The following information should be read in conjunction with the unaudited condensed consolidated financial information and the notes thereto included in this Quarterly Report on Form 10-Q. In addition to historical information, the following discussion and other parts of this Quarterly Report contain forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. You should not place undue reliance on these forward-looking statements. Actual events or results may differ materially due to competitive factors and other factors referred to in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for our fiscal year ended January 31, 2009 and elsewhere in this Quarterly Report. These factors may cause our actual results to differ materially from any forward-looking statement.

Overview

We are a leading developer, manufacturer and marketer of digital video systems and services including the management, aggregation, licensing, storage, and distribution of video, television, gaming and advertisement content to cable system operators, telecommunications companies and broadcast television companies.

The Company is managed and operated as three segments, Software, Servers and Storage, and Media Services, as defined by SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information. A description of the three reporting segments is as follows:

º Software segment includes product revenues from the Company's Advertising, VOD, Middleware and Broadcast software, related services such as professional services, installation, training, project management, product maintenance, technical support and software development for those software products, and operating expenses relating to the Software segment such as research and development, selling and marketing and amortization of intangibles.
º Servers and Storage segment includes product revenues from VOD and Broadcast server product lines and related services such as professional services, installation, training, project management, product maintenance, and technical support for those products and operating expenses relating to the Servers and Storage segment, such as research and development and selling and marketing.
º Media Services segment includes the operations of ODG, including the acquisition of Mobix on November 19, 2008, activities which include content acquisition and preparation services for television service providers and related operating expenses.

The basis of the assumptions for all such revenues, costs and expenses includes significant judgments and estimations. There are no inter-segment revenues for the periods shown below. The Company does not separately track all assets by operating segments nor are the segments evaluated under this criterion.

We have experienced fluctuations in our product revenues from quarter to quarter due to the timing of the receipt of customer orders and the shipment of those orders. The factors that impact the timing of the receipt of customer orders include among other factors:

º the customer's receipt of authorized signatures on their purchase orders;
º the budgetary approvals within the customer's company for capital purchases; and
º the ability to process the purchase order within the customer's organization in a timely manner.

Factors that may impact the shipment of customer orders include:

º the availability of material to produce the product;
º the time required to produce and test the product before delivery; and
º the customer's required delivery date.

The delay in the timing of receipt and shipment of any one customer order can result in significant fluctuations in our revenue reported on a quarterly basis.

Our operating results are significantly influenced by a number of factors, including the mix of products sold and services provided, pricing, costs of materials used in our products and the expansion of our operations during the fiscal year. We price our products and services based upon our costs and consideration of the prices of competitive products and services in the marketplace. The costs of our products primarily consist of the costs of components and subassemblies that have generally declined from product introduction to product maturity. As a result of the growth of our business, our operating expenses have historically increased in the areas of research and development, selling and marketing and administration. In the current state of the economy, we currently expect that customers may still have limited capital spending budgets as we believe they are dependent on advertising revenues to fund their capital equipment purchases. Accordingly, we expect our financial results to vary from quarter to quarter and our historical financial results are not necessarily indicative of future performance. In light of the higher proportion of our international business, we expect movements in foreign exchange rates to have a greater impact on our operating results and the equity section of our balance sheet in the future.

Our ability to continue to generate revenues within the markets that our products are sold and to generate cash from operations and net income is dependent on several factors which include:

º market acceptance of the products and services offered by our customers and increased subscriber usage and demand for these products and services;
º selection by our customers of our products and services versus the products and services being offered by our competitors;
º our ability to introduce new products to the market in a timely manner and to meet the demands of the market for new products and product enhancements;
º our ability to maintain gross margins from the sale of our products and services at a level that will provide us with cash to fund our operations given the pricing pressures within the market and the costs of materials to manufacture our products; and
º our ability to control operating costs given the fluctuations that we have experienced with revenues from quarter to quarter.

The following table sets forth statement of operations data for the three months ended April 30, 2009 compared to the three months ended April 30, 2008.

                                                                                   Three Months Ended
                                                                                       April 30,
                                                                                 2009              2008
                                                                                     (in thousands)
    Revenues:
       Products                                                              $    26,370       $    26,994
       Services                                                                   22,506            18,390
                                                                                  48,876            45,384

    Costs and expenses:
       Cost of product revenues                                                    9,969            10,725
       Cost of service revenues                                                   13,889            11,897
       Research and development                                                   12,104            10,476
       Selling and marketing                                                       6,264             6,423
       General and administrative                                                  4,867             5,285
       Amortization of intangibles                                                   479               396
    Income from operations                                                         1,304               182
       Interest and other income, net                                                135               869
    Income before income taxes and equity loss in earnings of affiliates           1,439             1,051
    Income tax expense                                                              (244 )            (425 )
    Equity loss in earnings of affiliates, net of tax                               (197 )            (283 )
    Net income                                                               $       998       $       343

Revenues

The following table summarizes information about the Company's reportable
segment revenues for the three months ended April 30, 2009 and 2008.

