UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended March 31, 2005

or

For the transition period from                      to                    

Commission File Number: 001-15473

OPENTV CORP.

(415) 962-5000
(Registrant’s telephone number, including area code)

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

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

     As of March 31, 2005, the Registrant had outstanding (not including 76,327 Class A ordinary shares held in treasury):

92,686,176 Class A ordinary shares, no par value; and
30,631,746 Class B ordinary shares, no par value

Table of Contents

Part I. Financial Information

Item 1. Financial Statements

OPENTV CORP.

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

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OPENTV CORP.

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

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OPENTV CORP.

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

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OPENTV CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments that in the opinion of management are necessary for a fair presentation of the results of operations, financial position and cash flows as of, and for, the periods shown. These adjustments consist of normal recurring adjustments unless otherwise indicated. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The results of operations for such period are not necessarily indicative of the results that may be expected for the year ending December 31, 2005, or for any future period. These condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2004.

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

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

Note 2. Summary of Significant Accounting Policies

Share-Based Compensation

     We account for share-based employee compensation arrangements in accordance with the provisions of APB No. 25, “Accounting for Stock Issued to Employees,” and comply with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” Under APB No. 25 compensation expense is based on the difference, if any, on the date of the grant, between the fair value of our shares and the exercise price of the option or purchase right. Had compensation cost for options plans been determined based on the fair value at the grant dates for the awards under a method prescribed by SFAS 123, our net loss would have been increased to the pro-forma amounts indicated below (amounts in millions, except per share amounts):

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     These pro-forma amounts may not be representative of the effects on reported net loss for future periods as options vest over several years and additional awards are generally made each year.

     We calculated the fair value of each option grant on the date of the grant using the Black-Scholes option pricing model with the following assumptions:

     The weighted average fair value of options granted during the three months ended March 31, 2005 and 2004 was $2.71 and $2.99, respectively.

Recent Accounting Pronouncements

     In December 2004, the FASB issued SFAS 123R which requires the measurement of all employee share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our consolidated statements of income. The accounting provisions of SFAS 123R are effective for fiscal years beginning after June 15, 2005. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. Although we have not yet determined whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123, we are evaluating the requirements under SFAS 123R and expect the adoption to have a significant impact on our consolidated statements of income.

Note 3. Net Loss Per Share

     Basic and diluted net loss per share were computed using the weighted average number of ordinary shares outstanding during the periods presented. The following items as of March 31, 2005 and 2004 were not included in the computation of diluted net loss per share because the effect would be anti-dilutive:

     Had such items been included in the calculation of diluted net loss per share, shares used in the calculation would have been increased by approximately 9.4 million and 10.5 million for the three months ended March 31, 2005 and 2004, respectively.

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Note 4. Goodwill

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

Note 5. Intangible Assets, Net

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

     The intangible assets are being amortized on a straight-line basis over their estimated useful lives. Amortization of intangible assets (including $0.9 million and $1.6 million for the three months ended March 31, 2005 and 2004, respectively, that were reported in cost of revenues) was $1.3 million and $2.8 million for the three months ended March 31, 2005 and 2004, respectively. The future annual amortization expense is expected to be as follows (in millions):

Note 6. Restructuring and Impairment Costs

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

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commitments. These estimates could differ from actual results. We monitor the initial estimates periodically and record an adjustment for any significant changes in estimates.

     For the three months ended March 31, 2005, there was a restructuring and impairment provision of $0.5 million relating to the closure of our Lexington, Massachusetts facility. In March 2005, we negotiated a lease buy-out with the landlord of our Lexington, Massachusetts facility. We had previously recorded amounts in respect of estimated sublease income that we anticipated receiving based on the assumption that we would sublease that space. After recording those amounts, we subsequently determined to terminate the lease entirely through a buyout of the remaining term. The amount of that buyout was higher than the amount we previously recorded for expected sublease income, and we, therefore, recorded an additional restructuring provision of $0.2 million in the quarter ended March 31, 2005. In addition, in connection with the restructuring of our facility and operations in Lexington, we settled issues related to ownership of certain equipment within our joint venture, Spyglass Integration. As a result, we recorded an impairment of $0.3 million in respect of equipment that we transferred as part of that settlement arrangement. The following sets forth the restructuring and impairment activity during the three months ended March 31, 2005 (in millions):

     The outstanding accrual for excess facilities relates to operating lease obligations which expire through 2006.

Note 7. Employee Bonus

     During the three months ended March 31, 2005, we issued 1,162,180 of our Class A ordinary shares with an aggregate value of $3.2 million (based on the closing market price for our stock on the date of each grant) to employees in the United States and the United Kingdom pursuant to our 2004 bonus plan and also made certain cash bonus payments to employees in other foreign jurisdictions.

Note 8. Comprehensive Loss

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

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Note 9. Commitments and Contingencies

Operating Leases

     We lease our facilities from third parties under operating lease agreements or sublease agreements in the United States, Europe and Asia Pacific. These leases expire between July 2005 and March 2016. Total rent expense was $1.2 million and $1.5 million for the three months ended March 31, 2005 and 2004, respectively. There was no sublease income.

     Future minimum payments under non-cancelable operating leases as of March 31, 2005 were as follows (in millions):

Other Commitments

     In the ordinary course of business we enter into various arrangements with vendors and other business partners for bandwidth, marketing, and other services. Future minimum commitments under these arrangements as of March 31, 2005 were $3.3 million for the remaining nine months of 2005 and $1.3 million for the year ending December 31, 2006. In addition, we also have arrangements with certain parties that provide for revenue-sharing payments.

     As of March 31, 2005, we had two standby letters of credit aggregating approximately $2.0 million that were issued to landlords at two of our leased properties.

Contingencies

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

     On January 10, 2005, after Liberate’s previous bankruptcy filing had been dismissed, Liberate announced the signing of a definitive agreement to sell substantially all of the assets of its North American business to Double C Technologies, a joint venture between Comcast Corporation and Cox Communications, Inc. On February 11,

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2005, the United States District Court for the Northern District of California issued an order staying the patent litigation until further notice. Liberate completed its sale to Double C Technologies on April 7, 2005 and indicated in a filing with the United States District Court that Double C Technologies had assumed all liability related to this litigation. The parties recently requested that the Court continue the stay until at least May 23, 2005, to allow Double C and its new counsel time to familiarize themselves with the litigation and to allow the parties to evaluate settlement prospects.

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

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

          In November 2001, a putative securities class action was filed in United States District Court for the Southern District of New York against Wink Communications and two of its officers and directors and certain investment banks which acted as underwriters for Wink Communications’ initial public offering. We acquired Wink Communications in October 2002. The lawsuit is now captioned In re Wink Communications, Inc. Initial Public Offering Securities Litigation. The operative amended complaint alleges undisclosed and improper practices concerning the allocation of Wink Communications’ initial public offering shares in violation of the federal securities laws, and seeks unspecified damages on behalf of persons who purchased Wink Communications’ common stock during the period from August 19, 1999 through December 6, 2000. This action has been consolidated for pretrial purposes as In re Initial Public Offering Securities Litigation. On February 19, 2003, the Court ruled on the motions to dismiss filed by all defendants in the consolidated cases. The Court denied the motions to dismiss the claims under the Securities Act of 1933, granted the motion to dismiss the claims under Section 10(b) of the Securities Exchange Act of 1934 against Wink Communications and one individual defendant, and denied that motion against the other individual defendant. As described above, a stipulation of settlement for the claims against the issuer defendants has been submitted to and preliminarily approved by the Court. There is no

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guarantee that the settlement will become effective, as it is subject to a number of conditions, including approval of the Court, which cannot be assured. If the settlement does not occur, and the litigation against Wink Communications continues, we believe that Wink Communications has meritorious defenses to the claims brought against it and that Wink Communications will defend itself vigorously. No provision has been made in our consolidated financial statements for this matter. We are unable to predict the likelihood of an unfavorable outcome or estimate our potential liability, if any.

