. Approximately 49% of our total expenses are denominated in
      currencies other than the U.S. dollar (principally pounds sterling and euros).
      We estimate that the stronger U.S. dollar has favorably impacted our total
      reported expenses by approximately 2%.





**Operating
      income and other items**




As
      a
      result of the factors outlined above, operating income was $34.3 million (or
      22.5% of revenue) for the three months ended December 31, 2005, compared to
      $24.1 million (or 17.0% of revenue) for the corresponding period of the previous
      fiscal year. For the six months ended December 31, 2005, operating income was
      $70.1 million (or 23.6% of revenue) compared to $49.4 million (or 17.5% of
      revenue), for the corresponding period of the previous fiscal year.





Interest
      income earned on cash deposits was $3.5 million and $6.4 million for the three
      and six month periods ended December 31, 2005, respectively, compared to
      $2.8 million and $4.8 million, respectively, for the corresponding period of
      the
      previous fiscal year. The increases were due to higher average cash balances
      and
      higher interest rates.





Our
      effective tax rate was 31.4% and 30.6% for the three and six month periods
      ended
      December 31, 2005, respectively, compared to 33.7% and 34.6%, respectively,
      for
      the corresponding period of the previous fiscal year. The decrease in the rates
      was due to lower effective tax rates in our non-U.K. operations.




Page
          21




As
        a
        consequence of all these factors, net income for the three months ended December
        31, 2005 was $26.0 million, or $0.46 per share ($0.45 per share on a diluted
        basis), compared to $17.9 million, or $0.33 per share ($0.32 per share on
        a
        diluted basis), for the three months ended December 31, 2004. For the six
        months
        ended December 31, 2005 the factors described above resulted in net income
        of
        $53.1 million, or $0.95 per share ($0.92 on a diluted basis), compared to
        $35.5
        million, or $0.65 per share ($0.63 per share on a diluted basis), for the
        corresponding period of the prior fiscal year.
 
 **Recent
        accounting pronouncements**
  Total
        operating expenses for the three and six month periods ended December 31,
        2005
        include a charge in respect of stock option expenses of $0.7 million and
        $1.7
        million, respectively. The equivalent charges in the corresponding period
        of the
        prior fiscal year amounted to $0.9 million and $3.9 million,
        respectively.
 
 In
        December 2004, the Financial Accounting Standards Board issued Statement
        of
        Financial Accounting Standards No. 123 (R), “Share-Based Payment”
(“SFAS No. 123(R)”). This standard requires the cost of employee compensation
        paid with equity instruments to be measured based on grant-date fair values.
        That cost is recognized over the vesting period. SFAS No. 123 (R) became
        effective for the Company on July 1, 2005. We have adopted the modified
        prospective method to transition to the SFAS No. 123 (R). The charge recorded
        in
        the corresponding period of the prior fiscal year arose only in respect of
        stock
        options whose terms had been modified because stock option compensation was
        accounted for by using the intrinsic value-based method in accordance with
        APB
        No. 25, “Accounting for Stock Issued to Employees” (“APB25”). As a result of
        adopting SFAS No. 123 (R) on July 1, 2005, our income before income taxes
        and net income for the three and six month periods ended December 31, 2005
        was approximately $128 and $53 higher, respectively, than if we had continued
        to
        account for stock-based compensation under APB25.
 
 Additionally,
        in June 2005, the Remuneration Committee of our Board of Directors modified
        the
        terms of certain unvested out-of-the-money stock options granted under our
        stock
        option plans. The Remuneration Committee’s decision to accelerate the vesting of
        these stock options was in anticipation of compensation expense to be recorded
        subsequent to the effective date of SFAS No. 123 (R) on July 1, 2005. The
        acceleration eliminated approximately $1.7 million ($1.5 million net of tax)
        which would otherwise have been recorded as an operating expense in the three
        months ended December 31, 2005. For the six months ended December 31, 2005,
        the
        acceleration eliminated approximately $3.4 million ($3.1 million net of tax)
        which would otherwise have been recorded as an operating expense.
 
 SFAS
        No.
        123 (R) also requires excess tax benefits realized on the exercise of stock
        options to be shown as a financing cash inflow rather then as part of cash
        provided by operating activities. The amount so recorded in the six months
        ended
        December 31, 2005 was $4.6 million.
 
