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 sell technology-themed retail products for technology enthusiasts and general consumers through our ThinkGeek.com website and to our wholesale channel customers. We offer a broad range of unique products in a single web property that are not available in traditional brick-and-mortar stores. We introduce a range of new products to our audience on a regular basis and sell our own innovative GeekLabs products developed in-house. We have several wholesale partnerships with brick and mortar retailers that allow us to reach a new consumer audience and expand our unique brand. We have recently established and strengthened existing partnerships with certain retail store chains that have hundreds of locations throughout the United States and Canada.

Prior to September 17, 2012, we had two operating segments: e-Commerce and Media. e-Commerce sells technology-themed retail products for technology enthusiasts and general consumers through our ThinkGeek.com website and to our wholesale channel customers. Our Media segment provided web properties that served as platforms for the creation, review and distribution of online peer produced content, using our Media websites, SourceForge, Slashdot, and Freecode.

On May 11, 2012, we announced that our Board of Directors was exploring strategic alternatives with respect to our Media business, including the SourceForge, Slashdot and Freecode websites. We, along with our advisers, evaluated a range of options to maximize shareholder value, including, but not limited to, selling the Media business. We received bids from various organizations interested in purchasing the Media business and reviewed each one carefully with our advisers.

On September 17, 2012 (the "Closing Date"), we entered into an Asset Purchase Agreement (the "Purchase Agreement") with Dice Holdings, Inc. ("Dice") and two of Dice's subsidiaries, Dice Career Solutions, Inc. and eFinancialCareers Limited (collectively, the "Buyers") pursuant to which the Buyers purchased our Media business, including the SourceForge, Slashdot and Freecode websites (the "Purchased Business") and assumed certain related liabilities.

Our Board of Directors and management believe that selling the Media business will allow us to focus our business strategy on growing and improving our e-Commerce business and our ThinkGeek sourced and custom developed products. We believe the proceeds generated from the sale of the Media business and management's ability to solely focus on our core e-Commerce business will result in a positive impact to our future business strategy.

In accordance with the terms of the Purchase Agreement, the Buyers paid us $20.0 million in cash, of which $3.0 million was deposited by the Buyers into an escrow account for a period of twelve months after the Closing Date in order to secure our indemnification obligations to the Buyers for breaches of our representations, warranties, covenants and other obligations under the Purchase Agreement.

The Purchase Agreement contains customary representations, warranties and covenants. Subject to certain exceptions and limitations, each party has agreed to indemnify the other for breaches of representations, warranties and covenants and other specified matters. The Purchase Agreement generally limits the Company's liability for breaches of representations and warranties made in the Purchase Agreement to an aggregate of $10.0 million. The Purchase Agreement also contains covenants requiring us not to solicit or hire certain employees of the Buyers or

compete with the Purchased Business for a period of three years. We have also agreed with Dice to provide certain transition services to one another through December 31, 2013.

ThinkGeek's business strategy is to increase revenue by expanding the range of new and innovative products we sell, including our exclusive GeekLabs products, to manage gross margin dollars at the product level, and to increase traffic to our site and customer conversion. We attract traffic to our site by using a variety of traditional online and direct retail marketing channels including paid search and e-mail to our customers and followers. We continue to use the capabilities of the internet, including social networking sites such as Facebook, Twitter and YouTube, to increase brand awareness and to communicate with our customers.

Our ThinkGeek business is highly seasonal, reflecting the general pattern associated with the retail industry of peak sales and earnings during the calendar year-end holiday shopping season. In the past several years, a substantial portion of ThinkGeek revenue has occurred in the fourth quarter ending December 31. As is typical in the retail industry, we generally experience lower monthly revenue during the first nine months of the year.

Each year we initiate programs and promotions to attract additional customers and increase sales from our existing customer base. This year we enhanced our Geek Points program by making the program more flexible for our customers and in the first half of 2013 we will be modifying this program. We ran special programs to discount certain products and product lines and we offered free shipping and discounted shipping days. We regularly send direct marketing e-mails to our customers and we increase the number of e-mails and promotions during the fourth quarter in preparation for the holiday season. We also utilize Facebook, Twitter and YouTube to generate interest in our new product launches. We expect to continue to expand and diversify our sales and marketing programs next year.

During the first quarter of 2013, we restructured certain areas of the business and hired three new members of the senior leadership team. These changes will impact our operations beginning in the first quarter of 2013. We look forward to the knowledge, creativity, experience and passion these talented individuals will bring to the business.

