SECURITIES AND EXCHANGE
COMMISSIONWashington, D.C. 20549 FORM
10-K x
    
    ANNUAL REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934For the fiscal year ended January
      31, 2009o
    
    TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934 Commission File Number:
0-21393 SEACHANGE INTERNATIONAL, INC.(Exact name of registrant as specified in its
charter) Delaware(State or other jurisdictionof
      incorporation or organization)
    04-3197974(IRS EmployerIdentification
      No.)
 50 Nagog Park, Acton, MA
01720(Address of principal executive
offices, including zip code) (978)-897-0100(Registrants telephone number, including area
code) Securities Registered Pursuant To
Section 12(b) Of The Act: Common Stock, $.01 par
value Securities Registered Pursuant To
Section 12(g) Of The Act: None Indicate by
check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes oNo x Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes oNo x Indicate by
check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes xNo o Indicate by check mark if disclosure
of delinquent filers pursuant to Item 405 of Regulation of S-K is not contained
herein, and will not be contained, to the best of the registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. o Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. Large
      accelerated filer o
    Accelerated
      filer xNon-accelerated
      filer o
    Smaller
      reporting company o
  Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes oNo x As of July 31, 2008, the aggregate
market value of the voting stock held by non-affiliates of the registrant, based
upon the closing price for the registrants Common Stock on the Nasdaq Global
Select Market on such date was $206,103,418. The number of shares of the
registrants Common Stock outstanding as of the close of business on April 7,
2009 was 30,649,256. DOCUMENTS INCORPORATED BY
REFERENCE: Portions of
the definitive Proxy Statement (which is expected to be filed within 120 days
after the Companys fiscal year end) relating to the registrants Annual Meeting
of Stockholders to be held on or about July 15, 2009 to be filed pursuant to
Regulation 14A are incorporated by reference into Part III of this Annual Report
on Form 10-K.


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PART I

ITEM 1. Business

SeaChange
International, Inc. (SeaChange, we or us), a Delaware corporation founded
on July 9, 1993, is a leading developer, manufacturer and marketer of digital
video systems and services. These products and services facilitate the
aggregation, licensing, storage, management and distribution of video,
television programming and advertising content. We sell our products and
services worldwide to cable system operators, including Cablevision, Comcast,
Cox Communications, Virgin Media, and Rogers; telecommunications companies,
including Telekom Austria, Turk Telekom and Verizon Communications; and
broadcast television companies, including ABC Disney, Ascent Media, Clear
Channel, China Central Television and MTV Networks.

Our digital
video systems are designed to enable our customers to reduce subscriber turnover
and access new revenue-generating opportunities from subscribers, advertisers
and electronic commerce initiatives. Using our products and services, we believe
our customers can increase their revenues by offering additional services such
as on demand television, which allows, for example, the operator to offer a
variety of programming for viewing whenever a subscriber chooses and
incorporates the ability for subscribers to pause, rewind and fast-forward on
demand content. Our systems also allow our customers to insert advertising into
broadcast and on demand programming. Our advertising systems allow our customers
to target advertising segments to specific subscribers in a particular
geographic and/or demographic market. In addition, our systems enable broadband
system operators to offer other interactive television services that allow
subscribers to customize and/or dynamically interact with their television,
enhancing their viewing experience.

The primary
thrust of our business has been supplying systems to deliver video assets in the
evolving On Demand television environment. Through acquisitions and
partnerships we have expanded our capabilities, products and services to address
the needs of video content owners broadcasters, and content aggregators, and to
address the delivery of content to devices other than the television, such as
mobile phones and PCs. Our products and services include hardware and software
for content management and delivery systems, middleware that drives set top box
applications such as games, advertising systems that help pay for content and
services that involve the acquisition and distribution of video content. We
believe that our strategy of expanding our product line will position SeaChange
to support and maintain our existing customer base, take advantage of new
customers entering the on demand marketplace and to enter adjacent markets.

Our core
technologies provide a foundation for products and services that can be deployed
in next generation systems capable of increased levels of subscriber
interactivity. We have received several awards for technological excellence,
including Emmy Awards for our patented MediaCluster ® technology and
for our role in the growth of video on demand.

Industry Background

**Cable System Operators and
Telecommunications Companies**

According to
SNL Kagan, the number of households paying for TV access today, such as cable
subscription but excluding satellite, has been estimated at 110 million in the
Americas and approximately 560 million worldwide. Over the last several years,
cable system operators and telecommunications companies have spent billions of
dollars to upgrade their networks from analog to digital, yielding a significant
increase in available bandwidth, channel capacity and two-way interactive
capability. We believe this investment reflects their intent to provide video on
demand, advertising insertion, internet access and other value-added services to
their customers that will differentiate them from competing service providers,
including satellite delivery systems.

In 2001,
North American cable system operators and telecommunications companies began the
deployment of residential video on demand capability allowing subscribers to
watch video programming at any time with pause, rewind, fast forward and a
number of additional interactive capabilities. All of the major North American
cable system operators have deployed video on demand services in one or more
major residential markets. The various on demand applications offered by cable
system operators and, increasingly, telecommunications operators, include
movies-on-demand, subscription video on demand, such as Home Box Office (HBO),
as well as news, sports, music videos, games, niche programming and time-shifted
broadcast programming.

Cable
companies have also begun to market telephony services. In response,
telecommunications operators, notably AT&T and Verizon in the U.S., are
aggressively providing competitive digital television and video services.
Elsewhere, international telecommunications companies with high-speed network
capacity are actively exploring and launching similar television services.

In addition,
because cable television programming is transmitted over broadband (high
bandwidth networks), cable system and telecom operators have the opportunity to
segment and target their programming to viewers in selected geographies. In the
future, we believe that the ability of operators to target viewers will extend
to individual household-level targeting of advertisements in video on demand
applications, generating revenue which may help support the worldwide deployment
and growth of video on demand content and services.

2

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Increased
demand for video and audio content over the internet will also require a
substantial increase in storage capacity and bandwidth over time. We believe
that cable system operators and telecommunications companies will play an
integral role in providing these broadband internet applications. We also
believe that in order to offer high quality video applications over the
internet, cable system operators and telecommunications companies will need more
storage and delivery systems capable of complex management and scheduling of
video streams.

**Broadcast Television
Companies**

Both
domestically and internationally, broadcast television companies face a number
of new challenges to their business. In digital broadcasting, changing ownership
trends, new consumer alternatives (e.g., cable television, satellite television,
or internet) and evolving viewership models (e.g., Personal Video Recorders
(PVR), cell phones, Personal Digital Assistants (PDA), etc.) are creating a more
complex competitive environment for our customers that calls for greater
efficiencies and business innovation. We believe broadcast television companies
are therefore turning away from their out-dated tape-based systems with robotic
libraries, which are cumbersome and require high levels of maintenance and
manual intervention.

Some
television broadcasters are using digital bandwidth to originate multiple
program streams. As this application further develops, television broadcasters
will require more video storage and delivery systems that can effectively manage
and deliver these multiple television signals. As a result, we believe that
television broadcasters will continue to automate their entire programming and
advertising to reduce overall operating costs and improve reliability. We expect
new opportunities to emerge for broadcasters and video on demand operators to
create new business synergies that will likely require digital video storage and
delivery systems.

**SeaChange Business Segments**

In fiscal
2009, we realigned our business segments and financial reporting structure to
better portray the Companys strategic direction and potential areas for growth.
The Company now reports its financial results within three segments: Software,
Servers and Storage, and Media Services. Financial information about our
business segments is included in Managements Discussion and Analysis of
Financial Condition and Results of Operations and the Consolidated Financial
Statements.

Year ended January 31,2009
    
    2008
    
    2007Amount
    
    %
    
    Amount
    
    %
    
    Amount
    
    %Revenues by
      segment:
    
    **(in
      thousands, except percentages)**Software
    
    $
    132,237
    
    65
    %
    
    $
    113,269
    
    63
    %
    
    $
    100,386
    
    62
    %Servers and Storage
    
    
    53,640
    
    27
    %
    
    
    48,997
    
    27
    %
    
    
    48,080
    
    30
    %Media Services
    
    
    15,959
    
    8
    %
    
    
    17,627
    
    10
    %
    
    
    12,868
    
    8
    %Total
    
    $
    201,836
    
    
    
    
    $
    179,893
    
    
    
    
    $
    161,334


**Software**

In 2006, we
began selling our SeaChange Axiom® On Demand software independent of
our hardware and offering subscription services for the software in an effort to
increase market share and enhance revenue stability through more recurring
revenues. Additionally, by porting our software to other third party hardware
platforms, we expect to increase our market share with opportunities at
competitive vendors installations.

We also
develop, sell and support software products in the middleware and advertising
categories. Our middleware and application business is focused on producing
set-top box client middleware software products and end-to-end interactive
television applications, and performing system integration and software
customization services. Our client middleware solutions include the
VODlink® Platform Suite built for and deployed on common North
American cable set top boxes, and the TV Navigator platform deployed in Europe
and Asia.

Our
advertising insertion software products are available for both the traditional
analog environment (the way that video signals have been transmitted for the
past 60 years), and for the digital environment, which provides the cable
operator with a significant increase in available bandwidth, channel capacity
and two-way capability. Based on currently available industry sources and our
internal data, we believe our Spot System is the leading analog video insertion
system in the United States in the multichannel television market for
advertisements and other short-form video. Over the last several years, our
customers have begun to migrate to digital video ad insertion, and we believe
our digital video ad insertion system is establishing a strong market position
as well. Our SeaChange AdPulse On Demand Advertising software platform allows
operators to generate new advertising revenue from inserting ads, dynamically,
in on demand content while it provides detailed tracking and reporting on views
and usage of inserted ads.

Revenue sources from the Software
segment fall into two categories:

- product revenues such as licensing, and software
  development for those products and
- related services such as subscriptions (annual
  software subscriptions for upgrades) professional services, installation,
  training, project management, product maintenance, and technical support for
  those software products.

3

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**Servers and
Storage**

Combining
the advantages of standards-based hardware with our patented
MediaCluster® technology, our hardware products deliver high-density
streaming, clustered ingest and scalable storage for video on demand,
time-shifted TV, network PVR (Personal Video Recorder) applications, as well as
broadcast play to air and archiving.

Revenue
sources for our Servers and Storage segment fall into several categories. New
deployments are typically sold on a capacity basis and include one year of
maintenance. As our customers add more content and more users, they return to
purchase more streaming and storage capacity. The additional content usually
also leads to increased usage levels by the subscribers which also translates in
to add-on-sales. Recurring revenue consists of maintenance contracts after the
first year.

We offer
several configurations of our MediaCluster video servers to meet the evolving
needs of our customers for independently scalable ingest, streaming and
storage.

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.

**Media Services**

Through the
acquisition of On Demand Group Limited (ODG), completed in September of 2005 and
Mobix Interactive Ltd. on November 19, 2008, SeaChange continues to expand its
media content services, consisting of content aggregation and distribution. ODG
is a leader in Europe in the development and deployment of Pay TV services. This
division specializes in aggregating content for video on demand and Pay-Per-View
platforms, and provides marketing, promotional and production services to cable
operators and telecommunications providers throughout Europe.

As an
example, we source, acquire, package, and market Virgin Medias video on demand
services by providing access to content from local and Hollywood studio
providers in multiple formats including music, television programs and feature
length movies. Through ODG, we have a content rights management system and a
content preparation center for incorporating video content for VOD services from
the major content suppliers around the world.

Revenue from the Media Services
segment is generated from customer contracts depending on the services
rendered.

Key Products and Services

**SeaChange Video On Demand
System**

We have
developed and are deploying a video on demand system to cable television
companies and telecommunications companies. Our video on demand system consists
of:

- MediaCluster video servers that reside at various
  points in a broadband network system and are used to ingest, store and
  play or stream videos as requested;
- SeaChange Axiom® On Demand video
  software to manage and control the system and to support integration with
  third-party systems and
  applications;
- Spot Advertising Systems hardware and software and
  AdPulse On Demand Advertising System;
- Interactive middleware that enables operators to
  run multiple services, including video on demand and personal video
  recorders on multiple platforms;
- Record System, a time-shifting television
  application that enables broadcasted programming to be automatically encoded
  by broadband operators, with complete trick-mode functionality (fast-forward,
  pause and rewind); and
- Interfaces to digital headend modulators, control
  systems and subscriber management systems.

Our video on demand system allows
our customers to offer interactive services such as the following to their
subscribers:

- Video on demand. This interactive service allows residential users and commercial
  users (e.g., hotel guests) to review lists of available movies and/or
  programming content, order individual movies and/or programs and view them in
  real-time.Users have full control over the
  video stream.
- Subscription Video on demand. This service provides premium channel offerings, such as
  those offered by HBO, Showtime or Starz, in an on-demand manner, as well as on
  a scheduled basis. Similar to our video on demand service, our subscription
  video on demand service allows subscribers to review lists of available
  premium channel content, order individual programs and watch them at home with
  full video player control.

4

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- Networked Digital Video Recording.This service provides users with
  interactive control over broadcasted television programming, enabling viewers
  to watch sports, news, and other program types with full video cassette
  recorder and personal video recorder-like (e.g., TiVo® recorders)
  control over the video stream. We enable the provision of this service through
  our servers and software located in broadband local transmission sites known
  as headends. We believe this service also has the potential to accommodate new
  advertising techniques, such as ad replacement or limited fast-forward
  functionality.
- Targeted and Interactive Advertising.This service supports interactive
  advertising or advertising where the subscriber controls the path and delivery
  of an advertisement, in a video on demand service and in other forms of
  programming that result in a dedicated communications link between the
  subscribers set top box and the video on demand system itself.This service allows purchases over the television, such as
  one might do with a web browser over the internet.
- DVD Now on Demand Service.This interactive service brings DVD functionality to video
  on demand applications and provides a common standard for distributing and
  presenting video content. Our software tools and applications provide the
  capability to transform DVDs, including their menus and content chapter and
  options, into video on demand applications.
- Game Now Lite System. This interactive management and distribution system
  enables TV operators to provide games to subscribers. Game Now Lite allows
  operators to create a games business based on pay-per-play, pay-per-day,
  subscription, and/or ad-supported models.

**SeaChange Axiom® On Demand**video software is the end-to-end business solution for video
on demand (VOD) services. Software modules act in unison to manage and automate
every aspect of operations  streams, subscribers, billing, network load and
more. The product is built on an open architecture, meaning it can be deployed
by any service provider regardless of streaming, storage or network
architectures. SeaChange Axiom On Demand video software is comprised of three
components:

- On Demand Servicesmanage and deliver rich media content to a variety of
  consumer devices.
- Personalized Applications Platformenables operators to provide subscribers
  with innovative services such as games and movies on demand.
- Advanced Management Toolsgive operators the ability to reduce their
  costs and garner operational efficiencies through sophisticated system
  management tools.

SeaChange
Axiom On Demand Servicesconsist of the
essential functions that manage core on demand network resources such as
servers, bandwidth and storage. Modules administer network bandwidth through
session and resource management to ensure efficient content delivery. Content
propagation optimizes both network usage and storage by continually monitoring
demand for content, and moving content to locations where it is needed most. The
Connection Manager Service software mediates client requests, establishing the
shortest path between the client and the requested content. Asset Management is
responsible for managing the life cycle of content stored on the system. The
Asset Manager provides full visibility into the location and state of the
content in the system through a browser-based graphical user interface (GUI).
Additional Axiom On Demand Services include the Recording System that captures
broadcast programs and publishes them as VOD content and the Axiom Content
Dynamics module that automates dynamic insertion of advertisement and other
content into VOD streams.

SeaChange
Axiom Personalized Applicationssoftware
provides a broad range of on-demand applications to enhance the viewer
experience.

SeaChange
Axiom Advance Management Toolsprovide
engineering and operations personnel with tools that aid in the control of the
system. Problem identification and resolution, data warehouse management,
subscriber management and a configuration suite all help in reducing operational
costs while improving overall system efficiencies.

**Advertising
Products**

Our family
of Spot Systems automates the complex process of advertisement and other video
insertion across multiple channels and geographic zones for cable system
operators and telecommunications companies primarily in the Broadband segment.
Through our embedded proprietary software, our Spot System allows cable system
and telecom operators to insert local and regional advertisements and other
videos into a specific time allocated by television networks such as CNN, MTV,
ESPN, BET, Discovery Channel and Nickelodeon. The Spot System is capable of
inserting advertising into digital and analog channels including HD and
delivering targeted advertising, as well as advertising with interactive links
to content on video on demand systems, as well as to other interactive
advertising systems.

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The Spot
System is an integrated solution comprised of hardware platforms, software
applications, data networks and easy to use graphical interfaces. Our Spot
System is designed to be installed at local transmission sites, known as
headends, and advertising sales business offices. Our video insertion process
consists of six steps:

- Encoding.The process begins with our encoding software, which in real time
  transforms and compresses analog to digital short- and long-form
  video.
- Storage.Our
  Spot System organizes, manages and stores these video streams in a disk-based
  video library capable of storing thousands of advertisements.
- Scheduling.Our advertising management software coordinates with the traffic and
  billing application to determine the designated time slot, channel and
  geographic zone for each video stream.
- Distribution.Our strategic digital video software then copies the video files from
  the master video library and distributes them over the operators data network
  to appropriate headends, where they are stored in video servers for future
  play.
- Insertion.Following a network cue, our video switch module automatically inserts
  the video stream into the network feed (initiating the analog conversion, if
  necessary), where they are then seen by television viewers.
- Verification.After the video streams run, our proprietary software and hardware
  verifies the content, accuracy, timing and placement of these video streams to
  facilitate proper customer billing.

SeaChange AdPulse On Demand
Advertising System

The
SeaChange AdPulse System consists of an advertising and inventory management
system called the SeaChange AdPulse On Demand Ad Manager and a package of
enhancements for the core VOD system called SeaChange Axiom® Content
Dynamics software that provide functions tailored to the special needs of
managing, propagating, playing out and tracking of ads.

Key features of the AdPulse On
Demand Ad Manager include:

- Inventory Managementthe ability to define
  advertising avails (slots) in on demand content. The inventory is managed by
  creating an inventory definition that specifies a content group (by program,
  provider, or content category) to which the inventory definition will apply,
  then specifying the number and placement of ad breaks and the number of spots
  per break for programs in that content group.
- Order Entrythe ability to specify the rules by
  which different ad copy will be inserted into on demand content by
  assigning advertising copy to defined
  inventory.
- Dynamic Ad Placement Decisionsthe ability to
  modify a playlist at run-time to add, delete, or change ads played with
  assets based on defined ad placement
  rules.
- Interior Ad Breaks  ad insertion and /or
  replacement at ad breaks within an on demand content stream if interior ad
  breaks are marked with SCTE-35 descriptors.
- Operational Reportingthe ability to view and
  track aspects of the overall operation of the SeaChange AdPulse Manager, such
  as whether advertising copy required to execute an order has been received and
  propagated.
- Business Reportingthe ability to view and track
  specific business aspects of the SeaChange AdPulse Manager, such as
  which inventory has been sold and which is unsold, a
  summary of orders from a specific client, etc.
- Verification Reportingthe ability to track and
  view data about execution of orders, views of ad copy, and user action
  during the ad views.

This system
allows operators to generate new advertising revenue inserting ads, dynamically,
in on demand content while it provides detailed tracking and reporting on views
and usage of inserted ads. 2007 saw the first commercial deployment of our
SeaChange AdPulse On Demand advertising software platform. Since then we have
had successful trials and deployments with several operators including: Virgin
Media and Sunflower Broadband.

**SeaChange Middleware
Software Products**

Middleware
provides seamless, access across devices made by different manufacturers to
content across wired and/or wireless devices. We offer two middleware software
products to operators and content developers: VODlink software and TV Navigator
software.

SeaChange
VODlinksoftware is comprised of three
software modules that work together to enhance the user experience. The three
components: VODlink Platform Suite, VODlink Portal and VODlink Games help
operators jump-start their VOD offerings with a collection of games, a pop-up
portal to ease navigation and provide marketing of content, and a suite of tools
that allow easy development and integration of custom applications.

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SeaChange
TV Navigatorsoftwareis a platform serving
customers outside of North America that incorporates an optional Electronic
Program Guide (EPG  the user interface) that is completely customizable,
communications applications such as TV-mail, chat, ticker display and messaging,
and audience measurement tools that collect and report on usage
statistics.

**SeaChange Servers and
Storage**

Designed for
enterprise-wide video system deployments the patented SeaChange MediaCluster
architecture delivers massive, independently scalable, storage, streaming and
ingest capabilities. MediaCluster dramatically reduces the cost of storing and
delivering video assets. We offer several configurations of the MediaCluster to
meet the demands of different video delivery applications.

**SeaChange Flash MediaServers**

Our flash
memory-based servers provide 100% non-volatile, diskless edge streaming, stream
expansion and time-shifted TV. These servers allow operators to deploy diskless
streamers at the edge locations and locate centralized storage and storage
management at the head-end locations in their networks. The Flash MediaServers
also reduce operational costs. Compared to traditional spinning hard disk
drives, flash memory has no moving parts, therefore it is more reliable and
consumes less power.

**SeaChange MDS MediaServers**

Combining
the advantages of standards-based hardware with the SeaChange patented
MediaCluster technology the MDS products provide high density streaming,
clustered memory ingest and scalable storage. The MDS complements our widely
deployed disk-based video servers while providing independent scalable
streaming, storage and memory and can be deployed as a standalone system or a
streaming booster for existing systems.

**Broadcast and Specialty
Servers**

Additionally, we supply special function servers based on our
MediaCluster technology for the broadcast industry. Our Broadcast MediaCluster
System is composed of multiple individual video servers arranged in a cluster
acting as one system. This system is designed to provide high-quality digital
video storage and playback for use with automation systems in broadcast
television stations. This product is intended to replace on-air tape decks used
to store and play back advertising, movies and other programming from video tape
cart systems and, in some cases, to replace the cart systems themselves. Our
Broadcast MediaCluster System is designed for customers both in larger broadcast
television markets, which use station automation systems, and in smaller
markets, which use control software included in the system.

As with the
video on demand system, our Broadcast MediaCluster System is designed to
simultaneously record, encode, store to a disk and play video content using
compression and decompression hardware. These products seamlessly integrate into
television broadcasters current tape-based operations and meet the high
performance requirements of television broadcasters. Our Broadcast MediaCluster
System has features that enable the television broadcaster to have end-to-end
functionality and reliability, including the capability to schedule programming
for a week of television content.

Media Services

The Media
Services segment encompasses the business activities of the On Demand Group
(ODG), a U.K. based wholly-owned subsidiary of SeaChange. ODG group focuses on
the acquisition, licensing, preparation, management and marketing of content as
well as custom consulting services. The group was established though the
acquisition of ODG in November 2005 and Mobix Interactive Ltd. in November 2008.
Virgin Media in the U.K. is ODGs largest customer. In calendar year 2008, ODG
also added the Hellenic Telecommunication Organisation (OTE), Telekom Austria,
and TTNet  Turkeys largest ISP, as customers.

ODG also has
established joint ventures to provide specialized content and services. In 2005,
ODG launched FilmFlex in the U.K., a joint venture with Walt Disney and Sony
Pictures to provide an on demand movie service to Virgin Media. In December of
2007, ODG sold its interest in the FilmFlex joint venture to the other investors
for approximately $18 million.

In Germany,
ODG entered into a joint venture with the TeleMunchen Gruppe, a German media
company whose activities include the production and acquisition of
German-language feature films, television productions and classical music
programs. This joint venture has launched a pay-per-view service for Kabel
Deutschland Gruppe (KDG). KDG has approximately nine million subscribers and has
just begun to deploy digital services. We expect to transition the pay-per-view
service to a full-fledged VOD service as the digital rollout occurs. In addition
to providing pay-per-view services to KDG, the joint venture also provides
pay-per-view services to Unity Media and Telekom Austria.

7

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In November
2008, through ODG we acquired Mobix Interactive Limited in the U.K. Mobix
complements ODGs television VOD services business by offering mobile VOD
services to wireless network operators. Today, Mobix supports mobile subscribers
for its customers, o2 and 3 in the U.K. and Vodacom in South Africa.

**Service and Support**

We install,
maintain and support our hardware and software products worldwide. We offer
basic and advanced on-site training for customer employees. We currently provide
installation, maintenance and technical support to all our customers. We offer
maintenance and technical support to customers, agents and distributors of our
hardware, software and systems on a 24-hour, seven-day a week basis. Generally,
our systems sales include at least one year of free maintenance.

A separate professional services
group provides network design and architecture as well as systems integration
services.

Customer
support centers worldwide provide 24/7 coverage. We have support centers in the
U.S., Philippines, China, Japan, U.K., France, Turkey and Ireland.

Strategy

Our strategy
is to be the leading provider of video solutions in the television industry. We
develop, manufacture and market digital video systems and services that include
the management, aggregation, licensing, storage, and distribution of video,
television, gaming and advertising content. The key elements of our strategy are
to:

- Develop,Maintain and Extend Long-term Customer
  Relationships. We focus our product
  development, marketing and direct sales efforts on maintaining and extending
  long-term customer relationships with cable system operators,
  telecommunications companies and television broadcasters across the world. We
  have formed important relationships with customers that have grown from
  advertisement and other short-form video insertion to video on demand systems
  and other interactive television services, storage systems and streaming
  systems. We believe that the fundamental shift from broadcast to on demand
  applications and the growing emphasis on interactive technologies will
  continue to present opportunities for us to develop, market and support
  solutions to our existing customers as well as to new additional
  markets.
- Offer Integrated Solutions. Our customers operate complex networks that require the
  delivery and management of video programming across multiple channels and
  target zones. We believe that our integrated solutions can provide advantages
  in cost and implementation for digital video applications while interoperating
  with existing and emerging third-party equipment and software. To continue to
  address these needs, we intend to provide and further develop, internally and
  with our partners, integrated applications and support services for our
  customers. We believe that providing complete integrated solutions has been a
  significant factor in our success in the advertising and video on demand
  markets to date.
- Establish and Maintain Technological
  Leadership. We believe our competitive
  position is dependent in large part on the features and performance of our
  systems. As a result, we focus our research and development efforts on
  introducing systems with improved hardware and software capabilities. We have
  been granted patents and have patents pending for our various technologies. We
  have received several awards for technological excellence, including Emmy
  Awards for our patented MediaCluster ® technology and for our role
  in the growth of video on demand. As of January 31, 2009, 40% of our employees
  were focused on research and product development efforts.
- Provide Superior Customer Service and
  Support. Our products operate in customer
  environments where continuous operation is critical. As a result, we believe
  that providing a high level of service and support gives us a competitive
  advantage and is a differentiating factor in developing and maintaining key
  customer relationships. Our in-depth industry and application knowledge allows
  us to better understand the service needs of our customers. As of January 31,
  2009, 39% of our employees were dedicated to customer service and support,
  including project design and implementation, maintenance, installation and
  training. Customers have access to service personnel via 24/7 telephone
  support. In addition, we believe that the acquisitions and investments that we
  have made in media services and in system integration and customization
  services have positioned us as an integral partner with our customers to
  ensure optimal performance of their systems.

Customers

We currently sell our products
primarily to cable system operators, broadcast and telecommunications
companies.

Our customer
base is highly concentrated among a limited number of large customers, primarily
due to the fact that the cable, movie, broadcast, and telecommunications
industries in the United States are dominated by a limited number of large
companies. A significant portion of our revenues in any given fiscal period have
been derived from substantial orders placed by these large organizations. For
the year ended January 31, 2009, Comcast and Virgin Media comprised 31% and 12%,
respectively, of our total sales. We expect that we will continue to be
dependent upon a limited number of customers for a significant portion of our
revenues in future periods. As a result of this customer concentration, our
business, financial condition and results of operations could be materially
adversely affected by the failure of anticipated orders to materialize and by
deferrals or cancellations of orders as a result of changes in customer
requirements or new product announcements or introductions. In addition, the
concentration of customers may cause variations in revenue, expenses and
operating results on a quarterly basis due to seasonality of orders or the
timing and relative size of orders received and shipped during a fiscal
quarter.

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We do not
believe that our backlog at any particular time is meaningful as an indicator of
our future level of sales for any particular period. Because of the nature of
our products and our use of standard components, substantially the entire
backlog at the end of a quarter can be manufactured and shipped to the customer
before the end of the following quarter. However, because of the requirements of
particular customers these orders may not be shipped or, if shipped, the related
revenues may not be recognized in the ensuing quarter. Therefore, there is no
direct correlation between the backlog at the end of any quarter and our total
sales for the following quarter or other periods.

Selling and Marketing

We sell and
market our products in the United States primarily through a direct sales
organization and internationally through direct sales and independent agents and
distributors, complemented by a coordinated marketing effort of our product
marketing personnel. Direct sales activities in the United States are conducted
from our Massachusetts headquarters and through sales representatives deployed
across the country. We also market certain of our products to systems
integrators and value-added resellers.

In light of
the complexity of our digital video products, we primarily employ a consultative
direct sales process. Working closely with customers to understand and define
their needs enables us to obtain better information regarding market
requirements, enhance our expertise in our customers industries, and more
effectively and precisely convey to customers how our solutions address the
customers specific needs. In addition to the direct sales process, customer
references and visits by potential customers to sites where our products are in
place are often critical in the sales process.

We use
several marketing programs focused on our targeted markets to support the sale
and distribution of our products. We use exhibitions at a limited number of
prominent industry trade shows and conferences and presentations at technology
seminars to promote awareness of us and our products. We also publish articles
in trade and technical journals and we produce promotional product literature.

Research and Product Development

Our
management believes that our success will depend to a substantial degree upon
our ability to develop and introduce in a timely fashion new integrated
solutions and enhancements to our existing products that meet changing customer
requirements in our current and new markets. We have made, and intend to
continue to make, substantial investments in product and technological
development. Our direct sales and marketing groups closely monitor changes in
customer needs, changes in the marketplace and emerging industry standards, and
are therefore better able to focus our research and development efforts to
address these evolving industry requirements.

We believe
that the experience of our product development personnel is an important factor
in our success. We perform our research and product development activities at
our headquarters and in offices in New Hampshire, Pennsylvania, California,
Philippines, and China.

Manufacturing

Our
manufacturing operation is located at our facility in Acton, Massachusetts. This
manufacturing operation consists primarily of component and subassembly
procurement, systems integration and final assembly, testing and quality control
of the complete systems. We rely on independent contractors to manufacture
components and subassemblies to our specifications. Each of our products
undergoes testing and quality inspection at the final assembly stage.

Competition

The markets
in which we compete are characterized by intense competition, with a large
number of suppliers providing different types of products to different segments
of the markets. In new markets for our products, we compete principally based on
price. In markets in which we have an established presence, we compete
principally on the basis of the breadth of our products features and benefits,
including the flexibility, scalability, professional quality, ease of use,
reliability and cost effectiveness of our products, and our reputation and the
depth of our expertise, customer service and support. While we believe that we
currently compete favorably overall with respect to these factors and that our
ability to provide integrated solutions to manage, store and distribute digital
video differentiates us from our competitors, in the future we may not be able
to continue to compete successfully with respect to these factors. In the market
for long-form video products including video on demand, we compete with various
companies offering video server platforms such as Concurrent Computer Corp.,
Arris Group Inc. (through its 2007 acquisition of C-Cor Corporation), Cisco
Systems, Inc. (through its 2006 acquisition of Arroyo Video Solutions, Inc.),
Motorola, Inc. (through its 2006 acquisition of Broadbus Technologies, Inc.) and
Ericsson (through its 2007 acquisition of Tandberg Television). In the
television broadcast market, we compete against Thomson, Omneon Video Networks,
Sony Corporation and Harris Incorporated. In the digital advertisement insertion
market, we generally compete with Ericsson and Arris Group Inc. We expect the
competition in each of these markets to intensify in the future as existing and
new competitors with significant market presence and financial resources,
including computer hardware and software companies and television equipment
manufacturers, enter these rapidly evolving markets.

