The following discussion and analysis should be read in conjunction with "Selected Consolidated Financial Data" and our financial statements and the related notes included elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors including the risks discussed in "Item 1A. Risk Factors" and elsewhere in this Form 10-K. See Part I - Item 1 - "Special Note Regarding Forward-Looking Statements."

Overview

We are a leading provider of web properties that enable the creation, review, hosting and distribution of online peer-produced content. We are also an online seller of technology-themed retail products.

Our audience of technology professionals and enthusiasts relies on our web properties, SourceForge.net, Slashdot.org, Linux.com and freshmeat.net, to create, improve, compare and distribute Open Source software, and to debate and discuss current issues facing, and innovation in, the technology marketplace. Through our ThinkGeek, Inc. E-commerce subsidiary, we sell retail products to this audience and others.

We were incorporated in California in January 1995 and reincorporated in Delaware in December 1999. From the date of our incorporation through October 2001, we sold Linux-based hardware systems and services under the name VA Linux Systems, Inc. In December 2001, we changed our name to VA Software Corporation to reflect our decision to pursue our Online Media, E-commerce, Software and Online Images businesses. In December 2005, we sold our Online Images business to Jupitermedia Corporation ("Jupitermedia") and in April 2007, we sold our Software business to CollabNet, Inc. ("CollabNet"). On May 24, 2007 we changed our name to SourceForge, Inc. and merged with our wholly-owned subsidiary, OSTG, Inc.

Our business consists of two operating segments: Online Media and E-commerce. Our Online Media segment consists of a network of Internet web sites which connect millions of influential technology professionals and enthusiasts. Our Online Media segment's network of web sites include: SourceForge.net, Slashdot.org, Linux.com and freshmeat.net. Our E-commerce segment sells technology-themed retail products to technology professionals and enthusiasts through our ThinkGeek.com web site.

Our network of web sites served an average of over 33 million unique visitors per month* over the past twelve months (*Source: Google Analytics and Omniture). During fiscal 2008 we served 817 million downloads from our SourceForge.net web site. We have migrated substantially all of our web sites to our new data center. Within the E-commerce segment, we continued to increase our customer base, increasing the average order size by 9% and the number of orders by 20% during fiscal 2008 as compared to fiscal 2007.

Our sales continue to be primarily attributable to customers located in the United States of America.

Net revenue from continuing operations increased 21% in fiscal 2008 as compared to fiscal 2007 due to revenue increases of 6% in our Online Media business and 31% in our E-commerce business. Within the Online Media segment, the revenue increase was primarily due to an increase in cash advertising as new customers participated in our advertising campaigns as well as our premium advertising products, which were introduced in the second half of our 2008 fiscal year. E-commerce revenue increased due to a 20% increase in orders shipped to our customer base in this segment.

Net revenue from continuing operations increased 35% in fiscal 2007 as compared to fiscal 2006 due to revenue increases of 32% in our Online Media business and 38% in our E-commerce business. Within the Online Media segment, revenue increased due to our focus on developing innovative advertising campaigns for targeted customers as well as increased revenue from greater levels of contextually-relevant advertising. E-commerce revenue increased due to a 37% increase in orders shipped to our customer base in this segment.

Critical Accounting Policies

Accounting policies, methods and estimates are an integral part of the consolidated financial statements prepared by management and are based upon management's current judgments. Those judgments are normally based on knowledge and experience with regard to past and current events and assumptions about future events. Certain accounting policies, methods and estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ markedly from management's current judgments. While there are a number of accounting policies, methods and estimates affecting our financial statements, areas that are particularly significant include revenue recognition policies, the assessment of impairment of long-lived assets, restructuring reserves for excess facilities for non-cancelable leases, income taxes, stock-based compensation and contingencies and litigation.

Revenue Recognition
Online Media Revenue

Online Media revenue is derived from the sale of advertising space on our various web sites. We recognize Online Media revenue in accordance with SEC Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition" over the period in which the advertisements are displayed, provided that persuasive evidence of an arrangement exists, no significant obligations remain, the fee is fixed or determinable, and collection of the receivable is reasonably assured. Our obligations typically include guarantees of a minimum number of "impressions" (times that an advertisement is viewed by users of our online services). To the extent that minimum guaranteed impressions are not met in the specified time frame, we do not recognize the corresponding revenue until the guaranteed impressions are achieved.

We measure revenue on barter transactions based on the recorded amount of the non-monetary asset relinquished. Our barter transactions generally consist of the exchange of advertising on our Online Media web sites for access and advertising at industry trade shows. Accordingly, we do not record any revenue as a result of these transactions.