 As
        of
        December 31, 2005, the total compensation cost related to non-vested awards
        not
        yet recognized was approximately $2.6 million and the weighted average
        period over which it is expected to be recognized was 1.1 years. No stock
        options have been granted to date in fiscal 2006; however we may grant stock
        options later in the fiscal year, which would result in additional operating
        expenses being recorded. Further information about the effect of adopting
        SFAS
        No. 123(R) is provided in Note 10 to the accompanying unaudited consolidated
        financial statements.
 
 **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
        December 31, 2005, we had cash and cash equivalents of $380 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 December
        31,
        2005, and as of the date of this quarterly report, we have an unused credit
        facility to borrow up to £30 million (equivalent to approximately $52
        million) from a subsidiary of News Corporation. No amounts were drawn under
        this
        facility during the six month period ended December 31, 2005.
 
 The
        principal uses of cash that affect the Company’s liquidity position include
        purchases of smart cards, operational expenditures, capital expenditures,
        acquisitions and income tax payments.
  Page
            22
  **Sources
          and uses of cash**
  We
          had a
          net inflow of cash of $41.1 million in the six months ended December 31,
          2005,
          compared to a net cash inflow of $27.3 million in the six months ended
          December
          31, 2004.
 
 Net
          cash
          provided by operating activities was as follows:
 **For
                    the six months**
                  **ended
                    December 31,**(in
                    thousands)
                
                
                **2005**
                
                
                **2004**Net
                    cash provided by operating activities
                
                $
                44,447
                
                $
                28,728
  The
          increase in net cash provided by operating activities in the six months
          ended
          December 31, 2005 reflects lower payments for the purchase of smart cards
          and
          lower tax payments. These factors were offset in part by lower receipts
          from
          customers, due to high billings in December 2005 which were not due for
          payment
          as of December 31, 2005. As a result of the period end billings, the accounts
          receivable balance was higher at December 31, 2005 as compared to June
          30, 2005.
          Additionally, payments of payroll costs, travel expenses and facilities
          costs
          were higher in the six months ended December 31, 2005, compared to the
          corresponding period of the previous fiscal year, as a result of an increase
          in
          the number of our employees.
 
 Net
          cash
          used in investing activities was as follows:
  **For
                      the six months**
                      **ended
                        December 31,**(in
                      thousands)
                  
                  **2005**
                  
                  **2004**Capital
                      expenditure
                  
                  $
                  14,632
                  
                  $
                  8,461Business
                      acquisitions, net of cash acquired
                  
                  
                  3,121
                  
                  
                  17Proceeds
                      from sale of investments
                  
                  
                  ─
                  
                  
                  (232
                  )Net
                      cash used in investing activities
                  
                  $
                  17,753
                  
                  $
                  8,246
  The
          increase in capital expenditure was due to investment in new facilities
          in the
          United Kingdom, India and the United States, and higher purchases of technical
          equipment required to support our customers. In addition, during the six
          months
          ended December 31, 2005, we acquired NT Media Limited for initial cash
          consideration and costs totalling $3.1 million. Further payments may be
          made
          under the terms of the acquisition agreement up to a maximum of approximately
          $4
          million over the next three years.
 
 Net
          cash
          generated by financing activities was as follows:
  **For
                      the six months**
                    **ended
                        December 31**(in
                      thousands)
                  
                  **2005**
                  
                  **2004**Issuance
                      of shares
                  
                  $
                  9,787
                  
                  $
                  6,850Excess
                      tax benefits realized on exercise of stock options
                  
                  
                  4,578
                  
                  
                  ─Net
                      cash generated by financing activities
                  
                  $
                  14,365
                  
                  $
                  6,850
  Cash
          generated by financing activities comprises proceeds from the issuance
          of shares
          as a result of stock options exercised by employees. Higher numbers of
          stock
          options were exercised by employees during the six months ended December
          31,
          2005 than in the six months ended December 31, 2004. Certain stock option
          exercises result in a tax benefit higher than the amounts recorded in the
          statement of operations. Following the adoption of SFAS No. 123 (R) which
          became
          effective for us on July 1, 2005, such benefits are shown as a financing
          cash
          flow to the extent that they are realized, rather than as part of cash
          provided
          by operating activities as previously required.
 
 We
          have
          evaluated, and expect to continue to evaluate, possible acquisitions and
          dispositions of certain businesses. Such transactions may be material and
          may
          involve cash, our securities or the assumption of indebtedness.
  Page
              23
  **Commitments
          and contractual obligations**
  Apart
          from
          the contingent payments related to the acquisition of NT Media Limited
          referred
          to above, there has been no material change to our commitments since June
          30,
          2005.
 
