**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**


**(Mark
      One)**


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


**For
      the quarterly period ended September 30, 2005**





**or**





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


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





**Commission
      File Number: 0-30364**





**NDS
      Group plc**


(Exact
      name of registrant as specified in its charter)






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




**+44
      208 476 8000**


(Registrant’s
      telephone number, including area code)








Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. **Yes**  **[X]**  **No**  **[
      ]**





Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Exchange Act). **Yes**  **[X]**  **No**  **[
      ]**





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2) of the Exchange Act). **Yes**  **[
      ]**  **No**  **[X]**





As
      of
      November 7, 2005, the following shares were outstanding: 13,884,756 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**


PageItem
                  1.
              Financial
                  StatementsUnaudited
                  Consolidated Statements of Operations for
                  the three monthsended
                  September 30, 2005 and September 30,
                  2004
              1Consolidated
                  Balance Sheets as of September 30, 2005
                  (unaudited) and June 30, 2005
              2Unaudited
                  Consolidated Statements of Cash Flows for the
                  three monthsended
                  September 30, 2005 and September 30,
                  2004
              3Notes
                  to the Unaudited Consolidated Financial
                  Statements
              4Item
                  2.
              Management’s
                  Discussion and Analysis of Financial
                  Condition and Results of Operations
              11Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              24Item
                  4.
              Controls
                  and Procedures
              24**PART
                  II - Other Information**Item
                  1.
              Legal
                  Proceedings
              25Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds
              26Item
                  3.
              Defaults
                  Upon Senior Securities
              26Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              26Item
                  5.
              Other
                  Information
              26Item
                  6.
              Exhibits
              26Signatures
              
              27









**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
                  September 30,****2005**
              
              
              **2004****Revenue:**Conditional
                  access
              
              $
              83,145
              
              $
              90,324Integration,
                  development & support
              
              
              13,834
              
              
              16,808License
                  fees & royalties
              
              
              24,566
              
              
              16,000New
                  technologies
              
              
              20,859
              
              
              16,970Other
              
              
              2,091
              
              
              1,177Total
                  revenue
              
              
              144,495
              
              
              141,279**Cost
                  of goods and services sold:**Smart
                  card costs
              
              
              (21,625
              )
              
              (38,799
              )Operations
              
              
              (33,679
              )
              
              (15,553
              )Royalties
              
              
              (2,897
              )
              
              (3,075
              )Other
              
              
              (1,622
              )
              
              (140
              )Total
                  cost of goods and services sold
              
              
              (59,823
              )
              
              (57,567
              )**Gross
                  margin**
              
              
              84,672
              
              
              83,712**Operating
                  expenses:**Sales
                  & marketing
              
              
              (7,271
              )
              
              (6,066
              )Research
                  & development
              
              
              (30,104
              )
              
              (38,321
              )General
                  & administration
              
              
              (8,577
              )
              
              (12,102
              )Amortization
                  of other intangibles
              
              
              (2,338
              )
              
              (3,101
              )Other
              
              
              (647
              )
              
              1,162Total
                  operating expenses
              
              
              (48,937
              )
              
              (58,428
              )**Operating
                  income**
              
              
              35,735
              
              
              25,284**Other
                  income:**Interest
              
              
              2,876
              
              
              1,990Income
                  before income tax expense
              
              
              38,611
              
              
              27,274Income
                  tax expense
              
              
              (11,506
              )
              
              (9,657
              )**Net
                  income**
              
              $
              27,105
              
              $
              17,617**Net
                  income per share:**Basic
                  net income per share
              
              $
              0.49
              
              $
              0.32Diluted
                  net income per share
              
              $
              0.47
              
              $
              0.31




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




Page
          1




**NDS
        Group plc**
  **Consolidated
        Balance Sheets**
  (in
        thousands, except share and per share amounts)


**As
                  of**
                **September
                  30,**
                **2005**
                **(Unaudited)**
              
              
              **As
                  of**
                **June
                  30,**
                **2005**
                **(See
                  Note 2)****ASSETS****Current
                  assets:**Cash
                  and cash equivalents
              
              $
              342,025
              
              $
              339,791Accounts
                  receivable, net
              
              
              100,100
              
              
              73,588Accrued
                  income
              
              
              25,609
              
              
              25,391Inventories
              
              
              39,053
              
              
              41,508Prepaid
                  expenses
              
              
              14,053
              
              
              15,795Other
                  current assets
              
              
              3,535
              
              
              3,595Total
                  current assets
              
              
              524,375
              
              
              499,668Property,
                  plant & equipment, net
              
              
              38,890
              
              
              33,962Goodwill
              
              
              64,207
              
              
              64,236Other
                  intangibles, net
              
              
              48,983
              
              
              48,537Deferred
                  tax assets
              
              
              5,116
              
              
              5,121Other
                  receivables
              
              
              6,298
              
              
              ─Other
                  non-current assets
              
              
              21,051
              
              
              20,374**Total
                  assets**
              
              $
              708,920
              
              $
              671,898**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY****Current
                  liabilities:**Accounts
                  payable
              
              $
              17,295
              
              $
              18,336Deferred
                  income
              
              
              42,699
              
              
              47,175Accrued
                  payroll costs
              
              
              16,877
              
              
              25,069Accrued
                  expenses
              
              
              20,455
              
              
              21,097Income
                  tax liabilities
              
              
              13,596
              
              
              4,070Other
                  current liabilities
              
              
              11,054
              
              
              13,498Total
                  current liabilities
              
              
              121,976
              
              
              129,245Accrued
                  expenses
              
              
              31,031
              
              
              28,547Deferred
                  income
              
              
              97,502
              
              
              87,353**Total
                  liabilities**
              
              
              250,509
              
              
              245,145**Shareholders’
                  equity:**Series
                  A ordinary shares, par value $0.01 per share: 48,000,000 shares
                  authorized;
                13,526,222
                  and 13,318,546 shares outstanding as of September 30, and June
                  30, 2005,
                  respectively
              
              
              135
              
              
              133Series
                  B ordinary shares, par value $0.01 per share: 52,000,000 shares
                  authorized;
                42,001,000
                  shares outstanding as of September 30, and June 30, 2005,
                  respectively
              
              
              420
              
              
              420Deferred
                  shares, par value £1 per share: 42,000,002 shares
                  authorizedand
                  outstanding as of September 30, and June 30, 2005,
                  respectively
              
              
              64,103
              
              
              64,103Additional
                  paid-in capital
              
              
              502,935
              
              
              498,363Accumulated
                  deficit
              
              
              (153,466
              )
              
              (180,571
              )Other
                  comprehensive income
              
              
              44,284
              
              
              44,305**Total
                  shareholders’ equity**
              
              
              458,411
              
              
              426,753**Total
                  liabilities and shareholders’ equity**
              
              $
              708,920
              
              $
              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 three months**
                  **ended
                    September 30,****Operating
                    activities:**
                
                **2005**
                
                **2004**Net
                    income
                
                $
                27,105
                
                $
                17,617Adjustments
                    to reconcile net income to net cash provided by operating
                    activities:Depreciation
                
                
                3,837
                
                
                3,394Amortization
                    of other intangibles
                
                
                2,338
                
                
                3,101Stock
                    option-based compensation
                
                
                977
                
                
                2,531Change
                    in operating assets and liabilities, net of acquisitions
                
                
                (23,415
                )
                
                (28,445
                )Net
                    cash provided by (used in) operating activities
                
                
                10,842
                
                
                (1,802
                )**Investing
                    activities:**Capital
                    expenditure
                
                
                (8,757
                )
                
                (3,694
                )Business
                    acquisitions, net of cash acquired
                
                
                (2,922
                )
                
                --Net
                    cash used in investing activities
                
                
                (11,679
                )
                
                (3,694
                )**Financing
                    activities:**Issuance
                    of shares
                
                
                2,797
                
                
                780**Net
                    increase (decrease) in cash and cash equivalents**
                
                
                1,960
                
                
                (4,716
                )Cash
                    and cash equivalents, beginning of period
                
                
                339,791
                
                
                228,620Exchange
                    movements
                
                
                274
                
                
                (2,802
                )**Cash
                    and cash equivalents, end of period**
                
                $
                342,025
                
                $
                221,102


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 months ended
        September 30, 2005 are not necessarily indicative of results that may be
        expected for any other interim period or for the full fiscal year ending
        June
        30, 2006.
 
