NDS (NNDS) 10-Q 2007 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2006

or

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

For the transition period from ________ to ________

Commission File Number: 0-30364

NDS Group plc

(Exact name of registrant as specified in its charter)

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

+44 20 8476 8000

(Registrant’s telephone number, including area code)

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

Yes xNo o

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

Large accelerated filer oAccelerated filer xNon-accelerated filer o

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

Yes oNox

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

NDS Group plc

Table of Contents

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

PART I - Financial Information

Item 1. Financial Statements

NDS Group plc

Unaudited Consolidated Statements of Operations

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

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

Page 1

NDS Group plc

Consolidated Balance Sheets

(in thousands, except share amounts)	As of December 31, 2006  (Unaudited)			As of June 30, 2006 (See Note 2)
ASSETS
Current assets:
Cash and cash equivalents	$	280,058		$	320,636
Short-term investments		203,387			184,401
Accounts receivable, net (inclusive of $87,718 and $74,295 due from related parties)		123,855			97,716
Accrued income		43,931			37,050
Income tax receivable		192			1,411
Inventories, net		50,719			39,340
Prepaid expenses		16,920			17,031
Other current assets		2,565			3,650
Total current assets		721,627			701,235
Property, plant & equipment, net		49,081			46,239
Goodwill		122,398			66,917
Other intangibles, net		70,662			43,299
Deferred tax assets		9,720			7,506
Other receivables		14,098			6,681
Other non-current assets		29,788			25,244
Total assets	$	1,017,374		$	897,121
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable (inclusive of $3,770 and $4,228 due to related parties)	$	17,013		$	26,966
Deferred income		79,119			45,492
Accrued payroll costs		21,633			26,647
Accrued expenses		31,450			26,245
Income tax liabilities		24,375			19,039
Other current liabilities		15,786			16,762
Total current liabilities		189,376			161,151
Accrued expenses		39,034			33,747
Deferred income		134,206			134,529
Deferred tax liabilities		4,546			--
Total liabilities		367,162			329,427
Commitments and contingencies
Shareholders' equity:
Series A ordinary shares, par value $0.01 per share: 48,000,000 shares authorized;
15,199,340 and 14,873,262 shares outstanding as of December 31 and June 30, 2006, respectively		152			148
Series B ordinary shares, par value $0.01 per share: 52,000,000 shares authorized;
42,001,000 shares outstanding as of December 31 and June 30, 2006, respectively		420			420
Deferred shares, par value (pound)1 per share: 42,000,002 shares authorized
and outstanding as of December 31 and June 30, 2006, respectively		64,103			64,103
Additional paid-in capital		546,005			534,668
Accumulated deficit		(14,242	)		(79,621	)
Other comprehensive income		53,774			47,976
Total shareholders' equity		650,212			567,694
Total liabilities and shareholders' equity	$	1,017,374		$	897,121

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

Page 2

NDS Group plc

Unaudited Consolidated Statements of Cash Flows

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

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

Page 3

NDS Group plc

Notes to the Unaudited Consolidated Financial Statements

Note 1.Description of business

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

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

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

Note 2.Basis of presentation

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

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

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

The preparation of financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.

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

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

Recent accounting pronouncements

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

Page 4

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

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

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

Note 3.Comprehensive income

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

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

Note 4.Net income per share

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

Page 5

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

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

Note 5.Acquisitions

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

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

Fiscal 2007 transactions

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

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

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

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

Page 6

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

Fiscal 2006 transaction

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

Note 6.Short-term investments

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

Note 7.Accounts receivable

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

Note 8.Inventories

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

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

Page 7

Note 9.Deferred income

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

Note 10.Related party transactions

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

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

a) Provision of technology and services

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

Revenue recognized from such related parties was as follows:

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

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

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

b) Royalty payments

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

Page 8

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

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

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

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

c) Administration and finance services

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

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

	For the three months ended December 31,				For the six months ended December 31,
(in thousands)	2006		2005		2006		2005
Administration fees charged to the Company by related parties	$	59	$	43	$	118	$	86

