Opentv 10Q 2006 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006


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

For the transition period from to

Commission File Number: 001-15473

OPENTV CORP.

(Exact name of registrant as specified in its charter)


British Virgin Islands		98-0212376
(State or other jurisdiction of incorporation or		(I.R.S. Employer Identification No.)
organization)

275 Sacramento Street, San Francisco, California		94111
(Address of principal executive offices)		(Zip Code)

(415) 962-5000
(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.

Yesþ Noo

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

Large accelerated filero Accelerated filerþ Non-accelerated filero

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

Yeso Noþ

As of June 30, 2006, the Registrant had outstanding (not including 76,327 Class A ordinary shares held in treasury):

107,002,113 Class A ordinary shares, no par value; and
30,631,746 Class B ordinary shares, no par value

Table of Contents


	Page
Part I. Financial Information		3

Item 1. Financial Statements		3

Condensed Consolidated Balance Sheets at June 30, 2006 and December 31, 2005		3

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2006 and 2005		4

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005		5

Notes to Condensed Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		19

Item 3. Quantitative and Qualitative Disclosures About Market Risk		34

Item 4. Controls and Procedures		35

Part II. Other Information		37

Item 1. Legal Proceedings		37

Item 1A. Risk Factors		37

Item 6. Exhibits		37

Signature		38

Exhibit Index		39
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION

Part I. Financial Information

Item 1. Financial Statements

OPENTV CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)


	June 30,			December 31,
	2006			2005*
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	47,999		$	47,229
Short-term marketable debt securities		8,046			9,030
Accounts receivable, net of allowance for doubtful accounts of $287 and $305 at June 30, 2006 and December 31, 2005, respectively		17,464			16,873
Prepaid expenses and other current assets		3,044			4,638

Total current assets		76,553			77,770

Long-term marketable debt securities		8,924			8,213
Property and equipment, net		6,094			5,863
Goodwill		97,615			80,124
Intangible assets, net		23,621			27,150
Other assets		4,332			2,945

Total assets	$	217,139		$	202,065

LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,018		$	4,361
Accrued liabilities		16,560			18,568
Accrued restructuring		1,699			1,931
Due to Liberty Media		228			182
Current portion of deferred revenue		12,037			14,193

Total current liabilities		33,542			39,235
Long-term liabilities:
Deferred rent		1,248			1,404
Deferred revenue		12,067			8,391

Total long-term liabilities		13,315			9,795

Total liabilities		46,857			49,030

Commitments and contingencies (Note 9)
Minority interest		504			523

Shareholders’ equity:
Class A ordinary shares, no par value, 500,000,000 shares authorized; 107,078,440 and 98,105,119 shares issued and outstanding, including treasury shares, at June 30, 2006 and December 31, 2005, respectively		2,233,821			2,230,398
Class B ordinary shares, no par value, 200,000,000 shares authorized; 30,631,746 shares issued and outstanding		35,953			35,953
Additional paid-in capital		490,186			470,596
Treasury shares at cost, 76,327 shares		(38	)		(38	)
Deferred share-based compensation		—			(2	)
Accumulated other comprehensive loss		(395	)		(265	)
Accumulated deficit		(2,589,749	)		(2,584,130	)

Total shareholders’ equity		169,778			152,512

Total liabilities, minority interest and shareholders’ equity	$	217,139		$	202,065


*		The consolidated balance sheet at December 31, 2005 has been derived from the company’s audited consolidated financial statements at that date, but does not include all of the information and notes required by accounting principles generally accepted in the United States of America.

The accompanying notes are an integral part of these condensed consolidated financial statements.

OPENTV CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Revenues:
Royalties and licenses	$	14,743		$	12,518		$	31,114		$	27,922
Services and other		8,978			8,356			17,503			15,781

Total revenues		23,721			20,874			48,617			43,703
Cost of revenues:
Royalties and licenses		1,754			1,738			3,495			3,374
Services and other (1)		9,385			5,742			18,443			12,925

Total cost of revenues		11,139			7,480			21,938			16,299

Gross profit		12,582			13,394			26,679			27,404
Operating expenses:
Research and development (1)		7,654			8,107			16,017			16,843
Sales and marketing (1)		3,297			3,323			5,950			6,581
General and administrative (1)		4,266			4,047			9,614			8,258
Restructuring and impairment costs		20			1,692			20			2,177
Amortization of intangible assets		530			393			1,059			790

Total operating expenses		15,767			17,562			32,660			34,649

Loss from operations		(3,185	)		(4,168	)		(5,981	)		(7,245	)
Interest income		898			404			1,448			724
Other (expense) / income, net		(201	)		424			(198	)		362
Minority interest		10			(16	)		19			44

Loss before income taxes		(2,478	)		(3,356	)		(4,712	)		(6,115	)
Income tax expense		(14	)		(686	)		(907	)		(1,211	)

Net loss	$	(2,492	)	$	(4,042	)	$	(5,619	)	$	(7,326	)


Net loss per share, basic and diluted:	$	(0.02	)	$	(0.03	)	$	(0.04	)	$	(0.06	)


Shares used in per share calculation, basic and diluted		137,392,075			123,337,922			136,684,318			122,919,919


(1) Includes the following share-based compensation expense primarily due to the adoption of FAS 123(R):
Cost of services and other	$	153		$	2		$	339		$	4
Research and development		179			—			395			—
Sales and marketing		147			—			323			—
General and administrative		502			—			997			—

Total share-based compensation expense	$	981		$	2		$	2,054		$	4

The accompanying notes are an integral part of these condensed consolidated financial statements.

OPENTV CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Six Months Ended June 30,
	2006			2005
Cash flows from operating activities:
Net loss	$	(5,619	)	$	(7,326	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization of property and equipment		1,539			2,200
Amortization of intangible assets		3,529			2,561
Amortization of share-based compensation		2,054			4
Non-cash employee compensation		40			102
Provision for doubtful accounts		(18	)		—
Non-cash impairment costs		—			602
Loss on disposal of fixed assets		10			—
Minority interest		(19	)		(44	)
Changes in operating assets and liabilities:
Accounts receivable		(573	)		6,675
Prepaid expenses and other current assets		1,594			447
Other assets		(1,387	)		(743	)
Accounts payable		(1,343	)		(1,022	)
Accrued liabilities and deferred rent		494			(1,464	)
Accrued restructuring		(232	)		836
Due to Liberty Media		46			(229	)
Deferred revenue		1,520			3,017

Net cash provided by operating activities		1,635			5,616

Cash flows from investing activities:
Purchase of property and equipment		(1,668	)		(1,510	)
Proceeds from sale of marketable debt securities		6,800			25,438
Purchase of marketable debt securities		(6,555	)		(8,999	)
Private equity investments		—			(300	)

Net cash (used in) / provided by investing activities		(1,423	)		14,629

Cash flows from financing activities:
Proceeds from issuance of ordinary shares		772			22

Net cash provided by financing activities		772			22

Effect of exchange rate changes on cash and cash equivalents		(214	)		(237	)


Net increase in cash and cash equivalents		770			20,030

Cash and cash equivalents, beginning of period		47,229			35,660


Cash and cash equivalents, end of period	$	47,999		$	55,690


Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	(340	)	$	(623	)


Non-cash investing and financing activities
Conversion of exchangeable shares	$	17,491		$	26

Value of bonus shares issued to employees	$	2,658		$	3,180

The accompanying notes are an integral part of these condensed consolidated financial statements.

OPENTV CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006

(Unaudited)

Note 1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments that in the opinion of management are necessary for a fair presentation of the results of operations, financial position and cash flows as of, and for, the periods shown. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted pursuant to such rules and regulations. The results of operations for such periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2006, or for any future period. These condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2005.

The accompanying condensed consolidated financial statements include the accounts of OpenTV Corp., sometimes referred to herein as OpenTV, together with its wholly-owned and majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated.

Preparation of the accompanying condensed consolidated financial statements in conformity with US GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of expenses during the reporting period. Actual results could differ materially from these estimates.

Note 2. Summary of Significant Accounting Policies

Share-Based Compensation

On January 1, 2006, we adopted Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS 123(R)), that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for either equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The statement eliminates the ability to account for share-based compensation transactions, as we formerly did, using the intrinsic value method as prescribed by Accounting Principles Board, or APB, Opinion No. 25,“Accounting for Stock Issued to Employees” (APB 25) and generally requires that such transactions be accounted for using a fair-value-based method and recognized as expenses in our consolidated statement of operations.

We adopted SFAS 123(R) using the modified prospective method which requires the application of the accounting standard as of January 1, 2006. Our consolidated financial statements as of June 30, 2006, for the three and six months ended June 30, 2006 reflect the impact of adopting SFAS 123(R). In accordance with the modified prospective method, the consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). See Note 12 “Share-based Compensation Plans” for further details.

Share-based compensation expense recognized in the condensed consolidated statement of operations during the three and six months ended June 30, 2006 included compensation expense related to share-based payment awards granted: (i) prior to, but not yet vested, as of December 31, 2005, based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS No. 148, “Accounting for Share-based Compensation — Transition and Disclosure,” (SFAS 148); and (ii) subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). As share-based compensation expense recognized in the statement of operations for the first quarter of 2006 is based on awards management reasonably believes, based on various criteria, are ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R), which we applied to grants after December 31, 2005, requires forfeitures to be estimated at the time of grant, based, in part, on employment histories, and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the pro forma information required under SFAS 148 for the periods prior to 2006, we accounted for forfeitures as they occurred.

Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,“Accounting for Uncertainty in Income Taxes,” (FIN 48) an interpretation of FASB Statement No. 109,“Accounting for Income Taxes” (FASB109). FIN 48 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e. a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Upon adoption, the cumulative effect of applying the recognition and measurement provisions of FIN 48, if any, shall be reflected as an adjustment to the opening balance of retained earnings.

FIN 48 also requires expanded disclosures including identification of tax positions for which it is reasonably possible that total amounts of unrecognized tax benefits will significantly change in the next twelve months, a description of tax years that remain subject to examination by major tax jurisdictions, a tabular reconciliation of the total amount of unrecognized tax benefits at the beginning and end of each annual reporting period, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate and the total amounts of interest and penalties recognized in the statements of operations and financial position.

FIN 48 is effective for fiscal years beginning after December 15, 2006. We have not yet determined the impact of the recognition and measurement requirements of FIN 48 on our existing tax positions.

Note 3. Net Loss Per Share

Basic and diluted net loss per share were computed using the weighted average number of ordinary shares outstanding during the periods presented. The following weighted items as of June 30, 2006 and 2005 were not included in the computation of diluted net loss per share because the effect would be anti-dilutive:


	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Class A ordinary shares issuable upon exercise of stock options		10,604,099		10,338,310		10,226,512		10,567,202

Class A ordinary shares issuable for shares of OpenTV, Inc.
Class A common stock (including shares of OpenTV, Inc.
Class A common stock issuable upon exercise of stock options)		731,865		744,428		733,708		744,428

Class B ordinary shares issuable for shares of OpenTV, Inc.
Class B common stock		—		7,594,796		168,773		7,594,796

Had such items been included in the calculation of diluted net loss per share, shares used in the calculation would have been increased by approximately 3.5 million and 9.2 million for the three months ended June 30, 2006 and 2005, and 2.8 million and 9.3 million for the six months ended June 30, 2006 and 2005, respectively.

Note 4. Goodwill

Minority shareholders of OpenTV, Inc., which is a subsidiary of ours, have the ability, under certain arrangements, to exchange their shares of OpenTV, Inc. for our shares, generally on a one-for-one basis. As the shares are exchanged, they are accounted for at fair value. This accounting effectively provides that at each exchange date, the exchange is accounted for as a purchase of a minority interest in OpenTV, Inc., valued at the number of our Class A ordinary shares issued to effect the exchange multiplied by the market price of a Class A ordinary share on that date.

As of December 31, 2005, Sun Microsystems, Inc. beneficially owned 7,594,796 shares of Class B common stock of our subsidiary OpenTV, Inc., which is not publicly traded. On January 4, 2006, Sun exercised its right to exchange those Class B shares in OpenTV, Inc. for the same number of our Class B ordinary shares. As a result of applying purchase accounting to the exchanges, we recorded an additional $17.4 million of goodwill in the three months ended March 31, 2006.

On April 6, 2006, Sun Microsystems, Inc. converted its Class B ordinary shares into Class A ordinary shares.

As of June 30, 2006, minority shareholders continued to own approximately 0.5% of OpenTV, Inc.

Note 5. Intangible Assets, Net

The components of intangible assets, excluding goodwill, were as follows (in millions):


			June 30, 2006							December 31, 2005
	Useful		Gross					Net		Net
	life in		Carrying		Accumulated			Carrying		Carrying
	years		Amount		Amortization			Amount		Amount
Intangible assets:
Patents		5-13	$	20.7	$	(7.1	)	$	13.6	$	14.7
Developed technologies		3-5		11.3		(5.8	)		5.5		6.9
Contracts and relationships		5		9.8		(5.5	)		4.3		5.3
Trademarks		4		0.3		(0.1	)		0.2		0.3
Purchased technologies		5		0.4		(0.4	)		—		—

			$	42.5	$	(18.9	)	$	23.6	$	27.2

The intangible assets are being amortized on a straight-line basis over their estimated useful lives. Amortization of intangible assets was approximately $1.8 million and $1.3 million for the three months ended June 30, 2006 and 2005, respectively, and $3.6 million and $2.6 million for the six months ended June 30, 2006 and 2005, respectively (of which approximately $1.3 million and $0.9 million for the three months ended June 30, 2006 and 2005, respectively, and $2.6 million and $1.8 million for the six months ended June 30, 2006 and 2005, respectively, were reported in cost of royalties and licenses).

