NDS 10Q 2009 Q1 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 September 30, 2008 or
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to Commission File Number: 000-30364 NDS Group plc (Exact name of registrant as specified in its charter)
England and Wales (State or other jurisdiction of incorporation or organization) One Heathrow Boulevard, 286 Bath Road, West Drayton, Middlesex, United Kingdom (Address of principal executive offices)				Not applicable (I.R.S. Employer Identification No.) UB7 0DQ (ZIP Code)
+44 20 8476 8000 (Registrant’s telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
					Yes x		No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x		Accelerated filer ¨	Non-accelerated filer ¨			Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
					Yes ¨		No x
As of October 29, 2008, the following shares were outstanding: 16,428,228 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

PART I – Financial Information

Item 1.	Financial Statements

	Unaudited Consolidated Statements of Operations for the three months ended September 30, 2008 and 2007	1

	Consolidated Balance Sheets as of September 30, 2008 (unaudited) and June 30, 2008	2

	Unaudited Consolidated Statements of Cash Flows for the three months ended September 30, 2008 and 2007	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	25

Item 4.	Controls and Procedures	26

PART II – Other Information

Item 1.	Legal Proceedings	27

Item 1A.	Risk Factors	27

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 3.	Defaults upon Senior Securities	33

Item 4.	Submission of Matters to a Vote of Security Holders	33

Item 5.	Other Information	33

Item 6.	Exhibits	34

Signatures		35

PART I – Financial Information

Item 1. Financial Statements

NDS Group plc

Unaudited Consolidated Statements of Operations

	For the three months ended September 30,
(in thousands, except per-share amounts)	2008			2007

Revenue	$	182,164		$	204,876

Cost of goods and services sold		(75,461	)		(68,456	)

Gross margin		106,703			136,420

Operating expenses		(80,794	)		(78,134	)

Operating income		25,909			58,286

Interest income, net		5,200			7,372
Other expenses		(14,107	)		—

Income before income tax expense		17,002			65,658

Income tax expense		(3,618	)		(19,364	)

Net income	$	13,384		$	46,294

Net income per share:
Basic net income per share	$	0.23		$	0.80
Diluted net income per share	$	0.23		$	0.79

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

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NDS Group plc

Consolidated Balance Sheets

(in thousands, except share amounts)	As of September 30, 2008 (Unaudited)		As of June 30, 2008 (See Note 2)
ASSETS
Current assets:
Cash and cash equivalents	$	711,162	$	734,992
Accounts receivable, net (inclusive of $48,675 and $50,339 due from related parties)		119,141		126,131
Accrued income		40,386		46,948
Inventories, net		87,246		79,659
Prepaid expenses		24,869		24,904
Other current assets		19,523		4,203
Total current assets		1,002,327		1,016,837
Property, plant & equipment, net		47,239		49,741
Goodwill		130,944		134,693
Other intangibles, net		51,962		55,806
Deferred tax assets		15,641		17,370
Other non-current assets		109,402		101,702

Total assets	$	1,357,515	$	1,376,149

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable (inclusive of $4,488 and $4,846 due to related parties)	$	27,463	$	33,611
Deferred income		125,584		128,318
Accrued expenses		56,286		87,115
Income tax liabilities		15,016		24,513
Other current liabilities		33,291		20,673
Total current liabilities		257,640		294,230
Deferred income		79,454		79,100
Accrued expenses		70,041		67,713
Other non-current liabilities		4,419		4,701

Total liabilities		411,554		445,744
Commitments and contingencies
Shareholders’ equity:
Series A ordinary shares, par value $0.01 per share: 48,000,000 shares authorized; 16,424,907 and 16,250,058 shares outstanding as of September 30, and June 30, 2008, respectively		164		162
Series B ordinary shares, par value $0.01 per share: 52,000,000 shares authorized; 42,001,000 shares outstanding as of September 30, and June 30, 2008, respectively		420		420
Deferred shares, par value £1 per share: 42,000,002 shares authorized and outstanding as of September 30, and June 30, 2008, respectively		64,103		64,103
Additional paid-in capital		594,316		590,663
Retained earnings		229,585		216,201
Other comprehensive income		57,373		58,856
Total shareholders’ equity		945,961		930,405

Total liabilities and shareholders’ equity	$	1,357,515	$	1,376,149

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

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NDS Group plc

Unaudited Consolidated Statements of Cash Flows

	For the three months ended September 30,
(in thousands)	2008			2007

Operating activities:
Net income	$	13,384		$	46,294

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		5,451			5,652
Amortization of other intangibles		3,333			3,283
Equity-based compensation		4,795			4,311
Conditional Derivative Instrument, net (see Note 3)		6,620			—
Other		234			97
Change in operating assets and liabilities, net of acquisitions:
Inventories		(7,587	)		(4,402	)
Receivables and other assets		7,292			(18,244	)
Deferred income		(2,380	)		(9,222	)
Accounts payable and other liabilities		(35,875	)		9,016

Net cash (used in) provided by operating activities		(4,733	)		36,785

Investing activities:
Capital expenditure		(5,446	)		(3,470	)
Business acquisitions, net of cash acquired		(1,117	)		(10,374	)

Net cash used in investing activities		(6,563	)		(13,844	)

Financing activities:
Issuance of shares (inclusive of realized excess tax benefits of $262 and $79)		1,135			388

Net (decrease) increase in cash and cash equivalents		(10,161	)		23,329

Cash and cash equivalents, beginning of period		734,992			592,750
Currency exchange movements		(13,669	)		6,088

Cash and cash equivalents, end of period	$	711,162		$	622,167

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

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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 throughout the world and has research and development facilities, customer support operations and administrative offices in the United Kingdom, Israel, France, Denmark, Germany, India, China, Hong Kong, South Korea, Australia and the United States. All reported revenue, expenses, assets, liabilities and cash flows relate to the continuing operations of the Company and its consolidated subsidiaries.

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-month period ended September 30, 2008 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending June 30, 2009.

These interim unaudited consolidated financial statements and notes hereto should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2008 included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on August 8, 2008. Financial information as of June 30, 2008 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.

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 revenue 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 September 30, 2008 and September 30, 2007 relate to the three-month periods ended September 28, 2008 and September 30, 2007, respectively. For convenience purposes, the Company continues to date its financial statements as of September 30.

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

Recent accounting pronouncements

Business combinations

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”). SFAS No. 141R significantly changes the accounting for business combinations in a number of areas, including the treatment of contingent consideration, pre-acquisition contingencies, transaction costs, in-process research and development and restructuring costs. In addition, under SFAS No. 141R, changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. SFAS No. 141R will become effective for the Company in the first quarter of fiscal 2010. This standard will change the Company’s accounting treatment for business combinations on a prospective basis.

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In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method significantly changes the accounting for transactions involving minority interest holders. SFAS No. 160 will become effective for the Company in the first quarter of fiscal 2010. This standard would change the Company’s accounting treatment for transactions involving any minority interest holders.

Fair values and financial instruments

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which establishes a framework for measuring fair value and expands the related disclosure requirements. In accordance with SFAS No. 157, fair value measurements are required to be disclosed using a three-tiered fair value hierarchy which distinguishes market participant assumptions into the following categories: (i) inputs that are quoted prices in active markets (“Level 1”), (ii) inputs other than quoted prices included within Level 1 that are observable, including quoted prices for similar assets or liabilities (“Level 2”) and (iii) inputs that require the entity to use its own assumptions about market participant assumptions (“Level 3”). Certain provisions of SFAS 157 related to financial assets and liabilities as well as other assets and liabilities carried at fair value on a recurring basis became effective for the Company on July 1, 2008. The Company has entered into transactions in fiscal 2009 to which SFAS No. 157 is relevant. These are discussed in Notes 3 and 4 below. The provisions of SFAS 157 related to other nonfinancial assets and liabilities will be effective for the Company beginning in fiscal 2010 and will be applied prospectively.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 allows companies to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 became effective for the Company on July 1, 2008. The Company had no assets or liabilities subject to the provision of SFAS No. 159 as of June 30, 2008.

