Geeknet 10Q 2007 Q0 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended January 31, 2007

	Or

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934.

	For the transition period from to .

Commission File Number: 000-28369

VA Software Corporation

(Exact name of Registrant as specified in its charter)

Delaware	77-0399299
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

46939 Bayside Parkway, Fremont, California, 94538

(Address, including zip code, of principal executive offices)

(510) 687-7000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value

(Title of Class)

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 [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check one):

Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Title Of Class	Outstanding At February 28, 2007
Common Stock, $0.001 par value	67,621,932

Table of Contents


PART I.	FINANCIAL INFORMATION		Page No.
Item 1.	Financial Statements		3
		Condensed Consolidated Balance Sheets at January 31, 2007 (unaudited) and July 31, 2006	3
		Condensed Consolidated Statements of Operations for the three and six months ended January 31, 2007 and January 31, 2006 (unaudited)	4
		Condensed Consolidated Statements of Cash Flows for the six months ended January 31, 2007 and January 31, 2006 (unaudited)	5
		Notes to Unaudited Condensed Consolidated Financial Statements	6

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3	Quantitative and Qualitative Disclosures About Market Risk		31
Item 4	Controls and Procedures		32


PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		32
Item 1A.	Risk Factors		33
Item 4.	Submission of Matters to a Vote of Security Holders		43
Item 6.	Exhibits		44
Signatures			44
Certifications

PART I

VA SOFTWARE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, unaudited)

	January 31,			July 31,
	2007			2006
ASSETS

Current assets:
Cash and cash equivalents	$	7,117		$	14,753
Short-term investments		43,998			37,138
Accounts receivable, net of allowance of $182 and $202, respectively		5,728			5,365
Related party receivables		79			33
Inventories		2,462			1,091
Prepaid expenses and other current assets		1,583			1,026
Total current assets		60,967			59,406
Property and equipment, net		1,232			627
Long-term investments		4,972			1,152
Restricted cash, non current		1,000			1,000
Other assets		1,005			1,027
Total assets	$	69,176		$	63,212

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,219		$	1,172
Accrued restructuring liabilities, current portion		1,593			1,592
Deferred revenue (including $184 and $129 related party deferred revenue, respectively)		2,357			2,320
Accrued liabilities and other		3,098			3,057
Total current liabilities		9,267			8,141
Accrued restructuring liabilities, net of current portion		3,718			4,515
Other long-term liabilities		1,097			1,178
Total liabilities		14,082			13,834
Commitments and contingencies (Notes 9 and 11)
Stockholders’ equity:
Common stock		68			65
Treasury stock		(4	)		(4	)
Additional paid-in capital		794,508			790,437
Accumulated other comprehensive loss		(19	)		(25	)
Accumulated deficit		(739,459	)		(741,095	)
Total stockholders’ equity		55,094			49,378
Total liabilities and stockholders’ equity	$	69,176		$	63,212

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

VA SOFTWARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts, unaudited)

	Three Months Ended January 31,						Six Months Ended January 31,
	2007			2006			2007		2006