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

          Broadcast Innovation Matter. On November 30, 2001, a suit was filed in the United States District Court for the District of Colorado by Broadcast Innovation, L.L.C., or BI, alleging that DIRECTV, Inc., EchoStar Communications Corporation, Hughes Electronics Corporation, Thomson Multimedia, Inc., Dotcast, Inc. and Pegasus Satellite Television, Inc. are infringing certain claims of United States patent no. 6,076,094, assigned to or licensed by BI. DIRECTV and certain other defendants settled with BI on July 17, 2003. We are unaware of the specific terms of that settlement. Though we are not currently a defendant in the suit, BI may allege that certain of our products, possibly in combination with the products provided by some of the defendants, infringe BI’s patent. The agreement between OpenTV, Inc. and EchoStar includes indemnification obligations that may be triggered by the litigation. If liability is found against EchoStar in this matter, and if such a decision implicates our technology or products, EchoStar has notified OpenTV, Inc. of its expectation of indemnification, in which case our business performance, financial position, results of operations or cash flows may be adversely affected. Likewise, if OpenTV, Inc. were to be named as a defendant and it is determined that the products of OpenTV, Inc. infringe any of the asserted claims, and/or it is determined that OpenTV, Inc. is obligated to defend EchoStar in this matter, our business performance, financial position, results of operations or cash flows may be adversely affected. On November 7, 2003, Broadcast Innovation filed suit against Charter Communications, Inc. and Comcast Corporation in United States District Court for the District of Colorado, alleging that Charter and Comcast also infringe the ‘094 patent. The agreements between Wink Communications and Charter Communications include indemnification obligations of Wink Communications that may be triggered by the litigation. While reserving all of our rights in respect of this matter, we have conditionally reimbursed Charter for certain reasonable legal expenses that it incurred in connection with this litigation. On August 4, 2004, the District Court found the ‘094 patent invalid. On August 5, 2004, BI filed a motion for reconsideration in the case. On September 17, 2004, the District Court entered its summary judgment order based on the invalidity of the patent in suit. On December 16, 2004, Broadcast Innovations filed its appeal brief of the district court judge’s summary judgment order with the Court of Appeals for the Federal Circuit. The Federal Circuit has scheduled oral argument in the appeal for June 9, 2005. Based on the information available to us, we have established a reserve for costs and fees that may be incurred in connection with this matter; that reserve is an estimate only and actual costs may be materially different.

          Personalized Media Communications, LLC. On December 4, 2000, a suit was filed in the United States District Court for the District of Delaware by Pegasus Development Corporation and Personalized Media Communications, LLC alleging that DIRECTV, Inc., Hughes Electronics Corp., Thomson Consumer Electronics and Philips Electronics North America, Inc. are willfully infringing certain claims of seven U.S. patents assigned or licensed to Personalized Media Communications. Based on publicly available information, we believe that the case has been stayed in the District Court pending re-examination by the United States Patent and Trademark Office. Though Wink Communications is not a defendant in the suit, Personalized Media Communications may allege that certain products of Wink Communications, possibly in combination with products provided by the defendants, infringe Personalized Media Communication’s patents. The agreements between Wink Communications and each of the defendants include indemnification obligations that may be triggered by this litigation. If it is determined that

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Wink Communications is obligated to defend any defendant in this matter, and/or that the products of Wink Communications infringe any of the asserted claims, our business performance, financial position, results of operations or cash flows may be adversely affected. No provision has been made in our consolidated financial statements for this matter. We are unable to estimate our potential liability, if any

          Other Matters. In the normal course of our business, we provide indemnification to customers against claims of intellectual property infringement made by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations, although our liabilities in those arrangements are customarily limited in various respects, including monetarily.

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

          From time to time in the ordinary course of our business, we are also party to other legal proceedings or receive correspondence regarding potential or threatened legal proceedings. While we currently believe that the ultimate outcome of these other proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position or overall trends in our results of operations, legal proceedings are subject to inherent uncertainties. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on the results of operations of the period in which the ruling occurs.

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

Note 10. Related Party Transactions

          As of March 31, 2005, Liberty Media’s total ownership represented approximately 31.9% of the economic interest and approximately 78.7% of the voting power of our ordinary shares on an undiluted basis.

          Since January 2004, we have participated in the Liberty Media medical insurance program for employees in the United States at a cost of $0.4 million for the three months ended March 31, 2005 and $0.4 million for the three months ended March 31, 2004. We believe that this participation provides us with better economic terms than we would otherwise be able to achieve independent of Liberty Media.

Note 11. Segment Information

          Prior to 2004, we did not have separately reportable operating segments. During 2004, we redefined the reporting units of the Company resulting in three reportable business segments. Our Middleware and Integrated Technologies business has responsibility for our core middleware and the technologies that are customarily integrated as “extensions” of that middleware. Our Applications business has responsibility for our applications and related technologies and products. Our BettingCorp business has responsibility for fixed-odds and other wagering gaming applications. We report this information in a manner required by SFAS No. 131.

          Our Chief Executive Officer has been identified as the chief operating decision maker in assessing the performance of the segments. Our management reviews and assesses the “contribution margin” of each of these segments, which is not a financial measure in accordance with generally accepted accounting principles, or GAAP. We define “contribution margin,” for these purposes, as Adjusted EBITDA before unusual items and unallocated corporate overhead, which includes certain functions, such as executive management, accounting, administration, legal, tax, treasury and information technology infrastructure, that support but are not specifically attributable to our operating segments. “EBITDA” is an acronym for earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA before unusual items is a non-GAAP financial measure which excludes interest, taxes, depreciation and amortization, amortization of intangible assets, other income, minority interest, restructuring and

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impairment provisions and unusual items such as contract amendments that mitigated potential loss positions. Adjusted EBITDA before unusual items does not take into account substantial costs of doing business, such as income tax and interest. Management believes that segment contribution margin is a helpful measure in evaluating operational performance for our company. While we may consider “contribution margin” and Adjusted EBITDA before unusual items to be important measures of comparative operating performance, these measures should be considered in addition to, but not as a substitute for, loss from operations, net loss, cash flow used in operating activities and other measures of financial performance prepared in accordance with accounting principles generally accepted in the United States that are otherwise presented in our financial statements. In addition, our calculations of “contribution margin” and Adjusted EBITDA before unusual items may be different from the calculations used by other companies and, therefore, comparability may be affected.

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

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

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

          Four major customers accounted for the following percentages of revenues:

          British Sky Broadcasting, or BSkyB, directly and indirectly accounted for 21% and 15% of total revenues for the three months ended March 31, 2005 and 2004, respectively, taking into account the royalties which are paid by four manufacturers who sell set-top boxes to BSkyB.

          One customer accounted for 32% of net accounts receivable as of March 31, 2005.

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

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

          This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause the results of OpenTV Corp. and its consolidated subsidiaries to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any projections of revenue, expenses, earnings or losses from operations; any statements of the plans, strategies and objectives of management for future operation; any statements concerning developments, performance or market conditions relating to products or services; any statements regarding future economic conditions or performance; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. All these forward-looking statements are based on information available to us at this time, and we assume no obligation to update any of these statements. Actual results could differ materially from those projected in these forward-looking statements as a result of many factors, including those identified in the section titled “Factors That May Affect Future Results” and elsewhere. We urge you to review and consider the various disclosures made by us in this report, and those detailed from time to time in our filings with the Securities and Exchange Commission, that attempt to advise you of the risks and factors that may affect our future results.

          The following discussion should be read together with the unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited financial statements, the notes thereto and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2004, as filed with the Securities and Exchange Commission.

Overview

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

          We derive our revenues from the licensing of our core software and related technologies, the licensing and distribution of our content and applications and the delivery of professional services. We typically receive one-time royalty fees from manufacturers of set-top boxes or cable, satellite and digital terrestrial operators, which we refer to as “network operators,” once a set-top box, which incorporates our software, has been shipped to, or activated by, the network operator. We also receive professional services fees from consulting,

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engineering and training engagements, fees for the maintenance and support of our products and fees from revenue sharing arrangements related to the use of our interactive content and applications. In addition, we also receive ongoing licensing fees for various software products that we sell.

          As of March 31, 2005, Liberty Media Corporation’s total ownership represented approximately 31.9% of the economic interest and 78.7% of the voting interest of our ordinary shares on an undiluted basis.

Critical Accounting Policies and Estimates

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

          We believe the following critical accounting policies and estimates have the greatest potential impact on our consolidated financial statements: revenue recognition; valuation allowances, specifically the allowance for doubtful accounts and deferred tax assets; valuation of investments in privately-held companies; impairment of goodwill and intangible assets; and restructuring and impairment costs. All of these accounting policies, estimates and assumptions, as well as the resulting impact to our financial statements, have been discussed with our audit committee.

Revenue Recognition

          We recognize revenue in accordance with current generally accepted accounting principles, or GAAP, that have been prescribed for the software industry, the principal policies of which are reflected in American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, “Software Revenue Recognition” and Securities and Exchange Commission Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition.” Revenue recognition requirements in the software industry are very complex and are subject to change. Our revenue recognition policy is one of our critical accounting policies because revenue is a key component of our results of operations and is based on complex rules that require us to make judgments and estimates. The application of SOP 97-2 requires judgment, including whether a software arrangement includes multiple elements, and if so, whether vendor-specific objective evidence (VSOE) of fair value exists. In applying our revenue recognition policy we must determine what portions of our revenue are recognized currently and which portions must be deferred. In order to determine current and deferred revenue, we make judgments and estimates with regard to future deliverable products and services and the appropriate pricing for those products and services. Our assumptions and judgments regarding future products and services could differ from actual events.

          Professional services revenues from software development contracts, customization services and implementation support are recognized generally on the percentage of completion method. For fixed bid contracts under the percentage of completion method, the extent of progress towards completion is measured based on actual costs incurred to total estimated costs. The actual results could differ from the percentage estimates by the time a project is completed.