In March 2008, the FASB released SFAS No, 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. The application of SFAS 161 will become effective for the Company beginning in fiscal 2010. The Company is currently evaluating the impact of SFAS 161 on its consolidated financial statements but does not expect it to have a material effect.

Other

In March 2007, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 07-3, “Accounting for Nonrefundable Advance Payment for Goods or Services to Be Used in Future Research and Development Activities” (“EITF 07-3”). EITF 07-3 requires that nonrefundable advance payments for future research and development activities be deferred and capitalized. EITF 07-3 requires that such amounts be recognized as an expense as the goods are delivered or the related services are performed. If, subsequently, based on management’s assessment, it is no longer expected that the goods will be delivered or services will be rendered, then EITF 07-3 requires that the capitalized advance payment be charged to expense. EITF 07-3 became effective for the Company on July 1, 2008 but did not have any material impact on the Company’s consolidated results of operations and financial condition.

Note 3. Proposed transaction

On August 14, 2008, the Company, News Corporation and two newly incorporated companies formed by funds advised by Permira Advisers LLP (the “Permira Newcos”) announced that the Company signed an implementation agreement pursuant to which the Company would become a privately-owned company, with the Permira Newcos and News Corporation owning approximately 51% and 49% of the Company, respectively (the “Proposed Transaction”). The Proposed Transaction would be effected by means of:

·	Cancelling all of the outstanding Series A Ordinary Shares, par value $0.01 per share (“Series A Ordinary Shares”), including shares represented by American Depositary Shares (“ADSs”) traded on The NASDAQ Stock Market (“NASDAQ”), for per-share consideration of $63 in cash;

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Cancelling approximately 67% of the Series B Ordinary Shares, par value $0.01 per share (“Series B Ordinary Shares”) held by News Corporation for consideration of $63 per share to be paid in a combination of approximately $1.5 billion in cash and a $242 million vendor note. News Corporation currently owns 71.9% of the equity and 96.2% of the voting power of the Company through its ownership of 100% of the outstanding Series B Ordinary Shares. News Corporation would retain ownership of the remaining approximately 33% of the Series B Ordinary Shares it currently holds, resulting in it owning 49% of the Company following the completion of the Proposed Transaction; and

·	Issuing the Permira Newcos new Series B Ordinary Shares representing 51% of the Company’s then outstanding Series B Ordinary Shares.

If the Proposed Transaction is consummated, it will be funded by a mix of senior and mezzanine indebtedness incurred by the Company, an investment provided by the Permira Newcos and cash on hand at the Company. The Company’s commitments and obligations with respect to the indebtedness are contingent upon the consummation of the Proposed Transaction.

The consummation of the Proposed Transaction is conditioned upon the approval of the transaction by holders of the Series A Ordinary Shares, the approval of the High Court of Justice of England and Wales, the receipt of certain regulatory approvals, the receipt of funding described above and certain other customary closing conditions. The consummation of the Proposed Transaction is also conditioned upon the Proposed Transaction being consummated by February 25, 2009, or such later date as agreed by the parties and approved by the High Court of Justice of England and Wales. There can be no assurance that the Proposed Transaction will be consummated.

During the three-month period ended September 30, 2008, the Company entered into a conditional forward currency derivative financial instrument to act as an economic hedge against the fact that a portion of the debt to be drawn down upon the consummation of the Proposed Transaction will be denominated in euros, but payments to shareholders will be denominated in U.S. dollars (the “Conditional Derivative Instrument”). The notional value of the Conditional Derivative Instrument is €367 million. Should the Proposed Transaction not be consummated, no amounts will be due under the Conditional Derivative Instrument. SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”) requires all derivative financial instruments to be recognized at fair value as of the balance sheet date. The terms of the Conditional Derivative Instrument do not meet the criteria of SFAS No. 133 to qualify for hedge accounting and, accordingly, the changes in fair value of the Conditional Derivative Instrument are recorded within other expenses in the consolidated statement of operations.

The Company has estimated the fair value of the Conditional Derivative Instrument in accordance with SFAS No. 157. This requires the Company to include in the valuation inputs an assessment of the likelihood of the Proposed Transaction being consummated. The fair value is based on Level 3 inputs. These include forward foreign exchange rates, as well as an estimate of market participants’ assessment of the probability of the Proposed Transaction being completed within the parameters defined in the hedging contract, and counterparty risk.

The fair value of the Conditional Derivative Instrument as of September 30, 2008 was $11.0 million, and is recognized within other current liabilities. The Company has recognized a deferred income tax benefit of $4.4 million as a result of the Conditional Derivative Instrument. There were no cash flows associated with the Conditional Derivative Instrument in the three-month period ended September 30, 2008. Should the Proposed Transaction not be consummated, the amounts recorded as of September 30, 2008 will be reversed.

Expenses incurred by the Company in connection with the Proposed Transaction were as follows:

	For the three months ended September 30,
(in thousands)	2008		2007

Legal and professional fees	$	3,092	$	─
Unrealized loss on the Conditional Derivative Instrument		11,015		─
Total amount recorded as other expenses	$	14,107	$	─

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Note 4. Other derivative financial instruments

SFAS No. 133 requires every derivative instrument (including certain derivative instruments embedded in other contracts) to be recorded on the balance sheet at fair value as either an asset or a liability. SFAS No. 133 also requires that changes in the fair value of recorded derivatives be recognized currently in earnings unless specific hedge accounting criteria are met.

During the three-month period ended September 30, 2008, the Company commenced the use of financial instruments designated as cash flow hedges to hedge its exposure to foreign currency exchange risks associated with the operating expenses of its Israeli operations. All cash flow hedges are recorded at fair value on the consolidated balance sheet. The effective changes in fair value of derivatives designated as cash flow hedges are recorded in accumulated other comprehensive income. Amounts are reclassified from accumulated other comprehensive income when the underlying hedged item is recognized in earnings. If derivatives are not designated as cash flow hedges, changes in fair value are recorded in earnings.

As of September 30, 2008, the notional amount of these foreign exchange forward contracts with foreign currency risk was $279.0 million with settlement dates extending through August 2010. During the three-month period ended September 30, 2008, an unrealized gain of $17.0 million was recorded within other comprehensive income, a realized gain of $0.3 million was included within operating expenses and no amount of the cash flow hedge was determined to be ineffective. The fair value of these derivative financial instruments, measured by reference to quoted market exchange rates as of the balance sheet date (Level 2 inputs), was included on the consolidated balance sheet as of September 30, 2008 as other current assets of $7.8 million and other non-current assets of $9.2 million.

Note 5. Comprehensive Income

Comprehensive income comprises net income, foreign currency translation adjustments, changes in fair value of cash flow hedges and certain pension adjustments. The components of comprehensive income were as follows:

	For the three months ended September 30,
(in thousands)	2008			2007

Net income	$	13,384		$	46,294
Foreign currency translation differences (no tax effect)		(13,692	)		3,697
Changes in fair value of cash flow hedges (net of tax of $4,748 and $─)		12,209			─
Comprehensive income	$	11,901		$	49,991

Note 6. Net income per share

Basic 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 equity awards granted to employees. The dilutive effect of potential shares to be issued pursuant to outstanding equity awards has been calculated using the treasury stock method and as such, is a function of the average share price in each period. The Company has two classes of ordinary shares: Series A Ordinary Shares and Series B Ordinary Shares, which have equal rights except in respect of voting and, as such, have equal weighting in the calculation of net income per share and equal net income per share.