 **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 IP-TV
          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 seeking ways to compete with traditional
          television companies. As a result, our largest customers may face 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
              24
  **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
          IP-TV. 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. In the six months ended December 31, 2005, these three
          customers accounted directly and indirectly for approximately 70% 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
              25
  **The
          adoption of industry-wide standards for interactive television could adversely
          affect our ability to sell our products and services or place downward
          pressure
          on our pricing.**
  Ongoing
          efforts to establish industry-wide standards for interactive television
          software
          include a commitment by cable network operators in the United States to
          deploy a
          uniform platform for interactive television based on a jointly developed
          specification known as the OpenCable Applications Platform and an initiative
          by
          European television industry participants to create a similar platform
          called
          Multimedia Home Platform. The establishment of these standards or other
          similar
          standards could adversely affect the pricing of our products and services,
          significantly reduce the value of our intellectual property and the competitive
          advantage our proprietary technology provides, cause us to incur substantial
          expenditures to adapt our products or services to respond to these developments
          or otherwise harm our business, particularly if our products require significant
          redevelopment in order to conform to the newly established
          standards.
 
 We
          are not
          currently a member of CableLabs, the research and development consortium
          managing the OpenCable initiative, or certain other standards setting
          organizations. While we are involved in the activity of CableLabs and while
          we
          continually assess our position with respect to any relevant standards
          setting
          organizations, and have joined several of them, our failure to participate
          in
          certain organizations may affect the willingness of their respective members
          to
          conduct business with us and this may adversely affect our ability to sell
          products or services to cable network operators or other potential customers
          that are members of those organizations. If that were to be the case, our
          ability to continue to grow our business might be adversely
          affected.
 
 **The
          nature of our business is such that our operating results may fluctuate
          from
          period to period.**
  Our
          operating results have varied in the past from quarter to quarter and from
          year
          to year and are likely to vary from period to period in the future.
          Historically, our revenues have reflected a small number of relatively
          large
          orders for our technology and services, which generally have long sales
          and
          order cycles. Additionally, our customers 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 analyst expectations, which
          could adversely affect the price of our securities.
 
 **Changes
          to current accounting policies or in how such policies are interpreted
          or
          applied to our business could have a significant effect on our reported
          financial results.**
  New
          accounting pronouncements or a change in how GAAP is interpreted or applied
          to
          our business could have a significant effect on our reported results. Our
          accounting policies that recently have been or may in the future be affected
          by
          changes in the accounting rules include revenue recognition, accounting
          for
          stock-based compensation and accounting for goodwill and other intangible
          assets.
 
 Our
          revenue recognition policy, in particular, is a key component of our results
          of
          operations and is based on complex rules that require us to make judgments
          and
          estimates. In applying our revenue recognition policy, we must determine
          what
          portions of our revenue are recognized currently and which portions must
          be
          deferred. Because different contracts may require different accounting
          treatment, it may be difficult for investors to properly assess our financial
          condition or operating results unless they carefully review all of our
          financial
          information, including our consolidated financial statements and notes
          thereto.
 
 **Failure
          to protect the intellectual property rights upon which we depend could
          harm our
          business.**
  We
          rely
          primarily on a combination of patent, trademark and copyright laws, trade
          secrets, confidentiality procedures and contractual provisions to protect
          our
          intellectual property rights and the obligations we have to third parties
          from
          whom we license intellectual property rights. However, we may not be able
          to
          detect unauthorized use of, or take appropriate steps to enforce, our
          intellectual property rights and this could have a material adverse effect
          on
          our business, operating results and financial condition.
 
 **Defending
          against intellectual property infringement claims could harm our
          business.**
  We
          may be
          subject to an increased risk of infringement claims as the number of products
          and competitors grows and the functionality of products in different industry
          segments overlaps. It may be alleged that products that we have developed
          or
          technology that we have licensed from third parties infringes the rights
          of
          others. Intellectual property claims could be time consuming to defend,
          result
          in costly litigation, divert management’s attention and resources and cause
          product shipment delays. Such claims could also require us to seek to enter
          into
          royalty or license agreements, redesign our products or potentially cease
          using
          aspects of technology, which could have a material adverse effect on our
          business, operating results and financial condition.
  Page
              26
  **We
          grant certain indemnification rights to our customers when we license our
          software technologies. We may, therefore, become subject to third party
          infringement claims through those commercial arrangements. In addition,
          the
          damages to which we are subject may be increased by the use of our technologies
          in our customers’ products.**
  Many
          of
          our agreements with customers contain an indemnification obligation, which
          could
          be triggered in the event that a customer is named in an infringement suit
          involving their products or involving the customer’s products or services that
          incorporate or use our products. If it is determined that our products
          infringe
          any of the asserted claims in such a suit, we may be prevented from distributing
          certain of our products and we may incur significant indemnification
          liabilities, which may adversely affect our business, operating results
          and
          financial condition.
 