Net revenue:
Online Media revenue, including $21, $21, $43 and $43 of related party revenue, respectively	$	3,827		$	2,694		$	7,530	$	5,275
E-commerce revenue		13,277			9,062			17,738		12,648
Software revenue, including $73, $80, $147 and $291 of related party revenue, respectively		1,720			2,970			3,856		4,391
Net revenue		18,824			14,726			29,124		22,314
Cost of revenue:
Online Media cost of revenue		1,186			937			2,290		1,800
E-commerce cost of revenue		9,608			6,529			13,151		9,371
Software cost of revenue		374			311			744		587
Cost of revenue		11,168			7,777			16,185		11,758
Gross margin		7,656			6,949			12,939		10,556
Operating expenses:
Sales and marketing		2,927			2,771			5,530		5,002
Research and development		1,384			1,621			2,957		3,135
General and administrative		2,159			1,733			4,108		3,345
Amortization of intangible assets		1			1			2		2
Total operating expenses		6,471			6,126			12,597		11,484
Income (loss) from operations		1,185			823			342		(928	)
Interest and other income, net		727			208			1,431		495
Income (loss) from continuing operations before income taxes		1,912			1,031			1,773		(433	)
Provision for income taxes		136			(41	)		137		(32	)
Income (loss) from continuing operations		1,776			1,072			1,636		(401	)
Discontinued operations:
Income from operations, net of taxes		-			91			-		330
Gain on sale, net of taxes		-			9,340			-		9,340
Income from discontinued operations		-			9,431			-		9,670
Net income	$	1,776		$	10,503		$	1,636	$	9,269
Other comprehensive income:
Unrealized gain (loss) on marketable securities and investments		(4	)		40			6		(2	)
Foreign currency translation gain		-			104			-		36
Comprehensive income	$	1,772		$	10,647		$	1,642	$	9,303
Income (loss) per share from continuing operations:
Basic	$	0.03		$	0.02		$	0.02	$	(0.01	)
Diluted	$	0.03		$	0.02		$	0.02	$	(0.01	)
Income per share from discontinued operations:
Basic	$	0.00		$	0.15		$	0.00	$	0.16
Diluted	$	0.00		$	0.15		$	0.00	$	0.16
Net income per share:
Basic	$	0.03		$	0.17		$	0.02	$	0.15
Diluted	$	0.03		$	0.17		$	0.02	$	0.15
Shares used in per share calculations:
Basic		66,827			61,727			66,056		61,698
Diluted		69,248			62,984			68,666		62,837

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

VA SOFTWARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

	Six Months Ended January 31,
	2007			2006

Cash flows from operating activities:
Net income	$	1,636		$	9,269
(Income) from discontinued operations		-			(9,670	)
Income (loss) from continuing operations	$	1,636		$	(401	)
Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities:
Depreciation and amortization of intangibles		276			309
Stock-based compensation expense		856			378
Provision for bad debts		71			(4	)
Provision for excess and obsolete inventory		(8	)		(18	)
(Gain)/loss on sale of assets		(5	)		125
Changes in assets and liabilities, net of disposition:
Accounts receivable		(480	)		234
Inventories		(1,363	)		(723	)
Prepaid expenses and other assets		(536	)		(178	)
Accounts payable		1,047			553
Accrued restructuring liabilities		(796	)		(952	)
Deferred revenue		37			684
Accrued liabilities and other		41			141
Other long-term liabilities		(81	)		(46	)
Net cash provided by operating activities from continuing operations		695			102
Cash flows from investing activities from continuing operations:
Purchase of property and equipment		(875	)		(161	)
Purchase of marketable securities		(41,411	)		(24,761	)
Sale of marketable securities		30,737			23,964
Other, net		-			(3	)
Net cash used in investing activities from continuing operations		(11,549	)		(961	)
Cash flows from financing activities from continuing operations:
Proceeds from issuance of common stock, net		3,218			108
Other		-			(11	)
Net cash provided by financing activities from continuing operations		3,218			97
Effect of exchange rate changes on cash and cash equivalents		-			(16	)
Cash flows from discontinued operations:
Net cash provided by operating activities		-			274
Net cash used in investing activities		-			(2	)
Proceeds from sale of Online Images business, net		-			8,033
Net cash provided by discontinued operations		-			8,305
Net increase (decrease) in cash and cash equivalents		(7,636	)		7,527
Cash and cash equivalents, beginning of period		14,753			2,498
Cash and cash equivalents, end of period	$	7,117		$	10,025

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

VA SOFTWARE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

Overview

VA Software Corporation (“VA Software,” “VA” or the “Company”) was incorporated in California in January 1995 and reincorporated in Delaware in December 1999. From the date of its incorporation through October 2001, the Company sold Linux-based hardware systems and services under the name VA Linux Systems, Inc. On June 27, 2001, the Company announced its decision to exit its Linux-based hardware business. Today, the Company does business under the name VA Software Corporation. Its wholly-owned subsidiary, OSTG, Inc. ("OSTG"), an operator of a network of Internet web sites, including SourceForge.net and Slashdot.org, serving the IT professional, software development and open source communities, comprises the Online Media segment. OSTG’s wholly-owned subsidiary, ThinkGeek, Inc., an online sales retailer, comprises the E-commerce segment. The Software segment develops, markets and supports a software application known as SourceForge Enterprise Edition ("SFEE").

