Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. Words such as "may," "could," "anticipate," "potential," "intend," "expect," "believe," "in our view," and variations of such words and similar expressions, are intended to identify such forward-looking statements, which include, but are not limited to, statements regarding our expectations and beliefs regarding future revenue growth; key metrics; gross margins; financial performance and results of operations; technological trends in, and demand for online advertising; management's strategy, plans and objectives for future operations; employee relations and our ability to attract and retain highly qualified personnel; our ability to integrate Ohloh Corporation's technology and employees; our intent to continue to invest significant resources in development of our web properties; competition, competitors and our ability to compete; liquidity and capital resources; the outcome of any litigation to which we are a party; our accounting policies; and sufficiency of our cash resources and investments to meet our operating and working capital requirements and any share repurchases. Actual results may differ materially from those expressed or implied in such forward-looking statements due to various factors, including those set forth in the Risk Factors contained in the section of this Quarterly Report on Form 10-Q entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." We undertake no obligation to update the forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

Critical Accounting Estimates

The following are the significant changes in our critical accounting estimates during the three and six months ended June 30, 2009 as compared to what was previously disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended July 31, 2008.

Effective August 1, 2008, we adopted the provisions of Statement of Financial Accounting Standards (FAS) 157, "Fair Value Measurements" ("FAS 157") and FAS 159, "The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115" ("FAS 159"). As permitted by FAS 159, we have elected the fair value option for our Auction Rate Securities, also classified as Municipal Bonds, as of August 1, 2008. In conjunction with the adoption of FAS 159, we reduced our Accumulated Other Comprehensive Loss by $0.6 million and accounted for this as a cumulative effect of a change in accounting principle which was recorded as an increase in our Accumulated Deficit.

Overview

We own and operate a network of media web properties, serving the IT professional, software development and open source communities. Through our ThinkGeek, Inc. subsidiary, we also provide online sales of a variety of retail products of interest to these communities. Our network of web properties include: SourceForge.net, Slashdot.org, ThinkGeek.com, Ohloh.net, fossfor.us and freshmeat.net. Combining user-developed content and e-commerce, we are the global technology community's nexus for information exchange, goods for geeks, and open source software distribution and services.

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 WebMediaBrands Inc. and in April 2007, we sold our Software business to CollabNet, Inc. ("CollabNet"). On May 24, 2007, reflecting our strategic decision to focus on our network of media and e-commerce web properties, we changed our name to SourceForge, Inc. and merged with our wholly-owned subsidiary, OSTG, Inc. In June 2009, we acquired Ohloh Corporation, a directory of open source projects and developers.

Our business consists of two operating segments: Online Media and E-commerce. Our Online Media segment provides web properties that serve as platforms for the creation, review and distribution of online peer produced content. Our audience of technology professionals and enthusiasts relies on our web properties SourceForge.net, Slashdot.org, Ohloh.net, fossfor.us 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. Our E-commerce segment sells technology themed retail products for technology enthusiasts through our ThinkGeek.com web site.

Our strategy for our Online Media business is to increase our awareness, improve our sites and capture, analyze and draw insights from our data. We currently serve four communities: developers, consumers, advertisers and investors. We believe that our brand recognition in the marketing and advertising communities lags behind our recognition in the Open Source and technology communities. This gap is a challenge and also an opportunity to better monetize our traffic. We expect to invest in establishing our brand identity among all four communities to increase awareness. Our data strategy is designed to enable better targeting for advertisers, allowing for strategic insights to clients and partners, and ultimately to consumers. We have recently completed the acquisition of Ohloh Corporation, which further enhances this strategy by providing insights into the entire open source ecosystem. We are also investing in our web properties, primarily SourceForge.net where we launched a more modern platform in July 2009.

We currently use the following key metrics which are derived from data provided by Google Analytics and Coremetrics to measure our Online Media business:

                                                          Three Months Ended
                                                   June 30, 2009       June 30, 2008

Unique Visitors per Month (in thousands) (1)(2)            35,109              34,163
Visits per Month (in thousands) (2)                        60,101              63,042
Pages per Visit                                               2.4                 2.3
Page Views per Month (in thousands) (2)                   144,375             145,845

Revenue per Thousand Pages (RPM)                  $         10.02     $         11.47
Revenue per User (RPU) (3)                        $          0.49     $          0.59

(2) - Per month amounts are the average calculated as the total amount for the period divided by the months in the period.