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                                                       Three Months Ended
                                                           April 30,
                                                   2009                 2008              %
                                                 (in thousands, except for percentage data)
    Software revenues:
       Products                               $        16,285      $        19,153        -15 %
       Services                                        14,333               10,910         31 %
    Total Software revenues                   $        30,618      $        30,063          2 %

    Servers and Storage revenues:
       Products                               $        10,085      $         7,841         29 %
       Services                                         3,968                3,466         14 %
    Total Servers and Storage revenues        $        14,053      $        11,307         24 %

    Media Services:
       Services                               $         4,205      $         4,014          5 %

    Total consolidated revenue:
       Products                               $        26,370      $        26,994         -2 %
       Services                                        22,506               18,390         22 %
    Total consolidated revenues               $        48,876      $        45,384          8 %

Product Revenues. Product revenues decreased 2% to $26.4 million in the three months ended April 30, 2009 from $27.0 million in the three months ended April 30, 2008. Product revenues from the Software segment accounted for 62% and 71% of the total product revenue for the three months ended April 30, 2009, and 2008, respectively. The Servers and Storage segment accounted for 38% and 29% of total product revenues in the three months ended April 30, 2009 and 2008, respectively. The increased percentage of Server and Storage revenue is due to higher VOD server shipments year over year.

Services Revenues. Our Services revenues increased 22% year over year to $22.5 million in the three months ended April 30, 2009 from $18.4 million in the three months ended April 30, 2008. For the three months ended April 30, 2009 and 2008, Services revenues for the Software segment accounted for 64% and 59% of the total services revenue, respectively. Servers and Storage services revenue accounted for 18% and 19% of total services revenue and Media Services accounted for 18% and 22% of total services revenues in three months ended April 30, 2009 and 2008, respectively. The increased percentage of Software segment services revenues is due to higher VOD software maintenance and professional services year over year.

For the three months ended April 30, 2009 three customers accounted for more than 52% of our total revenues, and two customers accounted for more than 40% of our total revenues for the three months ended April 30, 2008. Revenue from each of these customers was comprised of Software and Servers and Storage segment revenues. We believe that a significant amount of our revenues will continue to be derived from a limited number of customers.

International sales accounted for approximately 26% and 31% of total revenues in the three months ended April 30, 2009 and 2008, respectively. We expect that international products and services revenues will remain a significant portion of our business in the future. A majority of our international sales are denominated in United States dollars (USD), and for the three months ended April 30, 2009 and 2008, respectively, approximately 67% and 71% of international revenues were transacted in USD.

Software Revenues. Revenues from our Software segment for the three months ended April 30, 2009 increased $500,000, or a 2% increase compared to the three months ended April 30, 2008. The $3.4 million increase in services revenue for the Software segment was primarily due to VOD product maintenance contracts and other technical support services from growth in our installed base of products. In addition, higher software licensing revenues of Axiom from Comcast and Verizon were partially offset by lower software licensing revenue from our Advertising products of $1.1 million primarily from lower orders from Comcast, lower TV Navigator revenue of $700,000 due to lower pricing, and lower Broadcast revenue of $800,000 due to reduced customer orders. There were also two large nonrecurring orders during our first quarter of fiscal 2009 for our VODlink and VOD hospitality software products.

Media Services. Revenues from Media Services increased by approximately $200,000 or 5% in the three months ended April 30, 2009 compared to the three months ended April 30, 2008. The increase in revenue was due primarily to recent contract wins in Greece and Turkey offset by the 27% year over year depreciation of the British pound compared to the U.S. dollar.

Product Gross Profit. Costs of product revenues consist primarily of the cost of purchased material components and subassemblies, labor and overhead relating to the final assembly and testing of complete systems and related expenses. The gross profit percentage for products increased from 60% in the three months ended April 30, 2008 to 62% in the three months ended April 30, 2009. The year over year increase in product gross profit percentages between years was due mainly to a favorable product mix of higher margin VOD server products combined with lower Broadcast server products, which typically carry lower margins.