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Many of our
current and prospective competitors have significantly greater financial,
technical, manufacturing, sales, marketing and other resources. As a result,
these competitors may be able to devote greater resources to the development,
promotion, sale and support of their products. Moreover, these companies may
introduce additional products that are competitive with ours or enter into
strategic relationships to offer complete solutions, and in the future our
products may not be able to compete effectively with these products.

Proprietary Rights

Our success
and our ability to compete are dependent, in part, upon our proprietary rights.
We have been granted sixteen U.S. patents and have filed foreign patent
applications related thereto for various technologies developed and used in our
products. In addition, we rely on a combination of contractual rights, trademark
laws, trade secrets and copyright laws to establish and protect our proprietary
rights in our products. It is possible that in the future not all of these
patent applications will be issued or that, if issued, the validity of these
patents would not be upheld. It is also possible that the steps taken by us to
protect our intellectual property will be inadequate to prevent misappropriation
of our technology or that our competitors will independently develop
technologies that are substantially equivalent or superior to our technology. In
addition, the laws of some foreign countries in which our products are or may be
distributed do not protect our proprietary rights to the same extent as do the
laws of the United States. We have been involved in significant intellectual
property litigation, and we may be a party to litigation in the future to
enforce our intellectual property rights or as a result of an allegation that we
infringe others intellectual property.

Employees

As of
January 31, 2009, we employed 1,046 persons, including 412 in research and
development, 406 in customer service and support, 81 in selling and marketing,
36 in manufacturing and 111 in general and administration functions. We believe
that our relations with our employees are good. None of our employees are
represented by a collective bargaining agreement.

Geographic Information

Geographic
information is included in Managements Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated Financial Statements.

Available Information

SeaChange is
subject to the informational requirements pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended (the Exchange
Act).SeaChange files periodic reports, proxy statements and other information
with the Securities and Exchange Commission (SEC). Such reports, proxy
statements and other information may be obtained by visiting the Public
Reference Room of the SEC at 100 F Street, N.E., Washington, DC 20549 or by
calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet
site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding issuers that file electronically.

Financial
and other information about SeaChange, including SeaChanges Code of Ethics and
Business Conduct and charters for SeaChanges Audit Committee, Compensation
Committee and Corporate Governance and Nominating Committee, is available on our
website (www.schange.com). We make available free of charge on our website our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and amendments to those reports filed or furnished pursuant to the Exchange Act
as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the SEC. The information contained on our web site is
not incorporated by reference into this document and should not be considered a
part of this Annual Report. Our web site address is included in this document as
an inactive textual reference only.

ITEM 1A. Risk Factors

Any
statements contained in this Form 10-K that do not describe historical facts may
constitute forward-looking statements as that term is defined in the Private
Securities Litigation Reform Act of 1995. These statements relate to future
events or our future financial performance and are identified by words such as
may, will, could, should, expect, plan, intend, seek,
anticipate, believe, estimate, potential, or continue or other
comparable terms or the negative of those terms. Forward-looking statements in
this Form 10-K include certain statements regarding the effect of certain
accounting standards on our financial position and results of operations, the
effect of certain legal claims against us, projected changes in our revenues,
earnings and expenses, exchange rate sensitivity, interest rate sensitivity,
liquidity, product introductions, industry changes and general market
conditions. Our actual future results may differ significantly from those stated
in any forward-looking statements. Any such forward-looking statements contained
herein are based on current expectations, but are subject to a number of risks
and uncertainties that may cause actual results to differ materially from
expectations. Factors that may cause such differences include, but are not
limited to, the factors discussed below. Each of these factors, and others, are
discussed from time to time in our filings with the SEC.

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Our future success is dependent on the
continued development of the video-on-demand market and if video-on-demand does
not gain broad market acceptance, our business may not continue to grow.

An
increasing portion of our revenue in the last year has come from sales and
services related to our video-on-demand products. However, the video-on-demand
market continues to develop as a commercial market and may not gain broad market
acceptance. The potential size of the video-on-demand market and the timing of
its development are uncertain. The success of this market requires that
broadband system operators, particularly the seven largest domestic cable system
operators, continue to upgrade their cable networks to support digital two-way
transmission service and successfully market video-on-demand and similar
services to their cable television subscribers. Some cable system operators are
still in the early stages of commercial deployment of video-on-demand service to
major residential cable markets and, accordingly, to date our digital video
systems have been commercially available only to a limited number of
subscribers. Also, the telecommunications companies have also begun to adapt
their networks to support digital two-way transmission and begun marketing
video-on-demand services. If cable system operators and telecommunications
companies fail to make the capital expenditures necessary to upgrade their
networks or determine that broad deployment of video-on-demand services is not
viable as a business proposition or if our digital video systems cannot support
a substantial number of subscribers while maintaining a high level of
performance, our revenues will not grow as we have planned.

In addition,
a number of well-funded companies have been discussing broadband internet VOD
services for home television viewing. If these products are developed, they may
be more cost effective than our VOD solutions, which could result in cable
system operators and telecommunications companies discontinuing purchases of our
on-demand products.

Current economic and market conditions
make forecasting difficult.

The global
economy and financial markets have been experiencing extreme disruption in
recent months, including, among other things, extreme volatility in security
prices, severely diminished liquidity and credit availability, rating downgrades
of certain investments and declining valuations of others. Governments have
taken historic actions intended to address extreme market conditions that
include severely restricted credit. There may be a further deterioration in
financial markets and confidence in major economies. We are unable to predict
the likely duration and severity of the current disruptions in financial
markets, credit availability, and adverse economic conditions throughout the
world. These economic developments affect businesses such as ours and those of
our customers and vendors in a number of ways that could result in unfavorable
consequences to us.

Current
economic and market conditions together with the inherent inconsistent and
unpredictable ordering patterns of our customers have limited our ability to
forecast the volume and product mix of our sales, making it difficult to provide
estimates of revenue and operating results. We continue to have limited
visibility into the capital spending plans of our current and prospective
customers. Fluctuations in our revenue can lead to even greater fluctuations in
our operating results. Our planned expense levels depend in part on our
expectations of future revenue. Our planned expenses include significant
investments, particularly within the research and development organization,
which we believe are necessary to continue to provide innovative optical
networking and multiservice access solutions to meet our current and prospective
customers needs. As a result, it is difficult to forecast revenue and operating
results. If our revenue and operating results are below the expectations of our
investors and market analysts, it could cause a decline in the price of our
common stock.

Because our customer base is highly
concentrated among a limited number of large customers, the loss of or reduced
demand of these customers could have a material adverse effect on our business,
financial condition and results of operations.

Our customer
base is highly concentrated among a limited number of large customers, and,
therefore, a limited number of customers account for a significant percentage of
our revenues in any year. We generally do not have written agreements that
require customers to purchase fixed minimum quantities of our products. Our
sales to specific customers tend to vary significantly from year to year
depending upon these customers budgets for capital expenditures and our new
product introductions. We believe that a significant amount of our revenues will
continue to be derived from a limited number of large customers in the future.
The loss of, or reduced demand for products or related services from, any of our
major customers could have a material adverse effect on our business, financial
condition and results of operations.

In addition,
the industry has experienced consolidation among our customers which may cause
delays or reductions in capital expenditure plans and/or increased competitive
pricing pressures as the number of available customers decline and their
relative purchasing power increases in relation to suppliers. Any of these
factors could adversely affect our business.

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Cancellation or deferral of purchases
of our products could cause our operating results to be below the expectations
of the public market stock analysts who cover our stock, resulting in a decrease
in the market price of our common stock.

We derive a
substantial portion of our revenues from purchase orders that exceed $1.0
million in value. Therefore, any significant cancellation or deferral of
purchases of our products could have a material adverse effect on our business,
financial condition and results of operations in any particular quarter due to
the resulting decrease in revenue and gross margin and our relatively fixed
costs. In addition, to the extent significant sales occur earlier than expected,
operating results for subsequent quarters may be adversely affected because our
operating costs and expenses are based, in part, on our expectations of future
revenues, and we may be unable to adjust spending in a timely manner to
compensate for any revenue shortfall. Because of these factors, in some future
quarter our operating results may be below the expectations of public market
analysts and investors which may adversely affect the market price of our common
stock.

Timing of significant customer orders
may cause our quarterly operating results to fluctuate, making period-to-period
comparisons of our operating results less meaningful.

We have
experienced significant variations in the revenue, expenses and operating
results from quarter to quarter and these variations are likely to continue. We
believe that fluctuations in the number of orders being placed from quarter to
quarter are principally attributable to the buying patterns and budgeting cycles
of broadband system operators, including telecommunications companies, and
broadcast companies, the primary buyers of the digital video-on-demand,
advertising and broadcast systems, respectively. We expect that there will
continue to be fluctuations in the number and value of orders received. As a
result, our results of operations have in the past and likely will, at least in
the near future, fluctuate in accordance with this purchasing activity making
period-to-period comparisons of our operating results less meaningful. In
addition, because these factors are difficult for us to forecast, our business,
financial condition and results of operations for one quarter or a series of
quarters may be adversely affected and below the expectations of public market
analysts and investors, resulting in a decrease in the market price of our
common stock.

Due to the lengthy sales cycle involved
in the sale of our products, our quarterly results may vary and should not be
relied on as an indication of future performance.

Digital
video-on-demand, advertising, movie and broadcast products are relatively
complex and their purchase generally involve a significant commitment of
capital, with attendant delays frequently associated with large capital
expenditures and implementation procedures within an organization. Moreover, the
purchase of these products typically requires coordination and agreement among a
potential customers corporate headquarters and its regional and local
operations. For these and other reasons, the sales cycle associated with the
purchase of our digital video-on-demand, advertising, movie and broadcast
products is typically lengthy and subject to a number of significant risks,
including customers budgetary constraints and internal acceptance reviews, over
which we have little or no control. Based upon all of the foregoing, we believe
that our quarterly revenues and operating results are likely to vary
significantly in the future, that period-to-period comparisons of our results of
operations are not necessarily meaningful and that these comparisons should not
be relied upon as indications of future performance.

If there were a decline in demand or
average selling prices for our broadband products, including our Video-On-Demand
Systems and Advertising Systems, our revenues and operating results would be
materially affected.

We expect
our broadband products to continue to account for a significant portion of our
revenues. Accordingly, a decline in demand or average selling prices for our
broadband products, whether as a result of new product introductions by others,
price competition, technological change, inability to enhance the products in a
timely fashion, or otherwise, could have a material adverse effect on our
business, financial condition and results of operations.

If we are unable to manage our growth
and the related expansion in our operations effectively, our business may be
harmed through a diminished ability to monitor and control effectively our
operations, and a decrease in the quality of work and innovation of our
employees.

Our ability
to successfully offer new products and services and implement our business plan
in a rapidly evolving market requires effective planning and management. We are
also continuing to transition towards greater reliance on our video-on-demand
products and services for an increased portion of our total revenue. In light of
the growing complexities in managing our expanding portfolio of products and
services, our anticipated future operations will continue to strain our
operational and administrative resources. To manage future growth effectively,
we must continue to improve our management, our operational controls and
internal controls over financial reporting, and to integrate the businesses we
have acquired and our new personnel and to manage our expanding international
operations. A failure to manage our growth may harm our business through a
decreased ability to monitor and control effectively our operations, and a
decrease in the quality of work and innovation of our employees upon which our
business is dependent.

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Because our business is susceptible to
risks associated with international operations, we may not be able to maintain
or increase international sales of our products.

Our
international operations are expected to continue to account for a significant
portion of our business in the future. However, in the future we may be unable
to maintain or increase international sales of our products and services.
International sales are subject to a variety of risks, including:

- difficulties in establishing and managing
  international distribution channels;
- difficulties in selling, servicing and supporting
  overseas products and in translating products into foreign languages;
- the uncertainty of laws and enforcement in certain
  countries relating to the protection of intellectual property;
- multiple and possibly overlapping tax
  structures;
- negative tax consequences such as withholding
  taxes and employer payroll taxes; and
- economic or political changes in international
  markets.

We are exposed to fluctuations in
currency exchange rates that could negatively impact our financial results and
cash flows.

To date,
most of our revenues have been denominated in U.S. dollars, while a significant
portion of our international expenses are incurred in the local currencies of
countries in which we operate. Because a portion of our business is conducted
outside the United States, we face exposure to adverse movements in foreign
currency exchange rates. These exposures may change over time as business
practices evolve, and they could have a material adverse impact on our financial
results and cash flows. An increase in the value of the dollar could increase
the real cost to our customers of our products in those markets outside the
United States where we often sell in dollars, and a weakened dollar could
increase local currency operating costs.

Currency exchange rate fluctuations
could reduce our overall profits.

With the
exception of On Demand Group, and its wholly-owned subsidiaries, the United
States dollar is the functional currency for our international subsidiaries;
therefore, all foreign translation currency gains and losses are included in our
Consolidated Statements of Operations. In preparing our consolidated financial
statements, certain financial information is required to be translated from
foreign currencies to the United States dollar using either the spot rate or the
weighted-average exchange rate. If the United States dollar changes relative to
applicable local currencies, there is a risk our reported sales, operating
expenses, and net income could significantly fluctuate. We are not able to
predict the degree of exchange rate fluctuations, nor can we estimate the effect
any future fluctuations may have upon our future operations. To date, we have
not entered into any hedging contracts or participated in any hedging or
derivative activities.

Our ability to compete could be
jeopardized if we are unable to protect our intellectual property rights from
third-party challenges.

Our success
and ability to compete depends upon our ability to protect our proprietary
technology that is incorporated into our broadband and broadcast products. We
rely on a combination of patent, copyright, trademark and trade secret laws and
restrictions on disclosure to protect our intellectual property rights. Although
we have issued patents, we cannot assure that any additional patents will be
issued or that the issued patents will not be invalidated. We also enter into
confidentiality or license agreements with our employees, consultants and
corporate partners, and control access to and distribution of our software,
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise misappropriate and use
our products or technology without authorization, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as in
the United States. We may need to resort to litigation in the future to enforce
our intellectual property rights, to protect our trade secrets or to determine
the validity and scope of the proprietary rights of others. If competitors are
able to use our technology, our ability to compete effectively could be harmed.

We have been and in the future could
become subject to litigation regarding intellectual property rights, which could
seriously harm our business and require us to incur significant legal costs to
defend our intellectual property rights.

The industry
in which we operate is characterized by vigorous protection and pursuit of
intellectual property rights or positions, which on occasion, have resulted in
significant and often protracted litigation. We have from time to time received,
and may in the future receive, communications from third parties asserting
infringements on patent or other intellectual property rights covering our
products or processes. We have been involved in significant intellectual
property litigation, and we may be a party to litigation in the future to
enforce our intellectual property rights or as a result of an allegation that we
infringe others intellectual property. Any parties asserting that our products
infringe upon their proprietary rights would force us to defend ourselves and
possibly our customers or manufacturers against the alleged infringement, as
many of our commercial agreements require us to defend and/or indemnify the
other party against intellectual property infringement claims brought by a third
party with respect to our products. These claims and any resulting lawsuit, if
successful, could subject us to significant liability for damages and
invalidation of our proprietary rights. This possibility of multiple damages
serves to increase the incentive for plaintiffs to bring such litigation. In
addition, these lawsuits,regardless of their
success, would likely be time-consuming and expensive to resolve and would
divert management time and attention away from our operations.

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Although we
carry general liability insurance, our insurance may not cover potential claims
of this type or may not be adequate to indemnify us for all liability that may
be imposed. In addition, any potential intellectual property litigation also
could force us to stop selling, incorporating or using the products that use the
infringed intellectual property or obtain from the owner of the infringed
intellectual property right a license to sell or use the relevant technology,
although this license may not be available on reasonable terms, or at all, or
redesign those products that use the infringed intellectual property. If we are
forced to take any of the foregoing actions, our business may be seriously
harmed.

If content providers, such as movie
studios, limit the scope of content licensed for use in the digital
video-on-demand market, our business, financial condition and results of
operations could be negatively affected because the potential market for our
products would be more limited than we currently believe and have communicated
to the financial markets.

The success
of the video-on-demand market is contingent on content providers, such as movie
studios, permitting their content to be licensed for use in this market. Content
providers may, due to concerns regarding either or both marketing and illegal
duplication of the content, limit the extent to which they provide content to
the video-on-demand market. A limitation of content for the video-on-demand
market would indirectly limit the market for our video-on-demand system which is
used in connection with that market.

If we are unable to successfully
introduce new products or enhancements to existing products, our financial
condition and operating results may be adversely affected by a decrease in sales
of our products.

Because our
business plan is based on technological development of new products and
enhancements to our existing products, our future success is dependent on our
successful introduction of these new products and enhancements. In the future we
may experience difficulties that could delay or prevent the successful
development, introduction and marketing of these and other new products and
enhancements, or find that our new products and enhancements do not adequately
meet the requirements of the marketplace or achieve market acceptance.
Announcements of currently planned or other new product offerings may cause
customers to defer purchasing our existing products. Moreover, despite testing
by us and by current and potential customers, errors or failures may be found in
our products, and, even if discovered, may not be successfully corrected in a
timely manner. These errors or failures could cause delays in product
introductions and shipments, or require design modifications that could
adversely affect our competitive position. Our inability to develop new products
or enhancements on a timely basis or the failure of these new products or
enhancements to achieve market acceptance could have a material adverse effect
on our business, financial condition and results of operations.

Because we purchase certain material
components used in manufacturing our products from sole suppliers and we use a
limited number of third party manufacturers to manufacture our products, our
business, financial condition and results of operations could be materially
adversely affected by a failure of these suppliers or manufacturers.

Certain key
components of our products are currently purchased from a sole supplier,
including computer chassis, switching gear, an interface controller video
transmission board, encoder and decoder hardware, and operating system and
applications software. We have in the past experienced quality control problems,
where products did not meet specifications or were damaged in shipping, and
delays in the receipt of these components. These problems were generally of
short duration and did not have a material adverse effect on our business and
results of operations. However, we may in the future experience similar types of
problems which could be more severe or more prolonged. While we believe that
there are alternative suppliers available for these components, we believe that
the procurement of these components from alternative suppliers could take up to
a year. In addition, these alternative components may not be functionally
equivalent or may be unavailable on a timely basis or on similar terms. The
inability to obtain sufficient key components as required, or to develop
alternative sources if and as required in the future, could result in delays or
reductions in product shipments which, in turn, could have a material adverse
effect on our business, financial condition and results of operations.

In addition,
we rely on a limited number of third parties who manufacture certain components
used in our products. While to date there has been suitable third party
manufacturing capacity readily available at acceptable quality levels, in the
future there may not be manufacturers that are able to meet our future volume or
quality requirements at a price that is favorable to us. Any financial,
operational, production or quality assurance difficulties experienced by these
third party manufacturers that result in a reduction or interruption in supply
to us could have a material adverse effect on our business, financial condition
and results of operations.

If we are not able to obtain necessary
licenses or distribution rights for third-party technology at acceptable prices,
or at all, our products could become obsolete or we may not be able to deliver
certain product offerings.

We have
incorporated third-party licensed technology into our current products and our
product lines. From time to time, we may be required to license additional
technology from third parties to develop new products or product enhancements or
to provide specific solutions. Third-party licenses may not be available or
continue to be available to us on commercially reasonable terms. Theinability to maintain or re-license any
third-party licenses required in our current products or to obtain any new
third-party licenses necessary to develop new products and product enhancements
or provide specific solutions could require us to obtain substitute technology
of lower quality or performance standards or at greater cost. Such inabilities
could delay or prevent us from making these products or enhancements or
providing specific solutions, which could seriously harm the competitiveness of
our products.

14

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If we are unable to successfully
compete in our marketplace, our financial condition and operating results may be
adversely affected.

We currently
compete against both computer companies offering video server platforms and more
traditional analog video playback systems. In the digital advertisement
insertion market, we compete against suppliers of both analog tape-based and
digital systems.

Due to the
rapidly evolving markets in which we compete, additional competitors with
significant market presence and financial resources, including computer hardware
and software companies and television equipment manufacturers, may enter those
markets, thereby further intensifying competition. Increased competition could
result in price reductions and loss of market share which would adversely affect
our business, financial condition and results of operations. Many of our current
and potential competitors have greater financial, selling and marketing,
technical and other resources than we do. Moreover, our competitors may also
foresee the course of market developments more accurately than we. Although we
believe that we have certain technological and other advantages over our
competitors, realizing and maintaining these advantages will require a continued
high level of investment by us in research and product development, marketing
and customer service and support. In the future we may not have sufficient
resources to continue to make these investments or to make the technological
advances necessary to compete successfully with our existing competitors or with
new competitors.

If we are
unable to compete effectively, our business, prospects, financial condition and
operating results would be materially adversely affected because of the
difference in our operating results from the assumptions on which our business
model is based.

If we fail to respond to rapidly
changing technologies related to digital video, our business, financial
condition and results of operations would be materially adversely affected
because the competitive advantage of our products relative to those of our
competitors would decrease.

The markets
for our products are characterized by rapidly changing technology, evolving
industry standards and frequent new product introductions and enhancements.
Future technological advances in the television and video industries may result
in the availability of new products or services that could compete with the
solutions provided by us or reduce the cost of existing products or services,
any of which could enable our existing or potential customers to fulfill their
video needs better and more cost efficiently than with our products. Our future
success will depend on our ability to enhance our existing digital video
products, including the development of new applications for our technology, and
to develop and introduce new products to meet and adapt to changing customer
requirements and emerging technologies. In the future, we may not be successful
in enhancing our digital video products or developing, manufacturing and
marketing new products which satisfy customer needs or achieve market
acceptance. In addition, there may be services, products or technologies
developed by others that render our products or technologies uncompetitive,
unmarketable or obsolete, or announcements of currently planned or other new
product offerings either by us or our competitors that cause customers to defer
or fail to purchase our existing solutions.

Our financial condition and results of
operations could be materially adversely affected by the performance of the
companies in which we have made and may in the future make equity investments.

We have made
non-controlling equity investments in complementary companies, including On
Demand Deutschland GmbH & Co. KG, Casa Systems, Inc., Minerva Networks, Inc.
and InSite One, Inc., and we may in the future make additional investments in
these and/or other companies. These investments may require additional capital
and may not generate the expected rate of return that we believed possible at
the time of making the investment. This may adversely affect our financial
condition or results of operations. Also, investments in development-stage
companies may generate other than temporary declines in fair value of our
investment that would result in impairment charges.

Future acquisitions may be difficult to
integrate, disrupt our business, dilute stockholder value or divert management
attention.

As part of
our business strategy, we have acquired and may in the future seek to acquire or
invest in new businesses, products or technologies that we believe could
complement or expand our business, augment our market coverage, enhance our
technical capabilities or otherwise offer growth opportunities. Acquisitions
could create risks for us, including:

- difficulties in assimilation of acquired
  personnel, operations, technologies or products which may affect our ability
  to develop new products and services and
  compete in our rapidly changing marketplace due to a resulting decrease in
  the quality of work and innovation of our
  employees upon which our business is dependent; and

15

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- adverse effects on our existing business
  relationships with suppliers and customers, which may be of particular
  importance to our business because we sell our
  products to a limited number of large customers, we purchase certain
  components used in manufacturing our products from
  sole suppliers and we use a limited number of third party manufacturers to manufacture our product.

In addition,
if we consummate acquisitions through an exchange of our securities, our
existing stockholders could suffer significant dilution. Any future
acquisitions, even if successfully completed, may not generate any additional
revenue or provide any benefit to our business.

We may make future acquisitions or
enter into joint ventures that are not successful, which could seriously harm
our business.

Historically, we have acquired technology or businesses to supplement and
expand our product offerings. In the future, we could acquire additional
products, technologies or businesses, or enter into joint venture arrangements,
for the purpose of complementing or expanding our business as occurred with
Mobix Interactive Ltd. in fiscal 2009 and On Demand Deutschland GMBH in fiscal
2007. Negotiation of potential acquisitions or joint ventures and our
integration of acquired products, technologies or businesses could divert
managements time and resources. Future acquisitions could cause us to issue
equity securities that would dilute existing stockholders, incur contingent
liabilities, amortize intangible assets, or write off in-process research and
development and other acquisition-related expenses that could have a material
adverse affect on our business, results of operations, cash flow and financial
condition. We may not be able to properly integrate acquired products,
technologies or businesses with our existing products and operations, train,
retain and motivate personnel from the acquired businesses, or combine
potentially different corporate cultures. Failure to do so could deprive us of
the intended benefits of those acquisitions. In addition, we may be required to
write-off acquired research and development if further development of purchased
technology becomes unfeasible, which may adversely affect our business, results
of operations, cash flow and financial condition.

If our goodwill or intangible assets
become impaired, we may be required to record a significant charge to
earnings.

Under
accounting principles generally accepted in the United States, we review our
intangible assets for impairment when events or changes in circumstances
indicate the carrying value may not be recoverable. Goodwill is required to be
tested for impairment at least annually. Factors that may be considered a change
in circumstances indicating that the carrying value of our goodwill or other
intangible assets may not be recoverable include; declines in our stock price
and market capitalization, or future cash flows projections. Our valuation
methodology for assessing impairment requires management to make judgments and
assumptions based on projections of future operating performance. We operate in
highly competitive environments and projections of future operating results and
cash flows may vary significantly from actual results. We may be required to
record a significant non cash charge to earnings in our financial statements
during the period in which any impairment of our goodwill or other intangible
assets is determined.

We may experience risks in our
investments due to changes in the market, which could adversely affect the value
or liquidity of our investments.

We maintain a portfolio of cash
equivalents and short-term and long-term investments in a variety of securities
which may include commercial paper, certificates of deposit, money market funds
and government debt securities. These available-for-sale investments are subject
to interest rate risk and may decline in value if market interest rates
increase. These investments are subject to general credit, liquidity, market and
interest rate risks. As a result, we may experience a reduction in value or loss
of liquidity of our investments. In addition, should any investment cease paying
or reduce the amount of interest paid to us, our interest income would suffer.
These market risks associated with our investment portfolio may have a negative
adverse effect on our results of operations, liquidity and financial condition.

The success of our business model could
be influenced by changes in the regulatory environment, such as changes that
either would limit capital expenditures by television, cable or
telecommunications operators or reverse the trend towards deregulation in the
industries in which we compete.

The
telecommunications and television industries are subject to extensive regulation
which may limit the growth of our business, both in the United States and other
countries. The growth of our business internationally is dependent in part on
deregulation of the telecommunications industry abroad similar to that which has
occurred in the United States and the timing and magnitude of which is
uncertain. Broadband system operators are subject to extensive government
regulation by the Federal Communications Commission and other federal and state
regulatory agencies. These regulations could have the effect of limiting capital
expenditures by broadband system operators and thus could have a material
adverse effect on our business, financial condition and results of operations.
The enactment by federal, state or international governments of new laws or
regulations, changes in the interpretation of existing regulations or a reversal
of the trend toward deregulation in these industries could adversely affect our
customers, and thereby materially adversely affect our business, financial
condition and results of operations.

16

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We may not be able to hire and retain
highly skilled employees, particularly which could affect our ability to compete
effectively because our business is technology-based.

Our success
depends to a significant degree upon the continued contributions of our key
personnel, many of whom would be difficult to replace. We believe that our
future success will also depend in large part upon our ability to attract and
retain highly skilled managerial, engineering, customer service, selling and
marketing, finance, administrative and manufacturing personnel, as our business
is technology-based. Because competition for these personnel is intense, we may
not be able to attract and retain qualified personnel in the future. The loss of
the services of any of the key personnel, the inability to attract or retain
qualified personnel in the future or delays in hiring required personnel,
particularly software engineers and sales personnel could have a material
adverse effect on our business, financial condition and results of operations
because our business is technology-based.

Any weaknesses identified in our system
of internal controls by us and our independent registered public accounting firm
pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 could have an adverse
effect on our business.

Section 404
of the Sarbanes-Oxley Act of 2002 requires that companies evaluate and report on
their systems of internal control over financial reporting. In addition, our
independent registered public accounting firm must report on its evaluation of
those controls. In future periods, we may identify deficiencies, including as a
result of the loss of the services of one or more of our key personnel, in our
system of internal controls over financial reporting that may require
remediation. There can be no assurances that any such future deficiencies
identified may not be significant deficiencies or material weaknesses that would
be required to be reported in future periods.

We may have additional tax liabilities.

We are
subject to income taxes in both the United States and numerous foreign
jurisdictions. Significant judgment is required in determining our worldwide
provision for income taxes. In the ordinary course of our business, there are
many transactions and calculations where the ultimate tax determination is
uncertain. We are regularly under audit by tax authorities. Although we believe
our tax estimates are reasonable, the final determination of tax audits and any
related litigation could be materially different from our historical income tax
provisions and accruals. The results of an audit or litigation could have a
material effect on our income tax provision, net income, or cash flows in the
period or periods for which that determination is made.

In 2006, we
received an audit notification from the Internal Revenue Service (IRS)
requesting materials relating to our 2004 through 2007 federal tax return. As of
January 31, 2009, we continue to provide information relating to the audit and
have not received or agreed upon any final adjustment from the IRS.

In addition,
we are subject to sales, use and similar taxes in many countries, jurisdictions
and provinces, including those states in the United States where we maintain a
physical presence or have a substantial nexus. These taxing regimes are complex.
For example, in the United States, each state and local taxing authority has its
own interpretation of what constitutes a sufficient physical presence or nexus
to require the collection and remittance of these taxes. Similarly, each state
and local taxing authority has its own rules regarding the applicability of
sales tax by customer or product type.

System errors, failures, or
interruptions could cause delays in shipments, require design modifications or
replacements which may have a negative impact on our business and damage our
reputation and customer relationships.

System
errors or failures may adversely affect our business, financial condition and
results of operations. Despite our testing and testing by current and potential
customers, not all errors or failures may be found in our products or, if
discovered, successfully corrected in a timely manner. These errors or failures
could cause delays in product introductions and shipments or require design
modifications that could adversely affect our competitive position. Further,
some errors may not be detected until the systems are deployed. In such a case,
we may have to undertake major replacement programs to correct the problem. Our
reputation may also suffer if our customers view our products as unreliable,
whether based on actual or perceived errors or failures in our products.

Further, a
defect, error or performance problem with our on-demand systems could cause our
customers VOD offerings to fail for a period of time or be degraded. Any such
failure would cause customer service and public relations problems for our
customers. As a result, any failure of our customers systems caused by our
technology, including the failure of third party technology incorporated therein
or therewith, could result in delayed or lost revenue due to adverse customer
reaction, negative publicity regarding us and our products and services and
claims for substantial damages against us, regardless of our responsibility for
such failure. Any claim could be expensive and require us to spend a significant
amount of resources. In circumstances where third party technology incorporated
with or in our systems includes a defect, error or performance problem or fails
for any reason, we may have to replace such third party technology at our
expense and be responsible to our customers for their corresponding claims. Such
replacements or claims could be expensive and could require us to spend a
significant amount of resources.

17

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Our stock price may be
volatile.

Historically, the market for technology stocks has been extremely
volatile. Our common stock has experienced, and may continue to experience,
substantial price volatility. The occurrence of any one or more of the factors
noted above could cause the market price of our common stock to fluctuate. In
addition, the stock market in general, and the NASDAQ Stock Market and
technology companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of such companies. These broad market and industry factors may
materially adversely affect the market price of our common stock, regardless of
our actual operating performance. In the past, following periods of volatility
in the market price of a companys securities, securities class action
litigation has often been instituted against such companies.

ITEM 1B. Unresolved Staff
Comments

None.