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

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Valuation Allowances

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

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

Valuation of Investments in Privately-Held Companies

          We invest in equity and debt instruments of privately-held companies for business and strategic objectives, and typically we do not attempt to reduce or eliminate the inherent market risks of these investments. We perform periodic reviews of these investments for impairment. Our investments in privately-held companies are considered impaired when a review of the investee’s operations and other indicators of impairment indicate that there has been a decline in the fair value that is other than temporary and that the carrying value of the investment is not likely to be recoverable. Such indicators include, but are not limited to, limited capital resources, need for additional financing, and prospects for liquidity of the related securities. Impaired investments in privately-held companies are written down to estimated fair value, which is the amount we believe is recoverable from the investment.

Impairment of Goodwill and Other Intangible Assets

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

Restructuring and Impairment Costs

          We monitor our organization structure and associated operating expenses periodically. Depending upon events and circumstances, actions may be taken to restructure the business, including terminating employees, abandoning excess lease space and incurring other exit costs. Any resulting restructuring and impairment costs include numerous estimates made by us based on our knowledge of the activity being affected and the cost to exit existing commitments. These estimates could differ from actual results. We monitor the initial estimates periodically and record an adjustment for any significant changes in estimates.

Recent Accounting Pronouncements

          In December 2004, the FASB issued SFAS 123R which requires the measurement of all employee share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our consolidated statements of income. The accounting provisions of SFAS 123R are effective for fiscal years beginning after June 15, 2005. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. Although we have not yet determined whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123, we are evaluating the requirements under SFAS 123R and expect the adoption to have a significant impact on our consolidated statements of income.

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Three Months Ended March 31, 2005 and 2004

Revenues

          Revenues for the three months ended March 31, 2005 were $22.8 million, an increase of $5.4 million, or 31%, from $17.4 million for the same period in 2004. Revenues by line item were as follows (in millions):

          Royalties. We generally derive royalties from sales of set-top boxes and other products that incorporate our software. Royalties are paid by either the set-top box manufacturer or by the network operator, depending upon the particular arrangement. We recognize royalties upon notification of unit shipments or activation of our software by manufacturers or network operators. Royalty reports are generally received one quarter in arrears. For non-refundable prepaid royalties, we recognize revenues upon delivery of the software.

          Royalties for the three months ended March 31, 2005 were $14.9 million, an increase of $5.8 million, or 64%, from $9.1 million in 2004. We experienced growth in all regions during the three months ended March 31, 2005, with Europe, Middle East and Africa accounting for almost 80% of that increase due to strong shipments to Sky Italia S.r.l. in the quarter ended March 31, 2005. Shipments by Echostar Communications Corp. in the U.S. and Matsushita Electric Industrial Co., Ltd. in Japan were also higher than the shipments in the same period of the prior year.

          Four of our customers sell set-top boxes to BSkyB, which accounted for $2.7 million, or 18%, of our royalties for the three months ended March 31, 2005, compared with $2.5 million, or 27%, of our royalties for the three months ended March 31, 2004. Sky Italia accounted for $4.5 million, or 30%, of our royalties for the three months ended March 31, 2005, compared with $0.1 million for the three months ended March 31, 2004. Echostar accounted for $3.4 million, or 23%, of our royalties for the three months ended March 31, 2005, compared with $2.3 million, or 25%, of our royalties for the three months ended March 31, 2004. In certain instances, we provide volume discounts to customers based on the number of copies of our software that they deploy. As a result of those types of arrangements, although we may experience continued growth in middleware deployments, the average price for each copy licensed to certain customers may decline over time, which could limit the growth of our royalty payments in the future. If current deployment trends continue in a manner consistent with those of 2004, we would expect the average pricing for our middleware, over the course of 2005, to decline for certain customers.

          Services, Support and Other. Services, support and other revenue consist primarily of professional services consulting engagements for set-top box manufacturers, network operators and system integrators and maintenance, support and training for set-top box manufacturers and network operators. For the three months ended March 31, 2005, revenues in this category were $3.5 million, a decline of $0.6 million, or 15%, from $4.1 million in 2004. This decrease resulted from reduced maintenance and support fees paid by customers.

          Fees and Revenue Shares. Fees and revenue shares consist of PlayJam games channel fees, interactive advertising fees, net betting and gaming revenues, and revenue shares received for advertising and other interactive services.

          For the three months ended March 31, 2005, fees and revenue shares were $3.7 million, an increase of $0.5 million, or 16%, from $3.2 million for the same period in 2004. Net betting and gaming revenues were $0.6 million higher than in the same period of the prior year, while PlayJam revenues were $0.3 million lower than in the same period of the prior year due to competitive pressure from other gaming channels and revenue share was $0.2 million higher than in the same period of the prior year. BSkyB accounted for $1.8 million, or 49%, of revenues in this category for the three months ended March 31, 2005.

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          License Fees and Programming. We derive license fees from the licensing of enterprise products such as OpenTV Streamer and OpenTV Software Developers Kit, and programming fees from NASCAR. For the three months ended March 31, 2005, total revenues in this category were $0.7 million, a decline of $0.3 million, or 30%, from $1.0 million in 2004. License fees accounted for a decrease of $0.5 million and programming accounted for an increase of $0.2 million compared with the same period in the prior year.

Operating Expenses

          Our total operating expenses for the three months ended March 31, 2005 were $25.9 million, a decrease of $0.4 million, or 2%, from $26.3 million in 2004. Operating expenses by line item were as follows (in millions):

          Cost of Revenues. Cost of revenues consist primarily of compensation-related expenses and related overhead costs associated with professional services engagements, network infrastructure and bandwidth costs of our interactive games and betting channels, and amortization of developed technology and patents.

          Cost of revenues for the three months ended March 31, 2005 were $8.8 million, a decrease of $1.5 million, or 15%, from $10.3 million for the same period in 2004. As a percentage of revenues, cost of revenues were 39% for the first three months of 2005 compared with 59% for the same period in 2004. Amortization of developed technology accounted for $0.8 million of the decrease due to the expiration of the amortization period for certain technology. Other decreases were $1.1 million, due principally to the reallocation of staff to research and development in 2005, and there were increases in bandwidth and revenue share costs of $0.4 million.

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

          Research and development expenses for the three months ended March 31, 2005 were $8.7 million, an increase of $1.6 million, or 23%, from $7.1 million in 2004. As a percentage of revenues, research and development expenses were 38% for the first three months of 2005 compared with 41% for the same period in 2004. The dollar increase resulted mainly from a reallocation of staff from other areas into research and development in 2005.

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

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

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          Sales and marketing expenses for the three months ended March 31, 2005 were $3.3 million, including a $0.3 million expense associated with our investment in an interactive television company, a decrease of $0.2 million, or 6%, from $3.5 million for the same period in 2004. As a percentage of revenues, sales and marketing expenses were 15% for the first three months of 2005 compared with 20% for the same period in 2004. The decrease was due to reduced personnel costs.

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

          General and administrative expenses for the three months ended March 31, 2005 were $4.2 million, the same amount as in the same period of 2004. As a percentage of revenues, general and administrative expenses were 18% for the first three months in 2005 compared with 24% for the same period in 2004. Legal fees declined by $1.4 million with that decrease partially offset by increased professional fees of $0.4 million for work related to our audit and Sarbanes-Oxley compliance efforts and an increase of $0.7 million in personnel costs and other items. In the first three months of 2004, we also recorded a credit of $0.3 million for bad debt recovery, but did not have a similar credit during the three months ended March 31, 2005.

          Restructuring and Impairment Costs. For the three months ended March 31, 2005, there was a restructuring and impairment provision of $0.5 million relating to the closure of our Lexington, Massachusetts facility. In March 2005, we negotiated a lease buy-out with the landlord of our Lexington, Massachusetts facility. We had previously recorded amounts in respect of estimated sublease income that we anticipated receiving based on the assumption that we would sublease that space. After recording those amounts, we subsequently determined to terminate the lease entirely through a buyout of the remaining term. The amount of that buyout was higher than the amount we previously recorded for expected sublease income, and we, therefore, recorded an additional restructuring provision of $0.2 million in the quarter ended March 31, 2005. In addition, in connection with the restructuring of our facility and operations in Lexington, we settled issues related to ownership of certain equipment within our joint venture, Spyglass Integration. As a result, we recorded an impairment of $0.3 million in respect of equipment that we transferred as part of that settlement arrangement.

          Amortization of Intangible Assets. For the three months ended March 31, 2005, amortization of intangible assets was $0.4 million, a decrease of $0.8 million, or 67%, from $1.2 million for the same period in 2004. The decrease resulted from certain intangible assets having been fully amortized in 2004.

Interest Income, Other Expense and Minority Interest

          As a result of increased interest rates, interest income was $0.3 million for the three months ended March 31, 2005, compared with $0.2 million for the same period in the prior year.