In December 2005, the Company completed the sale of its Online Images business to Jupitermedia Corporation and no longer has operations in this segment. The sale met the criteria in Statement of Financial Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” to be presented as discontinued operations. Accordingly, all financial information related to the Online Images business has been presented as discontinued operations in the accompanying condensed consolidated financial statements. See Note 8 — Discontinued Operations.

The interim financial information presented in this Form 10-Q is not audited and is not necessarily indicative of the Company’s future consolidated financial position, results of operations or cash flows. The unaudited condensed consolidated financial statements contained in this Form 10-Q have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), and on the same basis as the annual financial statements. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position as of January 31, 2007, its results of operations for the three and six months ended January 31, 2007 and January 31, 2006 and its cash flows for the six months ended January 31, 2007 and January 31, 2006 have been made. These financial statements and notes should be read in conjunction with the Company’s audited financial statements and notes thereto for the fiscal year ended July 31, 2006, included in the Company’s Annual Report on Form 10-K filed with the SEC.

2. Summary of Significant Accounting Policies

Use of Estimates in Preparation of Consolidated Financial Statements

The preparation of the Company’s consolidated financial statements and related notes requires the Company to make estimates, which include judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. The Company has based its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances and the Company evaluates its estimates on a regular basis and makes changes accordingly. Historically, the Company’s estimates relative to its critical accounting estimates have not differed materially from actual results, however actual results may differ from these estimates under different conditions.

A critical accounting estimate is based on judgments and assumptions about matters that are highly uncertain at the time the estimate is made. Different estimates that reasonably could have been used, or changes in accounting estimates, could materially impact the financial statements.

There have been no significant changes to the Company’s critical accounting estimates during the three and six months ended January 31, 2007 as compared to what was previously disclosed in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2006.

Principles of Consolidation

The interim financial information presented in this Quarterly Report on Form 10-Q includes the accounts of VA and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company owns approximately 14% of VA Linux Systems Japan, K.K.’s (“VA Linux Japan”) outstanding common stock. As the Company holds less than 20% of the voting stock of VA Linux Japan and does not otherwise exercise significant influence, this investment is accounted for under the cost method. VA Linux Japan acts as a reseller of the Company’s SFEE application to customers in Japan and, pursuant to a license agreement with the Company, resyndicates certain OSTG web sites for the Japanese market. There are $0.1 million of related-party receivables and $0.2 million of related-party deferred revenue associated with VA Linux Japan as of January 31, 2007 that are included in trade receivables and deferred revenue in the accompanying condensed consolidated balance sheets. There were $0.03 million of related-party receivables and $0.1 million of related-party deferred revenue associated with VA Linux Japan as of July 31, 2006 that were included in trade receivables and deferred revenue in the accompanying condensed consolidated balance sheets. There were $0.1 million and $0.1 million of related-party revenue associated with VA Linux Japan for the three months ended January 31, 2007 and January 31, 2006, respectively. There were $0.2 million and $0.3 million of related-party revenue associated with VA Linux Japan for the six months ended January 31, 2007 and January 31, 2006, respectively.

Foreign Currency Translation

The functional currency of all the Company’s foreign subsidiaries is the respective country’s local currency. The Company has liquidated all but a single foreign legal entity as of January 31, 2007. For the periods presented, no revenue was generated from foreign entities and the expenses were administrative in nature and were immaterial to the consolidated results of operations for the periods presented. A minimal cash balance is maintained in the remaining foreign entity for legal purposes. Remaining balance sheet accounts are translated into U.S. dollars at exchange rates prevailing at balance sheet dates. Expenses are translated into U.S. dollars at average rates for the period. Gains and losses resulting from translation are charged or credited in other comprehensive income as a component of stockholders’ equity. As of January 31, 2007 the Company did not hold any foreign currency derivative instruments.