ITEM 2. Properties

|Location                      |  | Lease/
      Own |  | Principal Use                                                              |  | Segment                           |  | Square
      Feet
|----------------------------- |  | ---------------- |  | -------------------------------------------------------------------------- |  | --------------------------------- |  | -----------------
|Acton, Massachusetts          |  | Own              |  | Corporate Headquarters, video software engineering and
      manufacturing |  | Software, Servers and
    Storage |  | 120,000          
|Greenville, New Hampshire     |  | Own              |  | Video Storage engineering, logistics and services                          |  | Servers and Storage               |  | 24,000           
|Greenville, New Hampshire     |  | Lease            |  | Video Server and broadcast product
      engineering                       |  | Servers and Storage               |  | 13,000           
|Fort Washington, Pennsylvania |  | Lease            |  | Software Development, digital video and interactive
      television       |  | Software                          |  | 14,000           
|London, United Kingdom        |  | Own              |  | ODG head corporate offices                                                 |  | Media Services                    |  | 9,000            

In addition,
we also lease research and development and/or sales and support offices in
Illinois, Nevada, California, France, Ireland, Singapore, Germany, Japan, India,
Turkey, Philippines, UK, and China. We believe that existing facilities are
adequate to meet our foreseeable requirements.

ITEM 3. Legal
Proceedings

Litigation

None.

Other Matters

SeaChange
provides indemnification, to the extent permitted by law, to its officers,
directors, employees and agents for liabilities arising from certain events or
occurrences while the officer, director, employee, or agent is or was serving at
SeaChanges request in such capacity. With respect to acquisitions, SeaChange
provides indemnification to or assumes indemnification obligations for the
current and former directors, officers and employees of the acquired companies
in accordance with the acquired companies bylaws and charter. As a matter of
practice, SeaChange has maintained directors and officers liability insurance
including coverage for directors and officers of acquired companies.

SeaChange
enters into agreements in the ordinary course of business with customers,
resellers, distributors, integrators and suppliers. Most of these agreements
require SeaChange to defend and/or indemnify the other party against
intellectual property infringement claims brought by a third party with respect
to SeaChanges products. From time to time, SeaChange also indemnifies customers
and business partners for damages, losses and liabilities they may suffer or
incur relating to personal injury, personal property damage, product liability,
and environmental claims relating to the use of SeaChanges products and
services or resulting from the acts or omissions of SeaChange, its employees,
authorized agents or subcontractors. For example, SeaChange has received
requests from several of its customers for indemnification of patent litigation
claims asserted by Acacia Media Technologies, USA Video Technology Corporation
and VTran Media Technologies. Management performed an analysis of all requests
under Statement of Financial Accounting Standards No. 5,Accounting for Contingencies(SFAS 5) as interpreted by FASB Interpretation No. 45,Guarantors Accounting and Disclosure Requirements for
Guarantees, including Indirect Guarantees of Indebtedness of Others(FIN45).

SeaChange
warrants that its products, including software products, will substantially
perform in accordance with its standard published specifications in effect at
the time of delivery. Most warranties have at least a one year duration that
generally commence upon installation. In addition, SeaChange provides
maintenance support to all customers and therefore allocates a portion of the
product purchase price to the initial warranty period and recognizes revenue on
a straight line basis over that warranty period related to both the warranty
obligation and the maintenance support agreement. When SeaChange receives
revenue for extended warrantiesbeyond the
standard duration, it is deferred and recognized on a straight line basis over
the contract period. Related costs are expensed as incurred.

18

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In the
ordinary course of business, SeaChange provides minimum purchase guarantees to
certain of its vendors to ensure continuity of supply against the market demand.
Although some of these guarantees provide penalties for cancellations and/or
modifications to the purchase commitments as the market demand decreases, most
of the guarantees do not. Therefore, as the market demand decreases, SeaChange
re-evaluates the accounting implications of guarantees and determines what
charges, if any, should be recorded.

With respect
to its agreements covering product, business or entity divestitures and
acquisitions, SeaChange provides certain representations and warranties and
agrees to indemnify and hold such purchasers harmless against breaches of such
representations, warranties and covenants. With respect to its acquisitions,
SeaChange may, from time to time, assume the liability for certain events or
occurrences that took place prior to the date of acquisition.

SeaChange
provides such guarantees and indemnification obligations after considering the
economics of the transaction and other factors including but not limited to the
liquidity and credit risk of the other party in the transaction. SeaChange
believes that the likelihood is remote that any such arrangement could have a
material adverse effect on its financial position, results of operation or
liquidity. SeaChange records liabilities, as disclosed above, for such
guarantees based on the Companys best estimate of probable losses which
considers amounts recoverable under any recourse provisions.

ITEM 4. Submission of Matters to a Vote
of Securities Holders

No matters
were submitted during the fourth quarter of the fiscal year ended January 31,
2009 to a vote of security holders of the Company through the solicitation of
proxies or otherwise.

19

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PART II

ITEM 5. Market for Registrants Common
Equity and Related Stockholder Matters

Market Information

Our common
stock (symbol, SEAC) began trading on NASDAQ on November 5, 1996 and currently
trades on the Nasdaq Global Select Market.

On April 9,
2009, the last reported sale price of our common stock on NASDAQ was $6.21 per
share and there were approximately 160 holders of record of our common stock. We
believe that the number of beneficial holders of our common stock exceeds
6,200.

The
following table sets forth the quarterly high and low closing sales prices per
share reported on NASDAQ for our last two fiscal years ended January 31, 2009
and 2008.

|                          |  | Fiscal Year 2009 |      | Fiscal Year 2008
|------------------------- |  | ---------------- | ---- | ----------------
|                          |  | High             |      | Low             
|Three Month Period Ended: |  |                  |      |                 
|First Quarter             |  | $                | 7.48 |                 
|Second Quarter            |  |                  | 8.32 |                 
|Third Quarter             |  |                  | 9.70 |                 
|Fourth Quarter            |  |                  | 8.17 |                 

Dividend Policy

We have
never declared or paid any cash dividends on our common stock, since inception,
and do not expect to pay cash dividends on our common stock in the foreseeable
future. We currently intend to retain all of our future earnings for use in
operations and to finance the expansion of our business.

Equity Compensation Plan
Information

The
following table provides information about the common stock that may be issued
upon the exercise of options, warrants and rights under all of SeaChanges
existing equity compensation plans as of January 31, 2009, including the Amended
and Restated 2005 Equity Compensation Incentive Plan, the Amended and Restated
1995 Stock Option Plan, the 1996 Non-Employee Director Stock Option Plan and the
Third Amended and Restated 1996 Employee Stock Purchase Plan.

|                                                              |  |                         |     |                   |   | Number of securities 
|------------------------------------------------------------- |  | ----------------------- | --- | ----------------- | - | ---------------------
|                                                              |  |                         |     |                   |   | remaining available  
|                                                              |  |                         |     | Weighted-         |   | for future issuance  
|                                                              |  | Number of securities    |     | average exercise  |   | under equity         
|                                                              |  | to be issued upon       |     | price of          |   | compensation plans   
|                                                              |  | exercise of outstanding |     | outstanding       |   | (excluding securities
|                                                              |  | options, warrants and   |     | options, warrants |   | reflected            
|Plan category                                                 |  | rights                  |     | and rights        |   | in column (a))       
|                                                              |  | (a)                     |     | (b)               |   | (c)                  
|Equity compensation plans approved by security holders(1)     |  | 4,228,437               | (2) |                   | $ | 15.43                
|Equity
      compensation not approved by security holders(4) |  | 160,134                 |     |                   | $ | 14.71                
|Total                                                         |  | 4,388,571               |     |                   | $ | 15.41                

|(1) |  | Consists of the
      Amended and Restated 2005 Equity Compensation Incentive Plan, the Amended
      and Restated 1995 Stock Option Plan, the 1996 Non-Employee Director Stock
      Option Plan and the Third Amended and Restated 1996 Employee Stock
      Purchase Plan.                                                                                                                                                                             
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Excludes the shares to
      be issued for the period ended May 31, 2009 under the Third Amended and
      Restated 1996 Employee Stock Purchase Plan, because the number of shares
      to be issued upon exercise of currently outstanding options thereunder
      cannot be determined, as it will be determined on May 31, 2009, the last
      day of the payment period, and will be for a maximum of 1,125 shares per
      eligible participant.
|   
|(3) |  | As of January 31,
      2009, 2,480,483 shares remained available for issuance under the Amended
      and Restated 2005 Equity Compensation Incentive Plan and no shares
      remained available for grant under the Third Amended and Restated 1996
      Employee Stock Purchase Plan.                                                                                                                                                                

20

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|(4) |  | Pursuant to the
      Video-on-Demand Purchase Agreement, dated as of December 1, 2000, by and
      between SeaChange and Comcast Cable Communications of Pennsylvania, Inc.,
      Comcast has been issued warrants exercisable for 450,000 shares of common
      stock. As disclosed in SeaChanges Current Report on Form 8-K filed
      October 6, 2004, Comcast exercised certain of these warrants and there
      remains outstanding today one warrant exercisable for 160,134 shares of
      common stock with a per share exercise price of $14.71 and which is
      nonforfeitable and freely exercisable.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(5) |  | Excludes the weighted
      average exercise price for shares to be issued under the Third Amended and
      Restated 1996 Employee Stock Purchase Plan, as amended, because the
      weighted average exercise price of currently outstanding options
      thereunder cannot be determined, as it will be equal to 85% of the lower
      of the average market price of the common stock on December 1, 2008 and
      May 29, 2009, the first and last business day of the applicable payment
      period.                                                                                                          

Repurchase of our Equity Securities

On February
13, 2008, SeaChange Internationals Board of Directors authorized 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, 833,597 shares were
purchased in the open market. This stock repurchase program expired on December
31, 2008. All repurchases were funded from the Companys current cash and
investments balances. The Company did not repurchase any shares from its
management team or other insiders.

On March 13, 2009, SeaChange Internationals
Board of Directors authorized 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. This stock repurchase program does not obligate
the Company to acquire any specific number of shares and may be suspended or
discontinued at any time. This stock repurchase program expires on January 31,
2010. All repurchases are expected to be funded from the Companys current cash
and investments balances. The Company does not intend to repurchase any shares
from its management team or other insiders.

21

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STOCK PERFORMANCE GRAPH

The
following graph compares the change in the cumulative total stockholder return
on SeaChanges common stock during the period from the close of trading on
January 31, 2004 through January 31, 2009, with the cumulative total return on
the Center for Research in Securities Prices (CRSP) Index for the Nasdaq Stock
Market (U.S. Companies) and a SIC Code Index based on the SeaChanges SIC Code.
The comparison assumes $100 was invested on January 31, 2004 in SeaChanges
common stock at the $20.18 closing price on January 30, 2004 and in each of the
foregoing indices and assumes reinvestment of dividends, if any.

The
following graph is not soliciting material, is not deemed filed with the SEC
and is not to be incorporated by reference in any filing of SeaChange under the
Securities Act or the Exchange Act, whether made before or after the date hereof
and irrespective of any general incorporation language in any such filing. The
stock price performance shown on the following graph is not necessarily
indicative of future price performance. Information used on the graph was
obtained from a third party provider, a source believed to be reliable, but
SeaChange is not responsible for any errors or omissions in such information.



Notes:

| | A. |  | The lines represent
      monthly index levels derived from compounded daily returns that include
      all dividends.     
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------
| |    |  |                                                                                                                            
| | B. |  | If the monthly
      interval, based on the fiscal year-end, is not a trading day, the
      preceding trading day is used.
| |   
| | C. |  | The Index level for
      all series was set to 100 on January 31, 2004.                                                   

22

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ITEM 6. Selected Financial Data

The
following consolidated selected financial data should be read in conjunction
with Managements Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and related notes included
elsewhere in this Annual Report on Form 10-K. The selected financial data for
the years ended January 31, 2008, 2007, 2006 and 2005 have been recast to
reflect the reclassification of foreign currency gain (loss) from operating
expenses to other income (expense), net below operating income.

|                                                                |  | Year ended January
  31,             
|--------------------------------------------------------------- |  | -------------------------------------
|                                                                |  | 2009                                 
|                                                                |  | (in thousands, except per share data)
|Consolidated Statement of Operations Data:                      |  |                                      
|Revenues:                                                       |  |                                      
|Products                                                        |  | $                                    
|Services                                                        |  |                                      
|                                                                |  |                                      
|Costs of
      revenues:                                        |  |                                      
|Products                                                        |  |                                      
|Services                                                        |  |                                      
|                                                                |  |                                      
|Gross profit                                                    |  |                                      
|Operating expenses:                                             |  |                                      
|Research and development                                        |  |                                      
|Selling and marketing                                           |  |                                      
|General and administrative                                      |  |                                      
|Amortization of intangibles                                     |  |                                      
|                                                                |  |                                      
|Income (loss) from operations                                   |  |                                      
|Interest income,
      net                                      |  |                                      
|Other (expense) income, net                                     |  |                                      
|Impairment on
      investment in affiliate                     |  |                                      
|Gain on sale of investment in affiliate                         |  |                                      
|Income (loss)
      before income taxes and equity income       |  |                                      
|(loss) in earnings of
      affiliates                          |  |                                      
|Income tax (expense) benefit                                    |  |                                      
|Equity (loss)
      income in earnings of affiliate, net of tax |  |                                      
|Net income (loss)                                               |  | $                                    
|Earnings (loss) per share:                                      |  |                                      
|Basic                                                           |  | $                                    
|Diluted                                                         |  | $                                    
|Consolidated Balance Sheet Data (as of January 31):             |  |                                      
|Working capital                                                 |  | $                                    
|Total assets                                                    |  |                                      
|Deferred revenue                                                |  |                                      
|Long-term liabilities                                           |  |                                      
|Total liabilities                                               |  |                                      
|Total stockholders equity                                      |  |                                      

23

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ITEM 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations

You
should read the following discussion and analysis together with our consolidated
financial statements, related notes and other financial information appearing
elsewhere in this report. In addition to historical information, the following
discussion and other parts of this report contain forward-looking information
that involves risks and uncertainties. Our actual results could differ
materially from those anticipated by such forward-looking information due to a
number of factors including risks discussed in Item 1A. Risk Factors, and
elsewhere in this Annual Report on Form 10-K. These risks could cause our actual
results to differ materially from any future performance suggested below.

Overview

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

Until the
end of fiscal 2008, the Company was managed and operated as three segments,
Broadcast, Broadband and Services. In its first quarter of fiscal 2009, the
Company realigned its previously reported segments into three new reporting
segments: Software, Servers and Storage, and Media Services as segments defined
by SFAS No. 131, Disclosure about Segments of
an Enterprise and Related Information. The
Company believes this reorganization better reflects the increasing importance
and magnitude of its software products and services as well as the scale of its
ODG subsidiary. A description of the three new reporting segments is as follows:

- 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.
- 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.
- Media Services segment includes the operations of
  ODG including content acquisition, and preparation services for television and wireless network service providers and
  related operating expenses.

Under this
revised reporting structure, the Company determined there are significant
functions, and therefore costs, that are considered corporate expenses and are
not allocated to the reportable segments for the purposes of assessing
performance and making operating decisions. These unallocated costs include
general and administrative expenses, other than general and administrative
expenses related to ODG, interest, taxes and equity earnings in affiliates,
which are managed separately at the corporate level.

The segment
data for the fiscal year ended January 31, 2008 and 2007, respectively, has been
recast to reflect the realignment of the new segments. Prior to fiscal 2009,
services revenues, which included ODG revenues, were reported in the Services
segment and the Company did not separately track these service revenues and
costs by these new segments, except for ODG. Accordingly, management has made
certain assumptions to determine the amount of service revenues and service
costs attributed to the Software and Servers and Storage reporting segments for
the fiscal years ended January 31, 2008 and 2007, respectively. 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.
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:

- the customers receipt of authorized signatures on
  their purchase orders;
- the budgetary approvals within the customers
  company for capital purchases; and
- 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:

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

24

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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:

- market acceptance of the products and services
  offered by our customers and increased subscriber usage and demand for
  these products and services;
- selection by our customers of our products and
  services versus the products and services being offered by our
  competitors;
- 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;
- 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
- our ability to control operating costs given the
  fluctuations that we have experienced with revenues from quarter to
  quarter.

Summary of Critical Accounting
Policies; Significant Judgments and Estimates

Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
significant estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. These items are regularly monitored and analyzed by management
for changes in facts and circumstances, and material changes in these estimates
could occur in the future. Changes in estimates are recorded in the period in
which they become known. We base our estimates on historical experience and
various other assumptions that we believe to be reasonable under the
circumstances. Actual results may differ from our estimates if past experience
or other assumptions do not turn out to be substantially accurate.

We believe
that the accounting policies described below are critical to understanding our
business, results of operations and financial condition because they involve
significant judgments and estimates used in the preparation of our consolidated
financial statements. An accounting policy is deemed to be critical if it
requires a judgment or accounting estimate to be made based on assumptions about
matters that are highly uncertain, and if different estimates that could have
been used, or if changes in the accounting estimates that are reasonably likely
to occur periodically, could materially impact our consolidated financial
statements. Other significant accounting policies, primarily those with lower
levels of uncertainty than those discussed below, are also critical to
understanding our consolidated financial statements. The notes to our
consolidated financial statements contain additional information related to our
accounting policies and should be read in conjunction with this
discussion.

Principles of Consolidation.The
Company consolidates the financial statements of its wholly-owned subsidiaries
and all inter-company accounts are eliminated in consolidation. SeaChange also
holds minority investments in the capital stock of certain private companies
having product offerings or customer relationships that have strategic
importance. The Company evaluates its equity and debt investments and other
contractual relationships with affiliate companies in order to determine whether
the guidelines of FASB Interpretation (FIN) No. 46,Consolidation of Variable Interest Entities(FIN 46R), as revised under FIN 46R should be applied in the financial
statements. FIN 46R addresses consolidation by business enterprises of variable
interest entities that possess certain characteristics. A variable interest
entity (VIE) is defined as an entity in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support. The primary beneficiary is required to
consolidate the financial position and results of the VIE. The Company has
concluded that it is not the primary beneficiary for any variable interest
entities as of January 31, 2009.

25

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The
Companys investments in affiliates include investments accounted for under the
cost method and the equity method of accounting. The investments that represent
less than a 20% ownership interest of the common shares of the affiliate are
carried at cost. Under the equity method of accounting, which generally applies
to investments that represent 20% to 50% ownership of the common shares of the
affiliate, SeaChanges proportionate ownership share of the earnings or losses
of the affiliate are included in equity income (loss) in earnings of affiliates
in the consolidated statement of operations.

We
periodically review indicators of the fair value of our investments in
affiliates in order to assess whether available facts or circumstances, both
internally and externally, may suggest an other than temporary decline in the
value of the investment. The carrying value of an investment in an affiliate may
be affected by the affiliates ability to obtain adequate funding and execute
its business plans, general market conditions, industry considerations specific
to the affiliates business, and other factors. The inability of an affiliate to
obtain future funding or successfully execute its business plan could adversely
affect our equity earnings of the affiliate in the periods affected by those
events. Future adverse changes in market conditions or poor operating results of
the affiliates could result in equity losses or an inability to recover the
carrying value of the investments in affiliates that may not be reflected in an
investments current carrying value, thereby possibly requiring an impairment
charge in the future. We record an impairment charge when we believe an
investment has experienced a decline in value that is other-than-temporary.

Revenue
Recognition and Allowance for Doubtful Accounts.The accounting related to revenue recognition is complex and affected by
interpretations of the rules and an understanding of industry practices. As a
result, revenue recognition accounting rules require us to make significant
judgments. Revenues from sales of hardware, software and systems that do not
require significant modification or customization of the underlying software are
recognized when title and risk of loss has passed to the customer, there is
evidence of an arrangement, fees are fixed or determinable and collection of the
related receivable is considered probable. Customers are billed for
installation, training, project management and at least one year of product
maintenance and technical support at the time of the product sale. Revenue from
these activities are deferred at the time of the product sale and recognized
ratably over the period these services are performed. Revenue from ongoing
product maintenance and technical support agreements are recognized ratably over
the period of the related agreements. Revenue from software development
contracts that include significant modification or customization, including
software product enhancements, is recognized based on the percentage of
completion contract accounting method using labor efforts expended in relation
to estimates of total labor efforts to complete the contract. For contracts,
where some level of profit is assured but the Company is only able to estimate
ranges of amounts of total contract revenue and total contract cost, the Company
uses the lowest probable level of profits in accounting for the contract
revenues and costs. Accounting for contract amendments and customer change
orders are included in contract accounting when executed. Revenue from shipping
and handling costs and other out-of-pocket expenses reimbursed by customers are
included in revenues and cost of revenues. Our share of inter-company profits
associated with sales and services provided to affiliated companies is
eliminated in consolidation in proportion to our equity ownership.

Our
transactions frequently involve the sales of hardware, software, systems and
services in multiple element arrangements. Revenues under multiple element
arrangements are recorded based on the residual method of accounting. Under this
method, the total arrangement value is allocated first to undelivered elements,
based on their fair values, with the remainder being allocated to the delivered
elements. Where fair value of undelivered service elements has not been
established, the total arrangement value is recognized over the period during
which the services are performed. The amounts allocated to undelivered elements,
which may include project management, training, installation, maintenance and
technical support and hardware and software components, are based upon the price
charged when these elements are sold separately and unaccompanied by the other
elements. The amount allocated to installation, training and project management
revenue is based upon standard hourly billing rates and the estimated time
required to complete the service. These services are not essential to the
functionality of systems as these services do not alter the equipments
capabilities, are available from other vendors and the systems are standard
products. For multiple element arrangements that include software development
with significant modification or customization and systems sales where
vendor-specific objective evidence of the fair value does not exist for the
undelivered elements of the arrangement (other than maintenance and technical
support), percentage of completion accounting is applied for revenue recognition
purposes to the entire arrangement with the exception of maintenance and
technical support.

We recognize
revenue for product and services only in those situations where collection from
the customer is probable. The Company performs ongoing credit evaluations of
customers financial condition but generally does not require collateral. For
some international customers, the Company may require an irrevocable letter of
credit to be issued by the customer before the purchase order is accepted. The
Company monitors payments from customers and assesses any collection issues. The
Company maintains allowances for specific doubtful accounts and other risk
categories of accounts based on estimates of losses resulting from the inability
of the Companys customers to make required payments and records these
allowances as a charge to general and administrative expenses. The Company bases
its allowances for doubtful accounts on historical collections and write-off
experience, current trends, credit assessments, and other analysis of specific
customer situations. While such credit losses have historically been within our
expectations and the allowances established, we cannot guarantee that we will
continue to experience the same credit loss rates that we have in the past. If
the financial condition of our customers were to change, additional allowances
may be required or established allowances may be considered unnecessary.
Judgment is required in making these determinations and our failure to
accurately estimate the losses for doubtful accounts and ensure that payments
are received on a timely basis could have a material adverse effect on our
business, financial condition and results of operations.

26

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Any taxes
assessed by a governmental authority related to revenue-producing transactions
(e.g. sales or value-added taxes) are reported on a net basis and excluded from
revenues.

Inventories and Reserves. Inventories
are stated at the lower of cost or net realizable value. Cost is determined
using the first-in, first-out (FIFO) method. Inventories consist primarily of
components and subassemblies and finished products held for sale. All of
SeaChanges hardware components are purchased from outside vendors. The value of
inventories are reviewed quarterly to determine that the carrying value is
stated at the lower of cost or net realizable value. SeaChange records charges
to reduce inventory to its net realizable value when impairment is identified
through the quarterly review process. For inventory that has been written down
to its net realizable value, the reserve is released upon sale or disposal of
this inventory. The obsolescence evaluation is based upon assumptions and
estimates about future demand and possible alternative uses and involves
significant judgments. For the years ended January 31, 2009, 2008, and 2007, we
recorded inventory write-downs of $1.0 million, $2.1 million, and $1.1 million.

Goodwill
and Long-Lived Assets.The Company accounts
for business acquisitions in accordance with SFAS No. 141,Business Combinations,
which requires that the purchase method of accounting be used for all business
combinations. The Company determines and records the fair values of assets
acquired and liabilities assumed as of the dates of acquisition. The Company
recognizes the excess of the purchase price over the fair value of the net
assets acquired as goodwill. At the time of acquisition, goodwill is assigned to
the operating segment as the applicable reporting unit for the goodwill
impairment review. Goodwill is not amortized, but is evaluated for impairment,
at the reporting unit level, annually in the third fiscal quarter. Goodwill of a
reporting unit also is tested for impairment on an interim basis in addition to
the annual evaluation if an event occurs or circumstances change such as
declines in sales, earnings or cash flows, decline in our stock price, or
material adverse changes in the business climate, which would more likely than
not reduce the fair value of a reporting unit below its carrying amount. The
process of evaluating goodwill for impairment requires several judgments and
assumptions to be made to determine the fair value of the reporting units,
including the method used to determine fair value, discount rates, expected
levels of cash flows, revenues and earnings, and the selection of comparable
companies used to develop market based assumptions.

In the third
quarter of fiscal 2009, the Company changed the timing of its annual goodwill
impairment testing for its Media Services reporting unit from October 31, 2008
to August 1, 2008. This change did not delay, accelerate or avoid an impairment
charge. SeaChange completed the annual impairment tests of goodwill associated
with the Software, Servers and Storage and Media Services segments and
determined that as of August 1, 2008 no adjustment was required to the carrying
value of goodwill based on the analyses performed. However, there can be no
assurance that goodwill will not become impaired in future periods.

SeaChange
also evaluates property and equipment, intangible assets and other long-lived
assets on a regular basis for the existence of facts or circumstances, both
internal and external that may suggest an asset is not recoverable. If such
circumstances exist, SeaChange evaluates the carrying value of long-lived assets
to determine if impairment exists based upon estimated undiscounted future cash
flows over the remaining useful life of the assets and compares that value to
the carrying value of the assets. SeaChanges cash flow estimates contain
managements best estimates, using appropriate and customary assumptions and
projections at the time.

Intangible
assets consist of customer contracts, completed technology, patents and
trademarks and are respectively assigned to the operating segments. The
intangible assets are amortized to cost of sales and operating expenses, as
appropriate, on a straight-line or accelerated basis in order to reflect the
period that the assets will be consumed.

SeaChange
develops software for resale in markets that are subject to rapid technological
change, new product development and changing customer needs. The time period
during which software development costs can be capitalized from the point of
reaching technological feasibility until the time of general product release is
very short, and consequently, the amounts that could be capitalized are not
material to the Companys financial position or results of operations. Software
development costs relating to sales of software requiring significant
modification or customization are charged to costs of product revenues.

During
fiscal 2008, the Company determined that purchased capitalized software licenses
that were classified as Other assets on the Companys Condensed Consolidated
Balance Sheets were impaired as of July 31, 2007, resulting in a reduction to
Other assets of $4.1 million and a corresponding increase to Cost of revenues on
the Companys Consolidated Statement of Operations for the year ended January
31, 2008. The Company concluded that three separate capitalized software
licenses that were purchased for eventual use in current and future products of
the Company were impaired based on its determination that triggering events had
occurred during fiscal 2008 that warranted consideration of an impairment of
long-lived assets. The Company abandoned plans to use the capitalized software
licenses in any new or existing Company products during fiscal 2008. With no
identified future cash flows to substantiate further capitalization of these
software licenses, the Company determined these assets to be impaired during the
fiscal year ended January 31, 2008.

27

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Amortization expense is recorded over the period of economic consumption or the
life of the agreement, whichever results in the higher expense, starting with
the first shipment of the product to a customer. Amortization expense was
$100,000, $4.8 million, and $346,000 for the fiscal years ended January 31,
2009, 2008, and 2007, respectively. Of the $4.8 million fiscal year 2008
amortization, $4.1 million includes accelerated amortization taken in the second
quarter to align the recognition of amortization expense with the remaining
economic life of the purchased software.

Accounting for Income Taxes. As part
of the process of preparing our financial statements, we are required to
estimate our provision for income taxes in each of the jurisdictions in which we
operate. This process involves estimating our actual current tax exposure,
including assessing the risks associated with tax audits, together with
assessing temporary differences resulting from the different treatment of items
for tax and accounting purposes. These differences result in deferred tax assets
and liabilities, which are included within our balance sheet.

Deferred
income tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective income tax bases, and
operating loss and tax credit carryforwards. We evaluate the weight of all
available evidence to determine whether it is more likely than not that some
portion or all of the deferred income tax assets will not be realized. We will
record a valuation allowance if the likelihood of realization of the deferred
tax assets in the future is reduced based on an evaluation of objective
verifiable evidence. Significant management judgment is required in determining
our income tax expense (benefit), our deferred tax assets and liabilities and
any valuation allowance recorded against our deferred tax assets. We have
established a valuation allowance against our deferred tax assets due to
indications that they may not be fully realized. The amount of the deferred tax
asset considered realizable is subject to change based on future events,
including generating sufficient pre-tax income in future periods. In the event
that actual results differ from these estimates, our provision for income taxes
could be materially impacted. SeaChange does not provide for U.S. federal and
state income taxes on the undistributed earnings of its non-U.S. subsidiaries
that are considered indefinitely reinvested in the operations outside the
U.S.

Income
Tax Contingencies.In July 2006, the FASB
issued Interpretation No. 48,Accounting for
Uncertainty in Income Taxes(FIN 48). FIN
48 supersedes SFAS No. 5,Accounting for
Contingencies, as it relates to income tax
liabilities and lowers the minimum threshold a tax position is required to meet
before being recognized in the financial statements from probable to more
likely than not (i.e., a likelihood of occurrence greater than fifty percent).
Under FIN 48, the recognition threshold is met when an entity concludes that a
tax position, based solely on its technical merits, is more likely than not to
be sustained upon examination by the relevant taxing authority. Those tax
positions failing to qualify for initial recognition are recognized in the first
interim period in which they meet the more likely than not standard, or are
resolved through negotiation or litigation with the taxing authority, or upon
expiration of the statute of limitations. Derecognition of a tax position that
was previously recognized occurs when an entity subsequently determines that a
tax position no longer meets the more likely than not threshold of being
sustained. FIN 48 was adopted by the Company on February 1, 2007.

Share-based Compensation. We account for all employee and
non-employee director stock-based compensation awards using the provisions of
SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R). We have
continued to use the Black-Scholes pricing model as the most appropriate method
for determining the estimated fair value of all applicable awards. Determining
the appropriate fair value model and calculating the fair value of share-based
payment awards requires the input of highly subjective assumptions, including
the expected life of the share-based payment awards and stock price volatility.
Management estimated the volatility based on the historical volatility of our
stock. The assumptions used in calculating the fair value of share-based payment
awards represent managements best estimates, but these estimates involve
inherent uncertainties and the application of managements judgment. As a
result, if circumstances change and we use different assumptions, our
share-based compensation expense could be materially different in the future. In
addition, we are required to estimate the expected forfeiture rate and only
recognize expense for those shares expected to vest. If our actual forfeiture
rate is materially different from our estimate, the share-based compensation
expense could be significantly different from what we have recorded in the
current period. The estimated fair value of SeaChanges stock-based options and
performance-based restricted stock units, less expected forfeitures, is
amortized over the awards vesting period on a graded vesting basis, whereas the
restricted stock units and Employee Stock Purchase Plan stock units are
amortized on a straight line basis.

Foreign
Currency Translation.We have determined that
the functional currency of all of our foreign subsidiaries, other than ODG and
its wholly-owned subsidiaries, is the U.S. dollar. Where the U.S. dollar is
designated as the functional currency of an entity, we translate that entitys
monetary assets and liabilities denominated in local currencies into U.S.
dollars (the functional and reporting currency) at current exchange rates, as of
each balance sheet date. Nonmonetary assets (e.g., inventories, property, plant,
and equipment and intangible assets) and related income statement accounts
(e.g., cost of sales, depreciation, amortization of intangible assets) are
translated at historical exchange rates between the functional currency (the
U.S. dollar) and the local currency. Revenue and other expense items are
translated using average exchange rates during the fiscal period. Translation
adjustments and transactions gains and losses on foreign currency transactions,
and any unrealized gains and losses on short-term inter-company transactions are
included in other income or expense, net.