E-commerce Revenue

E-commerce revenue is derived from the online sale of consumer goods. We recognize E-commerce revenue from the sale of consumer goods in accordance with SAB 104. Under SAB 104, product revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sale price is fixed or determinable, and collectibility is reasonably assured. In general, we recognize E-commerce revenue when the goods are shipped and title transfers to the customer. We grant customers a right to return E-commerce products within 30 days of the shipment date. Such returns are recorded as incurred and have been immaterial for the periods presented.

Impairment of Long-Lived Assets

We continually evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance of long-lived assets may not be recoverable in accordance with Statement of Financial Accounting Standards "SFAS" No. 144, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." When factors indicate that long-lived assets should be evaluated for possible impairment, we use an estimate of the related undiscounted future cash flows over the remaining life of the long-lived assets in measuring whether they are recoverable. If the carrying value of the asset exceeds the estimated undiscounted future cash flows, a loss is recorded as the excess of the asset's carrying value over fair value. Long-lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

Restructuring Costs

In October 2007, we relocated our corporate headquarters to Mountain View, California. During fiscal 2008, we recorded a restructuring charge of $2.2 million for the remaining facility space and leasehold improvements at our former corporate headquarters located in Fremont, California. In conjunction with the sale of its Software business in April 2007, we accrued a restructuring charge of $0.6 million for the excess facility space formerly used by our Software business, which was included in the gain on disposal of

discontinued operations. In fiscal 2001 and 2002, we exited our hardware systems and hardware-related software engineering and professional services businesses, as well as a sublease agreement, and reduced our general and administrative overhead costs. The restructuring liability of $5.2 million as of July 31, 2008 represents the remaining accrual from non-cancelable lease payments, which continue through 2010, less estimated sublease rent. This accrual is subject to change should actual circumstances change. We will continue to evaluate and update, if applicable, these accruals on an annual basis.

All charges as a result of restructuring activities have been recorded in accordance with SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" and Emerging Issues Task Force ("EITF") 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs incurred in a Restructuring)."

Income Taxes

Effective August 1, 2007, we adopted the provisions of FASB Financial Accounting Standards Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on a tax return.

The adoption of FIN 48 did not result in any adjustment in the liability for unrecognized income tax benefits. As of July 31, 2008 and August 1, 2007, we reduced our unrecognized tax benefits by $0.6 million and $0.6 million, respectively. Since a full valuation allowance was provided for these unrecognized tax benefits, there was no impact on retained earnings as of August 1, 2007.

It is our policy to classify accrued interest and penalties as part of the accrued FIN 48 liability and record the expense in the provision for income taxes. As of the adoption date and July 31, 2008, it was not necessary to accrue interest and penalties related to our uncertain tax positions. For unrecognized tax benefits that exist at July 31, 2008, we do not anticipate any significant changes within the next twelve months. We are not currently subject to any federal, state or foreign income tax examination.

Stock-Based Compensation

We account for stock based compensation using the provisions of SFAS No. 123R "Share-Based Compensation." Under the fair value recognition provisions of SFAS 123R, we recognize stock-based compensation expense net of an estimated forfeiture rate and therefore only recognize compensation cost for those shares expected to vest over the service period of the award.

Calculating stock-based compensation expense requires the input of subjective assumptions, including the expected term of the option grant, stock price volatility, and the pre-vesting option forfeiture rate. We estimate the expected life of options granted based on historical exercise patterns. We estimate stock price volatility based on historical implied volatility in our stock. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience of our stock-based awards that are granted, exercised, or cancelled.

Contingencies and Litigation

We are subject to proceedings, lawsuits and other claims. We assess the likelihood of any adverse judgments or outcomes to these matters as well as ranges of probable losses. A determination of the amount of loss contingency required, if any, is assessed in accordance with SFAS No. 5, "Contingencies and Commitments" and recorded if probable after careful analysis of each individual matter. The required loss contingencies may change in the future as the facts and circumstances of each matter change.

Results of Operations

We believe that the application of accounting standards is central to a company's reported financial position, results of operations and cash flows. We review our annual and quarterly results, along with key accounting policies, with our audit committee prior to the release of financial results. In addition, we have not entered into any significant transactions with related parties. We do not use off-balance sheet arrangements with unconsolidated related parties, nor do we use other forms of off-balance sheet arrangements such as research and development arrangements.

The following table sets forth our operating results for the periods indicated as a percentage of net revenue, represented by selected items from the consolidated statements of operations. This table should be read in conjunction with the consolidated financial statements and the accompanying notes included in this Form 10-K.