Segment and Geographic Information

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS No. 131 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions about how to allocate resources and assess performance. The Company’s chief decision-making group, as defined under SFAS No. 131, is the Chief Executive Officer and the executive team. The Company currently operates as three reportable business segments: Online Media, E-commerce and Software. In December 2005, the Company sold its Online Images operations and no longer operates in this segment. All financial information related to this segment has been presented as discontinued operations (see Note 8).

The Company markets its products in the United States through its direct sales force and online web sites. Revenue for the three and six months ended January 31, 2007 and January 31, 2006, respectively, was generated primarily from sales to customers in the United States.

Cash, Cash Equivalents and Investments

The Company considers all highly-liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist principally of cash deposited in money market and checking accounts.

The Company accounts for its investments under the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Investments in highly-liquid financial instruments with remaining maturities greater than three months and maturities of less than one year are classified as short-term investments. Financial instruments with remaining maturities greater than one year are classified as long-term investments. All investments are classified as available-for-sale and are reported at fair value with net unrealized gains (losses) reported, net of tax, using the specific identification method as other comprehensive gain/(loss) in stockholders’ equity. The cost of the investments is not significantly different than the fair value for the fiscal years presented. The fair value of the Company’s available-for-sale securities are based on quoted market prices at the balance sheet dates.

Cash, cash equivalents and investments consist of the following (in thousands) at market value:

	January 31,		July 31,
	2007		2006

Cash and cash equivalents:
Cash	$	2,566	$	2,774
Money market funds		3,466		2,615
Corporate securities		1,085		9,364
Total cash and cash equivalents	$	7,117	$	14,753

Short-term investments:
Government securities	$	8,347	$	23,483
Corporate securities		20,107		3,245
Asset backed securities		5,480		3,742
Money market securities		10,064		6,668
Total short-term investments	$	43,998	$	37,138

Long-term investments:
Government securities	$	2,636	$	752
Corporate securities		2,336		400
Total long-term investments	$	4,972	$	1,152

The contractual maturities of debt securities classified as available-for-sale at January 31, 2007 are as follows (in thousands):

		January 31,
		2007

Maturing 90 days or less from purchase	$	1,085
Maturing between 90 days and one year from purchase		43,998
Maturing more than one year from purchase		4,972
Total available-for-sale debt securities	$	50,055

Revenue Recognition

The Company applies the provisions of SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” for revenue recognition, unless modified as follows:

Online Media Revenue

Online Media revenue is primarily derived from cash sales of advertising space on the Company’s various web sites, as well as sponsorship and royalty related arrangements associated with advertising on these web sites. The Company recognizes Online Media revenue 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. The Company’s obligations may include guarantees of a minimum number of “impressions” (the number of times that an advertisement is viewed by users of the Company’s online services). To the extent that minimum guaranteed impressions are not met in the specified time frame, the Company does not recognize the corresponding revenue until the guaranteed impressions are achieved.

E-commerce Revenue

E-commerce revenue is derived from the online sale of consumer goods. The Company recognizes E-commerce revenue from the sale of consumer goods in accordance with SAB No. 104, “Revenue Recognition.” Under SAB No. 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, the Company recognizes E-commerce revenue upon the shipment of goods. The Company does grant customers a right to return E-commerce products. Such returns are recorded as incurred and have been immaterial for the periods presented.

The Company’s E-commerce business is highly seasonal, reflecting the general pattern associated with the retail industry of peak sales and earnings during the holiday shopping season. In the past several years, a substantial portion of the Company’s E-commerce revenue has occurred in the Company’s second fiscal quarter, which for fiscal 2007, began on November 1, 2006, and ended on January 31, 2007. As is typical in the retail industry, the Company generally experiences lower E-commerce revenue during the other quarters. The Company’s E-commerce revenue in a particular quarter is not necessarily indicative of future E-commerce revenue for a subsequent quarter or its full fiscal year.

