**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 March 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
      208 476 8000**


(Registrant’s
      telephone number, including area code)








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


**Yes
                x****No
                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 May
      7, 2006, the following shares were outstanding: 14,609,796 Series A ordinary
      shares of $0.01 par value per share, 42,001,000 Series B ordinary shares of
      $0.01 par value per share and 42,000,002 deferred shares of £1 par value per
      share.







**NDS
      Group plc**




**Table
      of contents**


**PART
                  I - Financial Information**Item
                  1.
              Financial
                  StatementsUnaudited
                  Consolidated Statements of Operations for the three and nine month
                  periodsended
                  March 31, 2006 and March 31, 2005
              1Consolidated
                  Balance Sheets as of March 31, 2006 (unaudited) and June 30,
                  2005
              2Unaudited
                  Consolidated Statements of Cash Flows for the nine month
                  periodsended
                  March 31, 2006 and March 31, 2005
              3Notes
                  to the Unaudited Consolidated Financial Statements
              4Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition
                  and Results of Operations
              13Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              29Item
                  4.
              Controls
                  and Procedures
              30**PART
                  II - Other Information**Item
                  1.
              Legal
                  Proceedings
              31Item
                  1A.
              Risk
                  Factors
              31Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              31Item
                  3.
              Defaults
                  Upon Senior Securities
              31Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              31Item
                  5.
              Other
                  Information
              31Item
                  6.
              Exhibits
              31Signatures
              
              32







**PART
      I - Financial Information**


**Item
        1. Financial Statements**
  **NDS
        Group plc**
 **Unaudited
        Consolidated Statements of Operations**
 (in
        thousands, except per share amounts)
 **For
                    the three months**
                  **ended
                    March 31,**
                
                **For
                    the nine months**
                  **ended
                    March 31,****Revenue:**
                
                **2006**
                
                **2005**
                
                **2006**
                
                **2005**Conditional
                    access
                
                $
                89,458
                
                $
                66,712
                
                $
                260,222
                
                $
                243,755Integration,
                    development & support
                
                
                10,393
                
                
                13,855
                
                
                36,087
                
                
                42,680License
                    fees & royalties
                
                
                18,994
                
                
                18,319
                
                
                70,501
                
                
                53,157New
                    technologies
                
                
                29,193
                
                
                26,131
                
                
                73,099
                
                
                64,641Other
                
                
                1,166
                
                
                1,577
                
                
                5,993
                
                
                5,263Total
                    revenue
                
                
                149,204
                
                
                126,594
                
                
                445,902
                
                
                409,496**Cost
                    of goods and services sold:**Smart
                    card costs
                
                
                21,617
                
                
                22,996
                
                
                66,324
                
                
                94,338Operations
                
                
                32,679
                
                
                19,751
                
                
                101,260
                
                
                52,360Royalties
                
                
                2,727
                
                
                2,815
                
                
                8,405
                
                
                10,573Other
                
                
                937
                
                
                2,399
                
                
                3,570
                
                
                2,643Total
                    cost of goods and services sold
                
                
                57,960
                
                
                47,961
                
                
                179,559
                
                
                159,914**Gross
                    margin**
                
                
                91,244
                
                
                78,633
                
                
                266,343
                
                
                249,582**Operating
                    expenses:**Research
                    & development
                
                
                36,608
                
                
                40,847
                
                
                103,053
                
                
                119,501Sales
                    & marketing
                
                
                7,762
                
                
                7,035
                
                
                21,767
                
                
                19,154General
                    & administration
                
                
                11,371
                
                
                4,995
                
                
                29,145
                
                
                32,280Amortization
                    of other intangibles
                
                
                2,242
                
                
                3,286
                
                
                7,038
                
                
                9,576Other
                
                
                (2,151
                )
                
                (160
                )
                
                (127
                )
                
                (2,974
                )Total
                    operating expenses
                
                
                55,832
                
                
                56,003
                
                
                160,876
                
                
                177,537**Operating
                    income**
                
                
                35,412
                
                
                22,630
                
                
                105,467
                
                
                72,045**Other
                    income:**Interest
                
                
                4,067
                
                
                2,313
                
                
                10,451
                
                
                7,100Other
                
                
                ─
                
                
                ─
                
                
                ─
                
                
                46Total
                    other income
                
                
                4,067
                
                
                2,313
                
                
                10,451
                
                
                7,146Income
                    before income tax expense
                
                
                39,479
                
                
                24,943
                
                
                115,918
                
                
                79,191Income
                    tax expense
                
                
                (11,340
                )
                
                (8,353
                )
                
                (34,714
                )
                
                (27,100
                )**Net
                    income**
                
                $
                28,139
                
                $
                16,590
                
                $
                81,204
                
                $
                52,091**Net
                    income per share:**Basic
                    net income per share
                
                $
                0.50
                
                $
                0.30
                
                $
                1.45
                
                $
                0.95Diluted
                    net income per share
                
                $
                0.49
                
                $
                0.29
                
                $
                1.41
                
                $
                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 and per share amounts)
  **ASSETS****Current
                    assets:**
                
                **As
                    of**
                  **March
                    31,**
                  **2006**
                  **(Unaudted)**
                
                **As
                    of**
                  **June
                    30,**
                  **2005**
                  **(See
                    Note 2)**Cash
                    and cash equivalents
                
                $
                344,625
                
                $
                339,791Short-term
                    investments
                
                
                101,035
                
                
                ─Accounts
                    receivable, net
                
                
                89,941
                
                
                73,588Accrued
                    income
                
                
                48,817
                
                
                25,391Inventories
                
                
                33,626
                
                
                41,508Prepaid
                    expenses
                
                
                12,635
                
                
                15,795Other
                    current assets
                
                
                4,169
                
                
                3,595Total
                    current assets
                
                
                634,848
                
                
                499,668Property,
                    plant and equipment, net
                
                
                42,678
                
                
                33,962Goodwill
                
                
                63,528
                
                
                64,236Other
                    intangibles, net
                
                
                45,389
                
                
                48,537Deferred
                    tax assets
                
                
                5,339
                
                
                5,121Other
                    receivables
                
                
                6,346
                
                
                ─Other
                    non-current assets
                
                
                22,319
                
                
                20,374**Total
                    assets**
                
                $
                820,447
                
                $
                671,898**LIABILITIES
                    AND SHAREHOLDERS’ EQUITY****Current
                    liabilities:**Accounts
                    payable
                
                $
                15,311
                
                $
                18,336Deferred
                    income
                
                
                49,733
                
                
                47,175Accrued
                    payroll costs
                
                
                20,211
                
                
                25,069Accrued
                    expenses
                
                
                16,594
                
                
                21,097Income
                    tax liabilities
                
                
                20,787
                
                
                4,070Other
                    current liabilities
                
                
                11,391
                
                
                13,498Total
                    current liabilities
                
                
                134,027
                
                
                129,245Accrued
                    expenses
                
                
                32,192
                
                
                28,547Deferred
                    income
                
                
                122,700
                
                
                87,353**Total
                    liabilities**
                
                
                288,919
                
                
                245,145**Shareholders’
                    equity:**Series
                    A ordinary shares, par value $0.01 per share: 48,000,000 shares
                    authorized;14,557,106
                    and 13,318,546 shares outstanding as of March 31, 2006, and June
                    30, 2005,
                    respectively
                
                
                146
                
                
                133Series
                    B ordinary shares, par value $0.01 per share: 52,000,000 shares
                    authorized;42,001,000
                    shares outstanding as of March 31, 2006, and June 30, 2005,
                    respectively
                
                
                420
                
                
                420Deferred
                    shares, par value £1 per share: 42,000,002 shares
                    authorizedand
                    outstanding as of March 31, 2006, and June 30, 2005,
                    respectively
                
                
                64,103
                
                
                64,103Additional
                    paid-in capital
                
                
                523,652
                
                
                498,363Accumulated
                    deficit
                
                
                (99,367
                )
                
                (180,571
                )Other
                    comprehensive income
                
                
                42,574
                
                
                44,305**Total
                    shareholders’ equity**
                
                
                531,528
                
                
                426,753**Total
                    liabilities and shareholders’ equity**
                
                $
                820,447
                
                $
                671,898




The
        accompanying notes form an integral part of these unaudited consolidated
        financial statements.
  Page
            2


**NDS
      Group plc**


**Unaudited
        Consolidated Statements of Cash Flows**
 (in
        thousands)
 **For
                    the nine months**
                  **ended
                    March 31,****Operating
                    activities:**
                
                **2006**
                
                **2005**Net
                    income
                
                $
                81,204
                
                $
                52,091Adjustments
                    to reconcile net income to net cash provided by operating
                    activities:Depreciation
                
                
                12,088
                
                
                11,621Amortization
                    of other intangibles
                
                
                7,038
                
                
                9,576Stock-based
                    compensation
                
                
                3,776
                
                
                3,957Other
                
                
                ─
                
                
                (46
                )Change
                    in operating assets and liabilities, net of acquisitions
                
                
                7,082
                
                
                966Net
                    cash provided by operating activities
                
                
                111,188
                
                
                78,165**Investing
                    activities:**Capital
                    expenditure
                
                
                (21,921
                )
                
                (13,287
                )Business
                    acquisitions, net of cash acquired
                
                
                (3,118
                )
                
                (17
                )Short-term
                    investments
                
                
                (101,035
                )
                
                -Proceeds
                    from sale of investments
                
                
                ─
                
                
                232Net
                    cash used in investing activities
                
                
                (126,074
                )
                
                (13,072
                )**Financing
                    activities:**Issuance
                    of shares (inclusive of realized excess tax benefits of $4,095
                    and
                    $─)
                
                
                20,348
                
                
                10,543**Net
                    increase in cash and cash equivalents**
                
                
                5,462
                
                
                75,636Cash
                    and cash equivalents, beginning of period
                
                
                339,791
                
                
                228,620Exchange
                    movements
                
                
                (628
                )
                
                4,686**Cash
                    and cash equivalents, end of period**
                
                $
                344,625
                
                $
                308,942
  The
            accompanying notes form an integral part of these unaudited consolidated
            financial statements.
  Page
              3




**NDS
        Group plc**
 **Notes
        to the Unaudited Consolidated Financial Statements**
  **Note
        1.** **Description
        of business**
  NDS
        Group
        plc (the “Company”) is incorporated in Great Britain and registered in England
        and Wales. The Company is engaged in the business of supplying open end-to-end
        digital technology and services to digital pay-television platform operators
        and
        content providers.
 