As part of these administration and finance services, News Corporation pays certain costs (principally certain payroll, legal and property expenses) on behalf of the Company. The Company reimburses News Corporation for such payments, typically the month following that in which the payment was made by News Corporation. Included within the consolidated balance sheets are the following amounts which were owed to News Corporation in respect of administrative services and other costs paid by News Corporation on behalf of the Company:

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

d) Other

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

The Company has entered into cross-guarantees with HSBC Bank plc (“HSBC”), providing mutual guarantees with other subsidiaries of News Corporation for amounts owed to HSBC under a collective overdraft facility of £20 million (approximately $39 million). News Corporation has indemnified the Company against any liabilities which the Company may be required to pay under these cross-guarantees. Management has been informed by News Corporation that no amounts were owed to HSBC as of December 31, 2006 or June 30, 2006 which would be covered by these guarantees.

Page 9

Note 11.Contingencies and commitments

a) Litigation

Echostar Litigation

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

After Echostar filed a second amended complaint, the Company filed a motion to dismiss this complaint on March 31, 2004. On July 21, 2004, the court issued an order directing Echostar to, among other things, file a third amended complaint within ten days correcting various deficiencies noted in the second amended complaint. Echostar filed its third amended complaint on August 4, 2004. On August 6, 2004, the court ruled that the Company was free to file a motion to dismiss the third amended complaint, which the Company did on September 20, 2004. The hearing occurred on January 3, 2005. On February 28, 2005, the court issued an order treating the Company’s motion to dismiss as a motion for a more definite statement, granting the motion and giving Echostar until March 30, 2005 to file a fourth amended compliant correcting various deficiencies noted in the third amended complaint. On March 30, 2005, Echostar filed a fourth amended complaint, which the Company moved to dismiss. On July 27, 2005, the court granted in part and denied in part the Company’s motion to dismiss, and again limited Echostar’s surviving claims to acts allegedly occurring within three years of the filing of Echostar’s original complaint. The Company believes these surviving claims are without merit and intends to vigorously defend against them.

On October 24, 2005, the Company filed its Amended Answer with Counterclaims, alleging that Echostar misappropriated the Company’s trade secrets, violated the Computer Fraud and Abuse Act and engaged in unfair competition. On November 8, 2005, Echostar moved to dismiss the Company’s counterclaims for conversion and claim and delivery, arguing that these claims were preempted and time-barred. Echostar also moved for a more definite statement of the Company’s trade secret misappropriation claim. On December 8, 2005, the court granted in part and denied in part Echostar’s motion to dismiss and for a more definite statement, but granted the Company leave to file amended counterclaims. On December 13, 2005, the Company filed a Second Amended Answer with Counterclaims, which Echostar answered on December 27, 2005. The court has set this case to go to trial in November 2007.

The International Electronic Technology Corp. Litigation

On April 18, 1997, International Electronic Technology Corp. (“IETC”) filed suit in the United States District Court for the Central District of California against the Company’s customers, Hughes, DIRECTV, Inc. and Thomson Consumer Electronics, Inc., alleging infringement of one U.S. patent and seeking unspecified damages and injunction.

Although not a party to this case, the Company has assumed the defense and agreed to indemnify the named defendants. On March 9, 2006, the district court granted defendants’ motion for summary judgment, finding that the defendants did not infringe IETC’s patent. The district court entered judgment for defendants on March 24, 2006. IETC filed an appeal to the United States Court of Appeals for the Federal Circuit. The parties completed all briefing on the appeal on October 4, 2006.