For the ODG
group where the local currency is designated as the functional currency, we
translate its assets and liabilities into U.S. dollars (the reporting currency)
at current exchange rates as of each balance sheet date. Revenue and expense
items are translated using average exchange rates during the period. Cumulative
translation adjustments are presented as a separate component of stockholders
equity. Exchange gains and losses on foreign currency transactions and
unrealized gains and losses on short-term inter-company transactions are
included in other income or expense, net.

The
aggregate foreign exchange transaction losses included as other (expense)
income, net on the Consolidated Statement of Operations were $951,000, $43,000
and $320,000 for the years ended January 31, 2009, 2008 and 2007, respectively.

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Fiscal Year Ended January 31, 2009
Compared to the Fiscal Year Ended January 31, 2008

The
following table sets forth summarized consolidated financial information for
each of the two fiscal years ended January 31, 2009 and 2008.

Year EndedJanuary 31,2009
    
    2008(in thousands)Revenues:Products
    
    $
    117,372
    
    
    $
    105,769Services
    
    
    84,464
    
    
    
    74,124201,836
    
    
    
    179,893Costs and expenses:Cost of
      product revenues
    
    
    46,533
    
    
    
    52,464Cost of
      service revenues
    
    
    52,007
    
    
    
    46,465Research and
      development
    
    
    43,042
    
    
    
    42,699Selling and
      marketing
    
    
    27,506
    
    
    
    23,073General and
      administrative
    
    
    20,979
    
    
    
    20,240Amortization
      of intangibles
    
    
    1,575
    
    
    
    2,952Income (loss) from operations
    
    
    10,194
    
    
    
    (8,000
    )Interest
      income, net
    
    
    2,050
    
    
    
    1,927Other (expense) income, net
    
    
    (925
    )
    
    
    (43
    )Gain on sale of investment in affiliate
    
    
    -
    
    
    
    10,031Income before income taxes and equity income in earnings of
      affiliates
    
    
    11,319
    
    
    
    3,915Income tax
      expense
    
    
    (575
    )
    
    
    (2,156
    )Equity (loss) income in earnings of affiliates, net of
tax
    
    
    (770
    )
    
    
    1,143Net income
      (loss)
    
    $
    9,974
    
    
    $
    2,902


Revenues

The
following table summarizes information about the Companys reportable segments
for each of the two fiscal years ended January 31, 2009 and 2008. Segment data
for fiscal 2008 is presented on a basis consistent with the fiscal 2009 data and
the changed reporting data segment structure.

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Fiscal Year EndedJanuary 31,2009
    
    2008
    
    %(in thousands, except for percentage data)Software revenues:Products
    
    $
    78,397
    
    $
    69,762
    
    12
    %Services
    
    
    53,840
    
    
    43,507
    
    24
    %Total Software
      revenues
    
    $
    132,237
    
    $
    113,269
    
    17
    %Servers and Storage revenues:Products
    
    $
    38,975
    
    $
    36,007
    
    8
    %Services
    
    
    14,665
    
    
    12,990
    
    13
    %Total Servers
      and Storage revenues
    
    $
    53,640
    
    $
    48,997
    
    9
    %Media Services Revenue:Services
    
    $
    15,959
    
    $
    17,627
    
    -9
    %Total consolidated revenue:Products
    
    $
    117,372
    
    $
    105,769
    
    11
    %Services
    
    
    84,464
    
    
    74,124
    
    14
    %Total
      consolidated revenues
    
    $
    201,836
    
    $
    179,893
    
    12
    %


Product
Revenue.Product revenue increased 11% to
$117.4 million in the fiscal year ended January 31, 2009 from $105.8 million in
the fiscal year ended January 31, 2008. Product revenues from the Software
segment accounted for 67% and 66% of the total product revenues in the years
ended January 31, 2009 and 2008, respectively. The Servers and Storage segment
accounted for 33% and 34% of total product revenues in the fiscal years ended
January 31, 2009 and 2008, respectively.

Service
Revenue.Service revenues increased 14% to
$84.5 million in the fiscal year ended January 31, 2009 from $74.1 million in
the fiscal year ended January 31, 2008. Services revenue for the Software
segment accounted for 64% and 59% of the total services revenue in the fiscal
years ended January 31, 2009 and 2008, respectively. Servers and Storage
services revenue accounted for 17% and 18% of total services revenue in the
fiscal year ended January 31, 2009 and 2008, respectively, while Media Services
revenue accounted for 19% and 23% of total services revenue for the fiscal years
ended January 31, 2009 and 2008, respectively.

For the
fiscal year ended January 31, 2009, two customers each accounted for more than
10% and collectively accounted for 43% of our total revenues and these same two
customers each accounted for more than 10% and collectively accounted for 45% of
our total revenues for the year ended January 31, 2008. Revenues from these
customers were primarily in the Software and Servers and Storage segment. We
believe that a significant amount of our revenues will continue to be derived
from a limited number of customers.

International products and services revenues accounted for approximately
36% or $72.7 million and 38% or $ 68.4 million of total revenues in the fiscal
years ended January 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 made in
United States dollars (USD), and for the fiscal years 2009 and 2008,
approximately 78% and & 74%, of international revenues were transacted in
USD.

Media
Services has designated the Great Britain Pound (GBP) as its functional
currency. For the fiscal years 2009 and 2008, approximately 76% and 85%,
respectively of the Media Services revenues were sales in GBP and 24% and 11%,
respectively were made in Euros. During the third and fourth quarter of fiscal
2009, Media Services financial results were translated to USD for reporting
purposes, and the depreciation of the GBP compared to the USD has impacted the
amount of revenue recorded by our Media Services during fiscal 2009. We will
continue to have exposure to fluctuations in the USD/GBP and Euro exchange rates
on our revenue each quarter for the Media Services segment.

Software
Revenue.Revenues from our software segment
increased 17% to $132.2 million in the fiscal year ended January 31, 2009 from
$113.3 million in the fiscal year ended January 31, 2008. The year over year
growth was primarily due to increased software licensing revenue from shipments
of Advertising Insertion, Axiom, VODlink, Media Client and our VOD hospitality
software products which were partially offset by $7.9 million of lower software
subscription revenues from Comcast. The 24% increase in service revenue for the
Software segment was primarily due to higher Advertising and VOD product
maintenance revenues from a growing installed base of products and installation
revenue from the completion of several large projects during fiscal
2009.

30

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Servers
and Storage Revenue.Revenues from the Server
and Storage segment increased 9% to $53.6 million for the fiscal year ended
January 31, 2009 from $49.0 for the fiscal year ended January 31, 2008. The
increase in product revenues of 8% compared to the previous year was due
primarily to higher VOD server revenue from increased shipments of our new flash
servers during our fourth quarter of fiscal 2009. The 13% year over year
increase in services revenue in the Servers and Storage segment is due to
increased installation revenue from VOD and broadcast servers products year over
year.

Media
Services Revenue.Revenues from Media
Services decreased 9% to $16.0 million in the year ended January 31, 2009
compared to the year ended January 31, 2008. The decrease in revenue was due
primarily to the impact of the weakening of GBP compared to the USD during
fiscal 2009 compared to the previous year. Valued at a constant USD/GBP exchange
rate, ODG increased revenue year over year by 5% with two additional customers
in Europe.

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, and labor and overhead costs related to
software development contracts. The gross profit percentage for products
increased from 50% in the fiscal year ended January 31, 2008 to 60% in the
fiscal year ended January 31, 2009. The increase in product gross profit
percentages between years were primarily due to higher sales volume-related
margin from our Advertising Insertion, Axiom, VODlink and our VOD hospitality
software products. In addition, the Company recorded a charge of $4.1 million in
connection with asset impairments taken during fiscal 2008 which significantly
lowered our fiscal 2008 product gross margin.

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 media services. Costs of
services revenues increased from $46.5 million in the fiscal year ended January
31, 2008 to $52.0 million in the fiscal year ended January 31, 2009 while our
service gross profit percentage was relatively flat year over year. The increase
in the cost of service of $5.5 million was due to increased headcount-related
costs to service our increased installed base of systems.

Software
Gross Profit.Software segment gross margin
was 58% and 51% in the years ended January 31, 2009 and 2008, respectively. The
increase in product gross profit percentages between years is due mainly to a
favorable product mix of higher margin Advertising Insertion and VOD software
product revenue in the fiscal year ended January 31, 2009 compared to the fiscal
year ended January 31, 2008, as well as the asset impairments taken in fiscal
year 2008.

Servers
and Storage Gross Profit.Servers and Storage
segment gross margin of 46% in the years ended January 31, 2009 was six points
higher than in the year ended January 31, 2008 because of increased shipment of
higher margin VOD flash servers and lower manufacturing costs due to headcount
and other cost reductions taken in fiscal year 2008.

Media
Services Gross Profit.Media Services segment
gross margin of 15% in the year ended January 31, 2009 was two points lower than
in the year ended January 31, 2008 due principally to higher year over year
higher headcount related expenses to support additional revenue.

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 were 21% and 24% of total
revenues for fiscal year ended January 31, 2009 and 2008, respectively, and
increased $300,000 year over year. The increase is primarily due to higher
software-related headcount and related expenses of $900,000 offset by lower
contract labor of $500,000. We expect that research and development expenses
will continue to increase in the fiscal year ended January 31, 2010 as we
continue our development of our new products and enhancements.

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
increased 19% from $23.1 million or 13% of total revenues in the fiscal year
ended January 31, 2008 to $27.5 million, or 14% of total revenues, in the fiscal
year ended January 31, 2009. This increase in total expenses is primarily due to
$1.9 million in increased salaries and benefits attributable to the hiring of
additional sales and marketing employees, increased commissions of approximately
$1.7 million due to higher revenues and distributor commissions of $900,000
offset by lower trade show expenses.

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 fiscal year
ended January 31, 2009, general and administrative expenses of $21.0 million, or
10% of total revenues, increased 4% from $20.2 million, or 11% of total
revenues, in the fiscal year ended January 31, 2008. General and administrative
expenses increased approximately $800,000 due to higher general and
administrative expenses at ODG of $600,000 primarily due to higher headcount,
higher bad debt expense of $400,000, offset by lower accounting fees.

31

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Amortization of Intangibles.Amortization expense consists of the amortization of acquired intangible
assets which are operating expenses and not considered costs of revenues.
Amortization of intangible assets decreased from $3.0 million in the fiscal year
ended January 31, 2008 to $1.6 million in the fiscal year ended January 31, 2009
due primarily to the sale of the Companys equity investment in FilmFlex and the
related intangible assets in fiscal 2008. Amortization is also based on the
future economic value of the related intangible assets which is generally higher
in earlier years of the assets lives. The table below classifies the
amortization expense by its source category, sales and marketing or general and
administrative expense.

Year EndedJanuary 31,2009
    
    2008(in thousands)Sales and marketing expense
    
    $
    1,491
    
    $
    2,842General and
      administrative expense
    
    
    84
    
    
    110Amortization expense
    
    $
    1,575
    
    $
    2,952


An
additional $350,000 and $490,000 of amortization expense related to acquired
technology was charged to cost of sales for the years ended January 31, 2009 and
2008, respectively.

Interest
Income, net. Interest income, net was $2.1
million in the fiscal year ended January 31, 2009 and $2.0 million in the fiscal
year ended January 31, 2008. The increase in interest income is primarily due to
the increase in average cash balance in fiscal 2009 compared to fiscal
2008.

Other
Expense Income, net.With the exception of
ODG, and its wholly-owned subsidiaries, the U.S. Dollar is the functional
currency for our international subsidiaries, therefore all foreign currency
translation gains and losses are included in Consolidated Statements of
Operations. The increase in foreign exchange losses was a result of the
increased strength of the USD against the foreign currencies held by our
subsidiaries in the second half of fiscal 2009 compared to fiscal 2008. In light
of the high proportion of our international businesses, we expect the risk of
any adverse movements in foreign currency exchange rates could have an impact on
our translated results within the Consolidated Statements of
Operations.

Gain on
Sale of Investment in Affiliate.The gain of
$10 million was the result the sale of our equity investment in FilmFlex during
the fourth quarter of fiscal 2008.

Equity
Income in Earnings of Affiliates.Equity loss
in earnings of affiliates was $800,000 in the fiscal year ended January 31, 2009
compared with $1.1 million in income for fiscal year-ended January 31, 2008. The
equity income (loss) in earnings of affiliates consists of our proportionate
ownership share of the net income (loss) under the equity method of accounting.
For fiscal year 2009, the losses consisted of our 50% ownership share in our
German joint venture, On Demand Deutschland GmbH & Co. KG. For fiscal 2008
(until December 2007, when we sold FilmFlex), the equity income in earnings of
affiliates consisted of our proportionate ownership share of the earnings of
FilmFlex and the losses of On Demand Deutschland GmbH & Co. KG.

Income
Tax (Provision)/Benefit.Our effective tax
rate and income tax provision for fiscal 2009 was 5% and $600,000 respectively
compared to an effective tax rate of 55% and $2.2 million respectively for the
fiscal year ended January 31, 2008. The decrease in the effective tax rate was
due to the reduction of our valuation allowance from the utilization in fiscal
2009 of a $1.4 million foreign tax credit attributable to the taxable gain from
the sale of our equity investment in FilmFlex during fiscal 2008. In addition,
the fiscal 2009 tax rate was also reduced for the entitlement and claim of the
benefit for a refundable research and development credit of $300,000 as a result
of the tax stimulus package passed by the U.S. Congress in 2008. For the fiscal
year 2008, the income tax provision was primarily attributable to the taxable
gains recorded for ODGs transfer of assets to and the reimbursement of
previously paid costs from On Demand Deutschland GmbH & Co. KG and to the
sale of our equity investment in FilmFlex.

At January
31, 2009 and 2008, we provided a valuation allowance for the full amount of net
deferred tax assets due to the uncertainty of realization of those assets. We
will continue to assess the need for the valuation allowance at each balance
sheet date based on all available evidence. If we determine that we can realize
some portion or all of the net deferred tax assets, the valuation allowance
would be reversed and a corresponding increase in net income would be recognized
during the period.

32

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Fiscal Year Ended January 31, 2008
Compared to the Fiscal Year Ended January 31, 2007

The
following table sets forth summarized consolidated financial information for
each of the two fiscal years ended January 31, 2008 and 2007.

| |                                                                              | January 31,   
| | ---------------------------------------------------------------------------- | --------------
| |                                                                              | 2008          
| |                                                                              | (in thousands)
| | Revenues:                                                                    |               
| | Products                                                                     | $             
| | Services                                                                     |               
| |                                                                              |               
| |                                                                             
| | Costs and expenses:                                                          |               
| | Cost of product
      revenues                                               |               
| | Cost of service
      revenues                                               |               
| | Research and
      development                                               |               
| | Selling and marketing                                                        |               
| | General and
      administrative                                             |               
| | Amortization of
      intangibles                                            |               
| |                                                                             
| | Income (loss) from operations                                                |               
| | Interest income,
      net                                                   |               
| | Other (expense) income, net                                                  |               
| | Impariment on
      investment in affiliate                                  |               
| | Gain on sale of investment in affiliate                                      |               
| | Income before
      income taxes and equity income in earnings of affiliates |               
| | Income tax expense                                                           |               
| | Equity (loss)
      income in earnings of affiliates, net of tax             |               
| | Net income (loss)                                                            | $             

Revenues

The
following table summarizes information about the Companys reportable segments
for each of the two fiscal years ended January 31, 2008 and 2007. Segment data
for fiscal 2008 and 2007 are presented on a basis consistent with the fiscal
2009 data and the changed reporting data segment structure.

33

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| |                                          | Fiscal Year Ended                      |         |      |  
| | ---------------------------------------- | -------------------------------------- | ------- | ---- | -
| |                                          | January 31,                            |         |      |  
| |                                          | 2008                                   |         | 2007 |  
| |                                          | (in thousands, except percentage data)
| | Software revenues:                       |                                        |         |      |  
| | Products                                 | $                                      | 69,762  |      | $
| | Services                                 |                                        | 43,507  |      |  
| | Total Software
      revenues            | $                                      | 113,269 |      | $
| |                                         
| | Servers and Storage revenues:            |                                        |         |      |  
| | Products                                 | $                                      | 36,007  |      | $
| | Services                                 |                                        | 12,990  |      |  
| | Total Servers
      and Storage revenues | $                                      | 48,997  |      | $
| |                                         
| | Media Services revenue:                  |                                        |         |      |  
| | Services                                 | $                                      | 17,627  |      | $
| |                                         
| | Total consolidated revenue:              |                                        |         |      |  
| | Products                                 | $                                      | 105,769 |      | $
| | Services                                 |                                        | 74,124  |      |  
| | Total
      consolidated revenues        | $                                      | 179,893 |      | $

Product
Revenues.Product revenues increased 11% to
$105.8 million for the fiscal year ended January 31, 2008. Product revenues from
the Software segment accounted for 66% and 62% of the total product revenues for
fiscal year ended January 31, 2008 and 2007, respectively while the Servers and
Storage segment accounted for 34% and 38% of total product revenues for fiscal
year ended January 31, 2008 and 2007, respectively.

Service
Revenues.Our Services revenues increased 12%
to $74.1 million for the fiscal year ended January 31, 2008. Services revenues
for the Software segment accounted for 59% and 63% of the total Services revenue
for fiscal year ended January 31, 2008 and 2007, respectively. Servers and
Storage services revenue accounted for 18% of total services revenues for both
fiscal years ended January 31, 2008 and 2007, respectively, while Media Services
revenue accounted for 24% and 19% of total services revenues for the fiscal year
ended January 31, 2008 and 2007, respectively.

For the fiscal year ended January 31,
2008, two customers each accounted for more than 10% and collectively accounted
for 45% of our total revenues and these same two customers each accounted for
more than 10% and collectively accounted for 53% of our total revenues for the
year ended January 31, 2007.

International revenues accounted for
approximately 38% and 33% of total revenues in the fiscal years ended January
31, 2008 and 2007, respectively. These orders were made primarily in United
States dollars except for ODG which are primarily in GBP.

Software
Revenues. Revenues from our Software segment
increased $12.9 million or 13% from the previous fiscal year. Of the $12.9
million increase year over year in software revenues, $11.1 million was due to
increased products revenues and $1.8 million of services revenue. The year over
year product revenue growth of $11.1 million was to due to increased advertising
license revenues of $4.7 million, higher software development revenue of $4.7
million, and increased broadcast software revenue of $4.2 million offset by
lower VOD software revenues. Increased Advertising product revenues of $4.7
million was driven primarily by the increased high definition advertising
insertion requirements for North American-based cable, telephone and satellite
customers. The increase in software development revenues of $4.7 million was
derived primarily from our Comcast VOD Purchase Agreement and our Virgin Media
middleware contract. The year over year increase of $4.2 million of Broadcast
software revenues related primarily to significant orders from European and
Asia-Pacific customers. The 4% increase in services revenue for the Software
segment was primarily attributable to the year over year increase of product
revenues and the related fees for training, installation, project management,
product maintenance and technical support.

Servers
and Storage Revenues.Revenues from the
Servers and Storage segment for the fiscal year ended January 31, 2008 increased
$900,000 or 2% compared the previous fiscal year. The year over year increase
was due the higher services revenues of $1.2 million due to a larger installed
base of our VOD and broadcast server products offset partially by a $300,000
decrease in server product revenue. The decrease in server product revenue was
$200,000 of VOD servers and $100,000 broadcast servers compared to the previous
year.

34

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Media
Services.Revenues from Media Services
increased by 37% or $4.8 million year over year from higher content processing
revenue from Virgin Media along with increased professional services revenue
from new customers in Europe and Latin America.

Product
Gross Profit.Costs of product revenues
increased to $52.5 million compared to $48.3 million in the fiscal year ended
January 31, 2007 resulting in product gross profit of 50% of related revenues in
fiscal year 2008 compared to 49% in fiscal 2007. The increase in product gross
profit percentages between years is due mainly to a significant increase in
Broadcast product gross profit percentage due to increased revenue and a
favorable customer mix partially offset by significant expenses incurred in the
second quarter of fiscal 2008 related to impaired assets and headcount
reductions.

Services
Gross Profit.Costs of services revenues
increased from $37.2 million in the fiscal year ended January 31, 2007 to $46.5
million in the fiscal year ended January 31, 2008. The decrease in service gross
profit percentage to 37% from 44% was primarily due to headcount-related costs
to service our increased installed base of systems, and additional
headcount-related costs at ODG as it expanded its operations to Latin America
and Europe.

Software
Gross Profit.Software segment gross margin
of 51% was four points lower compared to the year ended January 31, 2007. The
decrease in gross margins is due mainly to costs incurred during the second
quarter of fiscal 2008 related to impaired assets and headcount reductions
offset partially by increases in Broadcast software margins.

Servers
and Storage Gross Profit.Servers and Storage
segment gross margin of 40% in the year ended January 31, 2008 was seven points
higher than fiscal 2007 due to improvements of the margins for broadcast server
revenue during fiscal year 2008 from a favorable customer mix.

Media
Services Gross Profit.Media Services segment
gross margin of 17% in the year ended January 31, 2008 was 18 points lower than
fiscal year 2007 due to increased headcount-related costs as ODG expanded its
operations to Latin America and Europe.

Research
and Development.Research and development
expenses increased from $40.9 million, or 25% of total revenues, in the fiscal
year ended January 31, 2007 to $42.7 million, or 24% of total revenues, in the
fiscal year ended January 31, 2008. The increase is primarily due to an increase
in salaries and benefits of $3.5 million which includes employee severance
expenses of $763,000 related to headcount reductions occurring in the second
quarter of fiscal year ended January 31, 2008, higher performance based
compensation, and lower absorption of engineering expenses for customer software
development. The increase was offset by decreases in research and development
materials cost of $827,000, a decrease in sabbatical expense of $400,000, and
contract labor of $440,000.

Selling
and Marketing.Selling and marketing expenses
increased 3% from $22.4 million or 14% of total revenues in the fiscal year
ended January 31, 2007 to $23.1 million, or 13% of total revenues, in the fiscal
year ended January 31, 2008. Selling and marketing expenses as a percentage of
revenues are relatively flat year over year. This increase in total expenses is
primarily due to $940,000 in increased salaries and benefits attributable to the
hiring of additional sales and marketing employees, increased commissions of
approximately $1.0 million due to higher revenues offset by lower distributor
commissions of $400,000 and lower tradeshow expenses of $450,000.

General
and Administrative.In the fiscal year ended
January 31, 2008, general and administrative expenses of $20.2 million, or 11%
of total revenues, increased from $18.9 million, or 12% of total revenues, in
the fiscal year ended January 31, 2007. General and administrative expenses as a
percentage of revenues are relatively flat year over year. General and
administrative expenses increased due primarily to increased headcount related
expenses of $1.8 million and $1.0 million of performance-based compensation
offset by lower general and administrative expenses at ODG.

Amortization of Intangibles.Amortization of intangible assets was $3.0 million in the fiscal year
ended January 31, 2008 and $5.7 million in the fiscal year ended January 31,
2007. Amortization is based on the future economic value of the related
intangible assets which is generally higher in earlier years of the assets
lives. The sale of the Companys equity investment in FilmFlex and the related
intangible assets also contributed to the decrease in amortization expense from
the fiscal year ended January 31, 2008 compared to the year ended January 31,
2007. The table below classifies the amortization expense by its source
category, sales and marketing or general and administrative expense.

35

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|                                         | Year Ended    
|---------------------------------------- | --------------
|                                         | January 31,   
|                                         | 2008          
|                                         | (in thousands)
|Sales and marketing expense              | $             
|General and
      administrative expense |               
|Amortization expense                     | $             

An additional $490,000 and $643,000 of
amortization expense related to acquired technology was charged to cost of sales
for the years ended January 31, 2008 and 2007, respectively.

Interest
Income, net. Interest income was $2.0 million
in the fiscal year ended January 31, 2008 and $1.4 million in the fiscal year
ended January 31, 2007. The increase in interest income in comparison to the
year ended January 31, 2007 is primarily due to higher prevailing interest rates
on our marketable securities invested and the increase of our cash and
marketable securities as a result of the sale of the Companys equity investment
in FilmFlex during the fiscal year ended January 31, 2008.

Impairment on Investment in Affiliate.Impairment on investment in affiliate was $150,000 in the fiscal year
ended January 31, 2007 due to the impairment of a small investment in an
affiliate company.

Equity
Income in Earnings of Affiliates.Equity
income in earnings of affiliates was $1.1 million in the fiscal year ended
January 31, 2008 compared with $1.3 million in the fiscal year-ended January 31,
2007. The equity income in earnings of affiliates consists of our proportionate
ownership share of the net income (loss) under the equity method of accounting.
For fiscal 2008 (until December 2007, when we sold our equity investment), the
equity income in earnings of affiliates consisted of our proportionate ownership
share of the earnings of FilmFlex and equity losses recognized from On Demand
Deutschland GmbH & Co. KG, the German joint venture formed in February 2007
with Tele-Munchen Fernseh GmbH & Co. Produktionsgesellschaft.

Income
Tax (Provision)/Benefit.Our effective tax
rate and income tax provision for fiscal 2008 was 55% and $2.2 million
respectively compared to an income tax benefit of 15% and $1.6 million
respectively for the fiscal year ended January 31, 2007. For the fiscal year
2008, the income tax provision was primarily attributable to the taxable gains
recorded in the first quarter of fiscal 2008 for ODGs transfer of assets to and
the reimbursement of previously paid costs from On Demand Deutschland GmbH &
Co. KG and to the sale of our equity investment in FilmFlex.

Liquidity and Capital Resources

Historically, we have financed our operations and capital expenditures
primarily with the proceeds from sales of our common stock and cash flows
generated from operations. During fiscal 2009, cash and marketable securities
decreased by $3.6 million from $87.9 million at January 31, 2008 to $84.3
million at January 31, 2009, largely due to cash used for repurchasing our
common stock, purchase of a facility in the U.K., and the acquisition of Mobix
Interactive offset by cash provided by operations. Working capital increased
$1.2 million to $89.5 million at January 31, 2009 from $88.3 million at January
31, 2008. We believe that existing funds combined with available borrowings
under our revolving line of credit and cash provided by future operating
activities are adequate to satisfy our working capital, potential acquisitions,
capital expenditure requirements and other contractual obligations for the
foreseeable future, including at least the next 24 months.

Our
operating activities provided net cash of $21.7 million. Cash provided by
operating activities was the result of the net income of $10.0 million and
non-cash charges of $15.8 million which was primarily from depreciation and
amortization, stock-based based compensation, charges for inventory valuation
and accounts receivable allowance. These amounts were offset by increases to
inventory, accounts receivable deferred revenues and lower accounts payable. The
increase in accounts receivable and deferred revenue was related to our annual
maintenance renewals that occurred on January 1, 2009.

Our
investing activities used $15.0 million primarily due to cash payments
aggregating $3.2 million, net of cash acquired, for our November 19, 2008
acquisition of Mobix Interactive and related $1.5 million deposited in escrow,
the purchase of our facility in the U.K. and related equipment and improvements
for the new facility of $8.6 million, and other capital expenditures of $4.3
million. These amounts were offset by $2.7 million of net sales and maturities
of marketable securities during the fiscal year.

Our financing activities used $3.2
million primarily due to the purchase of common stock under the share repurchase
program which was partially offset by proceeds from the issuance of common stock
for the exercise of employee stock options and the employee stock purchase
plan.

36

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Debt Instruments and Related Covenants

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 January 31, 2009, we were in compliance with
the financial covenants and there were no amounts outstanding under the
revolving line of credit.

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.

Contractual Obligations

The
following table reflects our current and contingent contractual obligations to
make potential future payments as of January 31, 2009 (in thousands):

Payment due by
  periodLess than one
    
    One to three
    
    Three to five
    
    More than fiveTotal
    
    year
    
    years
    
    years
    
    years(in thousands)Purchase obligations
    $
    7,814
    
    $
    7,814
    
    $
    -
    
    $
    -
    
    $
    -Non-cancelable
      lease obligations
    
    6,166
    
    
    2,575
    
    
    2,654
    
    
    624
    
    
    313Total
    $
    13,980
    
    $
    10,389
    
    $
    2,654
    
    $
    624
    
    $
    313


The purchase obligations include
open, non-cancelable purchase commitments from our suppliers.

The Company
has excluded from the table above uncertain tax liabilities as defined in FASB
issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN
48) due to the uncertainty of the amount and period of payment. As of January
31, 2009, the Company has gross unrecognized tax benefits of $6.3 million.

On February 27, 2007, ODG, a
wholly-owned subsidiary of SeaChange, entered into an agreement with
Tele-Munchen Fernseh GmbH & Co. Produktionsgesellschaft (TMG) to create a
joint venture named On Demand Deutschland GmbH & Co. KG. The related
Shareholders Agreement requires ODG to provide cash contributions up to $4.2
million (USD equivalent) upon the request of the joint ventures management and
approval by the shareholders of the joint venture.

On June 3,
2008 ODG purchased a 9,000 square foot facility in London, UK to be used as
office space for ODG personnel as well as housing content preparation
activities.The Company is in the process of building out the facility and estimates
it will incur costs of approximately GBP 1.6 million ($2.3 million equivalent)
to complete this build out.

On November
19, 2008, ODG entered into a Share Purchase Agreement (the Share Purchase
Agreement) providing for the purchase by ODG of all the outstanding capital
stock (the Mobix Shares) of Mobix Interactive Limited (Mobix). Mobix is a
London, England based company that provides software and content services
related to the deployment of mobile video services for wireless network
operators. At the closing, ODG paid the shareholders of Mobix approximately £2
million (approximately $3 million USD) in cash for the Mobix Shares, with an
additional £1 million (approximately $1.5 million USD) deposited in escrow to be
released on the later of May 19, 2009 and the date certain performance goals
have been satisfied, with the amount of the escrow being subject to reduction
should there have been a breach of the representations, warranties, covenants
and agreements contained in the Share Purchase Agreement. Subsequent to fiscal
2009, on March 16, 2009 ODG released £500,000 (approximately $700,000 USD) cash
from restricted to the shareholders of Mobix upon meeting its first performance
goal.

In addition,
under the earnout provisions in the Share Purchase Agreement, if Mobix meets
certain performance goals, over the next three year period ending November 19,
2011 primarily related to the financial performance of Mobix, SeaChange will be
obligated to make additional cash payments aggregating £8.3 million
(approximately $12.4 million USD). The contingent consideration will be reduced
or increased based upon Mobixs actual performance relative to the performance
goals. Any payout of contingent consideration will be recorded as additional
goodwill.

37

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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 January 31, 2009, the full amount of the letters of credit of
$833,000 was supported by our credit facility.

On March 11,
2009, SeaChange Internationals Board of Directors authorized through January
31, 2010, 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 stock 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
investments 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.

Effects of Inflation

Our management believes that
financial results have not been significantly impacted by inflation and price
changes.

New Accounting Pronouncements

In December
2007, the FASB issued SFAS No. 141 (R)Business Combinations(SFAS 141R).
SFAS 141R establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. SFAS 141R also provides guidance for recognizing and measuring the
goodwill acquired in the business combination and determines what information to
disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. The guidance will become
effective as of the beginning of the Companys fiscal year beginning after
December 15, 2008. SFAS No. 141R is effective for the Company beginning February
1, 2009. SFAS 141R will have an impact on accounting for business combinations
once adopted but the effect is dependant upon acquisitions at that time.