We currently use the following key metrics to measure our e-Commerce business:

                                                  Year Ended December 31,
                                               2012        2011        2010
Daily unique visitors (in thousands) (1)      89,330      73,076      53,111
Number of orders received (in thousands) (2)   2,010       1,640       1,239
Conversion rate                                 2.25 %      2.24 %      2.33 %
Average order value received (3)             $ 61.10     $ 61.51     $ 63.74

Number of orders shipped (in thousands) (4)    2,011       1,707       1,303
Average order value shipped (5)              $ 59.13     $ 58.04     $ 58.59

(1) Unique visitors is the total of unique visitors for the ThinkGeek website during the periods presented. This data is accumulated daily and can include the same unique visitor on different days. We track unique visitors and the volume of traffic to our website to help us determine the effectiveness of our online marketing efforts.

(2) The number of orders received represents all orders placed on the ThinkGeek website during each period shown and does not necessarily correlate to revenue recognized during the period. For example, some orders placed on the ThinkGeek website at the end of a reporting period are recognized as revenue in the subsequent reporting period because delivery had not yet occurred.

(3) Average order value received or shipped is calculated by the total sales for orders received or shipped divided by the number of orders received or shipped. Average order value can vary depending on, but not limited to, seasonality, promotions, the number of volume sales in a given period, the competitive environment and economic conditions.

(4) The number of orders shipped represents all orders associated with the amount of revenue recognized for ThinkGeek for the period presented.

(5) Wholesale channel sales contributed to the total average order value shipped. Excluding wholesale channel sales, average order value shipped for ThinkGeek website orders was $56 and $55 for the years ended December 31, 2012 and 2011. Wholesale channel sales were insignificant compared to total sales during 2010 and therefore did not have a meaningful impact on average order value shipped for the year ended December 31, 2010.

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 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, inventories, the assessment of impairment of long-lived assets, stock-based compensation and discontinued operations.

Basis of Presentation

The results of our Media business, which was sold on September 17, 2012, are classified as discontinued operations for the years ended December 31, 2012, 2011 and 2010 in the Company's Consolidated Statement of Operations. The results include Media business revenues, cost of sales and operating and non operating expenses, excluding general corporate costs. Also included as discontinued operations for the year ended December 31, 2010 are the results from the sale of the Company's Geek.com business. The cash flows from the Media business' operating and investing activities are shown separately in cash flows from discontinued operations, with the exception of proceeds from the sale of the Media business and related transaction costs.

The assets and liabilities related to the Media business are included in their respective sections on the December 31, 2011 Consolidated Balance Sheet as they did not meet the criteria for classification as assets held for sale at that date.

During the fourth quarter of 2012, we reviewed our accounting treatment for accruing liabilities for our Geek Points loyalty program. We performed an analysis on the costs incurred for redeeming the Geek Points using historical data and determined that the liabilities were understated at the end of each of the reporting periods presented. Although the impact of the adjustments is immaterial, we adjusted our consolidated financial statements for all prior periods presented.

Net Revenue

Net revenue is derived from the online sale of consumer goods and through our wholesale channel. Net revenues are presented net of sales tax. We recognize revenue from consumer goods when persuasive evidence of an arrangement exists, delivery has occurred, the sale price is fixed or determinable, and collectibility is reasonably assured. Revenue is deferred for orders shipped but not delivered before the end of the period. The amount recorded as deferred revenue is estimated because of our high volume of transactions and the use of multiple shipping carriers. These estimates are used to determine what orders that shipped at the end of the reporting period, were delivered and should be recognized as revenue. When calculating these estimates, we consider historical experiences of shipping transit times for domestic and international orders using different carriers. On average, shipping transit times are approximately one to six business days. As of December 31, 2012 and December 31, 2011, $1.3 million and $0.9 million, respectively, was recognized as deferred revenue for orders placed at the end of the reporting period, but not yet delivered.

We also engage in the sale of gift certificates. When a gift certificate is sold, revenue is deferred until the certificate is redeemed and the products are delivered. Deferred revenue at December 31, 2012 and December 31, 2011 relating to gift certificates was $1.0 million and $0.7 million, respectively.

We reserve an amount for estimated returns at the end of each reporting period. We generally give customers a 90-day right to return products. These estimates are based on historical trends of amounts returned per revenue for a period. Reserves for returns at December 31, 2012 and December 31, 2011 were $0.5 million and $0.7 million, respectively, and are recorded as accrued liabilities and other in the consolidated balance sheets.