The future annual amortization expense for the intangible assets is expected to be as follows (in millions):


	Amortization
Year ending December 31,	Expense
2006 (Remaining six months)	$	3.5
2007		6.0
2008		3.5
2009		2.0
2010		1.7
Thereafter		6.9

	$	23.6

Note 6. Restructuring and Impairment Costs

We monitor our organizational structure and associated operating expenses periodically. Depending upon events and circumstances, actions may be taken to restructure the business, including terminating employees, abandoning excess lease space and incurring other exit costs. Restructuring costs are recorded in accordance with SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Any resulting restructuring accrual includes numerous estimates made by management, which are developed based on management’s knowledge of the activity being affected and the cost to exit existing commitments. These estimates could differ from actual results. We monitor the initial estimates periodically and record an adjustment for any significant changes in estimates.

The following sets forth the restructuring activity during the six months ended June 30, 2006 (in millions):


	Employee
	Severance		Excess
	and Benefits		Facilities			Total
Balance, December 31, 2005	$	0.2	$	1.7		$	1.9

Cash payments		—		(0.1	)		(0.1	)

Balance, March 31, 2006	$	0.2	$	1.6		$	1.8

Cash payments		—		(0.1	)		(0.1	)

Balance, June 30, 2006	$	0.2	$	1.5		$	1.7

The outstanding accrual for severance will be paid within 12 months. The outstanding accrual for excess facilities relates to an operating lease obligation net of estimated sublease income which expires in 2016.

Note 7. Employee Bonus

For the year ended December 31, 2005, the compensation committee of our board of directors approved a bonus plan that provided for the issuance of our Class A ordinary shares to employees based on company and individual performance objectives. Due to legal restrictions in certain foreign jurisdictions related to the issuance of shares or the costs associated with implementing such a program, certain employee bonuses were paid in cash. In addition, applicable withholding taxes were netted from employees’ gross bonus in calculating the net Class A ordinary shares to be issued in the United States and the United Kingdom. The estimated amount recorded as an expense was $5.5 million for the year ended December 31, 2005.

During the three months ended March 31, 2006, we paid approximately $0.2 million in cash in respect of the 2005 bonus. During the three months ended June 30, 2006, we paid the full remaining 2005 bonus net of withholding taxes in the form of 935,664 shares of our Class A ordinary shares with an aggregate value of $2.7 million (based on the closing price for our Class A ordinary shares as of April 4, 2006) to our employees in the United States and the United Kingdom and cash in our other foreign jurisdictions. In connection with that issuance, we also reserved for issuance an additional equivalent number of shares under our 2005 Incentive Plan as contemplated by the terms of that plan.

Note 8. Comprehensive Loss

The components of comprehensive loss, net of tax, were as follows (in millions):


	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Net loss	$	(2.5	)	$	(4.0	)	$	(5.6	)	$	(7.3	)
Other comprehensive loss:
Foreign currency translation adjustment		0.1			(0.2	)		(0.1	)		(0.3	)

Comprehensive loss	$	(2.4	)	$	(4.2	)	$	(5.7	)	$	(7.6	)

Note 9. Commitments and Contingencies

Operating Leases

We lease our facilities from third parties under operating lease agreements or sublease agreements in the United States, Europe and Asia Pacific. These leases expire between October 2006 and April 2011. Total rent expense was $1.3 million and $1.1 million for the three months ended June 30, 2006 and 2005, respectively, and $2.4 million and $2.3 million for the six months ended June 30, 2006 and 2005, respectively. There was no sublease income.

Future minimum payments under operating leases as of June 30, 2006 were as follows (in millions):


	Minimum
Year ending December 31,	Commitments
2006 (remaining six months)	$	2.4
2007		4.4
2008		4.3
2009		3.8
2010		0.7
Thereafter		0.2

	$	15.8

We have the right to terminate, without penalty, two of our operating leases prior to their scheduled expiration. If we exercised those early termination rights, our future minimum lease commitments would be reduced by an aggregate of $6.5 million over the current remaining life of those leases, beginning in 2008. We have not yet made any determination as to whether we intend to exercise any of those rights. If we did exercise any such rights, while our commitments under those specific leases would be reduced, we might also be required to lease additional space to conduct our business and we cannot be certain, at this time, whether any such actions would possibly result in a net increase in our future minimum lease commitments.

Other Commitments

In the ordinary course of business we enter into various arrangements with vendors and other business partners for bandwidth, marketing, and other services. Future minimum commitments under these arrangements as of June 30, 2006 were $1.4 million for the remaining six months of 2006 and $0.1 million for the year ending December 31, 2007. In addition, we also have arrangements with certain parties that provide for revenue-sharing payments.

As of June 30, 2006, we had three standby letters of credit aggregating approximately $1.2 million, two of which were issued to landlords of our leased properties, and one of which was issued to a sublessee at our New York facility which we vacated in the second quarter of 2005 (see Note 6). We pledged approximately $0.5 million of restricted cash and one certificate of deposit of $1.0 million as collateral in respect of these standby letters of credit.

Contingencies

OpenTV, Inc. v. Liberate Technologies, Inc.On February 7, 2002, OpenTV, Inc., our subsidiary, filed a lawsuit against Liberate Technologies, Inc. alleging patent infringement in connection with two patents held by OpenTV, Inc. relating to interactive technology. The lawsuit is pending in the United States District Court for the Northern District of California. On March 21, 2002, Liberate Technologies filed a counterclaim against OpenTV, Inc. for alleged infringement of four patents allegedly owned by Liberate Technologies. Liberate Technologies has since dismissed its claims of infringement on two of those patents. In January 2003, the District Court granted two of OpenTV, Inc.’s motions for summary judgment pursuant to which the court dismissed Liberate Technologies’ claim of infringement on one of the remaining patents and dismissed a defense asserted by Liberate Technologies to OpenTV, Inc.’s infringement claims, resulting in only one patent of Liberate Technologies remaining in the counterclaim. The District Court issued a claims construction ruling for the two OpenTV patents and one Liberate patent remaining in the suit on December 2, 2003.

In April 2005, Liberate sold substantially all of the assets of its North American business to Double C Technologies, a joint venture between Comcast Corporation and Cox Communications, Inc. In connection with that transaction, Liberate and Double C Technologies indicated in a filing with the United States District Court that Double C Technologies had assumed all liability related to this litigation. A stay of these proceedings has been granted to the parties through September 30, 2006 to allow for settlement discussions.

We continue to believe that our lawsuit is meritorious and intend to continue vigorously pursuing prosecution of our claims. In addition, we believe that we have meritorious defenses to the counterclaims brought against OpenTV, Inc. and will defend ourselves vigorously. No provision has been made in our consolidated financial statements for this matter. We are unable to predict the likelihood of a favorable outcome or estimate our potential liability, if any, in respect of any potential counterclaims if litigated to conclusion.

Initial Public Offering Securities Litigation.In July 2001, the first of a series of putative securities class actions,Brody v. OpenTV Corp., et al., was filed in United States District Court for the Southern District of New York against certain investment banks which acted as underwriters for our initial public offering, us and various of our officers and directors. These lawsuits were consolidated and are captionedIn re OpenTV Corp. Initial Public Offering Securities Litigation. The complaints allege undisclosed and improper practices concerning the allocation of our initial public offering shares, in violation of the federal securities laws, and seek unspecified damages on behalf of persons who purchased OpenTV Class A ordinary shares during the period from November 23, 1999 through December 6, 2000. The Court has appointed a lead plaintiff for the consolidated cases. On April 19, 2002, the plaintiffs filed an amended complaint. Other actions have been filed making similar allegations regarding the initial public offerings of more than 300 other companies, including Wink Communications as discussed in greater detail below. All of these lawsuits have been coordinated for pretrial purposes asIn re Initial Public Offering Securities Litigation, 21 MC 92 (SAS). Defendants in these cases filed an omnibus motion to dismiss on common pleading issues. Oral argument on the omnibus motion to dismiss was held on November 1, 2002. All claims against our officers and directors have been dismissed without prejudice in this litigation pursuant to the parties’ stipulation approved by the Court on October 9, 2002. On February 19, 2003, the Court denied in part and granted in part the omnibus motion to dismiss filed on behalf of defendants, including us. The Court’s Order dismissed all claims against us except for a claim brought under Section 11 of the Securities Act of 1933. Plaintiffs and the issuer defendants, including us, have agreed to a stipulation of settlement, in which plaintiffs will dismiss and release their claims in exchange for a guaranteed recovery to be paid by the insurance carriers of the issuer defendants and an assignment of certain claims. The stipulation of settlement for the claims against the issuer-defendants, including us, has been submitted to the Court. On February 15, 2005, the Court preliminarily approved the settlement contingent on specified modifications. On August 31, 2005, the Court entered an order confirming its preliminary approval of the settlement. On April 24, 2006, the Court held a fairness hearing in connection with the motion for final approval of the settlement. The Count did not issue a ruling on the motion for final approval at the fairness hearing. There is no guarantee that the settlement will become effective, as it is subject to a number of conditions which cannot be assured. If the settlement does not occur, and the litigation against us continues, we believe that we have meritorious defenses to the claims asserted against us and will defend ourselves vigorously. No provision has been made in our consolidated financial statements for this matter. We are unable to predict the likelihood of an unfavorable outcome or estimate our potential liability, if any.

In November 2001, a putative securities class action was filed in United States District Court for the Southern District of New York against Wink Communications and two of its officers and directors and certain investment banks which acted as underwriters for Wink Communications’ initial public offering. We acquired Wink Communications in October 2002. The lawsuit is now captionedIn re Wink Communications, Inc. Initial Public Offering Securities Litigation. The operative amended complaint alleges undisclosed and improper practices concerning the allocation of Wink Communications’ initial public offering shares in violation of the federal securities laws, and seeks unspecified damages on behalf of persons who purchased Wink Communications’ common stock during the period from August 19, 1999 through December 6, 2000. This action has been consolidated for pretrial purposes asIn re Initial Public Offering Securities Litigation. On February 19, 2003, the Court ruled on the motions to dismiss filed by all defendants in the consolidated cases. The Court denied the motions to dismiss the claims under the Securities Act of 1933, granted the motion to dismiss the claims under Section 10(b) of the Securities Exchange Act of 1934 against Wink Communications and one individual defendant, and denied that motion against the other individual defendant. As described above, a stipulation of settlement for the claims against the issuer defendants has been submitted to and preliminarily approved by the Court. There is no guarantee that the settlement will become effective, as it is subject to a number of conditions, including approval of the Court, which cannot be assured. If the settlement does not occur, and the litigation against Wink Communications continues, we believe that Wink Communications has meritorious defenses to the claims brought against it and that Wink Communications will defend itself vigorously. No provision has been made in our consolidated financial statements for this matter. We are unable to predict the likelihood of an unfavorable outcome or estimate our potential liability, if any.

Litigation Relating to the Acquisition of ACTV, Inc.On November 18, 2002, a purported class action complaint was filed in the Court of Chancery of the State of Delaware in and for the County of New Castle against ACTV, Inc., its directors and us. The complaint generally alleges that the directors of ACTV breached their fiduciary duties to the ACTV shareholders in approving the ACTV merger agreement pursuant to which we acquired ACTV on July 1, 2003, and that, in approving the ACTV merger agreement, ACTV’s directors failed to take steps to maximize the value of ACTV to its shareholders. The complaint further alleges that we aided and abetted the purported breaches of fiduciary duties committed by ACTV’s directors on the theory that the merger could not occur without our participation. No proceedings on the merits have occurred with respect to this action, and the case is dormant. We believe that the allegations are without merit and intend to defend against the complaint vigorously. No provision has been made in our consolidated financial statements for this matter. We are unable to predict the likelihood of an unfavorable outcome or estimate our potential liability, if any.