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

	For the three months ended September 30,
	2008		2007

Weighted average number of ordinary shares in issue		58,340,998		57,771,456
Effect of dilutive equity awards		983,816		773,849
Denominator for dilutive net income per share		59,324,814		58,545,305

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Note 7. Inventories

(in thousands)	As of September 30, 2008			As of June 30, 2008

Unprocessed smart cards and their components	$	67,114		$	61,364
Inventory reserves		(4,467	)		(4,369	)
		62,647			56,995

Deferred smart card costs		16,529			16,216
Contract work-in-progress		8,070			6,448
Total inventories	$	87,246		$	79,659

Unprocessed smart cards and their components are considered to be in the state of work-in-progress. Deferred smart card costs represent the book value of smart cards shipped to customers but for which revenue had not been recognized as of the balance sheet date.

Note 8. Deferred income

(in thousands)	As of September 30, 2008		As of June 30, 2008

Deferred security fees	$	132,752	$	135,175
Advance receipts and other deferred income		72,286		72,243
Total deferred income	$	205,038	$	207,418

Included within current liabilities	$	125,584	$	128,318
Included within non-current liabilities		79,454		79,100
	$	205,038	$	207,418

Note 9. Related-party transactions

The Company conducts business transactions with News Corporation and its subsidiaries and affiliates. These entities are considered to be related parties under SFAS No. 57, “Related Party Disclosures.” 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. Therefore, there can be no assurance 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”) in accordance with NASDAQ listing requirements.

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 by the Company to affiliates and subsidiaries of News Corporation. The principal related parties to which the Company supplied such services through the period covered by these financial statements are BSkyB, 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 wholly owned subsidiaries of News Corporation). In February 2008, News Corporation divested of its entire interest in its affiliate DIRECTV. The Company therefore no longer considers DIRECTV or its affiliates DIRECTV Latin America, Sky Brasil and Sky Mexico to be related parties from that date, although it continues to conduct business with them. In April 2008, News Corporation increased its interest in Premiere AG (“Premiere”), a customer of the Company, to a level where it is considered to be a related party from that date.

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Revenue recognized from such related parties was as follows:

	For the three months ended September 30,
(in thousands)	2008⁽¹⁾		2007⁽²⁾

Revenue from related parties	$	60,212	$	159,258

⁽¹⁾	Includes revenue from Premiere.

⁽²⁾	Includes revenue from DIRECTV and its affiliates.

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

(in thousands)	As of September 30, 2008			As of June 30, 2008

Accounts receivable	$	48,675		$	50,339
Accrued income		9,441			11,299
Other assets		27,304			27,704
Deferred income		(78,815	)		(73,099	)

b) Royalty payments

A royalty is payable to a related party in respect of certain intellectual property rights that the Company has licensed for use in certain applications supplied to customers. The royalty expense in respect of this related party arrangement, which is included within cost of goods and services sold, was as follows:

	For the three months ended September 30,
(in thousands)	2008		2007

Royalties payable to related party	$	956	$	842

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

(in thousands)	As of September 30, 2008		As of June 30, 2008

Accrued expenses	$	1,769	$	3,148

c) Administration and finance services

News Corporation provides services to the Company under a Master Intercompany Agreement that 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:

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	For the three months ended September 30,
(in thousands)	2008		2007

Administration fees charged by related parties	$	36	$	37

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 that 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 September 30, 2008		As of June 30, 2008

Accounts payable	$	4,488	$	4,846

d) Other

The Company has a short-term loan facility of £30 million (approximately $55 million) from a subsidiary of News Corporation. The facility has no expiry date and no amounts were drawn down as of September 30, 2008 or June 30, 2008. 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 $37 million). News Corporation has indemnified the Company against any liabilities which the Company may be required to pay under these cross-guarantees. The Company has been informed by News Corporation that no amounts were owed to HSBC as of September 30, 2008 or June 30, 2008 that would be covered by these guarantees.

Note 10. 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. That complaint purported to allege claims for violation of the Digital Millennium Copyright Act (“DMCA”), the Communications Act of 1934 (“Communications Act”), the Electronic Communications Privacy Act, the Computer Fraud and Abuse Act, California’s Unfair Competition Law (“UCL”) and the federal Racketeer Influenced and Corrupt Organizations (“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. Extensive motion practice ensued regarding this complaint, regarding subsequent complaints filed by Echostar, and regarding counterclaims asserted by the Company.

The trial of this case began April 9, 2008. Echostar’s claims under the DMCA, the Communications Act, the California Penal Code, and RICO were tried to the jury, Echostar’s UCL claim was tried to the court and the Company’s counterclaim under the California Uniform Trade Secrets Act was tried to the jury. All other claims were either dismissed by the court or abandoned by the parties.

On May 15, 2008, the jury returned its verdict. The jury found the Company not liable on three counts and awarded minimal damages on the remaining three counts. On those latter three counts, the jury awarded Echostar actual damages of $45.69 or, in the alternative, statutory damages of $1,000. The Company believes that these awards relate to a single incident involving a test of a card during the course of the Company’s anti-piracy efforts. The jury found Echostar not liable on the Company’s counterclaim.

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A hearing on the UCL claim was held on October 9, 2008. On October 15, 2008, the court issued its ruling. The court found the Company liable under the UCL based on the single incident that formed the basis for the jury’s previous verdict and awarded restitution in a nominal amount to EchoStar. The court also issued a permanent injunction that requires the Company to comply with the statutes that the jury previously found the Company had violated.

On October 20, 2008, Echostar and the Company filed applications requesting that the court award them attorneys’ fees and costs. The Company believes that Echostar’s request is without merit and intends to vigorously defend against that request. Instead, the Company believes that it prevailed in the litigation and on several claims for which a recovery of attorneys’ fees is authorized. The court has set a hearing for November 17, 2008 to hear argument related to requests for attorneys' fees and costs. It is not known when the court will provide a decision on those requests.

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 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. On February 21, 2007, the petition was denied. On June 11, 2007, the Company filed a petition for a Writ of Certiorari in the United States Supreme Court seeking reversal of the Ninth Circuit Court of Appeals’ decision. On August 27, 2007, the Company renewed its motion to dismiss the second amended complaint on grounds not previously decided. On October 1, 2007, the petition for Writ of Certiorari was denied. On January 25, 2008, the court issued an order granting-in-part and denying-in-part the Company’s renewed motion to dismiss Sogecable’s second amended complaint. The court dismissed Sogecable’s claim for tortuous interference with prospective economic advantage, but allowed Sogecable to proceed on its RICO and DMCA claims, as well as its claim for tortuous interference with contract. The court has set February 16, 2010 as the trial date. The Company believes that Sogecable’s claims are without merit and will continue to vigorously defend itself in this matter.

b) Guarantees

In the normal course of business, the Company provides, and from time to time makes payments in respect of, indemnification agreements of varying scopes, including warranties concerning the security of the Company’s smart cards, 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. Also, the Company may be subject to liquidated damages in the event of late delivery of goods or services. The nature of these commitments has been considered in determining the revenue 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.

c) Other

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

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 financial statements would materially affect the Company’s financial position.

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The Company experiences routine litigation in the normal course of its business. The Company believes that none of its pending litigation will have a material adverse effect on its consolidated financial condition, future results of operations or liquidity.

The Company’s operations are subject to tax in various domestic and international jurisdictions and, as a matter of course, the Company is regularly audited by U.K. and overseas tax authorities. There has been no material change in the Company’s assessment of uncertain tax positions since June 30, 2008. The Company believes it has appropriately accrued for the expected outcome of all pending tax matters and does not currently anticipate that the ultimate resolution of pending tax matters will have a material adverse effect on its consolidated financial condition, future results of operations or liquidity.

Note 11. Equity-based compensation

The following amounts have been recorded in the consolidated financial statements relating to equity-based compensation:

	For the three months ended September 30,
(in thousands, except share amounts)	2008		2007

Number of Series A Ordinary Shares issued in respect of stock options exercised in period		32,472		48,798
Number of Series A Ordinary Shares issued in the period in respect of vested conditional awards, net of statutory tax withholdings		142,377		61,516
Number of Series A Ordinary Shares issued in respect of all equity compensation plans		174,849		110,314

Equity-based compensation cost included within the statement of operations	$	4,795	$	4,311

Net cash received from exercise of equity-based awards	$	873	$	309

Excess tax benefits derived from equity-based awards	$	278	$	52

Intrinsic value of stock options exercised	$	1,045	$	1,335

As of September 30, 2008, the total compensation cost related to non-vested equity awards not yet recognized was approximately $34.0 million and the period over which it is expected to be recognized is 2.9 years. The Board may grant additional equity-based compensation, which would result in additional operating expenses being recorded in future periods.