 These
        interim unaudited consolidated financial statements and notes thereto should
        be
        read in conjunction with the audited consolidated financial statements and
        notes
        thereto for the fiscal year ended June 30, 2005 included in the Company’s Annual
        Report on Form 10-K as filed with the Securities and Exchange Commission
        on
        September 8, 2005. Financial information as of June 30, 2005 have
        been
        derived from those audited consolidated financial statements.
 
 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.**  **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
                  September 30,****2005**
              
              **2004**Net
                  income
              
              $
              27,105
              
              $
              17,617Currency
                  translation differences (no tax effect)
              
              
              (21
              )
              
              (4,644
              )Other
              
              
              ─
              
              
              93Comprehensive
                  income
              
              $
              27,084
              
              $
              13,066




Page
          4




**Note
        4.**  **Net
        income per share**
  Net
        income per share is calculated as net income divided by the weighted average
        number of ordinary shares in issue in each period. The interests of ordinary
        shareholders may be diluted due to the existence of stock options granted
        to
        employees. The dilutive effect of potential shares has been calculated using
        the
        treasury 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 shares,
        as
        follows:
 **For
                    the three months**
                  **ended
                    September 30,****2005**
                
                **2004**Weighted
                    average number of ordinary shares in issue
                
                
                55,419,452
                
                
                54,215,794Effect
                    of dilutive stock options
                
                
                1,890,149
                
                
                1,832,928Denominator
                    for dilutive net income per share
                
                
                57,309,601
                
                
                56,048,722
 **Note
            5.**  **Inventories**
  Inventories
            are categorized as work-in-progress and are stated net of reserves of
            $3,263 and
            $3,398 as of September 30, and June 30, 2005, respectively.
 
 
 **Note
            6.**  **Accounts
            receivable**
  Accounts
            receivable are stated net of valuation reserves of $1,089 and $1,427
            as of
            September 30, and June 30, 2005, respectively.
 
 
 **Note
            7.**  **Related
            party transactions**
  The
            Company conducts business transactions with News Corporation and its
            subsidiaries and affiliates. These entities are considered to be related
            parties. Agreements covering arrangements between News Corporation or
            its
            subsidiaries or affiliates and the Company are entered into in the context
            of
            two entities over which a third entity exercises significant influence
            or
            control. There can be no assurance therefore, that each of the agreements,
            or
            the transactions provided for therein, or any amendments thereof will
            be
            affected on terms at least as favorable to the Company as could have
            been
            obtained from unaffiliated third parties. Any new contracts with related
            parties
            or significant amendments to such contracts are approved by the Audit
            Committee
            of the Company’s Board of Directors.
 
 These
            transactions are of three main types: the provision by the Company of
            technology
            and services for digital pay-television systems; the payment by the Company
            of
            royalties for the use of certain intellectual property rights; and the
            receipt
            by the Company of administrative services.
  **a)**  **Provision
            of technology and services**
  Technology
            and services for digital pay-television systems are supplied to affiliates
            and
            subsidiaries of News Corporation. The principal related parties supplied
            by the
            Company are BSkyB, DIRECTV, DIRECTV Latin America, Sky Brasil, Sky Mexico,
            DTH
            TechCo, Sky Colombia, Sky Chile, FOXTEL and Sky Network Television (all
            of which
            are affiliates of News Corporation), and Sky Italia and STAR TV (both
            of which
            are subsidiaries of News Corporation).
 
 Revenue
            recognized from such related parties was $111,322 and $105,252 for the
            three
            months ended September 30, 2005 and 2004, respectively.
 
 Included
            within accounts receivable are amounts of $80,401 and $51,909 as of September
            30, and June 30, 2005, respectively, which are due from related
            parties in
            respect of normal sales transactions.
  Page
              5


**b)**  **Royalty
      payments**




A
      royalty
      is payable to a related party in respect of certain intellectual property rights
      which the Company has licensed for use in certain applications supplied to
      customers. The royalty expense payable to such related parties was $956 and
      $400
      for the three months ended September 30, 2005 and 2004,
      respectively.





**c)**  **Administration
      and finance services**




News
      Corporation provides services under a Master Intercompany Agreement which
      provides, among other things, for arrangements governing the relationship
      between the Company and News Corporation. The consideration for each of the
      services and other arrangements set forth in the Master Intercompany Agreement
      is mutually agreed and based upon allocated costs. All such consideration and
      any material arrangements are subject to the approval of the Audit Committee
      of
      the Company’s Board of Directors. The services covered by the Master
      Intercompany Agreement include cash management and financing, services of News
      Corporation employees, facility arrangements, employee matters, including
      pensions and certain other services. Amounts charged in respect of these
      services amounted to $64 and $44 for the three month periods ended September
      30,
      2005 and 2004, respectively.





Included
      within accounts payable are amounts of $9,152 and $3,124 as of September 30,
      and
      June 30, 2005, respectively, which were owed to News Corporation in
      respect
      of administrative services and operating costs paid by News Corporation on
      behalf of the Company.





The
      Company has a short-term loan facility of £30 million from News Corporation. The
      facility has no expiry date and no amounts were drawn down as of September
      30,
      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. News Corporation has
      indemnified the Company against any liabilities which the Company may be
      required to pay under these cross-guarantees. Management has been informed
      by
      News Corporation that no amounts were owed to HSBC Bank plc as of September
      30,
      2005 or June 30, 2005 which would be covered by these
      guarantees.