 In
          addition, while damage claims in respect of an alleged infringement may,
          in many
          cases, be based upon a presumed royalty rate that the patent holder would
          have
          otherwise been entitled to, it is possible that our liability may increase
          as a
          result of the incorporation of our technology with our customer’s products. In
          some cases, potential damages against us could be based on the profits
          derived
          from a product that infringes through the use of our software even though
          we
          receive a relatively moderate economic benefit from the licensing
          arrangement.
 
 **Any
          significant disruption in our processing of smart cards could adversely
          affect
          our business.**
  We
          process
          all of our smart cards at two facilities, one located in England and the
          other
          in California. A significant disruption in the processing of smart cards
          at
          either facility could result in delays in the delivery of smart cards to
          our
          customers. The sale of smart cards which we have processed is a material
          portion
          of our business. Although our smart card processing facilities are designed
          to
          provide sufficient capacity to meet expected demand if one facility becomes
          inoperable for a limited period of time, any significant disruption to
          our smart
          card processing facilities could result in the loss of revenues, customers
          and
          future sales.
 
 **We
          may be unable to process sufficient quantities of smart cards because we
          obtain
          certain components from, and depend upon, a limited number of
          suppliers.**
  We
          currently obtain the chips used in our smart cards from a limited number
          of
          suppliers. In the event of a disruption of supply, including a shortage
          of
          manufacturing capacity, we may be unable to develop an alternative source
          in a
          timely manner or at favorable prices. Such failure could harm our ability
          to
          deliver smart cards to our customers or could negatively affect our operating
          margins. This could have a material adverse effect on our business, operating
          results and financial condition.
 
 **Political,
          regulatory and economic risks associated with our international customers
          could
          harm our business.**
  Our
          customers are located throughout the world. Inherent risks of doing business
          in
          international markets include changes in legal and regulatory requirements,
          export restrictions, exchange controls, tariffs and other trade barriers,
          longer
          payment cycles, political disruption, wars, acts of terrorism and civil
          unrest.
          We may incur substantial expense as a result of the imposition of new
          restrictions or changes in the existing legal and regulatory environments
          in the
          territories where we conduct our business or due to political and economic
          instability in these territories.
 
 The
          telecommunications, media, broadcast and cable television industries are
          subject
          to extensive regulation by governmental agencies. These governmental agencies
          continue to oversee and adopt legislation and regulation over these industries,
          particularly in the areas of user privacy, consumer protection, online
          content
          distribution and the characteristics and quality of online products and
          services, which may affect our business, the development of our products,
          the
          decisions by market participants to adopt our products and services or
          the
          acceptance of interactive television by the marketplace in general. In
          particular, governmental laws or regulations restricting or burdening the
          exchange of personally identifiable information could delay the implementation
          of interactive services or create liability for us or any other manufacturer
          of
          software that facilitates information exchange. These governmental agencies
          may
          also seek to regulate interactive television directly. Future developments
          relating to any of these regulatory matters may adversely affect our
          business.
 
 **Fluctuations
          in foreign exchange rates could harm our financial
          condition.**
  A
          risk
          inherent in our international operations is the exposure to fluctuations
          in
          currency exchange rates. Certain of our customer contracts denominate prices
          in
          pounds sterling or in euros. During the six months ended December 31, 2005,
          approximately 29% of our revenues were denominated in pounds sterling and
          a
          further 21% were denominated in euros. Some of our smart card costs and
          our
          operating expenses are denominated in pounds sterling and euros. During
          the six
          months ended December 31, 2005, we estimate that approximately 49% of our
          total
          cost of sales and operating expenses were denominated in pounds sterling
          or in
          euros. As a result, we are exposed to fluctuations in exchange rates which
          may
          have a material adverse effect on our business, operating results and financial
          condition.
  Page
              27
  Additionally,
          although most of our contracts with customers in Latin America and the
          Asia-Pacific region are denominated in U.S. dollars, those customers are
          affected by fluctuations in their local currencies and by exchange control
          regulations which may restrict their ability to remit payments to
          us.
 