(3) - Revenue per User ("RPU") is an annualized amount based on revenue and unique users during the period presented.

Based on our review and analysis of metrics surrounding peer sites and our competitors, we believe that growth in engagement is a significant element of our strategy. As such, a key element of our growth plans is to increase engagement. Our metrics around engagement per user are an important measure, and we are focused on both growing the number of unique visitors and deepening the average levels of engagement.

Media companies have historically reported page views as a metric seeking to measure users' level of engagement. Since the introduction of a new web technology, known as asynchronous JavaScript and XML ("AJAX") which allows users to browse web sites without loading a new page, page views have generally declined for the same, or even higher, level of activity. We have begun to implement this technology and as we increase our adoption and change our sites to continue to make them easier to use and more accessible, we may experience associated fluctuations in page views. As the measures of engagement utilized by media companies evolve to include elements such as time spent per visit or number of visits per month in addition to or in lieu of page views, we expect that our reported metrics may also evolve. In addition, as we modernize and insert more intelligence into our web properties to enhance the user experience, we remove pages from the user's flow which decreases page views.

Our E-commerce business strategy is to increase revenue by expanding the range of new and innovative products we sell, including products developed by us, and by attracting increased traffic to our site. We attract traffic to our sites using a variety of traditional online and direct retail marketing channels, direct mail and email to our customers and followers. We also publish and communicate with our customers and followers using Twitter (http://twitter.com/thinkgeek) and a ThinkGeek fan page on Facebook. In addition, we are investing in a site redesign which is expected to be released coinciding with ThinkGeek's 10 year anniversary in August 2009.

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

Results of Operations

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. 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 revenue, represented by selected items from the unaudited condensed consolidated statements of operations. This table should be read in conjunction with the condensed consolidated financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q.

                                                 Three Months Ended June 30,             Six Months Ended June 30,
                                                  2009                 2008              2009                 2008
Consolidated Statements of Operations Data:
Online Media revenue                                  36.8 %               42.5 %            36.6 %               41.4 %
E-commerce revenue                                    63.2                 57.5              63.4                 58.6
Revenue                                              100.0 %              100.0 %           100.0 %              100.0 %
Online Media cost of revenue                          14.6                 16.7              16.4                 16.9
E-commerce cost of revenue                            52.2                 44.1              53.0                 47.4
Cost of revenue                                       66.8                 60.8              69.4                 64.3
Gross margin                                          33.2                 39.2              30.6                 35.7
Operating expenses:
Sales and marketing                                   16.6                 19.7              19.3                 18.2
Research and development                              17.6                 10.6              16.6                 10.2
General and administrative                            19.0                 34.6              19.6                 26.1
Amortization of intangible assets                      0.2                    -               0.1                    -
Restructuring costs                                      -                  6.5                 -                  3.3
Total operating expenses                              53.4                 71.4              55.6                 57.8
Loss from operations                                 (20.2 )              (32.2 )           (25.0 )              (22.1 )
Interest and other income (expense), net             (10.5 )                0.1             (25.1 )                2.0
Loss before income taxes                             (30.7 )              (32.1 )           (50.1 )              (20.1 )
Provision (benefit) for income taxes                  (0.3 )               (0.3 )            (0.4 )                0.1
Net loss                                             (30.4 )%             (31.8 )%          (49.7 )%             (20.2 )%

Revenue

The following table summarizes our revenue by business segment:

                                                    Three Months Ended                       Six Months Ended
                                                                                                                              % Change           % Change
                                             June 30, 2009       June 30, 2008       June 30, 2009       June 30, 2008      Three Months        Six Months
($ in thousands)
Online Media revenue                        $         4,341     $         5,018     $         8,118     $         9,603               (13 )%            (15 )%
E-commerce revenue                                    7,444               6,780              14,038              13,583                10 %               3 %
Revenue                                     $        11,785     $        11,798     $        22,156     $        23,186                 0 %              (4 )%

Sales for the three and six months ended June 30, 2009 and June 30, 2008 were primarily to customers located in the United States of America.

For the three months ended June 30, 2009 and June 30, 2008, no one customer represented more than 10% of our revenue. For the six months ended June 30, 2009, Google Inc. represented 11.1% of our revenue while no one customer represented more than 10% of our revenue for the six months ended June 30, 2008.