Software Revenue

Software revenue is derived from fees for licenses of the Company’s SFEE software products, maintenance, hosting, consulting and training. The Company recognizes all Software revenue using the residual method in accordance with Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions.” Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. If evidence of the vendor specific fair value of one or more undelivered elements does not exist, revenue is deferred and recognized when delivery of those elements occurs or when fair value can be established. Company-specific objective evidence of fair value of maintenance and other services is based on the Company’s customary pricing for such maintenance and/or services when sold separately. At the outset of the arrangement with the customer, the Company defers revenue for the fair value of its undelivered elements (e.g., maintenance, hosting, consulting and training) and recognizes revenue for the remainder of the arrangement fee attributable to the elements initially delivered in the arrangement (i.e., software product) when the basic criteria in SOP 97-2 have been met. If such evidence of fair value for each undelivered element of the arrangement does not exist, the Company defers all revenue from the arrangement until such time that evidence of fair value does exist or until all elements of the arrangement are delivered.

Under SOP 97-2, revenue attributable to an element in a customer arrangement is recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, (iv) collectibility is probable and (v) the arrangement does not require services that are essential to the functionality of the software.

Persuasive evidence of an arrangement exists. The Company determines that persuasive evidence of an arrangement exists with respect to a customer when the Company has a written contract, which is signed by both the Company and the customer, or a purchase order from the customer when the customer has previously executed a standard license arrangement with the Company. The Company does not offer product return rights for its software products.

Delivery has occurred. The Company’s software may be either physically or electronically delivered to the customer. The Company determines that delivery has occurred upon shipment of the software pursuant to the billing terms of the agreement or when the software is made available to the customer through electronic delivery.

The fee is fixed or determinable. If at the outset of the customer engagement the Company determines that the fee is not fixed or determinable, the Company recognizes revenue when the fee becomes due and payable. Fees due under a contract are generally deemed not to be fixed or determinable if a significant portion of the fee is beyond the Company’s normal payment terms, which are generally no greater than 120 days from the date of invoice.

Collectibility is probable. The Company determines whether collectibility is probable on a case-by-case basis. When assessing probability of collection, the Company considers the number of years in business, history of collection, and product acceptance for each customer. The Company typically sells to customers for whom there is a history of successful collection. New customers are subject to a credit review process, in which the customer’s financial position and ultimately such customer’s ability to pay are evaluated. If the Company determines from the outset that collectibility is not probable based upon its review process, revenue is recognized as payments are received.

The Company allocates revenue on software arrangements involving multiple elements to each element based on the relative fair value of each element. The Company’s determination of fair value of each element in multiple-element arrangements is based on vendor-specific objective evidence (“VSOE”). The Company aligns its assessment of VSOE for each element to the price charged when the same element is sold separately. The Company has analyzed all of the elements included in its multiple-element arrangements and determined that it has sufficient VSOE to allocate revenue to the maintenance, hosting, support and professional services components of its perpetual license arrangements. The Company sells its professional services separately, and has established VSOE for professional services on that basis. VSOE for maintenance and support is determined based upon the customer’s annual renewal rates for these elements. Accordingly, assuming all other revenue recognition criteria are met, the Company recognizes revenue from perpetual licenses upon delivery using the residual method in accordance with SOP 98-9.

Services revenue consists of professional services, hosting fees and maintenance fees. In general, the Company’s professional services, which are comprised of software installation and integration, business process consulting and training, are not essential to the functionality of the software. The Company’s software products are fully functional upon delivery and implementation and do not require any significant modification or alteration of products for customer use. Customers purchase these professional services to facilitate the adoption of the Company’s technology and dedicate personnel to participate in the services being performed, but they may also decide to use their own resources or appoint other professional service organizations to provide these services. Software products are billed separately from professional services, which are generally billed on a time-and-materials basis. The Company recognizes revenue from professional services as services are performed.

Maintenance agreements are typically priced based on a percentage of the product license fee and have a one-year term, renewable annually. Services provided to customers under maintenance agreements include technical product support and unspecified product upgrades. Deferred revenue from advanced payments for maintenance agreements are recognized ratably over the term of the agreement, which is typically one year.

Software Development Costs

In accordance with SFAS No. 86, “Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed,” development costs incurred in the research and development of new software products are expensed as incurred until technological feasibility in the form of a working model has been established at which time such costs are capitalized, subject to a net realizable value evaluation. Technological feasibility is established upon the completion of an integrated working model. To date, the Company’s software development has been completed concurrent with the establishment of technological feasibility and, accordingly, all software development costs have been charged to research and development expense in the accompanying Condensed Consolidated Statements of Operations.