 There
        is a
        common management structure across the Company, which ensures that the various
        subsidiary entities operate in a coordinated and complementary manner. The
        business is managed as a single operating unit or segment.
 
 The
        Company is a majority owned subsidiary of News Corporation and conducts business
        transactions with a number of affiliates and subsidiaries of News
        Corporation.
  **Note
        2.** **Basis
        of presentation**
  The
        accompanying unaudited consolidated financial statements have been prepared
        in
        accordance with U.S. generally accepted accounting principles (“GAAP”) for
        interim financial statements and with the instructions to Form 10-Q and Article
        10 of Regulation S-X. Information and footnote disclosures normally included
        in
        annual financial statements prepared in accordance with GAAP have been condensed
        or omitted pursuant to such rules and regulations. In the opinion of management,
        the unaudited consolidated financial statements reflect all adjustments
        (consisting only of normal recurring adjustments) necessary for a fair
        presentation of the consolidated financial position, the consolidated operating
        results and the consolidated cash flows as of, and for the periods shown.
        The
        unaudited consolidated results of operations for the three and nine month
        periods ended March 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, 2006.
 
 These
        interim unaudited consolidated financial statements and notes thereto should
        be
        read in conjunction with the audited consolidated financial statements and
        notes
        thereto for the fiscal year ended June 30, 2005 included in the Company’s Annual
        Report on Form 10-K as filed with the Securities and Exchange Commission
        on
        September 8, 2005. Financial information as of June 30, 2005 has been
        derived from those audited consolidated financial statements.
 
 These
        interim consolidated financial statements are unaudited and do not constitute
        statutory results as defined in Section 240 of the Companies Act 1985 of
        Great
        Britain. U.K. statutory accounts for the fiscal year ended June 30, 2005,
        which
        were prepared under U.K. generally accepted accounting practice and on which
        the
        auditors’ report was unqualified, have been delivered to the Registrar of
        Companies for England and Wales.
 
 The
        preparation of financial statements in conformity with GAAP requires that
        management make estimates and assumptions that affect the reported amounts
        of
        assets and liabilities as of the date of the consolidated financial statements
        and the reported amounts of revenues and expenses during the reporting period.
        Because of the use of estimates inherent in the financial reporting process,
        actual results could differ from those estimates.
 
 Certain
        fiscal 2005 amounts have been reclassified to conform to fiscal 2006
        presentation.
 
 All
        amounts are presented in thousands, except share and per share amounts or
        unless
        otherwise noted.
  **Note
        3.** **Summary
        of revenue accounting policies**
  Revenue
        is
        recognized when persuasive evidence of an arrangement exists, the fees are
        fixed
        or determinable, the product or service has been delivered and collectability
        is
        assured. The Company considers the terms of each arrangement to determine
        the
        appropriate accounting treatment.
 
 Where
        an
        arrangement includes more than incidental software elements, the Company
        follows
        Statement of Position 97-2: “Software Revenue Recognition” (“SOP 97-2”). Where
        an arrangement does not involve the supply of software and that arrangement
        is
        separate from an arrangement for the supply of software, the Company follows
        Staff Accounting Bulletin No. 104: “Revenue Recognition,” (“SAB 104”) and
        Emerging Issues Task Force Issue No. 00-21: “Revenue Arrangements with Multiple
        Deliverables” (“EITF 00-21”). As the Company’s business develops, other
        accounting guidance may become applicable.
  Page
            4




Many
        of
        the Company’s contracts contain multiple deliverables. Where an arrangement is
        accounted for under SOP 97-2, revenue from delivered elements is deferred
        until
        such time as the Company has vendor specific objective evidence of the value
        of
        the undelivered elements. Where the only undelivered element is post-contract
        support and the Company does not have vendor specific objective evidence
        of the
        value of that post-contract support, the revenue from the entire arrangement
        is
        recognized over the term of the support period. Where an arrangement is
        accounted for under SAB 104 and EITF 00-21, the Company considers whether
        the
        various deliverables should be considered separate units of accounting. In
        such
        circumstances, revenues from these arrangements are recognized based on the
        relative fair values of all the elements. Where fair value of delivered items
        cannot be determined, but the fair value of the undelivered elements can
        be
        determined, the fair value of the undelivered elements is deferred and the
        residual revenue is allocated to delivered elements. Where it is not possible
        to
        allocate consideration to separate deliverables in the manner prescribed
        by the
        accounting literature, revenue is deferred until all items have been
        delivered.
 
 *Smart
        cards and security maintenance revenue*
  Most
        of
        the arrangements under which the Company generates revenue from the sale
        of
        smart cards and the provision of security maintenance services are accounted
        for
        under SAB 104 and EITF 00-21. Revenue derived from sales of smart cards is
        recognized upon delivery of the smart cards in accordance with contractual
        terms. Appropriate provision is made for warranty and similar arrangements
        agreed with customers. For some contracts, the Company receives fees from
        platform operators for the maintenance of security of the conditional access
        system for a specified duration. These revenues are recognized over the term
        of
        the security contract in the period in which the security maintenance activities
        are performed. In some instances, the maintenance of security includes a
        requirement to replace a population of smart cards with a supply of “changeover
        cards” which is considered a separate unit of accounting. In such instances, an
        amount of the maintenance income is deferred and is recognized when the
        changeover cards are delivered. The amount of such maintenance revenue to
        be
        deferred is based on the fair value of the undelivered future changeover
        cards.
 
 *Software* *revenue*
  Apart
        from
        the arrangements for the supply of smart cards and security maintenance services
        referred to above, most of the other arrangements under which the Company
        generates revenue involve the supply of software and are accounted for under
        SOP
        97-2. Revenue is deferred until all elements have been delivered or until
        the
        Company has vendor specific objective evidence of the fair value of the
        undelivered elements. Set-top box royalty income may continue to arise after
        all
        elements of an arrangement have been delivered. Such revenue is recognized
        when
        it is fixed or determinable, and this is typically when the Company receives
        reports from the platform operator or the set-top box manufacturer of the
        number
        of units manufactured or deployed.
 
 *Deferred
        income*
  Revenue
        billed but not recognized is recorded in the Company’s consolidated balance
        sheet as deferred income. Where the revenue is expected to be recognized
        within
        one year of the balance sheet date, the deferred income is classified as
        a
        current liability; otherwise it is classified as a non-current
        liability.
 
 
 **Note
        4.** **Comprehensive
        income**
  Comprehensive
        income comprises net income, foreign currency translation adjustments, certain
        pension adjustments and unrealized holding gains and losses on investments
        available for sale. The components of comprehensive income were as
        follows:
  **For
                    the three months**
                  **ended
                    March 31,**
                
                
                **For
                    the nine months**
                  **ended
                    March 31,****2006**
                
                
                **2005**
                
                
                **2006**
                
                
                **2005**Net
                    income
                
                $
                28,139
                
                $
                16,590
                
                $
                81,204
                
                $
                52,091Currency
                    translation differences (no tax effect)
                
                
                697
                
                
                (9,209
                )
                
                (1,731
                )
                
                6,724Other
                
                
                ─
                
                
                6
                
                
                ─
                
                
                (19
                )Comprehensive
                    income
                
                $
                28,836
                
                $
                7,387
                
                $
                79,473
                
                $
                58,796




Page
          5




**Note
        5.** **Net
        income per share**
  Net
        income
        per share is calculated as net income divided by the weighted average number
        of
        ordinary shares in issue in each period. The interests of ordinary shareholders
        may be diluted due to the existence of stock options granted to employees.
        The
        dilutive effect of potential shares has been calculated using the treasury
        stock
        method and as such, is a function of the average share price in each period.
        The
        Series A ordinary shares and Series B ordinary shares have equal rights except
        in respect of voting and as such have equal weighting in the calculation
        of net
        income per share and equal net income per share.
 
 The
        numerator for the calculations of net income per share is net income. The
        denominator for the calculations is the weighted average numbers of ordinary
        shares, as follows:
  **For
                    the three months****ended
                    March 31,**
                
                
                **For
                    the nine months**
                  **ended
                    March 31,****2006**
                
                
                **2005**
                
                
                **2006**
                
                
                **2005**Weighted
                    average number of ordinary shares in issue
                
                
                56,305,882
                
                
                54,994,616
                
                
                55,863,709
                
                
                54,611,396Effect
                    of dilutive stock options
                
                
                1,438,071
                
                
                2,313,859
                
                
                1,750,084
                
                
                2,163,612Denominator
                    for dilutive net income per share
                
                
                57,743,953
                
                
                57,308,475
                
                
                57,613,793
                
                
                56,775,008




**Note
        6.** **Short-term
        investments**
  The
        short-term investment balance at March 31, 2006 is comprised of cash deposits
        at
        banks with an original term of six months.
 
 **Note
        7.** **Inventories**
  Inventories
        are categorized as work-in-progress and are stated net of reserves of $2.6
        million and $3.4 million as of March 31, 2006, and June 30, 2005,
        respectively.
 