Broadcast Innovation Matter.On November 30, 2001, a suit was filed in the United States District Court for the District of Colorado by Broadcast Innovation, L.L.C., or BI, alleging that DIRECTV, Inc., EchoStar Communications Corporation, Hughes Electronics Corporation, Thomson Multimedia, Inc., Dotcast, Inc. and Pegasus Satellite Television, Inc. are infringing certain claims of United States patent no. 6,076,094, assigned to or licensed by BI and certain other defendants settled with BI on July 17, 2003. We are unaware of the specific terms of that settlement. Though we are not currently a defendant in the suit, BI may allege that certain of our products, possibly in combination with the products provided by some of the defendants, infringe BI’s patent. The agreement between OpenTV, Inc. and EchoStar includes indemnification obligations that may be triggered by the litigation. If liability is found against EchoStar in this matter, and if such a decision implicates our technology or products, EchoStar has notified OpenTV, Inc. of its expectation of indemnification, in which case our business performance, financial position, results of operations or cash flows may be adversely affected. Likewise, if OpenTV, Inc. were to be named as a defendant and it is determined that the products of OpenTV, Inc. infringe any of the asserted claims, and/or it is determined that OpenTV, Inc. is obligated to defend EchoStar in this matter, our business performance, financial position, results of operations or cash flows may be adversely affected. On November 7, 2003, BI filed suit against Charter Communications, Inc. and Comcast Corporation in United States District Court for the District of Colorado, alleging that Charter and Comcast also infringe the ‘094 patent. The agreements between Wink Communications and Charter Communications include indemnification obligations of Wink Communications that may be triggered by the litigation. While reserving all of our rights in respect of this matter, we have conditionally reimbursed Charter for certain reasonable legal expenses that it incurred in connection with this litigation. On August 4, 2004, the District Court found the ‘094 patent invalid. After various procedural matters, including interim appeals, in November 2005, the United States Court of Appeals for the Federal Circuit remanded the case back to the District Court for disposition. Charter filed a request with the United States Patent and Trademark Office on June 8, 2006 to re-examine the patent based on prior art references. On July 11, 2006, the District Court ordered a stay of the proceedings pending notice as to whether the re-examination request is accepted by the United States Patent and Trademark Office. On August 5, 2006, the United States Patent and Trademark Office ordered a re-examination of all of the patent's claims.

Personalized Media Communications, LLC.On December 4, 2000, a suit was filed in the United States District Court for the District of Delaware by Pegasus Development Corporation and Personalized Media Communications, LLC alleging that DIRECTV, Inc., Hughes Electronics Corp., Thomson Consumer Electronics and Philips Electronics North America, Inc. are willfully infringing certain claims of seven U.S. patents assigned or licensed to Personalized Media Communications. Based on publicly available information, we believe that the case has been stayed in the District Court pending re-examination by the United States Patent and Trademark Office. Though Wink Communications is not a defendant in the suit, Personalized Media Communications may allege that certain products of Wink Communications, possibly in combination with products provided by the defendants, infringe Personalized Media Communication’s patents. The agreements between Wink Communications and each of the defendants include indemnification obligations that may be triggered by this litigation. If it is determined that Wink Communications is obligated to defend any defendant in this matter, and/or that the products of Wink Communications infringe any of the asserted claims, our business performance, financial position, results of operations or cash flows may be adversely affected. No provision has been made in our consolidated financial statements for this matter. We are unable to estimate our potential liability, if any.

Other Matters.From time to time in the ordinary course of our business, we are also party to other legal proceedings or receive correspondence regarding potential or threatened legal proceedings. While we currently believe that the ultimate outcome of these other proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position or overall trends in our results of operations, legal proceedings are subject to inherent uncertainties.

The estimate of the potential impact on our financial position or overall results of operations for any of the legal proceedings described in this section could change in the future.

Indemnifications

As permitted under the laws of the British Virgin Islands, we have agreed to indemnify our officers and directors for certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that limits our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is not material.

Note 10. Related Party Transactions

Our ordinary shares consist of Class A and Class B shares. Each of our Class A ordinary shares entitles its holder to one vote, and each of our Class B ordinary shares entitles its holder to ten votes. As of June 30, 2006, Liberty Media’s total ownership represented approximately 28.6% of the economic interest and approximately 76.0% of the voting power of our ordinary shares on an undiluted basis.

Since January 2004, we have participated in the Liberty Media benefits program for employees in the United States at a cost of $0.7 million and $0.4 million for the three months ended June 30, 2006 and 2005, respectively, and $1.4 million and $0.8 million for the six months ended June 30, 2006 and 2005, respectively. We believe that this participation provides us with better economic terms than we would otherwise be able to achieve independent of Liberty Media.

In connection with, and as a condition to, the adoption of our amended and restated memorandum of association which was approved by our board of directors (including each of our independent directors) in February 2006, we entered into a letter agreement with Liberty Media. Under that agreement, Liberty Media agreed that if it (or any of its affiliates) sells or otherwise transfers any of our Class B ordinary shares to a third party and the aggregate sale proceeds received by Liberty Media in that transaction exceed, on a per share basis, the trading price of our Class A ordinary shares as determined in accordance with an agreed formula, then Liberty Media will contribute to us, generally in the same form it receives as consideration for its shares, a proportionate percentage of that aggregate premium, reflecting Liberty Media’s relative economic (not voting) ownership in our company. As a result of that commitment, Liberty Media will retain only that portion of any premium that is equal to its relative equity ownership, based on the number of outstanding Class A and Class B ordinary shares at the time of any such sale.

Note 11. Segment Information

Our chief operating decision maker is our Chief Executive Officer. Our management assesses our results and financial performance, and prepares our internal budgeting reports, on the basis of three segments: the middleware and integrated technologies business, the applications business, and the BettingCorp business. We have prepared this segment analysis in accordance with SFAS No. 131,“Disclosure about Segments of an Enterprise and Related Information.”

Our middleware and integrated technologies business includes our middleware products and the related technologies that are customarily integrated as extensions of that middleware. Our applications business includes our advanced advertising, PlayJam and NASCAR products and related technologies. Our BettingCorp business includes our fixed-odds and other wagering gaming applications, the development and operation of our “Ultimate One” platform and the marketing of our evolving Participation TV product that is based on the Ultimate One technology.

Our management reviews and assesses the “contribution margin” of each of these segments, which is not a financial measure calculated in accordance with US GAAP. We define “contribution margin,” for these purposes as segment revenues less related, direct or indirect, allocable costs, including headcount and headcount-related overhead costs, consulting and subcontractor costs, travel, marketing and network infrastructure and bandwidth costs. There are significant judgments management makes with respect to the direct and indirect allocation of costs that may affect the calculation of contribution margins. While management believes these and other related judgments are reasonable and appropriate, others could assess such matters in ways different than our company’s management. Contribution margin is a non-US GAAP financial measure which excludes unallocated corporate overhead, interest, taxes, depreciation and amortization, amortization of intangible assets, share-based compensation, impairment of goodwill, impairment of intangibles, other income, minority interest, restructuring provisions, and unusual items such as contract amendments that mitigated potential loss positions. These exclusions reflect costs not considered directly allocable to individual business segments and result in a definition of “contribution margin” that does not take into account the substantial cost of doing business. Management believes that segment contribution margin is a helpful measure in evaluating operational performance for our company. While our management may consider “contribution margin” to be an important measure of comparative operating performance, this measure should be considered in addition to, but not as a substitute for, loss from operations, net loss, cash flow and other measures of financial performance prepared in accordance with accounting principles generally accepted in the United States that are otherwise presented in our financial statements. In addition, our calculation of “contribution margin” may be different from the calculation used by other companies and, therefore, comparability may be affected.

Because these segments reflect the manner in which management reviews our business, they necessarily involve judgments that management believes are reasonable in light of the circumstances under which they are made. These judgments may change over time or may be modified to reflect new facts or circumstances. Segments may also be changed or modified to reflect technologies and applications that are newly created, or that change over time, or other business conditions that evolve, each of which may result in reassessing specific segments and the elements included within each of those segments.

Summarized information by segment was as follows (in millions):


	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Revenues:
Middleware and integrated technologies
Royalties and licenses	$	13.8		$	12.4		$	29.4		$	27.8
Services and other		4.4			4.0			8.4			7.4

Subtotal — Middleware and integrated technologies		18.2			16.4			37.8			35.2

Applications
Royalties and licenses		0.9			0.1			1.7			0.1
Services and other		3.9			3.1			7.4			6.2

Subtotal — Applications		4.8			3.2			9.1			6.3

BettingCorp
Services and other		0.7			1.3			1.7			2.2

Subtotal — BettingCorp		0.7			1.3			1.7			2.2

Total Revenue	$	23.7		$	20.9		$	48.6		$	43.7


Contribution margin:
Middleware and integrated technologies	$	6.5		$	6.8		$	14.0		$	16.0
Applications		—			(0.8	)		(0.6	)		(2.8	)
BettingCorp		(0.9	)		(0.9	)		(1.7	)		(2.3	)


Total contribution margin		5.6			5.1			11.7			10.9

Unallocated corporate overhead		(5.2	)		(5.2	)		(10.5	)		(11.2	)
Restructuring and impairment costs		—			(1.7	)		—			(2.2	)
Depreciation and amortization		(0.8	)		(1.1	)		(1.5	)		(2.2	)
Amortization of intangible assets		(1.8	)		(1.3	)		(3.6	)		(2.6	)
Amortization of share-based compensation		(1.0	)		—			(2.1	)		—
Interest income		0.9			0.4			1.5			0.7
Other (expense) / income, net		(0.2	)		0.5			(0.2	)		0.4
Minority interest		—			—			—			0.1


Loss before income taxes		(2.5	)		(3.3	)		(4.7	)		(6.1	)
Income tax expense		—			(0.7	)		(0.9	)		(1.2	)


Net loss	$	(2.5	)	$	(4.0	)	$	(5.6	)	$	(7.3	)

Our revenues by geographic area, based on the location of customers, were as follows (in millions):


	Three Months Ended June 30										Six Months Ended June 30,
			% of					% of					% of					% of
	2006		revenues			2005		revenues			2006		revenues			2005		revenues
Europe, Africa and Middle East
United Kingdom	$	6.2		26	%	$	5.5		27	%	$	13.6		28	%	$	11.4		26	%
Italy		1.2		5	%		2.6		12	%		3.1		6	%		7.2		17	%
Other countries		4.8		21	%		2.6		12	%		9.1		19	%		5.8		13	%

Subtotal		12.2		52	%		10.7		51	%		25.8		53	%		24.4		56	%

Americas
United States		7.1		30	%		6.4		31	%		13.8		28	%		11.5		26	%
Other countries		1.0		4	%		0.7		3	%		2.3		5	%		1.7		4	%

Subtotal		8.1		34	%		7.1		34	%		16.1		33	%		13.2		30	%

Asia Pacific		3.4		14	%		3.1		15	%		6.7		14	%		6.1		14	%

	$	23.7		100	%	$	20.9		100	%	$	48.6		100	%	$	43.7		100	%

Two major customers accounted for the following percentages of revenues:


	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Sky Italia		5	%		12	%		6	%		16	%
Echostar		16	%		18	%		16	%		17	%

British Sky Broadcasting, or BSkyB, directly and indirectly accounted for 20% and 19% of total revenues for the three months ended June 30, 2006 and 2005, respectively, and 23% and 20% of total revenue for the six months ended June 30, 2006 and 2005, respectively, taking into account the royalties that are paid by four manufacturers who sell set-top boxes to BSkyB and by customers transacting on our PlayJam service on BSkyB channels.

One customer accounted for 14% of net accounts receivable as of June 30, 2006. Three customers accounted for 16%, 12% and 11% of net accounts receivable as of June 30, 2005.

Additional summarized information by geographic area was as follows (in millions):


	Three Months Ended June 30,				Six Months Ended June 30,
Capital expenditures, net:	2006		2005		2006		2005
United States	$	0.8	$	0.4	$	1.3	$	0.9
Other countries		0.3		0.3		0.4		0.6

	$	1.1	$	0.7	$	1.7	$	1.5


	June 30,		December 31,
*Long-lived assets: ()**	2006		2005
United States	$	7.5	$	6.0
Other countries		2.9		2.8

	$	10.4	$	8.8


(*)		Long-lived assets include property and equipment, and other assets.

Note 12. Share-based Compensation Plans

Employee Stock Purchase Plan

We have an Amended and Restated 1999 Employee Stock Purchase Plan, or the ESPP. Our board of directors has suspended offering periods under the ESPP and no options or purchase rights are currently outstanding under the ESPP. In the event our board of directors elects to commence offering periods under our ESPP in the future, the number of Class A ordinary shares issuable under the ESPP will, pursuant to the terms of the ESPP, be reset at 500,000 each successive December 31 through calendar year 2008, in each case for issuance during the following year.

Option Plans

Options are currently outstanding under the following plans: (i) the Amended and Restated OpenTV Corp. 1999 Share Option/ Share Issuance Plan, or the 1999 Plan; (ii) the Amended and Restated OpenTV, Inc. 1998 Option/ Stock Issuance Plan, or the 1998 Plan; (iii) the OpenTV Corp. 2001 Nonstatutory Stock Option Plan, or the 2001 Plan; (iv) the OpenTV Corp. 2003 Incentive Plan, or the 2003 Plan; (v) the OpenTV Corp. 2005 Incentive Plan, or the 2005 Plan; (vi) option plans relating to outstanding options assumed in connection with the Spyglass merger (collectively, the “Assumed Spyglass Options”); and (vii) option plans relating to outstanding options assumed in connection with the ACTV merger (collectively, the “Assumed ACTV Options”). Options have been issued to employees, directors and consultants.