Stock Based Compensation Expense

The Company accounts for stock based compensation expense using SFAS No. 123(R) “Share-Based Payment”, which the Company adopted on August 1, 2005.

The fair value of the option grants has been calculated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

	Three Months Ended January 31,		Six Months Ended January 31,
	2007	2006	2007	2006

Expected life (years)	6	7	6.15	7
Risk-free interest rate	4.59%	4.43%	4.73%	4.34%
Volatility	72.8%	83.2%	74.2%	86.7%
Dividend yield	None	None	None	None
Weighted-average fair value at grant date	$3.34	$1.35	$2.94	$1.29

The Company uses the simplified method for determining the expected term of options granted. Our computation of expected volatility for the three and six months ended January 31, 2007 and January 31, 2006 was based on historical implied volatility in 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.

As stock-based compensation expense recognized in the condensed consolidated statement of operations for the three and six months ended January 31, 2007 and January 31, 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures for stock options and restricted stock purchase rights with service conditions were estimated based on historical experience and the Company estimated forfeitures to be 20% annually for the three and six months ended January 31, 2007 and January 31, 2006. Forfeitures for restricted stock purchase rights with performance conditions were estimated based on the estimate of achieving the performance conditions and the Company estimated forfeitures to be 100% for the three and six months ended January 31, 2007.

Property and Equipment

Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the estimated useful lives or the corresponding lease term. Property and equipment consist of the following (in thousands):

	January 31,			July 31,
	2007			2006

Computer and office equipment (useful lives of 2 years)	$	4,616		$	4,188
Furniture and fixtures (useful lives of 2 to 4 years)		499			495
Leasehold improvements (useful lives of lesser of estimated life or lease term)		283			281
Software (useful lives of 2 to 5 years)		2,492			2,057
Total property and equipment		7,890			7,021
Less: Accumulated depreciation and amortization		(6,658	)		(6,394	)
Property and equipment, net	$	1,232		$	627

During the three and six months ended January 31, 2007, we capitalized $0.4 million and $0.4 million, respectively, of software development costs relating to the development of our SourceForge.net Marketplace platform.

Intangibles

Intangible assets are amortized on a straight-line basis over three to five years. The Company continually evaluates whether events or circumstances have occurred that indicate the remaining estimated useful lives of these intangible assets may not be recoverable. When events or circumstances indicate that the intangible assets should be evaluated for possible impairment, the Company uses an estimate of the related business segment's undiscounted net income over the remaining useful life of the intangible assets in measuring whether they are recoverable. No events or circumstances occurred during the six months ended January 31, 2007 that would indicate a possible impairment in the carrying value of intangible assets at January 31, 2007.

The changes in the carrying amount of the intangible assets are as follows (in thousands):

	As of January 31, 2007					As of July 31, 2006
	Gross Carrying		Accumulated			Gross Carrying		Accumulated
	Amount		Amortization			Amount		Amortization

Domain and trade names	$	5,933	$	(5,930	)	$	5,933	$	(5,929	)
Purchased technology		2,534		(2,534	)		2,534		(2,534	)
Total intangible assets	$	8,467	$	(8,464	)	$	8,467	$	(8,463	)

The aggregate amortization expense of intangible assets was minimal for the three and six month periods ended January 31, 2007 and January 31, 2006, respectively. The remaining net carrying amount of intangible assets will be amortized ratably through July 31, 2008.

Inventories

Inventories related to the Company’s E-commerce business consist solely of finished goods that are valued at the lower of cost or market using the average cost method. Provisions, when required, are made to reduce excess and obsolete inventories to their estimated net realizable values.

Concentrations of Credit Risk and Significant Customers

The Company’s investments are held with two reputable financial institutions; both institutions are headquartered in the United States. The Company’s investment policy limits the amount of risk exposure. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash trade receivables. The Company provides credit, in the normal course of business, to a number of companies and performs ongoing credit evaluations of its customers. The credit risk in the Company’s trade receivables is substantially mitigated by its credit evaluation process and reasonably short collection terms. The Company maintains reserves for potential credit losses and such losses have been within management’s expectations. As of January 31, 2007, Starcom IP, an advertising agency representing several advertisers, accounted for approximately 10% of our gross account receivables.