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                                           For the Year Ended July 31,
                               2008                   2007                    2006
Consolidated
Statements of
Operations Data:
Online Media revenue            33.4 %                   38.4 %                  39.3 %
E-commerce revenue              66.6                     61.6                    60.7
Net revenue                    100.0 %                  100.0 %                 100.0 %
Online Media cost of            13.1                     10.4                    11.1
revenue
E-commerce cost of              50.4                     46.5                    46.4
revenue
Cost of revenue                 63.5                     56.9                    57.5
Gross margin                    36.5                     43.1                    42.5
Operating expenses:
Sales and marketing             15.1                     13.4                    13.1
Research and                     7.9                      8.3                     9.0
development
General and                     20.1                     14.1                    13.4
administrative
Restructuring costs              3.9                        -                       -
Total operating                 47.0                     35.8                    35.5
expenses
Income (loss) from             (10.5 )                    7.3                     7.0
operations
Interest and other               3.0                      6.4                     4.9
income, net
Income (loss) from
continuing                      (7.5 )                   13.7                    11.9
operations before
income taxes
Provision for income             0.2                      0.6                     0.3
taxes
Income (loss) from
continuing                      (7.7 )%                  13.1 %                  11.6 %
operations


Net Revenue

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                                             Year Ended July 31,                          % Change Fiscal 2008 to 2007      % Change Fiscal 2007 to 2006
($ in Thousands)              2008                  2007                  2006
Online Media revenue   $          18,506     $          17,496     $          13,242                       6 %                              32 %
E-commerce revenue                36,820                28,103                20,416                      31 %                              38 %

Sales for the fiscal years ended 2008, 2007, and 2006 were primarily to customers located in the United States of America.

For the fiscal years ended July 31, 2008, 2007, and 2006, respectively, no one customer represented 10% or greater of net revenue. Going forward, we do not anticipate that any one customer will represent more than 10% of annual net revenue.

Online Media Revenue

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                                           Year Ended July 31,                             % Change Fiscal 2008 to 2007      % Change Fiscal 2007 to 2006
($ in Thousands)            2008                   2007                   2006
Online Media        $        18,506        $        17,496        $        13,242                        6 %                                 32 %
revenue
Percentage of                    33 %                   38 %                   39 %
total net revenue

Online Media revenue was derived primarily from sales of advertising space on our various web sites as well as sponsorship-related arrangements and contextually-relevant advertising associated with advertising on these web sites.

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                                             Year Ended July 31,                          % Change Fiscal 2008 to 2007      % Change Fiscal 2007 to 2006
($ in Thousands)              2008                  2007                  2006
Cash advertising       $          12,223     $          11,091     $           9,193                   10 %                                 21 %
Sponsorships                       1,430                 1,339                   739                    7 %                                 81 %
Other revenue                      4,853                 5,066                 3,310                   (4 )%                                53 %
Online Media revenue   $          18,506     $          17,496     $          13,242                    6 %                                 32 %

Cash advertising revenue is derived from advertisements or services delivered to advertisers. Such advertisements may be in the form of an advertising impression, a click, the display of a text link, the download of a file or the collection of some data such as a lead.

The increase in cash advertising revenue during fiscal 2008 as compared to fiscal 2007 was due primarily to the addition of new customers participating in some of the new custom and premium programs we began offering in the second half of fiscal 2008.

The increase in cash advertising revenue during fiscal 2007 as compared to fiscal 2006 was due to the addition of new advertisers as well as additional spending by existing customers. The new customers were primarily due to the attractive demographics of the users of our web sites to these advertisers while the increased spending by existing customers was due to customers taking advantage of the programs we offer, such as our download program and custom landing page program.

Sponsorship revenue is derived from web marketing programs that are used to increase brand awareness. Revenue related to sponsorships is recognized ratably over the term of the marketing program or in conjunction with the delivery requirements set forth in the contract. The increase in sponsorship revenue in fiscal 2008 as compared to fiscal 2007 was due to customer participation in the sponsorship programs surrounding our 2008 Community Choice Awards. The increase in sponsorship revenue in fiscal 2007 as compared to fiscal 2006 was primarily due to additional advertisers participating in our sponsorship programs as well as increased revenue from existing advertisers whose campaigns ran partially during fiscal 2006 and for a full year in fiscal 2007.