Income Taxes

          We had United States federal tax loss carryforwards of approximately $340 million as of March 31, 2005, although our ability to make use of those tax loss carryforwards may be limited under applicable tax regulations. However, we are subject to income taxes in certain state and foreign jurisdictions. The provision for income taxes was $0.5 million for the three months ended March 31, 2005, compared with $0.3 million for the prior year period due to an increase in foreign profitability.

Business Segment Results

          In 2004, we redefined our financial reporting to better align our financial analysis with our current businesses. Our management assesses our results and financial performance and prepares our internal budgeting reports on the basis of the Middleware and Integrated Technologies business, the Applications business and the BettingCorp business. We have prepared this segment analysis in accordance with Statement of Financial Accounting Standards No. 131.

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          Our Middleware and Integrated Technologies business has responsibility for our core middleware and the technologies that are customarily integrated as “extensions” of that middleware. Our Applications business has responsibility for our applications and related technologies and products. Our BettingCorp business has responsibility for fixed-odds and other wagering gaming applications.

          The contribution margin of the segments represents adjusted EBITDA before unusual items and corporate overhead. Adjusted EBITDA before unusual items is a non-GAAP financial measure which excludes interest, taxes, depreciation and amortization, amortization of intangible assets, other income, minority interest and unusual items such as contract amendments that mitigated potential loss positions and restructuring and impairment provisions. Management believes that segment contribution margin is an appropriate measure of evaluating operational performance. However, this measure should be considered in addition to, not as a substitute for, or superior to, income from operations or other measures of financial performance prepared in accordance with generally accepted accounting principles.

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

          Revenues by segment were as follows (in millions):

          Revenues from the Middleware and Integrated Technologies business for the three months ended March 31, 2005 were $18.8 million, an increase of $4.8 million, or 34%, from $14.0 million for the same period in 2004. The two major components of revenues are royalties and services and support. Royalties from set-top boxes and other products that incorporate our software accounted for 79% of segment revenues for the first three months in 2005, an increase from 65% for the same period in 2004. The increase in 2005 was primarily attributable to significant shipments by Sky Italia and other customers as described under “Royalties” above. Services, support and other accounted for 18% of segment revenues for the first three months in 2005, a decrease of $0.6 million, or 15%, from the first three months in 2004 due primarily to a decline in maintenance and support revenues. License fees and programming were $0.5 million, a decrease of $0.4 million, or 44%, from $0.9 million in the first three months in 2004.

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          Revenues from the Applications business for the three months ended March 31, 2005 were $3.1 million, the same amount as in the same period in 2004. PlayJam games channel fees accounted for 90% of the applications segment revenues.

          Revenues from the BettingCorp business for the three months ended March 31, 2005 were $0.9 million, an increase of $0.6 million, or 200%, from $0.3 million for the same period in 2004 due to increased consumer demand.

          Contribution margin by segment was as follows (in millions):

          Contribution margin for the Middleware and Integrated Technologies business increased for the first three months in 2005 from the same period in 2004 due to increased revenue. Contribution loss for the Applications business increased for the first three months in 2005 from the same period in 2004 due to increased operating expenses associated with that segment. Betting Corp.’s expenses increased slightly more than revenues resulting in a greater contribution loss for the first three months in 2005 from the same period in 2004.

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Liquidity and Capital Resources

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

          As of March 31, 2005, we had cash and cash equivalents of $36.8 million, which was an increase of $1.1 million from the balance at December 31, 2004. Taking into account short-term and long-term marketable debt securities of $27.2 million, our cash, cash equivalents and marketable debt securities were $64.0 million as of March 31, 2005, compared with $63.0 million as of December 31, 2004. Our primary source of cash is receipts from revenues. The primary uses of cash are payroll, general operating expenses and cost of revenues.

          Cash provided from operating activities was $2.2 million for the three months ended March 31, 2005. Cash used in operating activities was $8.7 million for three months ended March 31, 2004. The improvement in the first three months of 2005 versus the same period of 2004 was due primarily to the reduced net loss and working capital improvements.

          Cash used in investing activities was $1.0 million for the three months ended March 31, 2005, primarily due to the purchase of property and equipment. For the three months ended March 31, 2004, the cash provided from investing activities was $3.2 million, primarily due to the net sale of marketable debt securities.

          Cash provided from financing activities was not significant for the three months ended March 31, 2005, compared with $0.9 million for the three months ended March 31, 2004. The amount for 2004 represented proceeds from issuance of ordinary shares from the exercise of stock options.

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

Commitments and Contractual Obligations

          Information as of March 31, 2005 concerning the amount and timing of required payments under our contractual obligations is summarized below (in millions):

          In the ordinary course of business we enter into various arrangements with vendors and other business partners for bandwidth, marketing, and other services. Minimum commitments under these arrangements as of March 31, 2005 were $3.3 million for the remaining nine months of 2005 and $1.3 million for the year ending December 31, 2006. In addition, we also have arrangements with certain parties that provide for revenue-sharing payments.

          As of March 31, 2005, we had two standby letters of credit aggregating approximately $2.0 million that

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were issued to landlords at two of our leased properties.

Indemnifications

          In the normal course of our business, we provide indemnification to customers against claims of intellectual property infringement made by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations, although our liabilities in those arrangements are customarily limited in various respects, including monetarily.

          As permitted under the laws of the British Virgin Islands, we have agreed to indemnify our officers and directors for certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that limits our exposure and enables us to recover a portion of any future amounts paid.

Factors That May Affect Future Results

          In addition to the other information contained in this Quarterly Report on Form 10-Q, you should consider carefully the following factors in evaluating OpenTV and our business.

We have a history of net losses, and we may continue to experience net losses in the future.

          We have incurred significant net losses since our inception. Our net losses for the years ended December 31, 2004, 2003 and 2002 were approximately $22.0 million, $54.1 million and $802.6 million, respectively. We expect to continue to incur significant sales and marketing, product development and administrative expenses and expect to continue to suffer net losses in the near term. We will need to generate significant revenue to achieve and maintain profitability. We cannot be certain that we will achieve, sustain or increase profitability in the future. Any failure to significantly increase revenue as we implement our product and distribution strategies would adversely affect our business, financial condition and operating results.

We have historically derived a significant percentage of our revenues from licensing our middleware to network operators. Our opportunities for future revenue growth with middleware are limited by the actual number of worldwide network operators and by technology decisions they make from time to time.

          We have on a historic basis derived a significant percentage of our total revenues from royalties associated with the deployment of our middleware and fees charged for services rendered in support of our middleware deployments. While we continue to seek deployments within the United States, we have a significant number of customers outside of the United States that have deployed our middleware. In most cases, the number of network operators in any particular country is relatively small, and to the extent that we have already achieved deployments in those countries, the opportunities for future growth of our middleware business may be limited.

          Our capacity to generate future revenues associated with our middleware may also be limited due to a number of reasons, including:

	•	network operators that have selected our middleware may switch to another middleware platform for the provision of interactive services, reduce their pace of set-top box deployment or stop deploying set-top boxes enabled with our middleware, decrease or stop their use of our support services, or choose not to upgrade or add additional features to the version of our middleware running on their networks;
	•	network operators that have not selected our middleware may choose another middleware platform for the provision of interactive services; or
	•	a meaningful opportunity to deploy our middleware in the markets that have not yet adopted interactive television on a large scale may never develop or may develop at a very slow pace.

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Any of these eventualities would have an adverse effect on our results of operations.

We offer volume discounts to certain customers, which may, over time, depress our average pricing. While deployments of our software may continue to grow, those discounts, as they are triggered, may limit the rate of our royalty growth in the future.

          In certain instances, we provide volume discounts to customers based on the number of copies of our software that they deploy. As a result, although we may experience continued growth in middleware deployments, the average price for each copy licensed to certain customers may decline over time, which could slow the growth of our royalty payments in the future. If current deployment trends continue in a manner consistent with those of 2004, we would expect the average pricing for our middleware, over the course of 2005, to decline for certain customers, which could limit the overall growth rate of our royalty revenues.

We expect a more significant portion of our revenue growth in the future to be derived from interactive applications that we develop and market. If we are not successful in developing and marketing interactive applications, our future revenue growth may be limited.

          We expect over the next several years to develop extensive interactive applications, including addressable and targeted advertising and programming synchronous applications. The market for interactive applications is still nascent 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 interactive applications will develop as we anticipate, and even if they do, we cannot be certain that we will be able to market that content and those applications effectively and successfully respond to changes in consumer preferences. In addition, our ability to market those products will be affected to a large degree by network operators. If network operators determine that our interactive applications do not meet their business or operational expectations, they may choose not to offer our applications to their customers. To the extent that network operators fail to renew or enter into new or expanded contracts with us for provision of interactive content, such as our enhanced interactive television service, and applications, such as the PlayJam channel, we will be unable to maintain or increase the level of distribution of our interactive applications and the associated revenue from those offerings. Moreover, due to global economic conditions, network operators may slow down their deployment of new content and applications offerings, and such actions would negatively impact our revenue. Accordingly, our ability to generate substantial revenues from our interactive content and applications offerings is uncertain.