Services Gross Profit. Cost of services revenues consist primarily of labor, materials and overhead relating to the installation, training, product maintenance and technical support, software development, and project management provided by us and costs associated with providing video content services. The gross profit percentage for services increased from 35% in the three months ended April 30, 2008 to 38% in the three months ended April 30, 2009. The increase was primarily due to increased VOD maintenance revenues due to a larger installed base year over year combined with a slower level of growth in services headcount costs compared to last year's first quarter.

Software Revenues Gross Profit. Software gross margin of 58% for the three months ended April 30, 2009 was three percentage points higher compared to the three months ended April 30, 2008. The increase in software gross margins is due mainly to higher Software services maintenance revenue year over year with comparable headcount-related costs.

Servers and Storage Gross Profit. Servers and Storage segment gross margin of 49% in the three months ended April 30, 2009 was one point lower than in the three months ended April 30, 2008 due mainly to higher sales volume-related VOD server gross margins offset by lower service margins resulting from higher VOD headcount-related costs to service the larger install base.

Media Services Gross Profit. Media Services segment gross margin of 9% in the three months ended April 30, 2009 was eight points lower than gross margin for the three months ended April 30, 2008 due principally to the overlap of increased headcount related costs associated with bringing all content processing in-house combined with the continued third party costs as this transition is finalized.

Research and Development. Research and development expenses consist primarily of the compensation of development personnel, depreciation of development and test equipment and an allocation of related facilities expenses. Research and development expenses increased from $10.5 million, or 23% of total revenues, in the three months ended April 30, 2008, to $12.1 million or 25% of total revenues, in the three months ended April 30, 2009. The increase year over year is primarily due to lower absorption of research and development expenses to cost of revenues due to lower customer-funded development revenue and increased headcount costs related to the VOD and TV Navigator product lines.

Selling and Marketing. Selling and marketing expenses consist primarily of compensation expenses, including sales commissions, travel expenses and certain promotional expenses. Selling and marketing expenses decreased from $6.4 million, or 14% of total revenues, in the three months ended April 30, 2008, to $6.3 million, or 13% of total revenues, in the three months ended April 30, 2009. This decrease is primarily due to lower travel expenses of $75,000 and lower marketing-related expenses of $100,000 offset by higher commission expense of $100,000 related to higher revenues.

General and Administrative. General and administrative expenses consist primarily of the compensation of executive, finance, human resource and administrative personnel, legal and accounting services and an allocation of related facilities expenses. In the three months ended April 30, 2009, general and administrative expenses decreased to $4.9 million, or 10% of total revenues, from $5.3 million, or 12% of total revenues, in the three months ended April 30, 2008. The decrease was primarily due to lower performance based compensation of $300,000 and lower contract labor of $100,000.

Amortization of intangible assets. Amortization expense consists of the amortization of acquired intangible assets which are operating expenses and not considered costs of revenues. In the three months ended April 30, 2009 and 2008, amortization expense was $479,000 and $396,000, respectively. An additional $51,000 and $92,000 of amortization expense related to acquired technology was charged to cost of sales for the three months ended April 30, 2009 and 2008, respectively.

Equity Loss in Earnings of Affiliates. Equity loss in earnings of affiliates was $197,000 in the three months ended April 30, 2009 in comparison to equity loss in earnings of affiliates of $283,000 in the three months ended April 30, 2008. For the three months ended April 30, 2009, $328,000 of equity loss was recognized from On Demand Deutschland, net of $131,000 in accreted gains related to customer contracts and content licensing agreements and a capital distribution related to reimbursement of previously incurred costs. For the three months ended April 30, 2008, the On Demand Deutschland loss was $462,000 net of $179,000 in accreted gains related to customer contracts and content licensing agreements and a capital distribution related to reimbursement of previously incurred costs.

Income Tax Provision and Benefit. For the three months ended April 30, 2009, we recorded an income tax provision of $244,000 on income before tax of $1.4 million resulting in an effective income tax provision rate of 17%. The income tax provision rate of 17% was primarily attributable to revenue in our foreign subsidiaries which are taxed at lower rates than in the U.S. For the three months ended April 30, 2008, we recorded an income tax provision of $425,000 on income before taxes of $1.1 million resulting in an effective income tax provision rate of 40%.

As of April 30, 2009, the Company has maintained the full valuation allowance against its net U.S. deferred tax assets primarily due to the uncertainties related to our ability to generate sufficient pre-tax income for fiscal 2010 and thereafter. If we generate sufficient pre-tax income in the future, some portion or all of the valuation allowance could be reversed and a corresponding increase in net income would be reported in future periods.

