**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, 2006**





**or**





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




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





**Commission
      File Number: 0-30364**





**NDS
      Group plc**


(Exact
      name of registrant as specified in its charter)




**England
                and
                Wales**
            
            **Not
                applicable**(State
                or other jurisdiction of incorporation or
                organization)
            
            (I.R.S.
                Employer Identification
                No.)**One
                Heathrow Boulevard, 286 Bath Road, West Drayton,**
              **Middlesex,
                United Kingdom**
            
            **UB7
                0DQ**(Address
                of principal executive offices)
            
            (Zip
                Code)




**+44
      20 8476 8000**


(Registrant’s
      telephone number, including area code)




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




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





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):




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





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




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





As
      of
      January 28, 2007, the following shares were outstanding: 15,228,681 Series
      A
      ordinary shares, par value $0.01 per share; 42,001,000 Series B ordinary shares,
      par value $0.01 per share; and, 42,000,002 deferred shares, par value £1 per
      share.








**NDS
      Group plc**




**Table
      of Contents**




Page**PART I - Financial
              Information**Item 1.
            
            Financial Statements
            
            1Unaudited
                Consolidated Statements of Operations for the three and six month
                periodsended
                December 31, 2006 and December 31, 2005
            
            1Consolidated
                Balance Sheets as of December 31, 2006 (unaudited) and
                June 30, 2006
            
            2Unaudited
                Consolidated Statements of Cash Flows for the six month periodsended
                December 31, 2006 and December 31, 2005
            
            3Notes
                to the Unaudited Consolidated Financial
                Statements
            
            4Item 2.
            
            Management’s Discussion and Analysis of
              Financial Condition and Results of Operations
            
            14Item 3.
            
            Quantitative and Qualitative Disclosures
              About Market Risk
            
            23Item 4.
            
            Controls and Procedures
            
            23**PART II - Other
              Information**Item 1.
            
            Legal Proceedings
            
            24Item 1A.
            
            Risk Factors
            
            24Item 2.
            
            Unregistered Sales of Equity Securities
              and
              Use of Proceeds
            
            29Item 3.
            
            Defaults Upon Senior Securities
            
            29Item 4.
            
            Submission of Matters to a Vote of Security
              Holders
            
            29Item 5.
            
            Other Information
            
            30Item 6.
            
            Exhibits
            
            30Signatures
            
            31







**PART
      I - Financial Information**




**Item
      1. Financial Statements**




**NDS
      Group plc**




**Unaudited
      Consolidated Statements of Operations**




**For
                  the three months endedDecember
                  31,**
              
              **For
                  the six months
                  endedDecember 31,**(in
                  thousands, except per-share
                  amounts)
              
              **2006**
              
              **2005**
              
              **2006**
              
              **2005****Revenue:**Conditional
                  access
              
              $
              98,184
              
              $
              87,619
              
              $
              191,031
              
              $
              170,764Integration,
                  development & support
              
              
              12,683
              
              
              11,860
              
              
              31,095
              
              
              25,694License
                  fees & royalties
              
              
              23,450
              
              
              26,941
              
              
              47,800
              
              
              51,507New
                  technologies
              
              
              28,922
              
              
              23,047
              
              
              56,421
              
              
              43,906Other
              
              
              1,823
              
              
              2,736
              
              
              2,877
              
              
              4,827Total
                  revenue
              
              
              165,062
              
              
              152,203
              
              
              329,224
              
              
              296,698**Cost
                  of goods and services sold**(exclusive
                  of items shown separately below):Smart
                  card costs
              
              
              (19,255
              )
              
              (23,082
              )
              
              (40,074
              )
              
              (44,707
              )Operations
                  & support
              
              
              (38,064
              )
              
              (34,902
              )
              
              (74,995
              )
              
              (68,581
              )Royalties
              
              
              (3,582
              )
              
              (2,781
              )
              
              (7,096
              )
              
              (5,678
              )Other
              
              
              (217
              )
              
              (1,011
              )
              
              (1,188
              )
              
              (2,633
              )Total
                  cost of goods and services sold
              
              
              (61,118
              )
              
              (61,776
              )
              
              (123,353
              )
              
              (121,599
              )**Gross
                  margin**
              
              
              103,944
              
              
              90,427
              
              
              205,871
              
              
              175,099**Operating
                  expenses:**Research
                  & development
              
              
              (43,309
              )
              
              (36,341
              )
              
              (77,975
              )
              
              (66,445
              )Sales
                  & marketing
              
              
              (9,314
              )
              
              (6,734
              )
              
              (17,291
              )
              
              (14,005
              )General
                  & administration
              
              
              (11,411
              )
              
              (10,574
              )
              
              (23,688
              )
              
              (19,798
              )Amortization
                  of other intangibles
              
              
              (2,510
              )
              
              (2,458
              )
              
              (4,927
              )
              
              (4,796
              )Total
                  operating expenses
              
              
              (66,544
              )
              
              (56,107
              )
              
              (123,881
              )
              
              (105,044
              )**Operating
                  income**
              
              
              37,400
              
              
              34,320
              
              
              81,990
              
              
              70,055**Other
                  income:**Interest,
                  net
              
              
              6,500
              
              
              3,508
              
              
              12,512
              
              
              6,384Income
                  before income tax expense
              
              
              43,900
              
              
              37,828
              
              
              94,502
              
              
              76,439Income
                  tax expense
              
              
              (13,609
              )
              
              (11,868
              )
              
              (29,123
              )
              
              (23,374
              )**Net
                  income**
              
              $
              30,291
              
              $
              25,960
              
              $
              65,379
              
              $
              53,065**Net
                  income per share:**Basic
                  net income per share
              
              $
              0.53
              
              $
              0.46
              
              $
              1.15
              
              $
              0.95Diluted
                  net income per share
              
              $
              0.52
              
              $
              0.45
              
              $
              1.13
              
              $
              0.92





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 amounts)
              
              **As
                  ofDecember 31, 2006 
                  (Unaudited)**
              
              **As
                  ofJune 30, 2006(See Note
                  2)****ASSETS****Current
                assets:**Cash
                  and cash equivalents
              
              $
              280,058
              
              $
              320,636Short-term
                  investments
              
              
              203,387
              
              
              184,401Accounts
                  receivable, net (inclusive of $87,718 and $74,295 due from related
                  parties)
              
              
              123,855
              
              
              97,716Accrued
                  income
              
              
              43,931
              
              
              37,050Income
                  tax receivable
              
              
              192
              
              
              1,411Inventories,
                  net
              
              
              50,719
              
              
              39,340Prepaid
                  expenses
              
              
              16,920
              
              
              17,031Other
                  current assets
              
              
              2,565
              
              
              3,650Total
                  current assets
              
              
              721,627
              
              
              701,235Property,
                  plant & equipment, net
              
              
              49,081
              
              
              46,239Goodwill
              
              
              122,398
              
              
              66,917Other
                  intangibles, net
              
              
              70,662
              
              
              43,299Deferred
                  tax assets
              
              
              9,720
              
              
              7,506Other
                  receivables
              
              
              14,098
              
              
              6,681Other
                  non-current assets
              
              
              29,788
              
              
              25,244**Total
                  assets**
              
              $
              1,017,374
              
              $
              897,121**LIABILITIES
                  AND SHAREHOLDERS' EQUITY****Current
                  liabilities:**Accounts
                  payable (inclusive of $3,770 and $4,228 due to related
                  parties)
              
              $
              17,013
              
              $
              26,966Deferred
                  income
              
              
              79,119
              
              
              45,492Accrued
                  payroll costs
              
              
              21,633
              
              
              26,647Accrued
                  expenses
              
              
              31,450
              
              
              26,245Income
                  tax liabilities
              
              
              24,375
              
              
              19,039Other
                  current liabilities
              
              
              15,786
              
              
              16,762**Total
                  current liabilities**
              
              
              189,376
              
              
              161,151Accrued
                  expenses
              
              
              39,034
              
              
              33,747Deferred
                  income
              
              
              134,206
              
              
              134,529Deferred
                  tax liabilities
              
              
              4,546
              
              
              --**Total
                  liabilities**
              
              
              367,162
              
              
              329,427Commitments
                  and contingencies**Shareholders'
                  equity:**Series
                  A ordinary shares, par value $0.01 per share: 48,000,000 shares
                  authorized;15,199,340
                  and 14,873,262 shares outstanding as of December 31 and June 30,
                  2006,
                  respectively
              
              
              152
              
              
              148Series
                  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, 2006,
                  respectively
              
              
              420
              
              
              420Deferred
                  shares, par value (pound)1 per share: 42,000,002 shares
                  authorizedand
                  outstanding as of December 31 and June 30, 2006,
                  respectively
              
              
              64,103
              
              
              64,103Additional
                  paid-in capital
              
              
              546,005
              
              
              534,668Accumulated
                  deficit
              
              
              (14,242
              )
              
              (79,621
              )Other
                  comprehensive income
              
              
              53,774
              
              
              47,976**Total
                  shareholders' equity**
              
              
              650,212
              
              
              567,694**Total
                  liabilities and shareholders' equity**
              
              $
              1,017,374
              
              $
              897,121





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




Page
          2


**NDS
      Group plc**




**Unaudited
      Consolidated Statements of Cash Flows**




**For
                  the six months endedDecember
                  31,**(in
                  thousands)
              
              **2006**
              
              **2005****Operating
                  activities:**Net
                  income
              
              $
              65,379
              
              $
              53,065Adjustments
                  to reconcile net income to net cash provided by operating activities:Depreciation
              
              
              9,120
              
              
              7,838Amortization
                  of other intangibles
              
              
              4,927
              
              
              4,796Stock
                  option-based compensation
              
              
              4,378
              
              
              1,712Other
                  compensation cost
              
              
              399
              
              
              --Change
                  in operating assets and liabilities, net of acquisitions:Inventories
              
              
              (11,371
              )
              
              8,545Receivables
                  and other assets
              
              
              (38,168
              )
              
              (53,223
              )Deferred
                  income
              
              
              31,465
              
              
              22,282Accounts
                  payable and other liabilities
              
              
              (6,730
              )
              
              (568
              )Net
                  cash provided by operating activities
              
              
              59,399
              
              
              44,447**Investing
                  activities:**Capital
                  expenditure
              
              
              (10,361
              )
              
              (15,014
              )Proceeds
                  from sale of property, plant and equipment
              
              
              241
              
              
              382Business
                  acquisitions, net of cash acquired
              
              
              (82,456
              )
              
              (3,121
              )Short-term
                  investments, net
              
              
              (18,986
              )
              
              —Net
                  cash used in investing activities
              
              
              (111,562
              )
              
              (17,753
              )**Financing
                  activities:**Issuance
                  of shares (inclusive of realized excess tax benefits of $1,790
                  and
                  $4,578)
              
              
              7,035
              
              
              14,365**Net
                  (decrease) increase in cash and cash equivalents**
              
              
              (45,128
              )
              
              41,059Cash
                  and cash equivalents, beginning of period
              
              
              320,636
              
              
              339,791Exchange
                  movements
              
              
              4,550
              
              
              (1,216
              )**Cash
                  and cash equivalents, end of period**
              
              $
              280,058
              
              $
              379,634





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





Page
          3


**NDS
      Group plc**




**Notes
      to the Unaudited Consolidated Financial Statements**






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




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





There
      is
      a common management structure across the Company, which ensures that the various
      subsidiary entities operate in a coordinated and complementary manner. The
      business is managed as a single operating unit or segment.