In December
2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 160Noncontrolling Interests in Consolidated
Financial Statementsan amendment of ARB No. 51(SFAS 160). SFAS 160 establishes accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. The guidance will become effective as of the beginning of the
Companys fiscal year beginning after December 15, 2008. SFAS 160 is effective
for the Company beginning February 1, 2009. The Company does not expect the
adoption of SFAS 160 to have a material impact on its results of operations and
financial position.

In March
2008, the FASB issued FASB Statement No. 161 (SFAS 161),Disclosures about Derivative Instruments and Hedging
Activities. SFAS 161 is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entitys financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The Company does not currently have any derivative instruments or
hedging activities. The Company does not expect the adoption of SFAS 161 to have
a material impact on its results of operations and financial
position.

On December
12, 2007, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 07-01,Accounting for Collaborative
Arrangements(EITF 07-01). EITF 07-01
defines collaborative arrangements and establishes reporting requirements for
transactions between participants in a collaborative arrangement and between
participants in the arrangement and third parties. EITF 07-01 also establishes
the appropriate income statement presentation and classification for joint
operating activities and payments between participants, as well as the
sufficiency of the disclosures related to these arrangements. EITF 07-01 is
effective for fiscal years beginning after December 15, 2008 (February 1, 2009,
for the Company). Companies are required to apply EITF 07-01 using a modified
version of retrospective transition for those arrangements in place at the
effective date. In addition, companies are required to report the effects of the
application of EITF 07-01 as a change in accounting principle through
retrospective application to all prior periods presented for all arrangements
existing as of the effective date, unless it is impracticable to apply the
effects of the change retrospectively. The Company is currently assessing the
impact that EITF 07-01 may have on its results of operations and financial
position.

38

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On April 25,
2008, the FASB issued FASB Staff Position (FSP) FAS 142-3,Determination of the Useful Life of Intangible
Assets, which revises the factors that an
entity should consider to develop renewal or extension assumptions used in
determining the useful life of a recognized intangible asset. The FSP amends
paragraph 11(d) of SFAS 142. The FSP is effective for financial statements
issued for fiscal years beginning after December 15, 2008 (February 1, 2009, for
the Company) and for interim periods within those fiscal years. Early adoption
is prohibited. Entities should apply the FSPs guidance in determining the
useful life of an intangible asset prospectively to recognized intangible assets
acquired after the FSPs effective date. However, once effective, the FSPs
disclosure requirements apply prospectively to all recognized intangible assets,
including those acquired before the FSPs effective date. The Company is
currently assessing the impact that FAS 142-3 may have on its results of
operations and financial position.

Impact of Recently Adopted Accounting
Pronouncements

In September
2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
157,Fair Value Measurement(SFAS 157). SFAS 157 clarifies the principle that fair
value should be based on the assumptions market participants would use when
pricing an asset or liability and establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. Under SFAS 157,
fair value measurements would be separately disclosed by level within the fair
value hierarchy. The provisions of SFAS 157, as issued, are effective for the
fiscal years beginning after November 15, 2007. However, in February 2008, the
FASB issued FASB Staff Position No. 157-2,Effective Date of FASB Statement No. 157(FSP 157-2) that amended SFAS 157 to delay the effective date for all
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (that is, at least annually). FSP 157-2 defers the effective date of SFAS
157 to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years for items within the scope. The Company adopted the
required provisions of SFAS as of February 1, 2008 and had no material impact
upon the Companys results of operations and financial position.

In October
2008, the FASB issued FASB Staff Position No. FAS 157-3, Determining the Fair
Value of a Financial Asset in a Market That Is Not Active (FSP 157-3), which
clarifies the application of SFAS 157 when the market for a financial asset is
inactive. Specifically, FSP 157-3 clarifies how (1) managements internal
assumptions should be considered in measuring fair value when observable data
are not present, (2) observable market information from an inactive market
should be taken into account, and (3) the use of broker quotes or pricing
services should be considered in assessing the relevance of observable and
unobservable data to measure fair value. The guidance in FSP 157-3 was effective
during the Companys third fiscal quarter, and had no material impact upon the
Companys results of operations and financial position upon adoption.

In December 2008, the FASB issued FASB
Staff Position No. FAS 140-4 and FIN46(R)-8,Disclosures by Public Entities(Enterprises) about Transfers of Financial Assets and Interests in
Variable Interest Entities(FSP FAS 140-4 and
FIN 46(R)-8). FSP FAS 140-4 and FIN 46(R)-8 amends both FASB Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, a replacement of FASB Statement No. 125, and FASB Interpretation
No. 46(R), Consolidation of Variable Interest Entities (revised December 2003)
an interpretation of ARB No. 51, to require public entities to provide
additional disclosures about transfers of financial assets and about their
involvement with variable interest entities. The Company does not anticipate
that the adoption of this statement in fiscal 2010 will have a material impact
on its consolidated financial statement footnote disclosures. This FSP was
effective for financial statements issued after December 15, 2008. Adoption of
FSP 140-4 and FIN 46(R)-8 affects disclosures only and therefore, had no impact
on our consolidated financial statements.

ITEM 7A. Quantitative and Qualitative
Disclosures about Market Risk

We face
exposure to financial market risks, including adverse movements in foreign
currency exchange rates and changes in interest rates. These exposures may
change over time as business practices evolve and could have a material adverse
impact on our financial results. Our foreign currency exchange exposure is
primarily associated with product sales arrangements, European and Asian
repatriation or settlement of intercompany payables and receivables among
subsidiaries and its parent company, and/or investment/equity contingency
considerations denominated in the local currency where the functional currency
of the foreign subsidiary is the U.S. dollar. Substantially all of our
international product sales are payable in United States Dollars (USD) or in the
case of our ODG, and its wholly-owned subsidiaries, have operations service
sales, payable in GBP, and provide a natural hedge for receipts and local
payments. In light of the high proportion of our international businesses, we
expect the risk of any adverse movements in foreign currency exchange rates
could have an impact on our translated results within the Combined Statements of
Financial Position and Operations. For the fiscal year ended January 31, 2009,
the Companys ODG operations in the United Kingdom generated a foreign currency
translation loss of $12.0 million which was recorded as accumulated other
comprehensive loss reducing the Companys equity section of the balance sheet
over the prior period.

The carrying
amounts reflected in the consolidated balance sheet of cash and cash
equivalents, short-term marketable securities, trade receivables and trade
payables approximate fair value at January 31, 2009 due to the short maturities
of these instruments. We maintain investment portfolio holdings of various
issuers, types, and maturities. Our cash and marketable securities include cash
equivalents, which we consider to be investments purchased with original
maturities of three months or less. Given the short maturities and investment
grade quality of the portfolio holdings at January 31, 2009, a sharp rise in
interest rates should not have a material adverse impact on the fair value of
our investment portfolio. Additionally, our long term marketable investments,
have fixed interest rates, and therefore are not subject to any interest rate
exposure.

39

---

ITEM 8. Financial Statements and
Supplementary Data

See the consolidated financial
statements fields as part of this Annual Report on Form 10-K as listed under
Item 15 below.

ITEM 9. Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure

None.

ITEM 9A. Controls and Procedures

(A) Evaluation of Disclosure Controls
and Procedures

We evaluated
the effectiveness of our disclosure controls and procedures, as defined in the
Securities Exchange Act of 1934, as amended (the Exchange Act) Rule 13a-15(e),
as of the end of the period covered by this Annual Report on Form 10-K. William
C. Styslinger, III, our Chief Executive Officer, and Kevin M. Bisson, our Chief
Financial Officer, participated in this evaluation. Based upon that evaluation,
Messrs. Styslinger and Bisson concluded that our disclosure controls and
procedures were effective as of the end of the period covered by the report.

(B) Report of Management on Internal
Control over Financial Reporting

Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control system was designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.

Our internal
control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our assets; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made
only in accordance with authorizations of our management and directors, and
(iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on the financial statements.

Because of
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

Our
management assessed the effectiveness of our internal control over financial
reporting as of January 31, 2009. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) inInternal
ControlIntegrated Framework.Based on our
assessment, management concluded that, as of January 31, 2009, our internal
control over financial reporting was effective based on those criteria.

The
effectiveness of our internal control over financial reporting as of January 31,
2009 has been audited by Grant Thornton LLP, our independent registered public
accounting firm, as stated in their report which is included under Item 9A(D) of
this Annual Report.

(C) Changes in Internal Control over
Financial Reporting

As a result
of the evaluation completed by management, and in which Messrs. Styslinger and
Bisson participated, we have concluded that there were no changes during the
fiscal quarter ended January 31, 2009 in our internal control over financial
reporting, which have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

40

---

(D) Audit Report of the Registered
Public Accounting Firm

REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
of SeaChange International, Inc.

We have audited SeaChange International,
Inc.s (a Delaware Corporation) internal control over financial reporting as of
January 31, 2009, based on criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). SeaChange International, Inc.s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Managements Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on SeaChange
International, Inc.s internal control over financial reporting based on our
audit.

We conducted our audit in accordance with
the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.

A companys internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. A companys internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys
assets that could have a material effect on the financial statements.

Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

In our opinion, SeaChange International,
Inc. maintained, in all material respects, effective internal control over
financial reporting as of January 31, 2009, based on criteria established inInternal ControlIntegrated
Frameworkissued by COSO.

We also have audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of SeaChange International, Inc. as of January
31, 2009 and 2008, and the related consolidated statement of operations,
stockholders equity and comprehensive income (loss), and cash flows for each of
the three years in the period ended January 31, 2009and our report dated April 14,
2009expressed an unqualified opinion.

/s/ Grant Thornton LLP

Boston, Massachusetts April 14, 2009

41

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ITEM 9B. Other Information

None.

PART III

ITEM 10.
Directors, Executive Officers and Corporate Governance

Information
concerning the directors of SeaChange is hereby incorporated by reference from
the information contained under the heading Election of Directors in
SeaChanges definitive proxy statement related to SeaChanges Annual Meeting of
Stockholders to be held on or about July 15, 2009 which will be filed with the
Commission within 120 days after the close of the fiscal year (the Definitive
Proxy Statement).

Certain
information concerning directors and executive officers of SeaChange is hereby
incorporated by reference to the information contained under the headings
Information Concerning Executive Officers, and Section 16(a) Beneficial
Ownership Reporting Compliance, Availability of Corporate Governance
Documents and Audit Committee in our Definitive Proxy Statement.

ITEM 11. Executive Compensation

Information
concerning executive compensation is hereby incorporated by reference to the
information contained under the headings Compensation Discussion and Analysis
and Compensation of Directors in the Definitive Proxy Statement.

ITEM 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters

Information
concerning security ownership of certain beneficial owners and management is
hereby incorporated by reference to the information contained under the headings
Securities Ownership of Certain Beneficial Owners and Management and
Compensation Discussion and Analysis in the Definitive Proxy Statement.

ITEM 13. Certain Relationships and
Related Transactions, and Director Independence

Information
concerning certain relationships and related transactions is hereby incorporated
by reference to the information contained under the heading Certain
Relationships and Related Transactions and Determination of Director
Independence in the Definitive Proxy Statement.

ITEM 14. Principal Accountant Fees and
Services

Information
concerning Principal accountant fees and services is hereby incorporated by
reference to the information contained under the heading Ratification of
Appointment of Independent Registered Public Accounting Firm in the Definitive
Proxy Statement.

42

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PART IV

ITEM 15. Exhibits and Financial
Statement Schedules.

(a)(1) INDEX TO THE CONSOLIDATED
FINANCIAL STATEMENTS

The following Consolidated Financial
Statements of the Registrant are filed as part of this Annual Report on Form
10-K:

|                                                                                                                                 | Page
|-------------------------------------------------------------------------------------------------------------------------------- | ----
|Report of Independent Registered Public Accounting Firm                                                                          | 49  
|Consolidated
      Balance Sheet as of January 31, 2009 and 2008                                                                 | 50  
|Consolidated Statement of Operations for the years ended January
      31, 2009, 2008 and 2007                                   | 51  
|Consolidated
      Statement of Stockholders Equity and Comprehensive Income (Loss) for the
      years ended January 31, 2009, |     
|2008 and 2007                                                                                                                    | 52  
|Consolidated Statement of Cash Flows for the years ended January
      31, 2009, 2008 and 2007                                   | 53  
|Notes to
      Consolidated Financial Statements                                                                                 | 54  

(a)(2) INDEX TO FINANCIAL STATEMENT
SCHEDULE

The following Financial Statement
Schedule of the Registrant is filed as part of this report:

|                                                           | Page
|---------------------------------------------------------- | ----
|Schedule IIValuation and Qualifying Accounts and
Reserves | 83  

Schedules
not listed above have been omitted because the information requested to be set
forth therein is not applicable or is shown in the accompanying consolidated
financial statements or notes thereto.

(a)(3) INDEX TO EXHIBITS

See attached Exhibit Index of this
Annual Report on Form 10-K.

(b) EXHIBITS

The Company
hereby files as part of this Form 10-K the Exhibits listed in Item 15 (a) (3)
above. Exhibits which are incorporated herein by reference can be inspected and
copied at the public reference facilities maintained by the Securities and
Exchange Commission (the Commission), 450 Fifth Street, Room 1024, N.W.,
Washington, D.C. 20549. Copies of such material can also be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates.

(c) FINANCIAL STATEMENT SCHEDULES

The Company
hereby files as part of this Form 10-K the consolidated financial statements
schedule listed in Item 15 (a) (2) above, which is attached hereto.

43

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SIGNATURES

Pursuant to
the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934,
SeaChange International, Inc. has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Dated: April 14, 2009

SEACHANGE
      INTERNATIONAL, INC.By:
    /s/     WILLIAM C. STYSLINGER, IIIWilliam C.
      Styslinger, IIIChief Executive
      Officer,Chairman of the
      Board and Director


POWER OF ATTORNEY AND
SIGNATURES

KNOW ALL MEN
BY THESE PRESENTS, that each person whose signature appears below constitutes
and appoints William C. Styslinger, III and Kevin M. Bisson, jointly and
severally, his attorney-in-fact, each with the power of substitution, for him in
any and all capacities, to sign any amendments to this Report on Form 10-K and
to file same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.

Pursuant to
the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

|Signature                                            |  | Title(s)                                           |  | Date                
|---------------------------------------------------- |  | -------------------------------------------------- |  | --------------------
|                                                    
|/s/    
      WILLIAM C.
      STYSLINGER,
      III |  | Chief Executive
      Officer, Chairman            |  | April 14,
      2009
|William C.
      Styslinger, III                     |  | of the Board and
      Director (Principal         |  |                     
|                                                     |  | Executive
      Officer)                           |  |                     
|                                                    
|/s/    
      KEVIN M.
      BISSON                  |  | Chief Financial
      Officer, Senior Vice         |  | April 14,
      2009
|Kevin M.
      Bisson                                |  | President,
      Finance and Administration,       |  |                     
|                                                     |  | Treasurer and
      Secretary (Principal Financial |  |                     
|                                                     |  | and Accounting
      Officer)                      |  |                     
|                                                     |  |                                                    |  |                     
|/s/    
      MARY PALERMO COTTON                    |  | Director                                           |  | April 14,
      2009
|Mary Palermo
      Cotton                            |  |                                                    |  |                     
|                                                    
|/s/    
      THOMAS F.
      OLSON                  |  | Director                                           |  | April 14,
      2009
|Thomas F.
      Olson                                |  |                                                    |  |                     
|                                                    
|/s/ CARLO SALVATORI                                  |  | Director                                           |  | April 14,
      2009
|Carlo
      Salvatori                                |  |                                                    |  |                     
|                                                    
|/s/    
      CARMINE VONA                           |  | Director                                           |  | April 14,
      2009
|Carmine
      Vona                                   |  |                                                    |  |                     

44

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EXHIBIT INDEX

|**Exhibit
      No.** |  | Description
|--------------------- |  | -----------
|2.1                   |  |            
|                      |  |            
|3.1                   |  |            
|                      |  |            
|3.2                   |  |            
|                      |  |            
|3.3                   |  |            
|                      |  |            
|4.1                   |  |            
|                      |  |            
|4.2                   |  |            
|                      |  |            
|4.3                   |  |            
|                      |  |            
|10.1                  |  |            
|                      |  |            
|10.2                  |  |            

45

---

|Exhibit
      No. |  | Description
|----------------- |  | -----------
|10.3              |  |            
|                  |  |            
|10.4              |  |            
|                  |  |            
|10.5              |  |            
|                  |  |            
|10.6              |  |            
|                  |  |            
|10.7              |  |            
|                  |  |            
|10.8              |  |            
|                  |  |            
|10.9              |  |            
|                  |  |            
|10.10             |  |            
|                  |  |            
|10.11             |  |            
|                  |  |            
|10.12             |  |            
|                  |  |            
|10.13             |  |            
|                  |  |            
|10.14             |  |            

46

---

|Exhibit
      No. |  | Description
|----------------- |  | -----------
|10.15             |  |            
|                  |  |            
|10.16             |  |            
|                  |  |            
|10.17             |  |            
|                  |  |            
|10.18             |  |            
|                  |  |            
|10.19             |  |            
|                  |  |            
|10.20             |  |            
|                  |  |            
|10.21             |  |            
|                  |  |            
|10.22             |  |            
|                  |  |            
|10.23             |  |            
|                  |  |            
|10.24             |  |            
|                  |  |            
|10.25             |  |            
|                  |  |            
|10.26             |  |            
|                  |  |            
|10.27             |  |            

47

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|Exhibit
      No. |  | Description
|----------------- |  | -----------
|10.28             |  |            
|                  |  |            
|10.29             |  |            
|                  |  |            
|10.30             |  |            
|                  |  |            
|10.31             |  |            
|                  |  |            
|21.1*             |  |            
|                  |  |            
|23.1*             |  |            
|                  |  |            
|24.1              |  |            
|                  |  |            
|31.1*             |  |            
|                  |  |            
|31.2*             |  |            
|                  |  |            
|32.1*             |  |            
|                  |  |            
|32.2*             |  |            

|* |  | Provided
  herewith.
|- |  | --------------------

48

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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
of SeaChange International, Inc.

We have audited the accompanying
consolidated balance sheets of SeaChange International, Inc. and subsidiaries (a
Delaware corporation) (collectively the Company) as of January 31, 2009 and
2008, and the related consolidated statements of operations, stockholders'
equity and comprehensive income (loss), and cash flows for each of the three
years in the period ended January 31, 2009. Our audits of the basic financial
statements included the financial statement schedule listed in the index
appearing under Item 15 (a) (2). These financial statements and financial
statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements
and financial statement schedule based on our audits.

We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the
financial position of SeaChange International, Inc. and subsidiaries as of
January 31, 2009 and 2008, and the results of their operations and their cash
flows for each of the three years in the period ended January 31, 2009, in
conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth
therein.

We also have audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States),
SeaChange International, Inc.s internal control over financial reporting as of
January 31, 2009, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated April 14, 2009
expressed an unqualified opinion thereon.

/s/ Grant Thornton LLPBoston,
MassachusettsApril 14, 2009

49

---

|SEACHANGE INTERNATIONAL, INC.                                                                              
|-----------------------------------------------------------------------------------------------------------
|CONSOLIDATED BALANCE SHEET                                                                                 
|(in
      thousands, except share data)                                                                    
|                                                                                                           
|                                                                                                           
|Assets                                                                                                     
|Current
    assets:                                                                                        
|Cash and cash
      equivalents                                                                            
|Restricted cash                                                                                            
|Marketable
securities                                                                                      
|Accounts receivable, net of
      allowance for doubtful accounts of $853 and $663, respectively           
|Income taxes
    receivable                                                                                
|Unbilled receivables                                                                                       
|Inventories, net                                                                                           
|Prepaid expenses and other
      current assets                                                            
|Total current assets                                                                                       
|Property and equipment,
      net                                                                          
|Marketable securities, long-term                                                                           
|Investments in
      affiliates                                                                            
|Intangible assets, net                                                                                     
|Goodwill                                                                                                   
|Other
      assets                                                                                         
|Total assets                                                                                               
|Liabilities and Stockholders Equity                                                                       
|Current
      liabilities:                                                                                 
|Accounts payable                                                                                           
|Income taxes payable                                                                                       
|Other accrued
    expenses                                                                                 
|Customer deposits                                                                                          
|Deferred revenues                                                                                          
|Total current liabilities                                                                                  
|Deferred revenue, long-term                                                                                
|Distribution and losses
      in excess of investment                                                      
|Deferred tax liabilities and taxes payable, long-term                                                      
|Total liabilities                                                                                          
|                                                                                                           
|Commitments and contingencies (Note 10)                                                                    
|Stockholders
      Equity:                                                                                 
|Convertible preferred stock, $0.01 par value, 5,000,000 shares
      authorized, none issued or outstanding
|Common stock, $0.01 par
      value;100,000,000 shares authorized; 31,822,838 and                          
|29,944,095 shares issued;
      30,949,457 and 29,904,311 shares outstanding, respectively                 
|Additional paid-in capital                                                                                 
|Treasury stock, at cost
      873,381 and 39,784 common shares , respectively                              
|Accumulated deficit                                                                                        
|Accumulated other
      comprehensive (loss) income                                                        
|Total stockholders equity                                                                                 
|Total liabilities and
      stockholders equity                                                           

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

50

---

|SEACHANGE INTERNATIONAL, INC.                                                             
|------------------------------------------------------------------------------------------
|CONSOLIDATED STATEMENT OF OPERATIONS                                                      
|(in
      thousands, except per share data)                                               
|                                                                                          
|                                                                                          
|Revenues:                                                                                 
|Products                                                                                  
|Services                                                                                  
|                                                                                          
|Cost of
      revenues:                                                                   
|Products                                                                                  
|Services                                                                                  
|                                                                                          
|Gross profit                                                                              
|Operating
      expenses:                                                                 
|Research and
    development                                                              
|Selling and
marketing                                                                     
|General and
      administrative                                                          
|Amortization of
      intangibles                                                         
|                                                                                          
|Income (loss) from
      operations                                                       
|Interest income                                                                           
|Interest
    expense                                                                      
|Other
      (expense) income, net                                                         
|Impairment on
      investment in affiliate                                               
|Gain on
      sale of investment in affiliate                                             
|Income (loss) before income
      taxes and equity (loss) income in earnings of affiliates
|Income
      tax (expense) benefit                                                        
|Equity (loss) income in
      earnings of affiliates, net of tax                          
|Net income (loss)                                                                         
|Earnings (loss) per
      Share:                                                          
|Basic income (loss) per
      share                                                       
|Diluted income (loss) per
      share                                                     
|Weighted average common shares outstanding:                                               
|Basic                                                                                     
|Diluted                                                                                   

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

51

---

|SEACHANGE INTERNATIONAL,
      INC.                                                 
|------------------------------------------------------------------------------------
|CONSOLIDATED STATEMENT OF
      STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
|(in thousands, except share
      data)                                             
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Balance
      at January 31, 2006                                                   
|Issuance of common
      stock                                                      
|pursuant to exercise of                                                             
|stock options                                                                       
|Issuance of common stock                                                            
|in connection with the                                                              
|employee stock purchase plan                                                        
|Issuance of common
      stock                                                      
|pursuant to vesting of                                                              
|restricted stock units                                                              
|Issuance of common stock                                                            
|pursuant to second earnout                                                          
|for ODG acquisition (Note 8)                                                        
|Stock-based
      compensation expense                                              
|Change
      in fair value on                                                       
|marketable securities,                                                              
|net of tax                                                                          
|Translation
      adjustment                                                        
|Net
      loss                                                                      
|Reversal of
      unearned                                                          
|compensation upon                                                                   
|adoption of SFAS 123R                                                               
|Cumulative effect of adjustment                                                     
|based on the adoption of                                                            
|EITF 06-02                                                                          
|Cumulative effect of
      adjustment                                               
|based on the adoption of                                                            
|FIN 48                                                                              
|Comprehensive loss                                                                  
|Balance January 31,
      2007                                                      
|Issuance of common stock                                                            
|pursuant to exercise of                                                             
|stock options                                                                       
|Issuance of common
      stock                                                      
|in connection with the                                                              
|employee stock purchase plan                                                        
|Issuance of common stock                                                            
|pursuant to vesting of                                                              
|restricted stock units                                                              
|Stock-based
      compensation expense                                              
|Change
      in fair value on                                                       
|marketable securities,                                                              
|net of tax                                                                          
|Translation adjustment                                                              
|Net income                                                                          
|Comprehensive income                                                                
|Balance at January 31, 2008                                                         
|Issuance of common
      stock                                                      
|pursuant to exercise of                                                             
|stock options                                                                       
|Issuance of common stock                                                            
|in connection with the                                                              
|employee stock purchase plan                                                        
|Issuance of common
      stock                                                      
|pursuant to vesting of                                                              
|restricted stock units                                                              
|Issuance of common stock                                                            
|pursuant to third earnout                                                           
|for ODG acquisition                                                                 
|Stock-based
      compensation expense                                              
|Purchase of treasury shares                                                         
|Change in fair value
      on                                                       
|marketable securities,                                                              
|net of tax                                                                          
|Translation adjustment                                                              
|Net income                                                                          
|Comprehensive loss                                                                  
|Balance at January 31,
      2009                                                   

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

52

---

|SEACHANGE INTERNATIONAL, INC.                                                                 
|----------------------------------------------------------------------------------------------
|CONSOLIDATED STATEMENT OF CASH FLOWS                                                          
|(in
      thousands)                                                                          
|                                                                                              
|                                                                                              
|Cash
      flows from operating activities:                                                   
|Net income (loss)                                                                             
|Adjustments to reconcile net
      income (loss) to net cash provided by operating activities:
|Depreciation                                                                                  
|Amortization of intangibles and capitalized software                                          
|Impairment of capitalized software                                                            
|Inventory valuation charge                                                                    
|Provision for doubtful accounts receivable                                                    
|Discounts earned and amortization of premiums on marketable
      securities                  
|Equity loss (income) in earnings of affiliates                                                
|Gain on sale of investment in affiliate                                                       
|Impairment on investment in affiliates                                                        
|Stock-based compensation expense                                                              
|Deferred income taxes                                                                         
|Changes in operating assets and liabilities:                                                  
|Accounts receivable                                                                           
|Unbilled receivables                                                                          
|Inventories                                                                                   
|Income taxes receivable                                                                       
|Prepaid expenses and other assets                                                             
|Accounts payable                                                                              
|Income taxes payable                                                                          
|Accrued expenses                                                                              
|Accrued litigation reserve                                                                    
|Customer deposits                                                                             
|Deferred revenues                                                                             
|Other                                                                                         
|Net cash provided by operating activities                                                     
|Cash
      flows from investing activities:                                                   
|Purchases of property and
      equipment                                                     
|Proceeds from sale of property
      and equipment                                            
|Purchases of marketable
      securities                                                      
|Proceeds from sale and
      maturity of marketable securities                                
|Acquisition of businesses and
      payment of contingent consideration, net of cash acquired 
|Capital distribution from
      investment in affiliate                                       
|Proceeds from sale of
      investment in affiliate                                           
|(Deposit) release of
      restricted cash                                                    
|Investments in
      affiliates                                                               
|Net cash (used in) provided by investing activities                                           
|Cash flows from
      financing activities:                                                   
|Purchase of treasury
      stock                                                              
|Proceeds from issuance of
      common stock relating to the stock plans                      
|Net cash (used in) provided by financing activities                                           
|Effect of exchange
      rates on cash                                                        
|Net
      (decrease) increase in cash and cash equivalents                                    
|Cash and cash
      equivalents, beginning of period                                          
|Cash
      and cash equivalents, end of period                                                
|Supplemental disclosure
      of cash flow information:                                       
|Income taxes paid                                                                             
|Interest paid                                                                                 
|Supplemental disclosure of non-cash activities:                                               
|Transfer of items originally
      classified as inventories to equipment                     
|Issuance of equity for ODG
      contingent consideration                                     
|Conversion of accounts
      receivable to equity related to investment in affiliate          

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

53

---

SEACHANGE INTERNATIONAL,
INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1. Nature of Business

SeaChange
International, Inc. (SeaChange or the Company), headquartered in Acton,
Massachusetts, is a leading developer, manufacturer and marketer of digital
video systems and services including the aggregation, licensing, storage,
management and distribution of video, television programming, and advertising
content to cable system operators, telecommunications companies and broadcast
television companies.

2. Summary of Significant Accounting
Policies

Significant
accounting policies followed in the preparation of the accompanying consolidated
financial statements are as follows:

Use of
Estimates

The
preparation of these financial statements in conformity with accounting
principles generally accepted in the United States of America requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and disclosure of contingent assets
and liabilities. On an ongoing basis, management evaluates these estimates and
judgments, including those related to revenue recognition, valuation of
inventory and accounts receivable, valuation of investments and income taxes,
stock-based compensation, goodwill, intangible assets and related amortization.
The Company bases these estimates on historical and anticipated results and
trends and on various other assumptions that the Company believes are reasonable
under the circumstances, including assumptions as to future events. These
estimates form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. By
their nature, estimates are subject to an inherent degree of uncertainty. Actual
results may differ from managements estimates.

Principles of
Consolidation

The Company
consolidates the financial statements of its wholly-owned subsidiaries and all
intercompany accounts are eliminated in consolidation. SeaChange also holds
minority investments in the capital stock of certain private companies having
product offerings or customer relationships that have strategic importance. The
Company evaluates its equity and debt investments and other contractual
relationships with affiliate companies in order to determine whether the
guidelines of FASB Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities( FIN 46R), as revised under FIN 46R should be applied in the financial
statements. FIN 46R addresses consolidation by business enterprises of variable
interest entities that possess certain characteristics. A variable interest
entity (VIE) is defined as an entity in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support. The primary beneficiary is required to
consolidate the financial position and results of the VIE. The Company has
concluded that it is not the primary beneficiary for any variable interest
entities during the fiscal year ended January 31, 2009.

The
Companys investments in affiliates include investments accounted for under the
cost method and the equity method of accounting. The investments that represent
less than a 20% ownership interest of the common shares of the affiliate are
carried at cost. Under the equity method of accounting, which generally applies
to investments that represent 20% to 50% ownership of the common shares of the
affiliate, SeaChanges proportionate ownership share of the earnings or losses
of the affiliate are included in equity income in earnings of affiliates in
equity income (loss) in earnings of affiliates in the consolidated statement of
operations.

The Company
periodically review indicators of the fair value of our investments in
affiliates in order to assess whether available facts or circumstances, both
internally and externally, may suggest an other than temporary decline in the
value of the investment. The carrying value of an investment in an affiliate may
be affected by the affiliates ability to obtain adequate funding and execute
its business plans, general market conditions, industry considerations specific
to the affiliates business, and other factors. The inability of an affiliate to
obtain future funding or successfully execute its business plan could adversely
affect our equity earnings of the affiliate in the periods affected by those
events. Future adverse changes in market conditions or poor operating results of
the affiliates could result in equity losses or an inability to recover the
carrying value of the investments in affiliates that may not be reflected in an
investments current carrying value, thereby possibly requiring an impairment
charge in the future. We record an impairment charge when we believe an
investment has experienced a decline in value that is
other-than-temporary.