 **We
          are subject to certain risks relating to our operations in
          Israel.**
  We
          have
          research and development facilities in Israel and we have customers in
          Israel.
          Therefore, we are directly influenced by the political, economic and security
          conditions affecting Israel. Any major hostilities involving Israel, or
          the
          interruption or curtailment of trade or the movement of people within Israel
          or
          between Israel and other countries, could significantly harm our business,
          operating results and financial condition. Additionally, certain of our
          employees are currently required to perform annual reserve duty in the
          Israeli
          Defense Force and are subject to being called for active military duty
          at any
          time. We have, in the past, operated effectively under these requirements.
          We
          cannot predict the effect of these obligations on us in the future.
 
 **We
          are controlled by, and are dependent upon our relationship with, News
          Corporation.**
  We
          are
          controlled by News Corporation. As of the date hereof, News Corporation
          beneficially owns approximately 74.7% of our total issued and outstanding
          share
          capital. Because News Corporation beneficially owns 100% of our Series
          B
          ordinary shares, which have ten votes per share (as opposed to our Series
          A
          ordinary shares which have one vote per share), it controls approximately
          96.7%
          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. Four
          of our
          eight current Directors have been appointed by News Corporation.
          Additionally, Dr. Abe Peled, our Chairman and Chief Executive Officer,
          is a
          member of News Corporation’s Executive Management Committee and from time to
          time is involved in matters pertaining to News Corporation’s wider business
          interests.
 
 Businesses
          in which News Corporation has an interest currently account for, and are
          expected to continue to account for, a significant portion of our revenues.
          During the six months ended December 31, 2005, approximately 77% 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.
  Page
              28
  **Our
          share price could be affected by our ordinary shares becoming available
          for sale
          in the future or by the dilutive effect of the issue of new
          shares.**
  If
          investors or News Corporation sell substantial amounts of our ADSs or ordinary
          shares in the public market, the market price of our ADSs could fall. The
          negative effect of such sales on the market price of our ADSs could be
          more
          pronounced given the relatively small number of our ordinary shares in
          ADS form
          relative to the total number of shares outstanding. In addition, such sales
          could create the public perception of difficulties or problems with our
          technologies and services. These sales may also make it more difficult
          for us to
          sell equity or equity-related securities in the future at a time and price
          that
          we deem appropriate if we require additional financing.
 
 Interests
          of existing shareholders may also be diluted due to the existence of stock
          options granted to certain employees. We may grant further stock options
          to our
          Directors, executive officers and employees.
 
 At
          our
          annual general meeting held on October 31, 2005, shareholders authorized
          our
          Board of Directors, pursuant to Section 80 of the U.K. Companies Act 1985,
          to
          allot relevant securities (including ordinary shares, other equity securities
          and the right to subscribe for or convert securities) for further issuance
          for a
          period expiring November 1, 2010. At the same time, our Board of Directors
          were
          empowered, pursuant to Section 95 of the U.K. Companies Act 1985, to allot
          equity securities for cash on a non-pre-emptive basis without first being
          required to offer them to existing shareholders.
 
 We
          may
          issue equity securities in connection with possible future business
          acquisitions.
  **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 euros.
          Historically, we have not entered into free-standing derivative contracts
          to
          hedge foreign exchange exposure arising from operating activities. We expect
          to
          review this policy from time to time as circumstances change. No derivative
          instruments were outstanding as of December 31, 2005.
 
 In
          certain
          countries in which we have operations, we are required to make severance
          payments to employees leaving employment in certain circumstances, on the
          basis
          of the latest monthly salary for each year of service. This liability is
          provided for by payments of premiums to insurance companies under approved
          plans. The obligation as of December 31, 2005 in the consolidated balance
          sheet
          was $27.4 million. The value of insurance policies which substantially
          fund this
          obligation as of December 31, 2005 was $21.9 million and is included within
          the consolidated balance sheet as other non-current assets. The bulk of
          the
          arrangements relates to our Israeli employees. Because the gross liability
          reflects the contracts of employment, it is denominated in U.S. dollars,
          whereas
          the amount funded by insurance policies is regulated by the government
          of the
          State of Israel and is denominated in Israeli shekels. Accordingly, the
          difference between the gross liability and the amount funded by insurance
          policies is subject to fluctuations depending on the relative values of
          the U.S.
          dollar and Israeli shekel.
 