 **Note
        8.** **Accounts
        receivable**
  Accounts
        receivable are stated net of valuation reserves of $1.3 million and $1.4
        million
        as of March 31, 2006, and June 30, 2005, respectively.
 
 **Note
        9.** **Related
        party transactions**
  The
        Company conducts business transactions with News Corporation and its
        subsidiaries and affiliates. These entities are considered to be related
        parties. Agreements covering arrangements between News Corporation or its
        subsidiaries or affiliates and the Company are entered into in the context
        of
        two entities over which a third entity exercises significant influence or
        control. There can be no assurance, therefore, that each of the agreements,
        or
        the transactions provided for therein, or any amendments thereof will be
        effected on terms at least as favorable to the Company as could have been
        obtained from unaffiliated third parties. Any new contracts with related
        parties
        or significant amendments to such contracts are approved by the Audit Committee
        of the Company’s Board of Directors.
 
 These
        transactions are of three main types: the provision by the Company of technology
        and services for digital pay-television systems; the payment by the Company
        of
        royalties for the use of certain intellectual property rights; and the receipt
        by the Company of some administration and finance services.
  **a)** **Provision
        of technology and services**
  Technology
        and services for digital pay-television platform operators are supplied to
        affiliates and subsidiaries of News Corporation. The principal related parties
        supplied by the Company are BSkyB, DIRECTV, DIRECTV Latin America, Sky Brasil,
        Sky Mexico, DTH TechCo, Sky Colombia, Sky Chile, 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).
  Page
            6




Revenue
        recognized from such related parties was as follows:
  **For
                  the three months**
                **ended
                  March 31,**
              
              
              **For
                  the nine months**
                **ended
                  March 31,**(in
                  thousands)
              
              
              **2006**
              
              
              **2005**
              
              
              **2006**
              
              
              **2005**Revenue
                  from related parties
              
              $
              114,233
              
              $
              86,534
              
              $
              343,632
              
              $
              294,180




Included
        within accounts receivable are amounts of $68.4 million and $51.9 million
        as of
        March 31, 2006, and June 30, 2005, respectively, which are due from related
        parties in respect of normal sales transactions. Accrued income includes
        revenue
        recognized from related parties but not invoiced as of the balance sheet
        date,
        in the amounts of $38.2 million and $18.8 million as of March 31, 2006, and
        June
        30, 2005, respectively. Deferred income includes $152.0 million and $109.6
        million as of March 31, 2006, and June 30, 2005, respectively, in respect
        of
        normal sales transactions with related parties.
 
 **b)** **Royalty
        payments**
  A
        royalty
        is payable to a related party in respect of certain intellectual property
        rights
        which the Company has licensed for use in certain applications supplied to
        customers. The royalty expense payable to the related party was as
        follows:
  **For
                  the three months**
                **ended
                  March 31,**
              
              
              **For
                  the nine months**
                **ended
                  March 31,**(in
                  thousands)
              
              
              **2006**
              
              
              **2005**
              
              
              **2006**
              
              
              **2005**Royalty
                  expense payable to related party
              
              $
              225
              
              $
              1,341
              
              $
              1,609
              
              $
              2,617




**c)** **Administration
        and finance services**
  News
        Corporation provides services under a Master Intercompany Agreement which
        provides, among other things, for arrangements governing the relationship
        between the Company and News Corporation. The consideration for each of the
        services and other arrangements set forth in the Master Intercompany Agreement
        is mutually agreed and based upon allocated costs. All such consideration
        and
        any material arrangements are subject to the approval of the Audit Committee
        of
        the Company’s Board of Directors. The services covered by the Master
        Intercompany Agreement include cash management and financing, services of
        News
        Corporation employees, facility arrangements, and employee matters, including
        pensions and certain other services. Administration fees charged in respect
        of
        these services were as follows:
  **For
                  the three months**
                **ended
                  March 31,**
              
              
              **For
                  the nine months**
                **ended
                  March 31,**(in
                  thousands)
              
              
              **2006**
              
              
              **2005**
              
              
              **2006**
              
              
              **2005**Administration
                  fees payable to related parties
              
              $
              43
              
              $
              68
              
              $
              129
              
              $
              198




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 accounts payable are amounts of $6.4 million and $3.1 million
        as
        of March 31, 2006, and June 30, 2005, respectively, which were owed to News
        Corporation in respect of administrative services and other costs paid by
        News
        Corporation on behalf of the Company.
 
 **d)** **Other**
  The
        Company has a short-term loan facility of £30 million (approximately $52
        million) from News Corporation. The facility has no expiry date and no amounts
        were drawn down as of March 31, 2006 or June 30, 2005. The facility is
        considered to be adequate for the Company’s needs.
 
 The
        Company has entered into cross-guarantees with HSBC Bank plc providing mutual
        guarantees with other subsidiaries of News Corporation for amounts owed to
        the
        bank under a collective overdraft facility of £20 million (approximately
        $35 million). News Corporation has indemnified the Company against any
        liabilities which the Company may be required to pay under these
        cross-guarantees. Management has been informed by News Corporation that no
        amounts were owed to HSBC Bank plc as of March 31, 2006 or June 30, 2005
        which would be covered by these guarantees.
  Page
            7




**Note
        10.** **Contingencies
        and commitments**
  **a)** **Litigation**
  *The
        International Electronic Technology Corp. Litigation*
  On
        April
        18, 1997, International Electronic Technology Corp. (“IETC”) filed suit in the
        United States District Court for the Central District of California against
        the
        Company’s customers, Hughes, DIRECTV, Inc. and Thomson Consumer Electronics,
        Inc., alleging infringement of one U.S. patent and seeking unspecified damages
        and injunction.
 
 Although
        not a party to this case, the Company has assumed the defense and agreed
        to
        indemnify the named defendants. The defendants have raised defenses, including
        non-infringement and invalidity. On September 22, 2005, the court issued
        an
        order construing certain terms in the patent as a matter of law, after an
        extensive delay due to the death of two judges previously assigned to the
        case.
        Following receipt of the claim construction order, defendants notified IETC
        that
        they intended to file a motion for summary judgment of non-infringement based
        on
        the claim construction. During a status conference with the court on January
        9,
        2006, IETC requested that defendants’ motion be deferred to permit it to seek
        additional document discovery. The court denied this request, and ordered
        IETC
        to make its request in response to defendants’ summary judgment motion.
        Defendants’ motion for summary judgment was filed on January 30, 2006. On March
        9, 2006, the court granted defendants’ motion, and judgment for defendants was
        entered on March 24, 2006. IETC has filed a notice of appeal to the United
        States Court of Appeals for the Federal Circuit.
 
 **b)** **Guarantees**
  In
        the
        normal course of business, the Company provides indemnification agreements
        of
        varying scopes, including limited product warranties and indemnification
        of
        customers against claims of intellectual property infringement made by other
        parties arising from the use of the Company’s products or services. The nature
        of these commitments has been considered in determining the revenues and
        costs
        recognized in these financial statements. Costs are accrued for known warranty
        and indemnification issues if a loss is probable and can be reasonably
        estimated. Historically, costs related to these warranties and indemnification
        agreements have not been significant, but because potential future costs
        are
        highly variable, the Company’s management is unable to estimate the maximum
        potential impact of these guarantees on the Company’s future results of
        operations.
 
 **c)** **Other**
  The
        nature
        of the Company’s business is such that it may be subject to claims by other
        parties alleging infringements of various intellectual property rights. Such
        claims are vigorously defended. Where a liability arising from these claims
        is
        probable, an accrual is made based on management’s best estimate. It is not
        considered that any resulting liability in excess of amounts recognized in
        these
        financial statements would materially affect the Company’s financial
        position.
  **Note
        11.** **Stock
        option schemes**
  The
        Company has three executive stock option schemes under which stock options
        have
        been granted to certain Directors, Executive Officers and employees: The
        NDS
        1997 Executive Share Option Scheme (the “1997 scheme”), The NDS 1999 Executive
        Share Option Scheme (the “1999 unapproved scheme”) and The NDS UK Approved Share
        Option Scheme (the “1999 approved scheme”). The provisions of each scheme are
        substantially the same, except that the 1999 approved scheme is approved
        by the
        U.K. Inland Revenue for the purposes of granting U.K. employees options over
        shares in the Company which are free from income tax in the hands of the
        employee under certain circumstances. Following the creation of the 1999
        unapproved scheme, no further options have been granted under the 1997 scheme.
        The schemes provide for the grant of options to purchase Series A ordinary
        shares in the Company with a maximum term of ten years. Options granted under
        the schemes vest in equal portions over a four-year period. The schemes
        authorize options to be granted subject to a maximum of 10% of the ordinary
        shares of the Company in issue at the date of grant.
 
 In
        addition, the Company has operated employee share ownership schemes in the
        United Kingdom, Israel and the United States. These enabled employees to
        enter
        into a fixed-term savings contract with independent financial institutions
        linked to an option to subscribe for Series A ordinary shares in the Company.
        The option price was set at a discount of between 15% and 20% of the quoted
        closing price of the Series A ordinary shares on The NASDAQ Stock Market
        (“NASDAQ”) on the last trading day before the announcement of the schemes. These
        schemes have now matured and there are currently no options outstanding under
        these employee share ownership schemes.
  Page
            8




All
        employees are entitled to participate in the plans, however (with the exception
        of the employee share ownership schemes which are open to all), management
        determines to whom and how many options are granted. The Company’s obligations
        under all stock option schemes have been settled by issuing new Series A
        ordinary shares.
 
