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 Mobix Interactive, Inc. activities which include content acquisition and preparation services for television and wireless 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.

º our ability to successfully integrate businesses acquired by us, including eventIS Group B.V. and Mobit Interactive, Ltd.

The following table sets forth statement of operations data for the three months ended July 31, 2009 compared to the three months ended July 31, 2008.

                                                                                  Three Months Ended
                                                                                       July 31,
                                                                                2009             2008
                                                                                    (in thousands)
Revenues:
    Products                                                                $    22,598      $    29,486
    Services                                                                     23,909           21,219
                                                                                 46,507           50,705
Costs and expenses:
    Cost of product revenues                                                      7,788           13,019
    Cost of services revenues                                                    15,004           13,046
    Research and development                                                     11,976           11,047
    Selling and marketing                                                         6,251            7,265
    General and administrative                                                    5,184            4,800
    Amortization of intangibles                                                     794              397
(Loss) income from operations                                                      (490 )          1,131
    Interest and other income, net                                                  150              678
(Loss) income before income taxes and equity loss in earnings of affiliates        (340 )          1,809
Income tax benefit (expense)                                                         11             (208 )
Equity loss in earnings of affiliates, net of tax                                   (47 )           (114 )
Net (loss) income                                                           $      (376 )    $     1,487

Revenues

The following table summarizes information about the Company's reportable
segment revenues for the three months ended July 31, 2009 and 2008.

                                              Three Months Ended
                                                   July 31,
                                           2009                 2008              %
                                        (in thousands, except for percentage data)
  Software revenues:
      Products                       $         14,424     $         18,906       -24 %
      Services                                 15,636               13,673        14 %
  Total Software revenues            $         30,060     $         32,579        -8 %
  Servers and Storage revenues:
      Products                       $          8,174     $         10,580       -23 %
      Services                                  3,657                3,652         0 %
  Total Servers and Storage revenues $         11,831     $         14,232       -17 %
  Media Services:
      Services                       $          4,616     $          3,894        19 %
  Total consolidated revenue:
      Products                       $         22,598     $         29,486       -23 %
      Services                                 23,909               21,219        13 %
  Total consolidated revenues        $         46,507     $         50,705        -8 %

Services Revenues. Our Services revenues increased 13% year over year to $23.9 million in the three months ended July 31, 2009 from $21.2 million in the three months ended July 31, 2008. For both the three months ended July 31, 2009 and 2008, Services revenues for the Software segment accounted for 65% of the total services revenue. Servers and Storage services revenue accounted for 15% and 17% of total services revenue and Media Services accounted for 20% and 18% of total services revenues in the three months ended July 31, 2009 and 2008, respectively. The increased Service revenues is due to higher revenues from On Demand Group primarily from two customer contract wins that occurred in the second half of fiscal 2009 and increased VOD professional service revenues year over year.

For the three months ended July 31, 2009, four customers accounted for more than 54% of our total revenues, and two customers accounted for more than 48% of our total revenues for the three months ended July 31, 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 40% and 33% of total revenues in the three months ended July 31, 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 July 31, 2009 and 2008 approximately 75% and 76% of international revenues, respectively, were denominated in USD, lessening the exposure of the Company's revenues to currency fluctuations.

Software Revenues. Revenues from our Software segment for the three months ended July 31, 2009 decreased $2.5 million, or an 8% decrease compared to the three months ended July 31, 2008. The decrease in software product revenues were due to lower TV Navigator license revenues and lower software licensing revenues from Advertising and Broadcast products resulting from less capital spending by North American advertisers and broadcasters. The decrease in software product revenues was partially offset by higher software subscription revenues resulting from the renewal of subscription agreements during the quarter and higher VOD license revenues. In addition, lower software product revenues were also partially offset by higher software services revenues primarily due to higher VOD product maintenance revenue and other technical support services revenue from growth in our installed base of products.