Two of our potential North American cable customers, Cox Communications and Comcast Corporation, joined together in early 2005 to acquire certain assets from Liberate Technologies, one of our direct competitors in the middleware business. That acquisition, which closed in April 2005, is likely to eliminate Cox and Comcast as potential customers for our middleware, which could adversely affect our ability to grow.

          In April 2005, Double C Technologies, a joint venture formed by Cox Communications and Comcast Corporation, acquired substantially all of the assets of Liberate’s North American business. Our middleware competes directly with the middleware software included within those assets transferred by Liberate. To date, while we have licensed certain of our technologies to Comcast, and expect to pursue additional applications opportunities with both Cox and Comcast, we have not licensed to either of these companies our middleware solutions. Based on our current understanding of the circumstances, we would not expect Cox or Comcast, in light of the assets that they acquired from Liberate, to license middleware or related solutions from us. As a result, our opportunity to license our middleware in the United States to cable operators may have been materially diminished and our future revenue growth adversely affected. In addition, it is unclear whether Double C Technologies will only develop that technology for the benefit of Comcast and Cox or whether it will attempt to sell that technology and related products to other cable operators in competition with OpenTV.

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A significant percentage of our revenues are currently provided by entities affiliated with The News Corporation, which also controls companies that compete with us in certain market segments. Those circumstances may make it more difficult for us, over the long-term, to sell products, technologies or services to News Corporation affiliates in market segments in which other News Corporation affiliates offer competing products.

          The News Corporation currently controls NDS Group and Gemstar-TV Guide International, Inc., each of which competes with us in certain respects. The News Corporation also controls, directly or indirectly, or exerts significant influence over, a number of our customers, including BSkyB, Sky Italia and FOXTEL. For the year ended December 31, 2004, BSkyB, Sky Italia and FOXTEL, accounted, in the aggregate, for 38% of our revenues. While we believe that our relationships with each of these customers is good, and we have multi-year contracts with each, the long-term implications of The News Corporation owning technology companies that directly compete with us in certain respects is difficult to assess. We may be at a disadvantage in selling certain of our products, technologies or services to The News Corporation affiliates over the long-term when in direct competition with other companies in which The News Corporation maintains a significant ownership interest.

We have concluded that our internal control over financial reporting and disclosure controls were not effective as of December 31, 2004. While we have remediated certain aspects of those control issues, we had not completed those efforts as of March 31, 2005. If we do not properly address identified weaknesses and implement additional controls to remedy those weaknesses, the reliability of our financial statements could be implicated and, ultimately, our financial results and our stock price could suffer.

          Section 404 of the Sarbanes-Oxley Act of 2002 requires companies to do a comprehensive evaluation of their internal control over financial reporting and their disclosure controls. To comply with this new statute, our management assessed our internal control over financial reporting and our disclosure controls. We identified certain weaknesses in our internal control over financial reporting as of December 31, 2004 that we have discussed in a separate report included as part of our Annual Report. Those weaknesses related to a lack of segregation of certain duties within our financial group and certain inadequacies in the controls associated with our financial review and closing process. Based on those findings, we concluded that our internal control over financial reporting was not effective as of December 31, 2004. We also concluded that, as a result of those material weaknesses, our disclosure controls, as of December 31, 2004, were not effective. We began to implement additional controls and procedures in the first quarter of 2005 with the intention of remedying those weaknesses, but had not completed those efforts as of March 31, 2005. As a result, we concluded that as of March 31, 2005, our internal control over financial reporting was not yet effective, and that our disclosure controls were also not yet effective as of that date.

          These efforts have required significant managerial effort, and we have incurred substantial costs in undertaking those efforts. If our efforts to remedy the weaknesses we identified are not successful, the reliability of our financial statements could be impaired, which could adversely affect our stock price and could also affect our company in other adverse ways. In addition, the ongoing costs associated with implementing such additional controls and procedures, and otherwise complying with the requirements of Sarbanes-Oxley, are not immaterial, and while we would expect those costs to decline over the next several years they do impose greater financial burdens on medium sized companies such as ours than were originally anticipated.

We may be unable in the future to raise additional capital required to support our operating activities.

          We expect to be able to fund our capital requirements for at least the next twelve months by using existing cash balances and short-term and long-term marketable debt securities, if our assumptions about our revenues, expenses and cash commitments are generally accurate. Nevertheless, we have incurred to date and we expect that we will continue to incur in the future significant expenses, many of which result from non-cancelable operating commitments. As of March 31, 2005, we had $64.0 million of cash, cash equivalents and marketable debt securities. We generated approximately $1.9 million in cash from operating activities during the fiscal quarter ended March 31, 2005 and used $16.2 million in cash for operating activities during the year ended December 31, 2004. We may need to raise additional capital in the future if our revenue growth does not meet our expectations or we are unable to reduce substantially the amount of cash used in our operating activities. While we continue to monitor our

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operating expenses and seek to bring them in line with our revenues, there can be no assurance that we will be successful in doing so.

          To the extent we are required to raise additional capital, we may not be able to do so at all or we may be able to do so only on unacceptable terms. If we cannot raise additional capital on acceptable terms, we may not be able to develop or enhance our products and services, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, any of which could have an adverse effect on our business, results of operations or future prospects.

We realize a percentage of our revenue from revenue sharing and subscription-based arrangements, especially in our applications business. We are not certain that those revenue models will be generally acceptable to our customers over the long-term or that they will offer us significant opportunities for revenue growth, which could adversely affect the growth opportunities for our applications business.

          We have historically generated a substantial portion of our revenue from royalty and licensing fees related to the licensing of our middleware products and from fees for professional services that we provide. We believe that our capacity to generate future revenues in this manner may be limited, and if we are unsuccessful in evolving our revenue model, our opportunities for future revenue growth, particularly outside of the United States, may be limited. While we currently generate a percentage of our revenues from revenue sharing arrangements with network operators, programmers and advertisers, and from subscriber-based arrangements, we cannot be certain that those revenue models will be accepted by our customers over the long-term, or that our customers will allow us to participate in their revenue streams on those bases. If our efforts to identify other sources of revenue in addition to the licensing of our middleware are unsuccessful, then our future results of operations will be adversely affected.

The market for our products and services is subject to significant competition, which could adversely affect our business.

          We face competition from a number of companies, including many that have significantly greater financial, technical and marketing resources and better recognized brand names than we do. Current and potential competitors in one or more aspects of our business include interactive technology companies, companies developing interactive television content and entertainment, and, in the professional services area, third party system integrators and internal information technology staffs at our network operator customers. Some of our customers or their affiliates offer products or services that compete with our products and services. For example, as we noted above, Double C Technologies, a joint venture between Cox and Comcast, has acquired the North American assets of Liberate Technologies, which includes its middleware business. SeaChange International has entered into a definitive agreement to acquire substantially all of the assets of Liberate Technologies’ business outside of North America. In addition to our PlayJam and PlayMonteCarlo applications, BSkyB also offers its own competitive gaming and gambling applications through its broadcast network. If any of these competitors achieves significant market penetration or other significant success within the markets upon which we rely as a significant source of revenue, or in new markets that we may enter in the future, our ability to maintain market share and sustain our revenues may be materially and adversely affected.

The trend of consolidation among industry participants may adversely impact our business, results of operations and future prospects.

          There has been a worldwide trend of consolidation in the cable and direct broadcast satellite industries. We believe this trend is likely to continue due to economic and competitive concerns. This trend appears to be expanding to include other companies involved with the interactive television industry. For example, in addition to the acquisition of certain assets of Liberate Technologies by Double C Technologies discussed above, Comcast and Gemstar-TV Guide International Inc., a media and technology company, formed a joint venture last year called Guideworks to develop an interactive programming guide for the cable television industry.

          While the full impact of this trend is uncertain at the present time, we will need to adapt to changing relationships with industry participants and address competitive concerns that may arise as companies consolidate. If we are unable to successfully manage these changing relationships and address these competitive concerns, our business and results of operations may be adversely affected.

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     Unanticipated fluctuations in our quarterly operating results could affect our stock price.

          We believe that quarter-to-quarter comparisons of our financial results are not necessarily meaningful indicators of our future operating results and should not be relied on as an indication of future performance. If our quarterly operating results fail to meet the expectations of analysts, the market price of our publicly-traded securities could be negatively affected. Our quarterly operating results have varied substantially in the past and they may vary substantially in the future depending upon a number of factors described below, including many that are beyond our control.