 The
        following table summarizes information about the Company’s stock option
        transactions:
  **Number**
                
                
                **Weighted**
                  **Average**
                  **Exercise**
                  **Price**
                
                
                **Remaining**
                  **ContractualTerm**
                  **(in
                    years)**
                
                
                **Aggregate**
                  **Intrinsic**
                  **Value**
                  **(in
                    thousands)**Outstanding
                    at July 1, 2005
                
                
                4,337,513
                
                $
                18.17Granted
                
                
                941,666
                
                $
                43.13Exercised
                
                
                (1,238,560
                )
                $
                13.05Forfeited
                
                
                (28,211
                )
                $
                18.44Expired
                
                
                ─
                
                
                ─Outstanding
                    at March 31, 2006
                
                
                4,012,408
                
                $
                25.61
                
                
                7.0
                
                $
                106,168Vested
                    or expected to vest at March 31, 2006
                
                
                3,982,234
                
                $
                25.55
                
                
                6.9
                
                $
                105,589Exercisable
                    at March 31, 2006
                
                
                2,460,734
                
                $
                20.59
                
                
                5.7
                
                $
                77,527
  **For
                      the three months**
                    **ended
                      March 31,**
                  
                  **For
                      the nine months**
                    **ended
                      March 31,****2006**
                  
                  **2005**
                  
                  **2006**
                  
                  **2005**Weighted
                      average fair value of stock options grantedin
                      period using the assumptions set out below
                  
                  $
                  29.42
                  
                  $
                  24.13
                  
                  $
                  29.42
                  
                  $
                  23.57Total
                      intrinsic value of options exercised
                  
                  $
                  14,415
                  
                  $
                  6,387
                  
                  $
                  34,806
                  
                  $
                  17,880Stock-based
                      compensation cost included within the statement of
                      operations:Operating
                      expenses
                  
                  $
                  2,064
                  
                  $
                  567
                  
                  $
                  3,776
                  
                  $
                  3,957Tax
                      benefit
                  
                  
                  (400
                  )
                  
                  (223
                  )
                  
                  (678
                  )
                  
                  (1,556
                  )Net
                      of tax amount
                  
                  $
                  1,664
                  
                  $
                  344
                  
                  $
                  3,098
                  
                  $
                  2,401Cash
                      received from exercise of stock options
                  
                  $
                  6,466
                  
                  $
                  6,070
                  
                  $
                  16,253
                  
                  $
                  6,850Excess
                      tax benefit from exercise of stock options
                  
                  $
                  695
                  
                  $
                  ─
                  
                  $
                  5,273
                  
                  $
                  ─




As
        of
        March 31, 2006, the total compensation cost related to non-vested awards
        not yet
        recognized was approximately $28.7 million and the period over which it is
        expected to be recognized is 3.8 years. The Board of Directors may grant
        additional stock options or other equity-based compensation, which would
        result
        in additional operating expenses being recorded in future periods.
  Page
            9




The
        fair
        value of each stock option grant is estimated on the date of grant using
        the
        Black-Scholes option-pricing model. The fair value of stock options granted
        during the nine month periods ended March 31, 2006 and 2005, were estimated
        using the following assumptions
 
 **Nine
                  months****ended March 31,****2006**
              
              
              **2005**Risk
                  free interest rate
              
              
              4.5
              %
              
              4.2
              %Dividend
                  yield
              
              
              ─
              
              
              ─Expected
                  volatility
              
              
              72
              %
              
              80
              %Expected
                  life of stock options
              
              
              6.3
                  years
              
              
              6.3
                  years
  The
          weighted average risk-free rate is the average interest rates of U.S. government
          bonds of comparable term to the stock options on the dates of the stock
          option
          grants. The dividend yield is assumed to be nil because the Company has
          not
          paid, and management does not currently expect to pay, a dividend. Expected
          volatility is derived from historical volatility of the Company’s American
          Depositary Shares as quoted on NASDAQ. The expected life of stock options
          granted is derived from the historical activity of the Company’s stock options
          and represents the period of time that stock options granted are expected
          to be
          outstanding. The stock options were granted at an exercise price equal
          to the
          closing market price on the last trading day before the date of
          grant.
 
 The
          terms
          of certain stock options were modified during the fiscal year ended
          June 30, 2005, as described below.
 
 In
          December 2004, the Financial Accounting Standards Board issued Statement
          of
          Financial Accounting Standards (“SFAS”) No. 123 (R), “Share-Based Payment”
(“SFAS No. 123 (R)”). This standard requires the cost of employee compensation
          paid with equity instruments to be measured based on grant date fair values.
          That cost is recognized over the vesting period. SFAS No. 123 (R) became
          effective for the Company on July 1, 2005. The Company has adopted the
          modified
          prospective method to transition to SFAS No. 123 (R). The compensation
          cost
          attributable to awards which were unvested as of July 1, 2005 is recognized
          in
          the income statement using the accelerated attribution method and the same
          estimates of grant date fair value had previously been disclosed in the
          Company’s financial statements. For awards granted after July 1, 2005, the
          compensation cost is recognized ratably over the vesting period using estimates
          of fair value made as of the grant date.
 
 For
          all
          periods ending prior to July 1, 2005, stock-based compensation was accounted
          for
          by using the intrinsic value-based method in accordance with APB No. 25,
          “Accounting for Stock Issued to Employees” (“APB25”) and the Company followed
          the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based
          Compensation.” As a result of adopting SFAS No. 123 (R) on July 1, 2005, the
          Company’s income before income taxes and net income for the three and nine month
          periods ended March 31, 2006 was approximately $0.7 million and $0.7 million
          lower, respectively, than if it had continued to account for stock-based
          compensation under APB25.
 
 The
          following table reflects the effect on net income and earnings per share
          as if
          the Company had applied the fair value recognition provisions for stock
          option-based employee compensation using a Black-Scholes option valuation
          methodology, for periods prior to the adoption of
          SFAS No. 123 (R). These pro forma effects may not be
          representative of future stock option-based compensation expense since
          the
          estimated fair value of stock options on the date of grant is amortized
          to
          expense over the vesting period and additional stock options may be granted
          in
          future years. Additionally, the terms of certain stock options held by
          the
          Company’s previous Chief Financial Officer were modified on his departure, and
          the vesting of certain stock options was accelerated on June 27, 2005 (as
          discussed below).
  **For
                      the three**
                  ****
                  **For
                      the nine**
                  ********
                  **months
                      ended**
                  ****
                  **months
                      ended**
                  ****(in
                      thousands, except per share amounts)
                  ****
                  **March
                      31, 2005**
                  ****
                  **March
                      31, 2005**Net
                      income, as reported
                  
                  $
                  16,590
                  
                  $
                  52,091Add:
                      Stock option-based compensation cost included in the
                      determinationof
                      net income as reported (net of tax benefits of $223 and $1,556)
                  
                  
                  344
                  
                  
                  2,401Deduct:
                      Total stock option-based compensation determined underfair
                        value based method for all awards, (net of tax benefits of
                        $510 and
                        $1,100)
                  
                  
                  (3,013
                  )
                  
                  (6,497
                  )Pro-forma
                      net income
                  
                  $
                  13,921
                  
                  $
                  47,995
  Page
              10




****
            **For
                the three**
            ****
            **For
                the nine**
            ********
            **months
                ended**
            ****
            **months
                ended**
            ****(in
                thousands, except per share amounts)
            ****
            **March
                31, 2005**
            ****
            **March
                31, 2005**Net
                income per shareBasic
                net income per share, as reported
            
            $
            0.30
            
            $
            0.95Diluted
                net income per share, as reported
            
            $
            0.29
            
            $
            0.92Pro-forma
                basic net income per share
            
            $
            0.25
            
            $
            0.88Pro-forma
                diluted net income per share
            
            $
            0.24
            
            $
            0.85








In
      recognition of his contribution to the Company, the Remuneration Committee
      of
      the Company’s Board of Directors (“the Remuneration Committee”) modified the
      terms of certain vested stock options held by the previous Chief Financial
      Officer such that those stock options could have been exercised at any time
      prior to September 20, 2005 rather than lapsing on his departure in October
      2004. The additional charge recorded in the statement of operations in the
      nine
      months ended March 31, 2005 was $1.3 million, net of tax of $0.6 million.





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





The
      Remuneration Committee’s decision to accelerate the vesting of these stock
      options was in anticipation of compensation expense to be recorded subsequent
      to
      the effective date of SFAS No. 123 (R) on July 1, 2005. Incremental expense
      of
      approximately $9.6 million ($8.8 million, net of tax) associated with the
      acceleration was recorded in the fourth quarter fiscal 2005 pro forma
      disclosure.








**Note
      12.**  **Abandoned
      property leases**




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




****
              ****
              **For
                  the three months**
              ****
              ******For
                  the nine months**
              ********
              ****
              **ended
                  March 31,**
              ****
              **ended
                  March 31,**
              ****(in
                  thousands)
              
              **2006**
              
              **2005**
              
              **2006**
              
              **2005**Beginning
                  of period
              
              $
              510
              
              $
              11,132
              
              $
              1,141
              
              $
              8,727Additions
              
              
              ─
              
              
              ─
              
              
              652
              
              
              2,973Reversals
              
              
              ─
              
              
              (8,056
              )
              
              (226
              )
              
              (8,056
              )Used
              
              
              (303
              )
              
              (497
              )
              
              (1,352
              )
              
              (1,588
              )Foreign
                  exchange movements
              
              
              3
              
              
              (337
              )
              
              (5
              )
              
              186End
                  of period
              
              $
              210
              
              $
              2,242
              
              $
              210
              
              $
              2,242





Page
          11


The
      cumulative amount paid through March 31, 2006 was $10.7 million and the total
      amount charged to the profit and loss net of releases up to March 31, 2006
      was
      $10.9 million. The accrual as of March 31, 2006 of $0.2 million is expected
      to
      be used by June 30, 2006.