Servers and Storage Revenues. Revenues from the Servers and Storage segment for the three months ended July 31, 2009 decreased $2.4 million or 17% compared to related revenues in the three months ended July 31, 2008. The decrease in these product revenues compared to the same quarter in the previous year was primarily due to lower Broadcast server revenue as broadcast customers curtailed their capital spending year over year. This was partially offset by strong VOD server shipments to customers in North America, Latin America and China.

Media Services. Revenues from Media Services increased by approximately $722,000 or 19% in the three months ended July 31, 2009 compared to the three months ended July 31, 2008. The increase in this revenue was due primarily to contract wins in Greece and Turkey that occurred in the second half of fiscal 2009. Excluding the impact of currency rate differences, Media Services revenue would have grown 46% compared to the second quarter of fiscal 2009.

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 56% in the three months ended July 31, 2008 to 66% in the three months ended July 31, 2009. The year over year increase was due mainly to a favorable product mix of higher margin software subscription revenues 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, project management and costs associated with providing video content services. The gross profit percentage for services decreased from 39% in the three months ended July 31, 2008 to 37% in the three months ended July 31, 2009. The decrease was primarily due to higher headcount costs for the Media Services segment compared to last year's second fiscal quarter.

Software Revenues Gross Profit. Software segment gross margin of 61% for the three months ended July 31, 2009 was five percentage points higher compared to the three months ended July 31, 2008. The increase in software gross margins is due mainly to higher software subscription revenues primarily from the renewal of our agreement with Comcast during the second quarter of fiscal 2010.

Media Services Gross Profit. Media Services segment gross margin of 5% in the three months ended July 31, 2009 was seven percentage points lower than gross margin for the three months ended July 31, 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 during this transition during the second quarter of fiscal 2010.

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 $11.0 million, or 22% of total revenues, in the three months ended July 31, 2008, to $12.0 million or 26% of total revenues, in the three months ended July 31, 2009. The increase year over year is primarily due to increased headcount costs related to the VOD servers 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 $7.3 million, or 14% of total revenues, in the three months ended July 31, 2008, to $6.3 million, or 13% of total revenues, in the three months ended July 31, 2009. This decrease is primarily due to lower travel expenses of $300,000, lower marketing-related expenses of $200,000 and lower third party commissions of $300,000.

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 July 31, 2009, general and administrative expenses increased to $5.2 million, or 11% of total revenues, from $4.8 million, or 9% of total revenues, in the three months ended July 31, 2008. The increase was primarily due to $500,000 of transaction expenses related to the acquisition of eventIS Group B.V. As a result of the adoption of SFAS
141(R), the Company is now required to expense acquisition-related costs in its general and administrative expenses whereas prior to the adoption of SFAS
141(R), such costs were capitalized as part of the purchase price allocated to assets and liabilities acquired.

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 July 31, 2009 and 2008, amortization expense was $794,000 and $397,000, respectively. The increase was due to the amortization of the intangible assets in connection with the acquisition of Mobix Interactive on November 18, 2008. An additional $30,000 and $47,000 of amortization expense related to acquired technology was charged to cost of sales for the three months ended July 31, 2009 and 2008, respectively. In the future, SeaChange expects to have a higher amortization expense as a result of the recent acquisitions of Mobix on November 19, 2008 and eventIS on September 1, 2009. The Company expects to complete valuations for Mobix and eventIS during the second half of fiscal 2010.

Interest and Other Income, net. Interest and other income, net was $149,000 in the three months ended July 31, 2009, compared to $678,000 in the three months ended July 31, 2008. The decrease in interest and other income, net is primarily due to a $400,000 decrease in interest income resulting from lower investment yields and $159,000 of translation losses at our various foreign subsidiaries (where the functional currency is the US Dollar) derived from fluctuations in exchange rates between the various currencies and the U.S. dollar.