The
      Company is a majority owned subsidiary of News Corporation and conducts business
      transactions with a number of affiliates and subsidiaries of News
      Corporation.






**Note
      2.**  **Basis
      of presentation**




The
      accompanying unaudited consolidated financial statements have been prepared
      in
      accordance with U.S. generally accepted accounting principles (“GAAP”) for
      interim financial statements and with the instructions to Form 10-Q and Article
      10 of Regulation S-X. Information and footnote disclosures normally included
      in
      annual financial statements prepared in accordance with GAAP have been condensed
      or omitted pursuant to such rules and regulations. In the opinion of management,
      the unaudited consolidated financial statements reflect all adjustments
      (consisting only of normal recurring adjustments) necessary for a fair
      presentation of the consolidated financial position, the consolidated operating
      results and the consolidated cash flows as of, and for the periods shown. The
      unaudited consolidated results of operations for the three and six month periods
      ended December 31, 2006 are not necessarily indicative of results that may
      be expected for any other interim period or for the full fiscal year ending
      June
      30, 2007.





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





These
      interim consolidated financial statements are unaudited and do not constitute
      U.K. statutory results as defined in Section 240 of the Companies Act 1985
      of
      Great Britain. U.K. statutory accounts for the fiscal year ended June 30, 2006,
      which include parent company financial statements prepared under U.K. generally
      accepted accounting practice and consolidated financial statements prepared
      under International Financial Reporting Standards as adopted by the European
      Union, and on which the auditors’ reports were unqualified, were approved by the
      Company’s shareholders at its Annual General Meeting of Shareholders held on
      October 30, 2006 and 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.





The
      Company maintains a 52-53 week fiscal year ending on the Sunday nearest to
      each
      reporting date. As such, all references to December 31, 2006 and December 31,
      2005 relate to the three or six month periods ended December 31, 2006 and
      January 1, 2006, respectively. For convenience purposes, the Company continues
      to date its financial statements as of December 31.





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





*Recent* *accounting pronouncements*




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





Page
          4




In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”), providing a
      framework to improve the comparability and consistency of fair value
      measurements in applying GAAP. SFAS No. 157 also expands the disclosures
      regarding fair value measurement. SFAS No. 157 will become effective for the
      Company beginning in fiscal 2009. The Company is currently evaluating what
      effects the adoption of SFAS No. 157 will have on the Company’s future results
      of operations and financial condition.





In
      September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans ─ an amendment of FASB Statements
      No. 87, 88, 106 and 132(R)” (“SFAS No. 158”). SFAS No. 158 improves financial
      reporting by requiring an employer to recognize the overfunded or underfunded
      status of a defined benefit postretirement plan (other than a multiemployer
      plan) as an asset or liability in its statement of financial position and to
      recognize changes in that funded status in the year in which the changes occur
      through comprehensive income. SFAS No. 158 is effective for the Company as
      of
      the fiscal year ending June 30, 2007. Adoption of SFAS No. 158 will not have
      a
      material impact on the Company's results of operations and financial
      condition.





In
      June
      2006, the Emerging Issues Task Force (the “EITF”) of the FASB reached a
      consensus on Issue No. 06-3: “How Taxes Collected from Customers and Remitted to
      Governmental Authorities Should Be Presented in the Income Statement (That
      Is,
      Gross versus Net Presentation)” (“EITF 06-3”). The EITF determined that the
      scope of EITF 06-3 includes any tax assessed by a governmental authority that
      is
      imposed concurrently on a specific revenue-producing transaction between a
      seller and a customer, and may include, but is not limited to, sales, use,
      value
      added, and some excise taxes. The EITF also determined that the presentation
      of
      taxes on either a gross basis or a net basis within the scope of EITF 06-3
      is an
      accounting policy decision that should be disclosed. EITF 06-3 is effective
      for
      interim and annual financial statements beginning after December 15, 2006.
      It
      has been the Company’s policy to state revenue net of value added and similar
      taxes and the Company will continue to do so.







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




Comprehensive
      income in the three and six month periods ended December 31, 2006 and 2005
      comprises net income and foreign currency translation adjustments. The
      components of comprehensive income were as follows:


**For
                  the three months
                  endedDecember 31,**
              
              **For
                  the six months endedDecember
                  31,**(in
                  thousands)
              
              **2006**
              
              **2005**
              
              **2006**
              
              **2005**Net
                  income
              
              $
              30,291
              
              $
              25,960
              
              $
              65,379
              
              $
              53,065Currency
                  translation differences (no tax effect)
              
              
              5,435
              
              
              (2,407
              )
              
              5,798
              
              
              (2,428
              )Comprehensive
                  income
              
              $
              35,726
              
              $
              23,553
              
              $
              71,177
              
              $
              50,637







**Note
      4.**  **Net
      income per share**




Net
      income per share is calculated as net income divided by the weighted average
      number of ordinary shares in issue in each period. The interests of ordinary
      shareholders may be diluted due to the existence of outstanding stock options
      granted to employees. The dilutive effect of the potential shares to be issued
      upon exercise of those stock options has been calculated using the treasury
      stock method and as such, is a function of the average share price in each
      period. The Company’s Series A ordinary shares, par value $0.01 per share
      (“Series A Ordinary Shares”) and Series B ordinary shares, par value $0.01 per
      share (“Series B Ordinary Shares”) have equal rights except in respect of
      voting, and as such have equal weighting in the calculation of net income per
      share and equal net income per share.





Page
          5


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


**For
                    the three months
                    endedDecember 31,**
                
                **For
                    the six months endedDecember
                    31,**(in
                    thousands)
                
                **2006**
                
                **2005**
                
                **2006**
                
                **2005**Weighted
                    average number of ordinary shares in issue
                
                
                57,045,855
                
                
                55,875,405
                
                
                56,967,765
                
                
                55,647,429Effect
                    of dilutive stock options
                
                
                938,707
                
                
                1,811,120
                
                
                924,759
                
                
                1,893,164Denominator
                    for dilutive net income per share
                
                
                57,984,562
                
                
                57,686,525
                
                
                57,892,524
                
                
                57,540,593








**Note
      5.**  **Acquisitions**




Acquisitions
      in the six months ended December 31, 2006 resulted in excess purchase price,
      net
      of the amounts assigned to assets acquired and liabilities assumed, of $53.0
      million, which has been preliminarily allocated to goodwill and which is not
      being amortized for all of the acquisitions noted below. Where the allocation
      of
      the excess purchase price is not final, the amount allocated to goodwill is
      subject to changes upon completion of final valuations of certain assets and
      liabilities. A future reduction in goodwill for additional value to be assigned
      to identifiable finite-lived intangible assets or tangible assets could reduce
      future earnings as a result of additional amortization. For every $1 million
      reduction in goodwill for additional value to be assigned to identifiable
      finite-lived intangible assets or tangible assets, depreciation and amortization
      expense would increase by approximately $0.1 million per fiscal year, assuming
      an average useful life of seven years.





The
      acquisitions referred to below were all accounted for in accordance with SFAS
      No. 141, “Business Combinations.”





*Fiscal
      2007 transactions*




On
      December 31, 2006, the Company completed the acquisition of Jungo Limited
      (“Jungo”), a company based in Israel whose business is the development and
      supply of software for use in residential gateway devices. These devices act
      as
      the interface between the broadband network connection in the home and the
      various devices that may be connected on a home network. The initial
      consideration paid in cash, including acquisition related costs, was $90.9
      million ($77.5 million, net of cash acquired). The excess purchase price over
      the fair value of the tangible net assets acquired including acquisition related
      costs was approximately $82 million, of which $30 million has been preliminarily
      allocated to identifiable finite-lived intangible assets with the remaining
      $52
      million preliminarily allocated to goodwill. This allocation is preliminary
      and
      may be adjusted when a detailed assessment and valuation of the separable assets
      and liabilities acquired is completed. Additional consideration of up to $17.0
      million may be payable in cash, contingent upon Jungo achieving certain revenue
      and profitability targets in the fiscal year ending December 31,
      2007.





The
      following unaudited pro forma consolidated results of operations for the three
      and six month periods ended December 31, 2006 and December 31, 2005 assume
      that
      the acquisition of Jungo was completed on July 1, 2005.


**For
                      the three months
                      endedDecember 31,**
                  
                  **For
                      the six months endedDecember
                      31,**(in
                      thousands, except per-share
                      amounts)
                  
                  **2006**
                  
                  **2005**
                  
                  **2006**
                  
                  **2005**Revenue
                  
                  $
                  169,776
                  
                  $
                  155,187
                  
                  $
                  338,882
                  
                  $
                  302,287Net
                      income
                  
                  
                  28,719
                  
                  
                  25,357
                  
                  
                  64,699
                  
                  
                  51,795Basic
                    net income per
                    share
                  
                  $
                  0.50
                  
                  $
                  0.45
                  
                  $
                  1.14
                  
                  $
                  0.93Diluted
                      net income per share
                  
                  $
                  0.50
                  
                  $
                  0.44
                  
                  $
                  1.12
                  
                  $
                  0.90





Pro
      forma
      data may not be indicative of the results that would have been obtained had
      these events actually occurred at the beginning of the periods presented, nor
      does it intend to be a projection of future results.





Page
          6




On
      September 29, 2006, the Company acquired Interactive Television Entertainment
      ApS, a company based in Copenhagen, Denmark, which specializes in the
      development of video games published on multiple gaming platforms, for cash
      consideration of $1.8 million. The Company also assumed debt of $1.2 million,
      which was repaid in early October 2006 and is regarded as part of the initial
      purchase consideration. The excess purchase price over the fair value of the
      tangible net assets acquired including acquisition related costs was $2.6
      million, of which $1.9 million has been preliminarily allocated to identifiable
      finite-lived intangible assets with the remaining $0.7 million preliminarily
      allocated to goodwill. This allocation is preliminary and may be adjusted when
      a
      detailed assessment and valuation of the separable assets and liabilities
      acquired is completed.





*Fiscal
      200* *6
      transaction*




On
      September 2, 2005, the Company acquired NT Media Limited (“NT Media”) for
      initial cash consideration and costs totaling $3.1 million, net of cash
      acquired. Further payments may be made under the terms of the acquisition
      agreement up to a maximum of approximately $4.6 million in cash over the period
      to fiscal 2009, contingent upon the business achieving certain targets through
      September 2, 2008. As of December 31, 2006, we have paid a total of
      $1.9 million in conditional consideration and accrued a further $0.8
      million.