          Our operating results may vary from quarter to quarter as a result of a number of factors, including:

	•	Changes in the rate of capital spending and the rollout of interactive television-related products and services by network operators;
	•	The number, size and scope of network operators deploying OpenTV-enabled interactive services and the associated rollout to subscribers;
	•	Increased competition in general and any changes in our pricing policies that may result from increased competitive pressures;
	•	Potential downturns in our customers’ businesses or in the domestic or international markets for our products and services;
	•	The ability to generate applications-related revenue from existing and potential customers;
	•	Changes in technology, whether or not developed by us;
	•	Our ability to develop and introduce on a timely basis new or enhanced versions of our products that can compete favorably in the marketplace; and
	•	The timing of revenue recognition associated with major licensing and services agreements.

          Because a high percentage of our expenses, particularly compensation, is fixed in advance of any particular quarter, any of the factors listed above could cause significant variations in our earnings on a quarter-to-quarter basis. You should not rely on the results of prior periods as an indication of our future performance. Any decline in revenues or a greater than expected loss for any quarter could cause the market price of our publicly-traded securities to decline.

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. On April 1, 2005, we announced the resignation of our Chief Financial Officer effective May 15, 2005. As of the date of this Quarterly Report on Form 10-Q, we had not appointed a new Chief Financial Officer, and until such time as we do we will not be able to complete our remediation efforts with respect to certain material weaknesses we identified in connection with our Sarbanes-Oxley compliance efforts. In addition, we may also need to increase our technical, consulting and support staff to support new customers and the expanding needs of our existing customers. We have, in the past, experienced difficulty in recruiting qualified personnel. If we are not successful in those efforts, our business may be adversely affected.

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We continue to evaluate our business operations and may implement structural and other changes that affect the conduct of our worldwide business operations. As we continue to align our resources appropriately with our evolving business we may face unintended consequences or suffer adverse effects on our operations or personnel.

          We review our operations on an ongoing basis with a view towards improving our business performance. Beginning in 2002, we undertook efforts to consolidate our operations, close and relocate various offices around the world and divest non-strategic assets. We also effected certain organizational changes in late 2004 to establish business units based on our middleware and applications businesses. There is a risk that, as new business strategies and administrative processes are developed and implemented, the changes we adopt will be unduly disruptive or less effective than our old strategies and processes. This may adversely affect our business, results of operations and future prospects.

Interactive television remains an emerging business and it may not attract widespread market acceptance or demand.

          Our success will depend upon, among other things, the broad acceptance of interactive television by industry participants, including operators of broadcast and pay television networks, network operators and manufacturers of televisions and set-top boxes, as well as by television viewers and advertisers. Because the market for interactive television remains an emerging market, the potential size of the market opportunity and the timing of its development are uncertain. The growth and future success of our business will depend in part upon our ability to penetrate new markets and convince network operators, television viewers and advertisers to adopt and maintain their use of our products and services.

Because much of our success and value lie in our ownership and use of our intellectual property, our failure to protect our intellectual property and develop new proprietary technology may negatively affect us.

          Our ability to effectively conduct our business will be dependent in part upon the maintenance and protection of our intellectual property. We rely on patent, trademark, trade secret and copyright law, as well as confidentiality procedures and licensing arrangements, to establish and protect our rights in and to our technology. We have typically entered into confidentiality or license agreements with our employees, consultants, customers, strategic partners and vendors, in an effort to control access to, and distribution of, our software, related documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our software and other proprietary information without authorization.

          Policing unauthorized use of our software and proprietary information will be difficult. The steps we take may not prevent misappropriation of our intellectual property and the agreements we enter into may not be enforceable in some instances. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited in certain foreign countries or, alternatively, such protection may be difficult to enforce. Litigation may be necessary in the future to enforce or protect our intellectual property rights or to determine the validity and scope of our intellectual property rights and the proprietary rights of others. Any such litigation could cause us to incur substantial costs and diversion of resources, which in turn could adversely affect our business.

Intellectual property infringement claims may be asserted against us, which could have the effect of disrupting our business.

          We may be the subject of claims by third parties alleging that we infringe their intellectual property. The defense of any such claims could cause us to incur significant costs and could result in the diversion of resources with respect to the defense of any claims brought, which could adversely affect our financial condition and operating results. As a result of such infringement claims, a court could issue an injunction preventing us from distributing certain products, which could adversely affect our business. If any claims or actions are asserted against us, we may seek to obtain a license under a third party’s intellectual property rights in order to avoid any litigation. However, a license under such circumstances may not be available on commercially reasonable terms, if at all.

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

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

The adoption of industry-wide standards for interactive television, such as the OpenCable initiative in North America, could adversely affect our ability to sell our products and services or place downward pressure on our pricing.

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

Our failure to participate in certain industry standards setting organizations, including CableLabs, may adversely affect our ability to sell products or services to network operators or other potential customers that are members of those organizations.

          We have not, to date, determined to become a member of CableLabs, the research and development consortium managing the OpenCable initiative, and certain other standards setting organizations. While we continually assess our position with respect to any relevant standards setting organizations, and have joined several of them, our failure to participate in certain organizations may affect the willingness of their respective members to conduct business with us. If that were the case, our ability to continue to grow our business might be adversely affected.

The adoption of incompatible standards by our industry and rapid technological advances could render our products and services obsolete or non-competitive.

          The migration of television from analog to digital transmission, the convergence of television, the Internet, communications and other media, and other emerging trends, such as the deployment of high definition television and multicasting, are creating a dynamic and unpredictable environment in which to operate. Our ability to anticipate trends and adapt to new technologies and evolving standards is critical to our success.

          The deployment of new digital television applications, such as high-definition television and multicasting multiple television programs through a single channel, may compete directly with our products and services for broadcast distribution capacity. To the extent that such capacity cannot accommodate all of the applications that a cable or direct broadcast satellite system operator wants to distribute, then there is a risk that other applications will be deployed to the exclusion of our content and applications. If this occurs, our results of operations could be

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adversely affected.

          Any delay or failure on our part to respond quickly, cost-effectively and sufficiently to these developments could render our products and services obsolete or non-competitive and have an adverse effect on our business, financial condition and operating results. In addition, we must stay abreast of cutting-edge technological developments and evolving service offerings to remain competitive and increase the utility of our services, and we must be able to incorporate new technologies into our products in order to address the increasingly complex and varied needs of our customer base. There can be no assurance that we will be able to do so successfully, and any failure to do so may adversely affect us.

Government regulations may adversely affect our business.

          The telecommunications, media, broadcast and cable television industries are subject to extensive regulation by governmental agencies. These governmental agencies continue to oversee and adopt legislation and regulation over these industries, particularly in the areas of user privacy, consumer protection, the online distribution of content 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.

Changes to current accounting policies or in how such policies are interpreted or applied to our business could have a significant effect on our reported financial results or the way in which we conduct our business and could make it difficult for investors to assess properly our financial condition or operating results.

          We prepare our financial statements in conformity with accounting principles generally accepted in the United States, which are subject to interpretation by the American Institute of Certified Public Accountants, the Public Company Accounting Oversight Board, the Securities and Exchange Commission and various other bodies formed to interpret and create appropriate accounting policies. A change in these policies or in how such policies are interpreted or applied to our business could have a significant effect on our reported results and may even retroactively affect previously reported transactions. Our accounting policies that recently have been or may in the future be affected by changes in the accounting rules are as follows:

	•	Software revenue recognition;
	•	Accounting for stock-based compensation; and
	•	Accounting for goodwill and other intangible assets.

          As a software company, 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. As a result, we may receive cash from a customer but not be able to recognize the revenue associated with that cash for some period of time under applicable accounting rules. This results in our recording the cash as “deferred revenue” on our balance sheet. 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 statement of operations, our balance sheet and our statement of cash flows.

          In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R which requires the measurement of all employer share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our consolidated statements of income. The accounting provisions of this standard are effective for fiscal years beginning after June 15, 2005. The adoption of those provisions, which have been previously disclosed on a pro

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forma basis in our financial footnotes, is likely to have a significant effect on our consolidated statement of loss.

Through the use of our technology, we have the ability to collect personal and confidential information from set-top boxes. If we fail to protect this information from security breaches or misuse this information, then our operations could be disrupted and we could be subject to litigation and liability under privacy laws.

          Through the technology that we license for use in set-top boxes, we have the ability, when requested by our customers, to collect and store personal information from users of our applications. Subject to applicable laws, and the agreement of our customers and consumers, we may also seek to use such information to help develop addressable and targeted advertising businesses. Storage and use of such information is subject to laws and regulations and may also subject us to privacy claims relating to its use and dissemination. In addition, a third party might be able to breach our security measures and gain unauthorized access to our servers where such information is stored and misappropriate such information or cause interruptions to our business operations. We may be required to expend significant capital and other resources to monitor the laws applicable to privacy matters, to protect against security breaches or to deal with the consequences of any breach. A breach of privacy rights by us, network operators or others could expose us to liability. Any compromise of security or misuse of private information could materially and adversely affect our business, reputation, operating results and financial condition and expose us to costly litigation and regulatory action. Concerns over the security of personal information transmitted through our applications and the potential misuse of such information might also inhibit market acceptance of our applications, and if this occurs, our business and operating results will be adversely affected.