No new equity-based awards were granted during the three-month period ended September 30, 2008.

Page 12

Note 12. Supplementary cash flow information

	For the three months ended September 30
(in thousands)	2008			2007

Cash payments for capital expenditure	$	(5,472	)	$	(3,531	)
Proceeds from sale of property, plant and equipment		26			61
Interest received in cash		6,026			7,381
Cash payments for income taxes		(15,047	)		(8,400	)
Business acquisitions, net of cash acquired		─			(10,374	)
Cash paid in respect of deferred consideration for acquisitions		(1,117	)		─

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, 2008 as filed with the Securities and Exchange Commission (“SEC”) on August 8, 2008 (SEC file no. 000-30364), 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. You 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 to date during the fiscal year ending June 30, 2009 that we believe are important in understanding our 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-month periods ended September 30, 2008 and 2007. In addition, a brief description is provided of significant transactions and events that impact the comparability of the results being analyzed.

Liquidity and capital resources — This section provides an analysis of our cash flows for the three-month periods ended September 30, 2008 and 2007. 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 and broadband stream management, set-top box and residential gateway middleware, electronic program guides (“EPGs”), digital video recorder (“DVR”) technologies and interactive infrastructure and applications. We provide technologies and services supporting standard definition and high definition television and a variety of industry, Internet and Internet protocol (“IP”) standards, as well as technology for mobile devices. 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 that incorporate various technologies supplied by us.

Our main customers are the digital pay-television platform operators that utilize a broadcast and/or a broadband infrastructure to deliver video and data to multiple subscribers. In addition, we may sell interactive applications to content providers, who do not usually operate a pay-TV platform, but instead 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 and broadband platform, such as broadcast equipment, network equipment, set-top box and residential gateway manufacturers. We integrate our technologies with the products manufactured by these suppliers to provide a platform operator with the required functionality. A particular platform operator may purchase some components of their platform from our competitors.

Page 14

Our customers consist of a limited number of large digital pay-television platform operators that are introducing, marketing and promoting products and services that utilize our technology. During the three-month period ended September 30, 2008, our three largest customers were DIRECTV in the United States, BSkyB in the United Kingdom and SKY Italia in Italy. Together, these three customers contributed, directly and indirectly, approximately 52% of our revenue during the three-month period ended September 30, 2008. We expect that a limited number of customers will continue to contribute a significant portion of our revenue.

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 Mediaroom (developed by Microsoft Corporation) and others, both to attract new customers and to retain our existing customers. In addition, some of the companies that currently operate in the set-top box and/or software business, but that 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 revenue is dependent upon our customers’ subscriber bases, the growth in their subscriber bases and the related quantities of set-top boxes deployed to their subscribers. Revenue can vary from period to period as our revenue reflects 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 revenue over the term of any post-contract support period.

Recently, certain of our customers have begun recycling set-top boxes and smart cards when a subscriber terminates its subscription by re-issuing the set-top box and smart card to a new subscriber. Such activity by our customers reduces demand for new smart cards and also reduces our incremental set-top box royalties. Should this activity become more widespread, it could materially adversely affect our revenues. In addition, the security of our smart cards has not been compromised in recent years. Accordingly, certain customers have delayed or reduced plans to complete card changeovers. This change in approach has been reflected in amended contract terms with certain of our customers and this has resulted in lower conditional access revenues from those customers in fiscal 2009, a trend we expect will continue in future periods.

We consider that we operate and manage our business as a single segment. 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.

Recent Business Developments

On August 14, 2008, the News Corporation, two newly incorporated companies formed by funds advised by Permira Advisers LLP (the “Permira Newcos”) and we announced that the we signed an implementation agreement pursuant to which the we would become a privately-owned company, with the Permira Newcos and News Corporation owning approximately 51% and 49% of us, respectively (the “Proposed Transaction”). The Proposed Transaction would be effected by means of:

·	Cancelling all of our outstanding Series A ordinary shares, par value $0.01 per share (the “Series A Ordinary Shares”), including shares represented by American Depositary Shares (“ADSs”) traded on The NASDAQ Stock Market (“NASDAQ”), for per-share consideration of $63 in cash;

Cancelling approximately 67% of our Series B ordinary shares, par value $0.01 per share (the “Series B Ordinary Shares”) held by News Corporation for consideration of $63 per share to be paid in a combination of approximately $1.5 billion in cash and a $242 million vendor note. News Corporation currently owns 71.9% of our equity and 96.2% of our voting power through its ownership of 100% of the outstanding Series B Ordinary Shares. News Corporation would retain ownership of the remaining approximately 33% of the Series B Ordinary Shares it currently holds, resulting in it owning 49% of us following the completion of the Proposed Transaction; and

·	Issuing the Permira Newcos new Series B Ordinary Shares representing 51% of our then outstanding Series B Ordinary Shares.

If the Proposed Transaction is consummated, it will be funded by a mix of senior and mezzanine indebtedness incurred by us, an investment provided by the Permira Newcos and our cash on hand. Our commitments and obligations with respect to the indebtedness are contingent upon the consummation of the Proposed Transaction.

Page 15

Revenue

We derive revenue from:

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 or as a result of card recycling or postponements of card changeovers. We refer to fees from the sales of smart cards and the provision of security maintenance services as “conditional access revenue.”

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 revenue.”

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

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

We distinguish between revenue from “established technologies” and revenue from “new technologies.” We categorize as revenue from established technologies our revenue from conditional access, middleware and EPG technologies and fees from the customization and integration of those technologies into head-end systems and set-top boxes, together with associated support. Revenue from these technologies is allocated between the three different revenue streams identified above. We aggregate under our separate new technologies revenue stream all revenue that we derive from DVR technologies, advanced middleware technologies, technologies involving broadband and video content over broadband (“IPTV”), interactive infrastructure and applications, and games and gaming. As our business develops, we will consider whether these groupings of revenue remain appropriate.

Costs and expenses

Our costs and expenses consist of: 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; legal costs; and the amortization of intangible assets, such as intellectual property rights that 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 that houses the computer chips and the plastic body of the smart cards. We do not manufacture smart cards, but our engineers design computer chips that 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, travel 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, Germany, Denmark, Hong Kong, 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.

Page 16

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 stated 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 employees in the United Kingdom, Europe, 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 personnel, facilities and legal and administration costs.

Operating expenses include gains and losses recognized on cash holdings as a result of changes in foreign exchange rates.