**Note
      6.**  **Short-term
      investments**




The
      short-term investment balance at December 31, 2006 and June 30, 2006 was
      comprised of cash deposits at banks with an original term of six months.








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


(in
                thousands)
              
              **As
                  ofDecember
                  31,****2006**
              
              **As
                  of****June
                  30, 2006**Gross
                  amount due
              
              $
              126,084
              
              $
              98,840Less
                  valuation reserves
              
              
              (2,229
              )
              
              (1,124
              )$
              123,855
              
              $
              97,716








**Note
      8.**  **Inventories**


(in
                thousands)
              
              **As
                  ofDecember
                  31,****2006**
              
              **As
                  of****June
                  30, 2006**Unprocessed
                  smart cards and their components
              
              $
              46,336
              
              $
              37,579Other
                  smart card inventory
              
              
              3,481
              
              
              2,731Inventory
                  reserves
              
              
              (3,627
              )
              
              (2,511
              )46,190
              
              
              37,799Contract
                  work-in-progress
              
              
              4,529
              
              
              1,541Total
                  inventories
              
              $
              50,719
              
              $
              39,340


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





Page
          7




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


(in
                  thousands)
                
                **As
                    ofDecember
                    31,****2006**
                
                **As
                    of****June
                    30, 2006**Deferred
                    security fees
                
                $
                157,545
                
                $
                134,129Advance
                    receipts and other deferred income
                
                
                55,780
                
                
                45,892Total
                    deferred income
                
                $
                213,325
                
                $
                180,021$
                79,119
                
                $
                45,492Included
                    within current liabilities
                
                
                134,206
                
                
                134,529Included
                    within non-current liabilities
                
                $
                213,325
                
                $
                180,021







**Note
      10.**  **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’s
      subsidiaries or affiliates and the Company are entered into in the context
      of
      two entities over which a third entity exercises significant influence or
      control. There can be no assurance, therefore, that each of the agreements,
      the
      transactions provided for therein or any amendments thereof will be effected
      on
      terms at least as favorable to the Company as could have been obtained from
      unaffiliated third parties. Any new contracts with related parties or
      significant amendments to such contracts are approved by the Audit Committee
      (the “Audit Committee”) of the Company’s Board of Directors (the
“Board”).





These
      transactions are of three main types: the provision by the Company of technology
      and services for digital pay-television systems; the payment by the Company
      of
      royalties for the use of certain intellectual property rights; and, the receipt
      by the Company of some administration and finance services.




**a)
      Provision of technology and services**




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





Revenue
      recognized from such related parties was as follows:


**For
                        the three months
                        endedDecember 31,**
                    
                    **For
                        the six months endedDecember
                        31,**(in
                        thousands)
                    
                    **2006**
                    
                    **2005**
                    
                    **2006**
                    
                    **2005**Revenue
                    
                    $
                    122,659
                    
                    $
                    118,077
                    
                    $
                    254,862
                    
                    $
                    229,399


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


(in
                  thousands)
                
                **As
                    ofDecember
                    31,****2006**
                
                **As
                    of****June
                    30, 2006**Accounts
                    receivable (net of reserves of $1,828 and $638)
                
                $
                87,718
                
                $
                74,295Accrued
                    income
                
                
                26,618
                
                
                25,434Deferred
                    income
                
                
                (175,869
                )
                
                (160,196
                )





**b)
      Royalty payments**




A
      royalty
      is payable to a related party in respect of certain intellectual property rights
      which the Company has licensed for use in certain applications supplied to
      customers.





Page
          8




The
      royalty expense in respect of this related party arrangement was as
      follows:


**For
                          the three months
                          endedDecember 31,**
                      
                      **For
                          the six months endedDecember
                          31,**(in
                          thousands)
                      
                      **2006**
                      
                      **2005**
                      
                      **2006**
                      
                      **2005**Royalty
                            expense payable to related party,included
                            within cost of goods and services sold
                      
                      $
                      397
                      
                      $
                      428
                      
                      $
                      1,135
                      
                      $
                      1,384





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


(in
                    thousands)
                  
                  **As
                      ofDecember
                      31,****2006**
                  
                  **As
                      of****June
                      30, 2006**Accrued
                      expenses
                  
                  $
                  1,885
                  
                  $
                  750





**c)
      Administration and finance services**




News
      Corporation provides services under a Master Intercompany Agreement which
      provides, among other things, for arrangements governing the relationship
      between the Company and News Corporation. The consideration for each of the
      services and other arrangements set forth in the Master Intercompany Agreement
      is mutually agreed and based upon allocated costs. All such consideration and
      any material arrangements are subject to the approval of the Audit Committee.
      The services covered by the Master Intercompany Agreement include cash
      management and financing, services of News Corporation employees, facility
      arrangements and employee matters, including pensions and certain other
      services.





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


**For
                            the three months
                            endedDecember 31,**
                        
                        **For
                            the six months endedDecember
                            31,**(in
                            thousands)
                        
                        **2006**
                        
                        **2005**
                        
                        **2006**
                        
                        **2005**Administration
                              fees charged to the Company by related parties
                        
                        $
                        59
                        
                        $
                        43
                        
                        $
                        118
                        
                        $
                        86
 As
        part
        of these administration and finance services, News Corporation pays certain
        costs (principally certain payroll, legal and property expenses) on behalf
        of
        the Company. The Company reimburses News Corporation for such payments,
        typically the month following that in which the payment was made by News
        Corporation. Included within the consolidated balance sheets are the following
        amounts which were owed to News Corporation in respect of administrative
        services and other costs paid by News Corporation on behalf of the
        Company:


(in
                          thousands)
                        
                        **As
                            ofDecember
                            31,****2006**
                        
                        **As
                            of****June
                            30, 2006**Accounts
                            payable
                        
                        $
                        3,770
                        
                        $
                        4,228





**d)
      Other**




The
      Company has a short-term loan facility of £30 million (approximately $59
      million) from News Corporation. The facility has no expiry date and no amounts
      were drawn down as of December 31, 2006 or June 30, 2006. The facility is
      considered to be adequate for the Company’s needs.





The
      Company has entered into cross-guarantees with HSBC Bank plc (“HSBC”), providing
      mutual guarantees with other subsidiaries of News Corporation for amounts owed
      to HSBC under a collective overdraft facility of £20 million (approximately
      $39 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 as of December 31, 2006 or June 30, 2006 which would
      be covered by these guarantees.





Page
          9







**Note
      11.**  **Contingencies
      and commitments**




**a)
      Litigation**




*Echostar
      Litigation*




On
      June
      6, 2003, Echostar Communications Corporation, Echostar Satellite Corporation,
      Echostar Technologies Corporation and Nagrastar L.L.C. (collectively,
“Echostar”) filed an action against the Company in the United States District
      Court for the Central District of California. Echostar filed an amended
      complaint on October 8, 2003, which purported to allege claims for violation
      of
      the Digital Millennium Copyright Act (“DMCA”), the Communications Act of 1934
      (“CA”), the Electronic Communications Privacy Act, the Computer Fraud and Abuse
      Act, California’s Unfair Competition statute and the federal RICO statute. The
      complaint also purported to allege claims for civil conspiracy, misappropriation
      of trade secrets and interference with prospective business advantage. The
      complaint sought injunctive relief, unspecified compensatory and exemplary
      damages and restitution. On December 22, 2003, all of the claims were dismissed
      by the court, except for the DMCA, CA and unfair competition claims, and the
      court limited these claims to acts allegedly occurring within three years of
      the
      filing of Echostar’s original complaint.





After
      Echostar filed a second amended complaint, the Company filed a motion to dismiss
      this complaint on March 31, 2004. On July 21, 2004, the court issued an order
      directing Echostar to, among other things, file a third amended complaint within
      ten days correcting various deficiencies noted in the second amended complaint.
      Echostar filed its third amended complaint on August 4, 2004. On August 6,
      2004,
      the court ruled that the Company was free to file a motion to dismiss the third
      amended complaint, which the Company did on September 20, 2004. The hearing
      occurred on January 3, 2005. On February 28, 2005, the court issued an order
      treating the Company’s motion to dismiss as a motion for a more definite
      statement, granting the motion and giving Echostar until March 30, 2005 to
      file
      a fourth amended compliant correcting various deficiencies noted in the third
      amended complaint. On March 30, 2005, Echostar filed a fourth amended complaint,
      which the Company moved to dismiss. On July 27, 2005, the court granted in
      part
      and denied in part the Company’s motion to dismiss, and again limited Echostar’s
      surviving claims to acts allegedly occurring within three years of the filing
      of
      Echostar’s original complaint. The Company 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 a Second Amended Answer with Counterclaims, which
      Echostar answered on December 27, 2005. The court has set this case to go to
      trial in November 2007.





*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. On March 9, 2006, the district court granted
      defendants’ motion for summary judgment, finding that the defendants did not
      infringe IETC’s patent. The district court entered judgment for defendants on
      March 24, 2006. IETC filed an appeal to the United States Court of Appeals
      for
      the Federal Circuit. The parties completed all briefing on the appeal on October
      4, 2006.





On
      December 6, 2006, the Court of Appeals notified the parties that the appeal
      was
      defective because the order IETC appealed from was not final. The Court of
      Appeals directed IETC to obtain a final order from the district court by January
      2, 2007, or the appeal would be dismissed. IETC and defendants subsequently
      notified the Court of Appeals that they were close to reaching an agreement
      settling the case and consented to dismissal of the appeal. The Court of Appeals
      has removed the appeal hearing from its calendar to await finalization of the
      settlement. The Company believes that any settlement will not have a material
      impact on the financial position of the Company.





Page
          10




*Sogecable
      Litigation*




On
      July
      25, 2003, Sogecable, S.A. and its subsidiary Canalsatellite Digital, S.L.,
      Spanish satellite broadcasters and customers of Canal+ Technologies SA
      (together, “Sogecable”), filed an action against the Company in the United
      States District Court for the Central District of California. Sogecable filed
      an
      amended complaint on October 9, 2003, which purported to allege claims for
      violation of the DMCA and the federal RICO statute. The amended complaint also
      purported to allege claims for interference with contract and prospective
      business advantage. The complaint sought injunctive relief, unspecified
      compensatory and exemplary damages and restitution. On December 22, 2003, all
      of
      the claims were dismissed by the court. Sogecable filed a second amended
      complaint. The Company filed a motion to dismiss the second amended complaint
      on
      March 31, 2004. On August 4, 2004, the court issued an order dismissing the
      second amended complaint in its entirety. Sogecable had until October 4, 2004
      to
      file a third amended complaint. On October 1, 2004, Sogecable notified the
      court
      that it would not be filing a third amended complaint, but would appeal the
      court’s entry of final judgment dismissing the suit to the United States Ninth
      Circuit Court of Appeals. On December 14, 2006, the appellate court issued
      a
      memorandum decision reversing the district court’s dismissal. On January 26,
      2007, the Company filed its petition for rehearing by an en banc panel of the
      United States Ninth Circuit Court of Appeals.