For the three and six months ended January 31, 2007 and January 31, 2006, no one customer represented more than 10% of net revenue. The Company does not anticipate that any one customer will represent more than 10% of net revenue in the near future.

3. Restructuring Costs and Other Special Charges

In fiscal 2001 and 2002, we adopted plans to exit our hardware systems and hardware-related software engineering and professional services businesses, as well as exit a sublease agreement and to reduce our general and administrative overhead costs. We exited these businesses to pursue our current Online Media, E-commerce and Software businesses and reduce our operating losses to improve cash flow. The restructuring liability of $5.3 million as of January 31, 2007 represents the remaining accrual from non-cancelable lease payments, which continue through 2010. This accrual is subject to change should actual circumstances change. We will continue to evaluate and update, if applicable, these accruals quarterly.

Below is a summary of the changes to the restructuring liability (in thousands):

	Balance at Beginning of Period		Cash payments			Balance at End of Period

For the six months ended January 31, 2006	$	7,855	$	(952	)	$	6,903
For the six months ended January 31, 2007	$	6,107	$	(796	)	$	5,311

Below is a summary of the components of the restructuring liability (in thousands):

	Short- Term		Long-Term		Total Liability

As of July 31, 2006	$	1,592	$	4,515	$	6,107
As of January 31, 2007	$	1,593	$	3,718	$	5,311

4. Computation of Per Share Amounts

In accordance with SFAS 128 “Earnings Per Share,” basic net loss per common share has been calculated using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase.

The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):

	Three Months Ended January 31,				Six Months Ended January 31,
	2007		2006		2007		2006

Income (loss) from continuing operations	$	1,776	$	1,072	$	1,636	$	(401	)
Income from discontinued operations		-		9,431		-		9,670
Net income	$	1,776	$	10,503	$	1,636	$	9,269

Weighted average shares - basic		66,827		61,727		66,056		61,698
Effect of dilutive potential common shares		2,421		1,257		2,610		1,139
Weighted average shares - diluted		69,248		62,984		68,666		62,837

Income (loss) per share from continuing operations:
Basic	$	0.03	$	0.02	$	0.02	$	(0.01	)
Diluted	$	0.03	$	0.02	$	0.02	$	(0.01	)

Income per share from discontinued operations:
Basic	$	0.00	$	0.15	$	0.00	$	0.16
Diluted	$	0.00	$	0.15	$	0.00	$	0.16

Net income per share:
Basic	$	0.03	$	0.17	$	0.02	$	0.15
Diluted	$	0.03	$	0.17	$	0.02	$	0.15

The following potential common shares have been excluded from the calculation of diluted net loss per share for all periods presented because they are anti-dilutive (in thousands):

	Three Months Ended January 31,				Six Months Ended January 31,
	2007		2006		2007		2006

Anti-dilutive securities:
Options to purchase common stock		2,766		7,602		3,139		8,092
Warrants (1)		-		731		-		731
Total		2,766		8,333		3,139		8,823

(1) The outstanding warrants expired unexercised on November 6, 2006.

5. Comprehensive Loss

Comprehensive loss is comprised of net loss and other non-owner changes in stockholders’ equity, including foreign currency translation gains or losses and unrealized gains or losses on available-for sale marketable securities.

6. Stockholders’ Equity and Stock-Based Compensation

Stock options plans

In fiscal 1999, the Company adopted and the board of directors approved the 1998 Stock Option Plan (the “1998 Plan”). Since inception, a total of 37,824,386 shares of common stock have been reserved for issuance under the 1998 Plan, subject to an annual increase of the lesser of 4,000,000 shares or 4.9% of the then outstanding common stock or an amount to be determined by the board of directors. Through January 31, 2007, 49,015,437 options and stock purchase rights have been granted under the 1998 Plan. Under the 1998 Plan, the board of directors may grant to employees and consultants options and/or stock purchase rights to purchase the Company’s common stock at terms and prices determined by the board of directors. The 1998 Plan will terminate in 2008. Nonqualified options granted under the 1998 Plan must be issued at a price equal to at least 85% of the fair market value of the Company’s common stock at the date of grant. All options may be exercised at any time within 10 years of the date of grant or within one month of termination of employment, or such shorter time as may be provided in the stock option agreement, and vest over a vesting schedule determined by the board of directors. The Company’s policy is to issue new shares upon exercise of options under the 1998 Plan.