Results of Operations

Commentary on the three-month period ended September 30, 2008 versus the three-month period ended September 30, 2007

Comparisons of our financial performance are materially impacted by fluctuations in foreign exchange rates. The principal foreign currency exchange rates that affect our consolidated results of operations and balance sheets are:

	Average exchange rate for the three months ended				Period end exchange rate as of
	September 30, 2008		September 30, 2007		September 30, 2008		June 30, 2008

U.K. pound sterling / U.S. dollar		0.5281		0.4948		0.5435		0.5016
Euro / U.S. dollar		0.6646		0.7276		0.6851		0.6350
Israeli shekel / U.S. dollar		3.4829		4.1871		3.4241		3.3719
Indian rupee / U.S. dollar		43.5840		40.3880		46.4800		42.7800

The effect of fluctuations in foreign exchange rates on our revenue and operating income may be summarized as follows:

(in thousands)	Revenue			Operating income

For the three-month period ended September 30, 2007	$	204,876		$	58,286
Effect of fluctuations in foreign currency exchange rates		1,010			(13,781	)
Effect of other operating factors		(23,722	)		(18,596	)
For the three-month period ended September 30, 2008	$	182,164		$	25,909

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The effect of fluctuations in foreign currency exchange rates can be further analyzed as follows:

(in thousands)	Revenue		Operating income

Effect on recorded value of revenue transactions⁽¹⁾	$	1,010	$	1,010
Effect on recorded value of expense transactions⁽²⁾		─		(4,463	)
		1,010		(3,453	)
Loss on revaluation of cash balances during the three-month period ended September 30, 2008⁽³⁾		─		(4,587	)
Effect of fluctuations in foreign currency exchange rates on result for the three-month period ended September 30, 2008		1,010		(8,040	)
Less gain on revaluation of cash balances during the three-month period ended September 30, 2007⁽³⁾		─		(5,741	)
Effect of fluctuations in foreign currency exchange rates on comparison of result for the three month period ended September 30, 2008 to that of the three-month-period ended September 30, 2007	$	1,010	$	(13,781	)

__________________

⁽¹⁾

Approximately 44% of our revenue was denominated in currencies other than U.S. dollars, principally pounds sterling and euros, during the three-month period ended September 30, 2008. The U.S. dollar was weaker against the euro but stronger against the pound sterling during the three-month period ended September 30, 2008 compared to the three-month period ended September 30, 2007, as measured by the average exchange rates prevailing during each period.

⁽²⁾	Approximately 75% of our total expenses were denominated in currencies other than the U.S. dollar, principally pounds sterling, Israeli shekels, euros and Indian rupees, during the three-month period ended September 30, 2008.

⁽³⁾	We recorded a loss of $4.6 million within operating expenses in the three-month period ended September 30, 2008 as a result of holding cash in currencies other than the U.S. dollar, compared to a gain of $5.7 million in the three-month period ended September 30, 2007.

The effect of other operating factors on individual elements of our financial statements is discussed below.

Revenue

Revenue for the periods under review was as follows:

	For the three months ended September 30,
(in thousands)	2008		2007		Change			% Change

Conditional access	$	98,766	$	121,583	$	(22,817	)		(19	)%
Integration, development & support		11,368		10,909		459			4	%
License fees & royalties		24,205		28,944		(4,739	)		(16	)%
New technologies		46,785		42,458		4,327			10	%
Other		1,040		982		58			6	%
Total revenue	$	182,164	$	204,876	$	(22,712	)		(11	)%

Revenue from conditional access decreased by 19% during the three-month period ended September 30, 2008 as compared to the three-month period ended September 30, 2007. The decrease was principally due to recognition in the three-month period ended September 30, 2007 of a portion of security services revenue previously deferred as certain remaining revenue recognition criteria were satisfied during that period. Additionally, smart card and security fee revenues were lower during the three-month period ended September 30, 2008 due to lower unit prices. These factors were partially offset by an increased volume of smart cards delivered and the growth of the subscriber bases of our customers during the three-month period ended September 30, 2008.

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The number of devices protected by NDS conditional access technology in each period was as follows:

	For the three months ended September 30,
(in millions)	2008		2007

Number of devices protected by NDS conditional access technology, beginning of period		90.3		75.4
Net additions		5.1		3.2
Number of devices protected by NDS conditional access technology, end of period		95.4		78.6

The quantity of smart cards delivered in each period was as follows:

	For the three months ended September 30,
(in millions)	2008		2007

Number of smart cards delivered		8.0		7.4

The increase in the number of smart cards delivered in the three-month period ended September 30, 2008 as compared to the three-month period ended September 30, 2007 principally reflects higher deliveries to existing customers in Asia and Europe and to new customers. The volume of smart cards supplied exceeded the increase in authorized smart cards in use due to a mixture of churn and the build-up of inventory by platform operators. As described above, recently certain of our customers have begun recycling set-top boxes and smart cards when a subscriber terminates its subscription by re-issuing the set-top box and smart card to a new subscriber. Such activity by our customers reduces demand for new smart cards and also reduces our incremental set-top box royalties. This trend depressed demand for smart cards from certain of our customers in the three-month period ended September 30, 2008 and we expect this to continue in the future.

Integration, development and support revenue increased by 4% in the three-month period ended September 30, 2008 as compared to the three-month period ended September 30, 2007. The recognition of revenue from new customers and from the delivery of enhancements to several of our existing major customers is dependent on the timing of satisfaction of all our revenue recognition criteria; therefore this component of our revenue tends to fluctuate from period to period.

License fee and royalty revenue decreased by 16% in the three-month period ended September 30, 2008 as compared to the three-month period ended September 30, 2007, principally as a result of a decrease in the number of middleware clients deployed during the three-month period ended September 30, 2008 as compared to the three-month period ended September 30, 2007.

The table below sets forth the number of middleware clients deployed by our customers during the three-month periods ended September 30, 2008 and 2007:

	For the three months ended September 30,
(in millions)	2008		2007

Number of middleware clients deployed, beginning of period		92.5		61.8
Net additions		6.2		8.1
Number of middleware clients deployed, end of period		98.7		69.9

The decrease in the number of middleware clients deployed was largely due to the download of our middleware to a large population of DIRECTV set-top boxes during the three-month period ended September 30, 2007, with no equivalent event in the three-month period ended September 30, 2008. Additionally, the set-top box recycling referred to above had an adverse effect in the three-month period ended September 30, 2008.

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The increase in revenue from new technologies of 10% in the three-month period ended September 30, 2008, compared to the three-month period ended September 30, 2007, was principally due to higher revenue from our Internet protocol television (“IPTV”) customers, and from gaming applications and residential gateway devices. These increases were partially offset by lower revenue from deployment of our DVR technologies and advanced middleware solutions. The fees recognized on deployment of DVR technologies were lower during the three-month period ended September 30, 2008 than in the three-month period ended September 30, 2007 due to the timing of project acceptance.

The increase in the cumulative number of DVR clients deployed in each period was as follows:

	For the three months ended September 30,
(in millions)	2008		2007

Number of DVR clients deployed, beginning of period		13.1		7.3
Net additions		1.4		1.5
Number of DVR clients deployed, end of period		14.5		8.8

Cost of Goods and Services Sold and Gross Margin

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

	For the three months ended September 30,
(in thousands)	2008			2007			Change			% Change

Cost of goods and services sold	$	75,461		$	68,456		$	7,005			10	%

Gross margin	$	106,703		$	136,420		$	(29,717	)		(22	)%
Gross margin as a percentage of revenue		59	%		67	%		(8	)%		**

** Not meaningful.

Cost of goods and services sold increased by 10% during the three-month period ended September 30, 2008 as compared to the three-month period ended September 30, 2007, principally due to an increase in the number of our employees working on development, integration and support activities in the three-month period ended September 30, 2008. This was offset in part by lower royalties paid to third parties during the three-month period ended September 30, 2008 for the use of their technologies.

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

Gross margin as a percentage of revenue was 59% for the three-month period ended September 30, 2008 as compared to 67% for the three-month period ended September 30, 2007. This decrease was a consequence of the reduction in conditional access and royalty revenues (which had no associated direct costs) and the effect of an increase in the total amount of employee costs allocated to cost of goods and services sold during the three-month period ended September 30, 2008.

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Operating Expenses

Operating expenses for the periods under review were as follows:

	For the three months ended September 30,
(in thousands)	2008		2007		Change			% Change

Research & development	$	47,893	$	51,011	$	(3,118	)		(6	)%
Sales & marketing		12,118		9,620		2,498			26	%
General & administration		17,450		14,220		3,230			23	%
Amortization of intangibles		3,333		3,283		50			2	%
Total operating expenses	$	80,794	$	78,134	$	2,660			3	%

Our main operating expenses are employee costs (including the cost of equity-based awards), facilities costs, depreciation, travel costs and legal expenses. Our main operating expenses increased in the three-month period ended September 30, 2008 as compared to the three-month period ended September 30, 2007, primarily due to a higher number of employees and higher facilities expenses. Employee costs were approximately 5% higher in U.S. dollar terms during the three-month period ended September 30, 2008 as compared to the three-month period ended September 30, 2007.