**Note
      8.**  **Contingencies
      and commitments**




**a)**  **Litigation**




On
      June
      6, 2003, Echostar Communications Corporation, Echostar Satellite Corporation,
      Echostar Technologies Corporation and Nagrastar L.L.C. (collectively,
“Echostar”) filed an action against the Company in the United States District
      Court for the Central District of California. Echostar filed an amended
      complaint on October 8, 2003, which purported to allege claims for violation
      of
      the Digital Millennium Copyright Act (“DMCA”), the Communications Act of 1934
      (“CA”), the Electronic Communications Privacy Act, The Computer Fraud and Abuse
      Act, California’s Unfair Competition statute and the federal RICO statute. The
      complaint also purported to allege claims for civil conspiracy, misappropriation
      of trade secrets and interference with prospective business advantage. The
      complaint sought injunctive relief, unspecified compensatory and exemplary
      damages and restitution. On December 22, 2003, all of the claims were dismissed
      by the court, except for the DMCA, CA and unfair competition claims, and the
      court limited these claims to acts allegedly occurring within three years of
      the
      filing of the complaint. Echostar filed a second amended complaint. The Company
      filed a motion to dismiss the second amended complaint on March 31,
      2004.
      On July 21, 2004, the court issued an order among other things directing
      Echostar to file a third amended complaint within ten days correcting various
      deficiencies in the second amended complaint noted by the court. Echostar filed
      its third amended complaint on August 4, 2004. On August 6, 2004, the court
      ruled that the Company was free to file a motion to dismiss the third amended
      complaint, which the Company did on September 20, 2004. The hearing occurred
      on
      January 3, 2005. On February 28, 2005, the court issued an order treating the
      motion as a motion for a more definite statement, granted the motion and gave
      Echostar until March 30, 2005 to file a fourth amended compliant correcting
      various deficiencies in the third amended complaint noticed by the court. On
      March 30, 2005, Echostar filed a fourth amended complaint. The Company filed
      a
      motion to dismiss the fourth amended complaint which Echostar opposed. On July
      27, 2005, the court granted the motion in part and denied the motion in part.
      The Company’s management believes the remaining claims are without merit and
      intends to vigorously defend against them. On October 24, 2005, the Company
      filed its amended answer with counterclaim, alleging that Echostar
      misappropriated the Company’s trade secrets, violated the Computer Fraud and
      Abuse Act and engaged in unfair competition. Echostar has not yet filed a
      reply.





On
      July
      25, 2003, Sogecable, S.A. and its subsidiary Canalsatellite Digital, S.L.,
      Spanish satellite broadcasters and customers of Canal+ Technologies SA
      (together, “Sogecable”), filed an action against the Company in the United
      States District Court for the Central District of California. Sogecable filed
      an
      amended complaint on October 9, 2003, which purported to allege claims




Page
          6


for
      violation of the DMCA and the federal RICO statute. The amended complaint also
      purported to allege claims for interference with contract and prospective
      business advantage. The complaint sought injunctive relief, unspecified
      compensatory and exemplary damages and restitution. On December 22, 2003, all
      of
      the claims were dismissed by the court. Sogecable filed a second amended
      complaint. The Company filed a motion to dismiss the second amended complaint
      on
      March 31, 2004. On July 23, 2004, the court heard oral argument on the
      motion and advised that a formal ruling should be issued by early August. On
      August 4, 2004, the court issued an order dismissing the second amended
      complaint in its entirety. Sogecable had until October 4, 2004 to file
      a
      third amended complaint. On October 1, 2004, Sogecable notified the court that
      it would not be filing a third amended complaint, but would appeal the court’s
      entry of final judgment dismissing the suit to the United States Ninth Circuit
      Court of Appeals. Sogecable has filed a brief on appeal, the Company’s
      opposition was filed on August 22, 2005, and Sogecable filed its reply on
      September 6, 2005.





On
      April
      18, 1997, International Electronics Technology Corp. filed suit in the United
      States District Court for the Central District of California against the
      Company’s customers, 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 of non-infringement and/or invalidity. On August 2, 2004, the court
      stayed the case indefinitely pending decision by the Federal Circuit in another
      case. The Federal Circuit’s decision was issued on July 12, 2005, and the court
      held a status conference on August 8, 2005.





**b)**  **Guarantees**




In
      the
      normal course of business, the Company provides indemnification agreements
      of
      varying scopes, including limited product warranties and indemnification of
      customers against claims of intellectual property infringement made by third
      parties arising from the use of our products or services. The nature of these
      commitments has been considered in determining the revenues and costs recognized
      in these financial statements. Costs are accrued for known warranty and
      indemnification issues if a loss is probable and can be reasonably estimated.
      Historically, costs related to these warranties and indemnification agreements
      have not been significant, but because potential future costs are highly
      variable, the Company’s management is unable to estimate the maximum potential
      impact of these guarantees on the Company’s future results of
      operations.





**c)** **Other**




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








**Note
      9.**  **Stock
      option plans**




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





In
      addition, the Company operates employee share ownership schemes in the United
      Kingdom, Israel and the United States. These enable employees to enter into
      a
      fixed-term savings contract with independent financial institutions linked
      to an
      option to subscribe for Series A ordinary shares in the Company. The option
      price is 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.





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




Page
          7


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




**Number**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**
              
              **Remaining**
                **Contractual**
                **Term**
                **(in
                  years)**
              
              **Aggregate**
                **Intrinsic**
                **Value**
                **(in
                  thousands)**Outstanding
                  at July 1
              
              
              4,337,513
              
              $
              18.17Granted
              
              
              ─
              
              
              ─Exercised
              
              
              (207,676
              )
              $
              13.68Lapsed
              
              
              (8,731
              )
              $
              21.83Cancelled
              
              
              ─
              
              
              ─Outstanding
                  at September 30
              
              
              4,121,106
              
              $
              18.39
              
              
              5.8
              
              $
              77,873Vested
                  or Expected to vest at September 30
              
              
              4,102,808
              
              $
              18.39
              
              
              5.8
              
              $
              77,366Exercisable
                  at September 30
              
              
              2,671,870
              
              $
              19.44
              
              
              5.5
              
              $
              47,880
  **For
                    the three months**
                  **ended
                    September 30,**(in
                    thousands, except per share amounts)
                
                
                **2005**
                
                
                **2004**Weighted
                    average fair value of stock options grantedin
                    period using the assumptions set out below
                
                
                ─
                
                $
                18.57Total
                    intrinsic value of options exercised
                
                $
                4,711
                
                $
                1,017Stock-based
                    compensation cost included within the statement of
                    operations(net
                    of tax benefits of $127 and $─, respectively)
                
                $
                977
                
                $
                2,531Cash
                    received from exercise of stock options
                
                $
                2,797
                
                $
                780Tax
                    benefit from exercise of stock options
                
                $
                800
                
                $
                ─
 As
            of
            September 30, 2005, the total compensation cost related to non vested
            awards not
            yet recognized is approximately $3.4 million and the weighted
            average
            period over which it is expected to be recognized is 1.3 years. No stock
            options
            have been granted to date in fiscal 2006; however we may grant options
            later in
            the fiscal year, which would result in additional operating expenses
            being
            recorded.
 
 The
            fair
            value of each stock option grant is estimated on the date of grant using
            the
            Black-Scholes option-pricing model. No stock options were granted in
            the three
            months ended September 30, 2005. The assumptions used for stock options
            granted
            in the three months ended September 30, 2004 were as follows: Risk free
            interest
            rate ─ 4.57%; Dividend yield ─ nil; Expected volatility ─ 83%; Expected life of
            stock options ─ 6.25 years. Expected volatility was based on historical
            volatility of the Company’s American Depositary Shares as quoted on NASDAQ. The
            expected life of stock options granted was derived from the historical
            activity
            of the Company’s options and represented the period of time that options granted
            were expected to be outstanding. The weighted average risk-free rate
            was the
            average interest rates of U.S. government bonds of comparable term to
            the stock
            options on the dates of the stock option grants. The dividend yield was
            assumed
            to be nil because the Company has not, and management does not currently
            expect
            to pay a dividend. The stock options were granted at an exercise price
            equal to
            the market price. The terms of certain stock options were modified during
            the
            year ended June 30, 2005, as described below.
  Page
              8


In
      December 2004, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards (“SFAS”) No. 123 (R), “Share-Based Payment”. This
      standard requires the cost of employee compensation paid with equity instruments
      to be measured based on grant-date fair values. That cost is recognized over
      the
      vesting period. SFAS No. 123 (R) became effective for the Company on July 1,
      2005. The Company has adopted the modified prospective method to transition
      to
      SFAS No. 123 (R). For all periods ending prior to July 1, 2005, stock-based
      compensation was accounted for by using the intrinsic value-based method in
      accordance with APB No. 25, “Accounting for Stock Issued to Employees” (“APB25”)
      and the Company followed the disclosure-only provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation.” As a result of adopting SFAS No. 123
      (R) on July 1, 2005, the Company’s income before income taxes and net income for
      the three months ended September 30, 2005 is approximately $75 lower than if
      it
      had continued to account for stock-based compensation under APB25. There is
      no
      impact on earnings per share or diluted earnings per share.