We voluntarily ceased selling a product in July 2012 because of safety concerns. We are offering our customers who have purchased this product, the opportunity to return the product in exchange for a ThinkGeek

credit. As of December 31, 2012, we issued an insignificant amount of credits. We believe the reserves for returns at December 31, 2012 to be adequate. Inventories

Inventories consist solely of finished goods that are valued at the lower of cost, using the weighted average cost method, or market. We review inventories each quarter and, when required, reduce estimated excess and obsolete inventories to their net realizable values.

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. 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.

Geek Points Loyalty Program

We maintain a customer loyalty program by issuing Geek Points to participating customers for certain purchases of products. Customers can redeem their Geek Points toward future purchases in accordance with program rules and promotions. Geek Points expire three years from the date they are earned. The Company accrues the cost of anticipated redemptions using an estimated redemption rate calculated based on historical experiences and trends, adjusted for known modifications to the program that will occur in the future. The cost of the redemptions is included in cost of revenues on the Company's consolidated statements of operations.

Stock-Based Compensation

We measure compensation cost for stock awards at grant date fair value and recognize the expense net of estimated forfeitures for shares expected to vest over the service period of the award.

Calculating compensation expense for stock options requires the input of subjective assumptions, including the expected term of the stock option grant, stock price volatility, interest rates and the forfeiture rate. The fair value of the option grants are calculated on the date of grant using the Black-Scholes option pricing model. The expected life is based on historical settlement patterns. Expected volatility is based on the historical implied volatility of our stock. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. We estimate the forfeiture rate based on historical trends of our stock-based awards that cancel.

Income Taxes

The Company has recognized a deferred tax asset associated with previously reported net operating losses, which can result in a future tax benefit. A valuation allowance is recognized if it is more-likely-than-not that some portion or all of the deferred tax asset will not be realized. The Company has recognized a valuation allowance for the full amount of the deferred tax asset as there is insufficient evidence to support that it is more-likely-than-not that the assets will be realized. The Company reviews its valuation allowance at each reporting period using, but not limited to, forecasted financial information to determine if the deferred tax assets could more-likely-than-not be realized and after considering the impact of limits sanctioned by Internal Revenue Code Section 382 on the use of net operating loss carryforwards.

The Company provides for uncertain tax positions and the related interest and penalties based upon management's assessment of whether a tax benefit is more-likely-than-not to be sustained upon examination by taxing authorities.

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 any loss contingency required is assessed 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 and Discontinued Operations

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.

                                                         Year Ended December 31,
                                                    2012          2011          2010
Consolidated Statements of Operations Data:
Net revenue                                         100.0  %      100.0  %      100.0  %
Cost of revenue                                      82.3          84.4          82.6
Gross margin                                         17.7  %       15.6  %       17.4  %
Operating expenses:
Sales and marketing                                   7.7           8.8           9.1
Technology and design                                 3.3           1.9           2.0
General and administrative                            8.4           9.6          11.9
Total operating expenses                             19.4  %       20.3  %       23.0  %
Loss from operations                                 (1.7 )        (4.7 )        (5.6 )
Gain on sale of non-marketable securities             3.4             -             -
Interest and other income (expense), net             (0.1 )           -           0.1
Income (loss) from continuing operations before
income taxes                                          1.6          (4.7 )        (5.5 )
Income tax provision (benefit)                          -          (1.1 )         0.1
Net income (loss) from continuing operations          1.5  %       (3.5 )%       (5.6 )%
Income from discontinued operations, net of tax      10.2  %        2.0  %       (0.8 )%
Net income (loss)                                    11.7  %       (1.5 )%       (6.4 )%

Net Revenue

Net revenue is derived from the sale of consumer goods at retail on our ThinkGeek website and from our wholesale channel, and includes shipping, net of returns and allowances. These consumer goods are typically electronics, gadgets, apparel, edibles, geek-themed and other specialty or unique items. Our customers are primarily technology enthusiasts and general consumers. We sell and ship our products domestically and internationally.

We experienced significant growth in net revenue during the years ended December 31, 2012 and December 31, 2011 as compared to their respective prior year periods. This is primarily due to an increase in the number of orders placed through our ThinkGeek website and an increase in revenue through our wholesale channel.
Our orders have grown year over year primarily due to heightened consumer awareness of our web site as a result of more advertising, diversified product offerings and the increase and variety of promotions offered to our customers. During 2012, we introduced a number of new products that included unique products developed in our GeekLabs. Our internally developed Minecraft Foam Pickaxe and Minecraft Foam Sword were best sellers throughout

the year. Also our GeekLabs product, Star Trek Pizza Cutter, continues to be a popular item. Other best selling GeekLabs products include Portal themed products, LED Iron Man shirt and Star Wars family car decals. Other popular products this year were the Bag of Holding Messenger bag, DIY guitar pick punch, Star Wars lightsaber, bathrobe products and Doctor Who-themed products. During 2011, new products such as the i-CADE ,the Joystick-IT, the Han Solo Carbonite Chocolate Bar, the Portal Plush Turret and items inspired by the popular TV show DEXTER were introduced. We are licensed to sell our unique GeekLabs products that have themes such as StarWars, StarTrek or Minecraft through the relationships we have with Lucas Films, CBS and Mojang, respectively.