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

	For the three months ended September 30,
	2008		2007

Number of employees, beginning of period		3,961		3,572
Net additions		112		93
Number of employees, end of period		4,073		3,665

Average number of employees during period		4,038		3,610

Research and development costs decreased by 6% for the three-month period ended September 30, 2008 as compared to the three-month period ended September 30, 2007, primarily as a result of a small decrease in the number of employees working on research and development projects. Additionally, in the three-month period ended September 30, 2008, we recognized the benefit of a $7.9 million grant from the French government as a consequence of our engagement in certain eligible research projects. In the three-month period ended September 30, 2007, we received an equivalent grant of $6.7 million.

Sales and marketing expenses increased by 26% in the three-month period ended September 30, 2008 as compared to the three-month period ended September 30, 2007, principally as a result of higher employee headcount and travel costs, increased attendance at trade shows and a higher level of corporate communications activities.

General and administrative expenses increased by 23% in the three-month period ended September 30, 2008 as compared to the three-month period ended September 30, 2007, primarily as a result of holding cash in currencies other than the U.S. dollar as noted above, partially offset by lower legal expenses.

Operating Income

As a result of the factors outlined above, and, in particular, the decrease in conditional access and royalty revenue and the impact of foreign currency exchange rate movements, operating income was $25.9 million, or 14% of revenue, for the three-month period ended September 30, 2008, compared to $58.3 million, or 28% of revenue, for the three-month period ended September 30, 2007.

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Other Expenses

Expenses incurred in connection with the Proposed Transaction were as follows:

	For the three months ended September 30,
(in thousands)	2008		2007

Legal and professional fees	$	3,092	$	─
Unrealized loss on the Conditional Derivative Instrument		11,015		─
Total amount recorded as other expenses	$	14,107	$	─

During the three-month period ended September 30, 2008, we entered into a conditional forward currency derivative financial instrument to act as an economic hedge against the fact that a portion of the debt to be drawn down upon the consummation of the Proposed Transaction will be denominated in euros, but payments to shareholders will be denominated in U.S. dollars (the “Conditional Derivative Instrument”). The notional value of the Conditional Derivative Instrument is €367 million. Should the Proposed Transaction not be consummated, no amounts will be due under the Conditional Derivative Instrument. SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”) requires all derivative financial instruments to be recognized at fair value as of the balance sheet date. The terms of the Conditional Derivative Instrument do not meet the criteria of SFAS No. 133 to qualify for hedge accounting and accordingly the changes in fair value of the Conditional Derivative Instrument are recorded within other expenses in the consolidated statement of operations.

We have estimated the fair value of the Conditional Derivative Instrument in accordance with Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). This requires us to include in the valuation inputs an assessment of the likelihood of the Proposed Transaction being consummated. The fair value is based on Level 3 inputs. These include forward foreign exchange rates, as well as an estimate of market participants’ assessment of the probability of the Proposed Transaction being completed within the parameters defined in the hedging contract, and counterparty risk.

The fair value of the Conditional Derivative Instrument as of September 30, 2008 was $11.0 million, and is recognized within other current liabilities. We recognized a deferred income tax benefit of $4.4 million as a result of the Conditional Derivative Instrument. There were no cash flows associated with the Conditional Derivative Instrument in the three-month period ended September 30, 2008. Should the Proposed Transaction not be consummated, the amounts recorded as of September 30, 2008 will be reversed.

During the three-month period ended September 30, 2008, we also incurred other expenses of $3.1 million in legal and professional fees associated with the Proposed Transaction, which are included in other expenses. We expect to incur further costs associated with the Proposed Transaction in future periods.

Interest Income

Interest income earned on cash deposits was $5.2 million in the three-month period ended September 30, 2008, as compared to $7.4 million in the three-month period ended September 30, 2007, due to lower interest rates.

Income Taxes

Our effective tax rate was 21.3% for the three-month period ended September 30, 2008, compared to 29.5% for the three-month period ended September 30, 2007. The decrease was primarily due to a deferred income tax benefit of $4.4 million related to the Conditional Derivative Instrument discussed above and lower U.K. statutory tax rates.

Net Income

As a consequence of all the factors described above, net income for the three-month period ended September 30, 2008 was $13.4 million, or $0.23 per share ($0.23 per share on a diluted basis), compared to $46.3 million, or $0.80 per share ($0.79 per share on a diluted basis), for the three-month period ended September 30, 2007.

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Liquidity and Capital Resources

Current Financial Condition

Our principal source of liquidity is internally generated funds; however, we also have access to the worldwide capital markets, subject to market conditions. As of September 30, 2008, we had an unused credit facility to borrow up to £30 million (equivalent to approximately $55 million) from a subsidiary of News Corporation. No amounts have been drawn under this facility.

On August 14, 2008, NDS Finance Limited (“NDS Finance”), a wholly owned subsidiary of ours, entered into (a) a senior credit agreement (the "Senior Facilities Agreement") and (b) a mezzanine credit agreement (the “Mezzanine Facility Agreement”). The Senior Facilities Agreement provides for senior secured credit facilities (the “Senior Facilities”) of up to $1.04 billion, comprising $890 million term loan facilities (consisting of three tranches in the amount of $300 million, $295 million and $295 million) and a $150 million revolving facility. The Mezzanine Facility Agreement provides for a mezzanine secured credit facility (the “Mezzanine Facility” and together with the Senior Facilities, the "Debt Facilities") of up to $385 million. Subject to the satisfaction of certain specified conditions, the Debt Facilities will be available to NDS Finance for the purpose of, among other things, financing in part the Proposed Transaction from August 14, 2008 to the earlier of (a) the date falling 15 days after the funding date, (b) the date on which the Scheme of Arrangement relating to the Proposed Transaction lapses or is withdrawn and (c) February 27, 2009. No amounts were outstanding under the Debt Facilities as of September 30, 2008.

As of September 30, 2008, we had cash and cash equivalents of $711.2 million which is being held with the intention of using it for the future development of the business and for use in connection with the Proposed Transaction. 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 a result of our holding a portion of our cash in currencies other than the U.S. dollar, foreign exchange rate fluctuations have reduced the value of our cash holdings by $13.7 million during the three-month period ended September 30, 2008.

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

We continue to invest in technical equipment for use in research and development and in supporting our customers. We have received payment from customers in advance of recognizing revenue (deferred income) of $205.0 million as of September 30, 2008 and we expect to utilize cash to meet our obligations under our arrangements with our customers. 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.

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Sources and Uses of Cash

We had a net outflow of cash and cash equivalents of $10.2 million in the three-month period ended September 30, 2008, compared to a net inflow of $23.3 million in the three-month period ended September 30, 2007 due to a decrease in net cash provided by operating activities, offset in part by lower cash payments for investing activities.

Net cash (used in) provided by operating activities was as follows:

	For the three months ended September 30,
(in thousands)	2008			2007

Net cash (used in) provided by operating activities	$	(4,733	)	$	36,785

The decrease in net cash provided by operating activities in the three-month period ended September 30, 2008 as compared to the three-month period ended September 30, 2007 reflects lower receipts from customers, higher payments relating to the purchase of smart cards, higher income tax payments, and higher payroll costs, travel expenses and rent and facilities costs, as a result of an increase in the number of employees.

Net cash used in investing activities was as follows:

	For the three months ended September 30,
(in thousands)	2008			2007

Capital expenditure	$	(5,446	)	$	(3,470	)
Business acquisitions, net of cash acquired		─			(10,374	)
Deferred consideration paid in respect of business acquisitions		(1,117	)		─
Net cash used in investing activities	$	(6,563	)	$	(13,844	)

In the three-month period ended September 30, 2007, we acquired CastUp Inc., a provider of solutions for the hosting, management and distribution of video over the Internet, for initial consideration net of cash acquired of $10.4 million. In accordance with the acquisition agreement, a further payment of $1.1 million was paid during the three-month period ended September 30, 2008.