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
      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****months
                  ended**(in
                  thousands, except per share amounts)
              
              **September
                  30, 2004**Net
                  income, as reported
              
              $
              17,617Add:
                  Stock option-based compensation cost included in the
                  determination
                of
                  net income as reported (net of tax benefits of $554)
              
              
              1,977Deduct:
                  Total stock option-based compensation determined underfair
                  value based method for all awards, (net of tax benefits of
                  $62)
              
              
              (2,140
              )Pro-forma
                  net income
              
              $
              17,454Net
                  income per shareBasic
                  net income per share, as reported
              
              $
              0.32Diluted
                  net income per share, as reported
              
              $
              0.31Pro-forma
                  basic net income per share
              
              $
              0.32Pro-forma
                  diluted net income per share
              
              $
              0.31


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 may be exercised at any time prior to
      September 20, 2006 rather than lapsing on his departure. The additional charge
      recorded in the statement of operations in the three months ended September
      30,
      2004 was $1,293, net of tax of $554.





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





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




Page
          9


**Note
      10.**  **Abandoned
      property leases**




In
      fiscal
      2001, the Company decided to abandon its leased premises at Heathrow, England
      which the Company vacated in September 2000. An additional accrual was made
      in
      fiscal 2003 and again in fiscal 2004, as the Company was unable to assign the
      lease back to a former tenant. During the year ended June 30, 2005, the Company
      committed to reoccupy most of the premises, and the Company reversed a part
      of
      the accrual previously made. The accrual as of September 30, 2005 represents
      management’s best estimate of its remaining obligation in connection with this
      abandonment, including its obligations in respect of one part of the building
      for which there are no plans to re-occupy. 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.




**For
                  the three months**
                **ended
                  September 30,**(in
                  thousands)
              
              **2005**
              
              **2004**Beginning
                  of period
              
              $
              1,141
              
              $
              8,727Additions
                  (reversals)
              
              
              (226
              )
              
              ─Used
              
              
              (518
              )
              
              (545
              )Foreign
                  exchange movements
              
              
              5
              
              
              (129
              )End
                  of period
              
              $
              402
              
              $
              8,053


The
      cumulative amount paid through September 30, 2005 is $9,877 and the total amount
      charged to the profit and loss net of releases up to September 30, 2005 is
      $10,279.




**Note
      11.**  **Pension
      expense**




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




**For
                  the three months**
                **ended
                  September 30,**(in
                  thousands)
              
              **2005**
              
              **2004**Service
                  cost
              
              $
              45
              
              $
              42Interest
                  cost
              
              
              245
              
              
              219Expected
                  return on plan assets
              
              
              (207
              )
              
              (163
              )Amortization
                  of unrecognized net loss
              
              
              146
              
              
              109$
              229
              
              $
              207




Page
          10




**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 the our businesses,
                  as well
                  as recent developments that have occurred during the first quarter
                  of
                  fiscal 2006 that the we believe are important in understanding
                  the results
                  of operations and financial condition or to disclose known future
                  trends.
 
 ·
              ***Results
                  of operations -***This section provides an analysis of our results of operations
                  for the
                  three months ended September 30, 2005 and 2004. In addition,
                  a brief
                  description is provided of significant transactions and events
                  that impact
                  the comparability of the results being
                  analyzed.
 
 ·
              ***Liquidity
                  and capital resources -***This section provides an analysis of our cash flows for the three
                  months
                  ended September 30, 2005 and 2004. It includes a discussion
                  of the
                  financial capacity available to fund our future commitments and
                  obligations, as well as a discussion of other financing
                  arrangements.
 
 
 **Overview
        of our Business**
  We
        supply
        open end-to-end digital technology and services to digital pay-television
        platform operators and content providers. Our technologies include conditional
        access and microprocessor security, broadcast stream management, set-top
        box
        middleware, electronic program guides (“EPGs”), personal video recording (“PVR”)
        technologies and interactive applications. Our software systems, consultancy
        and
        systems integration services are focused on providing platform operators
        and
        content providers with technology to help them profit from the secure
        distribution of digital information and entertainment to consumer devices
        which
        incorporate various technologies supplied by us.
 
 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, to approximately 69% of our revenues
        in
        the three months ended September 30, 2005. We expect that a limited number
        of
        customers will continue to contribute a significant portion of our revenues.
        If
        a large customer purchases significantly less of our products or services,
        defers or cancels orders or terminates its relationship with us, our revenues
        could decline significantly and as a result, our business, operating results
        and
        financial condition could be materially adversely affected.
 
 We
        compete primarily with technologies such as NagraVision (developed by Kudelski
        SA), DigiCypher (developed by Motorola, Inc.), Power Key (developed by
        Scientific-Atlanta, Inc.), OpenTV (developed by OpenTV Corp.) and MSTV
        (developed by Microsoft Corporation) both to attract new customers and to
        retain
        our existing customers. In addition, some of
  Page
            11


the
      companies that currently operate in the software business, but which have not
      historically been active competitors of ours may, in the future, through
      acquisitions or the development of their own resources, seek to enter and obtain
      significant market share in our current or planned business areas.





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





Unauthorized
      viewing and use of content may be accomplished by counterfeiting our technology
      or otherwise circumventing its security features. 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.





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.





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 and cost
      categories as described below.





**Conditional
      access revenues**




Conditional
      access revenues consist of the supply of smart cards and the provision of
      security services. Conditional access revenues from a particular platform
      operator are generally related to the number of subscribers to that platform
      and
      / or the quantity of smart cards authorized to decrypt content broadcast by
      that
      platform. Contracts with customers typically provide for the long-term supply
      of
      smart cards and the provision of conditional access services to preserve the
      security of the platform. From time to time we replace a population of smart
      cards for a particular broadcast platform. Where we have obligations to supply
      smart cards in the future as part of our support and maintenance obligations
      (“card changeover”), we are required to make estimates about the timing of
      supply of such changeover cards and to defer an appropriate amount of revenue
      from the security fees received from our platform operator customers and
      recognize an appropriate amount of revenue when such cards are supplied. These
      estimates include assessments of the likely timing of the card changeover,
      the
      quantity of smart cards to be supplied, the cost and fair value of those smart
      cards and the future receipt of security fees. The judgments made in determining
      the value of our liabilities to customers can significantly impact our reported
      operating income. The effect of changes in such estimates is recorded
      prospectively. The timing of card changeovers affects revenues from period
      to
      period as it significantly affects the volume of cards supplied in any period.
      There were no card changeovers during the three months ended September 30,
      2005, or 2004.