Equity Loss in Earnings of Affiliates. Equity loss in earnings of affiliates was $47,000 in the three months ended July 31, 2009 in comparison to equity loss in earnings of affiliates of $114,000 in the three months ended July 31, 2008. For the three months ended July 31, 2009 and 2008, $192,000 and $776,000, respectively, of equity loss was recognized from On Demand Deutschland, net of $155,000 and $662,000, respectively, 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 July 31, 2009, we recorded an income tax benefit of $12,000 on a loss before tax of $341,000 resulting in an effective tax rate of (3%). The income tax provision was attributable to the reduction of our deferred tax liabilities related to the Mobix intangibles, offset by our tax expense on foreign source income which are taxed at lower rates than in the U.S.. For the three months ended July 31, 2008, we recorded an income tax provision of $208,000 on income before taxes of $1.8 million, resulting in an effective tax rate of 12%.

Six Months Ended July 31, 2009 Compared to the Six Months Ended July 31, 2008

The following table sets forth statement of operations data for the six months
ended July 31, 2009 compared to the six months ended July 31, 2008.

                                                                            Six Months Ended
                                                                                July 31,
                                                                         2009             2008
                                                                             (in thousands)
Revenues:
    Products                                                         $    48,968      $    56,480
    Services                                                              46,415           39,609
                                                                          95,383           96,089
Costs and expenses:
    Cost of product revenues                                              17,758           23,744
    Cost of services revenues                                             28,893           24,943
    Research and development                                              24,080           21,523
    Selling and marketing                                                 12,515           13,688
    General and administrative                                            10,050           10,085
    Amortization of intangibles                                            1,273              793
Income from operations                                                       814            1,313
    Interest and other income, net                                           285            1,547
Income before income taxes and equity loss in earnings of affiliates       1,099            2,860
Income tax expense                                                          (233 )           (633 )
Equity loss in earnings of affiliates, net of tax                           (244 )           (397 )
Net income                                                           $       622      $     1,830

Revenues

The following table summarizes information about the Company's reportable
segment revenues for the six months ended July 31, 2009 and 2008.

                                               Six Months Ended
                                                   July 31,
                                           2009                 2008              %
                                        (in thousands, except for percentage data)
  Software revenues:
      Products                       $         30,709     $         38,059       -19 %
      Services                                 29,968               24,583        22 %
  Total Software revenues            $         60,677     $         62,642        -3 %
  Servers and Storage revenues:
      Products                       $         18,259     $         18,421        -1 %
      Services                                  7,625                7,118         7 %
  Total Servers and Storage revenues $         25,884     $         25,539         1 %
  Media Services:
      Services                       $          8,822     $          7,908        12 %
  Total consolidated revenue:
      Products                       $         48,968     $         56,480       -13 %
      Services                                 46,415               39,609        17 %
  Total consolidated revenues        $         95,383     $         96,089        -1 %

Product Revenues. Product revenues decreased 13% to $49.0 million in the six months ended July 31, 2009 from $56.5 million in the six months ended July 31, 2008. Product revenues from the Software segment accounted for 63% and 67% of the total product revenue for the six months ended July 31, 2009, and 2008, respectively. The Servers and Storage segment accounted for 37% and 33% of total product revenues in the six months ended July 31, 2009 and 2008, respectively. The $7.5 million decrease in product revenues between years is primarily due to lower sales of our Broadcast products driven by the impact of reduced advertising revenues on broadcasters' capital spending and lower North American Advertising Insertion license revenue.

Services Revenues. Our Services revenues increased 17% year over year to $46.4 million in the six months ended July 31, 2009 from $39.6 million in the six months ended July 31, 2008. For the six months ended July 31, 2009 and 2008, Services revenues for the Software segment accounted for 65% and 62% of the total services revenue, respectively. Servers and Storage services revenue accounted for 16% and 18% of total services revenue and Media Services accounted for 19% and 20% of total services revenues in the six months ended July 31, 2009 and 2008, respectively. The $6.8 million increase in Services revenues in our Software segment is due to increased VOD support maintenance and professional services and increases in our Media Services segment were due to two customer contract wins that occurred in the second half of fiscal 2009.

For the six months ended July 31, 2009, three customers accounted for more than 48% of our total revenues, and two customers accounted for more than 44% of our total revenues for the six months ended July 31, 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 33% and 32% of total revenues in . . .