 As
          of
          December 31, 2005, approximately 87% of our cash was held in U.S. dollars
          and 8%
          in pounds sterling, with the remainder being held primarily in euros. Our
          policy
          is to hold cash on deposits of up to three month maturity. In the future,
          we may
          place cash on deposit for longer than three month terms, which would introduce
          an exposure to the risks associated with fixed interest rates. We may also
          consider investing in money market funds and in top grade corporate or
          government bonds.
  **Item
          4. Controls and Procedures**
  **a)**  **Disclosure
          controls and procedures**
  The
          Company’s management, with the participation of the Company’s 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 Chief Executive Officer and
          Chief Financial Officer have concluded that, as of the end of such period,
          the
          Company’s disclosure controls and procedures are effective in recording,
          processing, summarizing and reporting, on a timely basis, information required
          to be disclosed by the Company in the reports that it files or submits
          under the
          Exchange Act and are effective in ensuring that information required to
          be
          disclosed by the Company in the reports 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.
  Page
              29
  **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 second quarter of fiscal 2006 that have materially
          affected, or are reasonably likely to materially affect, the Company’s internal
          control over financial reporting.
  
 **PART
          II - Other Information**
  **Item
          1. Legal Proceedings**
  See
          Note
          9a to the accompanying unaudited consolidated financial statements, which
          is
          incorporated herein by reference.
 
 **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**
  The
          Company held its Annual Meeting of Shareholders (the “Annual Meeting”) on
          October 31, 2005. A brief description of the matters voted upon at the
          Annual
          Meeting and the results of the voting on such matters is set forth
          below.
 
 Proposal
          1: A proposal to approve the Company’s U.K. Annual Report and Financial
          Statements for the fiscal year ended June 30, 2005, together with the
          corresponding Independent Auditors’ Report and Directors’ Report was voted upon
          as follows:
  For:
                  433,575,348Against:
                  535Abstain:
                  860
  Proposal
              2: A proposal to approve the Directors’ Remuneration Report for the fiscal year
              ended June 30, 2005 was voted upon as follows:
  For:
                    432,719,644Against:
                    856,969Abstain:
                    130
  Proposal
                3: A proposal to ratify the selection of Ernst & Young LLP as the Company’s
                independent registered public accounting firm for the fiscal year
                ending June
                30, 2006 and to authorize the Audit Committee of the Board of Directors
                of the
                Company to determine its remuneration in respect of such period was
                voted upon
                as follows:
  For:
                        433,576,118Against:
                        615Abstain:
                        10
  Proposal
                  4: A proposal to re-appoint Roger W. Einiger as a Director was
                  voted upon as
                  follows:
 For:
                          433,572,503Against:
                          50Abstain:
                          4,190
  Page
                      30
  Proposal
                5: A proposal to authorize the Board of Directors of the Company
                to allot
                relevant securities for further issuance up to a maximum nominal
                amount of
                $403,429 ( a maximum of 40,342,941 ordinary shares of the Company),
                with such
                authority expiring on November 1, 2010 without further shareholder
                consent was
                voted upon as follows:
  For:
                      430,513,515Against:
                      3,062,998Abstain:
                      230
  Proposal
          6: A proposal to authorize the Board of Directors of the Company to allot
          equity
          securities up to a maximum nominal amount of $403,439 for cash on a non
          pre-emptive basis, with such authority expiring on November 1, 2010 without
          further shareholder consent was voted upon as follows:
  For:
                430,272,596Against:
                3,303,097Abstain:
                1,050
  Proposal
          7: A proposal to approve and adopt the amended and restated Articles of
          Association of the Company was voted upon as follows:
  For:
                433,575,577Against:
                916Abstain:
                250
  **Item
          5. Other Information**
  Not
          applicable.
  **Item
          6. Exhibits**
  12
                  Computation
                      of ratio of earnings to fixed charges.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.*31.2
                  Chief
                      Financial Officer Certification required by Rules 13a-14 and
                      15d-14 under
                      the Securities Exchange Act of 1934, as amended.*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.**
                  Filed
                      herewith
  Page
            31
  **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
                    Gersh
                  Chief
                    Financial Officer
 
 Date:  January
          31, 2006
  Page
              32