Net cash generated by financing activities was as follows:

	For the three months ended September 30,
(in thousands)	2008		2007

Issuance of shares	$	873	$	309
Excess tax benefits realized on shares issued as a result of equity compensation awards		262		79
Net cash generated by financing activities	$	1,135	$	388

Fewer stock options were exercised during the three-month period ended September 30, 2008 than in the corresponding period of the prior fiscal year; however, the weighted average exercise price of stock options was higher during the three-month period ended September 30, 2008. Certain ordinary shares issued as a result of equity compensation awards result in a tax benefit higher than the amounts recorded in the consolidated statement of operations. Such excess tax benefits are shown as a financing cash flow to the extent that they are realized.

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Commitments and Contractual Obligations

As of September 30, 2008, we had open foreign exchange forward contracts to purchase Israeli shekels with a total notional contract value of $279.0 million with settlement dates extending through August 2010.

We have entered into various agreements in connection with the Proposed Transaction which would, should the Proposed Transaction be completed, result in us taking on substantial indebtedness and paying additional substantial fees. As discussed above, NDS Finance Limited, a wholly owned subsidiary of ours, entered into (a) a Senior Facilities Agreement of up to $1.04 billion and (b) a Mezzanine Facility Agreement of up to $385 million. Additionally, we entered into the Conditional Derivative Instrument referred to above with a notional value of €367 million. These commitments and obligations are conditioned upon the completion of the Proposed Transaction.

Except for these matters, there has been no other material change to our commitments since June 30, 2008.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to changes in foreign exchange rates. We operate in international markets and have an operational presence in several countries. Accordingly, our costs and revenue are primarily denominated in a mixture of U.S. dollars, Israeli shekels, pounds sterling, euros and Indian rupees.

Approximately 44% of our revenue was denominated in currencies other than the U.S. dollar, principally pounds sterling and euros, during the three-month period ended September 30, 2008. The U.S. dollar was weaker against the euro but stronger against the British pound sterling during the three-month period ended September 30, 2008 compared to the three-month period ended September 30, 2007, as measured by the average exchange rates prevailing during each period. We estimate that movements in foreign exchange rates favorably impacted our total revenue for the three-month period ended September 30, 2008 by approximately $1.0 million, or 0.5%, compared to what would have been achieved had foreign exchange rates been consistent with those prevailing during the three-month period ended September 30, 2007.

Approximately 75% of our total expenses were denominated in currencies other than the U.S. dollar, principally pounds sterling, Israeli shekels, euros and Indian rupees, during the three-month period ended September 30, 2008. We estimate that fluctuations in foreign exchange rates increased our total expenses in the three-month period ended September 30, 2008 by approximately $4.6 million, or 3%, compared to what would have been achieved had foreign exchange rates been consistent with those prevailing during the three-month period ended September 30, 2007.

The net effect of the factors described above was to reduce our operating income by $3.5 million in the three-month period ended September 30, 2008 compared to what would have been achieved had foreign exchange rates been consistent with those prevailing during the three-month period ended September 30, 2007.

As of September 30, 2008, approximately 81% of our cash was held in U.S. dollars, 12% in pounds sterling and 4% in euros, with the remaining balance held in other currencies in which we incur operating expenses. 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. We recorded a loss of $4.6 million within operating expenses in the three-month period ended September 30, 2008 as a result of holding cash in currencies other than the U.S. dollar and a further loss of $9.1 million was recorded within other comprehensive income in the same period. Our total losses on holding cash in currencies other than the U.S. dollar in the three-month period ended September 30, 2008 was $13.7 million.

Certain of our assets and liabilities are held by certain of our subsidiary companies whose functional currency is not the U.S. dollar. As a result of retranslating those assets and liabilities into U.S. dollars, we incurred a loss, recorded in other comprehensive income, of $13.7 million in the three-month period ended September 30, 2008. This loss in equity comprised $9.1 million as a result of holding cash, as noted above, together with a further loss of $4.6 million relating to other assets and liabilities.

During the three-month period ended September 30, 2008, we commenced the use of derivative financial instruments designated as cash flow hedges to hedge our exposure to foreign currency exchange risks associated with the operating expenses of our Israeli operations. As of September 30, 2008, the notional amount of foreign exchange forward contracts with foreign currency risk was $279.0 million with settlement dates extending through August 2010. During the three-month period ended September 30, 2008, an unrealized gain of $17.0 million was recorded within other comprehensive income ($12.2 million, net of tax), a realized gain of $0.3 million was included within operating expenses and no amount of the cash flow hedge was determined to be ineffective. The potential loss in fair value for such financial instruments of a 10% adverse change in quoted foreign currency exchange rates would be approximately $29.6 million. Subsequent to September 30, 2008, we entered into foreign exchange forward currency contracts to hedge the foreign exchange risks associated with the operating expenses of our Indian and Korean operations. We may use additional derivative financial instruments as a risk management tool in the future.

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Additionally, we entered into the Conditional Derivative Instrument described above with a notional value of €367 million. While adverse changes in the forward euro-U.S. dollar spot rate resulted in an unrealized loss of approximately $11 million to record the instrument at fair value as of September 30, 2008, such loss would be offset by a corresponding increase in the U.S. dollar equivalent value of the expected proceeds from the euro-denominated debt.

Our cash deposits are held and derivative financial instruments are contracted with several international banks. The recent uncertainty in the global financial markets has increased the risk associated with these cash deposits and derivative financial instruments. We mitigate this risk by using several different banks, but the failure of any of those banks could have a material adverse effect on our financial position. As a consequence of using banks generally regarded to be of lower risk, we may accept lower rates of interest on our deposits and pay higher fees for other transactions.

Our cash holdings are in excess of our immediate operating requirements; therefore, we are exposed to changes in market interest rates on cash deposits. We estimate that a decline in market interest rates available for cash deposits of one percentage point would decrease our annual interest income by approximately $7 million based on total cash on deposit of approximately $700 million.

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 has been no change 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 first quarter of fiscal 2009 that has materially affected, or is 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 10a 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 our 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 that 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 networking 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 broadband 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 and mobile telephone companies are now also marketing packages that combine television, telephone and high-speed Internet access to consumers. As a result, our largest customers are facing increased competition that could affect their ability to attract and retain subscribers. If we and our customers do not address 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 or if our customers otherwise purchase fewer smart cards or purchase smart cards on less favorable terms to us.

A significant portion of our revenue 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 may also receive royalties based on each set-top box manufactured or deployed that incorporates our technologies. Therefore, a significant portion of our revenue is dependent upon our customers’ subscriber numbers, the growth in subscriber and set-top box 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. Global economic conditions may have an impact on our customers’ subscriber numbers, with downturns in the economy potentially having a negative impact on such numbers. 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.

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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 the security features of the conditional access system. Any significant increase in the incidence of signal theft could require us to replace a population of a platform operator’s smart cards or take other remedial action. 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 us to replace a population of smart cards or take other action to rectify the problem. 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 revenue could have a material adverse effect on our business, operating results and financial condition. A significant increase in the level of signal theft, whether or not resulting from a failure of our conditional access systems, could also injure the reputation of our conditional access systems among our customers and potential customers and, as a consequence, our business, operating results and financial condition could be materially adversely affected.

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

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

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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 revenue from a limited number of large customers. Our three largest customers are BSkyB, DIRECTV and SKY Italia. During the three-month period ended September 30, 2008, these three customers accounted directly and indirectly for approximately 52% of our total revenue. News Corporation, which holds 71.9% of our total and issued outstanding share capital, currently owns approximately 39% and 100% of BSkyB and SKY Italia, respectively. We expect to continue to be dependent upon a limited number of customers for a significant portion of our revenue, 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 revenue could decline significantly and as a result, our business, operating results and financial condition could be materially adversely affected.