**Note
      13.**  **Pension
      expense**




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




****
              **For
                  the three months**
              
              **For
                  the nine months****ended
                  March 31,**
              
              **ended
                  March 31,**(in
                  thousands)
              
              **2006**
              
              **2005**
              
              **2006**
              
              **2005**
              ****Service
                  cost
              
              $
              44
              
              $
              44
              
              $
              132
              
              $
              129Interest
                  cost
              
              
              241
              
              
              229
              
              
              727
              
              
              672Expected
                  return on plan assets
              
              
              (203
              )
              
              (171
              )
              
              (613
              )
              
              (501
              )Amortization
                  of unrecognized net loss
              
              
              143
              
              
              115
              
              
              433
              
              
              336$
              225
              
              $
              217
              
              $
              679
              
              $
              636




During
      the
      nine months ended March 31, 2006, the Company made an additional voluntary
      cash
      contribution of $0.9 million into the defined benefit scheme.




Page
            12





**Item
      2. Management’s Discussion and Analysis of Financial Condition
      and Results of Operations**




***This
      document contains statements that constitute “forward-looking statements” within
      the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
      and Section 27A of the Securities Act of 1933, as amended. The words “expect,”
“estimate,” “anticipate,” “predict,” “believe” and similar expressions and
      variations thereof are intended to identify forward-looking statements. These
      statements appear in a number of places in this document and include statements
      regarding the intent, belief or current expectations of NDS Group plc (the
      “Company”), its directors or its officers with respect to, among other things,
      trends affecting the Company’s financial condition or results of operations.
      Readers of this document are cautioned that any such forward-looking statements
      are not guarantees of future performance and involve risks and uncertainties.
      Those risks and uncertainties are discussed under the heading “Risk Factors”
below, in the Company’s Annual Report on Form 10-K as filed with the Securities
      and Exchange Commission (“SEC”) on September 8, 2005 (SEC file no.
      0-30364), as well as the information set forth elsewhere in this Quarterly
      Report. The Company does not ordinarily make projections of its future operating
      results and undertakes no obligation (and expressly disclaims any obligation)
      to
      publicly update or revise any forward-looking statements, whether as a result
      of
      new information, future events or otherwise, except as required by law. Readers
      should carefully review other documents filed by the Company with the SEC.
      This
      section should be read in conjunction with the unaudited consolidated financial
      statements of the Company and related notes set forth elsewhere
      herein.***





**Introduction**




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





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





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





·
            ***Results
                of operations ─***This section provides an analysis of our results of operations for
                the
                three and nine month periods ended March 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 nine
                month
                periods ended March 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 both standard definition and high
      definition television and support 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 invest in a
      broadcast infrastructure to deliver video and data to multiple subscribers.
      A
      broadcast distribution infrastructure consists of three main
      elements:





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





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




Page
          13


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





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





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





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





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





Our
      customers consist of a limited number of large digital pay-television platform
      operators who are introducing, marketing and promoting products and services
      that utilize our technology. We currently derive, and we expect to continue
      to
      derive, a significant portion of our revenues from a limited number of large
      customers. Our three largest customers are DIRECTV in the United States, BSkyB
      in the United Kingdom and Sky Italia in Italy. Together, these three customers
      contributed, directly and indirectly, approximately 70% of our revenues in
      the
      nine months ended March 31, 2006. We expect that a limited number of customers
      will continue to contribute a significant portion of our revenues. If a large
      customer purchases significantly less of our products or services, defers or
      cancels orders or terminates its relationship with us, our revenues could
      decline significantly and as a result, our business, operating results and
      financial condition could be materially adversely affected.





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





A
      significant portion of our revenues is dependent upon our customers’ subscriber
      base, the growth in their subscriber base and the related quantities of set-top
      boxes deployed. If our customers’ subscriber numbers decline or do not continue
      to increase, we are unlikely to be able to generate substantial revenue growth
      or sustain our current revenue levels and, as a consequence, our business,
      operating results and financial condition could be materially adversely
      affected.





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





Revenues
      can vary from period to period as our revenues reflect a small number of
      relatively large orders for our technology and services. These generally have
      long sales and order cycles, and delivery and acceptance of our products and
      services fluctuate over the course of these cycles. Our accounting policies
      frequently require us to defer revenue until after our technologies have been
      deployed by our customers.





We
      consider that we operate as a single segment and our business is managed as
      such. There are no separate divisions or profit centers. We assess the financial
      performance of our business by reviewing specific revenue streams in the
      aggregate and by customer. We assess our costs by considering individual cost
      centers and their aggregation into the general cost categories as described
      below.





Page
          14


**Revenues**




We
      derive
      revenues from:





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





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





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





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





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





**Costs
      and expenses**




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





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





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





We
      classify operations costs as part of cost of goods and services sold. Operations
      costs include the costs of personnel and related costs, including an allocation
      of facilities costs, associated with our customer support and with integration
      and development activities undertaken under a customer contract. Operations
      costs include the costs of operating our two smart card processing plants,
      including the depreciation of our smart card processing equipment. Our
      operations costs have increased during the three and nine month periods ended
      March 31, 2006 as a result of a greater proportion of our total technical
      employees being deployed on customer projects, as well as an increase in the
      total number of our technical employees.





Research
      and development costs consist mainly of personnel and related costs, including
      an allocation of facilities costs, attributable to our technical employees
      who
      are developing our technology and adapting it for specific customer
      requirements. These costs also include consumables and the depreciation of
      equipment used in development and test activities and are net of the benefit
      of
      grants and other incentives. Our research and development costs have declined
      during the three and nine month periods ended March 31, 2006. As a result of
      a
      greater proportion of our technical employees being deployed on customer
      projects (and the cost therefore being included within operations), a
      corresponding lower proportion of our technical employees have been deployed
      on
      developing our technology and adapting it for specific customer
      requirements.





Page
          15


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





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








**Critical
      accounting policies and estimates**




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





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





*Conditional
      access revenues*




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





*Conditional
      access ─ Smart cards*




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





*Conditional
      access ─ Security services*




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





There
      were
      no card changeovers during the three and nine month periods ended March 31,
      2006
      or 2005, however, we have obligations to supply changeover cards in future
      periods. Accordingly the amount of revenue deferred under this type of
      arrangement has increased from $87.9 million as of June 30, 2005 to $122.7
      million as of March 31, 2006.





*Integration,
      development and support revenues*




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





Page
          16


*License
      fees and royalty revenues*




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




**Results
      of operations**




**Commentary
      on three and nine month periods ended March 31, 2006**




**Revenue**




Revenue
      for the periods under review was as follows:




**For
                  the three months**
              
              ****
              
              ********
              
              **ended
                  March 31,**(in
                  thousands)
              
              **2006**
              
              **2005**
              
              **Change**
              
              **%
                  Change**Conditional
                  access
              
              $
              89,458
              
              $
              66,712
              
              $
              22,746
              
              
              +34
              %Integration,
                  development & support
              
              
              10,393
              
              
              13,855
              
              
              (3,462
              )
              
              -25
              %License
                  fees & royalties
              
              
              18,994
              
              
              18,319
              
              
              675
              
              
              +4
              %New
                  technologies
              
              
              29,193
              
              
              26,131
              
              
              3,062
              
              
              +12
              %Other
              
              
              1,166
              
              
              1,577
              
              
              (411
              )
              
              -26
              %Total
                  revenue
              
              $
              149,204
              
              $
              126,594
              
              $
              22,610
              
              
              +18
              %




****
              **For
                  the nine months**
              
              
              ****
              ****
              ********
              ****
              **ended
                  March 31,**
              ****
              ****
              ****
              ****
              ****(in
                  thousands)
              ****
              **2006**
              ****
              **2005**
              ****
              **Change**
              ****
              **%
                  Change**Conditional
                  access
              
              $
              260,222
              
              $
              243,755
              
              $
              16,467
              
              
              +7
              %Integration,
                  development & support
              
              
              36,087
              
              
              42,680
              
              
              (6,593
              )
              
              -15
              %License
                  fees & royalties
              
              
              70,501
              
              
              53,157
              
              
              17,344
              
              
              +33
              %New
                  technologies
              
              
              73,099
              
              
              64,641
              
              
              8,458
              
              
              +13
              %Other
              
              
              5,993
              
              
              5,263
              
              
              730
              
              
              +14
              %Total
                  revenue
              
              $
              445,902
              
              $
              409,496
              
              $
              36,406
              
              
              +9
              %




The
      increase in conditional access revenues in the three months ended March 31,
      2006
      compared to the corresponding period in fiscal 2005 was due to higher security
      fees and higher deliveries of smart cards. For the nine months ended March
      31,
      2006, the increase in conditional access revenues was due to an increase in
      security fees which was partially offset by lower deliveries of smart cards
      than
      in the corresponding period in fiscal 2005.




Page
            17





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**
              
              **For
                  the nine months****ended
                  March 31,**
              
              **ended
                  March 31,**(in
                  millions)
              
              **2006**
              
              **2005**
              
              **2006**
              
              **2005**Number
                  of authorized cards, beginning of period
              
              
              61.4
              
              
              51.8
              
              
              56.7
              
              
              44.0Net
                  additions
              
              
              2.6
              
              
              2.9
              
              
              7.3
              
              
              10.7Number
                  of authorized cards, end of period
              
              
              64.0
              
              
              54.7
              
              
              64.0
              
              
              54.7




There
      has
      been growth in authorized cards in use across most of our broadcast platform
      customers. However, the increases in the three and nine month periods ended
      March 31, 2006 were less than the increases in the corresponding respective
      periods of the previous fiscal year, which were favorably impacted by the
      migration of Sky Italia subscribers to NDS technology.