If we continue to develop and seek to market gaming and gambling applications, we must assess the legality of these types of activities in different jurisdictions. Our inability to launch these applications legally, the uncertain regulatory landscape for these applications and the significant costs associated with ongoing evaluations regarding the state of gaming and gambling laws around the world may adversely affect our business.

          We develop and market gaming and gambling applications for interactive television based on technologies and know-how that we acquired through BettingCorp. In many jurisdictions throughout the world, the laws regulating gaming and gambling, particularly through media such as interactive television and the Internet, are highly uncertain and subject to frequent change. The penalties in many jurisdictions include both civil and criminal penalties. While we continually assess the laws and regulations regarding gaming and gambling ventures, and engage special outside legal counsel to assist in that process, we cannot be certain that our interpretation of, or the advice that we receive from outside professionals with respect to, those laws will necessarily be the only possible interpretation. The costs associated with that evaluative process are not, and will not be, insignificant. In the event that we are incorrect in our interpretation of certain laws or regulations, we may be subject to penalties. Moreover, we may be required to make significant changes to our business, if those laws or regulations change in ways that we do not anticipate or expect. The uncertainty inherent in these matters, the changing nature of these laws and regulations, and the significant costs associated with our ongoing evaluation of those laws and regulations, may adversely affect our business over time. If we do not believe that we can legally and effectively launch gaming and gambling applications, our future growth may be impaired.

Our multinational operations expose us to special risks that could increase our expenses, adversely affect our operating results and require increased time and attention of management.

          We derive a substantial portion of our revenue from customers located outside of the United States and have significant operations in a number of countries around the world. Our international operations are subject to special risks, including:

	•	differing legal and regulatory requirements and changes in those requirements;
	•	potential loss of proprietary information due to piracy, misappropriation or weaker laws regarding intellectual property protection;
	•	export and import restrictions, tariffs and other trade barriers;

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	•	currency fluctuations and devaluations;
	•	difficulties in staffing and managing offices as a result of, among other things, distance, language and cultural differences;
	•	longer payment cycles and problems in collecting accounts receivable;
	•	political and economic instability; and
	•	potentially adverse tax consequences.

Any of these factors could have an adverse effect on our business, financial condition and operating results.

Our software products may contain errors, which could cause us to lose revenue and incur unexpected expenses.

          Software development is an inherently complex and subjective process, which frequently results in products that contain errors, as well as defective features and functions. Moreover, our technology is integrated into the products and services of our network operator customers. Accordingly, a defect, error or performance problem with our technology could cause the systems of our network operator customers to fail for a period of time or to be impaired in certain respects. Any such failure could subject us to damage claims and claims for indemnification by our customers and result in severe customer relations problems and harm to our reputation. While our agreements with customers typically contain provisions designed to limit or exclude our exposure to potential liability claims in those circumstances, those provisions may not be effective, in all respects, under the laws of some jurisdictions. As a result, we could be required to pay substantial amounts of damages in settlement or upon the determination of any of these types of claims.

The interests of our majority owner may differ from yours and may result in OpenTV acting in a manner inconsistent with your general interests.

          Liberty Media Corporation beneficially owns our Class A and Class B ordinary shares representing approximately 31.9% of the economic interest and 78.7% of the voting power of our ordinary shares outstanding as of March 31, 2005. As a result of its ownership of our ordinary shares, Liberty Media has sufficient voting power, without the vote of any other stockholder, to determine the outcome of any action presented to a vote of our stockholders, including amendments of our memorandum of association and articles of association for any purpose (which could include increasing or reducing our authorized capital or authorizing the issuance of additional shares). The interests of Liberty Media may diverge from your interests, and Liberty Media may be in a position, subject to general fiduciary obligations, to cause or require us to act in a way that is inconsistent with the general interests of the holders of our Class A ordinary shares.

Because we are controlled by Liberty Media, we are exempt from certain listing requirements of the Nasdaq National Market relating to corporate governance matters.

          Over the past several years, the National Association of Securities Dealers has adopted certain listing requirements for the Nasdaq National Market System designed to enhance corporate governance standards of the companies who are listed thereon. As a result of Liberty Media’s beneficial ownership of our Class A and Class B ordinary shares, we are not subject to some of these requirements, including the requirement that a majority of our board of directors be “independent” under the guidelines established by the National Association of Securities Dealers and certain requirements regarding the determination of our Chief Executive Officer’s compensation and our director nominees. While we do not believe that our exemption from those requirements affects the manner and method by which we manage and operate the company, investors should be aware that we are not subject to those provisions and may have no obligation to comply with those requirements in the future unless our ownership profile changes.

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Because we are a British Virgin Islands company, you may not be able to enforce judgments against us that are obtained in United States courts.

          We are incorporated under the laws of the British Virgin Islands. As a result, it may be difficult for investors to effect service of process upon us within the United States or to enforce against us judgments obtained in the United States courts, including judgments predicated upon the civil liability provisions of the federal securities laws of the United States.

          We have been advised by our British Virgin Islands counsel, Harney Westwood Riegels, that judgments of United States courts predicated upon the civil liability provisions of the federal securities laws of the United States may be difficult to enforce in British Virgin Islands courts and that there is doubt as to whether British Virgin Islands courts will enter judgments in original actions brought in British Virgin Islands courts predicated solely upon the civil liability provisions of the federal securities laws of the United States.

Because we are a British Virgin Islands company, your rights as a stockholder may be less clearly established as compared to the rights of stockholders of companies incorporated in other jurisdictions.

          Our corporate affairs are governed by our memorandum of association and articles of association and by the International Business Companies Act of the British Virgin Islands. Principles of law relating to such matters as the validity of corporate procedures, the fiduciary duties of management and the rights of our stockholders may differ from those that would apply if we were incorporated in the United States or another jurisdiction. The rights of stockholders under British Virgin Islands law are not as clearly established as are the rights of stockholders in many other jurisdictions. Thus, our stockholders may have more difficulty protecting their interests in the face of actions by our board of directors or our controlling stockholder than they would have as stockholders of a corporation incorporated in another jurisdiction.

Certain provisions contained in our charter documents could deter a change of control of us.

          Certain provisions of our memorandum of association and articles of association may discourage attempts by other companies to acquire or merge with us, which could reduce the market value of our Class A ordinary shares. The comparatively low voting rights of our Class A ordinary shares as compared to our Class B ordinary shares, approximately 99.6% of which are beneficially owned by Liberty Media as of March 31, 2005, as well as other provisions of our memorandum of association and articles of association, may delay, deter or prevent other persons from attempting to acquire control of us.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Fixed Income Investment Risk

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

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

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maturities in the portfolio. Alternatively, a sharp decline in interest rates could have a material positive effect on the value of securities with longer maturities in the portfolio. We do not currently hedge interest rate exposures.

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

          The following table presents the hypothetical changes in fair values in our portfolio of investment securities with original maturities greater than 90 days as of March 31, 2005 using a model that assumes immediate sustained parallel changes in interest rates across the range of maturities (in thousands):

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

Foreign Currency Exchange Rate Risk

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

          We have a foreign currency exchange exposure management policy. The policy permits the use of foreign currency forward exchange contracts and foreign currency option contracts and the use of other hedging procedures in connection with hedging foreign currency exposures. The policy requires that the use of derivatives and other procedures qualify for hedge treatment under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities.” We regularly assess foreign currency exchange rate risk that results from our global operations. We did not use foreign currency forward exchange contracts or options in hedging foreign currency exposures during the first quarter of 2005. There were no foreign exchange forward contracts or other procedures implemented to hedge foreign currency exposures outstanding as of March 31, 2005. We expect over time, however, that a more significant number of our European customers will seek to pay us in Euros, which may affect our risk profile and require us to make use of appropriate hedging strategies. While we anticipate a certain portion of our revenues will be paid to us in 2005 in the form of Euros, we do not believe that such payments will require a material change in our existing hedging policies.

Item 4. Controls and Procedures

          Management of the company is responsible for establishing and maintaining adequate internal control over financial reporting (“Internal Control”) as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange

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Act of 1934, as amended (the “Exchange Act”). Management understands that a material weakness is a significant deficiency (within the meaning of Public Company Accounting Oversight Board Auditing Standard No. 2), or combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

          Management assessed the effectiveness of the company’s Internal Control as of December 31, 2004 using the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework and identified certain material weaknesses in its Annual Report on Form 10-K for the fiscal year ended December 31, 2004. These material weaknesses were described as follows, and this information should be read together with management’s complete report as included with the company’s Annual Report on Form 10-K:

	•	Certain duties within the company’s financial group were not properly segregated; and
	•	Certain controls associated with the financial reporting and close process were not effective, including the fact that:

	o	management’s review of certain quarter-end accruals was not effective;
	o	ineffective review of certain detailed schedules prepared in connection with the company’s financial reporting process led to errors in the statement of cash flows, lease commitments and tax notes and required modification of those notes as included in the Company’s 2004 audited financial statements; and
	o	the company did not have sufficient internal personnel and technical expertise to properly apply accounting principles to certain non-routine matters.