**Integration,
      development and support revenues**




Integration,
      development and support revenues consist of activities such as software
      development and adaptation, design, implementation and project management for
      broadcast systems, and ongoing support and maintenance of software and broadcast
      systems. Integration, development and support fees depend on the amount of
      time
      required to manage the integration, customize or develop the software and also
      on the level of support and assistance required by the customer. These fees
      are
      generally recognized over the contract period and the contracts may contain
      customer acceptance and other terms which may affect the timing of revenue
      recognition.





**License
      fees and royalty revenues**




We
      derive
      license fees and royalties from licensing technology to broadcasters and
      platform operators for use in their head-end and manufacturers for use in
      set-top boxes. License fees and royalties are charged for different elements
      of
      our software, such as our VideoGuard conditional access, EPG and our
      MediaHighway middleware. License revenues are dependent upon our ability to
      obtain new customers and upon the ongoing needs of existing customers to expand
      their services or upgrade their systems to more sophisticated technology.
      Royalties are generally a function of the quantity of set-top boxes
      manufactured, which in turn is dependent upon the ability of the platform
      operator or service provider to generate new subscribers.





**New
      technologies revenues**




We
      have
      developed and continue to develop, and are marketing, new technologies which
      offer platform operators or content providers the opportunity to increase the
      revenue per subscriber through enhancing the viewing experience and delivering
      more




Page
          12




than
        just
        video. Examples include games and gaming, interactive applications, PVR
        technologies, OpenBet (a back-office betting application), and Synamedia
        (technology to manage and control the secure distribution of digital content
        via
        broadband networks). Revenues under this category are in the form of development
        fees, license fees or royalties per subscriber or user. These are typically
        earned on the successful deployment and acceptance of technology by end users
        or
        on the manufacture or deployment of the set-top box or device containing
        the
        technology. In some instances, an ongoing fee is payable for support and
        maintenance which is dependent upon the number of subscribers having access
        to,
        or making use of, the enhanced functionality. We have entered into several
        revenue-share arrangements whereby we receive a share of the incremental
        revenues earned by the operator from an application supplied by us. The new
        technologies revenue stream depends upon us developing and selling applications
        for use by platform operators and content providers, and the take-up by
        subscribers of new services, applications and functions offered by the service
        provider.
 
 **Costs
        and expenses**
  Our
        costs
        and expenses consist of the physical and processing costs of smart cards,
        personnel, 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 which we acquired for incorporation within
        our
        technologies.
 
 The
        physical costs of smart cards include the costs of the integrated circuits
        manufactured by third party suppliers, the micro-module which houses the
        computer chips and the plastic body of the smart cards. We do not manufacture
        smart cards, but our engineers design the embedded computer chips. We arrange
        for the chips to be manufactured and assembled by third party suppliers.
        We then
        program the smart cards with our proprietary software. 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, sales
        and
        marketing, research and development, and general and
        administration.
 
 Operations
        costs include the costs of personnel and related costs, including an allocation
        of facilities costs, associated with customer support, 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.
 
 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.
 
 Research
        and development costs consist mainly of personnel and related costs, including
        an allocation of facilities costs, attributable to employees in Israel, the
        United Kingdom, France, Denmark, China and India 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 the benefit of grants and other incentives which we have
        received from the governments of the State of Israel and the French
        Republic.
 
 General
        and administration costs consist primarily of executives and other personnel,
        facilities, legal and administration costs.
 
 
 **Results
        of operations**
  **Commentary
        on three months ended September 30, 2005**
  **Revenue**
  Revenue
        for the periods under review was as follows:
 **For
                    the three months**
                  **ended
                    September 30**(in
                    thousands)
                
                **2005**
                
                **2004**
                
                **Change**
                
                **%
                    Change**Conditional
                    access
                
                $
                83,145
                
                $
                90,324
                
                $
                (7,179
                )
                
                -8
                %Integration,
                    development & support
                
                
                13,834
                
                
                16,808
                
                
                (2,974
                )
                
                -18
                %License
                    fees & royalties
                
                
                24,566
                
                
                16,000
                
                
                8,566
                
                
                +54
                %New
                    technologies
                
                
                20,859
                
                
                16,970
                
                
                3,889
                
                
                +23
                %Other
                
                
                2,091
                
                
                1,177
                
                
                914
                
                
                +78
                %Total
                  revenue
                
                $
                144,495
                
                $
                141,279
                
                $
                3,216
                
                
                +2
                %




Page
          13


The
      decrease in conditional access revenues in the three months ended September
      30,
      2005 compared to the corresponding period in fiscal 2005 is due to lower
      deliveries of smart cards offset in part by higher security fees. The quantity
      of smart cards delivered in each period was as follows:




**For
                  the three months**
                **ended
                  September 30**(in
                  millions)
              
              **2005**
              
              **2004**Number
                  of smart cards delivered
              
              
              5.5
              
              
              8.9
 The
          decrease in smart card sales in the in the three months ended September
          30, 2005
          compared to the corresponding period in fiscal 2005 reflects lower demand
          from
          DIRECTV and Sky Italia.  In the prior year, shipments were exceptionally
          high due to a new DIRECTV contract and the migration of all Sky Italia
          customers
          to NDS technology.
 
 The
          number of authorized cards in use at our broadcast platform customers has
          grown
          as follows:
 **For
                    the three months****ended
                    September 30**(in
                    millions)
                
                **2005**
                
                **2004**Number
                    of authorized cards, beginning of period
                
                
                56.7
                
                
                44.0Net
                    additions
                
                
                1.8
                
                
                3.8Number
                    of authorized cards, end of period
                
                
                58.5
                
                
                47.8
 There
            has
            been growth in authorized cards in use across most of our broadcast platform
            customers. However the increase in the quarter was less than the increase
            in the
            corresponding period of the previous fiscal year which was favourably
            impacted
            by the migration of Sky Italia subscribers to NDS technology.
 
 Revenues
            from integration, development and support decreased by 18% in the three
            months
            ended September 30, 2005 compared to the corresponding quarter of the
            previous
            fiscal year. There were no major conditional access or middleware systems
            delivered in the current year. The prior year included revenue from the
            migration of Sky Italia subscribers to NDS technology.
 
 Revenues
            from license fees and royalties increased by 54% in the three months
            ended
            September 30, 2005 compared to the corresponding period in fiscal 2005.
            The
            increase was mainly due to middleware supplied to DIRECTV, who commenced
            the
            download of our MediaHighway middleware to certain models of set-top
            boxes in
            use by their subscribers. The increase in the cumulative number of
            MediaHighway-enabled set-top boxes in each period was as
            follows:
 **For
                      the three months****ended
                      September 30**(in
                      millions)
                  
                  **2005**
                  
                  **2004**Number
                      of MediaHighway-enabled set-top boxes, beginning of period
                  
                  
                  20.4
                  
                  
                  18.4Additions
                  
                  
                  6.3
                  
                  
                  0.4Number
                      of MediaHighway-enabled set-top, end of period
                  
                  
                  26.7
                  
                  
                  18.8
  Page
                14
 The
            23%
            increase in revenues from new technologies in the three months ended
            September
            30, 2005 compared to the corresponding period of the previous fiscal
            year was
            due to higher development and royalty income related to the deployment
            of our
            advanced PVR technologies by several of our customers. The increase in
            the
            cumulative number of PVR-enabled set-top boxes in each period was as
            follows:
 **For
                      the three months****ended
                      September 30**(in
                      millions)
                  
                  **2005**
                  
                  **2004**Number
                      of PVR-enabled set-top boxes, beginning of period
                  
                  
                  1.4
                  
                  
                  0.4Additions
                  
                  
                  0.3
                  
                  
                  0.3Number
                      of PVR-enabled set-top, end of period
                  
                  
                  1.7
                  
                  
                  0.7


In
      addition, revenue from interactive infrastructure, gaming applications and
      our
      Synamedia IP-TV technologies increased due to the higher number of our
      customers’ subscribers using our technology and the addition of our technology
      on new platforms.