54

---

Revenue Recognition and
Allowance for Doubtful Accounts

Revenues
from sales of hardware, software and systems that do not require significant
modification or customization of the underlying software are recognized when
title and risk of loss has passed to the customer, there is evidence of an
arrangement, fees are fixed or determinable and collection of the related
receivable is considered probable. Customers are billed for installation,
training, project management and at least one year of product maintenance and
technical support at the time of the product sale. Revenue from these activities
are deferred at the time of the product sale and recognized ratably over the
period these services are performed. Revenue from ongoing product maintenance
and technical support agreements are recognized ratably over the period of the
related agreements. Revenue from software development contracts that include
significant modification or customization, including software product
enhancements, is recognized based on the percentage of completion contract
accounting method using labor efforts expended in relation to estimates of total
labor efforts to complete the contract. For contracts, where some level of
profit is assured but the Company is only able to estimate ranges of amounts of
total contract revenue and total contract cost, SeaChange uses the lowest
probable level of profits in accounting for the contract revenues and costs.
Accounting for contract amendments and customer change orders are included in
contract accounting when executed. Revenue from shipping and handling costs and
other out-of-pocket expenses reimbursed by customers are included in revenues
and cost of revenues. SeaChanges share of intercompany profits associated with
sales and services provided to affiliated companies are eliminated in
consolidation in proportion to our equity ownership.

SeaChanges
transactions frequently involve the sales of hardware, software, systems and
services in multiple element arrangements. Revenues under multiple element
arrangements are recorded based on the residual method of accounting. Under this
method, the total arrangement value is allocated first to undelivered elements,
based on their fair values, with the remainder being allocated to the delivered
elements. Where fair value of undelivered service elements has not been
established, the total arrangement value is recognized over the period during
which the services are performed. The amounts allocated to undelivered elements,
which may include project management, training, installation, maintenance and
technical support and certain hardware and software components, are based upon
the price charged when these elements are sold separately and unaccompanied by
the other elements. The amount allocated to installation, training and project
management revenue is based upon standard hourly billing rates and the estimated
time required to complete the service. These services are not essential to the
functionality of systems as these services do not alter the equipments
capabilities, are available from other vendors and the systems are standard
products. For multiple element arrangements that include software development
with significant modification or customization and systems sales where
vendor-specific objective evidence of the fair value does not exist for the
undelivered elements of the arrangement (other than maintenance and technical
support), percentage of completion accounting is applied for revenue recognition
purposes to the entire arrangement with the exception of maintenance and
technical support.

SeaChange
recognizes revenue for product and services only in those situations where
collection from the customer is probable. The Company performs ongoing credit
evaluations of customers financial condition but generally does not require
collateral. For some international customers, SeaChange requires an irrevocable
letter of credit to be issued by the customer before the purchase order is
accepted. The Company monitors payments from customers and assesses any
collection issues. The Company maintains allowances for specific doubtful
accounts and other risk categories of accounts based on estimates of losses
resulting from the inability of the Companys customers to make required
payments and records these allowances as a charge to general and administrative
expenses. SeaChange bases its allowances for doubtful accounts on historical
collections and write-off experience, current trends, credit assessments, and
other analysis of specific customer situations.

While such
credit losses have historically been within our expectations and the allowances
established, the Company cannot guarantee that we will continue to experience
the same credit loss rates that we have in the past. If the financial condition
of our customers were to change, additional allowances may be required or
established allowances may be considered unnecessary. Judgment is required in
making these determinations and our failure to accurately estimate the losses
for doubtful accounts and ensure that payments are received on a timely basis
could have a material adverse effect on our business, financial condition and
results of operations.

Any taxes
assessed by a governmental authority related to revenue-producing transactions
(e.g. sales or value-added taxes) are reported on a net basis and excluded from
revenues.

Concentration of Credit
Risk

Financial
instruments which potentially expose SeaChange to concentrations of credit risk
include cash equivalents, investments in treasury bills, certificates of
deposits and commercial paper, auction rate securities, trade accounts
receivable, accounts payable and accrued liabilities. The Company restricts its
cash equivalents and investments in marketable securities to repurchase
agreements with major banks and U.S. government and corporate securities which
are subject to minimal credit and market risk. For trade accounts receivable,
SeaChange evaluates customers financial condition, requires advancepayments from certain of its customers and
maintains reserves for potential credit losses. At January 31, 2009 and 2008,
SeaChange had an allowance for doubtful accounts of $853,000 and $663,000,
respectively, to provide for potential credit losses. Such losses have not
exceeded managements expectations to date.

55

---

The
following table summarizes revenues by significant customer where such revenue
exceeded 10% of total revenues of the fiscal year.

Year ended January
  31,2009
    
    2008
    
    2007Customer A
    
    31
    %
    
    32
    %
    
    37
    %Customer
    B
    
    12
    %
    
    13
    %
    
    16
    %


At January
31, 2009, two separate customers accounted for 27% and 14%, respectively, of
SeaChanges gross accounts receivable balance. At January 31, 2008, the same two
separate customers accounted for 23% and 18%, respectively, of SeaChanges gross
accounts receivable balance.

Cash Equivalents and
Marketable Securities

SeaChange
accounts for investments in accordance with SFAS, No. 115, Accounting for Certain Investment in Debt and Equity
Securities (SFAS 115). The Company
determines the appropriate classification of debt securities at the time of
purchase and reevaluates such designation as of each balance sheet date.
SeaChanges investment portfolio consists of money market funds, corporate debt
investments, asset-backed securities, government-sponsored enterprises, and
state and municipal obligations. All highly liquid investments with an original
maturity of three months or less when purchased are considered to be cash
equivalents. All cash equivalents are carried at cost, which approximates fair
value. SeaChanges marketable securities are classified as available-for-sale
and are reported at fair value with unrealized gains and losses, net of tax,
reported in stockholders equity as a component of accumulated other
comprehensive income or loss. The amortization of premiums and accretions of
discounts to maturity are computed under the effective interest method and is
included in interest income. Interest on securities is recorded as earned and is
also included in interest income. Any realized gains or losses would be shown in
the accompanying consolidated statements of operations in other income or
expense.

The Company evaluates its
investments on a regular basis to determine whether an other-than-temporary
decline in fair value has occurred. This evaluation consists of a review of
several factors, including, but not limited to: the length of time and extent
that an investment has been in an unrealized loss position; the existence of an
event that would impair the issuer's future earnings potential; and the
Companys intent and ability to hold an investment for a period of time
sufficient to allow for any anticipated recovery in fair value. Declines in
value below cost for investments where it is considered probable that all
contractual terms of the investment will be satisfied, is due primarily to
changes in interest rates, and where the company has the intent and ability to
hold the investment for a period of time sufficient to allow a market recovery,
and are not assumed to be other-than-temporary. Any other-than-temporary
declines in fair value are recorded in earnings and a new cost basis for the
investment is established.

*Inventories and Reserves for Obsolescence*

Inventories
are stated at the lower of cost or net realizable value. Cost is determined
using the first-in, first-out (FIFO) method. Inventories consist primarily of
components and subassemblies and finished products held for sale. All of
SeaChanges hardware components are purchased from outside vendors. The value of
inventories are reviewed quarterly to determine that the carrying value is
stated at the lower of cost or net realizable value. SeaChange records charges
to reduce inventory to its net realizable value when impairment is identified
through the quarterly review process. For inventory that has been written down
to its net realizable value, the reserve is released upon sale or disposal of
this inventory. The obsolescence evaluation is based upon assumptions and
estimates about future demand and possible alternative uses and involves
significant judgments. For the years ended January 31, 2009, 2008, and 2007, we
recorded inventory write-downs of $1.0 million, $2.1 million, and $1.1
million.

*Property and Equipment*

Property and
equipment consists of land and buildings, office and computer equipment,
leasehold improvements, demonstration equipment, deployed assets and spare
components and assemblies used to service SeaChanges installed base.

Demonstration equipment consists of systems manufactured by SeaChange for
use in marketing and selling activities. Property and equipment are recorded at
cost and depreciated using the straight-line method over their estimated useful
lives. Leasehold improvements are amortized over the shorter of their estimated
useful lives or the term of the respective leasesusing the straight-line method. Deployed assets consist of movie systems
owned and manufactured by SeaChange that are installed in a hotel environment.
Deployed assets are depreciated over the life of the related service agreements.
Capitalized service and spare components are depreciated over the estimated
useful lives using the straight-line method. Maintenance and repair costs are
expensed as incurred. Significant improvements are capitalized and depreciated.
Upon retirement or sale, the cost of the assets disposed of, and the related
accumulated depreciation, are removed from the accounts, and any resulting gain
or loss is included in the determination of net income.

56

---

Goodwill and Long-Lived
Assets

The Company
accounts for business acquisitions in accordance with SFAS No. 141,Business Combinations, which requires that the purchase method of accounting be
used for all business combinations. The Company determines and records the fair
values of assets acquired and liabilities assumed as of the dates of
acquisition. The Company recognizes the excess of the purchase price over the
fair value of the net assets acquired as goodwill. At the time of acquisition,
goodwill is assigned to the operating segment as the applicable reporting unit
for the goodwill impairment review. Goodwill is not amortized, but is evaluated
for impairment, at the reporting unit level, annually in the third fiscal
quarter. Goodwill of a reporting unit also is tested for impairment on an
interim basis in addition to the annual evaluation if an event occurs or
circumstances change such as declines in sales, earnings or cash flows, decline
in our stock price, or material adverse changes in the business climate, which
would more likely than not reduce the fair value of a reporting unit below its
carrying amount. The process of evaluating goodwill for impairment requires
several judgments and assumptions to be made to determine the fair value of the
reporting units, including the method used to determine fair value, discount
rates, expected levels of cash flows, revenues and earnings, and the selection
of comparable companies used to develop market based assumptions.

In the third
quarter of fiscal 2009, the Company changed the timing of its annual goodwill
impairment testing for its Media Services reporting unit from October 31, 2008
to August 1, 2008. This change did not delay, accelerate or avoid an impairment
charge. SeaChange completed the annual impairment tests of goodwill associated
with the Software, Servers and Storage and Media Services segments and
determined that as of August 1, 2008 no adjustment was required to the carrying
value of goodwill based on the analyses performed. However, there can be no
assurance that goodwill will not become impaired in future periods.

SeaChange
also evaluates property and equipment, intangible assets and other long-lived
assets on a regular basis for the existence of facts or circumstances, both
internal and external that may suggest an asset is not recoverable. If such
circumstances exist, SeaChange evaluates the carrying value of long-lived assets
to determine if impairment exists based upon estimated undiscounted future cash
flows over the remaining useful life of the assets and compares that value to
the carrying value of the assets. SeaChanges cash flow estimates contain
managements best estimates, using appropriate and customary assumptions and
projections at the time.

Intangible
assets consist of customer contracts, completed technology, patents and
trademarks and are respectively assigned to the operating segments. The
intangible assets are amortized to cost of sales and operating expenses, as
appropriate, on a straight-line or accelerated basis in order to reflect the
period that the assets will be consumed.

SeaChange
develops software for resale in markets that are subject to rapid technological
change, new product development and changing customer needs. The time period
during which software development costs can be capitalized from the point of
reaching technological feasibility until the time of general product release is
very short, and consequently, the amounts that could be capitalized are not
material to the Companys financial position or results of operations. Software
development costs relating to sales of software requiring significant
modification or customization are charged to costs of product revenues.

During
fiscal 2008, the Company determined that purchased capitalized software licenses
that were classified as Other assets on the Companys Condensed Consolidated
Balance Sheets were impaired as of July 31, 2007, resulting in a reduction to
Other assets of $4.1 million and a corresponding increase to Cost of revenues on
the Companys Consolidated Statement of Operations for the year ended January
31, 2008. The Company concluded that three separate capitalized software
licenses that were purchased for eventual use in current and future products of
the Company were impaired based on its determination that triggering events had
occurred during fiscal 2008 that warranted consideration of an impairment of
long-lived assets. The Company abandoned plans to use the capitalized software
licenses in any new or existing Company products during fiscal 2008. With no
identified future cash flows to substantiate further capitalization of these
software licenses, the Company determined these assets to be impaired during the
fiscal year ended January 31, 2008.

Amortization expense is recorded over the period of economic consumption or the
life of the agreement, whichever results in the higher expense, starting with
the first shipment of the product to a customer. Amortization expense was
$100,000, $4.8 million, and $346,000 for the fiscal years ended January 31,
2009, 2008, and 2007, respectively. Of the $4.8million fiscal year 2008 amortization, $4.1 million includes accelerated
amortization taken in the second quarter to align the recognition of
amortization expense with the remaining economic life of the purchased
software.

57

---

Income Taxes

Accounting for Income Taxes. As part
of the process of preparing our financial statements, we are required to
estimate our provision for income taxes in each of the jurisdictions in which we
operate. This process involves estimating our actual current tax exposure,
including assessing the risks associated with tax audits, together with
assessing temporary differences resulting from the different treatment of items
for tax and accounting purposes. These differences result in deferred tax assets
and liabilities, which are included within our balance sheet. Deferred income
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective income tax bases, and
operating loss and tax credit carryforwards. The Company evaluates the weight of
all available evidence to determine whether it is more likely than not that some
portion or all of the deferred income tax assets will not be realized. The
Company will record a valuation allowance if the likelihood of realization of
the deferred tax assets in the future is reduced based on an evaluation of
objective verifiable evidence. Significant management judgment is required in
determining our income tax expense (benefit), our deferred tax assets and
liabilities and any valuation allowance recorded against our deferred tax
assets. The Company has established a valuation allowance against our deferred
tax assets due to indications that they may not be fully realized. The amount of
the deferred tax asset considered realizable is subject to change based on
future events, including generating sufficient pre-tax income in future periods.
In the event that actual results differ from these estimates, our provision for
income taxes could be materially impacted. SeaChange does not provide for U.S.
federal and state income taxes on the undistributed earnings of its non-U.S.
subsidiaries that are considered indefinitely reinvested in the operations
outside the U.S.

*Income Tax Contingencies.*

In July 2006, the FASB issued Interpretation
No. 48,Accounting for Uncertainty in Income
Taxes(FIN 48). FIN 48 supersedes SFAS No.
5,Accounting for
Contingencies, as it relates to income tax
liabilities and lowers the minimum threshold a tax position is required to meet
before being recognized in the financial statements from probable to more
likely than not (i.e., a likelihood of occurrence greater than fifty percent).
Under FIN 48, the recognition threshold is met when an entity concludes that a
tax position, based solely on its technical merits, is more likely than not to
be sustained upon examination by the relevant taxing authority. Those tax
positions failing to qualify for initial recognition are recognized in the first
interim period in which they meet the more likely than not standard, or are
resolved through negotiation or litigation with the taxing authority, or upon
expiration of the statute of limitations. Derecognition of a tax position that
was previously recognized occurs when an entity subsequently determines that a
tax position no longer meets the more likely than not threshold of being
sustained. FIN 48 was adopted by the Company on February 1, 2007.

*Share-based Compensation.*

We account
for all employee and non-employee director stock-based compensation awards using
the provisions of SFAS No. 123 (revised 2004),Share-Based Payment(SFAS 123R). We
have continued to use the Black-Scholes pricing model as the most appropriate
method for determining the estimated fair value of all applicable awards.
Determining the appropriate fair value model and calculating the fair value of
share-based payment awards requires the input of highly subjective assumptions,
including the expected life of the share-based payment awards and stock price
volatility.Management estimated the volatility
based on the historical volatility of our stock. The assumptions used in
calculating the fair value of share-based payment awards represent managements
best estimates, but these estimates involve inherent uncertainties and the
application of managements judgment. As a result, if circumstances change and
we use different assumptions, our share-based compensation expense could be
materially different in the future. In addition, we are required to estimate the
expected forfeiture rate and only recognize expense for those shares expected to
vest. If our actual forfeiture rate is materially different from our estimate,
the share-based compensation expense could be significantly different from what
we have recorded in the current period. The estimated fair value of SeaChanges
stock-based options and performance-based restricted stock units, less expected
forfeitures, is amortized over the awards vesting period on a graded vesting
basis, whereas the restricted stock units and Employee Stock Purchase Plan stock
units are amortized on a straight line basis.

*Foreign Currency Translation*

SeaChange
has determined that the functional currency of all its foreign subsidiaries,
other than On Demand Group Limited (ODG) and its wholly-owned subsidiaries, is
the U.S. dollar. Where the U.S. dollar is designated as the functional currency
of an entity, SeaChange translates that entitys monetary assets and liabilities
denominated in local currencies into U.S. dollars (the functional and reporting
currency) at current exchange rates, as of each balance sheet date. Nonmonetary
assets (e.g., inventories, property, plant, and equipment and intangible assets)
and related income statement accounts (e.g., cost of sales, depreciation,
amortization of intangible assets) are translated at historical exchange rates
between the functional currency (the U.S. dollar)and the local currency. Revenue and other expense items are translated
using average exchange rates during the fiscal period. Translation adjustments
and transaction gains and losses on foreign currency transactions, and any
unrealized gains and losses on short-term inter-company transactions are
included in the accompanying consolidated statements of operations in other
income or expense.

58

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For the ODG
group where the local currency is designated as the functional currency, the
Company translates its assets and liabilities into U.S. dollars (the reporting
currency) at current exchange rates as of each balance sheet date. Revenue and
expense items are translated using average exchange rates during the period.
Cumulative translation adjustments are presented as a separate component of
stockholders equity. Exchange gains and losses on foreign currency transactions
and unrealized gains and losses on short-term inter-company transactions are
included in the accompanying consolidated statements of operations in other
income or expense, net.

The
aggregate foreign exchange transaction losses included as other (expense)
income, net on the Consolidated Statement of Operations were $951,000, $43,000
and $320,000 for the years ended January 31, 2009, 2008 and 2007,
respectively.

Comprehensive Income
(Loss)

SeaChange
presents accumulated other comprehensive income (loss) and total comprehensive
income (loss) in the Statement of Stockholders Equity. Total comprehensive
income (loss) consists primarily of net income (loss), cumulative translation
adjustments and unrealized gains and losses on marketable securities, net of
income tax.

*Advertising Costs*

Advertising
costs are charged to expense as incurred. Advertising costs were $340,000,
$300,000 and $313,000 for the years ended January 31, 2009, 2008 and 2007,
respectively.

*Earnings (Loss) Per Share*

Earnings
(loss) per share are presented in accordance with SFAS No. 128, Earnings Per
Share, which requires the presentation of basic earnings (loss) per share
and diluted earnings (loss) per share. Basic earnings (loss) per share is
computed by dividing earnings (loss) available to common shareholders by the
weighted-average shares of common stock outstanding during the period. For the
purposes of calculating diluted earnings (loss) per share, the denominator
includes both the weighted average number of shares of common stock outstanding
during the period and the weighted average number of potential common stock,
such as stock options, employee stock purchase plan, and restricted stock,
calculated using the treasury stock method.

For the
fiscal year ended January 31, 2009 and 2008 respectively, 3,699,228 and
4,673,372 of common shares issuable upon the exercise of stock options are
anti-dilutive and have been excluded from the diluted earnings per share
computation as the exercise prices of these common shares were above the market
price of the common stock for the periods indicated. For the fiscal year ended
January 31, 2007, 6,177,411 of common shares issuable upon the exercise of stock
options were anti-dilutive because SeaChange recorded a net loss for the period
and, therefore, have been excluded from the diluted loss per share
computation.

Below is a
summary of the shares used in calculating basic and diluted earnings (loss) per
share for the periods indicated:

|                                                                |  | Year ended January
  31,
|--------------------------------------------------------------- |  | ------------------------
|                                                                |  | 2009                    
|Weighted average shares used in calculating earnings
    (loss) |  |                         
|per shareBasic                                                 |  | 30,724,301              
|Dilutive common
      stock equivalents                         |  | 468,174                 
|Weighted average shares used in calculating earnings
    (loss) |  |                         
|per
      shareDiluted                                         |  | 31,192,475              

*New
Accounting Pronouncements*

In December
2007, the FASB issued SFAS No. 141 (R) Business Combinations (SFAS 141R).
SFAS 141R establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. SFAS 141R alsoprovides guidance for
recognizing and measuring the goodwill acquired in the business combination and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. The guidance will become effective as of the beginning of the
Companys fiscal year beginning after December 15, 2008. SFAS No. 141R is
effective for the Company beginning February 1, 2009. SFAS 141R will have an
impact on accounting for business combinations once adopted but the effect is
dependant upon acquisitions at that time.

59

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In December
2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 160Noncontrolling Interests in Consolidated
Financial Statementsan amendment of ARB No. 51(SFAS 160). SFAS 160 establishes accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. The guidance will become effective as of the beginning of the
Companys fiscal year beginning after December 15, 2008. SFAS 160 is effective
for the Company beginning February 1, 2009. The Company does not expect the
adoption of SFAS 160 to have a material impact on its results of operations and
financial position.

In March
2008, the FASB issued FASB Statement No. 161 (SFAS 161),Disclosures about Derivative Instruments and Hedging
Activities. SFAS 161 is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entitys financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The Company does not currently have any derivative instruments or
hedging activities. The Company does not expect the adoption of SFAS 161 to have
a material impact on its results of operations and financial
position.

On December
12, 2007, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 07-01,Accounting for Collaborative
Arrangements(EITF 07-01). EITF 07-01
defines collaborative arrangements and establishes reporting requirements for
transactions between participants in a collaborative arrangement and between
participants in the arrangement and third parties. EITF 07-01 also establishes
the appropriate income statement presentation and classification for joint
operating activities and payments between participants, as well as the
sufficiency of the disclosures related to these arrangements. EITF 07-01 is
effective for fiscal years beginning after December 15, 2008 (February 1, 2009,
for the Company). Companies are required to apply EITF 07-01 using a modified
version of retrospective transition for those arrangements in place at the
effective date. In addition, companies are required to report the effects of the
application of EITF 07-01 as a change in accounting principle through
retrospective application to all prior periods presented for all arrangements
existing as of the effective date, unless it is impracticable to apply the
effects of the change retrospectively. The Company is currently assessing the
impact that EITF 07-01 may have on its results of operations and financial
position.

On April 25,
2008, the FASB issued FASB Staff Position (FSP) FAS 142-3,Determination of the Useful Life of Intangible
Assets, which revises the factors that an
entity should consider to develop renewal or extension assumptions used in
determining the useful life of a recognized intangible asset. The FSP amends
paragraph 11(d) of SFAS 142. The FSP is effective for financial statements
issued for fiscal years beginning after December 15, 2008 (February 1, 2009, for
the Company) and for interim periods within those fiscal years. Early adoption
is prohibited. Entities should apply the FSPs guidance in determining the
useful life of an intangible asset prospectively to recognized intangible assets
acquired after the FSPs effective date. However, once effective, the FSPs
disclosure requirements apply prospectively to all recognized intangible assets,
including those acquired before the FSPs effective date. The Company is
currently assessing the impact that FAS 142-3 may have on its results of
operations and financial position.

Impact of Recently Adopted
Accounting Pronouncements

In September
2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
157,Fair Value Measurement(SFAS 157). SFAS 157 clarifies the principle that fair
value should be based on the assumptions market participants would use when
pricing an asset or liability and establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. Under SFAS 157,
fair value measurements would be separately disclosed by level within the fair
value hierarchy. The provisions of SFAS 157, as issued, are effective for the
fiscal years beginning after November 15, 2007. However, in February 2008, the
FASB issued FASB Staff Position No. 157-2,Effective Date of FASB Statement No. 157(FSP 157-2) that amended SFAS 157 to delay the effective date for all
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (that is, at least annually). FSP 157-2 defers the effective date of SFAS
157 to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years for items within the scope. The Company adopted the
required provisions of SFAS as of February 1, 2008 and had no material impact
upon the Companys results of operations and financial position.

In October
2008, the FASB issued FASB Staff Position No. FAS 157-3, Determining the Fair
Value of a Financial Asset in a Market That Is Not Active (FSP 157-3), which
clarifies the application of SFAS 157 when the market for a financial asset is
inactive. Specifically, FSP 157-3 clarifies how (1) managements internal
assumptions should be consideredin measuring
fair value when observable data are not present, (2) observable market
information from an inactive market should be taken into account, and (3) the
use of broker quotes or pricing services should be considered in assessing the
relevance of observable and unobservable data to measure fair value. The
guidance in FSP 157-3 was effective during the Companys third fiscal quarter,
and had no material impact upon the Companys results of operations and
financial position upon adoption.

60

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In December
2008, the FASB issued FASB Staff Position No. FAS 140-4 and FIN46(R)-8,
Disclosures by Public Entities (Enterprises) about
Transfers of Financial Assets and Interests in Variable Interest
Entities (FSP FAS 140-4 and FIN 46(R)-8). FSP
FAS 140-4 and FIN 46(R)-8 amends both FASB Statement No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
a replacement of FASB Statement No. 125, and FASB Interpretation No. 46(R),
Consolidation of Variable Interest Entities (revised December 2003) an
interpretation of ARB No. 51, to require public entities to provide additional
disclosures about transfers of financial assets and about their involvement with
variable interest entities. The Company does not anticipate that the adoption of
this statement in fiscal 2010 will have a material impact on its consolidated
financial statement footnote disclosures. This FSP was effective for financial
statements issued after December 15, 2008. Adoption of FSP 140-4 and FIN 46(R)-8
affects disclosures only and therefore, had no impact on our consolidated
financial statements.

3. Cash Equivalents and
Investments

The following is a summary of
available-for-sale securities, including the cost basis, aggregate fair value
and gross unrealized gains and losses, for cash equivalents, short-and long-term
marketable securities portfolio as of January 31, 2009 and 2008:

|                                                 |  |                |        | Gross      |   | Gross      |  |               
|------------------------------------------------ |  | -------------- | ------ | ---------- | - | ---------- |  | --------------
|                                                 |  |                |        | Unrealized |   | Unrealized |  | Estimated Fair
|                                                 |  | Cost           |        | Gains      |   | Losses     |  | Value         
|                                                 |  | (in thousands)
|January 31, 2009:                                |  |                |        |            |   |            |  |               
|Cash                                             |  | $              | 56,953 |            | $ | -          |  | $             
|Cash equivalents                                 |  |                | 5,505  |            |   | -          |  |               
|Cash and cash equivalents                        |  |                | 62,458 |            |   | -          |  |               
|US government agency issues                      |  |                | 9,280  |            |   | 163        |  |               
|Corporate debt
      securities                  |  |                | 4      |            |   | -          |  |               
|State and municipal obligations                  |  |                | -      |            |   | -          |  |               
|Marketable securitiesshort-term                 |  |                | 9,284  |            |   | 163        |  |               
|US government agency issues                      |  |                | 10,117 |            |   | 275        |  |               
|Corporate debt
      securities                  |  |                | 1,003  |            |   | 20         |  |               
|State and municipal obligations                  |  |                | 1,000  |            |   | -          |  |               
|Marketable securitieslong-term                  |  |                | 12,120 |            |   | 295        |  |               
|Total cash equivalents and marketable securities |  | $              | 83,862 |            | $ | 458        |  | $             
|January 31,
      2008:                          |  |                |        |            |   |            |  |               
|Cash                                             |  | $              | 61,547 |            | $ | -          |  | $             
|Cash
      equivalents                           |  |                | 1,812  |            |   | -          |  |               
|Cash and cash equivalents                        |  |                | 63,359 |            |   | -          |  |               
|US government
      agency issues                |  |                | 16,004 |            |   | 233        |  |               
|Corporate debt securities                        |  |                | 1,953  |            |   | 65         |  |               
|Asset-Backed
      Securites                     |  |                | 11     |            |   | -          |  |               
|State and municipal obligations                  |  |                | 1,000  |            |   | -          |  |               
|Marketable securitiesshort-term                 |  |                | 18,968 |            |   | 298        |  |               
|US government agency issues                      |  |                | 4,632  |            |   | 127        |  |               
|Asset Backed
      Securities                    |  |                | 503    |            |   | 10         |  |               
|Marketable securitieslong-term                  |  |                | 5,135  |            |   | 137        |  |               
|Total cash equivalents and marketable securities |  | $              | 87,462 |            | $ | 435        |  | $             

61

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During the years ended January 31,
2009, 2008, and 2007, available-for-sale securities were sold for total proceeds
of $8.0 million, $0, and $16.8 million, respectively. The gross realized gains
on those sales during fiscal years 2009, 2008, and 2007 were $26,000, $0, and
$0, respectively. The gross realized losses on those sales during fiscal years
2009, 2008, and 2007 were $0, $0, and $196,000, respectively. For purposes of
determining gross realized gains and losses, the cost of securities sold is
based on specific identification.

Contractual maturities of
available-for-sale debt securities at January 31, 2009 are as follows (in
thousands):

EstimatedFair ValueMaturity of one year or less
    $
    9,447Maturity between
      one and five years
    
    11,415Maturity greater than five years
    
    1,000Total
    $
    21,862


The Company concluded that there
were no declines in investments recorded as of January 31, 2009, 2008 and 2007
and the Company does not have any investments in a gross unrealized loss
position as of January 31, 2009 and 2008. The unrealized holding gains, net of
tax, on available-for-sale securities in the amount of $23,000, $449,000, and
$254,000 for the years ended January 31, 2009, 2008, and 2007, respectively,
have been included in stockholders equity as a component of accumulated other
comprehensive income or loss.

4. Fair Value
Measurements

The Company
adopted the provisions of Statement of Financial Account Standard No. 157 and
FASB Staff Position FAS 157-2, Fair Value
Measurements (SFAS 157 and FSP FAS 157-2) on February 1, 2008.
The adoption of these pronouncements did not have a material effect on the
Companys financial position or results of operations. Accordingly, the Company
is continuing to apply Statement of Financial Accounting Standard No. 115,
Accounting for Certain Investments in Debt and Equity
Securities (SFAS 115) for its available for sale securities with
offsetting unrealized gains and losses reported in other comprehensive income or
loss. Per SFAS 157, the Company is providing fair value measurement disclosures
of its available for sale securities in accordance with one of three levels of
fair value measurement.

SFAS 157
defines fair value to be the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date and emphasizes that fair value is a
market-based measurement, not an entity-specific measurement. It establishes a
fair value hierarchy and expands disclosures about fair value measurements in
both interim and annual periods. SFAS 157 enables the reader of the financial
statements to assess the inputs used to develop fair value measurements by
establishing a hierarchy for ranking the quality and reliability of the
information used to determine fair values. FSP FAS 157-2 defers the effective
date of SFAS 157 until January 2009 for non-financial assets and non-financial
liabilities that are recognized or disclosed in the financial statements on a
nonrecurring basis. SFAS 157 requires that assets and liabilities carried at
fair value will be classified and disclosed in one of the following three
categories:

Level 1: Quoted market prices in active
markets for identical assets or liabilities.

Level 2: Observable market based inputs or
unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not
corroborated by market data.

62

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The
Companys financial assets and liabilities that are measured at fair value on a
recurring basis as of January 31, 2009 are as follows:

January 31,
    
    Fair Value Measurements Using2009
    
    Level 1
    
    Level 2
    
    Level 3(in thousands)Financial assets:Available for sale marketable securities:Current marketable securities
    
    $
    9,447
    
    $
    9,447
    
    $
    -
    
    $
    -Non-current marketable securities
    
    
    12,415
    
    
    11,415
    
    
    -
    
    
    1,000Total
    
    $
    21,862
    
    $
    20,862
    
    $
    -
    
    $
    1,000


The Company
relies on mark to market valuations to record the fair value of the Companys
available for sale security assets which are measured under a Level 1 input.
These assets are publicly traded equity securities for which market prices are
readily observable and recorded under the guidelines of SFAS 115. At January 31,
2009, we had $9.4 million in short-term marketable securities and $12.4 million
in long-term marketable securities. Of the $21.9 million in available-for-sale
securities at January 31, 2009, the Company holds $1.0 million in auction rate
securities ("ARS") that were intended to provide liquidity via an auction
process that resets the applicable interest rate in the event there is no new
investment in these securities. Due to recent uncertainty in the credit markets,
this $1.0 million ARS holding in our investment portfolio has failed to settle
on its respective settlement date resulting in illiquidity in this investment.
Consequently, we have not been able to access these funds and do not expect to
do so until a future auction of these investments is successful or a buyer is
found outside the auction process. Although the maturity date of the underlying
security of our ARS investment is twenty-three years, we currently have
sufficient cash and cash equivalents, cash from operations and access to unused
credit facilities to meet our short term liquidity requirements and do not
anticipate that we will need to access our ARS investment. Accordingly, the Company has classified this investment at par value
which approximates fair value.