*Barry
      Thomas* *Litigation*




On
      November 28, 2005, Barry W. Thomas filed a complaint alleging infringement
      of
      United States Patent No. 4,777,354 by DIRECTV, Inc., its parent The DIRECTV
      Group, Inc., and the National Rural Telecommunications Cooperative in the United
      States Distinct Court for the Western District of North Carolina, Charlotte
      Division, captioned *Barry
      W. Thomas v. DIRECTV, Inc., et al.* ,
      No.
      3:05CV496-K (W.D.N.C.). Although not a party to this case, the Company has
      assumed a share in the cost of DIRECTV, Inc.’s defense. The asserted patent
      expired on January 27, 2006.




On
      February 24, 2006, Mr. Thomas voluntarily dismissed his complaint against The
      DIRECTV Group, Inc., but not his complaint against DIRECTV, Inc. On February
      27,
      2006, DIRECTV, Inc. filed an Answer and Counterclaims where, among other things,
      DIRECTV, Inc. denied Mr. Thomas’s allegations of infringement and alleged that
      the patent is invalid, unenforceable, and that Mr. Thomas’s cause of action is
      barred by the equitable doctrine of laches.





DIRECTV,
      Inc. filed a motion for summary judgment barring pre-suit damages based on
      its
      laches defense on September 12, 2006. The court granted DIRECTV, Inc.’s motion
      on December 19, 2006, limiting DIRECTV, Inc.’s potential liability to the two
      month period between the filing of the complaint and the expiration of the
      patent. There is no schedule for pretrial proceedings or trial date set by
      the
      court, although the court held a patent claim construction hearing on November
      17, 2006. The parties are now awaiting the court’s decision on issues of claim
      construction and further guidance concerning a case schedule.





The
      Company believes Mr. Thomas’s claims are without merit and will continue to
      vigorously defend itself in this matter.





**b)
      Contingent consideration for business acquisitions**




Additional
      consideration of up to $17.0 million may be payable to the vendors of Jungo,
      contingent upon Jungo achieving certain revenue and profitability targets in
      the
      fiscal year ending December 31, 2007. Additional contingent consideration of
      up
      to approximately $2.8 million (of which $0.8 million had been accrued as of
      December 31, 2006) may be payable to the vendors of NT Media, contingent upon
      future revenues of NT Media for the period through September 2,
      2008.





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





**d)
      Other**




The
      nature of the Company’s business is such that it may be subject to claims by
      third parties alleging infringements of various intellectual property rights.
      Such claims are vigorously defended. Where a liability arising from these claims
      is probable, an accrual is made based on management’s best estimate. It is not
      considered that any resulting liability in excess of amounts recognized in
      these
      consolidated financial statements would materially affect the Company’s
      financial position.





Page
          11




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








**Note
      12.**  **Equity-based
      compensation plans**




On
      October 30, 2006, the Company’s shareholders approved the NDS 2006 Long-Term
      Incentive Plan (the “Plan”). The Plan will terminate on October 30, 2016, unless
      terminated earlier pursuant to its terms. As of December 31, 2006, no grants
      were made pursuant to the Plan. The Plan provides for awards of stock options
      to
      purchase Series A ordinary shares, restricted awards, conditional awards, stock
      appreciation rights or awards of Series A Ordinary Shares, the terms and
      conditions of which are described in the Plan. The maximum number of Series
      A
      Ordinary Shares that may be issued or delivered under the Plan is 10,000,000
      shares. The Plan will be administered by the Board or a committee appointed
      by
      the Board.





There
      will be no further stock options granted under two of the Company’s existing
      stock option plans, The NDS 1997 Executive Share Option Scheme or The NDS 1999
      Executive Share Option Scheme; however, further grants may be made under the
      NDS
      U.K. Approved Share Option Scheme, which will be treated as a sub-scheme of
      the
      Plan.





The
      following amounts have been recorded in the consolidated financial statements
      concerning the Company’s equity-based compensation plans:


**For
                  the three months endedDecember
                  31,**
              
              **For
                  the six months endedDecember
                  31,**(in
                thousands, except share amounts)
              
              **2006**
              
              **2005**
              
              **2006**
              
              **2005**Number
                  of options exercised
              
              
              294,017
              
              
              592,949
              
              
              326,078
              
              
              800,625Total
                  intrinsic value of options exercised
              
              $
              9,403
              
              $
              15,680
              
              $
              10,247
              
              $
              20,391Stock-based
                  compensation cost,included
                  within the consolidated statement of operations:Operating
                  expenses
              
              $
              2,063
              
              $
              735
              
              $
              4,378
              
              $
              1,712Tax
                  benefit
              
              
              (279
              )
              
              (151
              )
              
              (640
              )
              
              (278
              )Net
                  of tax amount
              
              $
              1,784
              
              $
              584
              
              $
              3,738
              
              $
              1,434Cash
                  received from exercise of stock options
              
              $
              4,638
              
              $
              6,990
              
              $
              5,245
              
              $
              9,787Excess
                  tax benefit from exercise of stock options
              
              $
              1,763
              
              $
              3,778
              
              $
              1,790
              
              $
              4,578
 As
        of
        December 31, 2006, the total compensation cost related to non-vested stock
        option awards not yet recognized was approximately $21.8 million and the
        period over which it is expected to be recognized is 3.1 years. The Board
        may
        grant additional stock options or other equity-based compensation, which
        would
        result in additional operating expenses being recorded in future
        periods.




Page
          12




**Note
      13.**  **Supplementary
      cash flow information**


**For
                  the six months ended****December
                  31,**(in
                  thousands)
              
              **2006**
              
              **2005****Cash
                  receipts and payments:**Interest
                  received in cash
              
              $
              10,038
              
              $
              5,352Cash
                  payments for income taxes
              
              
              (21,993
              )
              
              (4,646
              )Gross
                  purchases of short-term investments
              
              
              (203,387
              )
              
              —Gross
                  sales of short-term investments
              
              
              184,401
              
              
              —Cash
                  paid in respect of deferred consideration for acquisitions
              
              
              (1,937
              )
              
              —**Supplemental
                  information on businesses acquired:**Fair
                  value of non-cash assets acquired (1)
              
              
              92,213
              
              
              3,489Cash
                  acquired
              
              
              13,435
              
              
              67Less:
                  liabilities assumed (1)
              
              
              (11,694
              )
              
              (368
              )Cash
                  paid in respect of acquisitions
              
              $
              93,954
              
              $
              3,188





────────


(1)
            Based
                on preliminary allocation of purchase
                price








**Note
      14.**  **Pension
      expense**




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


**For
                  the three months endedDecember
                  31,**
              
              **For
                  the six months endedDecember
                  31,**(in
                thousands)
              
              **2006**
              
              **2005**
              
              **2006**
              
              **2005**Service
                  cost
              
              $
              51
              
              $
              43
              
              $
              102
              
              $
              88Interest
                cost
              
              
              310
              
              
              241
              
              
              614
              
              
              486Expected
                  return on plan assets
              
              
              (256
              )
              
              (203
              )
              
              (507
              )
              
              (410
              )Amortization
                of unrecognized net loss
              
              
              149
              
              
              144
              
              
              296
              
              
              290$
              254
              
              $
              225
              
              $
              505
              
              $
              454


During
      the six months ended December 31, 2006 and 2005, the Company made discretionary
      contributions of $0.9 million and $0.9 million, respectively, to the defined
      benefit pension scheme.





Page
          13


**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, its
      directors or its officers with respect to, among other things, trends affecting
      NDS Group plc’s financial condition or results of operations. Unless otherwise
      indicated or unless the context requires otherwise, all reference herein to
      the
“Company,” “we,” “our” and “us” refers to the NDS Group plc. Readers of this
      document are cautioned that any such forward-looking statements are not
      guarantees of future performance and involve risks and uncertainties. Those
      risks and uncertainties are discussed under Item 1A. Risk Factors of Part II
      of
      this Quarterly Report on Form 10-Q, in the Company’s Annual Report on Form 10-K
      for the fiscal year ended June 30, 2006 as filed with the Securities and
      Exchange Commission (“SEC”) on September 1, 2006 (SEC file no. 0-30364), as
      well as the information set forth elsewhere in this Quarterly Report. The
      Company does not ordinarily make projections of its future operating results
      and
      undertakes no obligation (and expressly disclaims any obligation) to publicly
      update or revise any forward-looking statements, whether as a result of new
      information, future events or otherwise, except as required by law. Readers
      should carefully review other documents filed by the Company with the SEC.
      This
      section should be read in conjunction with the unaudited consolidated financial
      statements of the Company and related notes set forth elsewhere
      herein.***





**Introduction**




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





·
            ***Overview
                of our business ─***This section provides a general description of our business and
                developments that have occurred during fiscal 2007 that we believe
                are
                important in understanding the results of operations and financial
                condition or to disclose known future
                trends.





·
            ***Results
                of operations ─***This section provides an analysis of our results of operations for
                the
                three and six month periods ended December 31, 2006 and 2005. In
                addition,
                a brief description is provided of significant transactions and events
                that impact the comparability of the results being
                analyzed.





·
            ***Liquidity
                and capital resources ─***This section provides an analysis of our cash flows for the six month
                periods ended December 31, 2006 and 2005. It includes a discussion
                of the
                financial capacity available to fund our future commitments and
                obligations, as well as a discussion of other financing
                arrangements.





**Overview
      of our business**




We
      supply
      open end-to-end digital technology and services to digital pay-television
      platform operators and content providers. Our technologies include conditional
      access and microprocessor security, broadcast stream management, set-top box
      middleware, electronic program guides (“EPGs”), digital video recording (“DVR”)
      technologies and interactive infrastructure and applications. We provide
      technologies and services supporting standard definition and high definition
      televisions and a variety of industry standards. Our software systems,
      consultancy and systems integration services are focused on providing platform
      operators and content providers with technology to help them profit from the
      secure distribution of digital information and entertainment to consumer devices
      which incorporate various technologies supplied by us.





Our
      main
      customers are the digital pay-television platform operators who utilize a
      broadcast infrastructure to deliver video and data to multiple subscribers.
      In
      addition, we may sell interactive applications to content providers. Such
      customers usually do not operate a broadcast platform, but provide content
      for
      transmission over a platform operator’s network. The applications we sell to
      content providers make use of the functions and capabilities of the broadcast
      infrastructure.





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





Our
      customers consist of a limited number of large digital pay-television platform
      operators who are introducing, marketing and promoting products and services
      that utilize our technology. We currently derive, and we expect to continue
      to
      derive, a significant portion of our revenues from a limited number of large
      customers. Our three largest customers are DIRECTV in the United States, BSkyB
      in the United Kingdom and Sky Italia in Italy. Together, these three customers
      contributed, directly and indirectly, approximately 66% of our revenues in
      the
      six month period ended December 31, 2006. We expect that a limited number of
      customers will continue to contribute a significant portion of our
      revenues.