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




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




**For
                    the three months****ended
                    September 30,**(in
                    thousands)
                
                **2005**
                
                **2004**
                
                **Change**
                
                **%
                    Change**Smart
                    card costs
                
                $
                21,625
                
                $
                38,799
                
                
                (17,174
                )
                
                -44
                %Operations
                
                
                33,679
                
                
                15,553
                
                
                18,126
                
                
                **Royalties
                
                
                2,897
                
                
                3,075
                
                
                (178
                )
                
                -5
                %Other
                
                
                1,622
                
                
                140
                
                
                1,482
                
                
                **Total
                    cost of goods and services sold
                
                $
                59,823
                
                $
                57,567
                
                $
                2,256
                
                
                +4
                %Gross
                    margin
                
                $
                84,672
                
                $
                83,712
                
                $
                960
                
                
                +1
                %Gross
                    margin as a percentage of revenues
                
                
                58.6
                %
                
                58.0
                %
                
                +0.6
                %
                
                ****:
                    Not meaningful.


We
      consider that gross margin, defined as revenues less costs and expenses
      associated with those revenues (being those costs identified above), is an
      important measure for our management and investors. We consider that it gives
      a
      measure of profitability that distinguishes between those costs which are
      broadly a function of direct revenue-earning activities and costs which are
      of a
      general nature or which are incurred in the expectation of being able to earn
      future revenues.





The
      decrease in smart card costs in the three months ended September 30, 2005
      compared to the corresponding period of the previous fiscal year was due to
      the
      lower volume of smart cards delivered in the period as noted above. Operations
      costs include employee and facilities costs related to smart card processing,
      customer support and research and development projects undertaken under customer
      contracts. The increase over the corresponding period of the prior fiscal year
      was due to an increase in the number of our employees working on such
      activities. Royalty costs are a function of particular revenue items and the
      change in royalty expense for the periods was due to changes in the mix of
      revenues.





As
      a
      consequence of these factors, gross margin as a percentage of revenues was
      58.6%
      for the three months ended September 30, 2005, compared to 58.0% for the
      corresponding period of the prior fiscal year.




Page
          15


**Operating
      expenses**




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




**For
                  the three months****ended
                  September 30**(in
                  thousands)
              
              **2005**
              
              **2004**
              
              **Change**
              
              **%
                  Change**Research
                  & development
              
              $
              30,104
              
              $
              38,321
              
              $
              (8,217
              )
              
              -21
              %Sales
                  & marketing
              
              
              7,271
              
              
              6,066
              
              
              1,205
              
              
              +20
              %General
                  & administration
              
              
              8,577
              
              
              12,102
              
              
              (3,525
              )
              
              -29
              %Amortization
                  of intangibles
              
              
              2,338
              
              
              3,101
              
              
              (763
              )
              
              -25
              %Other
              
              
              647
              
              
              (1,162
              )
              
              1,809
              
              
              **Total
                  operating expenses
              
              $
              48,937
              
              $
              58,428
              
              
              (9,491
              )
              
              -16
              %**:
                  Not meaningful.
 Our
          main
          operating costs are employee costs, facilities costs, depreciation and
          travel
          costs. Our employee numbers (including contractors) have increased over
          the
          period under review, as follows:
 **For
                    the three months****ended
                    September 30****2005**
                
                **2004**Number
                    of employees, beginning of period
                
                
                2,508
                
                
                2,004Additions
                
                
                132
                
                
                115Number
                    of employees, end of period
                
                
                2,640
                
                
                2,119
 We
            have
            continued to recruit software development engineers and staff supporting
            customers. As a consequence of higher employee numbers, we have occupied
            additional facilities and increased our infrastructure costs.
 
 Research
            and development expenses represent the cost of employees and related
            items
            associated with research activities and development activities at our
            risk. Such
            activities involve a mixture of customer-specific projects as well as
            internal
            research and software development focused on the digital broadcasting
            industry
            and on the improved functionality to our existing product portfolio.
            Research
            and development expenses decreased by 21% compared to the corresponding
            period
            of the prior fiscal year. This decrease is attributable to a higher proportion
            of engineering resources being utilized on specific customer projects
            as opposed
            to internal research projects and development activities. In addition,
            the
            Company received a $5.3 million grant from the French government as a
            consequence of being engaged in research projects. Partially offsetting
            these
            decreases were increased infrastructure and facilities costs primarily
            due to
            the increase in the number of software development engineers.
 
 During
            the three months ended September 30, 2005, sales and marketing expenses
            increased by 20% as a result of increased activity, particularly in Europe
            and
            Asia.
 
 During
            the three months ended September 30, 2005, general and administrative
            expenses
            decreased by 29% as a consequence of lower facilities costs, lower legal
            expenses and lower stock option expenses.
 
 
 **Operating
            income and other items**
  As
            a
            result of the factors outlined above, operating income was $35.7 million
            for the
            three months ended September 30, 2005 compared to $25.3 million for the
            corresponding period of the previous fiscal year.
 
 Interest
            income earned on cash deposits was $2.9 million for the three months
            ended
            September 30, 2005 compared to $2.0 million for the corresponding period
            of the
            previous fiscal year. The increase was due to higher average cash balances
            and
            higher interest rates.
  Page
              16


Our
      effective tax rate for the three months ended September 30, 2005 was 29.8%
      compared to 35.4% for the corresponding period of the previous fiscal year.
      The
      decrease in the rate was due to lower effective tax rates in our non-U.K.
      operations, and higher effective tax relief on stock option
      expenses





As
      a
      consequence of all these factors, net income for the three months ended
      September 30, 2005 was $27.1 million or $0.49 per share ($0.47 on a diluted
      basis) compared to $17.6 million or $0.32 per share ($0.31 on a diluted basis)
      for the three months ended September 30, 2004.








**Recent
      accounting pronouncements**




Total
      operating expenses for the three months ended September 30, 2005 include a
      charge of $1.0 million in respect of stock option expenses, compared to
      $2.5 million in the corresponding period in the prior fiscal
      year.





In
      December 2004, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards (“SFAS”) No. 123 (R), “Share-Based Payment”. This
      standard requires the cost of employee compensation paid with equity instruments
      to be measured based on grant-date fair values. That cost is recognized over
      the
      vesting period. SFAS No. 123 (R) became effective for the Company on July 1,
      2005. We have adopted the modified prospective method to transition to the
      SFAS
      No. 123 (R). The charge recorded in the corresponding period of the prior fiscal
      year arose only in respect of options whose terms had been modified as 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, the
      Company’s income before income taxes and net income for the three months ended
      September 30, 2005 is approximately $75 lower than if it had continued to
      account for stock-based compensation under APB25. There is no impact on earnings
      per share or diluted earnings per share.





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 the
      Company’s 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 effect date of SFAS No.
      123 (R) on July 1, 2005. The acceleration eliminated approximately $1.7 million
      ($1.6 million net of tax) which would otherwise have been recorded as an
      operating expense in the three months ended September 30, 2005.