As a result of our shareholders’ approval of the 2005 Plan on November 10, 2005, no further awards will be granted under the 1999 Plan, 2001 Plan or 2003 Plan. The 1999 Plan, 2001 Plan and 2003 Plan will remain in existence for the sole purpose of governing the outstanding options until such time as such options have been exercised or cancelled. Options or shares awarded under the 1999 Plan, 2001 Plan or 2003 Plan that are forfeited or cancelled will no longer be available for future issuance.

We currently issue options from the 2005 Plan. The compensation committee of our board of directors administers the 2005 Plan. The compensation committee has the discretion to determine grant recipients, the number and exercise price of stock options, and the number of stock appreciation rights, restricted stock or stock units issued under the 2005 Plan. The options may be incentive stock options or non-statutory stock options. Consistent with the foregoing, options under the 2005 Plan have been granted at an exercise price equal to the fair market value on the date of grant and vest 25% after one year from the date of grant and 1/48^th over each of the next 36 months. The

term of the options generally is 10 years from the date of grant. Unexercised options generally expire ninety days after termination of employment with us and are then returned to the pool and available for reissuance. A total of 6,000,000 Class A ordinary shares have been reserved for issuance under the 2005 Plan since its inception, and as of June 30, 2006, options to purchase 1,326,250 Class A ordinary shares were outstanding under the 2005 Plan, and 4,673,750 shares were available for future grant. On April 4, 2006, we issued 935,664 shares under the 2005 Plan in respect of our 2005 bonus plan. In connection with that issuance, we also reserved for issuance an additional equivalent number of shares under the 2005 Plan as contemplated by the terms of that plan.

As discussed above, we no longer issue options from the 1999 Plan. The options outstanding may be incentive stock options or non-statutory options. Options that have been issued under the plan have generally been granted at an exercise price equal to the fair market value on the date of grant and vest 25% after 12 months of continuous service with us and¹/48th over each of the next 36 months. The term of the options generally is 10 years from the date of grant. Unexercised options generally expire three months after termination of employment with us. A total of 8,980,000 Class A ordinary shares have been reserved for issuance under the 1999 Plan since its inception, and as of June 30, 2006, options to purchase 3,192,052 Class A ordinary shares were outstanding under the 1999 Plan.

Effective as of October 23, 1999, options to purchase 5,141,114 shares of Class A common stock of OpenTV, Inc. under the 1998 Plan were assigned to and assumed by us and these options thereafter represented the right to purchase under the 1999 Plan an identical number of our Class A ordinary shares. The remainder of the options then outstanding under the 1998 Plan were not assigned to and assumed by us. OpenTV, Inc. no longer issues options from the 1998 Plan. The 1998 Plan will remain in existence for the sole purpose of governing those remaining outstanding options until such time as such options have been exercised and the underlying shares have become transferable by the holders. Options or shares awarded under the 1998 Plan that are forfeited or cancelled will no longer be available for issuance. As of June 30, 2006, options to purchase 62,000 shares of OpenTV, Inc.’s Class A common stock were outstanding under the 1998 Plan.

As discussed above, we no longer issue options from the 2001 Plan. Only non-statutory options were granted under the 2001 Plan and they were generally granted at an exercise price equal to the fair market value on the date of grant and vest 25% after one year from the date of grant and 1/48th over each of the next 36 months. The term of the options generally is 10 years from the date of grant. A total of 500,000 Class A ordinary shares had been reserved for issuance under the 2001 Plan, and as of June 30, 2006, options to purchase 144,254 Class A ordinary shares were outstanding under the 2001 Plan.

As discussed above, we no longer issue options from the 2003 Plan. The options outstanding are either incentive stock options or non-statutory stock options. Options under the 2003 Plan have generally been granted at an exercise price equal to the fair market value on the date of grant and, for grants made through the end of 2004, had vested 25% after two years from the date of grant and 25% yearly thereafter for the following three years. In 2005, we revised the vesting schedule so that it is consistent with the schedule generally applicable under the 1999 Plan. The term of the options generally is 10 years from the date of grant. Unexercised options generally expire ninety days after termination of employment with us. A total of 5,000,000 Class A ordinary shares had been reserved for issuance under the 2003 Plan since its inception, and as of June 30, 2006, options to purchase 4,642,983 Class A ordinary shares were outstanding under the 2003 Plan.

All of the Assumed Spyglass Options were converted as a result of the Spyglass acquisition into options to purchase our Class A ordinary shares. As of June 30, 2006, there were outstanding Assumed Spyglass Options to purchase 92,734 Class A ordinary shares.

All of the Assumed ACTV Options were converted as a result of the ACTV acquisition into options to purchase our Class A ordinary shares. As of June 30, 2006, there were outstanding Assumed ACTV Options to purchase 1,163,083 Class A ordinary shares.

Assumed Spyglass Options and Assumed ACTV Options that are forfeited or cancelled will no longer be available for issuance, and no new options will be granted under the option plans relating to the Assumed Spyglass Options and Assumed ACTV Options.

Impact of the Adoption of SFAS 123(R)

We adopted SFAS 123(R) using the modified prospective transition method beginning January 1, 2006. Accordingly, during the six months ended June 30, 2006, we recorded share-based compensation expense for awards granted prior to, but not yet vested, as of January 1, 2006, as if the fair value method required for pro forma disclosure under SFAS 148 were in effect for expense recognition purposes, adjusted for estimated forfeitures. For share-based compensation granted after January 1, 2006, we have recognized compensation expense based on the estimated grant date fair value method using the Black-Scholes valuation model. For all awards, we recognize compensation expense using the accelerated amortization method. As SFAS 123(R) requires that share-based compensation expense be based on awards that are ultimately expected to vest, share-based compensation for the six months ended June 30, 2006 has been reduced for estimated forfeitures. When estimating forfeitures, we consider voluntary termination behaviors as well as trends of actual option forfeitures.

The impact on our results of operations of recording share-based compensation for the three and six months ended June, 2006 was as follows (in thousands):


	Three Months Ended		Six Months Ended
	June 30, 2006		June 30, 2006
Cost of revenues — services and other	$	153	$	337
Research and development		179		395
Sales and marketing		147		323
General and administrative		502		997

	$	981	$	2,052

Cash received from option exercises under all share-based compensation plans was approximately $0.7 million and $0.8 million for the three and six months ended June 30, 2006, respectively. No income tax benefit was recognized in the statement of operations for share-based compensation costs. No share-based compensation costs were capitalized for the three and six months ended June 30, 2006.

Valuation Assumptions

We calculated the fair value of each option award on the date of grant using the Black-Scholes option pricing model. The following assumptions were used for each respective period:


	Three Months Ended June 30,						Six months Ended June 30,
	2006			2005			2006			2005
Risk-free interest rates		4.82% - 5.22	%		3.78% - 4.24	%		4.28% - 5.22	%		3.71% - 4.42	%
Average expected lives (months)		63			75			63			75
Dividend yield		—			—			—			—
Expected volatility		81-84	%		102	%		81-85	%		102-104	%

Our computation of expected volatility for the six months ended June 30, 2006 and in prior years was based on historical volatility on our stock. Our computation of expected life in 2006 was determined based on historical experience of similar awards, giving consideration to the contractual terms of the share-based awards, vesting schedules and expectations of future employee behavior. While we believe that these assumptions are reasonable, there can be no assurance that actual experience may not differ materially from these assumptions. The interest rate for periods within the contractual life of the award is based on the similar U.S. Treasury yield curve in effect at the time of grant.

Share-based Payment Award Activity

The following table summarizes activity under our equity incentive plans for the six months ended June 30, 2006:


	Shares			Number of
	Available for			Shares					Weighted Average
	Grant			Outstanding			Exercise Price		Exercise Price
Balance, December 31, 2005		5,997,000			10,325,710				$	5.42
Options granted		(37,900	)		37,900		$	2.27 - $2.88	$	2.54
Options exercised		—			(29,022	)	$	1.05 - $2.10	$	1.21
Options forfeited		—			(62,913	)	$	1.63 - $3.77	$	2.80
Options expired		—			(428,847	)	$	1.63 - $54.25	$	9.89

Balance, March 31, 2006		5,959,100			9,842,828				$	5.24

Options granted		(1,309,950	)		1,309,950		$	2.29 - $4.00	$	2.95
Options exercised		—			(385,548	)	$	0.33 - $2.99	$	1.89
Options forfeited		24,600			(106,470	)	$	1.63 - $3.61	$	2.93
Options expired		—			(37,404	)	$	1.63 - $54.25	$	13.05

Balance, June 30, 2006		4,673,750			10,623,356				$	5.08

The following table summarizes information with respect to options outstanding at June 30, 2006:


	Options Outstanding						Options Currently Exercisable
		��	Weighted Average				Number
	Number		Remaining		Weighted Average		Vested and		Weighted Average
Exercise Price	Outstanding		Contractual Life		Exercise Price		Exercisable		Exercise Price
$0.33 - $2.16		1,087,396		5.03	$	1.38		749,604	$	1.20
$2.18 - $2.69		1,050,444		3.09	$	2.26		747,023	$	2.19
$2.70 - $2.70		1,465,869		8.64	$	2.70		534,590	$	2.70
$2.72 - $2.82		371,411		8.88	$	2.77		69,982	$	2.77
$2.84 - $2.84		1,708,950		9.30	$	2.84		255,334	$	2.84
$2.85 - $2.98		121,300		8.29	$	2.91		23,466	$	2.91
$2.99 - $2.99		2,184,845		7.73	$	2.99		929,315	$	2.99
$3.00 - $4.59		1,083,197		6.56	$	3.58		345,177	$	3.47
$4.77 - $17.63		1,065,034		4.53	$	9.01		1,028,784	$	9.15
$19.00 - $94.56		484,910		4.06	$	40.92		484,910	$	40.92

		10,623,356		6.46	$	5.08		5,168,185	$	7.39

The aggregate intrinsic value, which is not equivalent to the value determined by Black-Scholes, is calculated as the difference between the exercise price of the underlying awards and the quoted price of our common stock. The aggregate intrinsic value of all vested and unvested options outstanding as of June 30, 2006, based on our then current closing price, was $10.5 million. The aggregate intrinsic value of options vested as of June 30, 2006 was $5.2 million. The weighted average remaining contractual life of currently vested and exercisable options is 4.97 years. The aggregate intrinsic value of options exercised under our stock option plans was $0.5 million and $0.1 million for the three months ended June 30, 2006 and 2005, respectively, and $0.5 million and $0.2 million for the six months ended June 30, 2006 and 2005, respectively, determined as of the date of option exercise. As of June 30, 2006, there was approximately $5.3 million of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under our option plans. That cost is expected to be recognized over a weighted-average period of two years.

The weighted average grant-date fair value of options granted was $2.95 and $2.76 for the grants in the three months ended June 30, 2006 and 2005, respectively, and $2.95 and $2.75 for the grants in the six months ended June 30, 2006 and 2005.

Pro forma Information for Periods Prior to the Adoption of SFAS 123(R)

Prior to the adoption of SFAS No. 123(R), we accounted for share-based employee compensation arrangements in accordance with the provisions of APB 25 and complied with the disclosure provisions of SFAS148, which was effective for the year ended December 31, 2003. Under APB 25, employee share-based compensation expense recognized under SFAS 148 was not reflected in our results of operations for the three and six months ended June 30, 2005 for employee stock option awards as all options were granted with an exercise price equal to the market value of the underlying common stock on the date of

grant. Previously reported amounts have not been restated upon adoption of SFAS 123(R).

Had compensation cost for option plans been determined based on the fair value at the grant dates for the awards under a method prescribed by SFAS 148, our net loss for the three and six months ended June 30, 2005 would have been increased to the pro forma amounts indicated below (amounts in millions, except per share amounts):


	Three Months Ended			Six Months Ended
	June 30, 2005			June 30, 2005
Net loss, as reported	$	(4.0	)	$	(7.3	)
Deduct: Share-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects		(1.1	)		(2.1	)

Pro-forma net loss	$	(5.1	)	$	(9.4	)

Net loss per share, basic and diluted:
As reported	$	(0.03	)	$	(0.06	)

Pro-forma	$	(0.04	)	$	(0.08	)

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

This Quarterly Report onForm 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause the results of OpenTV Corp. and its consolidated subsidiaries to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any projections of revenue, expenses, earnings or losses from operations; any statements of the plans, strategies and objectives of management for future operation; any statements concerning developments, performance or market conditions relating to products or services; any statements regarding future economic conditions or performance; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. All these forward-looking statements are based on information available to us at this time, and weassumeno obligation to update any of these statements. Actual results could differ materially from those projected in these forward-looking statements as a result of many factors, including those identified in the section titled “Factors That May Affect Future Results” contained in Item 1A of our Annual Report onForm 10-K for the fiscal year ended December 31, 2005, as such section may be updated in our subsequent Quarterly Reports onForm 10-Q, and elsewhere. We urge you to review and consider the various disclosures made by us from time to time in our filings with the Securities and Exchange Commission that attempt to advise you of the risks and factors that may affect our future results.

The following discussion should be read together with the unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited financial statements, the notes thereto and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report onForm 10-K for the fiscal year ended December 31, 2005, as filed with the Securities and Exchange Commission.

Overview

We are one of the world’s leading providers of software and solutions for interactive and enhanced television.