Page
          14




We
      compete primarily with technologies such as NagraVision (developed by Kudelski
      SA), DigiCipher (developed by Motorola, Inc.), Power Key (developed by
      Scientific-Atlanta, Inc.), OpenTV (developed by OpenTV Corp., a company
      controlled by Kudelski SA) and Microsoft TV Edition (developed by Microsoft
      Corporation) both to attract new customers and to retain our existing customers.
      In addition, some of the companies that currently operate in the software
      business, but which have not historically been active competitors of ours,
      may,
      through acquisitions or the development of their own resources, seek to enter
      and obtain significant market share in our current or planned business
      areas.





A
      significant portion of our revenues is dependent upon our customers’ subscriber
      base, the growth in their subscriber base and the related quantities of set-top
      boxes deployed. Revenues can vary from period to period as our revenues reflect
      a small number of relatively large orders for our technology and services.
      These
      generally have long sales and order cycles, and delivery and acceptance of
      our
      products and services fluctuate over the course of these cycles. Our accounting
      policies often require us to defer revenue until after our technologies have
      been deployed by our customers, or to recognize contract revenues over the
      term
      of any post-contract support period.





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.





**Other** **recent
      business developments**




On
      December 31, 2006, we completed the acquisition of Jungo Limited (“Jungo”).
      Jungo, which is based in Israel, develops and supplies software for residential
      gateway devices. The residential gateway device and the software contained
      in it
      act as the interface between the broadband network and the various consumer
      electronic devices that are attached in a home network. The residential gateway
      device plays an important role in controlling the quality and management of
      the
      individual services. Residential gateways devices have grown in sophistication
      and are increasingly deployed by telecom companies as the main service
      termination point in consumers’ premises for the delivery of a variety of
      services, including broadband data, video content over broadband (“IPTV”), voice
      over internet protocol (“VoIP”) telephony, video telephony and convergent
      wireless/wireline telephony. Providing the underlying software for both the
      residential gateway device and the set-top box will allow us to develop
      integrated solutions for enhanced IPTV and broadband services. In addition,
      we
      expect that the collaboration between these two devices in the home network
      will
      allow platform operators to introduce new services, such as enabling the set-top
      box to access music, video and pictures stored on personal computers in the
      home
      network, archiving of digital content stored on a DVR and video conferencing
      via
      VoIP. The acquisition of Jungo was completed on the last day of the fiscal
      period; therefore, there was no impact on our net income for either of the
      three
      or six month periods ended December 31, 2006.





**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.”





Page
          15




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





We
      distinguish between revenues from “established technologies” and revenues from
“new technologies.” We categorize as revenues from established technologies our
      revenue from conditional access, middleware and program guide technologies
      and
      fees from the customization and integration of those technologies into head-end
      systems and set-top boxes. Revenues from these technologies are allocated
      between the three different revenue streams identified above. We aggregate
      under
      our separate new technologies revenue stream all revenues which we derive from
      DVR technologies, technologies involving IPTV, interactive infrastructure and
      applications, and games and gaming. We anticipate that revenues of Jungo will
      also be included within new technologies and that the activities of Jungo will
      not comprise a separate reportable segment. As our business develops, we will
      consider whether these groupings of revenue remain appropriate.





**Costs
      and expenses**




Our
      costs
      and expenses consist of: physical and processing costs of smart cards;
      personnel, travel and facilities costs; royalties paid for the right to use
      and
      sub-license certain intellectual property rights owned by third parties; and,
      the amortization of intangible assets, such as intellectual property rights
      which we have acquired for incorporation within our technologies.





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





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





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





Research
      and development costs consist mainly of personnel and related costs, including
      an allocation of facilities costs, attributable to our technical employees
      who
      are developing our technology and adapting it for specific customer
      requirements. These costs also include consumables and the depreciation of
      equipment used in development and test activities and are net of the benefit
      of
      grants and other incentives.





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





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





Page
          16


**Results
      of operations**




**Commentary
      on the three and six month periods ended December 31, 2006**




**Revenue**




Revenue
      for the periods under review was as follows:


**For
                  the three months endedDecember
                  31,**(in
                thousands)
              
              **2006**
              
              **2005**
              
              **Change**
              
              **%
                  Change**Conditional
                  access
              
              $
              98,184
              
              $
              87,619
              
              $
              10,565
              
              
              12
              %Integration,
                  development & support
              
              
              12,683
              
              
              11,860
              
              
              823
              
              
              7
              %License
                  fees & royalties
              
              
              23,450
              
              
              26,941
              
              
              (3,491
              )
              
              (13
              %)New
                  technologies
              
              
              28,922
              
              
              23,047
              
              
              5,875
              
              
              25
              %Other
              
              
              1,823
              
              
              2,736
              
              
              (913
              )
              
              **Total
                  revenue
              
              $
              165,062
              
              $
              152,203
              
              $
              12,859
              
              
              8
              %


────────


** Not
      meaningful.


**For
                    the six months endedDecember
                    31,**(in
                  thousands)
                
                **2006**
                
                **2005**
                
                **Change**
                
                **%
                    Change**Conditional
                    access
                
                $
                191,031
                
                $
                170,764
                
                $
                20,267
                
                
                12
                %Integration,
                    development & support
                
                
                31,095
                
                
                25,694
                
                
                5,401
                
                
                21
                %License
                    fees & royalties
                
                
                47,800
                
                
                51,507
                
                
                (3,707
                )
                
                (7
                %)New
                    technologies
                
                
                56,421
                
                
                43,906
                
                
                12,515
                
                
                29
                %Other
                
                
                2,877
                
                
                4,827
                
                
                (1,950
                )
                
                **Total
                    revenue
                
                $
                329,224
                
                $
                296,698
                
                $
                32,526
                
                
                11
                %


────────


** Not
        meaningful.





The
      increase in conditional access revenues was due to higher security fees and
      a
      higher volume of smart cards delivered to customers. Higher security fees arise
      from increases in the number of authorized smart cards in use at our broadcast
      platform customers, which have grown as follows:


**For
                  the three months
                  ended****December
                  31,**
              
              
              **For
                  the six months
                  ended****December
                  31,**(in
                millions)
              
              
              **2006**
              
              
              **2005**
              
              
              **2006**
              
              
              **2005**Number
                  of authorized cards, beginning of period
              
              
              66.6
              
              
              58.5
              
              
              65.0
              
              
              56.7Net
                  additions
              
              
              3.3
              
              
              2.9
              
              
              4.9
              
              
              4.7Number
                  of authorized cards, end of period
              
              
              69.9
              
              
              61.4
              
              
              69.9
              
              
              61.4





The
      increase in the number of smart cards delivered in the three and six month
      periods ended December 31, 2006, compared to the corresponding periods in the
      previous fiscal year, reflects higher demand from customers in Asia and the
      United States and deliveries to new customers in Europe, China and India. The
      quantity of smart cards delivered in each period was as follows:


**For
                    the three months
                    ended****December
                    31,**
                
                
                **For
                    the six months
                    ended****December
                    31,**(in
                  millions)
                
                
                **2006**
                
                
                **2005**
                
                
                **2006**
                
                
                **2005**Number
                    of authorized cards, beginning of period
                
                
                6.3
                
                
                6.1
                
                
                13.0
                
                
                11.6





Page
          17




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





Integration,
      development and support revenues increased by 7% in the three month period
      ended
      December 31, 2006 and 21% in the six month period ended December 31, 2006,
      compared to the corresponding periods of the previous fiscal year. The increases
      were due to revenues from new customers and from the delivery of enhancements
      to
      several of our major customers.





License
      fee and royalty revenues decreased by 13% and 7% in the three and six month
      periods ended December 31, 2006, respectively, compared to the corresponding
      periods of the previous fiscal year. This revenue stream is substantially
      affected by the number of set-top boxes deployed with our MediaHighway
      middleware technology in a given period. The table below reflects the number
      of
      MediaHighway-enabled set-top boxes deployed by our customers during the three
      and six month periods ended December 31, 2006:


**For
                    the three months
                    ended****December
                    31,**
                
                
                **For
                    the six months
                    ended****December
                    31,**(in
                  millions)
                
                
                **2006**
                
                
                **2005**
                
                
                **2006**
                
                
                **2005**Number
                    of MediaHighway-enabled set-top boxes, beginning of period
                
                
                44.7
                
                
                26.7
                
                
                41.6
                
                
                20.4Additions
                
                
                5.5
                
                
                7.4
                
                
                8.6
                
                
                13.7Number
                    of MediaHighway-enabled set-top boxes, end of period
                
                
                50.2
                
                
                34.1
                
                
                50.2
                
                
                34.1


The
      volume of MediaHighway set-top boxes enabled during the first and second
      quarters of fiscal 2006 was unusually high, as DIRECTV commenced the initial
      download of MediaHighway and other of our related technologies to certain models
      of set-top boxes in use by their subscribers during that period. The decline
      in
      license fee and royalty revenues was offset in part by the recognition of
      license fee and royalty revenue following the launch of the Tata-Sky broadcast
      platform in India in August 2006.





The
      increase in revenues from new technologies of 25% and 29% in the three and
      six
      month periods ended December 31, 2006, respectively, compared to the
      corresponding periods of the previous fiscal year, was due to higher revenues
      from our DVR technologies. The increase in the cumulative number of DVR-enabled
      set-top boxes in each period was as follows:


**For
                    the three months
                    ended****December
                    31,**
                
                
                **For
                    the six months
                    ended****December
                    31,**(in
                  millions)
                
                
                **2006**
                
                
                **2005**
                
                
                **2006**
                
                
                **2005**Number
                    of DVR-enabled set-top boxes, beginning of period
                
                
                4.2
                
                
                1.7
                
                
                3.5
                
                
                1.4Additions
                
                
                1.1
                
                
                0.3
                
                
                1.8
                
                
                0.6Number
                    of DVR-enabled set-top boxes, end of period
                
                
                5.3
                
                
                2.0
                
                
                5.3
                
                
                2.0





In
      addition to the matters referred to above, comparisons of revenues for the
      three
      and six month periods ended December 31, 2006 to the corresponding periods
      in
      the prior fiscal year were also affected by the relative weakness of the U.S.
      dollar over the periods. Approximately 49% of our revenues were denominated
      in
      currencies other than the U.S. dollar (principally pounds sterling and the
      euro). We estimate that the weaker U.S. dollar has favorably impacted our total
      reported revenues for the six month period ended December 31, 2006 by
      approximately $10 million, or 3%, compared to the corresponding period of the
      prior fiscal year.