The
      increase in the number of smart cards delivered in the three month period ended
      March 31, 2006, compared to the corresponding period in fiscal 2005, was due
      to
      higher deliveries, principally to DIRECTV, Cablevision and customers in China.
      The decrease in the number of smart cards delivered in the nine month period
      ended March 31, 2006, compared to the corresponding period in fiscal 2005,
      reflects lower year-to-date demand from DIRECTV and Sky Italia offset in part
      by
      higher shipments to customers in China. The quantity of smart cards delivered
      in
      each period was as follows:




**For
                  the three months**
              
              **For
                  the nine months****ended
                  March 31,**
              
              **ended
                  March 31,**(in
                  millions)
              
              **2006**
              
              **2005**
              
              **2006**
              
              **2005**Number
                  of smart cards delivered
              
              
              6.8
              
              
              5.1
              
              
              18.4
              
              
              22.0




Revenues
      from integration, development and support decreased by 25% and 15% in the three
      and nine month periods ended March 31, 2006, respectively, compared to the
      corresponding periods of the previous fiscal year. Revenue in the first nine
      months of fiscal 2006 from integration, development and support reflects the
      delivery of a series of enhancements to our customers and middleware technology
      development revenue. The corresponding prior year period included higher revenue
      from the migration of Sky Italia subscribers to NDS technology.





Revenues
      from license fees and royalties increased by 4% and 33% in the three and nine
      month periods ended March 31, 2006, respectively, compared to the corresponding
      periods of the previous fiscal year. The increase was mainly due to middleware
      and program guide technology supplied to DIRECTV, who, in early summer 2005,
      commenced the download of our MediaHighway middleware and related technologies
      to certain models of set-top boxes in use by their subscribers. The increase
      in
      the cumulative number of MediaHighway-enabled set-top boxes in each period
      was
      as follows:




**For
                  the three months**
              
              **For
                  the nine months****ended
                  March 31,**
              
              **ended
                  March 31,**(in
                  millions)
              
              **2006**
              
              **2005**
              
              **2006**
              
              **2005**Number
                  of MediaHighway-enabled set-top boxes,beginning
                  of period
              
              
              34.1
              
              
              19.3
              
              
              20.4
              
              
              18.4Additions
              
              
              4.3
              
              
              0.4
              
              
              18.0
              
              
              1.3Number
                  of MediaHighway-enabled set-top boxes, end of period
              
              
              38.4
              
              
              19.7
              
              
              38.4
              
              
              19.7




The
      increase in revenues from new technologies of 12% and 13% in the three and
      nine
      month periods ended March 31, 2006, respectively, compared to the corresponding
      periods of the previous fiscal year, was due to the increase in revenue from
      our
      Synamedia IP-TV technologies, interactive infrastructure and gaming
      applications. This was due to the higher number of subscribers using this
      technology and the addition of our technology on new platforms. We also received
      higher development and royalty income related to the deployment of our advanced
      DVR technologies by several of our customers.





Page
          18


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




**For
                  the three months**
              
              ******For
                  the nine months********ended
                  March 31,**
              
              ******ended March
                  31,**(in
                  millions)
              
              ******2006**
              
              ******2005**
              
              ******2006**
              
              ******2005**Number
                  of DVR-enabled set-top boxes, beginning of period
              
              
              2.0
              
              
              0.9
              
              
              1.4
              
              
              0.4Additions
              
              
              0.7
              
              
              0.1
              
              
              1.3
              
              
              0.6Number
                  of DVR-enabled set-top boxes, end of period
              
              
              2.7
              
              
              1.0
              
              
              2.7
              
              
              1.0




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





In
      addition to the matters referred to above, comparisons of revenues for the
      three
      and nine month periods ended March 31, 2006 to the corresponding periods of
      the
      previous fiscal year were also affected by the relative strength of the U.S.
      dollar in the first nine months of fiscal 2006 compared to the first nine months
      of fiscal 2005. Approximately 47% of our revenues are denominated in currencies
      other than the U.S. dollar (principally pounds sterling and euros). We estimate
      that the stronger U.S. dollar has adversely impacted our total reported revenues
      by approximately 3%.








**Cost
      of goods and services sold and gross margin**




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




**For
                  the three months****ended
                  March 31,**(in
                  thousands)
              
              **2006**
              
              **2005**
              
              **Change**
              
              **%
                  Change**Smart
                  card costs
              
              $
              21,617
              
              $
              22,996
              
              $
              (1,379
              )
              
              -6
              %Operations
              
              
              32,679
              
              
              19,751
              
              
              12,928
              
              
              +65
              %Royalties
              
              
              2,727
              
              
              2,815
              
              
              (88
              )
              
              -3
              %Other
              
              
              937
              
              
              2,399
              
              
              (1,462
              )
              
              -61
              %Total
                  cost of goods and services sold
              
              $
              57,960
              
              $
              47,961
              
              $
              9,999
              
              
              +21
              %Gross
                  margin
              
              $
              91,244
              
              $
              78,633
              
              $
              12,611
              
              
              +16
              %Gross
                  margin as a percentage of revenues
              
              
              61.2
              %
              
              62.1
              %
              
              -0.9
              %




**For
                  the nine months****ended
                  March 31,**(in
                  thousands)
              
              **2006**
              
              **2005**
              
              **Change**
              
              **%
                  Change**Smart
                  card costs
              
              $
              66,324
              
              $
              94,338
              
              $
              (28,014
              )
              
              -30
              %Operations
              
              
              101,260
              
              
              52,360
              
              
              48,900
              
              
              +93
              %Royalties
              
              
              8,405
              
              
              10,573
              
              
              (2,168
              )
              
              -21
              %Other
              
              
              3,570
              
              
              2,643
              
              
              927
              
              
              +35
              %Total
                  cost of goods and services sold
              
              $
              179,559
              
              $
              159,914
              
              $
              19,645
              
              
              +12
              %Gross
                  margin
              
              $
              266,343
              
              $
              249,582
              
              $
              16,761
              
              
              +7
              %Gross
                  margin as a percentage of revenues
              
              
              59.7
              %
              
              60.9
              %
              
              -1.2
              %




Page
          19


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





The
      decrease in smart card costs in the three month period ended March 31, 2006,
      compared to the corresponding period of the previous fiscal year, was due to
      the
      lower unit costs. Lower deliveries of smart cards supplied in the nine month
      period ended March 31, 2006, compared to the corresponding period of the
      previous fiscal year, also reduced smart card costs. 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 costs over the corresponding period of the prior fiscal year was
      due
      to an increase in the number of our employees working on development,
      integration and support activities for our customers. Royalty costs are a
      function of particular revenue items and the changes in royalty expense for
      the
      three and nine months ended March 31, 2006 were due to changes in the mix of
      revenues.





As
      a
      consequence of these factors, gross margin as a percentage of revenues was
      61.2%
      for the three months ended March 31, 2006, compared to 62.1% for the
      corresponding period of the prior fiscal year. For the nine months ended March
      31, 2006, gross margin as a percentage of revenues was 59.7%, compared to 60.9%
      for the corresponding period of the prior fiscal year.








**Operating
      expenses**




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


**For
                  the three months****ended
                  March 31,**(in
                  thousands)
              
              
              **2006**
              
              
              **2005**
              
              
              **Change**
              
              
              **%
                  Change**Research
                  & development
              
              $
              36,608
              
              $
              40,847
              
              $
              (4,239
              )
              
              -10
              %Sales
                  & marketing
              
              
              7,762
              
              
              7,035
              
              
              727
              
              
              +10
              %General
                  & administration
              
              
              11,371
              
              
              4,995
              
              
              6,376
              
              
              +128
              %Amortization
                  of intangibles
              
              
              2,242
              
              
              3,286
              
              
              (1,044
              )
              
              -32
              %Other
              
              
              (2,151
              )
              
              (160
              )
              
              (1,991
              )
              
              **Total
                  operating expenses
              
              $
              55,832
              
              $
              56,003
              
              $
              (171
              )
              
              ─
              %**:
                  Not meaningful.
 
 **For
                  the nine months****ended
                  March 31,**(in
                  thousands)
              
              **2006**
              
              **2005**
              
              **Change**
              
              **%
                  Change**Research
                  & development
              
              $
              103,053
              
              $
              119,501
              
              $
              (16,448
              )
              
              -14
              %Sales
                  & marketing
              
              
              21,767
              
              
              19,154
              
              
              2,613
              
              
              +14
              %General
                  & administration
              
              
              29,145
              
              
              32,280
              
              
              (3,135
              )
              
              -10
              %Amortization
                  of intangibles
              
              
              7,0389,576
              
              
              (2,538
              )
              
              -27
              %Other
              
              
              (127
              )
              
              (2,974
              )
              
              2,847
              
              
              **Total
                  operating expenses
              
              $
              160,876
              
              $
              177,537
              
              $
              (16,661
              )
              
              -9
              %**:
                  Not meaningful.