5. Consolidated Balance Sheet
Detail

Inventories consist of the
following:

Year ended January 31,2009
    
    2008(in thousands)Components and assemblies
    
    $
    8,501
    
    $
    9,979Finished
      products
    
    
    8,750
    
    
    4,336Total inventories,
    net
    
    $
    17,251
    
    $
    14,315


63

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Property and equipment, net consist
of the following:

Estimated
      useful
    
    Year ended January
  31,life (years)
    
    2009
    
    2008**(in
      thousands)**Land
    
    
    
    $
    4,165
    
    
    $
    3,063Buildings
    
    20
    
    
    15,940
    
    
    
    12,870Office furniture and equipment
    
    5
    
    
    2,887
    
    
    
    2,582Computer
      equipment, software and demonstration equipment
    
    3
    
    
    49,688
    
    
    
    45,394Deployed assets
    
    2-7
    
    
    3,280
    
    
    
    3,280Service and
      spare components
    
    5
    
    
    8,296
    
    
    
    7,252Leasehold improvements
    
    1-7
    
    
    1,993
    
    
    
    1,712Automobiles and
      trucks
    
    5
    
    
    592
    
    
    
    592Construction in progress
    
    
    
    
    3,413
    
    
    
    1390,254
    
    
    
    76,758Less - Accumulated depreciation and amortization
    
    
    
    
    (55,037
    )
    
    
    (48,692
    )Total property and equipment, net
    
    
    
    $
    35,217
    
    
    $
    28,066


Depreciation
and amortization expense of fixed assets was $7.2 million, $7.9 million and $7.8
million for the years ended January 31, 2009, 2008 and 2007,
respectively.

Other accrued expenses consist of
the following:

Year ended January
  31,2009
    
    2008(in thousands)Accrued consideration payable to former shareholders in
    ODG
    
    $
    -
    
    $
    8,105Accrued
      compensation and commissions
    
    
    5,107
    
    
    5,149Employee benefits
    
    
    1,935
    
    
    1,780Accrued
      other
    
    
    3,413
    
    
    2,353Deferred tax liabilities
    
    
    137
    
    
    93Total other accrued expenses
    
    $
    10,592
    
    $
    17,480


6. Investments in
Affiliates

SeaChange
periodically reviews indicators of the fair value of its investments in
affiliate companies in order to assess whether available facts or circumstances,
both internally and externally, may suggest an other than temporary decline in
the fair value of the investment. In fiscal year 2007, SeaChange expensed the
remaining $150,000 balance of one of its investments. There were no other
indications of other than temporary declines in the fair value of investments in
affiliates as of January 31, 2009 and 2008, respectively. The Companys
investments in affiliates under the cost method of accounting are as
follows:

Year ended January 31,2009
    
    2008(in thousands)Casa
    
    $
    8,243
    
    $
    8,243Minerva
    
    
    1,000
    
    
    1,000Insite One
    
    
    2,748
    
    
    2,416Visible
      World
    
    
    552
    
    
    509Other investments
    
    
    500
    
    
    500Total investments in affiliates
    
    $
    13,043
    
    $
    12,668


64

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Casa
Systems.In fiscal year 2006, the Company
invested $8.2 million in convertible preferred stock, representing a 19.8%
ownership interest, of Casa Systems, Inc. (Casa), a Massachusetts development
stage company that specializes in video-on-demand products within the
telecommunications and television markets. The investment is represented by
shares of convertible preferred stock, and the shares are convertible at
SeaChanges option into shares of Casas common stock on a one-to-one basis. The
convertible preferred stock accrues dividends at the rate per annum of $0.3832
per share and the payment of the cumulative accruing dividends must be declared
by the Board of Directors of Casa. SeaChange determined that Casa was a variable
interest entity (VIE) as defined by the accounting guidance of FIN 46R.
However, SeaChange concluded that it is not the primary beneficiary in Casa.

Accordingly,
since the Companys convertible preferred stock investment was not
in-substance common stock, and the investment is not a SFAS No. 115,Accounting for Certain Investments in Debt and
EquitySecurities, security, the cost method
of accounting would be required to record its convertible preferred investment
as long as the estimated fair value of Casas common stock continued to be
sufficient to support a determination that the convertible preferred stock was
not in-substance common stock. Consequently, SeaChange accounts for this
investment under the cost method of accounting. For fiscal 2009, 2008, and 2007,
Seachange purchased $98,000, $984,000, and $1.3 million of equipment from Casa
Systems.

Minerva.SeaChange owns 1.3 million
shares of preferred stock representing 2.5% of the total capital stock of
Minerva Networks, Inc. (Minerva), a California based company specializing in
software products for the telecommunications and television markets. The
preferred shares are convertible to 1.3 million shares of common stock under
certain conditions as defined in the Stock Purchase Agreement. SeaChange
accounts for this investment under the cost method of accounting. At the time of
the investment in Minerva, SeaChange entered into a Software License Agreement
with Minerva in which SeaChange agreed to purchase from Minerva a license for
its iTV Manager Software and related source code for $3.8 million. The license
and source code was purchased during fiscal year 2006. The Company capitalized
the purchase of the license and source code and will amortize the amount over
the expected life of the software license and source code. During the second
quarter of fiscal 2008, the Company wrote-off the remaining unamortized portion
of the capitalized purchased software licenses of $3.3 million since the Company
determined it would not use iTV Manager Software in any future
products.

*InSite One.*In fiscal year 2006, the Company invested $2.0 million for
5.9 million shares of 8% cumulative convertible preferred stock of InSite One,
Inc. (InSite). In conjunction with the Stock Purchase Agreement, SeaChange and
InSite entered into a Master Purchase Agreement in which InSite agreed to
purchase SeaChange digital storage products and services under the terms and
conditions defined in the agreement. Under the terms of this agreement and
during fiscal year 2007, SeaChange recorded revenue for equipment sold to
InSite. In exchange for the equipment, InSite issued a convertible note
receivable to SeaChange in the amount of $407,000, with an interest rate of 9%
per annum. The sale of equipment is considered substantive due to the utility of
the equipment to InSite and to the customers ability to pay for the equipment
without the additional financing. During the fiscal year 2007, InSite One
converted the note and accrued interest into approximately 600,000 shares of 8%
cumulative convertible preferred stock as part of an effort by InSite One to
refinance its capital structure. In February 2008, the Company agreed to convert
the outstanding accounts receivable balance of $332,000 as of January 31, 2008
for 474,300 shares of InSite Ones Series E Convertible Preferred Stock. The
Company had an approximately 12% share of the total capital stock of InSite One.
SeaChange accounts for this investment under the cost method of accounting. In
total, for fiscal years 2009, 2008, and 2007 SeaChange recognized revenues of
$164,000, $711,000, and $1.2 million, respectively, from InSite One.

Visible
World.SeaChange owns less than 5% of the
common and preferred stock of Visible World and is accounting for this
investment under the cost method of accounting. In fiscal 2004, SeaChange and
Visible World signed a revised Marketing Agreement in which SeaChange agreed to
receive warrants to purchase 2.8 million shares of preferred stock of Visible
World in lieu of future royalties that would have been earned by SeaChange
relating to revenue earned by Visible World in accordance with an agreement
between Visible World and Comcast Cable Corporation (Comcast). The warrants
vested over the five year term of the agreement between Visible World and
Comcast ending in the fourth quarter of fiscal year 2009. SeaChange estimated
the fair value of these warrants to be $223,000 and included the amount in
investments in affiliates with an offsetting amount included in deferred
revenue. SeaChange recognized the deferred revenue over a five year period, the
term of the agreement ending in the fourth quarter of fiscal year 2009. For
fiscal years 2009, 2008, and 2007, SeaChange recognized revenues of
approximately $703,000, $971,000, and $500,000 respectively, from Visible World.

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7. Acquisitions and
Dispositions

*On Demand
Group Limited*

In fiscal
year 2006, SeaChange purchased the remaining 72.4% of the outstanding capital
stock of the On Demand Group Limited (ODG), a company incorporated under the
laws of the United Kingdom. As a result of this acquisition, SeaChange owned
100% of ODG and acquired a 33.3% equity investment in FilmFlex Movies Limited
(FilmFlex), a company based in the United Kingdom. The acquisition provides
SeaChange with a broader range of service offerings that complement its existing
video-on-demand products and services. As a wholly-owned subsidiary, the
financial position and results of operations of ODG have been consolidated
subsequent to the acquisition date. Prior to the acquisition, SeaChange owned
27.6% of ODG and accounted for the investment under the equity method of
accounting.

Under the terms of the purchase agreement, SeaChange acquired the
outstanding shares in ODG it did not previously own in exchange for
approximately $14.0 million in cash consideration, including transaction costs
of $500,000. Two of the former shareholders of ODG became executive officers of
SeaChange in conjunction with the acquisition. The purchase agreement provided
for additional contingent consideration to the former shareholders of ODG, if
ODG met certain goals. The contingent consideration was paid in cash or issued
of SeaChange common stock in four installments. In May 2006, SeaChange paid $3.0
million in cash to satisfy the first installment. On June 30, 2006, SeaChange
and the former shareholders of ODG amended the original purchase agreement to
provide for the acceleration of the second installment of contingent
consideration in exchange for the issuance of 341,360 shares of SeaChanges
common stock having a fair market value of $2.3 million as of the date of the
amendment. In December 2007 SeaChange and the former shareholders of ODG amended
the original purchase agreement to provide the former shareholders of ODG
417,304 shares of SeaChanges common stock which was satisfied in March 2008
having a fair market value of $3.2 million as of the date of the amendment in
satisfaction of the third installment. On March 13, 2008, SeaChange and the
former stockholders of ODG amended the original purchase agreement to provide
for the satisfaction of the final contingent payment through the issuance in
March 2008 of 714,084 shares of SeaChange's common stock having a fair market
value of $4.9 million, as of the date of the amendment. As of January 31, 2008
the Company recorded the third and fourth contingent consideration installments
totaling $8.1 million, as additional goodwill for the step up acquisition of
ODG.

FilmFlex Movies Limited

As a result
of the ODG purchase, SeaChange acquired a 33.3% equity investment in FilmFlex
Movies Limited (FilmFlex), a company based in the United Kingdom. FilmFlex was
founded in 2004 by ODG, Columbia Pictures Corporation Limited (Sony) and Walt
Disney Company Limited (Disney) to provide high-quality movies for use in an
on-demand service. Each of the investors owned 33.3% of FilmFlex. SeaChanges
original investment in FilmFlex reflected the historical basis of ODGs recorded
assets and liabilities; whereas, the additional investment in FilmFlex that
resulted from the step acquisition of ODG was recorded at its estimated fair
value as of the date of the acquisition of ODG. The Company determined the fair
value of FilmFlex and the customer contracts based on the net present value of
the expected future cash flows. The value of the customer contracts was recorded
as an intangible asset with the balance of the FilmFlex fair value recorded as
equity method goodwill. SeaChange accounted for this investment under the equity
method of accounting. In fiscal 2005, ODG and FilmFlex executed an outsourcing
services agreement in which ODG provided FilmFlex with financial planning,
scheduling, marketing, production and operations support services. ODGs share
of profits from this agreement in proportion to its equity ownership interest
was eliminated in consolidation. SeaChanges proportionate share of Film Flexs
income was reported one month in arrears. ODG recognized revenues of $2.7
million (through December 21, 2007 when the Company sold its equity investment)
and $3.3 million from FilmFlex for fiscal years 2008 and 2007,
respectively.

On December 21, 2007, SeaChange sold all of the shares held by ODG in
FilmFlex to the two other existing shareholders in FilmFlex (Sony and Disney)
and to FilmFlex. The aggregate consideration received by ODG in connection with
this sale was $17.9 million in cash resulting in a gain of approximately $10.0
million. Concurrent with the FilmFlex divestiture, ODG executed a two year
outsourcing services agreement in which ODG will continue to provide FilmFlex
with selected planning, production and operations support services.

On Demand
Deutschland GmbH & Co. KG

On February 27,
2007, ODG entered into an agreement with Tele-Munchen Fernseh GmbH & Co.Produktionsgesellschaft (TMG) to create a joint
venture named On Demand Deutschland GmbH & Co. KG. On Demand Deutschland
specializes in establishing on-demand and pay-per-view services on multiple
platforms in German-speaking Europe. ODG contributed $2.8 million to acquire its
50% ownership interest in the joint venture of which $2.6 million consisted of
the fair value of customer contracts and content license agreements contributed
by ODG and $154,000 represented a cash contribution. The customer contracts and
licensed content had no book value. SeaChange determined that this investment is
an operating joint venture and does not require consolidation under the
accounting guidance of FIN 46R. Consequently, SeaChange accounts for this
investment under the equity method of accounting.

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ODGs
original investment in the joint venture was recorded at $154,000 representing
the US dollar equivalent of the initial cash contribution. The difference
between the book and fair value of the customer contracts and content license
agreements is being accreted over the expected five year life of the contracts
and recorded as a gain and an increase in the investment. This gain will be
partially offset by ODGs 50% share of the joint ventures amortization expense
over the same period related to the acquired contracts and content license
agreements. ODG also recorded a net payable amount to the joint venture of
$337,000 as of the joint venture formation date (February 27, 2007) reflecting
the transfer of net liabilities incurred by ODG related to the joint venture as
well as the joint ventures reimbursement of previously incurred costs by ODG of
$787,000 related to joint venture activities prior to its formation. Consistent
with EITF 89-7,Exchange of Assets or Interest
in a Subsidiary for a Noncontrolling Equity Interest in a New
Entity, ODG did not record other income in
connection with the reimbursement of these costs or any other gains as ODG is
deemed to have a commitment to support the operations of the joint venture. ODG
treated the reimbursement and other gain for a total of $832,000 as a capital
distribution in excess of the carrying value of its investment in the joint
venture. This capital distribution will be accreted over the expected five year
life of the customer contracts and recorded as a gain and an increase in the
investment in the joint venture. ODG recorded an income tax provision during
fiscal 2008 of $1.1 million for the taxable gain recognized by ODG related to
the $2.6 million contribution of customer contracts and content licenses to and
the reimbursement of previously paid costs from the joint venture.

ODG entered
into a Service Agreement with the joint venture whereby ODG provides content
aggregation, distribution, marketing and administration services to the joint
venture under an arms length fee structure. For the years ended January 31,
2009 and 2008, ODG recorded revenues of $1.5 million and $1.0 million, related
to the Service Agreement. ODGs share of profits from this agreement in
proportion to its equity ownership interest is eliminated in consolidation.

The
Shareholders Agreement requires ODG to provide cash contributions up to $4.2
million (USD equivalent) upon the request of the joint ventures management and
approval by the shareholders of the joint venture. ODG recorded its
proportionate share of the joint ventures losses for the fiscal years ended
January 31, 2009 and 2008 of $723,000 and $490,000. Due to the capital
distribution and ODGs share of the joint ventures net loss exceeding the book
value of its investment in the joint venture, the investment is recorded as a
long-term liability of $1.6 million and $1.3 million at January 31, 2009 and
2008, respectively.

Mobix Interactive
Limited

On November
19, 2008, ODG, a wholly-owned subsidiary of SeaChange entered into a Share
Purchase Agreement (the Share Purchase Agreement) providing for the purchase
by ODG of all the outstanding capital stock (the Mobix Shares) of Mobix
Interactive Limited (Mobix). Mobix is a London, England based company that
provides software and content services related to the deployment of mobile video
services for wireless network operators.

At the
closing, ODG paid the shareholders of Mobix approximately £2 million
(approximately $3 million USD) in cash for the Mobix Shares, with an additional
£1 million (approximately $1.5 million USD) deposited in escrow to be released
on the date certain performance goals have been satisfied or May 19,2009, with
the amount of the escrow being subject to reduction should there have been a
breach of the representations, warranties, covenants and agreements contained in
the Share Purchase Agreement. Subsequent to fiscal 2009, on March 16, 2009, ODG
released £500,000 from restricted cash (approximately $700,000 USD) to the
shareholders of Mobix upon meeting its first performance goal.

In addition,
under the earnout provisions in the Share Purchase Agreement, if Mobix meets
certain performance goals, over the next three year period ending November 19,
2011, primarily related to the financial performance of Mobix, SeaChange will be
obligated to make additional cash payments aggregating £8.3 million
(approximately $12.4 million USD). The contingent consideration will be reduced
or increased based upon Mobixs actual performance relative to the performance
goals. Any payout of contingent consideration will be recorded as additional
goodwill.

The
acquisition was accounted for under the purchase method of accounting.
Accordingly, the financial position and results of operations of Mobix business
have been consolidated subsequent to the acquisition date. The Company is
currently undergoing a valuation of the assets and liabilities acquired and it
is expected to finalize the purchase price allocation in the quarter ending
April 30, 2009. The allocation of the purchase price is preliminary based on the
Companys best estimates of fair values as of November 19, 2008 and is as
follows, subject to the final valuation results (in thousands):

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Consideration:Cash paid, net of cash
      acquired of $209
    
    $
    2,791Transaction costs
    
    
    413Total consideration
    
    $
    3,204Preliminary allocation of the purchase consideration:Liabilities assumed
    
    $
    (898
    )Tangible
      assets acquired
    
    
    592Goodwill
    
    
    3,510$
    3,204


SeaChange
determined that the goodwill included the value of the Mobix work force and
expected synergies in global sales and marketing, especially within the European
market, and in content services related to the deployment of mobile video
services for wireless network operators. The goodwill generated from the
acquisition is not tax deductible. The acquired assets, including goodwill, have
been assigned to the Media Service operating segment.

In addition,
under the earnout provisions in the Share Purchase Agreement, if Mobix meets
certain performance goals over the next three year period ending November 19,
2011, primarily related to the financial performance of Mobix, SeaChange will be
obligated to make additional cash payments aggregating £8.3 million
(approximately $12.4 million USD). The contingent consideration will be reduced
or increased based upon Mobixs actual performance relative to the performance
goals. Any payout of contingent consideration will be recorded as additional
goodwill.

8. Goodwill and Intangible Assets

At January 31, 2009 and 2008, the Company
had goodwill of $27.4 million and $29.5 million, respectively. The change in the
carrying amount of goodwill for the years ended January 31, 2009 and 2008 are as
follows:

|                                            |  | Broadband      |         | Services |   |          |   | Servers & |   | Media    |   |       |   |    
|------------------------------------------- |  | -------------- | ------- | -------- | - | -------- | - | --------- | - | -------- | - | ----- | - | ---
|                                            |  | Segment        |         | Segment  |   | Software |   | Storage   |   | Services |   | Total
|                                            |  | (in thousands)
|Balance at
      January 31, 2007           |  | $              | 11,169  |          | $ | 12,557   |   |           | $ | -        |   |       | $ | -  
|Contingent consideration-ODG
      goodwill |  |                | -       |          |   | 8,105    |   |           |   | -        |   |       |   | -  
|Sale of
      equity investment in Filmflex |  |                | -       |          |   | (2,533   | ) |           |   | -        |   |       |   | -  
|Cumulative
      translation adjustment     |  |                | -       |          |   | 173      |   |           |   | -        |   |       |   | -  
|Balance at
      January 31, 2008           |  |                | 11,169  |          |   | 18,302   |   |           |   | -        |   |       |   | -  
|Reallocation                                |  |                | (11,169 | )        |   | (18,302  | ) |           |   | 10,398   |   |       |   | 771
|Mobix
      acquisition                     |  |                | -       |          |   | -        |   |           |   | -        |   |       |   | -  
|Realized
      deferred tax asset (Note 14) |  |                | -       |          |   | -        |   |           |   | (236     | ) |       |   | (17
|Cumulative
      translation adjustment     |  |                | -       |          |   | -        |   |           |   | -        |   |       |   | -  
|Balance at January 31, 2009                 |  | $              | -       |          | $ | -        |   |           | $ | 10,162   |   |       | $ | 754

The goodwill
reallocation shown in the table above relates to the reorganization of the
Companys reportable segments finalized in the first quarter of fiscal 2009. The
goodwill formerly included in the Broadband and Services segments was allocated
between the Software, Servers and Storage and Media Services segments based on a
relative fair value approach using management estimates of fair value of the
segments. No impairment was recorded as a result of the change in segments. As
of August 1, 2008, SeaChange reviewed the recoverability of goodwill associated
with its three reporting units, Software, Servers and Storage and Media
Services, and determined that there was no goodwill impairment.

At January
31, 2009 and 2008, the Company had recorded net intangible assets of $4.6
million and $6.8 million respectively, consisting of customer contracts,
completed technology and trademarks.

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Intangible
assets, net, consisted of the following:

Customer
    
    Completed
    
    Trademark andIntangible Assets
    
    Contracts
    
    Technology
    
    Other
    
    TotalBalance as of January 31, 2008
    
    $
    14,392
    
    
    $
    3,068
    
    
    $
    1,038
    
    
    $
    18,498Cumulative
      translation adjustment
    
    
    (447
    )
    
    
    (201
    )
    
    
    (90
    )
    
    
    (738
    )Balance as of January 31, 2009
    
    $
    13,945
    
    
    $
    2,867
    
    
    $
    948
    
    
    $
    17,760Customer
    
    Completed
    
    Trademark andAccumulated
    Amortization
    
    Contracts
    
    Technology
    
    Other
    
    TotalBalance as of January 31, 2008
    
    $
    8,461
    
    
    $
    2,415
    
    
    $
    813
    
    
    $
    11,689Current period
      amortization
    
    
    1,491
    
    
    
    330
    
    
    
    104
    
    
    
    1,925Cumulative translation adjustment
    
    
    (264
    )
    
    
    (153
    )
    
    
    (58
    )
    
    
    (475
    )Balance as of
      January 31, 2009
    
    $
    9,688
    
    
    $
    2,592
    
    
    $
    859
    
    
    $
    13,139Intangible Assets, net, as of January 31, 2009
    
    $
    4,257
    
    
    $
    275
    
    
    $
    89
    
    
    $
    4,621


Estimated
useful lives and the amortization basis for the intangible assets are as
follows:

**Estimated Useful Life and Amortization
      Basis**Customer contracts
    
    1 - 8 years using economic consumption life basisCompleted
      technology
    
    4 - 6 years
      using economic consumption life basisTrademarks and other
    
    5 years using economic consumption life basis


Amortization
expense for intangible assets was $2.0 million, $3.4 million and $6.3 million
for the years ended January 31, 2009, 2008 and 2007, respectively. In the years
ended January 31, 2009, 2008, and 2007, $450,000, $490,000 and $643,000,
respectively, were charged to cost of product revenues. In the years ended
January 31, 2009, 2008, and 2007, $1.6 million, $3.0 million and $5.7 million,
respectively, were charged to operating expense. Amortization expense is
estimated to be approximately $2.1 million in fiscal 2010, $1.3 million in
fiscal 2011, $600,000 in fiscal 2012 and $600,000 in fiscal 2013.

9. Lines of Credit

On October
31, 2008, RBS Citizens, (a subsidiary of the Royal Bank of Scotland Group plc)
extended the Companys $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 the
Companys assets. The loan agreement requires that the Company 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
January 31, 2009, the Company was in compliance with the financial covenants and
there are currently 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 January 31, 2009, the full amount of the letters of credit of
$833,000 was supported by our credit facility.

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10. Commitments and Contingencies

SeaChange
leases certain of its operating facilities and certain office equipment under
non-cancelable operating leases, which expire at various dates through 2015.
Rental expense under operating leases was $3.7 million, $3.1 million and $1.7
million for the years ended January 31, 2009, 2008 and 2007, respectively.
Future commitments under minimum lease payments as of January 31, 2009 are as
follows:

OperatingLeases(in thousands)Fiscal Year ended January 31, 2010
    
    $
    2,5752011
    
    
    1,4052012
    
    
    1,2492013
    
    
    5342014
    
    
    902015 and beyond
    
    
    313Minimum lease payments
    
    $
    6,166


SeaChange
has non-cancelable purchase commitments for its inventories of approximately
$7.8 million at January 31, 2009.

Guarantees and Indemnification
Obligations

SeaChange
provides indemnification, to the extent permitted by law, to its officers,
directors, employees and agents for liabilities arising from certain events or
occurrences while the officer, director, employee, or agent is or was serving at
SeaChanges request in such capacity. With respect to acquisitions, SeaChange
provides indemnification to or assumes indemnification obligations for the
current and former directors, officers and employees of the acquired companies
in accordance with the acquired companies bylaws and charter. As a matter of
practice, SeaChange has maintained directors and officers liability insurance
including coverage for directors and officers of acquired companies.

SeaChange
enters into agreements in the ordinary course of business with customers,
resellers, distributors, integrators and suppliers. Most of these agreements
require SeaChange to defend and/or indemnify the other party against
intellectual property infringement claims brought by a third party with respect
to SeaChanges products. From time to time, SeaChange also indemnifies customers
and business partners for damages, losses and liabilities they may suffer or
incur relating to personal injury, personal property damage, product liability,
and environmental claims relating to the use of SeaChanges products and
services or resulting from the acts or omissions of SeaChange, its employees,
authorized agents or subcontractors. For example, SeaChange has received
requests from several of its customers for indemnification of patent litigation
claims asserted by Acacia Media Technologies, USA Video Technology Corporation
and VTran Media Technologies. Management performed an analysis of these requests
under Statement of Financial Accounting Standards No. 5,Accounting for Contingencies(SFAS 5) as interpreted by FASB Interpretation No. 45,Guarantors Accounting and Disclosure Requirements for
Guarantees, including Indirect Guarantees of Indebtedness of Others(FIN45).

SeaChange
warrants that its products, including software products, will substantially
perform in accordance with its standard published specifications in effect at
the time of delivery. Most warranties have at least a one year duration that
generally commence upon installation. In addition, SeaChange provides
maintenance support to its customers and therefore allocates a portion of the
product purchase price to the initial warranty period and recognizes revenue on
a straight line basis over that warranty period related to both the warranty
obligation and the maintenance support agreement. When SeaChange receives
revenue for extended warranties beyond the standard duration, it is deferred and
recognized on a straight line basis over the contract period. Related costs are
expensed as incurred.

In the
ordinary course of business, SeaChange provides minimum purchase guarantees to
certain of its vendors to ensure continuity of supply against the market demand.
Although some of these guarantees provide penalties for cancellations and/or
modifications to the purchase commitments as the market demand decreases, most
of the guarantees do not. Therefore, as the market demand decreases, SeaChange
re-evaluates the accounting implications of guarantees and determines what
charges, if any, should be recorded.

With respect
to its agreements covering product, business or entity divestitures and
acquisitions, SeaChange provides certain representations and warranties and
agrees to indemnify and hold such purchasers harmless against breaches of such
representations, warranties and covenants. With respect to its acquisitions,
SeaChange may, from time to time, assume the liability for certain events or
occurrences that took place prior to the date of acquisition.

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SeaChange
provides such guarantees and indemnification obligations after considering the
economics of the transaction and other factors including but not limited to the
liquidity and credit risk of the other party in the transaction. SeaChange
believes that the likelihood is remote that any such arrangement could have a
material adverse effect on its financial position, results of operation or
liquidity. SeaChange records liabilities, as disclosed above, for such
guarantees based on the Companys best estimate of probable losses which
considers amounts recoverable under any recourse provisions.

11. Stockholders Equity

Stock Authorization

The Board of
Directors is authorized to issue from time to time up to an aggregate of
5,000,000 shares of preferred stock, in one or more series. Each such series of
preferred stock shall have the number of shares, designations, preferences,
voting powers, qualifications and special or relative rights or privileges to be
determined by the Board of Directors, including dividend rights, voting rights,
redemption rights and sinking fund provisions, liquidation preferences,
conversion rights and preemptive rights.

Stock Repurchase
Program

On February
13, 2008, SeaChange Internationals Board of Directors authorized the repurchase
of up to $20.0 million of its common stock, par value $0.01 per share, through a
share repurchase program which expired on December 31, 2008. During fiscal 2009,
833,597 shares of our common stock had been purchased as part of this repurchase
program at an average price of $7.16.

On March 11,
2009, SeaChange Internationals Board of Directors authorized the repurchase of
up to $20 million of its common stock through a share repurchase program,
expiring on January 31, 2010. As authorized by the program, shares will be
purchased through the open market or through privately negotiated transactions,
and in a manner consistent with applicable securities laws and regulations. This
stock 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
investments balances. The Company does not intend to repurchase any shares from
its management team or other insiders.

Accumulated Other
Comprehensive (Loss) Income

SeaChanges
accumulated other comprehensive (loss) income is as follows:

Year ended January
  31,2009
    
    2008(in thousands)Accumulated other comprehensive (loss) incomeAccumulated unrealized gain on
      marketable securities, net of tax
    
    $
    458
    
    
    $
    435Accumulated
      foreign currency translation adjustments, net of tax
    
    
    (10,189
    )
    
    
    1,788Total
      accumulated other comprehensive (loss) income, net of tax
    
    $
    (9,731
    )
    
    $
    2,223


12. Segment Information

Until the
end of fiscal 2008, the Company was managed and operated as three segments,
Broadcast, Broadband and Services. In its first quarter of fiscal 2009, the
Company realigned its previously reported segments into three new reporting
segments: Software, Servers and Storage, and Media Services, as segments defined
by SFAS No. 131,Disclosure about Segments of
an Enterprise and Related Information. The
Company believes this reorganization better reflects the increasing importance
and magnitude of its software products and services as well as the scale of its
ODG subsidiary. A description of the three new reporting segments is as follows:

- 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.

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- Servers and Storage segment includes product
  revenues from the 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.
- 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 and
  wireless network service providers and related operating
expenses.

Under this
revised reporting structure, the Company further determined that there are
significant functions, and therefore costs, that are considered corporate
expenses and are not allocated to the reportable segments for the purposes of
assessing performance and making operating decisions. These unallocated costs
include general and administrative expenses, other than general and
administrative expenses related to ODG, interest, taxes and equity earnings in
affiliates, which are managed separately at the corporate level.

The segment
data for the fiscal years ended January 31, 2008 and 2007 respectively, have
been recast to reflect the realignment of the new segments. Prior to fiscal
2009, services revenues, which included ODG revenues, were reported in the
Services segment and the Company did not separately track these service revenues
and costs by these new segments, except for ODG. Accordingly, management has
made certain assumptions to determine the amount of service revenues and service
costs attributed to the Software and Servers and Storage reporting segments for
the fiscal years January 31, 2008 and 2007, respectively. 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.