Revenue by Segment

Online Media Revenue

                                                     Three Months Ended                       Six Months Ended
                                                                                                                               % Change           % Change
                                             June 30, 2009        June 30, 2008       June 30, 2009       June 30, 2008      Three Months        Six Months
($ in thousands)
Direct sales                                $         3,030      $         3,914     $         5,255     $         7,366               (23 )%            (29 )%
Ad Networks                                           1,075                  876               2,434               1,786                23 %              36 %
Other                                                   236                  228                 429                 451                 4 %              (5 )%
Online Media revenue                        $         4,341      $         5,018     $         8,118     $         9,603               (13 )%            (15 )%

Our Online Media revenue is derived primarily from advertising products delivered on our web properties. Direct sales revenue is generated from orders received by our United States based sales team, which may also include advertisements to be delivered globally. Ad Networks revenue represents revenue from our Ad Network partners who sell our inventory globally to customers through automated systems and includes revenue from international resellers who use automated systems. Other represents orders received from our international resellers, sales of reports on data underlying the open source community as well as referral fees and revenue earned from subscriptions to our web properties.

Direct sales revenue for the three months ended June 30, 2009 decreased $0.9 million as compared with the three months ended June 30, 2008. The decrease was primarily due to a $2.2 million decrease in revenue from advertisers whose campaigns were not renewed or who chose to advertise at lower levels during the three months ended June 30, 2009, offset in part by increases in revenue of $0.6 million from customers who did not advertise in the three months ended June 30, 2008 and $0.7 million from customers who increased their advertising levels during the three months ended June 30, 2009 as compared with the three months ended June 30, 2008. The increase in Ad Networks revenue for the three months ended June 30, 2009 as compared to the three months ended June 30, 2008 was due to increased revenue from Google as we continue to optimize our web properties to increase yields from Google and other Ad Networks. Since we obtain higher prices for direct sales revenue, we allocate our available ad units first to direct sales campaigns and then to ad networks. To the extent that direct sales campaigns decline, we would allocate additional ad units to ad networks, which would increase revenue from ad networks. Other revenue did not change significantly during the three months ended June 30, 2009 as compared to the three months ended June 30, 2008.

Direct sales revenue for the six months ended June 30, 2009 decreased $2.1 million as compared with the six months ended June 30, 2008. The decrease was primarily due to a $4.0 million decrease in revenue from advertisers whose campaigns were not renewed or who chose to advertise at lower levels during the six months ended June 30, 2009, offset in part by increases in revenue of $1.0 million from customers who did not advertise in the six months ended June 30, 2008 and $0.9 million from customers who increased their advertising levels during the six months ended June 30, 2009 as compared with the six months ended June 30, 2008. The increase in Ad Networks revenue for the six months ended June 30, 2009 as compared to the six months ended June 30, 2008 was due to increased revenue from Google as we continue to optimize our web properties to increase yields from Google and other Ad Networks. Other revenue did not change significantly during the six months ended June 30, 2009 as compared to the six months ended June 30, 2008.

Traditional online advertising, which are those advertising units defined by The Interactive Advertising Bureau, has historically constituted a majority of our direct sales revenue. Pricing pressures combined with decrease in demand for traditional online advertising has resulted in a change in our revenue mix. In anticipation of this change, we began to introduce higher-priced premium advertising products in the first quarter of calendar 2008. Although revenue from these premium advertising products accounted for more than 20% of our revenue in the six months ended June 30, 2009, this revenue has not grown sufficiently to offset the declines in traditional online advertising. We believe that traditional online advertising will continue to decline and in order to grow revenue, we will continue to focus on creating new and innovative advertising products.

E-commerce Revenue

                                                    Three Months Ended                       Six Months Ended
                                                                                                                              % Change           % Change
                                             June 30, 2009       June 30, 2008       June 30, 2009       June 30, 2008      Three Months        Six Months

E-commerce revenue (in thousands)           $         7,444     $         6,780     $        14,038     $        13,583                10 %               3 %
Percentage of total revenue                              63 %                57 %                63 %                59 %
Number of orders shipped                            124,776              94,139             240,562             194,205                33 %              24 %
Avg. size of order received                 $            63     $            75     $            62     $            73               (16 )%            (15 )%

E-commerce revenue is derived from the online sale of consumer goods, including shipping, net of any returns and allowances. The increase in E-commerce revenue during the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, was primarily due to a 33% increase in the number of shipments year-over-year, offset in part by a 16% decrease in the average value per shipment. The increase in E-commerce revenue during the six months ended June 30, 2009, as compared to the six months ended June 30, 2008, was primarily due to a 15% decrease in the average value per shipment, offset in part by a 24% increase in the number of shipments year-over-year. The decrease in average shipment value was due to lower mix of price points of products purchased due to a customer preference for lower priced products. The increase in the number of shipments was primarily driven by increased demand for ThinkGeek's innovative products.