As
      of
      September 30, 2005, the total compensation cost related to non vested awards
      not
      yet recognized is approximately $3.4 million and the weighted average
      period over which it is expected to be recognized is 1.3 years. No stock options
      have been granted to date in fiscal 2006; however we may grant stock options
      later in the fiscal year, which would result in additional operating expenses
      being recorded. Further information about the effect of adopting SFAS No. 123(R)
      is provided in Note 9 to the accompanying unaudited consolidated financial
      statements.











**Liquidity
      and capital resources**




**Current
      financial condition**




Our
      principal source of liquidity is internally generated funds. We also have access
      to the worldwide capital markets.





As
      of
      September 30, 2005, we had cash and cash equivalents of $342 million.
      Our
      accumulated cash is being held with the intention of using it for the future
      development of the business and there are currently no plans to pay any
      dividends to shareholders. We believe that we have sufficient working capital
      resources for our present requirements. Our internally generated funds are
      dependent on the continued profitability of our business. As of
      September 30, 2005, and as of the date of this report, we have an unused
      credit facility to borrow up to £30 million (equivalent to approximately
      $53 million) from a subsidiary of News Corporation. No amounts were drawn under
      this facility during the three months ended September 30, 2005.





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




Page
          17


**Sources
      and uses of cash**




We
      had a
      net inflow of cash of $2.0 million in the three months ended September 30,
      2005,
      compared to a net cash outflow of $4.7 million in the three months ended
      September 30, 2004.





Net
      cash
      provided by operating activities was as follows:




**For
                  the three months****ended
                  September 30,**(in
                  thousands)
              
              **2005**
              
              **2004**Net
                  cash provided by (used in) operating activities
              
              $
              10,842
              
              $
              (1,802
              )


The
      increase in net cash provided by operating activities in the three months ended
      September 30, 2005 reflects higher receipts from customers, lower purchases
      of
      smart cards and lower tax payments, offset in part by higher payroll costs,
      travel expenses and facilities costs, as a result of an increase in the number
      of our employees.





Net
      cash
      used in investing activities was as follows:


**For
                  the three months****ended
                  September 30,**(in
                  thousands)
              
              **2005**
              
              **2004**Capital
                  expenditure
              
              $
              8,757
              
              $
              3,694Business
                  acquisitions, net of cash acquired
              
              
              2,922
              
              
              ─Net
                  cash used in investing activities
              
              $
              11,679
              
              $
              3,694


The
        increase in capital expenditure was due to investment in new facilities in
        the
        U.K., India and the U.S., and higher purchases of technical equipment required
        to support our customers. In addition, during the three months ended September
        30, 2005, we acquired the entire share capital of NT Media Limited for initial
        cash consideration of $2.9 million. Further payments will be made under the
        terms of the acquisition agreement up to a maximum of approximately $4 million
        over the next three years.
  Net
        cash
        generated by financing activities was as follows:
 **For
                    the three months****ended
                    September 30,**(in
                    thousands)
                
                **2005**
                
                **2004**Net
                    cash provided by financing activities
                
                $
                2,797
                
                $
                780


Cash
      from
      financing activities comprises proceeds from the issuance of shares as a result
      of stock options exercised by employees. Higher numbers of stock options were
      exercised by employees during the three months ended September 30, 2005 than
      in
      the three months ended September 30, 2004.





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





**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.




Page
          18


**Risk
      Factors**




Prospective
      investors should consider carefully the risk factors set forth 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 is 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, PVR
        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
        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
        and
        new technologies to our customers and ongoing subscriber 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 middleware, EPGs, games, gaming and other
        interactive applications, PVR functionality, 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.




Page
          19


**Our
      business could be harmed if a defect in our software or technology interferes
      with, or causes any failure in, our customers’ systems.**




Our
      software and technology are integrated into the broadcast infrastructure of
      our
      customers. Accordingly, a defect, error or performance problem with our software
      or technology could interfere with, or cause a critical component of, one or
      more of our customers’ systems to fail for a period of time. This could result
      in claims for substantial damages against us, regardless of whether we are
      responsible for such failure. Any claim brought against us could be expensive
      to
      defend and require the expenditure of a significant amount of resources,
      regardless of whether we prevail. Although we have not experienced any such
      material interference or failure in the past, any future problem could cause
      severe customer service and public relations problems for our customers and
      as a
      consequence, our business, operating results and financial condition could
      be
      materially adversely affected.





**We
      depend upon key personnel, including our senior executives and technical and
      engineering staff, to operate our business effectively, and we may be unable
      to
      attract or retain such personnel.**




Our
      future success depends largely upon the continued service of our senior
      executive officers and other key management and technical personnel. If certain
      of our senior executives were to leave the Company, we may be placed at a
      competitive disadvantage. In addition, we may also need to increase the number
      of our technical, consulting and support employees to support new customers
      and
      the expanding needs of our existing customers. We have, in the past, experienced
      difficulty in recruiting sufficient numbers of qualified personnel. If we are
      not successful in these recruiting efforts, our business may be adversely
      affected.





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




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





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




Our
      growth has depended historically on large digital satellite broadcasters
      introducing, marketing and promoting products and services that utilize our
      technology. We currently derive, and we expect to continue to derive, a
      significant portion of our revenues from a limited number of large customers.
      Our three largest customers have been DIRECTV in the United States, BSkyB in
      the
      United Kingdom and Sky Italia in Italy. In the three months ended September
      30,
      2005, these three customers accounted directly and indirectly for approximately
      69% 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.




Page
          20


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 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 replace their subscribers’ smart cards
        from time to time, either to upgrade the features of the smart cards or for
        security purposes. As a result, we believe that period-to-period comparisons
        of
        our operating results may not be a good indication of our future performance.
        Our actual results may differ from analyst expectations, which could adversely
        affect the price of our securities.
 
 **Changes
        to current accounting policies or in how such policies are interpreted or
        applied to our business could have a significant effect on our reported
        financial results.**
  We
        prepare our financial statements in conformity with U.S. generally accepted
        accounting principles (“GAAP”). 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 audited 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.




Page
          21


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




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





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




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





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




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





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





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




A
      risk
      inherent in our international operations is the exposure to fluctuations in
      currency exchange rates. Certain of our customer contracts denominate prices
      in
      pounds sterling or in euros. In the three months ended September 30, 2005,
      approximately 27% of our revenues were denominated in pounds sterling and a
      further 20% were denominated in euros. Some of our smart card costs and our
      operating expenses are denominated in pounds sterling and euros. In the three
      months ended September 30, 2005, we estimate that approximately 50% of our
      total
      cost of sales and operating expenses were denominated in pounds sterling or
      in
      euros. As a result, we are exposed to fluctuations in exchange rates which
      may
      have a material adverse effect on our business, operating results and financial
      condition.





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




Page
          22


**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 75.2% 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 96.8%
      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. Three of
      our
      seven current Directors are directors of News Corporation. Additionally, Dr.
      Abe
      Peled, our President 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 three months ended September 30, 2005, approximately 78% of our
      total
      revenues were derived directly from businesses in which News Corporation has
      an
      interest. Those businesses include our three largest customers. Although we
      believe the terms of our contracts with such related parties are no less
      favorable to us than those that we could obtain from unrelated third parties,
      we
      cannot assure you that this is the case.





In
      addition, because a number of major broadcasters around the world are owned
      or
      controlled by entities that compete with News Corporation or entities in which
      News Corporation has an interest, our ability to attract customers in which
      News
      Corporation does not have an interest may be affected by their perception of
      our
      relationship with News Corporation.