We derive our revenues from the licensing of our core software and related technologies, the licensing and distribution of our content and applications and the delivery of professional services. We typically receive one-time royalty fees from manufacturers of set-top boxes or from cable, satellite and digital terrestrial operators, which we refer to as “network operators,” once a set-top box, which incorporates our software, has been shipped to, or activated by, the network operator. In January 2006, we announced a subscription-based licensing agreement under which we would receive monthly payments for each set-top box embedded with our software that our customer deployed, for so long as those set-top boxes remain active. As we pursue additional subscription-based pricing, our

revenue model may change over time. We also receive ongoing licensing fees for various other software products that we sell. In addition, we receive professional services fees from consulting, engineering and training engagements, fees for the maintenance and support of our products and fees from revenue sharing arrangements related to the use of our interactive content and applications.

As of June 30, 2006, Liberty Media’s total ownership represented approximately 28.6% of the economic interest and 76.0% of the voting interest of our ordinary shares on an undiluted basis.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with US GAAP as applicable to financial statements for interim reporting periods. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. In preparing these condensed consolidated financial statements, we made our best estimates and judgments, which are normally based on knowledge and experience with regard to past and current events and assumptions about future events, giving due consideration to materiality. Actual results could differ materially from these estimates under different assumptions or conditions.

We believe the following critical accounting polices and estimates have the greatest potential impact on our consolidated financial statements: revenue recognition, valuation allowances, specifically the allowance for doubtful accounts and deferred tax assets, impairment of goodwill and long-lived assets, restructuring costs and share-based compensation. All of these accounting policies, estimates and assumptions, as well as the resulting impact to our financial statements, have been discussed with our audit committee.

Revenue Recognition

We recognize revenue in accordance with current US GAAP that have been prescribed for the software industry, the principal policies of which are reflected in American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, “Software Revenue Recognition” (SOP 97-2), SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (SOP 81-1) and Securities and Exchange Commission Staff Accounting Bulletin No. 104 (SAB 104), “Revenue Recognition.” Revenue recognition requirements in the software industry are very complex and are subject to change. Our revenue recognition policy is one of our critical accounting policies because revenue is a key component of our results of operations and is based on complex rules that require us to make judgments and estimates. The application of SOP 97-2 requires judgment, including whether a software arrangement includes multiple elements, and if so, whether vendor-specific objective evidence (VSOE) of fair value of the elements of the arrangement exists. In applying our revenue recognition policy, we must determine which portions of our revenue to recognize currently and which portions to defer. In order to determine current and deferred revenue, we make judgments and estimates with regard to future deliverable products and services and the appropriate valuation for those products and services. Our judgments and estimates regarding future products and services could differ from actual events. Because terms of our licensing arrangements may differ for various customers, including possibly subscription-based or one-time royalty arrangements, we often may apply different recognition policies to different customer contracts depending upon those particular terms.

As indicated, we provide a comprehensive suite of professional engineering and consulting services on a worldwide basis in support of our product offerings. Such services may include one or more of the following: middleware porting, customization, implementation and integration; the design, development or construction of software and systems; and system maintenance and support. Professional services from software development contracts, customization services and implementation support are recognized generally on the percentage of completion basis in accordance with the provisions of SOP 81-1. If a contract involves the provision of multiple elements, total estimated contract revenues are allocated to each element based on the relative fair value of each element. In the event that fair value is not determinable for each service element of a multiple-element contract, the contract is considered to be one accounting unit. If it is reasonably assured that no loss will be incurred under the contract, we recognize service revenues using the percentage of completion method using a zero-profit methodology until the contract accounting services are complete. If the arrangement includes the future delivery of specified software products for which we do not have evidence of fair value, we recognize revenue on the completed contract method, upon delivery of the services and such specified deliverables. If total costs are estimated to exceed the estimated contract revenues for the arrangement, then a provision for the estimated loss is made in the period in which the loss first becomes apparent.

For fixed bid contracts under the percentage of completion method, the extent of progress towards completion is measured based on actual costs incurred to total estimated costs. The actual results could differ from the percentage estimates by the time a project is complete.

The recognition of revenues is partly based on our assessment of the probability of collection of the resulting accounts receivable balance. As a result, the timing or amount of revenue recognition may have been different if other assessments of the probability of collection of accounts receivable had been made at the time the transactions were recorded in revenue.

Valuation Allowances

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We consider our potential future taxable income and ongoing prudent and feasible tax planning strategies in assessing the amount of our valuation allowance. Currently, we maintain a partial valuation allowance on deferred tax assets. Adjustments may be required in the future if it becomes more likely than not that an amount of deferred tax assets is realizable.

Impairment of Goodwill and Long-lived Assets

Our long-lived assets include goodwill, property and equipment, other assets and other intangible assets, which are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and in the case of goodwill, annually. In estimating the fair value of our reporting units and assessing the recoverability of our long-lived assets, we consider changes in economic conditions and make assumptions regarding estimated future cash flows and other factors. The biggest assumption impacting estimated future cash flows is revenue. Estimates of future cash flows are highly subjective judgments that can be significantly impacted by changes in global and local business and economic conditions, operating costs, competition and demographic trends. If our estimates or underlying assumptions change in the future, we may be required to record additional impairment charges.

Restructuring Costs

Share-Based Compensation

We adopted the provisions of SFAS 123(R) during the first quarter of fiscal 2006, and have accounted for share-based compensation since January 1, 2006 in accordance with that accounting policy. We elected the modified-prospective method, under which prior periods are not revised for comparative purposes. Under the fair value recognition provisions of this statement, share-based compensation cost is measured based on the fair value of the award at the grant date and is recognized as expense using the accelerated amortization method over the requisite service period, which is generally the vesting period.

We currently use the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends.

Our computation of expected lives has been determined based on historical experience of similar awards, giving consideration to the contractual terms of the share-based awards, vesting schedules and expectations of future employee behavior. Our computation of expected volatility has been based on historical volatility of our stock. We have based the risk-free interest rate that we use in the option pricing model on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option pricing model. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest.

While we believe that these assumptions are reasonable, there can be no assurance that actual experience may not differ materially from these assumptions. If factors change and we employ different assumptions for estimating share-based compensation expense in future periods or if we decide to use a different valuation model, the future periods may differ significantly from what we have recorded in the current period and could materially affect our operating income, net income and net income per share.

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics not present in our option grants. Existing valuation models, including the Black-Scholes and lattice binomial models, may not provide reliable measures of the fair values of our share-based compensation. Consequently, there is a risk that our estimates of the fair values of our share-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those share-based payments in the future. Certain share-based payments, such as employee stock options, may expire worthless as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that are significantly higher than the fair values originally estimated on the grant date and reported in our financial statements. There currently is no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values, except for options subject to variable accounting.

The guidance in SFAS 123(R) and Staff Accounting Bulletin No. 107, “Interaction Between FASB Statement No. 123(R), and Certain SEC Rules and Regulations Regarding the Valuation of Share-based Payment Arrangement for Public Companies,” is relatively new. The application of these principles may be subject to further interpretation and refinement over time. There are significant differences among valuation models, and there is a possibility that we will adopt different valuation models in the future. This may result in a lack of consistency in future periods and materially affect the fair value estimate of share-based payments. It may also result in a lack of comparability with other companies that use different models, methods and assumptions.

See Note 12 for further information regarding the SFAS 123(R) disclosures.

Recent Accounting Pronouncements

In July 2006, the FASB issued FIN 48, an interpretation of FASB 109. FIN 48 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e. a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.

Upon adoption, the cumulative effect of applying the recognition and measurement provisions of FIN 48, if any, shall be reflected as an adjustment to the opening balance of retained earnings.

FIN 48 also requires expanded disclosures including identification of tax positions for which it is reasonably possible that total amounts of unrecognized tax benefits will significantly change in the next twelve months, a description of tax years that remain subject to examination by major tax jurisdiction, a tabular reconciliation of the total amount of unrecognized tax benefits at the beginning and end of each annual reporting period, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate and the total amounts of interest and penalties recognized in the statements of operations and financial position.

FIN 48 is effective for fiscal years beginning after December 15, 2006. We have not yet determined the impact of the recognition and measurement requirements of FIN 48 on our existing tax positions.

Three and Six Months Ended June 30, 2006 and 2005

Revenues

Revenues for the three months ended June 30, 2006 were $23.7 million, an increase of $2.8 million, or 13%, from $20.9 million for the same period in 2005. Revenues for the six months ended June 30, 2006 were $48.6 million, an increase of $4.9 million, or 11%, from $43.7 million for the same period in 2005. Revenues by line item were as follows (in millions):


	Three Months Ended June 30,										Six Months Ended June 30,
			% of					% of					% of					% of
	2006		revenues			2005		revenues			2006		revenues			2005		revenues
Royalties and licenses	$	14.7		62	%	$	12.5		60	%	$	31.1		64	%	$	27.9		64	%
Services and other		9.0		38	%		8.4		40	%		17.5		36	%		15.8		36	%

Total revenues	$	23.7		100	%	$	20.9		100	%	$	48.6		100	%	$	43.7		100	%

Royalties and licenses.We generally derive royalties from the sale of set-top boxes and other products that incorporate our software. Royalties are paid by either the set-top box manufacturer or by the network operator depending upon our payment arrangements with those customers. We recognize royalties upon notification (when we receive the royalty reports) of unit shipments or activation of our software by manufacturers or network operators. Royalty reports are generally received one quarter in arrears. For non-refundable prepaid royalties, we recognize revenues upon delivery of the software, provided all the criteria of SOP 97-2 and related accounting principles have been met. We have historically realized revenues through one-time royalty payments and ongoing license fees. In late 2005, we signed a licensing agreement with an India-based satellite and cable television provider, and in the second quarter of 2006, we signed a license agreement with Time Warner Cable, that will pay us under a subscription-based model, pursuant to which we are paid a monthly fee for each set-top box that is deployed by the network operator for so long as that box remains in use by the operator. We expect, in the future, to seek additional licensing arrangements of this nature, which, if we are successful, may affect our revenues over a period of time. We also derive license fees from the licensing of other software products, such as OpenTV Streamer, OpenTV Software Developers Kit, and our advanced advertising products. License fees are generally one-time purchases by our customers and can vary significantly from quarter to quarter. Our royalties usually result from several different types of arrangements. These may include: initial deployments by new customers, the activation of new subscribers by existing customers, the shipment of additional set-top boxes as replacements for older or defective set-top boxes or for purposes of simply upgrading existing set-top boxes, or sales of new products or services by the network operators that require new or updated set-top boxes. We have historically provided various types of volume discounts to our customers and expect that we will continue to do so in the future. Unless we are able to offset anticipated discounts through a change in product mix, upgrades to our software or other methods which typically enable us to charge higher fees, we may experience slower royalty growth as discounting is triggered. Specific royalty trends associated with set-top box deployments by our customers are difficult to discern in many cases, as we do not control or directly influence actual deployment schedules of our customers.

Royalties and license revenues for the three months ended June 30, 2006 increased $2.2 million, or 18%, to $14.7 million compared to the same period in 2005.

In Europe, Middle East and Africa, BSkyB directly and indirectly, primarily through four of our customers who sell set-top boxes to BSkyB, accounted for $2.8 million, or 19%, of our total royalties and license revenues for the three months ended June 30, 2006. Royalties and licenses for the region increased by $2.1 million from the same period in 2005, principally as a result of a net increase in set-top box royalty revenues. Royalties and licenses from BSkyB were $1.0 million higher than in 2005, primarily as a result of increased set-top box shipments that included our software for personal video recording, or PVR, by the manufacturers who manufacture set-top boxes for BSkyB. We typically generate higher royalty rates from set-top boxes that include our PVR software, such as the set-top boxes shipped by BSkyB. Royalties and licenses from other customers were $2.5 million higher than in 2005, primarily as a result of increased shipments. These increases were partially offset by a decrease of $1.4 million in royalty and license revenues from Sky Italia, which resulted from a reduction in set-top box shipments and in the royalty rate paid by Sky Italia over the course of 2005; that reduction in royalty rate related to a one-time volume discount we offered Sky Italia when it became a customer.

In the Americas region, EchoStar accounted for $3.4 million, or 23%, of our total royalties and license

revenues for the three months ended June 30, 2006. Royalties and licenses for the region were the same as for the three months ended June 30, 2005. Royalties and license revenues from EchoStar were $0.1 million less than for the same period in 2005. This modest decline in total revenues from EchoStar for the period were affected, in part, by a reduction in EchoStar set-top box shipments in 2006 compared to 2005. Royalty payments we receive from EchoStar are amortized over the seven-year term of our EchoStar agreements because EchoStar has a right to receive a limited number of unspecified future applications developed by us. Until we are able to recognize the full royalty revenue reported by EchoStar, which would occur upon expiration of the seven-year agreement term, a portion of the amounts that we invoice to EchoStar is recorded as deferred revenue on our balance sheet and amortized over the remaining life of the agreement. License revenues from advanced advertising related products accounted for an increase of $0.7 million during the period, principally as a result of our acquisition of CAM Systems, the CAMS Acquisition, in September 2005, while other customers accounted for a net decrease of $0.6 million.