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




Page
            20





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




**For
                  the three months**
              
              **For
                  the nine months******
              
              **ended
                  March 31,**
              
              **ended
                  March 31,****2005**
              
              **2006**
              
              **2005**
              
              **2006**Number
                  of employees, beginning of period
              
              
              2,725
              
              
              2,234
              
              
              2,508
              
              
              2,004Additions
              
              
              182
              
              
              147
              
              
              399
              
              
              377Number
                  of employees, end of period
              
              
              2,907
              
              
              2,381
              
              
              2,907
              
              
              2,381Average
                  number of employees during period
              
              
              2,806
              
              
              2,303
              
              
              2,701
              
              
              2,181


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





A
      higher
      proportion of our engineering activities have been involved in
      revenue-generating projects for our customers and this has resulted in a higher
      amount and proportion of the total costs of our technical employees being
      classified as cost of goods and services sold. The residual costs of our
      technical employees represent research and development expenses, being the
      cost
      of employees and related items associated with research activities and
      development activities undertaken at our risk. Such activities involve a mixture
      of internal research and software development projects focused on the digital
      broadcasting industry and projects focused on improving functionality to our
      existing product portfolio. Research and development expenses decreased by
      10%
      and 14% for the three and nine month periods ended March 31, 2006, respectively,
      compared to the corresponding periods of the prior fiscal year, as a result
      of a
      lower proportion of development projects being undertaken at our risk. In
      addition, in the nine months ended March 31, 2006, we received a $5.3 million
      grant from the French government as a consequence of being engaged in eligible
      research projects.





During
      the
      three and nine month periods ended March 31, 2006, sales and marketing expenses
      increased by 10% and 14%, respectively, as a result of increased activity,
      particularly in Europe and Asia.





General
      and administrative expenses increased by $6.4 million and decreased by $3.1
      million for the three and nine months ended March 31, 2006, respectively, as
      compared to the corresponding periods of the prior fiscal year. During the
      three
      months ended March 31, 2005, our management committed to reoccupy part of a
      property in Heathrow, England which we had abandoned in 2000 resulting in a
      reversal of the abandoned property lease accrual of $8.1 million which was
      no
      longer needed. The decrease relating to the nine months ended March 31, 2006,
      was offset by an increase of $3.0 million in the abandoned property accrual
      that
      had been recorded for this property during the three months ended December
      31,
      2004. Excluding the effect of the abandoned property lease accruals noted above,
      general and administrative expenses decreased by $1.7 million and $8.3 million
      in the three and nine months ended March 31, 2006, respectively as compared
      to
      the corresponding periods of the prior fiscal year. Part of the decrease is
      a
      consequence of a lower proportion of the total number of our employees being
      engaged in general and administrative functions, which in turn, resulted in
      a
      reduction in the facilities and infrastructure costs included within general
      and
      administrative expenses. Additionally, legal expenses and that element of
      stock-based compensation expenses which is classified as general and
      administrative expense were both lower in the three and nine month periods
      ended
      March 31, 2006 than in the corresponding periods of the prior fiscal
      year.





Amortization
      of finite-lived intangible assets decreased by 32% and 27% in the three and
      nine
      month periods ended March 31, 2006, respectively, compared to the corresponding
      periods of the prior fiscal year. This is as a consequence of certain
      intellectual property rights becoming fully amortized in May 2005.





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





In
      addition to the matters referred to above, comparisons of expenses for the
      three
      and nine month periods ended March 31, 2006 to the corresponding periods of
      the
      previous fiscal year were also affected by the relative strength of the U.S.
      dollar in the first nine months of fiscal 2006 compared to the first nine months
      of fiscal 2005. Approximately 50% of our total expenses are denominated in
      currencies other than the U.S. dollar (principally pounds sterling and euros).
      We estimate that the stronger U.S. dollar has favorably impacted our total
      reported expenses by approximately 3%.





Page
          21





**Operating
      income and other items**




As
      a
      result of the factors outlined above, operating income was $35.4 million (or
      23.7% of revenue) for the three months ended March 31, 2006, compared to $22.6
      million (or 17.9% of revenue) for the corresponding period of the previous
      fiscal year. For the nine months ended March 31, 2006, operating income was
      $105.5 million (or 23.7% of revenue) compared to $72.0 million (or 17.6% of
      revenue) for the corresponding period of the previous fiscal year.





Interest
      income earned on cash deposits was $4.1 million and $10.5 million for the three
      and nine month periods ended March 31, 2006, respectively, compared to $2.3
      million and $7.1 million, respectively, for the corresponding periods of the
      previous fiscal year. The increases were due to higher average cash balances
      and
      higher interest rates.





Our
      effective tax rate was 28.7% and 29.9% for the three and nine month periods
      ended March 31, 2006, respectively, compared to 33.5% and 34.2%, respectively,
      for the corresponding periods of the previous fiscal year. The decrease in
      the
      tax rates was due to lower effective tax rates in our non-U.K.
      operations.





As
      a
      consequence of all these factors, net income for the three months ended March
      31, 2006 was $28.1 million, or $0.50 per share ($0.49 per share on a diluted
      basis), compared to $16.6 million, or $0.30 per share ($0.29 per share on a
      diluted basis), for the three months ended March 31, 2005. For the nine months
      ended March 31, 2006, the factors described above resulted in net income of
      $81.2 million, or $1.45 per share ($1.41 on a diluted basis), compared to $52.1
      million, or $0.95 per share ($0.92 per share on a diluted basis), for the
      corresponding period of the prior fiscal year.








**Recent
      accounting pronouncements**




Total
      operating expenses for the three and nine month periods ended March 31, 2006
      include a charge before income tax in respect of stock option expenses of $2.1
      million and $3.8 million, respectively. The equivalent charges in the
      corresponding period of the prior fiscal year amounted to $0.6 million and
      $4.0
      million, respectively. We have adopted the modified prospective method to
      transition to SFAS No. 123 (R), effective July 1, 2005. The charge recorded
      in
      the corresponding periods of the prior fiscal year arose only in respect of
      stock options whose terms had been modified because stock option compensation
      was accounted for by using the intrinsic value-based method in accordance with
      APB No. 25, “Accounting for Stock Issued to Employees” (“APB25”). As a result of
      adopting SFAS No. 123 (R) on July 1, 2005, our income before income taxes
      and net income for the three and nine month periods ended March 31, 2006 was
      lower by approximately $0.7 million and $0.7 million, respectively, than if
      we
      had continued to account for stock-based compensation under APB25.





Additionally,
      in June 2005, the Remuneration Committee of our Board of Directors modified
      the
      terms of certain unvested out-of-the-money stock options granted under our
      stock
      option plans. The Remuneration Committee’s decision to accelerate the vesting of
      these stock options was in anticipation of compensation expense to be recorded
      subsequent to the effective date of SFAS No. 123 (R) on July 1, 2005. The
      acceleration eliminated approximately $0.9 million ($0.8 million net of tax)
      which would otherwise have been recorded as an operating expense in the three
      months ended March 31, 2006. For the nine months ended March 31, 2006, the
      acceleration eliminated approximately $4.3 million ($3.9 million net of tax)
      which would otherwise have been recorded as an operating expense.





SFAS
      No.
      123 (R) also requires excess tax benefits realized on the exercise of stock
      options to be shown as a financing cash inflow rather then as part of cash
      provided by operating activities. The amount so recorded in the nine months
      ended March 31, 2006 was $4.1 million.





As
      of
      March 31, 2006, the total compensation cost related to non vested awards not
      yet
      recognized was approximately $28.7 million and the period over which it is
      expected to be recognized is 3.8 years. The Directors may grant additional
      stock
      options in the future, which would result in additional operating expenses
      being
      recorded. Further information about the effect of adopting SFAS No. 123 (R)
      is
      provided in Note 11 to the accompanying unaudited consolidated financial
      statements.








Page
          22





**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
      March 31, 2006, we had cash, cash equivalents and short-term investments
      totaling $445.7 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 March 31, 2006, we have an unused credit facility to borrow
      up
      to £30 million (equivalent to approximately $52 million) from a subsidiary
      of News Corporation. No amounts were drawn under this facility during the nine
      month period ended March 31, 2006.





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








**Sources
      and uses of cash**




We
      had a
      net inflow of cash of $5.5 million in the nine months ended March 31, 2006,
      compared to a net cash inflow of $75.6 million in the nine months ended March
      31, 2005.





Net
      cash
      provided by operating activities was as follows:




**For
                  the nine months**(in
                  thousands)
              
              **ended
                  March 31,****2006**
              
              **2005**Net
                  cash provided by operating activities
              
              $
              111,188
              
              $
              78,165




The
      increase in net cash provided by operating activities in the nine months ended
      March 31, 2006 reflects higher receipts from customers, lower payments for
      the
      purchase of smart cards and lower tax payments. These factors were offset in
      part by higher payments of payroll costs, travel expenses and facilities costs,
      compared to the corresponding period of the previous fiscal year, as a result
      of
      an increase in the number of employees.





Net
      cash
      used in investing activities was as follows:




**For
                  the nine months**
              ********
              ****
              **ended
                  March 31,**(in
                  thousands)
              
              **2006**
              
              **2005**Capital
                  expenditure
              
              $
              21,921
              
              $
              13,287Business
                  acquisitions, net of cash acquired
              
              
              3,118
              
              
              17Proceeds
                  from sale of investments
              
              
              ─
              
              
              (232
              )Increase
                  in short-term investments
              
              
              101,035
              
              
              ─Net
                  cash used in investing activities
              
              $
              126,074
              
              $
              13,072


The
      increase in capital expenditure was due to investment in new facilities in
      the
      United Kingdom, India and the United States, and higher purchases of technical
      equipment required to support our customers. In addition, during the nine months
      ended March 31, 2006, we acquired NT Media Limited for initial cash
      consideration and costs totaling $3.1 million. Further payments may be made
      under the terms of the acquisition agreement up to a maximum of approximately
      $4.2 million over the next three years. During the nine months ended March
      31,
      2006, we invested a portion of our cash with a bank on deposit for a six month
      term.