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Liquidity and Capital Resources

Historically, we have financed our operations and capital expenditures primarily with cash on-hand and the proceeds from sales of our common stock. Cash and marketable securities increased $4.9 million from $85.8 million at January 31, 2009 to $90.7 million at April 30, 2009. Working capital, excluding long-term marketable securities, decreased from $89.5 million at January 31, 2009 to $89.1 million at April 30, 2009.

Net cash provided by operating activities was $9.9 million for the three months ended April 30, 2009 compared to net cash used by operating activities of $7.3 million for the three months ended April 30, 2008. The net cash provided by operating activities for the three months ended April 30, 2009 was primarily the result of an increase in net income and non-cash expenses of $4.3 million and an increase of $7.4 million of customer deposits, offset by a decrease of $1.7 million in accrued expenses and an increase of $1.8 million in inventories. The increase in customer deposits was from Comcast related to their payment for software subscription services for calendar 2009. The decrease in accrued expenses was a result of the payments of commissions and performance based compensation during the first quarter of fiscal 2010 that had been accrued as of January 31, 2009.

Net cash used by investing activities was $3.9 million for the three months ended April 30, 2009 compared to net cash used by investing activities of $2.3 million for the three months ended April 30, 2008. Investment activity for the three months ended April 30, 2009 consisted primarily of the net purchase of $600,000 of marketable securities, the purchase of property and equipment of $2.4 million and a $700,000 payment to the former shareholders of Mobix due to Mobix meeting the first performance goal as part of the Share Purchase Agreement.

Net cash used by financing activities was $1.7 million for the three months ended April 30, 2009 and net cash used by financing activities was $1.5 million for the three months ended April 30, 2008. In the three months ended April 30, 2009, the cash used by financing activities was due to the repurchase of $1.7 million of the Company's stock.

In connection with our acquisition of Mobix Interactive Limited ("Mobix"), we deposited £1 million (approximately $1.5 million USD) in escrow to be released on May 19, 2009 if certain performance goals had been satisfied as part of the Share Purchase Agreement. We notified the former shareholders of Mobix that these targets had not been achieved and on May 28, 2009, the escrow balance was released back to us. In addition, we have agreed to make contingent earnout cash payments of approximately £8.3 million (approximately $12.4 million USD) upon the achievement of certain financial targets measured over defined periods through November 19, 2011. As of April 30, 2009, we have not recorded any obligation relative to this contingent consideration.

On October 31, 2008, RBS Citizens (a subsidiary of the Royal Bank of Scotland Group plc) extended our $15.0 million revolving line of credit from October 31, 2008 through October 31, 2010. Loans made under this revolving line of credit bear interest at a rate per annum equal to the bank's prime rate. Borrowings under this line of credit are collateralized by substantially all of our assets. The loan agreement requires that we provide RBS Citizens with certain periodic financial reports and comply with certain financial ratios including a minimum level of earnings before interest, taxes and depreciation and amortization on a trailing twelve month basis. As of April 30, 2009, we were in compliance with the financial covenants and there were no amounts outstanding under the revolving line of credit.

We are occasionally required to post letters of credit, issued by a financial institution, to secure certain sales contracts. Letters of credit generally authorize the financial institution to make a payment to the beneficiary upon the satisfaction of a certain event or the failure to satisfy an obligation. The letters of credit are generally posted for one-year terms and are usually automatically renewed upon maturity until such time as we have satisfied the commitment secured by the letter of credit. We are obligated to reimburse the issuer only if the beneficiary collects on the letter of credit. We believe that it is unlikely we will be required to fund a claim under our outstanding letters of credit. As of April 30, 2009, the full amount of the letters of credit of $537,000 was supported by our credit facility.

On March 11, 2009, SeaChange's Board of Directors authorized through the repurchase of up to $20.0 million of its common stock, par value $.01 per share, through a share repurchase program. As authorized by the program, shares may be purchased in the open market or through privately negotiated transactions in a manner consistent with applicable securities laws and regulations, including pursuant to a Rule 10b5-1 plan maintained by the Company. This share repurchase program does not obligate the Company to acquire any specific number of shares and may be suspended or discontinued at any time. All repurchases are expected to be funded from the Company's current cash and investment balances. The timing and amount of the shares to be repurchased will be based on market conditions and other factors, including price, corporate and regulatory requirements and alternative investment opportunities. The repurchase program is scheduled to . . .