For the three months ended June 30, 2006, royalties and licenses in the Asia Pacific region were $2.1 million, an increase of $0.1 million from the same period in 2005. This increase resulted primarily from net additional royalties from certain customers in the region.

Royalties and license revenues for the six months ended June 30, 2006 increased $3.2 million, or 11%, to $31.1 million compared to the same period in 2005.

In Europe, Middle East and Africa, BSkyB directly and indirectly, primarily through four of our customers who sell set-top boxes to BSkyB, accounted for $6.6 million, or 21%, of our total royalties and license revenues for the six months ended June 30, 2006. Royalties and licenses for the region increased by $1.1 million from the same period in 2005, principally as a result of a net increase in set-top box royalty revenues. Royalties and licenses from BSkyB were $2.0 million higher than in 2005, primarily as a result of increased PVR shipments. Royalties and licenses from other customers were $3.2 million higher than in 2005, primarily as a result of increased shipments. These increases were partially offset by a decrease of $4.1 million in royalty and license revenues from Sky Italia which resulted from a reduction in set-top box shipments and in the royalty rate paid by Sky Italia in 2006 compared to 2005.

In the Americas region, EchoStar accounted for $6.9 million, or 22%, of our total royalties and license revenues for the six months ended June 30, 2006. Royalties and licenses for the region increased by $1.4 million from the same period in 2005. Royalty and license revenues from EchoStar were the same for the same period in 2005. Despite increased amortization of EchoStar payments during 2006, total revenues from EchoStar were affected, in part, by a reduction in EchoStar set-top box shipments in 2006 compared to 2005. License revenues from advanced advertising related products accounted for an increase of $1.4 million during the period, principally as a result of the CAMS Acquisition.

For the six months ended June 30, 2006, royalties and licenses in the Asia Pacific region increased by $0.7 million from the same period in 2005. Royalties and licenses increased by $0.2 million from shipments of our integrated browser in certain digital television sets distributed within Japan, and royalties and licenses from other customers increased by $0.5 million.

Services and Other.Services and other revenues consist primarily of professional services, maintenance and support, training, service usage fees and revenue shares and programming fees. Professional service revenues are generally derived from consulting engagements for set-top box manufacturers, network operators and system integrators. Maintenance, support and training revenues are generally realized as services are provided to set-top box manufacturers and network operators. The decision by a set-top box manufacturer to purchase maintenance and support from us largely depends on whether such manufacturer is actively shipping set-top boxes with our software or reasonably expects to do so in quantities large enough to justify payment of these amounts, which, in both cases, is dependent upon such manufacturer’s supply contracts with network operators and set-top box demand by the network operator. Service usage fees and revenue shares are generally derived from our PlayJam games channels, our betting and gaming channels, and revenue shares for advertising and other interactive services. We also derive programming fees from our NASCAR agreement and from other programmers.

Services and other revenues for the three months ended June 30, 2006 increased $0.6 million, or 7%, to $9.0 million compared to the same period in 2005.

We realized an increase of $1.2 million in service and other revenues from advanced advertising related services and support for this three month period related to products acquired through our CAMS Acquisition. This increase was partially offset by a decrease of $0.6 million in PlayJam games channel fees resulting from increased competition and a termination of service on our PlayJam games channel in France that we initiated in late 2005. We also realized increases of $0.7 million in maintenance and support fees from other customers which offset net decreases of $0.7 million in fees from one-time middleware and integrated technologies consulting service engagements.

Services and other revenues for the six months ended June 30, 2006 increased $1.7 million, or 11%, to $17.5 million compared to the same period in 2005.

We realized an increase of $2.4 million in service and other revenues from advanced advertising related services and support for this six month period related to products acquired through our CAMS Acquisition. We also realized an increase of $1.1 million in maintenance and support fees from other customers. These increases were partially offset by a decrease of $1.6 million in PlayJam games channel fees resulting from increased competition and a termination of service on our PlayJam games channel in France that we initiated in late 2005, and by a net decrease of $0.2 million in fees from one-time middleware and integrated technologies consulting service engagements.

Operating Expenses

Our total operating expenses, which include cost of revenues, for the three months ended June 30, 2006 were $26.9 million, an increase of $1.9 million, or 8%, from $25.0 million in 2005. For the 2006 period, we included $1.0 million in share-based compensation expenses that were not included within the same period in 2005. As a percentage of revenues, total operating expenses, including share-based compensation expenses in 2006, declined from 120% to 114%. Our total operating expenses for the six months ended June 30, 2006, increased $3.7 million, or 7%, to $54.6 million from the same period in 2005. For the 2006 period, we included $2.1 million in share-based compensation expenses that were not included within the same period in 2005. As a percentage of revenues, total operating expenses, including share-based compensation expenses in 2006 decreased from 116% to 112%.

Operating expenses by line item were as follows (in millions):


	Three Months Ended June 30,										Six Months Ended June 30,
			% of					% of					% of					% of
	2006		revenues			2005		revenues			2006		revenues			2005		revenues
Cost of royalties and licenses	$	1.7		7	%	$	1.7		8	%	$	3.5		7	%	$	3.4		8	%
Cost of services and other (1)		9.4		40	%		5.8		28	%		18.4		38	%		12.9		29	%

Total cost of revenues		11.1		47	%		7.5		36	%		21.9		45	%		16.3		37	%
Research and development (1)		7.7		33	%		8.1		39	%		16.0		33	%		16.8		38	%
Sales and marketing (1)		3.3		14	%		3.3		16	%		6.0		12	%		6.6		15	%
General and administrative (1)		4.3		18	%		4.0		19	%		9.6		20	%		8.2		19	%
Restructuring and impairment costs		—		—	%		1.7		8	%		—		—	%		2.2		5	%
Amortization of intangible assets		0.5		2	%		0.4		2	%		1.1		2	%		0.8		2	%

Total operating expenses	$	26.9		114	%	$	25.0		120	%	$	54.6		112	%	$	50.9		116	%

(1) Includes the following share-based compensation expense primarily due to the adoption of FAS 123(R):


Cost of services and other	$	0.2	$	—	$	0.4	$	—
Research and development		0.2		—		0.4		—
Sales and marketing		0.1		—		0.3		—
General and administrative		0.5		—		1.0		—

Total share-based compensation expense	$	1.0	$	—	$	2.1	$	—

Cost of Royalties and Licenses.Cost of royalties and licenses consist primarily of materials and shipping costs, amortization of developed technology and patents and patent-related legal costs.

Cost of royalties and licenses were $1.7 million for both the three months ended June 30, 2006 and 2005. As a percentage of revenues, cost of royalties and licenses decreased to 7% from 8% in the same period in 2005. Amortization of developed technologies increased by $0.3 million as a result of our CAMS Acquisition, which was offset by a decrease in patent-related legal costs of $0.3 million.

Cost of royalties and licenses for the six months ended June 30, 2006 increased $0.1 million, or 3%, to $3.5 million compared to the same period in 2005. As a percentage of revenues, cost of royalties and licenses

decreased to 7% from 8% in the same period in 2005. Amortization of developed technologies increased by $0.7 million as a result of our CAMS Acquisition, which was offset by a decrease in patent-related legal costs of $0.6 million.

Cost of Services and Other.Cost of services and other consist primarily of headcount and headcount-related costs associated with maintenance and support and professional services engagements, consulting and subcontractor costs, third party material costs, depreciation and network infrastructure and bandwidth costs of our interactive games and betting channels.

Cost of services and other for the three months ended June 30, 2006 increased $3.6 million, or 62%, to $9.4 million compared to the same period in 2005. As a percentage of revenues, cost of services and other increased to 40% from 28% in the same period in 2005. Headcount and headcount-related costs increased $2.9 million, due to an increase in hiring to staff new and ongoing projects and a reallocation of staff from research and development to cost of services that we made in 2006. We also incurred an additional $0.2 million of share-based compensation as a result of the adoption of SFAS 123(R) in 2006. In addition, we experienced an increase of $0.6 million in consulting and subcontractor costs associated with professional services engagements. These increases were partially offset by a net decrease of $0.1 million in network infrastructure and bandwidth costs.

Cost of services and other for the six months ended June 30, 2006 increased $5.5 million, or 43%, to $18.4 million compared to the same period in 2005. As a percentage of revenues, cost of services and other increased to 38% from 29% in the same period in 2005. Headcount and headcount-related costs increased $5.0 million, due to an increase in hiring to staff new and ongoing projects and a reallocation of staff from research and development in 2006. We also incurred an additional $0.3 million of share-based compensation as a result of the adoption of SFAS 123(R) in 2006. In addition, we experienced an increase of $1.1 million in consulting and subcontractor costs associated with professional services engagements. These increases were partially offset by a net decrease of $0.9 million in network infrastructure and bandwidth costs.

Research and Development.Research and development expenses consist primarily of headcount and headcount-related overhead costs, travel, consulting and subcontractor costs incurred for both new product development and enhancements to our range of software and application products.

We believe that research and development spending is critical to remain competitive in the marketplace. We will continue to focus on the timely development of new and enhanced interactive television products for our customers, and we plan to continue investing at levels that are adequate to develop our technologies and product offerings.

Research and development expenses for the three months ended June 30, 2006 decreased $0.4 million, or 5%, to $7.7 million compared to the same period in 2005. As a percentage of revenues, research and development expenses decreased to 33% from 39% in the same period in 2005. The decrease was primarily the a result of a reallocation of staff to cost of services and other in 2006, which offset an increase in headcount-related costs of $0.2 million for share-based compensation included as a result of the adoption of SFAS 123(R) in 2006.

Research and development expenses for the six months ended June 30, 2006 decreased $0.8 million, or 5%, to $16.0 million compared to the same period in 2005. As a percentage of revenues, research and development expenses decreased to 33% from 38% in the same period in 2005. The decrease was primarily the result of a reallocation of staff to cost of services and other in 2006, which offset an increase in headcount-related costs of $0.4 million for share-based compensation included as a result of the adoption of SFAS 123(R) in 2006.

Sales and Marketing.Sales and marketing expenses consist primarily of advertising and other marketing-related expenses, headcount and headcount-related overhead costs, travel, consulting and subcontractor costs.

Sales and marketing expenses were $3.3 million for both the three months ended June 30, 2006 and 2005. As a percentage of revenues, sales and marketing expenses decreased to 14% from 16% in the same period in 2005. A decrease in headcount and headcount-related overhead costs was offset by an increase in headcount-related costs of $0.1 million for share-based compensation included as a result of the adoption of SFAS 123(R) in 2006.

Sales and marketing expenses for the six months ended June 30, 2006 decreased $0.6 million, or 9%, to $6.0 million compared to the same period in 2005. As a percentage of revenues, sales and marketing expenses decreased to 12% from 15% in the same period in 2005. The decrease is primarily attributable to a decrease in

headcount and headcount-related overhead costs, which offset an increase in headcount-related costs of $0.3 million for share-based compensation included as a result of the adoption of SFAS 123(R) in 2006.

General and Administrative.General and administrative expenses consist primarily of headcount and headcount-related overhead costs, fees for professional services, including litigation costs, and provision for doubtful accounts.

General and administrative expenses for the three months ended June 30, 2006 increased $0.3 million, or 8%, to $4.3 million compared to the same period in 2005. As a percentage of revenues, general and administrative expenses decreased to 18% from 19% in the same period in 2005. Professional fees for consulting and for work related to our audit and Sarbanes-Oxley compliance efforts accounted for an increase of $0.2 million, with an additional increase in headcount-related overhead costs of $0.5 million for share-based compensation costs included as a result of the adoption of SFAS 123(R) in 2006. That aggregate increase was partially offset by a decrease of $0.4 million in headcount and headcount-related overhead costs.

General and administrative expenses for the six months ended June 30, 2006 increased $1.4 million, or 17%, to $9.6 million compared to the same period in 2005. As a percentage of revenues, general and administrative expenses increased to 20% from 19% in the same period in 2005. Professional fees for consulting, legal services and for work related to our audit and Sarbanes-Oxley compliance efforts accounted for an increase of $1.0 million, with an additional increase in headcount-related overhead costs of $1.0 million for share-based compensation costs included as a result of the adoption of SFAS 123(R) in 2006. That aggregate increase was partially offset by a decrease of $0.6 million in headcount and headcount-related overhead costs.

Restructuring and Impairment Costs. For the three months ended June 30, 2005, there was a restructuring and impairment provision of $1.7 million for excess office space in New York City, net of estimated sub-lease income and existing reserves. That lease was assumed through our acquisition of ACTV in 2003. In the three months ended March 31, 2005, we had recorded a restructuring and impairment provision of $0.5 million relating to the closure of our Lexington, Massachusetts facility.

Amortization of Intangible Assets. Intangible assets are amortized on a straight-line basis over the estimated useful life of three to 13 years. As noted above, cost of royalties and licenses includes amounts relating to the amortization of developed technologies and patents.

For the three months ended June 30, 2006, amortization of intangible assets was $0.5 million, an increase of $0.1 million, or 25%, from $0.4 million for the same period in 2005. The increase resulted from the inclusion of certain intangible assets from our CAMS Acquisition.