Page
          18


**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 endedDecember
                  31,****2006**
              
              **2005**
              
              **Change**
              
              **%
                  Change**Smart
                  card costs
              
              $
              19,255
              
              $
              23,082
              
              $
              (3,827
              )
              
              (17
              %)Operations
                  & support
              
              
              38,064
              
              
              34,902
              
              
              3,162
              
              
              9
              %Royalties
              
              
              3,582
              
              
              2,781
              
              
              801
              
              
              29
              %Other
              
              
              217
              
              
              1,011
              
              
              (794
              )
              
              **Total
                  cost of goods and services sold
              
              $
              61,118
              
              $
              61,776
              
              $
              (658
              )
              
              (1
              %)Gross
                  margin
              
              $
              103,944
              
              $
              90,427
              
              $
              13,517
              
              
              15
              %Gross
                  margin as a percentage of revenues
              
              
              63.0
              %
              
              59.4
              %
              
              3.6
              %
              
              **
 
 ────────
 ** Not
          meaningful.
  **For
                  the six months endedDecember
                  31,****2006**
              
              **2005**
              
              **Change**
              
              **%
                  Change**Smart
                  card costs
              
              $
              40,074
              
              $
              44,707
              
              $
              (4,633
              )
              
              10
              %Operations
                  & support
              
              
              74,995
              
              
              68,581
              
              
              6,414
              
              
              9
              %Royalties
              
              
              7,096
              
              
              5,678
              
              
              1,418
              
              
              25
              %Other
              
              
              1,188
              
              
              2,633
              
              
              (1,445
              )
              
              **Total
                  cost of goods and services sold
              
              $
              123,353
              
              $
              121,599
              
              $
              1,754
              
              
              1
              %Gross
                  margin
              
              $
              205,871
              
              $
              175,099
              
              $
              30,772
              
              
              18
              %Gross
                  margin as a percentage of revenues
              
              
              62.5
              %
              
              59.0
              %
              
              3.5
              %
              
              **




──────── ** Not
      meaningful.




We
      consider that gross margin, defined as revenues less costs and expenses
      associated with those revenues (i.e., cost of goods and services sold), is
      an
      important measure for our management and investors. We consider that it gives
      a
      measure of profitability that distinguishes between those costs which are
      broadly a function of direct revenue-earning activities and costs which are
      of a
      general nature or which are incurred in the expectation of being able to earn
      future revenues. Cost of goods and services sold excludes charges in respect
      of
      the amortization of intellectual property rights and other finite-lived
      intangibles which we have acquired.





The
      decrease in smart card costs in the three and six month periods ended December
      31, 2006, compared to the corresponding periods of the previous fiscal year,
      was
      due to the lower unit costs, offset in part by higher deliveries of smart cards.
      Operations costs include employee and facilities costs related to smart card
      processing, customer support and development projects undertaken under customer
      contracts. The increase in operations and support costs in the three and six
      month periods ended December 31, 2006, compared to the corresponding periods
      of
      the previous fiscal year, was due to an increase in the number of our employees
      working on development, integration and support activities for our customers.
      Royalty costs are amounts we pay to third parties for the use of their
      technology and are calculated based on revenues derived from certain
      technologies. The increase in royalty expense for the three and six month
      periods ended December 31, 2006, compared to the corresponding periods of the
      previous fiscal year, was due to changes in the mix of revenues from different
      types of applications, principally an increase in revenues from conditional
      access applications.





As
      a
      consequence of these factors, gross margin as a percentage of revenues was
      63.0%
      and 62.5% for the three and six month periods ended December 31, 2006,
      respectively, compared to 59.4% and 59.0%, respectively, in the corresponding
      periods of the previous fiscal year.





Page
          19





**Operating
      expenses**




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


**For
                  the three months endedDecember
                  31,****2006**
              
              **2005**
              
              **Change**
              
              **%
                  Change**Research
                  & development
              
              $
              43,309
              
              $
              36,341
              
              $
              6,968
              
              
              10
              %Sales
                  & marketing
              
              
              9,314
              
              
              6,734
              
              
              2,580
              
              
              38
              %General
                  & administration
              
              
              11,411
              
              
              10,574
              
              
              837
              
              
              25
              %Amortization
                  of intangibles
              
              
              2,510
              
              
              2,458
              
              
              52
              
              
              2Total
                  operating expenses
              
              $
              66,544
              
              $
              56,107
              
              $
              10,437
              
              
              19
              %
  ──────── ** Not
          meaningful.


**For
                  the six months endedDecember
                  31,****2006**
              
              **2005**
              
              **Change**
              
              **%
                  Change**Research
                  & development
              
              $
              77,975
              
              $
              66,445
              
              $
              11,530
              
              
              17
              %Sales
                  & marketing
              
              
              17,291
              
              
              14,005
              
              
              3,286
              
              
              23
              %General
                  & administration
              
              
              23,688
              
              
              19,798
              
              
              3,890
              
              
              20
              %Amortization
                  of intangibles
              
              
              4,927
              
              
              4,796
              
              
              131
              
              
              3Total
                  operating expenses
              
              $
              123,881
              
              $
              105,044
              
              $
              18,837
              
              
              18
              %




──────── ** Not
        meaningful.




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





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


**For
                      the three months
                      ended****December
                      31,**
                  
                  
                  **For
                      the six months
                      ended****December
                      31,**(in
                    millions)
                  
                  
                  **2006**
                  
                  
                  **2005**
                  
                  
                  **2006**
                  
                  
                  **2005**Number
                      of employees, beginning of period
                  
                  
                  3,089
                  
                  
                  2,640
                  
                  
                  2,989
                  
                  
                  2,508Net
                      additions (1)
                  
                  
                  123
                  
                  
                  85
                  
                  
                  223
                  
                  
                  217Number
                      of employees, end of period (1)
                  
                  
                  3,212
                  
                  
                  2,725
                  
                  
                  3,212
                  
                  
                  2,725





────────


(1)
            Excludes
                136 employees of Jungo, acquired on December 31,
                2006.





Higher
      employee numbers have resulted in higher operating expenses in the three and
      six
      month periods ended December 31, 2006, compared to the corresponding periods
      in
      the previous fiscal year, due to higher payroll, travel and facilities costs.





Research
      and development costs increased by 19% and 17% for the three and six month
      periods ended December 31, 2006, respectively, compared to the corresponding
      periods of the previous fiscal year, as a result of higher employee headcount
      due to more research and development being performed. The increase in research
      and development expenses for the six month period ended December 31, 2006,
      compared to the corresponding period of the previous fiscal year, due to higher
      employee costs and infrastructure costs, was partially offset by a
      $5.5 million grant from the French government as a consequence of being
      engaged in certain eligible research projects. In the corresponding period
      of
      the previous period, the Company received an equivalent grant of $5.3 million.





Page
          20




Sales
      and
      marketing expenses increased by 38% and 23% in the three and six month periods
      ended December 31, 2006, respectively, compared to the corresponding periods
      of
      the previous fiscal year, as a result of higher employee headcount, increased
      facilities costs, attendance at trade shows and corporate communications
      activities.





General
      and administrative expenses increased by 8% and 20% in the three and six month
      periods ended December 31, 2006, respectively, compared to the corresponding
      periods of the previous fiscal year, due to higher costs in respect of stock
      options, higher legal expenses and business development costs, and higher
      facilities and infrastructure costs.





Amortization
      of finite-lived intangible assets increased by 2% and 3% in the three and six
      month periods ended December 31, 2006, respectively, compared to the
      corresponding periods of the previous fiscal year.





In
      addition to the matters referred to above, comparisons of expenses for the
      three
      and six month periods ended December 31, 2006, compared to the corresponding
      periods of the previous fiscal year, were also affected by the relative weakness
      of the U.S. dollar. In the six months ended December 31, 2006, approximately
      71%
      of our total expenses were denominated in currencies other than the U.S. dollar
      (principally pounds sterling, Israeli shekels and the euro). We estimate that
      the weaker U.S. dollar has adversely impacted our total reported expenses in
      the
      six month period ended December 31, 2006 by approximately $10 million, or 4%,
      compared to the corresponding period of the previous fiscal year.





**Operating
      income and other items**




As
      a
      result of the factors outlined above, operating income was $37.4 million, or
      22.7% of revenue, for the three month period ended December 31, 2006, compared
      to $34.3 million, or 22.5% of revenue, for the corresponding period of the
      previous fiscal year. For the six month period ended December 31, 2006,
      operating income was $82.0 million, or 24.9% of revenue, compared to $70.1
      million, or 23.6% of revenue, for the corresponding period of the previous
      fiscal year.




Interest
      income earned on cash deposits was $6.5 million and $12.5 million in the three
      and six month periods ended December 31, 2006, respectively, compared to $3.5
      million and $6.4 million, respectively, in the corresponding periods of the
      previous fiscal year. This was due to higher average cash balances and higher
      interest rates. Our effective tax rate was approximately 31% for all periods
      under review.





As
      a
      consequence of all these factors, net income for the three month period ended
      December 31, 2006 was $30.3 million, or $0.53 per share ($0.52 per share on
      a
      diluted basis), compared to $26.0 million, or $0.46 per share ($0.45 per share
      on a diluted basis), for the corresponding period of the previous fiscal year.
      Net income for the six month period ended December 31, 2006 was $65.4 million,
      or $1.15 per share ($1.13 per share on a diluted basis), compared to $53.1
      million, or $0.95 per share ($0.92 per share on a diluted basis), for the
      corresponding period of the previous fiscal year.





**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, 2006, we had cash, cash equivalents and short-term investments
      totaling $483.4 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, 2006, we had an unused credit facility to borrow
      up
      to £30 million (approximately $59 million) from a subsidiary of News
      Corporation. No amounts have been drawn under this facility.





The
      principal uses of cash that affect our liquidity position include purchases
      of
      smart cards, operational expenditures, capital expenditures, acquisitions and
      income tax payments.





**Sources
      and uses of cash**




During
      the six month period ended December 31, 2006, we paid a net $82.5 million in
      respect of business acquisitions and invested a net of $19.0 million in bank
      deposits with an initial maturity of more than three months. As a result of
      this, we had a net outflow of cash and cash equivalents of $45.1 million,
      compared to a net cash inflow of $41.1 million in the corresponding period
      of
      the previous fiscal year.





Page
          21




Net
      cash
      provided by operating activities was as follows:


**For
                  the six months endedDecember
                  31,**(in
                  thousands)
              
              **2006**
              
              **2005**Net
                  cash provided by operating activities
              
              $
              59,399
              
              $
              44,447





The
      increase in net cash provided by operating activities in the six month period
      ended December 31, 2006, compared to the corresponding period of the previous
      fiscal year, reflects higher receipts from customers and higher interest
      receipts, offset in part by higher payments for the purchase of smart cards,
      higher payments for operating expenses and higher tax payments. Net cash
      provided by operating activities includes receipts under security maintenance
      contracts where we have assumed the liability to procure and supply changeover
      cards in future periods. These arrangements will result in higher cash payments
      for the purchase of smart cards in future periods.


**For
                    the six months endedDecember
                    31,**(in
                    thousands)
                
                **2006**
                
                **2005**Capital
                    expenditure
                
                $
                10,361
                
                $
                15,014Proceeds
                  from sale
                  of property, plant and equipment
                
                
                (241
                )
                
                (382
                )Payments
                  for
                  business acquisitions
                
                
                82,456
                
                
                3,121Increase
                  in short-term investments
                
                
                18,986
                
                
                ─Net
                  cash used in investing activities
                
                $
                111,562
                
                $
                17,753


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





On
      December 31, 2006, we acquired Jungo for initial cash consideration of $90.9
      million ($77.5 million net of cash acquired). On September 29, 2006, we acquired
      Interactive Television Entertainment ApS, a company based in Copenhagen,
      Denmark, which specializes in the development of video games published on
      multiple gaming platforms, for cash consideration of $1.8 million. We also
      assumed debt of $1.2 million, which we repaid in early October 2006. In
      addition, during the six month period ended December 31, 2006, we paid
      approximately $1.9 million of additional consideration related to the
      acquisition of NT Media Limited (“NT Media”). In fiscal 2006, we acquired NT
      Media for initial cash consideration and costs totaling $3.1 million, net
      of cash acquired.