Page
            23





Net
      cash
      generated by financing activities was as follows:


**For
                  the nine months****ended
                  March 31,**(in
                  thousands)
              
              **2006**
              
              **2005**Issuance
                  of shares
              
              $
              16,253
              
              $
              10,543Excess
                  tax benefits realized on exercise of stock options
              
              
              4,095
              
              
              ─Net
                  cash generated by financing activities
              
              $
              20,348
              
              $
              10,543




Higher
      numbers of stock options were exercised by employees during the nine months
      ended March 31, 2006 than in the corresponding period of the prior fiscal year.
      Certain stock option exercises result in a tax benefit higher than the amounts
      recorded in the consolidated statement of operations. Following the adoption
      of
      SFAS No. 123 (R) which became effective for us on July 1, 2005, such benefits
      are shown as a financing cash flow to the extent that they are realized, rather
      than as part of cash provided by operating activities as previously required.




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




**Commitments
      and contractual obligations**




Apart
      from
      the contingent payments related to the acquisition of NT Media Limited referred
      to above, there has been no material change to our commitments since June 30,
      2005.




**Risk
      Factors**




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





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




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





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





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




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




Page
          24




**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.




**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.





Page
          25


**Intense
      competition could reduce our market share and harm our financial
      performance.**




We
      compete
      with numerous companies both to attract new customers and to retain our existing
      customers. Such competition may cause us to lose market share and may result
      in
      reduced profit margins. It may also hinder our ability to develop our business
      in areas such as DVRs, middleware, interactive television services and IP-TV.
      In
      addition, some of the companies that currently operate in the software business,
      but which have not historically been active competitors of ours may, in the
      future, through acquisitions or the development of their own resources, seek
      to
      enter and obtain significant market share in our current or planned business
      areas. Increased competition from existing or new competitors could result
      in
      price reductions, reduced margins or loss of market share, any of which could
      materially and adversely affect our business, operating results and financial
      condition.





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




Our
      growth
      has depended historically on large digital satellite broadcasters introducing,
      marketing and promoting products and services that utilize our technology.
      We
      currently derive, and we expect to continue to derive, a significant portion
      of
      our revenues from a limited number of large customers. Our three largest
      customers are DIRECTV in the United States, BSkyB in the United Kingdom and
      Sky
      Italia in Italy. In the nine months ended March 31, 2006, these three customers
      accounted directly and indirectly for approximately 70% of our total revenues.
      We expect that we will continue to be dependent upon a limited number of
      customers for a significant portion of our revenues, although the particular
      customers may vary from period to period. If a large customer purchases
      significantly less of our products or services, defers or cancels orders, or
      terminates its relationship with us, our revenues could decline significantly
      and as a result, our business, operating results and financial condition could
      be materially adversely affected.




**The
      adoption of industry-wide standards for interactive television could adversely
      affect our ability to sell our products and services or place downward pressure
      on our pricing.**




Ongoing
      efforts to establish industry-wide standards for interactive television software
      include a commitment by cable network operators in the United States to deploy
      a
      uniform platform for interactive television based on a jointly developed
      specification known as the OpenCable Applications Platform and an initiative
      by
      European television industry participants to create a similar platform called
      Multimedia Home Platform. The establishment of these standards or other similar
      standards could adversely affect the pricing of our products and services,
      significantly reduce the value of our intellectual property and the competitive
      advantage our proprietary technology provides, cause us to incur substantial
      expenditures to adapt our products or services to respond to these developments
      or otherwise harm our business, particularly if our products require significant
      redevelopment in order to conform to the newly established
      standards.





We
      are not
      currently a member of CableLabs, the research and development consortium
      managing the OpenCable initiative, or certain other standards setting
      organizations. While we are involved in the activity of CableLabs and while
      we
      continually assess our position with respect to any relevant standards setting
      organizations, and have joined several of them, our failure to participate
      in
      certain organizations may affect the willingness of their respective members
      to
      conduct business with us and this may adversely affect our ability to sell
      products or services to cable network operators or other potential customers
      that are members of those organizations. If that were to be the case, our
      ability to continue to grow our business might be adversely
      affected.





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




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





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          26


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




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





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





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




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





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




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





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




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





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





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




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





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




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





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          27


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




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





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





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




A
      risk
      inherent in our international operations is the exposure to fluctuations in
      currency exchange rates. Certain of our customer contracts denominate prices
      in
      pounds sterling or in euros. During the nine months ended March 31, 2006,
      approximately 28% of our revenues were denominated in pounds sterling and a
      further 19% were denominated in euros. Some of our smart card costs and our
      operating expenses are denominated in pounds sterling and euros. During the
      nine
      months ended March 31, 2006, we estimate that approximately 27% of our total
      cost of sales and operating expenses were denominated in pounds sterling and
      a
      further 23% were denominated in euros. As a result, we are exposed to
      fluctuations in exchange rates which may have a material adverse effect on
      our
      business, operating results and financial condition.





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





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




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





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




We
      are
      controlled by News Corporation. As of the date hereof, News Corporation
      beneficially owns approximately 74.2% of our total issued and outstanding share
      capital. Because News Corporation beneficially owns 100% of our Series B
      ordinary shares, which have ten votes per share (as opposed to our Series A
      ordinary shares which have one vote per share), it controls approximately 96.6%
      of our voting power. By reason of such ownership, News Corporation is able
      to
      control the composition of our entire Board of Directors and to control the
      votes on all other matters submitted to a vote of our shareholders. Four of
      our
      eight current Directors have been appointed by News Corporation. Additionally,
      Dr. Abe Peled, our Chairman and Chief Executive Officer, is a member of News
      Corporation’s Executive Management Committee and from time to time is involved
      in matters pertaining to News Corporation’s wider business
      interests.





Businesses
      in which News Corporation has an interest currently account for, and are
      expected to continue to account for, a significant portion of our revenues.
      During the nine months ended March 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.





Page
          28


**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. We may grant further stock options to
      our
      Directors, executive officers and employees.





At
      our
      annual general meeting held on October 31, 2005, shareholders authorized our
      Board of Directors, pursuant to Section 80 of the Companies Act 1985 of
      Great Britain, to allot relevant securities (including ordinary shares, other
      equity securities and the right to subscribe for or convert securities) for
      further issuance for a period expiring November 1, 2010. At the same time,
      our
      Board of Directors were empowered, pursuant to Section 95 of the Companies
      Act 1985 of Great Britain, to allot equity securities for cash on a
      non-pre-emptive basis without first being required to offer them to existing
      shareholders.





We
      may
      issue equity securities in connection with possible future business
      acquisitions.











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




The
      only
      significant financial market risk to which we are exposed is to changes in
      foreign exchange rates. We operate in international markets and have operational
      presence in several countries. Accordingly, our costs and revenues are
      denominated in a mixture of U.S. dollars, pounds sterling and euros.
      Historically, we have not entered into free-standing derivative contracts to
      hedge foreign exchange exposure arising from operating activities. We expect
      to
      review this policy from time to time as circumstances change. No derivative
      instruments were outstanding as of March 31, 2006.





In
      certain
      countries in which we have operations, we are required to make severance
      payments to employees leaving employment in certain circumstances, on the basis
      of the latest monthly salary for each year of service. This liability is
      provided for by payments of premiums to insurance companies under approved
      plans. The obligation as of March 31, 2006 included within our consolidated
      balance sheet as non-current accrued expenses was $28.3 million. The value
      of
      insurance policies which substantially fund this obligation as of March 31,
      2006
      was $22.3 million and is included within our consolidated balance sheet as
      other
      non-current assets. The bulk of the arrangements relates to our Israeli
      employees. Because the gross liability reflects the contracts of employment,
      it
      is denominated in U.S. dollars, whereas the amount funded by insurance policies
      is regulated by the government of the State of Israel and is denominated in
      Israeli shekels. Accordingly, the difference between the gross liability and
      the
      amount funded by insurance policies is subject to fluctuations depending on
      the
      relative values of the U.S. dollar and Israeli shekel.





Page
          29


As
      of
      March 31, 2006, approximately 80% of our cash was held in U.S. dollars and
      13%
      in pounds sterling, with the remainder being held primarily in euros.




**Item
      4. Controls and Procedures**




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




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




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




There
      have
      not been any changes in the Company’s internal control over financial reporting
      (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange
      Act) during the Company’s third quarter of fiscal 2006 that have materially
      affected, or are reasonably likely to materially affect, the Company’s internal
      control over financial reporting.





Page
          30





**PART
      II - Other Information**




**Item
      1. Legal Proceedings**




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








**Item
      1A. Risk Factors**




See
“Risk
      Factors” beginning on page 24 ,
      which is
      incorporated herein by reference.








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




Not
      applicable.








**Item
      3. Defaults Upon Senior Securities**




Not
      applicable.








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




Not
      applicable.








**Item
      5. Other Information**




Not
      applicable.








**Item
      6. Exhibits**




10.1  Non-Executive
      Director Compensation Summary Sheet. (1)





10.2  Letter
      Agreement dated October 20, 2002 between Raffi Kesten and NDS Technologies
      Israel Limited. (2)





10.3  Letter
      Agreement dated June 22, 2004 between Raffi Kesten and NDS Group
      plc. (3)





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.(2)
              Incorporated
                  by reference to Exhibit 10.1 to the Current Report on Form 8K,
                  filed by
                  NDS Group plc with the Securities and Exchange Commission (File
                  No.
                  0-30364) on April 10, 2006.(3)
              Incorporated
                  by reference to Exhibit 10.2 to the Current Report on Form 8K,
                  filed by
                  NDS Group plc with the Securities and Exchange Commission (File
                  No.
                  0-30364) on April 10, 2006.




Page
            31





**Signatures**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on


its
      behalf
      by the undersigned thereunto duly authorized.





NDS
      GROUP
      PLC


(Registrant)





By:  /s/
      Alexander Gersh


Alexander
      Gersh


Chief
      Financial Officer


(Principal
      Financial Officer)










Date:  May
      8,
      2006





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          32