For the six months ended June 30, 2006, amortization of intangible assets was $1.1 million, an increase of $0.3 million, or 38%, from $0.8 million for the same period in 2005. The increase resulted from the inclusion of certain intangible assets from our CAMS Acquisition.

Interest Income, Other Expense and Minority Interest

As a result of increased interest rates, interest income was $0.9 million for the three months ended June 30, 2006 and $1.5 million for the six months ended June 30, 2006, compared with $0.4 million and $ 0.7 million, respectively, for the same periods in the prior year.

Income Taxes

We estimate that we had net United States federal tax loss carryforwards of approximately $312 million at the end of 2005, although our ability to make use of those tax loss carryforwards may be limited under applicable tax regulations. The calculation of those tax loss carryforwards is a complex matter and may require a reassessment from time to time, which could result in changes to that estimate. Notwithstanding those federal tax loss carryforwards, we are subject to income taxes in certain state and foreign jurisdictions and we have foreign taxes withheld from certain royalty payments. Our income tax expense was nominal for the three months ended June 30, 2006. During the second quarter, we obtained tax refunds from amended returns in Australia and a Swiss ruling on the intercompany cost-sharing agreement to increase the Swiss net operating loss. Accordingly, we recognized tax benefits of $0.5 million and $0.7 million, respectively. These benefits were offset by foreign and state taxes of approximately $1.2 million. Our income tax expense of $0.7 million for the three months ended June 30, 2005 was primarily attributable to foreign and state taxes. Our income tax expense of $0.9 million and $1.2 million for the six months ended June 30, 2006 and 2005, respectively, was primarily attributable to foreign and state taxes, net of the benefits described above.

Business Segment Results

Our chief operating decision maker is our Chief Executive Officer. Our management assesses our results and financial performance, and prepares our internal budgeting reports, on the basis of three segments: the middleware and integrated technologies business, the applications business, and the BettingCorp business. We have prepared this segment analysis in accordance with SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information.”

Our middleware and integrated technologies business includes our middleware products and the related technologies that are customarily integrated as “extensions” of that middleware. Our applications business includes our PlayJam, advanced advertising and NASCAR products and related technologies. Our BettingCorp business includes our fixed-odds and other wagering gaming applications, the development and operation of our “Ultimate One” platform and the marketing of our evolving Participation TV product that is based on the Ultimate One technology.

Our management reviews and assesses the “contribution margin” of each of these segments, which is not a financial measure calculated in accordance with US GAAP. We define “contribution margin,” for these purposes, as segment revenues less related, direct or indirect, allocable costs, including headcount and headcount-related overhead costs, consulting and subcontractor costs, travel, marketing and network infrastructure and bandwidth costs. There are significant judgments management makes with respect to the direct and indirect allocation of costs that may affect the calculation of contribution margins. While management believes these and other related judgments are reasonable and appropriate, others could assess such matters in ways different than our company’s management. Contribution margin is a non-US GAAP financial measure which excludes unallocated corporate overhead, interest, taxes, depreciation and amortization, amortization of intangible assets, share-based compensation, impairment of goodwill, impairment of intangibles, other income, minority interest, restructuring provisions, and unusual items such as contract amendments that mitigated potential loss positions. These exclusions, reflect costs not considered directly allocable to individual business segments and result in a definition of “contribution margin” that does not take into account the substantial costs of doing business. Management believes that segment contribution margin is a helpful measure in evaluating operational performance for our company. While we may consider “contribution margin” to be an important measure of comparative operating performance, this measure should be considered in addition to, but not as a substitute for, loss from operations, net loss, cash flow and other measures of financial performance prepared in accordance with accounting principles generally accepted in the United States that are otherwise presented in our financial statements. In addition, our calculation of “contribution margin” may be different from the calculation used by other companies and, therefore, comparability may be affected.

Revenues and contribution margin, as reconciled to net loss on a US GAAP basis, by segment were as follows (in millions):


	Three Months Ended June 30,												Six Months Ended June 30,
				% of segment						% of segment						% of segment						% of segment
	2006			revenue			2005			revenue			2006			revenue			2005			revenue
Revenues:
Middleware and integrated technologies
Royalties and licenses	$	13.8			76	%	$	12.4			76	%	$	29.4			78	%	$	27.8			79	%
Services and other		4.4			24	%		4.0			24	%		8.4			22	%		7.4			21	%

Subtotal — Middleware and integrated technologies		18.2			100	%		16.4			100	%		37.8			100	%		35.2			100	%

Applications
Royalties and licenses	$	0.9			19	%	$	0.1			3	%	$	1.7			19	%	$	0.1			2	%
Services and other		3.9			81	%		3.1			97	%		7.4			81	%		6.2			98	%

Subtotal — Applications		4.8			100	%		3.2			100	%		9.1			100	%		6.3			100	%

BettingCorp
Royalties and licenses	$	—			—	%	$	—			—	%	$	—			—	%	$	—			—	%
Services and other		0.7			100	%		1.3			100	%		1.7			100	%		2.2			100	%

Subtotal — BettingCorp		0.7			100	%		1.3			100	%		1.7			100	%		2.2			100	%


Total Revenue	$	23.7					$	20.9					$	48.6					$	43.7


Contribution margin:
Middleware and integrated technologies	$	6.5					$	6.8					$	14.0					$	16.0
Applications		—						(0.8	)					(0.6	)					(2.8	)
BettingCorp		(0.9	)					(0.9	)					(1.7	)					(2.3	)


Total contribution margin		5.6						5.1						11.7						10.9

Unallocated corporate overhead		(5.2	)					(5.2	)					(10.5	)					(11.2	)
Restructuring and impairment costs		—						(1.7	)					—						(2.2	)
Depreciation and amortization		(0.8	)					(1.1	)					(1.5	)					(2.2	)
Amortization of intangible assets		(1.8	)					(1.3	)					(3.6	)					(2.6	)
Amortization of share-based compensation		(1.0	)					—						(2.1	)					—
Interest income		0.9						0.4						1.5						0.7
Other (expense) / income, net		(0.2	)					0.5						(0.2	)					0.4
Minority interest		—						—						—						0.1


Loss before income taxes		(2.5	)					(3.3	)					(4.7	)					(6.1	)
Income tax expense		—						(0.7	)					(0.9	)					(1.2	)


Net loss	$	(2.5	)				$	(4.0	)				$	(5.6	)				$	(7.3	)

Middleware and integrated technologies

Revenues from the middleware and integrated technologies business for the three months ended June 30, 2006 were $18.2 million, an increase of $1.8 million, or 11%, from $16.4 million for the same period in 2005. For the six months ended June 30, 2006, revenues from the middleware and integrated technologies business increased $2.6 million, or 7%, to $37.8 million compared to the same period in 2005.

Royalties and licenses from set-top box shipments and other product sales accounted for 76% of segment revenues for both the three months ended June 30, 2006 and 2005. For the six months ended June 30, 2006, royalties and licenses decreased as a percentage of segment revenues to 78% from 79% in the same period for 2005. Royalties and licenses from the middleware and integrated technologies business account for the majority of our overall royalties and licenses, and increased in 2006 due to the additional shipments and amortization described under “Royalties and licenses” above.

Services and other consists primarily of professional services consulting engagements for set-top box manufacturers, network operators and system integrators and maintenance, support and training. Services and other revenues accounted for 24% of segment revenues for both the three months ended June 30, 2006 and 2005. For the six months ended June 30, 2006, royalties and licenses increased as a percentage of segment revenues to 22% from 21% in the same period for 2005. The increases in 2006 were due to discrete middleware professional service fees and maintenance and support fees from customers in 2006.

Total contribution margin for the middleware and integrated technologies business decreased in 2006, primarily as a result of higher headcount and headcount-related costs, and higher consulting and subcontractor costs associated with billable professional services engagements, which were included in cost of services and other and research and development expenses above.

Applications

Revenues from the applications business for the three months ended June 30, 2006 were $4.8 million, an increase of $1.6 million, or 50%, from $3.2 million for the same period in 2005. For the six months ended June 30, 2006, revenues from the applications business increased $2.8 million, or 44%, to $9.1 million compared to the same period in 2005.

For the three months ended June 30, 2006, revenues from products acquired through our CAMS Acquisition, accounted for $0.7 million of application licenses and $1.2 million of application services. This increase in application services was offset by a $0.6 million decrease in PlayJam games channel fees resulting from increased competition and a termination of service on our PlayJam games channel in France that we initiated in late 2005. The remaining $0.3 million was as a result of increased revenues from other advanced advertising customers.

For the six months ended June 30, 2006, revenues from products acquired through our CAMS Acquisition, accounted for $1.4 million of application licenses and $2.4 million of application services. This increase in application services was offset by a $1.6 million decrease in PlayJam games channel fees resulting from increased competition and termination of service on our PlayJam games channel in France that we initiated in late 2005. The remaining $0.4 million was as a result of increased revenues from other advanced advertising customers.

Total contribution loss for the applications business improved in 2006, primarily as a result of increased revenues, including revenues net of related directly allocable costs from our CAMS Acquisition, as described above, and as a result of reduced network infrastructure and bandwidth costs.

BettingCorp

Revenues from the BettingCorp business for the three months ended June 30, 2006 were $0.7 million, a decrease of $0.6 million, or 46%, from $1.3 million for the same period in 2005. Revenues from the BettingCorp business for the six months ended June 30, 2006 were $1.7 million, a decrease of $0.5 million, or 23%, from $2.2 million for the same period in 2005. The decrease was primarily a result of one-off professional services fees recorded in the three months ended June 30, 2005.

For the three months ended June 30, 2006, total contribution loss remained the same as in the three months ended June 30, 2005, as reduced network infrastructure and bandwidth costs were offset by reduced revenues as described above. For the six months ended June 30, 2006, total contribution loss for the BettingCorp business improved primarily as a result of reduced network infrastructure and bandwidth costs which were partially offset by the decline in revenues described above.

Deferred Revenue

When we apply our revenue recognition policy, we must determine what portions of our revenue are recognized currently and which portions must be deferred, principally in terms of SOP 97-2, SOP 81-1 and SAB 104. In order to determine current and deferred revenue, we make judgments and estimates with regard to future deliverable products and services and the appropriate valuation for those products and services.

We entered into multiple-element arrangements for products and services with customers including TimeWarner Cable, Essel Group in India (which operates the DishTV network in India), EchoStar, United GlobalCom (or UGC, a subsidiary of Liberty Global), FOXtel, Austar, PartiTV and Comcast. Portions of the amounts that we have invoiced to TimeWarner, Essel Group, EchoStar, UGC, FOXtel and Austar under those agreements have been deferred and will be included as revenue over time in our middleware and integrated technologies business. Portions of those amounts that we have invoiced to Comcast under our agreement with Comcast will be included as revenue over time in our applications business. Portions of the amounts that we have invoiced to PartiTV under our agreements with them will be included as revenue over time in our BettingCorp business.

The arrangements with these customers included maintenance and support, for which vendor specific objective evidence of fair value did not exist. In addition, several of these arrangements provided for the delivery of specified future products, for which such evidence of fair value also did not exist. All revenues under arrangements for which we are obligated to provide specified future products are initially deferred. Upon final delivery of all specified products under each arrangement, we will recognize revenue either over the remaining contractual period of support or over the remaining period during which maintenance and support is expected to be provided.

As of June 30, 2006, we recorded $24.1 million in deferred revenue (including both current and non-current portions) compared with $22.6 million at the end of 2005. Of that total deferred amount at June 30, 2006, $18.7 million, or 78%, was deferred as a result of the arrangements with TimeWarner, Essel Group, EchoStar, UGC, FOXtel, Austar, PartiTV and Comcast described in the preceding paragraphs. The remaining $5.4 million, or 22%, of our deferred revenue as of June 30, 2006 was principally attributable to other maintenance and support and professional services arrangements with other customers, which are typically short-term in nature.

Based on our current estimates of final delivery for all specified products, we expect the following recognition of the $18.7 million of unearned revenue at June 30, 2006 resulting from the TimeWarner, Essel Group, EchoStar, UGC, FOXtel, Austar, PartiTV and Comcast arrangements:


	Expected
	Recognition
	of Unearned
Year Ending December 31,	Revenue
	(In millions)
Remaining six months of 2006	$	4.7
2007		4.8
Thereafter		9.2

	$	18.7

As noted in our critical accounting policies, our assumptions and judgments regarding future products and services could differ from actual events. As a result, the actual revenue recognized from these arrangements, and the timing of that recognition, may differ from the amounts identified in this table. While management believes that this information is a helpful measure in evaluating the company’s performance, investors should understand that unless, and until, the company is actually able to recognize these amounts as revenue in accordance with US GAAP, there can be no assurance that the conditions to recording that revenue will be satisfied.

Liquidity and Capital Resources

We expect to be able to fund our operating and capital requirements for at least the next twelve months by using existing cash balances and short-term and long-term marketable debt securities, if our assumptions about our revenues, expenses and cash commitments are generally accurate. Because we cannot be certain that our assumptions about our business or the interactive television market in general will prove to be accurate, our funding requirements may differ from our current expectations.