During
      the six month period ended December 31, 2006, we invested a further portion
      of
      our cash with banks on deposit for terms of up to six months, bringing the
      total
      amount invested as bank deposits with an initial term of more than three months
      to $203.4 million as of December 31, 2006.





Net
      cash
      generated by financing activities was as follows:


**For
                    the six months endedDecember
                    31,**(in
                    thousands)
                
                **2006**
                
                **2005**Issuance
                    of shares
                
                $
                5,245
                
                $
                9,787Excess
                  tax benefits realized on exercise of stock
                  options
                
                
                1,790
                
                
                4,578Net
                  cash generated by financing
                  activities
                
                $
                7,035
                
                $
                14,365


During
      the six month period ended December 31, 2006, we issued 326,078 of our Series
      A
      ordinary shares, par value $0.01 per share (“Series A Ordinary Shares”), to
      employees upon the exercise of their stock options. This compares to 800,625
      Series A Ordinary Shares issued to employees upon the exercise of their stock
      options in the corresponding period of the previous fiscal year. Certain stock
      option exercises resulted in a tax benefit higher than the amounts recorded
      in
      the consolidated statement of operations. Such tax benefits are shown as a
      financing cash flow to the extent that they were realized.





Page
          22




We
      have
      evaluated, and expect to continue to evaluate, possible acquisitions and
      dispositions of certain businesses. Such transactions may be material and may
      involve cash, our securities and/or the assumption of indebtedness.





**Commitments
      and contractual obligations**




Under
      the
      terms of our agreement with the vendors of Jungo, we may pay additional
      consideration of up to $17.0 million, contingent upon Jungo achieving certain
      revenue and profitability targets in the year ending December 31, 2007. Aside
      from this matter, there has been no material change to our commitments since
      June 30, 2006.







**Item
      3. Quantitative and Qualitative Disclosures About Market
      Risk**




The
      only
      significant financial market risk to which we are exposed is to changes in
      foreign exchange rates. We operate in international markets and have an
      operational presence in several countries. Accordingly, our costs and revenues
      are denominated in a mixture of U.S. dollars, pounds sterling and the euro.
      During the six months ended December 31, 2006, we amended the terms of
      employment with our employees in Israel such that their salaries and benefits
      are now denominated in Israeli shekels, rather than U.S. dollars as was
      previously the case. This change brought us in line with other companies
      operating in Israel, but increased our exposure to movements in the U.S. dollar
      - Israeli shekel exchange rate.





Historically,
      we have not entered into free-standing derivative contracts to hedge foreign
      exchange exposure arising from operating activities. We expect to review this
      policy from time to time as circumstances change. We had no derivative
      instruments outstanding as of December 31, 2006.





As
      of
      December 31, 2006, approximately 84% of our cash and short-term investments
      were
      held in U.S. dollars and 10% in pounds sterling, with most of the rest being
      in
      euro. Our policy is to hold cash in U.S. dollar bank deposits and to hold cash
      in other currencies to the extent that our cash flow projections indicate that
      we have need for those other currencies. Where we require other currencies
      or
      identify a surplus of non-U.S. dollar cash balances, we make purchases or sales
      on the spot market. Therefore, our reported cash balances are subject to
      fluctuations in foreign exchange rates. As a result of fluctuations in exchange
      rates, we experienced gains on cash holdings of $4.6 million in the six month
      period ended December 31, 2006, of which approximately $1.0 million was recorded
      within operating expenses, and the balance was recorded within other
      comprehensive income.







**Item
      4. Controls and Procedures**




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




The
      Company’s management, with the participation of the Company’s President and
      Chief Executive Officer and Chief Financial Officer, has evaluated the
      effectiveness of the Company’s disclosure controls and procedures (as such term
      is defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange
      Act
      of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by
      this quarterly report. Based on such evaluation, the Company’s President and
      Chief Executive Officer and Chief Financial Officer have concluded that, as
      of
      the end of such period, the Company’s disclosure controls and procedures were
      effective in recording, processing, summarizing and reporting, on a timely
      basis, information required to be disclosed by the Company in the reports that
      it files or submits under the Exchange Act and were effective in ensuring that
      information required to be disclosed by the Company in the reports it files
      or
      submits under the Exchange Act is accumulated and communicated to the Company’s
      management, including the Company’s Chief Executive Officer and Chief Financial
      Officer, as appropriate to allow timely decisions regarding required disclosure.





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




There
      were not 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 2007 that materially
      affected, or are reasonably likely to materially affect, the Company’s internal
      control over financial reporting.





Page
          23


**PART
      II - Other Information**






**Item
      1. Legal Proceedings**




See
      Note
      11a to the accompanying unaudited consolidated financial statements, which
      is
      incorporated herein by reference.








**Item
      1A. Risk Factors**




Prospective
      investors should consider carefully the risk factors set out below before making
      an investment in the Company’s securities.





**Our
      business will suffer if we do not respond to commercial and technological
      changes affecting the broadcasting industry.**




Our
      business and the market in which we operate are characterized by rapid
      commercial and technological change, evolving industry standards and frequent
      product enhancements. Many digital broadcasters are seeking more sophisticated
      software which will afford them greater flexibility in delivering content such
      as news, films and sports. They are also seeking to offer additional services,
      such as middleware, EPGs, games, gaming and other interactive applications,
      DVR
      functionality, home networks services and other services.





Our
      continued success will depend, in part, upon our ability to develop and market
      products and services that respond to technological changes and evolving
      industry standards in a timely and cost-effective manner. If the market in
      which
      we operate develops more slowly than we anticipate, or if we should fail to
      develop and introduce products and services that are compatible with industry
      standards, satisfy customer requirements and compete effectively with products
      and services offered by our competitors, our business, operating results and
      financial condition could be materially adversely affected.





**Our
      business may suffer if we and our customers do not respond to commercial and
      technological changes affecting the business of delivering information and
      entertainment, especially the threat of the internet and IPTV
      technologies.**




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





**Our
      operating results and growth could decline if our customers’ subscriber bases do
      not continue to increase.**




A
      significant portion of our revenues is derived from the sale of smart cards
      to
      our customers and ongoing fees paid by our customers on a monthly basis based
      on
      the number of active subscribers or authorized smart cards. We also receive
      royalties based on each set-top box manufactured or deployed which incorporates
      our technology. Therefore, a significant portion of our revenues is dependent
      upon our customers’ subscriber numbers, the growth in those numbers, the degree
      to which set-top boxes are replaced with enhanced models and the number of
      set-top boxes in each subscriber’s home. If our customers’ subscriber numbers do
      not continue to increase, we may be unable to generate substantial revenue
      growth or sustain our current revenue levels and, as a consequence, our
      business, operating results and financial condition could be materially
      adversely affected.





**Our
      business could be harmed if the security provided by our conditional access
      systems and products is compromised.**




We
      face
      risks relating to the failure of our conditional access systems to protect
      platform operators and content providers from signal theft. An important
      component of our conditional access systems is the smart cards we provide for
      the platform operators’ individual subscribers. Unauthorized viewing and use of
      content may be accomplished by counterfeiting the smart card or otherwise
      thwarting its security features. Any significant increase in the incidence
      of
      signal theft could require the replacement of a platform operator’s smart cards
      sooner than otherwise planned. In those cases where we have accepted specific
      responsibilities for maintaining the security of a platform operator’s
      conditional access system, significant costs could be imposed on us if a
      security breach requires an accelerated replacement of smart cards. To the
      extent that signal theft may result in the cessation of all, or some portion
      of,
      the per-subscriber fees paid to us by a broadcaster while the security breach
      is
      being remedied or, in the event of termination by the broadcaster of our
      agreement if the breach is not satisfactorily remedied, the resultant loss
      of
      revenues could have a material adverse effect on our business, operating results
      and financial condition. A significant increase in the level of signal theft,
      whether or not resulting from a failure of our conditional access systems,
      could
      also injure the reputation of our conditional access systems among our customers
      and potential customers and as a consequence, our business, operating results
      and financial condition could be materially adversely affected.





Page
          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
      IPTV. In addition, some of the companies that currently operate in the software
      business, but which have not historically been active competitors of ours may,
      in the future, through acquisitions or the development of their own resources,
      seek to enter and obtain significant market share in our current or planned
      business areas. Increased competition from existing or new competitors could
      result in price reductions, reduced margins or loss of market share, any of
      which could materially and adversely affect our business, operating results
      and
      financial condition.





**We
      derive a significant portion of our revenues from a limited number of large
      customers. Our revenues could decline significantly if any of these customers
      significantly reduces its purchases of our technology or services or terminates
      its relationship with us.**




Our
      growth has depended historically on large digital satellite broadcasters
      introducing, marketing and promoting products and services that utilize our
      technology. We currently derive, and we expect to continue to derive, a
      significant portion of our revenues from a limited number of large customers.
      Our three largest customers are The DIRECTV Group, Inc. (“DIRECTV”, operating
      through various subsidiaries and affiliates in the United States and Latin
      America), British Sky Broadcasting Group plc (“BSkyB”, operating through
      various subsidiaries in the United Kingdom) and Sky Italia S.r.l. (“Sky Italia”,
      operating in Italy). During the six month period ended December 31, 2006, these
      three customers accounted directly and indirectly for approximately 69.5% of
      our
      total revenues. News Corporation, a 73.8% holder of our total and issued
      outstanding share capital, currently owns approximate 39%, 39% and 100% of
      DIRECTV, BSkyB and Sky Italia, respectively. News Corporation has announced
      that
      it has entered into an agreement with Liberty Media Corporation, which, if
      consummated, would result in News Corporation no longer owning its shares in
      DIRECTV. We have a number of contracts with DIRECTV, its subsidiaries and
      affiliates, covering the supply of conditional access, middleware and DVR
      technologies, which expire at various dates through 2010 and which contain
      various terms covering renewal and termination. We expect to 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 fails to renew or terminates its relationship with us
      or
      renews with us on less favorable terms, our revenues could decline significantly
      and as a result, our business, operating results and financial condition could
      be materially adversely affected.





Page
          25




**The
      nature of our business is such that our operating results may fluctuate from
      period to period.**




Our
      operating results have varied in the past from quarter to quarter and from
      year
      to year and are likely to vary from period to period in the future.
      Historically, our revenues have reflected a small number of relatively large
      orders for our technology and services, which generally have long sales and
      order cycles. Additionally, our customers may replace their subscribers’ smart
      cards from time to time to maintain the security of their conditional access
      systems and this significantly affects our revenue in periods when we supply
      such replacement smart cards. As a result, we believe that period-to-period
      comparisons of our operating results may not be a good indication of our future
      performance. Our actual results may differ from expectations, which could
      adversely affect the price of our securities.