The number of unique visitors increased 22% during the year ended December 31, 2012, as compared to the year ended December 31, 2011 and the number of unique visitors increased 38% during the year ended December 31, 2011 , as compared to the year ended December 31, 2010. The higher volume of visitors is primarily due to our efforts to increase consumer awareness of our ThinkGeek website through media coverage and advertising.

Wholesale revenue to retailers and brick and mortar stores increased $1.5 million during the year ended December 31, 2012, as compared to the year ended December 31, 2011. These stores include chain stores with a strong presence in malls across the country and in Canada and free standing retail stores. Some of our current wholesale clients are f.y.e., HMV, Books-A-Million and Urban Outfitters. We also partnered with Old Navy for a custom version of the Electronic Rock Guitar shirt during the 2011 holiday season. The ThinkGeek sales team continues to strengthen relationships with our existing wholesale clients and acquire new clients who have particular interest in ThinkGeek products.

ThinkGeek products are sold in the U.S. and internationally. Approximately 86%, 86% and 82% of sales were made to customers in the US in 2012, 2011 and 2010 respectively. We have been focusing on increasing ThinkGeek awareness in other countries and increasing our ability to ship to other countries. We continue to diversify our product offerings by introducing new products, including our innovative GeekLabs products and expanding licensing partnerships. We also are working to continually improve our ThinkGeek website. We have developed enhancements that include improved product search capabilities, easier navigation in the website, and a smoother check-out process. In 2011, we developed our mobile site allowing our customers to access our website from numerous new channels such as tablets and smart phones.

Cost of Revenue / Gross Margin

Cost of revenue consists of product, shipping and fulfillment costs and
personnel and related overhead expenses associated with the operations and
merchandising functions.
                     Year Ended December 31,                          Year Ended December 31,
                      2012              2011         % Change          2011              2010         % Change
($ in thousands)
Cost of revenue  $     97,848       $   83,602           17 %     $     83,602       $   63,036           33 %
Gross margin     $     21,065       $   15,455           36 %     $     15,455       $   13,299           16 %
Gross margin %             18 %             16 %                            16 %             17 %

Cost of revenues increased $14.2 million during the year ended December 31, 2012, as compared to the year ended December 31, 2011 primarily due to an increase in product costs of $13.1 million and packaging and fulfillment costs of $2.4 million, partially offset by a lower expense of $0.9 million related to a reduction of our Geek Points liability and a lower expense of $0.3 million due to a rebate received from a vendor . The aforementioned increases were due to the increase in revenues and number of orders. Royalties increased due to a higher volume of sales of our licensed product lines. Our Geek Points liability decreased due to management's decision to modify the Geek Points loyalty program in the first half of 2013.

Cost of revenues increased $20.6 million during the year ended December 31, 2011, as compared to year ended December 31, 2010 primarily due to an increase in product costs of $13.4 million, shipping costs of $3.6 million, fulfillment and packing costs of $1.9 million, and merchandising and customer support costs of $1.0 million. These increases were due to the increase in revenues and number of orders. Fulfillment costs were also higher due to the start-up costs related to moving to a new fulfillment center. The increase in merchandising and customer support costs was also due to increased personnel required to support our broader product offering.

Gross margin as a percentage of revenues increased by two percentage points due to a decrease in seventeen full-time equivalents ("FTEs"). During the first quarter of 2012, we began outsourcing our customer service department, which reduced FTEs. We also redirected certain of our workforce from merchandising, included as cost of revenue, to developing our own innovative products in our GeekLabs, included in technology and design. Also contributing to better margins is our efforts to reduce shipping costs due to renegotiations with our largest shipping supplier.

Gross margin percentage for the year ended December 31, 2011 decreased from the year ended December 31, 2010 due to higher customer discounts as well as increased inbound shipping costs, fulfillment costs and merchandising and customer support costs. The higher customer discounts were primarily due to decisions to discontinue certain products in the second and third quarters of 2011 to prepare for the peak holiday season and apparel promotions during the holiday season.

We are continually analyzing gross margins by the product and category levels to ensure that product mix and product costs are in line with our gross margin . . .