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

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Sogecable Litigation

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

Barry Thomas Litigation

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

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

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

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

b) Contingent consideration for business acquisitions

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

c) Guarantees

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

d) Other

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

Page 11

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

Note 12.Equity-based compensation plans

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

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

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

	For the three months ended December 31,						For the six months ended December 31,
(in thousands, except share amounts)	2006			2005			2006			2005
Number of options exercised		294,017			592,949			326,078			800,625
Total intrinsic value of options exercised	$	9,403		$	15,680		$	10,247		$	20,391
Stock-based compensation cost,
included within the consolidated statement of operations:
Operating expenses	$	2,063		$	735		$	4,378		$	1,712
Tax benefit		(279	)		(151	)		(640	)		(278	)
Net of tax amount	$	1,784		$	584		$	3,738		$	1,434
Cash received from exercise of stock options	$	4,638		$	6,990		$	5,245		$	9,787
Excess tax benefit from exercise of stock options	$	1,763		$	3,778		$	1,790		$	4,578

As of December 31, 2006, the total compensation cost related to non-vested stock option awards not yet recognized was approximately $21.8 million and the period over which it is expected to be recognized is 3.1 years. The Board may grant additional stock options or other equity-based compensation, which would result in additional operating expenses being recorded in future periods.

Page 12

Note 13.Supplementary cash flow information

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

────────

⁽¹⁾ Based on preliminary allocation of purchase price

Note 14.Pension expense

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

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

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

Page 13

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

This document contains statements that constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words “expect,” “estimate,” “anticipate,” “predict,” “believe” and similar expressions and variations thereof are intended to identify forward-looking statements. These statements appear in a number of places in this document and include statements regarding the intent, belief or current expectations of NDS Group plc, its directors or its officers with respect to, among other things, trends affecting NDS Group plc’s financial condition or results of operations. Unless otherwise indicated or unless the context requires otherwise, all reference herein to the “Company,” “we,” “our” and “us” refers to the NDS Group plc. Readers of this document are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Those risks and uncertainties are discussed under Item 1A. Risk Factors of Part II of this Quarterly Report on Form 10-Q, in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2006 as filed with the Securities and Exchange Commission (“SEC”) on September 1, 2006 (SEC file no. 0-30364), as well as the information set forth elsewhere in this Quarterly Report. The Company does not ordinarily make projections of its future operating results and undertakes no obligation (and expressly disclaims any obligation) to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Readers should carefully review other documents filed by the Company with the SEC. This section should be read in conjunction with the unaudited consolidated financial statements of the Company and related notes set forth elsewhere herein.

Introduction

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

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

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

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

Overview of our business

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

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

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

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

Page 14

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

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

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

Other recent business developments

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

Revenues

We derive revenues from:

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

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

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

Page 15

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

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

Costs and expenses

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

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

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

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

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

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

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

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Results of operations

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

Revenue

Revenue for the periods under review was as follows:

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

    ────────

^** Not meaningful.

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

────────

^** Not meaningful.

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

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

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

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

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

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

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

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

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

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

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

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

Page 18

Cost of goods and services sold and gross margin

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

	For the three months ended December 31,
	2006			2005			Change			% Change
Smart card costs	$	19,255		$	23,082		$	(3,827	)		(17	%)
Operations & support		38,064			34,902			3,162			9	%
Royalties		3,582			2,781			801			29	%
Other		217			1,011			(794	)		**
Total cost of goods and services sold	$	61,118		$	61,776		$	(658	)		(1	%)
Gross margin	$	103,944		$	90,427		$	13,517			15	%
Gross margin as a percentage of revenues		63.0	%		59.4	%		3.6	%		**

────────

^** Not meaningful.

	For the six months ended December 31,
	2006			2005			Change			% Change
Smart card costs	$	40,074		$	44,707		$	(4,633	)		10	%
Operations & support		74,995			68,581			6,414			9	%
Royalties		7,096			5,678			1,418			25	%
Other		1,188			2,633			(1,445	)		**
Total cost of goods and services sold	$	123,353		$	121,599		$	1,754			1	%
Gross margin	$	205,871		$	175,099		$	30,772			18	%
Gross margin as a percentage of revenues		62.5	%		59.0	%		3.5	%		**

────────
^** Not meaningful.

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

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

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

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Operating expenses

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

	For the three months ended December 31,
	2006		2005		Change		% Change
Research & development	$	43,309	$	36,341	$	6,968		10	%
Sales & marketing		9,314		6,734		2,580		38	%
General & administration		11,411		10,574		837		25	%
Amortization of intangibles		2,510		2,458		52		2
Total operating expenses	$	66,544	$	56,107	$	10,437		19	%

────────
^** Not meaningful.