**Changes
      to current accounting policies or in how such policies are interpreted or
      applied to our business could have a significant effect on our reported
      financial results.**




New
      accounting pronouncements or a change in how GAAP is interpreted or applied
      to
      our business could have a significant effect on our reported results. Our
      accounting policies that recently have been or may in the future be affected
      by
      changes in the accounting rules include revenue recognition, accounting for
      stock-based compensation, accounting for income taxes and accounting for pension
      and other postretirement plans.





Our
      revenue recognition policy, in particular, is a key component of our results
      of
      operations and is based on complex rules that require us to make judgments
      and
      estimates. In applying our revenue recognition policy, we must determine what
      portions of our revenue are recognized currently and which portions must be
      deferred. Because different contracts may require different accounting
      treatment, it may be difficult for investors to properly assess our financial
      condition or operating results unless they carefully review all of our financial
      information, including our consolidated financial statements and notes
      thereto.





**Failure
      to protect the intellectual property rights upon which we depend could harm
      our
      business.**




We
      rely
      primarily on a combination of patent, trademark and copyright laws, trade
      secrets, confidentiality procedures and contractual provisions to protect our
      intellectual property rights and the obligations we have to third parties from
      whom we license intellectual property rights. However, we may not be able to
      detect unauthorized use of, or take appropriate steps to enforce, our
      intellectual property rights and this could have a material adverse effect
      on
      our business, operating results and financial condition.





**Defending
      against intellectual property infringement claims could harm our
      business.**




We
      may be
      subject to an increased risk of infringement claims as the number of products
      and competitors grows and the functionality of products in different industry
      segments overlaps. It may be alleged that products that we have developed or
      technology that we have licensed from third parties infringes the rights of
      others. Intellectual property claims could be time consuming to defend, result
      in costly litigation, divert management’s attention and resources and cause
      product shipment delays. Such claims could also require us to seek to enter
      into
      royalty or license agreements, redesign our products or potentially cease using
      aspects of technology, which could have a material adverse effect on our
      business, operating results and financial condition.





We
      grant
      certain indemnification rights to our customers when we license our software
      technologies. We may, therefore, become subject to third party infringement
      claims through those commercial arrangements. In addition, the damages to which
      we are subject may be increased by the use of our technologies in our customers’
products.





Many
      of
      our agreements with customers contain an indemnification obligation, which
      could
      be triggered in the event that a customer is named in an infringement suit
      involving their products or involving the customer’s products or services that
      incorporate or use our products. If it is determined that our products infringe
      any of the asserted claims in such a suit, we may be prevented from distributing
      certain of our products and we may incur significant indemnification
      liabilities, which may adversely affect our business, operating results and
      financial condition.





Page
          26




In
      addition, while damage claims in respect of an alleged infringement may, in
      many
      cases, be based upon a presumed royalty rate that the patent holder would have
      otherwise been entitled to, it is possible that our liability may increase
      as a
      result of the incorporation of our technology with our customer’s products. In
      some cases, potential damages payable by us could be based on the profits
      derived by our customers from a product that infringes through the use of our
      software even though we receive a relatively moderate economic benefit from
      the
      licensing arrangement.





**Any
      significant disruption in our processing of smart cards could adversely affect
      our business.**




We
      process all of our smart cards at two facilities, one located in the United
      Kingdom and the other in the United States. A significant disruption in the
      processing of smart cards at either facility could result in delays in the
      delivery of smart cards to our customers. The sale of smart cards which we
      have
      processed is a material portion of our business. Although our smart card
      processing facilities are designed to provide sufficient capacity to meet
      expected demand if one facility becomes inoperable for a limited period of
      time,
      any significant disruption to our smart card processing facilities could result
      in the loss of revenues, customers and future sales.





**We
      may be unable to process sufficient quantities of smart cards because we obtain
      certain components from, and depend upon, a limited number of
      suppliers.**




We
      currently obtain the computer chips used in our smart cards from a limited
      number of suppliers. In the event of a disruption of supply, including a
      shortage of manufacturing capacity, we may be unable to develop an alternative
      source in a timely manner or at favorable prices. Such failure could harm our
      ability to deliver smart cards to our customers or could negatively affect
      our
      operating margins. This could have a material adverse effect on our business,
      operating results and financial condition.





**Political,
      regulatory and economic risks associated with our international customers could
      harm our business.**




Our
      customers are located throughout the world. Inherent risks of doing business
      in
      international markets include changes in legal and regulatory requirements,
      export restrictions, exchange controls, tariffs and other trade barriers, longer
      payment cycles, political disruption, wars, acts of terrorism and civil unrest.
      We may incur substantial expense as a result of the imposition of new
      restrictions or changes in the existing legal and regulatory environments in
      the
      territories where we conduct our business or due to political and economic
      instability in these territories.





The
      telecommunications, media, broadcast and cable television industries are subject
      to extensive regulation by governmental agencies. These governmental agencies
      continue to oversee and adopt legislation and regulation over these industries,
      particularly in the areas of user privacy, consumer protection, online content
      distribution and the characteristics and quality of online products and
      services, which may affect our business, the development of our products, the
      decisions by market participants to adopt our products and services or the
      acceptance of interactive television by the marketplace in general. In
      particular, governmental laws or regulations restricting or burdening the
      exchange of personally identifiable information could delay the implementation
      of interactive services or create liability for us or any other manufacturer
      of
      software that facilitates information exchange. These governmental agencies
      may
      also seek to regulate interactive television directly. Future developments
      relating to any of these regulatory matters may adversely affect our
      business.





**Fluctuations
      in foreign exchange rates could harm our financial
      condition.**




A
      risk
      inherent in our international operations is the exposure to fluctuations in
      currency exchange rates. Certain of our customers have contracts denominated
      in
      pounds sterling or in euro. During the six month period ended December 31,
      2006,
      approximately 30% of our revenues were denominated in pounds sterling and a
      further 19% were denominated in euro. Some of our smart card costs and our
      operating expenses are denominated in pounds sterling, Israeli shekels and
      euro.
      During the six month period ended December 31, 2006, we estimate that
      approximately 30% of our total cost of sales and operating expenses were
      denominated in pounds sterling, 18% were denominated in euro and 17% were
      denominated in Israeli shekels. As a result, we are exposed to fluctuations
      in
      exchange rates which may have a material adverse effect on our business,
      operating results and financial condition.





Additionally,
      although most of our contracts with customers in Latin America, India and the
      Asia-Pacific region are denominated in U.S. dollars, those customers are
      affected by fluctuations in their local currencies and by exchange control
      regulations which may restrict their ability to remit payments to
      us.





**We
      are subject to certain risks relating to our operations in
      Israel.**




We
      have
      research and development facilities in Israel and we have customers in Israel.
      Therefore, we are directly influenced by the political, economic and security
      conditions affecting Israel. Any major hostilities involving Israel, or the
      interruption or curtailment of trade or the movement of people within Israel
      or
      between Israel and other countries, could significantly harm our business,
      operating results and financial condition. Additionally, certain of our
      employees are currently required to perform annual reserve duty in the Israeli
      Defense Force, and are subject to being called for active military duty at
      any
      time. We have, in the past, operated effectively under these requirements.
      We
      cannot predict the effect of these obligations on us in the future.





Page
          27




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




We
      are
      controlled by News Corporation. As of December 31, 2006, News Corporation
      beneficially owned approximately 73.4% of our total issued and outstanding
      share
      capital. Because News Corporation beneficially owns 100% of our Series B
      ordinary shares, par value $0.01 per share (“Series B Ordinary Shares”), which
      have ten votes per share (as opposed to our Series A Ordinary Shares which
      have
      one vote per share), it controls approximately 96.5% 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 seven current Directors
      have been appointed by News Corporation, including Dr. Abe Peled, our Chairman
      and Chief Executive Officer, who is a member of News Corporation’s Executive
      Management Committee and from time to time is involved in matters pertaining
      to
      News Corporation’s wider business interests.





Businesses
      in which News Corporation has an interest currently account for, and are
      expected to continue to account for, a significant portion of our revenues.
      During the six month period ended December 31, 2006, 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.





**Our
      share price could be affected by our ordinary shares becoming available for
      sale
      in the future or by the dilutive effect of the issue of new
      shares.**




If
      investors or News Corporation sell substantial amounts of our ADSs or ordinary
      shares in the public market, the market price of our ADSs could fall. The
      negative effect of such sales on the market price of our ADSs could be more
      pronounced given the relatively small number of our ordinary shares in ADS
      form
      relative to the total number of shares outstanding. In addition, such sales
      could create the public perception of difficulties or problems with our
      technologies and services. These sales may also make it more difficult for
      us to
      sell equity or equity-related securities in the future at a time and price
      that
      we deem appropriate if we require additional financing.





Interests
      of existing shareholders may also be diluted due to the existence of stock
      options granted to certain employees and stock options or other equity awards
      we
      may grant to our Directors, executive officers and employees in the
      future.





Page
          28








**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 General Meeting of Shareholders (the “Annual Meeting”)
      on October 30, 2006. 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, 2006, together with the corresponding
      Independent Auditors’ Report and Directors’ Report was voted upon as
      follows:




For:
            
            425,194,303Against:
            
            735Abstain:
            
            1,937





*Proposal
      2*




A
      proposal to approve the Directors’ Remuneration Report for the fiscal year ended
      June 30, 2006 was voted upon as follows:


For:
              
              422,344,898Against:
              
              2,851,630Abstain:
              
              447





*Proposal
      3*




A
      proposal to ratify the appointment of Ernst & Young LLP as the Company’s
      independent registered public accounting firm for the fiscal year ending June
      30, 2007 and to authorize the Audit Committee of the Company’s Board of
      Directors to determine its remuneration in respect of such period was voted
      upon
      as follows:




For:
            
            425,194,328Against:
            
            2,350Abstain:
            
            297





*Proposal
      4*




A
      proposal to re-appoint Nathan Gantcher as a Director was voted upon as
      follows:


For:
              
              422,458,953WithholdAuthority:
              
              2,738,022





*Proposal
      5*




A
      proposal to approve the NDS 2006 Long-Term Incentive Plan was voted upon as
      follows:




For:
            
            421,594,240Against:
            
            3,601,368Abstain:
            
            1,367





Page
          29








**Item
      5. Other Information**




Not
      applicable.








**Item
      6. Exhibits**




10.1
            NDS
                2006 Long-Term Incentive Plan (incorporated by reference to Exhibit
                10.1
                to the Current Report of NDS Group plc on Form 8-K (File No.
                333-11086) filed with the Securities and Exchange Commission on November
                1, 2006).





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





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





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





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





────────


(1)
            Filed
                herewith.





Page
          30


**Signatures**




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




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





Date:  January
      30, 2007





Page
          31