As of June 30, 2006, we had cash and cash equivalents of $48.0 million, which was an increase of $0.8 million from the balance at December 31, 2005, and a decrease of $7.7 million from the balance at June 30, 2005. Taking into account short-term and long-term marketable debt securities of $17.0 million, our cash, cash equivalents and marketable debt securities were $65.0 million as of June 30, 2006, compared with $64.5 million as of December 31, 2005, and $66.6 million as of June 30, 2005. Our primary source of cash is receipts from revenues. The primary uses of cash are payroll, general operating expenses and cost of revenues.

Our cash balances as of June 30, 2006 were positively affected by $1.6 million in cash generated from operating activities, from $0.8 million from the issuance of ordinary shares in connection with option exercises and by the net sale of $0.3 million of marketable debt securities. These increases were used to fund $1.7 million of capital expenditures. Our cash balances as of June 30, 2005 were positively affected by a $5.6 million in cash generated from operating activities, and by $14.6 million in investing activities, primarily from the sale of marketable debt securities.

Cash generated from operating activities was $1.6 million for six months ended June 30, 2006, compared with cash generated from operating activities of $5.6 million for the six months ended June 30, 2005. The reduction in cash generated from operations was primarily due to a lower favorable movement in working capital as compared to the same period of 2005, primarily from a significant reduction in accounts receivable in 2005, and from a greater increase in deferred revenues in 2005, which was partially offset by a reduced net loss from increased revenues and reduced operating expenses in 2006.

Cash used in investing activities was $1.4 million for the six months ended June 30, 2006, compared with cash provided by investing activities of $14.6 million for the six months ended June 30, 2005. In 2006, cash used to purchase property and equipment of $1.7 million was partially offset by the net sale of $0.3 million of marketable debt securities. For 2005, net proceeds from the sale of marketable debt securities of $16.4 million were used to fund the purchase of property and equipment of $1.5 million and a private equity investment of $0.3 million.

Cash provided from financing activities of $0.8 million for the six months ended June 30, 2006, resulted from $0.8 million of funds received from the issuance of ordinary shares in connection with option exercises.

We use professional investment management firms to manage most of our invested cash. The portfolio consists of highly liquid, high-quality investment grade securities of the United States government and agencies, corporate notes and bonds and certificates of deposit that predominantly have maturities of less than three years. All investments are made in accordance with our written investment policy, which has been approved by our board of directors.

Commitments and Contractual Obligations

Information as of June 30, 2006 concerning the amount and timing of required payments under our contractual obligations is summarized below (in millions):


			Due in		Due in		Due in		Due in 2011
	Total		2006		2007-2008		2009-2010		Or After
Operating leases obligations	$	15.8	$	2.4	$	8.7	$	4.5	$	0.2
Noncancellable purchase obligations		1.5		1.4		0.1		—		—


Total contractual obligations	$	17.3	$	3.8	$	8.8	$	4.5	$	0.2

In the ordinary course of business, we enter into various arrangements with vendors and other business partners for bandwidth, marketing, and other services. Future minimum commitments under these arrangements as of June 30, 2006 were $1.4 million for the remaining six months of 2006 and $0.1 million for the year ending December 31, 2007. In addition, we also have arrangements with certain parties that provide for revenue-sharing payments.

As of June 30, 2006, we had three standby letters of credit aggregating approximately $1.2 million, two of which were issued to landlords of our leased properties, and one of which was issued to a sublessee at our New York facility which we vacated in the second quarter of 2005. We pledged approximately $0.5 million of restricted cash and one certificate of deposit of $1.0 million as collateral in respect of these standby letters of credit.

Indemnifications

In the normal course of our business, we provide indemnification to customers, subject to limitations, against claims of intellectual property infringement made by third parties arising from the use of our products. Costs related to these indemnification provisions are sometimes difficult to estimate. While we have not historically experienced significant costs for these matters, there may be occasions in the ordinary course of our business where we assume litigation and other costs on behalf of our customers that could have an adverse effect on our financial position depending upon the outcome of any specific matter. We ordinarily seek to limit our liabilities in those arrangements in various respects, including monetarily, but the costs associated with any type of intellectual property indemnification arrangement continue to escalate in general, and especially in the technology sector.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to financial market risks. This exposure relates to our holdings of fixed income investment securities, investments in privately-held companies and assets and liabilities denominated in foreign currencies.

Fixed Income Investment Risk

We own a fixed income investment portfolio with various holdings, types and maturities. These investments are generally classified as available-for-sale. Available-for-sale securities are recorded on the balance sheet at fair value with unrealized gains or losses, net of tax, included as a separate component of the balance sheet line item titled “accumulated other comprehensive loss.”

Most of these investments consist of a diversified portfolio of highly liquid United States dollar-denominated debt securities classified by maturity as cash equivalents, short-term investments or long-term investments. These debt securities are not leveraged and are held for purposes other than trading. Our investment policy limits the maximum maturity of securities in this portfolio to three years and weighted-average maturity to 15 months. Although we expect that market value fluctuations of our investments in short-term debt obligations will not be significant, a sharp rise in interest rates could have a material adverse effect on the value of securities with longer maturities in the portfolio. Alternatively, a sharp decline in interest rates could have a material positive effect on the value of securities with longer maturities in the portfolio. We do not currently hedge interest rate exposures.

Our investment policy limits investment concentration in any one issuer (other than with respect to United States treasury and agency securities) and also restricts this part of our portfolio to investment grade obligations based on the assessments of rating agencies. There have been instances in the past where the assessments of rating agencies have failed to anticipate significant defaults by issuers. It is possible that we could lose most or all of the value in an individual debt obligation as a result of a default. A loss through a default may have a material impact on our earnings even though our policy limits investments in the obligations of a single issuer to no more than five percent of the value of our portfolio.

The following table presents the hypothetical changes in fair values in our portfolio of investment securities with original maturities greater than 90 days as of June 30, 2006 using a model that assumes immediate sustained parallel changes in interest rates across the range of maturities (in thousands):

Valuation of

Fair Value as

Securities if

of June 30,

Interest Rates

2006

Decrease 1%

Increase 1%

Decrease 2%

Increase 2%

Marketable debt securities

$16,970

$17,134

$16,806

$17,299

$16,641

The modeling technique used in the above table estimates fair values based on changes in interest rates assuming static maturities. The fair value of individual securities in our investment portfolio is likely to be affected by other factors including changes in ratings, market perception of the financial strength of the issuers of such securities and the relative attractiveness of other investments. Accordingly, the fair value of our individual securities could also vary significantly in the future from the amounts indicated above.

Foreign Currency Exchange Rate Risk

We transact business in various foreign countries. We incur a substantial majority of our expenses, and earn most of our revenues, in United States dollars. A majority of our worldwide customers are invoiced and make payments in United States dollars, with the remainder invoiced by our non-United States business units under contracts that require payments to be remitted in local currency.

We have a foreign currency exchange exposure management policy. The policy permits the use of foreign currency forward exchange contracts and foreign currency option contracts and the use of other hedging procedures in connection with hedging foreign currency exposures. The policy requires that the use of derivatives and other procedures qualify for hedge treatment under SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities.”We regularly assess foreign currency exchange rate risk that results from our global operations. We did not use foreign currency forward exchange contracts, options in hedging foreign currency exposures, or other hedging procedures, during the first six months of 2006. We expect over time, however, that a more significant number of our European customers may seek to pay us in Euros, which may affect our risk profile and require us to make use of appropriate hedging strategies. While we anticipate a certain portion of our revenues in 2006 will be paid to us in Euros, we do not believe that such payments will require a material change in our existing hedging policies.

Item 4. Controls and Procedures

Management of the company is responsible for establishing and maintaining adequate internal control over financial reporting (“Internal Control”) as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Management understands that a material weakness is a significant deficiency (within the meaning of Public Company Accounting Oversight Board Auditing Standard No. 2), or combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

Management assessed the effectiveness of the company’s Internal Control as of December 31, 2005 using the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework and identified certain material weaknesses in its Annual Report on Form 10-K for the fiscal year ended December 31, 2005. These material weaknesses were described as follows, and this information should be read together with management’s complete report as included with the company’s Annual Report on Form 10-K:

•The company’s financial reporting process did not provide for effective account analysis for certain financial statement accounts. Specifically, the accounting for accruals, long-term other assets, and deferred-tax assets was not adequately analyzed. This material weakness resulted in errors, which were material in the aggregate, in the company’s preliminary 2005 financial statements.

•The company did not have sufficient personnel with adequate technical expertise to analyze effectively, and review in a timely manner, its accounting for revenue and income taxes. These material weaknesses resulted in material errors in the company’s accounting for: (a) certain complex multiple-element software license and professional service arrangements; and (b) income taxes and related financial statement note disclosures.

Based on those assessments and the relevant criteria, management concluded that, as of December 31, 2005, the company’s Internal Control was not effective.

Based on these findings, management has initiated remediation efforts with respect to each of the material weaknesses referred to above. We continue to assess the adequacy and effectiveness of those remediation efforts.

Remediation of Material Weakness Related to Certain Ineffective Account Analysis in Financial Reporting Process

Management continues to review and assess its procedures to address the financial reporting and close process.

These procedures require the company’s financial group to collect, analyze and monitor all necessary and relevant supporting documentation for accrual balances, long-term other assets and deferred tax assets and any adjustments. Management has initiated the introduction of additional procedures to ensure a more thorough review of financial data in the financial reporting and close process. Management expects to continue reviewing and assessing its remediation efforts through the course of the year with respect to this identified weakness. Management does not expect to be able to report that its Internal Control is effective until it is able to remediate this matter.

Remediation of Material Weakness Related to Insufficient Personnel with Technical Expertise

In the first half of 2006, management also began to evaluate its finance personnel, develop a plan to enhance the current staff’s capabilities and assess the extent of additional resources with appropriate accounting knowledge and experience that were required.

Management expects to continue evaluating and implementing remediation efforts through the course of the year with respect to this identified weakness. Management does not expect to be able to report that its Internal Control is effective until it is able to remediate this matter.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (“Disclosure Controls”), as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed in our Exchange Act reports, including the company’s Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In designing and evaluating the Disclosure Controls, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) and 15d-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. As described above, we identified certain material weaknesses as of December 31, 2005 that we had not remediated as of June 30, 2006. The company’s Chief Executive Officer and Chief Financial Officer have concluded that, as a result of those material weaknesses that remain outstanding, the company’s Disclosure Controls, as of June 30, 2006, were, therefore, not effective.

We dismissed our former independent registered public accounting firm, KPMG LLP, on June 29, 2006. We engaged Grant Thornton LLP as our independent registered public accounting firm for fiscal 2006 on July 6, 2006. Grant Thornton has not audited the financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q, nor have they attested to, or reported on, the material weaknesses we described above or our remediation efforts in respect of those material weaknesses.

Part II. Other Information

Item 1. Legal Proceedings

The information set forth in this Section has been included only to the extent that it reflects a significant update of information previously set forth in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 (the “March 10-Q”). To the extent that we do not have any significant changes in contingencies referred to in our March 10-Q, we have not restated the description of those contingencies. That determination not to so restate those contingencies should not be taken as a representation that we have resolved the contingency or that it is no longer a contingency. In addition, any update of the contingencies referred to below does not necessarily mean that the information contained in the update is material; rather, we have determined that the updated information is relevant to a fair assessment of the contingency and is intended to provide our investors with a reasonable understanding of the nature of the contingency as we understand it on the date of this Quarterly Report.

OpenTV, Inc. v. Liberate Technologies, Inc.On February 7, 2002, OpenTV, Inc., our subsidiary, filed a lawsuit against Liberate Technologies, Inc.., whose liability related to this litigation has been assumed by Double C Technologies, alleging patent infringement in connection with two patents held by OpenTV, Inc. relating to interactive technology. A stay of those proceedings has been granted to the parties through September 30, 2006 to allow for settlement discussions.

Broadcast Innovation Matter.In connection with the lawsuit filed by Broadcast Innovation, L.L.C. against Charter Communications, Inc. alleging that Charter infringed the 6,076,094 patent, Charter filed a request with the United States Patent and Trademark Office on June 8, 2006 to re-examine the patent based on prior art references. On July 11, 2006, the District Court ordered a stay of the proceedings pending notice as to whether the re-examination request is accepted by the United States Patent and Trademark Office. On August 5, 2006, the United States Patent and Trademark Office ordered a re-examination of all of the patent's claims.

The estimate of the potential impact on our financial position or overall results of operations for any of the legal proceedings described in this section could change in the future.

Item 1A. Risk Factors

Based on information available to management as of the date of this Quarterly Report on Form 10-Q, management has determined that no material changes are required to the risk factor disclosure as reported in the company’s Annual Report on Form 10-K for the year ended December 31, 2005.

Item 6. Exhibits


Exhibit		Description

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Signature

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.


Date: August 9, 2006	OpenTV Corp.
	/s/ Shum Mukherjee
	Shum Mukherjee
	Executive Vice President and Chief Financial Officer

Exhibit Index


Exhibit
Number		Description

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

Opentv (OPTV) Inactive 10-Q2006 Q2 Quarterly report

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