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

────────
^** Not meaningful.

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

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

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

────────

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

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

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

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

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

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

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

Operating income and other items

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

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

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

Liquidity and capital resources

Current financial condition

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

As of December 31, 2006, we had cash, cash equivalents and short-term investments totaling $483.4 million. Our accumulated cash is being held with the intention of using it for the future development of the business and there are currently no plans to pay any dividends to shareholders. We believe that we have sufficient working capital resources for our present requirements. Our internally generated funds are dependent on the continued profitability of our business. As of December 31, 2006, we had an unused credit facility to borrow up to £30 million (approximately $59 million) from a subsidiary of News Corporation. No amounts have been drawn under this facility.

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

Sources and uses of cash

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

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Net cash provided by operating activities was as follows:

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

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

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

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

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

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

Net cash generated by financing activities was as follows:

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

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

Page 22

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

Commitments and contractual obligations

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

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

Item 4. Controls and Procedures

a)Disclosure controls and procedures

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

b)Internal control over financial reporting

There were not any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) during the Company’s second quarter of fiscal 2007 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II - Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

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

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

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

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

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

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

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

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

Page 24

A substantial part of our expected future revenue and income growth is based on our aim to sell advanced technologies and services to our existing customers and to sell end-to-end systems to new customers.

We expect over the next several years to sell advanced technology solutions for the television market, including DVR functionality, games, gaming and other interactive applications, home networks services and other services. The market for advanced television technology solutions is still new and evolving. Historically, we have derived only a relatively small percentage of our total revenue from these offerings. We cannot be certain that the demand for or the market acceptance of these technologies will develop as we anticipate, and even if they do, we cannot be certain that we will be able to market these solutions effectively and successfully respond to changes in consumer preferences. In addition, our ability to market those solutions will be affected to a large degree by platform operators. If platform operators determine that our solutions do not meet their business or operational expectations, they may choose not to offer our applications to their customers. To the extent that platform operators and content providers fail to renew or enter into new or expanded contracts with us for provision of advanced technologies, we will be unable to maintain or increase the associated revenue from those offerings. Moreover, due to global economic conditions, platform operators may slow the pace of their deployment of these advanced services and such action would negatively impact our revenues. Accordingly, our ability to generate substantial revenues from our advanced technology solutions offerings is uncertain.

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

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

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

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

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

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

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

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

Page 25

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

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

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

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

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

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

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

Defending against intellectual property infringement claims could harm our business.

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

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

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

Page 26

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

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

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

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

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

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

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

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

Fluctuations in foreign exchange rates could harm our financial condition.

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

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

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

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

Page 27

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

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

Businesses in which News Corporation has an interest currently account for, and are expected to continue to account for, a significant portion of our revenues. During the six month period ended December 31, 2006, approximately 77% of our total revenues were derived directly from businesses in which News Corporation has an interest. Those businesses include our three largest customers. Although we believe the terms of our contracts with such related parties are no less favorable to us than those that we could obtain from unrelated third parties, we cannot assure you that this is the case.

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

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

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

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

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

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

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

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

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

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

The Company held its Annual General Meeting of Shareholders (the “Annual Meeting”) on October 30, 2006. A brief description of the matters voted upon at the Annual Meeting and the results of the voting on such matters is set forth below.

Proposal 1

A proposal to approve the Company’s U.K. Annual Report and Financial Statements for the fiscal year ended June 30, 2006, together with the corresponding Independent Auditors’ Report and Directors’ Report was voted upon as follows:

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

Proposal 2

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

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

Proposal 3

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

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

Proposal 4

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

For:	422,458,953
Withhold
Authority:	2,738,022

Proposal 5

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

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

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Item 5. Other Information

Not applicable.

Item 6. Exhibits

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

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

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

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

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

────────

⁽¹⁾ Filed herewith.

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Signatures

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

NDS GROUP PLC (Registrant)
By:	/s/ Alexander Gersh
	Alexander Gersh
	Chief Financial Officer

Date:January 30, 2007

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