          Based on those assessments and the relevant criteria, management concluded that, as of December 31, 2004, the company’s Internal Control was not effective.

          Based on these findings, management initiated certain remediation efforts in the first quarter of 2005 with respect to each of the material weaknesses referred to above and continued those efforts through March 31, 2005. These remediation efforts, which are discussed below, are reasonably likely to materially affect our Internal Control.

Remediation of Material Weakness Related to Improper Segregation of Certain Duties within the Financial Group

          Management introduced new procedures in the first quarter of 2005 to address the improper segregation of duties. These new procedures require the company’s Chief Financial Officer to perform a detailed review of any and all non-recurring manual journal entries above a certain dollar threshold and also to review all journal entries that are directed by the company’s Controller. The company’s Chief Financial Officer was also charged with responsibility for undertaking a reasonable review of all other non-recurring journal entries, to ensure that all such entries are fully and properly authorized and reviewed. These procedures have been performed monthly since January 2005.

          Management believes that the remediating and compensating controls that it initiated in the first quarter of 2005 have effectively remediated this identified material weakness as of March 31, 2005.

Remediation of Certain Controls Associated with the Financial Reporting and Close Process

          Management introduced new procedures in the first quarter of 2005 to address the financial reporting and close process.

          These new procedures require the company’s financial group to collect, analyze and monitor all necessary and relevant supporting documentation for accrual balances and any adjustments. Management also introduced additional procedures to ensure a more thorough review of financial data in the financial reporting and close process. Management believes that these additional procedures have effectively remediated certain aspects of this material weakness, although management continues to assess the efficacy of these changes.

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          In the first quarter of 2005, management also began to evaluate its personnel, develop a plan to enhance the current staff’s capabilities and assess whether additional resources with appropriate accounting knowledge and experience were required. On April 1, 2005, the company announced the resignation of its Chief Financial Officer effective May 15, 2005. As of the date of this Quarterly Report, the company had not announced a new Chief Financial Officer. Until such time as the company hires a new Chief Financial Officer, management does not believe that it will be able to complete its remediation efforts with respect to the financial reporting and close process.

          As a result of the foregoing, management will continue to evaluate and to implement remediation efforts with respect to these identified weaknesses. Management does not expect to be able to report that its Internal Control is effective until it is able to remediate these matters.

Evaluation of Disclosure Controls and Procedures

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

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

          As required by Rule 13a-15(b) and 15d-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. As described above, we identified certain material weaknesses as of December 31, 2004 that we had not fully remediated as of March 31, 2005. The company’s Chief Executive Officer and Chief Financial Officer have concluded that, as a result of those material weaknesses that remain outstanding, the company’s Disclosure Controls, as of March 31, 2005, were, therefore, not effective.

          Our independent registered public accounting firm KPMG LLP has not audited the financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q, nor have they attested to, or reported on, our remediation efforts. While we believe that we have effectively remediated certain aspects of the material weaknesses we identified as of December 31, 2004, as discussed above, and have not identified any other material weaknesses since such date, we cannot be certain that KPMG LLP would agree with our conclusions and assessments.

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Part II. Other Information

Item 1. Legal Proceedings

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

          On January 10, 2005, after Liberate’s previous bankruptcy filing had been dismissed. Liberate announced the signing of a definitive agreement to sell substantially all of the assets of its North American business to Double C Technologies, a joint venture between Comcast Corporation and Cox Communications, Inc. On February 11, 2005, the United States District Court for the Northern District of California issued an order staying the patent litigation until further notice. Liberate completed its sale to Double C Technologies on April 7, 2005 and indicated in a filing with the United States District Court that Double C Technologies had assumed all liability related to this litigation. The parties recently requested that the Court continue the stay until at least May 23, 2005, to allow Double C and its new counsel time to familiarize themselves with the litigation and to allow the parties to evaluate settlement prospects.

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

          Initial Public Offering Securities Litigation. In July 2001, the first of a series of putative securities class actions, Brody v. OpenTV Corp., et al., was filed in United States District Court for the Southern District of New York against certain investment banks which acted as underwriters for our initial public offering, us and various of our officers and directors. These lawsuits were consolidated and are captioned In re OpenTV Corp. Initial Public Offering Securities Litigation. The complaints allege undisclosed and improper practices concerning the allocation of our initial public offering shares, in violation of the federal securities laws, and seek unspecified damages on behalf of persons who purchased OpenTV Class A ordinary shares during the period from November 23, 1999 through December 6, 2000. The Court has appointed a lead plaintiff for the consolidated cases. On April 19, 2002, the plaintiffs filed an amended complaint. Other actions have been filed making similar allegations regarding the initial public offerings of more than 300 other companies, including Wink Communications as discussed in greater detail below. All of these lawsuits have been coordinated for pretrial purposes as In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS). Defendants in these cases filed an omnibus motion to dismiss on common pleading issues. Oral argument on the omnibus motion to dismiss was held on November 1, 2002. All claims against our officers and directors have been dismissed without prejudice in this litigation pursuant to the parties’ stipulation approved by the Court on October 9, 2002. On February 19, 2003, the Court denied in part and granted in part the omnibus motion to dismiss filed on behalf of defendants, including us. The Court’s Order dismissed all claims against us except for a claim brought under Section 11 of the Securities Act of 1933. The Court has given plaintiffs an opportunity to amend their claims in order to state a claim. Plaintiffs have not yet filed an amended complaint. Plaintiffs and the issuer defendants, including us, have agreed to a stipulation of settlement, in which plaintiffs will dismiss and release their claims in exchange for a guaranteed recovery to be paid by the insurance carriers of the issuer defendants and an assignment of certain claims. The stipulation of settlement for the claims against the issuer-defendants, including us, has been submitted to the Court. On February 15, 2005, the Court preliminarily approved the settlement contingent on specified modifications. The Court has scheduled a hearing on January 9, 2006, to

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consider final approval of the settlement. There is no guarantee that the settlement will become effective, as it is subject to a number of conditions which cannot be assured. If the settlement does not occur, and the litigation against us continues, we believe that we have meritorious defenses to the claims asserted against us and will defend ourselves vigorously. No provision has been made in our consolidated financial statements for this matter. We are unable to predict the likelihood of an unfavorable outcome or estimate our potential liability, if any.

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

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

          Broadcast Innovation Matter. On November 30, 2001, a suit was filed in the United States District Court for the District of Colorado by Broadcast Innovation, L.L.C., or BI, alleging that DIRECTV, Inc., EchoStar Communications Corporation, Hughes Electronics Corporation, Thomson Multimedia, Inc., Dotcast, Inc. and Pegasus Satellite Television, Inc. are infringing certain claims of United States patent no. 6,076,094, assigned to or licensed by BI. DIRECTV and certain other defendants settled with BI on July 17, 2003. We are unaware of the specific terms of that settlement. Though we are not currently a defendant in the suit, BI may allege that certain of our products, possibly in combination with the products provided by some of the defendants, infringe BI’s patent. The agreement between OpenTV, Inc. and EchoStar includes indemnification obligations that may be triggered by the litigation. If liability is found against EchoStar in this matter, and if such a decision implicates our technology or products, EchoStar has notified OpenTV, Inc. of its expectation of indemnification, in which case our business performance, financial position, results of operations or cash flows may be adversely affected. Likewise, if OpenTV, Inc. were to be named as a defendant and it is determined that the products of OpenTV, Inc. infringe any of the asserted claims, and/or it is determined that OpenTV, Inc. is obligated to defend EchoStar in this matter, our business performance, financial position, results of operations or cash flows may be adversely affected. On November 7, 2003, Broadcast Innovation filed suit against Charter Communications, Inc. and Comcast Corporation in United States District Court for the District of Colorado, alleging that Charter and Comcast also infringe the ‘094 patent. The agreements between Wink Communications and Charter Communications include indemnification

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obligations of Wink Communications that may be triggered by the litigation. While reserving all of our rights in respect of this matter, we have conditionally reimbursed Charter for certain legal reasonable expenses that it incurred in connection with this litigation. On August 4, 2004, the District Court found the ‘094 patent invalid. On August 5, 2004, BI filed a motion for reconsideration in the case. On September 17, 2004, the District Court entered its summary judgment order based on the invalidity of the patent in suit. On December 16, 2004, Broadcast Innovations filed its appeal brief of the district court judge’s summary judgment order with the Court of Appeals for the Federal Circuit. The Federal Circuit has scheduled oral argument in the appeal for June 9, 2005. Based on the information available to us, we have established a reserve for costs and fees that may be incurred in connection with this matter; that reserve is an estimate only and actual costs may be materially different.

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

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

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Item 6. Exhibits

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Signature

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

Exhibit Index