Cost of Revenue/Gross Margin

                                                     Three Months Ended                       Six Months Ended
                                                                                                                               % Change           % Change
($ in thousands)                             June 30, 2009        June 30, 2008       June 30, 2009       June 30, 2008      Three Months        Six Months
Cost of revenue                             $         7,870      $         7,174     $        15,387     $        14,901                10 %               3 %

Cost of revenue consists of personnel costs and related overhead associated with developing and delivering external content for our media sites, cost of equipment and co-location costs to deliver external media content and product and operating costs associated with our E-commerce business.

Gross margins decreased for the three and six months ended June 30, 2009 as compared with the three and six months ended June 30, 2008, due primarily to decreases in our Online Media revenue and increases in our E-commerce costs of revenue.

Cost of Revenue/Gross Margin by Segment

Online Media Cost of Revenue/Gross Margin

                                                     Three Months Ended                       Six Months Ended
                                                                                                                               % Change           % Change
($ in thousands)                             June 30, 2009        June 30, 2008       June 30, 2009       June 30, 2008      Three Months        Six Months
Online Media cost of revenue                $         1,718      $         1,967     $         3,625     $         3,921               (13 )%             (8 )%
Online Media gross margin                             2,623                3,051               4,493               5,682               (14 )%            (21 )%
Online Media gross margin %                              60 %                 61 %                55 %                59 %
Headcount                                                19                   20                  19                  20

Online Media cost of revenue consists of personnel costs and related overhead associated with maintaining and supporting the sites, delivering advertising campaigns and developing the editorial content of the sites, co-location and depreciation costs for delivering site content, and the costs of serving and running advertising campaigns.

The decrease in Online Media gross margin percentages for the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, was primarily driven by decreased Online Media revenue, offset in part by lower cost of revenue due to lower personnel related costs of $0.1 million and lower co-location costs of $0.1 million.

The decrease in Online Media gross margin percentages for the six months ended June 30, 2009, as compared to the six months ended June 30, 2008, was primarily driven by the $1.5 million decrease in Online Media revenue, offset in part by lower cost of revenue of $0.2 million primarily due to lower personnel and consulting costs and lower co-location costs. The decrease in personnel and consulting costs is due to lower headcount and our discontinued use of outside editors for our web-sites and the decrease in co-location costs is primarily the result of the transition to our new data center and lower rates charged by our co-location provider.

E-commerce Cost of Revenue/Gross Margin

                                         Three Months Ended                       Six Months Ended                 % Change           % Change
                                 June 30, 2009        June 30, 2008       June 30, 2009       June 30, 2008      Three Months        Six Months
($ in thousands)
E-commerce cost of revenue      $         6,152      $         5,207     $        11,762     $        10,980                18 %                7 %
E-commerce gross margin                   1,292                1,573               2,276               2,603               (18 )%             (13 )%
E-commerce gross margin %                    17 %                 23 %                16 %                19 %
Headcount                                    24                   17                  24                  17

E-commerce cost of revenue consists of product costs, shipping and fulfillment costs and operating costs, and includes personnel costs associated with the E-commerce operations and merchandising functions.

The increase in E-commerce cost of revenue during the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, was primarily due to an increase in product costs of $0.6 million and an increase in operating costs of $0.2 million. The increase in product costs was due to an increase in revenue as well as the mix of products ordered by customers. The increase in operating expenses was primarily due to additional headcount and related costs to provide customer service and to identify and source new products.

The increase in E-commerce cost of revenue during the six months ended June 30, 2009, as compared to the six months ended June 30, 2008, was primarily due to increases in product costs of $0.5 million and operating costs of $0.5 million, offset in part by a decrease in shipping costs of $0.2 million. The increase in product costs was primarily due to an increase in revenue as well as the mix of products ordered by customers. The increase in operating expenses was primarily . . .