72

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The following summarizes the income (loss)
from operations by reportable operating segment:

Year ended January
  31,2009
    
    2008
    
    2007(in thousands)**Software**Revenue:Products
    
    $
    78,397
    
    
    $
    69,762
    
    
    $
    58,672Services
    
    
    53,840
    
    
    
    43,507
    
    
    
    41,714Total revenue
    
    
    132,237
    
    
    
    113,269
    
    
    
    100,386Gross
      profit
    
    
    76,087
    
    
    
    58,238
    
    
    
    55,310Operating expenses:Research and
      development
    
    
    33,373
    
    
    
    31,035
    
    
    
    27,904Selling and
marketing
    
    
    16,417
    
    
    
    13,259
    
    
    
    11,565Amortization
      of intangibles
    
    
    1,456
    
    
    
    2,146
    
    
    
    3,87451,246
    
    
    
    46,440
    
    
    
    43,343Income from
      operations
    
    $
    24,841
    
    
    $
    11,798
    
    
    $
    11,967Servers and StorageRevenue:Products
    
    $
    38,975
    
    
    $
    36,007
    
    
    $
    36,328Services
    
    
    14,665
    
    
    
    12,990
    
    
    
    11,752Total revenue
    
    
    53,640
    
    
    
    48,997
    
    
    
    48,080Gross
      profit
    
    
    24,865
    
    
    
    19,730
    
    
    
    15,961Operating expenses:Research and
      development
    
    
    9,669
    
    
    
    11,664
    
    
    
    12,585Selling and
      marketing
    
    
    11,025
    
    
    
    9,703
    
    
    
    10,467Amortization
      of intangibles
    
    
    -
    
    
    
    -
    
    
    
    7520,694
    
    
    
    21,367
    
    
    
    23,127Income (loss)
      from operations
    
    $
    4,171
    
    
    $
    (1,637
    )
    
    $
    (7,166
    )Media ServicesService
      revenue
    
    $
    15,959
    
    
    $
    17,627
    
    
    $
    12,868Gross
      profit
    
    
    2,344
    
    
    
    2,996
    
    
    
    4,540Operating
      expenses:Research and
      development
    
    
    -
    
    
    
    -
    
    
    
    428Selling and
      marketing
    
    
    64
    
    
    
    111
    
    
    
    351General and
      administrative
    
    
    3,049
    
    
    
    2,449
    
    
    
    4,000Amortization
      of intangibles
    
    
    119
    
    
    
    806
    
    
    
    1,7153,232
    
    
    
    3,366
    
    
    
    6,494Loss from
      operations
    
    $
    (888
    )
    
    $
    (370
    )
    
    $
    (1,954
    )Unallocated CorporateOperating
      expenses:General and
      administrative
    
    $
    17,930
    
    
    $
    17,791
    
    
    $
    14,873Total unallocated corporate expenses
    
    $
    17,930
    
    
    $
    17,791
    
    
    $
    14,873Consolidated income (loss) from operations
    
    $
    10,194
    
    
    $
    (8,000
    )
    
    $
    (12,026
    )


The
following summarizes revenues by customers geographic locations. Certain
reclassifications have been made to conform prior period amounts to current
period presentation, including the reclassification of revenue originated in
Canada from Latin American to North American revenue:

73

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|                                                     |  | Year ended January
  31,
|---------------------------------------------------- |  | ------------------------
|                                                     |  | 2009                    
|                                                     |  | Amount                  
|                                                     |  |                         
|Revenues by
      customers' geographic locations:   |  |                         
|North America                                        |  | $                       
|Europe and Middle
    East                           |  |                         
|Asia Pacific and other
      international locations |  |                         
|Latin
      America                                  |  |                         
|Total                                                |  | $                       

The following
summarizes fixed assets, net by geographic locations:

Year ended January
  31,2009
    
    2008(in thousands)Fixed assets, netNorth America
    
    $
    24,497
    
    $
    25,107Europe and
      Middle East
    
    
    7,280
    
    
    825Asia Pacific
      and other international locations
    
    
    3,440
    
    
    2,134Total
    
    $
    35,217
    
    $
    28,066


13.
Stock-Based Compensation and Stock Incentive Plans

Effective
February 1, 2006, SeaChange adopted on a modified prospective basis the
provisions of the Financial Accounting Standards Boards SFAS 123R, which
requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors including employee
stock options, restricted stock units and employee stock purchases related to
SeaChanges Employee Stock Purchase Plan (ESPP) based on estimated fair
values. The estimated fair value of SeaChanges stock-based options and
performance-based restricted stock units, less expected forfeitures, is
amortized over the awards vesting period on a graded vesting basis, whereas the
restricted stock units and Employee Stock Purchase Plan stock units are
amortized on a straight line basis. SeaChange has applied the provisions of SAB
No. 107,Share-Based Payment, (SAB 107) in its adoption of SFAS 123R. Effective January
1, 2008, the Company has applied the provisions of SAB No. 110, an amendment to
SAB No. 107, which provides expressed views on the use of a simplified method,
in developing an estimate of the expected term of plain vanilla share options
in accordance with SFAS No. 123 (revised 2004),Share-Based Payment(Note 2).

Under the modified prospective transition method, SeaChange recognized
stock-based compensation expense during the year ended January 31, 2007 for: (a)
ESPP awards from offering periods that began on December 1, 2005, June 1, 2006
and December 1, 2006 and ended on May 31, 2006, November 30, 2006 and May 31,
2007, respectively, (b) stock options and restricted stock units granted prior
to, but not yet vested as of February 1, 2006, based on the grant date fair
value estimated in accordance with the disclosure provisions of SFAS No. 123,
and (c) stock options and restricted stock units granted subsequent to February
1, 2006, based on the grant date fair value, estimated in accordance with the
provisions of SFAS No. 123R. Under the modified prospective transition method,
results for prior periods are not restated. The adoption of SFAS No. 123R did
not affect the accounting for stock-based compensation expense related to
restricted stock units. The fair value of a restricted stock unit is the market
value of a share of the Companys common stock on the date of grant of the
restricted stock unit. This fair value is amortized on a straight-line basis
over the related vesting period of the restricted stock unit.

Stock-based
compensation includes expense charges for all stock-based awards to employees
and directors. Such awards include option grants, restricted stock unit awards,
and shares expected to be purchased under an employee stock purchase plan. The
estimated fair value of SeaChanges stock-based options and performance-based
restricted stock units, less expected forfeitures, is amortized over the awards
vesting period on a graded vesting basis, whereas the restricted stock units and
ESPP stock units are amortized on a straight line basis.

The effect
of recording stock-based compensation for the years ended January 31, 2009,
2008, and 2007 was as follows:

74

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Year ended January
  31,2009
    
    2008
    
    2007(in thousands)Stock-based compensation expense by type of award:Stock options
    
    $
    304
    
    $
    1,060
    
    $
    2,179Restricted
      stock units
    
    
    996
    
    
    775
    
    
    625Performance-based restricted stock units
    
    
    2,061
    
    
    1,557
    
    
    248Employee
      stock purchase plan
    
    
    593
    
    
    586
    
    
    462Total
      stock-based compensation
    
    $
    3,954
    
    $
    3,978
    
    $
    3,514


Since
additional option grants and restricted stock unit awards are expected to be
made each year and options and awards vest over several years, the effects of
applying SFAS 123R for recording stock-based compensation for the year ended
January 31, 2009 are not indicative of future amounts.

Determining Fair Value under SFAS
123(R)

SeaChange
estimates the fair value of stock options, including rights granted under the
ESPP, using the Black-Scholes valuation model. Key input assumptions used to
estimate the fair value of stock options include the exercise price, the
expected option term, the risk-free interest rate over the options expected
term, the expected annual dividend yield and the expected stock price
volatility. The expected option term was determined using the simplified
method for plain vanilla options as allowed by SAB No. 107, as amended by SAB
No. 110. The expected stock price volatility was established using a blended
volatility, which is an average of the historical volatility of SeaChanges
common stock over a period of time equal to the expected term of the stock
option, and the average volatility of SeaChanges common stock over the most
recent one-year and two-year periods.

SeaChange
used the Black-Scholes valuation model for estimating the grant date fair value
of employee stock options granted using the following assumptions for the years
ended January 31, 2009, 2008 and 2007, respectively:

Year ended January
  31,2009
    
    2008
    
    2007Expected (range in years)
    
    4-5
    
    4-5
    
    4-5Expected
      volatility (range)
    
    52%-56%
    
    46%-50%
    
    51%-58%Weighted average volatility
    
    52%
    
    48%
    
    56%Risk-free
      interest rate
    
    2.6%-2.9%
    
    3.2%-5.1%
    
    4.4%-5.1%Weighted average interest rate
    
    2.9%
    
    4.6%
    
    4.7%Expected
      dividend yield
    
    0%
    
    0%
    
    0%


The fair
value of the rights to purchase shares of common stock under the ESPP was
estimated on the commencement date of the offering period using the
Black-Scholes valuation model with the following assumptions:

Year ended January
  31,2009
    
    2008
    
    2007Expected term (in years)
    
    0.5
    
    0.5
    
    0.5Weighted average
      volatility
    
    61%
    
    42%
    
    45%Weighted average interest rate
    
    2.8%
    
    4.6%
    
    4.6%Expected
      dividend yield
    
    0%
    
    0%
    
    0%


Stock Option Plans

Amended and Restated 2005 Equity
Compensation and Incentive Plan

The Amended
and Restated 2005 Equity Compensation and Incentive Plan (the 2005 Plan)
provides for the grant of incentive stock options, nonqualified stock options,
restricted stock, restricted stock units, and other non-stock option awards as
determined by the plan administrator for the purchase of up to an aggregate of
2,800,000 shares of SeaChanges common stock by officers, employees, consultants
and directors of SeaChange. The Company may satisfy awards upon the exercise of
stock options or restricted stock units with either newly issued shares or
treasury shares. The Board of Directors is responsible for administration of the
2005 Plan and determining the term of each award, award exercise price, number
of shares for which each award is granted and the rate at which each award is
exercisable. As of January 31, 2009, there were 2,480,483 shares available for
future grant. The Company has made an undertaking not to issue an amount of
awards under the 2005 Plan greater than two percent of the aggregate shares
outstanding per fiscal year.

75

---

Option
awards may be granted to employees at an exercise price per share of not less
than 100% of the fair market value per common share on the date of the grant
(not less than 110% for an incentive stock option granted to a 10% or more
stockholder). Incentive stock options may be granted only to those employees of
SeaChange to the extent that the fair value of the options granted that become
exercisable during any one calendar year plus previously granted incentive stock
options that become exercisable in that period is less than $100,000. Restricted
stock units and other equity-based non-stock option awards may be granted to any
officer, employee, director or consultant at a purchase price per share as
determined by SeaChanges Board of Directors. Awards granted under the 2005 Plan
generally vest over three years and expire seven years from the date of the
grant (five years for incentive stock options granted to holders of more than
10% of SeaChanges voting stock).

1995 Stock Option Plan

In July
2005, SeaChanges Board of Directors terminated the 1995 Stock Option Plan and
began granting stock options under the Companys 2005 Plan. The Amended and
Restated 1995 Stock Option Plan (the 1995 Stock Option Plan) provided for the
grant of incentive stock options and nonqualified stock options. The Board of
Directors is responsible for administration of the 1995 Stock Option Plan and
determining the term of each option, option exercise price, number of shares for
which each option is granted and the rate at which each option is exercisable.
Options generally vest ratably over four years. SeaChange may not grant an
employee incentive stock options with a fair value in excess of $100,000 that
are initially exercisable during any one calendar year.

Incentive
stock options may be granted to employees at an exercise price per share of not
less than the fair value per common share on the date of the grant (not less
than 110% of the fair value in the case of holders of more than 10% of
SeaChanges voting stock). Nonqualified stock options may be granted to any
officer, employee, director or consultant at an exercise price per share as
determined by SeaChanges Board of Directors. Grants of stock options to the
Board of Directors under SeaChanges 1995 Stock Option Plan are made pursuant to
a policy under which each non-employee director receives a grant of 2,500 stock
options per quarter.

Options
granted under the 1995 Stock Option Plan generally expire ten years from the
date of the grant (five years for incentive stock options granted to holders of
more than 10% of SeaChanges voting stock).

Director Option Plan

In May 2002,
SeaChanges Board of Directors terminated the Director Option Plan and began
granting stock options to the board of directors under the Companys 1995 Stock
Option Plan. In June 1996, SeaChanges Board of Directors adopted and the
stockholders approved a director stock option plan (the Director Option Plan)
which provided for the grant of options to full time directors of SeaChange.
Under the Director Option Plan, participating directors receive an option to
purchase 5,062 shares of common stock per annum. Options granted under the
Director Option Plan vest as to 33% of the shares underlying the option
immediately upon the date of the grant, and vest as to an additional 8% of the
shares underlying the option at the end of each of the next eight quarters,
provided that the option holder remains a director. Directors will also receive,
on each three-year anniversary of such directors option grant date, an
additional option to purchase 5,062 shares of common stock, provided that such
director continues to serve on the Board of Directors. All options granted under
the Director Option Plan have an exercise price equal to the fair value of the
common stock on the date of grant and a term of ten years from the date of
grant.

The
following table summarizes the stock option activity (excluding restricted stock
units) during the years ended January 31, 2009, 2008 and 2007:

76

---

|                                           |  | Year ended January
  31,
|------------------------------------------ |  | ------------------------
|                                           |  | 2009                    
|                                           |  |                         
|                                           |  |                         
|                                           |  | Shares                  
|Outstanding at beginning of period         |  | 4,884,205               
|Granted                                    |  | 13,500                  
|Exercised                                  |  | (223,006                
|Forfeited/expired/cancelled                |  | (446,462                
|Outstanding at end of period               |  | 4,228,237               
|Options
      exercisable at end of period |  | 4,169,492               
|Weighted average remaining                 |  |                         
|contractual term (in
      years)          |  |                         

The
weighted-average fair valuation at grant date of stock options granted during
the years ended January 31, 2009, 2008 and 2007, was $3.52, $3.89 and $4.10,
respectively. As of January 31, 2009, the unrecognized stock-based compensation
related to the unvested stock options was $61,000 net of estimated forfeitures.
Total unrecognized compensation cost will be adjusted for any future changes in
estimated changes in forfeitures. This cost will be recognized over an estimated
weighted average amortization period of seven months.

The total
intrinsic value of options exercised during the years ended January 31, 2009,
2008 and 2007 was approximately $576,000, $299,000 and $731,000, respectively,
with intrinsic value defined as the difference between the market price on the
date of exercise and the grant date price.

The cash
received from employees as a result of employee stock options exercises during
fiscal years 2009, 2008, and 2007 was $1.2 million, $1.1 million, and $1.6
million, respectively.

The
following table summarizes information about employee and director stock options
outstanding and exercisable as of January 31, 2009:

Options Outstanding
    
    Options ExercisableWeightedaverageremaining
    
    **Weighted**
    
    
    
    **Weighted**Number
    
    contractual
    
    average
    
    Number
    
    averageoutstanding
    
    terms (years)
    
    **exercise price**
    
    exercisable
    
    **exercise price**Range of
      exercise prices$ 5.17 to 6.88
    
    604,538
    
    3.74
    
    $
    6.53
    
    594,872
    
    $
    6.536.93 to 8.38
    
    426,845
    
    3.95
    
    
    7.38
    
    400,578
    
    
    7.358.42 to 10.75
    
    429,099
    
    4.14
    
    
    10.12
    
    406,287
    
    
    10.1811.00 to 13.76
    
    718,379
    
    4.30
    
    
    13.09
    
    718,379
    
    
    13.0914.12 to 15.59
    
    437,855
    
    4.28
    
    
    15.02
    
    437,855
    
    
    15.0215.62 to 17.39
    
    451,973
    
    4.18
    
    
    16.55
    
    451,973
    
    
    16.5517.56 to 22.00
    
    123,262
    
    4.30
    
    
    19.20
    
    123,262
    
    
    19.2023.31 to 23.31
    
    478,806
    
    3.71
    
    
    23.31
    
    478,806
    
    
    23.3124.10 to 34.00
    
    503,930
    
    4.21
    
    
    29.39
    
    503,930
    
    
    29.3935.50 to 39.13
    
    53,550
    
    4.43
    
    
    37.35
    
    53,550
    
    
    37.354,228,237
    
    4.08
    
    $
    15.43
    
    4,169,492
    
    $
    15.53


Restricted Stock Units

Pursuant to
the 2005 Plan, SeaChange may grant restricted stock units that entitle the
recipient to acquire shares of SeaChanges common stock. Awards of restricted
stock units vest in equal increments on each of the first three anniversaries of
the grant of the award. Stock-based compensation expense associated with the
restricted stock units is charged for the market value of the Companys stock on
the date of grant, assuming nominal forfeitures, and is amortized over the
awards vesting period on a straight-line basis for awards with only a service
condition and graded vesting basis for awards that include both a performance
and service condition. The Company recorded non-performance based restricted
stock unit compensation expense of $996,000, $775,000, $625,000 for the years
ended January 31, 2009, 2008 and 2007, respectively. Performance-based
restricted stock unit compensation of $2.1 million, $1.6 million and $248,000
was recorded during fiscal 2009, 2008 and 2007, respectively. As of January 31,
2009, 2008 and 2007, $861,000, $1.1 million and $248,000 was accrued for
restricted stock units earned by the Companys senior executives, respectively.
In fiscal 2009, 381,814 shares were issued under the fiscal 2008 performance
based plans. Awards of restricted stock units related to the fiscal year 2009
performance based plan will be made in fiscal year 2010.

77

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The
following table summarizes the restricted stock unit activity as of and for the
years ended January 31, 2009, 2008 and 2007:

|                                 | Year ended January
  31,
|-------------------------------- | ------------------------
|                                 | 2009                    
|                                 |                         
|                                 |                         
|                                 |                         
|                                 | Shares                  
|Nonvested at beginning of period | 230,508                 
|Awarded                          | 519,814                 
|Vested                           | (287,648                
|Forfeited/expired/cancelled      | (4,000                  
|Nonvested at end of period       | 458,674                 

As of
January 31, 2009, 2008 and 2007, the unrecognized stock-based compensation
related to the unvested restricted stock units was $1.5 million, $1.2 million,
and $1.7 million respectively. This cost will be recognized over an estimated
weighted average amortization period of 1.8.

Employee Stock Purchase Plan

In September
1996, SeaChanges Board of Directors adopted and the stockholders approved an
employee stock purchase plan (the ESPP), effective January 1, 1997 as amended
July 16, 2008, which provides for the issuance of a maximum of 2.2 million
shares of common stock to participating employees who meet eligibility
requirements. Employees who would immediately after the purchase own 5% or more
of the total combined voting power or value of SeaChanges stock and directors
who are not employees of SeaChange may not participate in the ESPP. The purchase
price of the stock is 85% of the lesser of the average market price of the
common stock on the first or last business day of each six-month plan period. In
the most recent period under the ESPP ended November 30, 2008, employees
purchased an aggregate of 115,872 shares at a discounted price of $6.63 per
share. During the fiscal years ended January 31, 2009, 2008 and 2007, 236,707,
236,553 and 250,082 shares of common stock, respectively, were issued under the
Stock Purchase Plan. The cash received from employees as a result of the ESPP
during fiscal 2009, 2008 and 2007 was $1.6 million, $1.6 million, and $1.4
million, respectively. As of January 31, 2009, there were 488,444 shares
available for future grant.

14. Income Taxes

The
components of income (loss) before income taxes are as follows:

Year ended January
  31,2009
    
    2008
    
    2007(in thousands)Domestic
    $
    2,840
    
    $
    (13,191
    )
    
    $
    (11,454
    )Foreign
    
    8,479
    
    
    17,106
    
    
    
    313$
    11,319
    
    $
    3,915
    
    
    $
    (11,141
    )


The
components of the income tax (expense) benefit are as follows:

78

---

Year ended January
  31,2009
    
    2008
    
    2007(in thousands)Current:Federal
    $
    296
    
    
    $
    (192
    )
    
    $
    1,188State
    
    (80
    )
    
    
    -
    
    
    
    -Foreign
    
    (915
    )
    
    
    (2,985
    )
    
    
    (49
    )(699
    )
    
    
    (3,177
    )
    
    
    1,139Deferred:Foreign
    
    124
    
    
    
    1,021
    
    
    
    493$
    (575
    )
    
    $
    (2,156
    )
    
    $
    1,632


The income
tax (expense) benefit computed using the federal statutory income tax rate
differs from SeaChanges effective tax rate primarily due to the
following:

Year ended January
  31,2009
    
    2008
    
    2007(in thousands)Statutory U.S. federal tax rate
    $
    (3,962
    )
    
    $
    (1,370
    )
    
    $
    3,899State taxes, net
      of federal tax benefit
    
    52
    
    
    
    147
    
    
    
    557Change in valuation allowance on U.S. net deferred tax
    assets
    
    527
    
    
    
    1,620
    
    
    
    (3,869
    )Non-deductible
      stock compensation expense
    
    (255
    )
    
    
    (465
    )
    
    
    (996
    )Other
    
    (35
    )
    
    
    82
    
    
    
    314Gain on transfer
      of intangible assets
    
    -
    
    
    
    (1,055
    )
    
    
    -Gain on sale of FilmFlex
    
    -
    
    
    
    (4,008
    )
    
    
    -Current year
      impact of FIN 48
    
    (529
    )
    
    
    (638
    )
    
    
    -Research and development tax credits
    
    650
    
    
    
    695
    
    
    
    1,080Foreign tax rate
      differential
    
    2,977
    
    
    
    2,836
    
    
    
    647$
    (575
    )
    
    $
    (2,156
    )
    
    $
    1,632


Excluded in
the research and development tax credits are approximately $324,000 related to
research and development tax credit resulting from exercise of employee stock
options, the tax benefit of which when recognized, will be accounted for as a
credit to additional paid in capital rather than a reduction in income tax.

SeaChanges
effective tax rate was 5%, 55%, and (15%) in the years ended January 31, 2009,
2008 and 2007, respectively. The tax rate for the fiscal year 2009 was primarily
driven by the utilization of $1.4 million of foreign tax credits attributable to
the taxable gain from the sale of our equity investment in Filmflex in fiscal
2008.

For the
fiscal year 2008, the income tax provision was primarily attributable to the
$1.1 million taxable gains recorded in the first quarter of fiscal 2008 for the
ODGs U.K. operation related to the transfer of assets to and the reimbursement
of previously paid costs from On Demand Deutschland GmbH & Co. KG, the
German joint venture formed in February 2007 with Tele-Munchen Fernseh GmbH
& Co. Produktionsgesellschaft and to the gain on the sale of the Companys
investment in FilmFlex during fiscal 2008 for $4.0 million.

79

---

The
components of deferred income taxes are as follows:

Year ended January
  31,2009
    
    2008(in thousands)Deferred tax assets:Inventories
    $
    2,202
    
    
    $
    2,194Deferred
      revenue
    
    1,188
    
    
    
    1,189Accrued
      expenses
    
    1,093
    
    
    
    809Capitalized
      intangible costs
    
    1,228
    
    
    
    1,448Stock-based
      compensation expense
    
    1,787
    
    
    
    1,034Various tax
      credit carryforwardsfederal and state
    
    3,868
    
    
    
    4,857Net operating
      loss carryforwards
    
    4,332
    
    
    
    2,004Other
    
    673
    
    
    
    767Deferred tax
      assets
    
    16,371
    
    
    
    14,302Less:
      Valuation allowance
    
    (15,692
    )
    
    
    (13,319
    )Net deferred tax assets
    
    679
    
    
    
    983Deferred tax liabilities:Property and
      equipment
    
    (486
    )
    
    
    (822
    )Intangible
      assets
    
    (168
    )
    
    
    (320
    )Other
    
    (146
    )
    
    
    (153
    )Deferred tax
      liabilities
    
    (800
    )
    
    
    (1,295
    )Total net
      deferred tax liabilities
    $
    (121
    )
    
    $
    (312
    )


At January
31, 2009, SeaChange had federal, state and foreign net operating loss
carryforwards of $1.8 million, $29.1 million and $9.2 million respectively,
which can be used to offset future tax liabilities and expire at various dates
beginning in fiscal 2016. Utilization of these net operating loss carryforwards
may be limited pursuant to provisions of the respective local jurisdiction. At
January 31, 2009, SeaChange had federal and state research and development
credit carryforwards of $2.6 million and $913,000, respectively and state
investment tax credit carryforwards of $284,000. The federal credit
carryforwards will expire at various dates beginning in fiscal 2011 if not
utilized. Certain state credit carryforwards will expire at various dates
beginning in fiscal 2011, while certain other state credit carryforwards may be
carried forward indefinitely. Utilization of these credit carryforwards may be
limited pursuant to provisions of the respective local jurisdiction. SeaChange
also has alternative minimum tax credit carryforwards of $558,000 which is
available to reduce future federal regular income taxes over an indefinite
period.

SeaChange
reviews quarterly the adequacy of the valuation allowance for deferred tax
assets. The Company has evaluated the positive and negative evidence bearing
upon the realizability of its deferred tax assets and has established a full
valuation allowance of approximately $15.7 million for such assets, which are
comprised principally of net operating loss carryforwards, research and
development credits, inventory and stock based compensation. If SeaChange
continues to generate 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. The Company recorded an increase to
deferred tax assets of approximately $2.0 million due to the acquisition of
Mobix in November 2008 and the assumption of its net operating loss
carryforwards. However this increase was entirely offset by a corollary increase
to the valuation allowance resulting in no impact to the net deferred tax
balances. In addition, the Company utilized during fiscal 2009 foreign net
operating loss carryforwards from our acquisition of IPC Interactive Pte. Ltd
(IPC) in 1997, resulting in the reduction of the remaining IPC goodwill
balance of $253,000. These deferred tax assets were carried with a 100%
valuation allowance since the acquisition; therefore, the tax benefit associated
with IPCs net operating loss carryforwards was not recorded until the Company
utilized them. The $191,000 decrease in the net deferred tax liabilities was due
to the difference in the accounting for ODG intangible assets. The net deferred
tax liabilities cannot be offset against the Companys deferred tax assets under
U.S. generally accepted accounting principles since they relate to
indefinite-lived assets and are not anticipated to reverse in the same period.

At January
31, 2009, the Company has indefinitely reinvested $29.9 million of the
cumulative undistributed earnings of certain foreign subsidiaries. Approximately
$19.6 million of such earnings would be subject to U.S. taxes if repatriated to
the U.S. Through January 31, 2009, the Company has not provided deferred income
taxes on the undistributed earnings of its foreign subsidiaries because such
earnings are considered to be indefinitely reinvested outside the U.S. Non-US
income taxes are, however, provided on those foreign subsidiaries undistributed
earnings. Determination of the potential deferred income tax liability on these
undistributed earnings in not practicable because such liability, if any, is
dependent on circumstances existing if and when remittance occurs.

80

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The Company
adopted FIN 48 on February 1, 2007, at which time differences between the
amounts recognized in the financial statements prior to the adoption of FIN 48
and the amounts recognized after adoption were accounted for as a cumulative
effect adjustment recorded to the beginning balance of retained earnings. As a
result of this implementation, the Company recognized a $456,000 increase to
reserves for uncertain tax positions. This increase was accounted for as an
adjustment to the beginning balance of retained earnings in fiscal 2008. As of
February 1, 2007, the Company had $5.0 million of total gross unrecognized tax
benefits (before consideration of any valuation allowance). Of this total, $1.0
million represents the amount of unrecognized tax benefits that, if recognized,
would favorably affect the effective income tax rate in future periods.

For the year
ended January 31, 2009, the Company recognized an additional tax expense for
unrecognized tax benefits of $834,000. None of the amounts included in the
balance of unrecognized tax benefits at January 31, 2009 of $2.2 million are
related to tax positions for which it is reasonably possible that the total
amounts could significantly change during the next twelve months.

The Company
recognizes accrued interest and penalties related to uncertain tax positions in
income tax expense. A reconciliation of the beginning and ending balance of the
total amounts of gross unrecognized tax benefits, excluding interest of $422,000
is as follows (in thousands):

Year ended January
  31,2009
    
    2008(in thousands)Balance of gross unrecognized tax benefits, beginning of
      period
    $
    5,468
    
    $
    4,772Gross amounts of
      increases in unrecognized tax benefits as a result oftax positions taken in the
      current period
    
    834
    
    
    698Gross amounts of decreases in unrecognized tax benefits as a result
      of theexpiration of
      the applicable statute of limitations
    
    -
    
    
    (2
    )Balance of gross
      unrecognized tax benefits, end of period
    $
    6,302
    
    $
    5,468


As of
January 31, 2009, the Company is subject to U.S. Federal income tax examinations
for the tax years 2004 through 2007.

15. Employee Benefit Plan

SeaChange
sponsors a 401(k) retirement savings plan (the Plan). Participation in the
Plan is available to full-time employees who meet eligibility requirements.
Eligible employees may contribute up to 25% of their annual salary, subject to
certain limitations. SeaChange matched contributions up to 25% of the first 6%
of compensation contributed by the employee to the Plan for February 2008 and
30% from March 2008 to December 2008. Beginning in January 2009, SeaChange
matched contributions up to 50% of the first 6% of compensation. The Company
also contributes to various retirement plans in our international subsidiaries,
of which the amounts will vary, according to the local foreign plans specific to
each location.

During the
fiscal years ended January 31, 2009, 2008 and 2007, SeaChange contributed
$802,000, $566,000 and $482,000, respectively.

81

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16. Quarterly Results of
OperationsUnaudited

The
following table sets forth certain unaudited quarterly results of operations for
the fiscal years ended January 31, 2009 and 2008. In the opinion of management,
this information has been prepared on the same basis as the audited consolidated
financial statements and all necessary adjustments, consisting only of normal
recurring adjustments, have been included in the amounts stated below to present
fairly the quarterly information when read in conjunction with the audited
consolidated financial statements and notes thereto included elsewhere in this
Annual Report on Form 10-K. The selected financial data for the quarters ended
April 30, 2007 through July 31, 2008, respectively have been recast to reflect
the reclassification of foreign currency gain (loss) from operating expenses to
other income (expense) below operating income. The quarterly operating results
are not necessarily indicative of future results of operations.

|                          | Three months ended
|------------------------- | ------------------
|                          | April 30,         
|                          | 2007              
|Revenue                   | $                 
|Gross
      profit        |                   
|Operating expenses        |                   
|Net (loss)
      income   |                   
|(Loss) earnings per       |                   
|share-Basic               |                   
|(Loss) earnings
      per |                   
|share-Diluted             |                   

82

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Schedule IISEACHANGE INTERNATIONAL, INC.VALUATION OF QUALIFYING ACCOUNTS AND RESERVES

Years ended January
31, 2009, 2008, and 2007

|                                  | Balance at     |     |                  |   |                |  |                 |      |                |  |   |     |   |  |  
|--------------------------------- | -------------- | --- | ---------------- | - | -------------- |  | --------------- | ---- | -------------- |  | - | --- | - |  | -
|                                  | beginning of   |     | Charged to costs |   | Deductions and |  | Other           |      | Balance at end
|                                  | period         |     | and expenses     |   | write-offs     |  | **Adjustments** |      | of period     
|                                  | (in thousands)
|Accounts Receivable Allowance:    |                |     |                  |   |                |  |                 |      |                |  |   |     |   |  |  
|Year ended
      January 31, 2009 | $              | 663 |                  | $ | 670            |  | $               | (480 | )              |  | $ | -   |   |  | $
|Year ended January 31, 2008       |                | 466 |                  |   | 486            |  |                 | (224 | )              |  |   | (65 | ) |  |  
|Year ended
      January 31, 2007 |                | 405 |                  |   | 403            |  |                 | (305 | )              |  |   | (37 | ) |  |  

|                                         | Balance at     |        |           |   |           |  |             |        |           |  |   |        |   |                |  
|---------------------------------------- | -------------- | ------ | --------- | - | --------- |  | ----------- | ------ | --------- |  | - | ------ | - | -------------- | -
|                                         | beginning of   |        |           |   |           |  |             |        |           |  |   |        |   | Balance at end
|                                         | period         |        | Additions |   | Deletions |  | Adjustments |        | of period
|                                         | (in thousands)
|Deferred Tax Assets Valuation Allowance: |                |        |           |   |           |  |             |        |           |  |   |        |   |                |  
|Year ended
      January 31, 2009        | $              | 13,319 |           | $ | 2,373     |  | $           | -      |           |  | $ | -      |   |                | $
|Year ended January 31, 2008              |                | 18,785 |           |   | -         |  |             | (1,393 | )         |  |   | (4,073 | ) |                |  
|Year ended
      January 31, 2007        |                | 15,444 |           |   | 6,702     |  |             | -      |           |  |   | (3,361 | ) |                |  

83

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