**Because
      we are controlled by News Corporation, we are exempt from certain listing
      requirements of The NASDAQ Stock Market relating to corporate governance
      matters.**




Over
      the
      past several years, the National Association of Securities Dealers has adopted
      certain listing requirements for companies listed on The NASDAQ Stock Market.
      As
      a result of News Corporation’s beneficial ownership of our Series B ordinary
      shares, we are deemed to be a “controlled company” and accordingly are not
      subject to some of these requirements, including the requirement that a majority
      of our board of directors be “independent” under the guidelines established by
      the National Association of Securities Dealers and certain requirements
      regarding the determination of our Chief Executive Officer’s compensation and
      our director nominees. While we do not believe that our exemption from those
      requirements affects the manner and method by which we manage and operate the
      Company, investors should be aware that we are not subject to those provisions
      and may have no obligation to comply with those requirements in the future
      unless our ownership profile changes.





**Since
      we are** **a public limited company organized under the laws of England and Wales, your
      rights as a shareholder differ from the rights of shareholders under U.S.
      law.**




NDS
      Group
      plc is a public limited company organized under the laws of England and Wales.
      The rights of holders of our ordinary shares and, indirectly, many of the rights
      of holders of our American Depositary Shares (“ADSs”) are governed by English
      law and by our Memorandum and Articles of Association. These rights differ
      from
      the rights of shareholders in U.S. companies. In particular, English law
      significantly limits the circumstances under which shareholders of English
      companies may bring derivative actions. Under English law generally, only the
      Company can be the proper plaintiff in proceedings in respect of wrongful acts
      committed against us. In addition, it may be difficult for you to enforce
      liabilities predicated upon U.S. securities laws.





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




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





Interests
      of existing shareholders may also be diluted due to the existence of stock
      options granted to certain employees. 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
      Directors, pursuant to Section 80 of the U.K. Companies Act 1985, to allot
      relevant securities (including ordinary shares, other equity securities and
      the
      right to subscribe for or convert securities) for further issuance for a period
      expiring November 1, 2010. At the same time, our Directors were empowered,
      pursuant to Section 95 of the U.K. Companies Act 1985, to allot equity
      securities for cash without first being required to offer them to existing
      shareholders.





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




Page
          23


**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 September 30, 2005.





In
      certain countries in which we have operations, we are required to make severance
      payments to dismissed employees and employees leaving employment in certain
      other circumstances, on the basis of the latest monthly salary for each year
      of
      service. This liability is provided for by payments of premiums to insurance
      companies under approved plans. The obligation in the consolidated balance
      sheet
      is $26.5 million. The value of insurance policies which substantially fund
      this
      obligation is $21.1 million and is included within the consolidated
      balance
      sheet as other non-current assets. The bulk of the arrangements relates to
      our
      Israeli employees. Because the gross liability reflects the contracts of
      employment, it is denominated in U.S. dollars, whereas the amount funded by
      insurance policies is regulated by the government of the State of Israel
      Government and is denominated in Israeli shekels. Accordingly, the difference
      between the gross liability and the amount funded by insurance policies is
      subject to fluctuations depending on the relative values of the U.S. dollar
      and
      Israeli shekel.





As
      of
      September 30, 2005, approximately 87% of our cash was held in U.S. dollars
      and
      9% in pounds sterling, with the remainder being held primarily in euros. Our
      policy is to hold cash on deposits of up to three month maturity. In the future,
      we may place cash on deposit for longer than three month terms, which would
      introduce an exposure to the risks associated with fixed interest
      rates.











**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 15d-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 that 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)**  **Changes
      in 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 15d-15(f) under the
      Exchange Act) during the Company’s first quarter of fiscal 2006 to which this
      report relates that have materially affected, or are reasonably likely to
      materially affect, the Company’s internal control over financial reporting.




Page
          24


**PART
      II - Other Information**




**Item
      1. Legal Proceedings**




On
      June
      6, 2003, Echostar Communications Corporation, Echostar Satellite Corporation,
      Echostar Technologies Corporation and Nagrastar L.L.C. (collectively,
“Echostar”) filed an action against the Company in the United States District
      Court for the Central District of California. Echostar filed an amended
      complaint on October 8, 2003, which purported to allege claims for violation
      of
      the Digital Millennium Copyright Act (“DMCA”), the Communications Act of 1934
      (“CA”), the Electronic Communications Privacy Act, The Computer Fraud and Abuse
      Act, California’s Unfair Competition statute and the federal RICO statute. The
      complaint also purported to allege claims for civil conspiracy, misappropriation
      of trade secrets and interference with prospective business advantage. The
      complaint sought injunctive relief, unspecified compensatory and exemplary
      damages and restitution. On December 22, 2003, all of the claims were dismissed
      by the court, except for the DMCA, CA and unfair competition claims, and the
      court limited these claims to acts allegedly occurring within three years of
      the
      filing of the complaint. Echostar filed a second amended complaint. The Company
      filed a motion to dismiss the second amended complaint on March 31,
      2004.
      On July 21, 2004, the court issued an order among other things directing
      Echostar to file a third amended complaint within ten days correcting various
      deficiencies in the second amended complaint noted by the court. Echostar filed
      its third amended complaint on August 4, 2004. On August 6, 2004, the court
      ruled that the Company was free to file a motion to dismiss the third amended
      complaint, which the Company did on September 20, 2004. The hearing occurred
      on
      January 3, 2005. On February 28, 2005, the court issued an order treating the
      motion as a motion for a more definite statement, granted the motion and gave
      Echostar until March 30, 2005 to file a fourth amended compliant correcting
      various deficiencies in the third amended complaint noticed by the court. On
      March 30, 2005, Echostar filed a fourth amended complaint. The Company filed
      a
      motion to dismiss the fourth amended complaint which Echostar opposed. On July
      27, 2005, the court granted the motion in part and denied the motion in part.
      The Company’s management believes those claims are without merit and intends to
      vigorously defend against them. On October 24, 2005, the Company filed its
      amended answer with counterclaim, alleging that Echostar misappropriated the
      Company’s trade secrets, violated the Computer Fraud and Abuse Act and engaged
      in unfair competition. Echostar has not yet filed a reply.








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





On
      April
      18, 1997, International Electronics Technology Corp. filed suit in the United
      States District Court for the Central District of California against the
      Company’s customers, 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 of non-infringement and/or invalidity. On August 2, 2004, the court
      stayed the case indefinitely pending decision by the Federal Circuit in another
      case. The Federal Circuit’s decision was issued on July 12, 2005, and the court
      held a status conference on August 8, 2005.




Page
          25


**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**




3
            New
                Articles of Association of NDS Group
                plc.*31.1
            President
                and Chief Executive Officer
                Certification required by Rules 13a-14 and 15d-14 under the Securities
                Exchange Act of 1934, as amended.*31.2
            Chief
                Financial Officer Certification required
                by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934,
                as
                amended *32
            Certification
                of President and Chief Executive
                Officer and Chief Financial Officer pursuant to 18 U.S.C. Section
                1350, as
                adopted pursuant to Section 906 of Sarbanes Oxley Act of
                2002.**
            Filed
                herewith




Page
          26


**Signatures**




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




NDS
                GROUP PLC
              (Registrant)By:
            /s/ Alexander
              GershAlexander GershChief
              Financial OfficerDate: November 7, 2005




Page
          27