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

Our operating results have varied in the past from quarter to quarter and from year to year and are likely to vary from period to period in the future. Historically, our revenue has reflected a small number of relatively large orders for our technology and services, which generally have long sales and order cycles. Additionally, our accounting policies may require us to defer revenue until all elements of an arrangement have been delivered to and accepted by our customers. 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 financial results.

New accounting pronouncements or a change in how U.S. generally accepted accounting principles (“GAAP”) are interpreted or applied to our business could have a significant effect on our financial 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 income taxes and accounting for goodwill and other intangible assets.

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

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

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

Defending against intellectual property infringement claims could harm our business.

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

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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 as alleged in any of the asserted claims in such a suit, we may be prevented from distributing certain of our products and we may incur significant indemnification liabilities, which may adversely affect our business, operating results and financial condition.

In addition, while damage claims in respect of an alleged infringement may, in many cases, be based upon a presumed royalty rate to which the patent holder would have otherwise been entitled, 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 that 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 revenue, 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 the international aspects of our operations could harm our business.

Our customers and other business counterparties, including banks that we use, are located throughout the world. Inherent risks of doing business in international markets include changes in legal and regulatory requirements, local or global economic changes, counterparty risk, 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, cable television and gaming and gambling 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.

A portion of our business involves the licensing of software used to conduct betting and gaming applications. The regulation of the gambling industry is complex, intensive and constantly changing. The adoption or modification of laws or regulations relating to Internet gambling in various jurisdictions could adversely affect the manner in which we currently conduct this portion of our business.

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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. In the three-month period ended September 30, 2008, approximately 44% of our revenues and approximately 75% of our total expenses were denominated in currencies other than the U.S. dollar. Additionally, as of September 30, 2008, approximately 19% of our cash balances were denominated in currencies other than the U.S. dollar. As a result, we are exposed to fluctuations in foreign exchange rates that may have a material adverse effect on our business, operating results and financial condition.

To partially mitigate the risks associated with fluctuations in the exchange rate of the Israeli shekel against the U.S. dollar, as at September 30, 2008 we have a derivative financial instrument in place to enable us to hedge the exchange rate risk associated with substantially all of our forecasted Israeli shekel-denominated cash operating expenses through August 2010. As of September 30, 2008, the notional amount of foreign exchange forward contracts with foreign currency risk was $279.0 million with settlement dates extending through August 2010. The fair value of derivative financial instruments, measured by reference to quoted market exchange rates as of September 30, 2008 was $17.0 million The potential loss in fair value for such financial instruments of a 10% adverse change in quoted foreign currency exchange rates would be approximately $29.6 million. Subsequent to September 30, 2008, we entered into foreign exchange forward currency contracts to hedge the foreign exchange risks associated with the operating expenses of our Indian operations. We may use additional derivative financial instruments as a risk management tool in the future.

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 that may restrict their ability to remit payments to us.

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

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

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

We are controlled by News Corporation. As of September 30, 2008, News Corporation beneficially owned 71.9% of our total issued and outstanding share capital. Because News Corporation beneficially owns 100% of our Series B Ordinary Shares, which have ten votes per share (as opposed to our Series A Ordinary Shares, which have one vote per share), it controls 96.2% of our voting power. By reason of such ownership, unless it is excluded or recuses itself from the vote, News Corporation is able to control the composition of our entire Board of Directors, to influence our decisions to take or refrain from taking certain actions and to control the votes on 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 from time to time advises News Corporation with respect to various technology matters.

Businesses in which News Corporation has an interest currently account for, and are expected to continue to account for, a significant portion of our revenue, although the proportion of such revenue has declined following News Corporation’s divestiture of its interest in DIRECTV in February 2008. During the three-month period ended September 30, 2008, approximately 34% of our total revenues were derived from businesses in which News Corporation has a continuing interest. Those businesses include two of 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 NASDAQ 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 NASDAQ. 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 Chairman and 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.

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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 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 any equity awards that we may grant to our Directors, executive officers and employees in the future.

The proposed transaction with News Corporation and Permira may have an adverse impact on, or cause significant fluctuations in, the market price or liquidity of our ADSs.

On August 14, 2008, News Corporation, the Permira Newcos and we announced that we signed an implementation agreement relating to the Proposed Transaction. The Proposed Transaction would be effected by means of:

·	Cancelling all of our outstanding Series A Ordinary Shares, including shares represented by ADSs traded on NASDAQ, for per-share consideration of $63 in cash;

Cancelling approximately 67% of our Series B Ordinary Shares held by News Corporation for consideration of $63 per share to be paid in a combination of approximately $1.5 billion in cash and a $242 million vendor note. News Corporation currently owns 71.9% of our equity and 96.2% of our voting power through its ownership of 100% of the outstanding Series B Ordinary Shares. News Corporation would retain ownership of the remaining approximately 33% of the Series B Ordinary Shares it currently holds, resulting in it owning 49% of us following the completion of the Proposed Transaction; and

·	Issuing the Permira Newcos new Series B Ordinary Shares representing 51% of our then outstanding Series B Ordinary Shares.

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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

Not applicable.

Item 5. Other Information

2008 Annual General Meeting of Shareholders

We currently expect to hold our 2008 Annual General Meeting of Shareholders (the “2008 Annual Meeting”) on December 17, 2008. This meeting date represents a change of more than 30 days from the anniversary of our 2007 Annual General Meeting of Shareholders. Accordingly, the deadline for submitting shareholder proposals to be considered for inclusion in our proxy materials for the 2008 Annual Meeting has changed. Any submission by a shareholder who wishes for a proposal to be considered for inclusion in our proxy materials for the 2008 Annual Meeting pursuant to Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), must be received by us a reasonable time before we begin to print and mail our proxy materials. We have set the deadline for receipt of such proposals as the close of business on November 4, 2008. Proposals must be received by our Secretary at the principal executive offices at NDS Group plc, One Heathrow Boulevard, 286 Bath Road, West Drayton, Middlesex UB7 0DQ, England, and must otherwise comply with the requirements of Rule 14a-8 in order to be considered for inclusion in our 2008 proxy statement and proxy.

In addition, in order for proposals of shareholders made outside the processes of Rule 14a-8 under the Exchange Act to be considered “timely” for purposes of Rule 14a-4(c) under the Exchange Act, we must receive the proposal at our principal executive offices no later than November 25, 2008. This is without prejudice to shareholders’ rights under the U.K. Companies Act or under our Articles of Association to propose resolutions that may properly be considered at that meeting.

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Item 6.	Exhibits

2.1	Implementation Agreement, by and among Nuclobel Lux 1 S.à r.l., Nuclobel Lux 2 S.à r.l., NDS Group plc, NDS Finance Limited, News Corporation and NDS Holdco Inc. dated August 14, 2008 (Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by NDS Group plc with the Securities and Exchange Commission on August 20, 2008)

10.1	Senior Facilities Agreement, by and among NDS Finance Limited, J.P. Morgan plc, Morgan Stanley Bank International Limited, J.P. Morgan Europe Limited, JPMorgan Chase Bank, N.A., London Branch and J.P. Morgan Europe Limited, dated August 14, 2008 (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by NDS Group plc with the Securities and Exchange Commission on August 20, 2008)

10.2	Mezzanine Facility Agreement, by and among NDS Finance Limited, J.P. Morgan plc, Morgan Stanley Bank International Limited, J.P. Morgan Europe Limited, JPMorgan Chase Bank, N.A., London Branch and J.P. Morgan Europe Limited, dated August 14, 2008 (Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by NDS Group plc with the Securities and Exchange Commission on August 20, 2008)

12	Computation of Ratio of Earnings to Fixed Charges*

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

31.2	Chief Financial Officer Certification required by Rules 13a-14(a) and 15d-14(a) of the Exchange Act*

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 the Sarbanes-Oxley Act of 2002*

* Filed herewith.

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, 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: October 30, 2008

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Readability	H.S. freshman Avg

NDS (NNDS) Inactive 10-Q2009 Q1 Quarterly report

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