Other revenue consists primarily of paid search, contextually-relevant advertising and referral fees. The decrease in other revenue during fiscal 2008 as compared to fiscal 2007 was primarily due to decreased revenue from referral fees resulting from completion of a partner's contracts. The increase in other revenue during fiscal 2007 as compared to fiscal 2006 was primarily due to an increase in revenue resulting from a higher allocation of unsold inventory to the providers of contextually-relevant advertising, including $0.7 million related to a new program with our largest partner.

We believe that our audience of technology professionals and enthusiasts who rely on our web properties, along with our favorable online visitor demographics, makes us an attractive advertising vehicle. We expect our Online Media revenue to increase in the future as we continue to develop new products which appeal to advertisers and optimize our web properties to increase monetization of ad network and international traffic.

E-commerce Revenue

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                                           Year Ended July 31,                            % Change Fiscal 2008 to 2007      % Change Fiscal 2007 to 2006
                            2008                   2007                   2006
E-commerce
revenue (in         $        36,820        $        28,103        $        20,416                         31 %                              38 %
thousands)
Percentage of                    67 %                   62 %                   61 %
total net revenue
Number of orders            518,429                431,919                316,060                         20 %                              37 %
(per year)
Average order       $         71.02        $         65.07        $         64.60                          9 %                               1 %
size (in dollars)

E-commerce revenue is derived from the online sale of consumer goods, including shipping, net of any returns and allowances.

The growth in E-commerce revenue in fiscal 2008 and 2007 as compared to the prior year was primarily due to increased consumer awareness of our web site as a result of broader product offerings, an increase in the number of custom developed products such as the Wi-Fi Detector Shirt and the 8-bit Tie, catalog marketing and media coverage of our web site which attracted a larger customer base, as well as web site enhancements, including improved search capability and customer communication features, that drove a 26% increase in the number of unique visitors to our web site. This increase in unique visitors resulted in a 20% and 37% increase in the number of orders shipped during fiscal 2008 and 2007, respectively. The average order size increased by 9% and 1% in fiscal 2008 and fiscal 2007, respectively, when compared to the prior fiscal year.

We expect E-commerce revenue to continue to grow as we increase the number of orders received by visitors to our site.

Cost of Revenue/Gross Margin

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                                           Year Ended July 31,                            % Change Fiscal 2008 to 2007      % Change Fiscal 2007 to 2006
($ in Thousands)            2008                   2007                   2006
Cost of revenue     $        35,128        $        25,933        $        19,337                         35 %                              34 %
Gross margin                 20,198                 19,666                 14,321                          3 %                              37 %
Gross margin %                   37 %                   43 %                   43 %
Headcount                        39                     33                     29

Gross margins increased in fiscal 2008 as compared to fiscal 2007 and in fiscal 2007 as compared to fiscal 2006. The increase in gross margins in fiscal 2008 as compared to fiscal 2007 was primarily due to increased gross margins in our E-commerce business, which was primarily due to the significant increase in E-commerce net revenue, offset in part by decreased gross margins in our Online Media business, which was primarily due to the significant increase in Online Media cost of revenue. The increase in gross margins in fiscal 2007 as compared to fiscal 2006 was primarily due to the 35% increase in net revenue, offset in part by a 34% increase in cost of revenue.

Cost of Revenue/Gross Margin by Segment
Online Media Cost of Revenue/Gross Margin

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                                            Year Ended July 31,                            % Change Fiscal 2008 to 2007      % Change Fiscal 2007 to 2006
($ in Thousands)            2008                   2007                   2006
Online Media cost   $         7,268        $         4,733        $         3,732                         54 %                               27 %
of revenue
Online Media                 11,238                 12,763                  9,510                        (12 )%                              34 %
gross margin
Online Media                     61 %                   73 %                   72 %
gross margin %

Online Media cost of revenue consists of personnel and related overhead, equipment and bandwidth associated with the operation of our data center, personnel costs and related overhead associated with developing the editorial content of our sites and personnel and related overhead and third-party costs associated with delivering revenue producing products. Online Media cost of revenue includes both costs which do not vary directly with revenue (fixed costs), such as equipment, personnel and editorial costs, as well as costs which are more directly affected by revenue (variable costs), such as bandwidth for delivering content and ad-serving costs. While our fixed costs will generally not vary directly with revenue; they may increase to the extent that we expand or upgrade the equipment necessary to operate our network or if we add additional sites to our network of web sites. Our variable costs generally vary based on the delivery of web pages, content, the number of advertisements delivered and the size of the advertisement. To the extent that we are able to increase our revenue without increasing our fixed costs, our gross margins will increase; however, to the extent that we expand our equipment in anticipation of increased activity, we may experience decreased gross margins.

The decrease in Online Media gross margin percentage for fiscal 2008 as compared . . .