The Company’s 1999 Director’s Option Plan (the “Directors’ Plan”) was adopted by the Company’s board of directors in October 1999. Since inception, a total of 1,500,000 shares of common stock have been reserved for issuance under the Directors’ Plan, subject to an annual increase of the lesser of 250,000 shares, or 0.5% of the then outstanding common stock or an amount determined by the board of directors. Through January 31, 2007, 1,130,000 options have been granted under the Directors’ Plan. Under the Directors’ Plan, options are granted when a non-employee director joins the board of directors and at each annual meeting where the director continues to serve on the board of directors. The Directors’ Plan establishes an automatic grant of 80,000 shares of common stock to each non-employee director who is elected. The Directors’ Plan also provides that upon the date of each annual stockholders’ meeting, each non-employee director who has been a member of the board of directors for at least six months prior to the date of the stockholders’ meeting will receive automatic annual grants of options to acquire 20,000 shares of common stock. Each automatic grant has an exercise price per share equal to the fair market value of the common stock at the date of grant, vest 25% immediately upon the grant date, one thirty-sixth per month thereafter and become fully vested three years after the date of grant. Each automatic grant has a term of ten years. In the event of a merger with another corporation or the sale of substantially all of its assets, each non-employee director’s outstanding options will become fully vested and exercisable. Options granted under the Directors’ Plan must be exercised within three months of the end of the non-employee director’s tenure as a member of the board of directors, or within 12 months after a non-employee director’s termination by death or disability, provided that the option does not terminate earlier under its terms. Unless terminated sooner, the Directors’ Plan terminates automatically in 2009. The Company’s policy is to issue new shares upon exercise of options under the Directors’ Plan.

The Company has assumed certain option plans and the underlying options of companies which the Company has acquired (the “Assumed Plans”). Options under the Assumed Plans have been converted into the Company’s options and adjusted to effect the appropriate conversion ratio as specified by the applicable acquisition agreement, but are otherwise administered in accordance with the terms of the Assumed Plans. Options under the Assumed Plans generally vest over four years and expire ten years from the date of grant. No additional options will be granted under the Assumed Plans.

Restricted Stock Purchase Rights

In August 2006, the board of directors granted executive management as well as certain other employees, rights to purchase an aggregate of 747,500 restricted shares at $0.001 per share. The restricted stock purchase rights have both service and performance conditions attached to them. The weighted-average grant date fair value per share was $3.77.

A total of 515,000 shares were granted with service conditions. The service conditions have a three year vesting period as follows: 25% vest one year after the date of grant, an additional 25% vest two years after the date of grant and the remaining 50% vest three years after the date of grant.

A total of 232,500 shares were granted with performance conditions and vest based on the Company attaining certain performance conditions during its fiscal year ending July 31, 2007.

Stock Based Compensation Expense

The following table summarizes employee stock-based compensation expense resulting from stock options and stock purchase rights (in thousands):

	Three Months Ended January 31,				Six Months Ended January 31,
	2007		2006		2007		2006

Included in cost of revenue:
Online Media cost of revenue	$	8	$	2	$	12	$	5
E-commerce cost of revenue		19		2		34		9
Software cost of revenue		5		2		9		5
Total included in cost of revenue		32		6		55		19
Included in operating expenses:
Sales and marketing		115		12		213		26
Research and development		43		12		78		46
General and administrative		264		120		511		278
Total included in operating expenses		422		144		802		350
Included in discontinued operations		-		-		-		9

Total stock-based compensation expense	$	454	$	150	$	857	$	378

The following table summarizes option and restricted stock purchase rights activities from July 31, 2005 through January 31, 2007:

							Stock Options Outstanding					Stock Options
	Available for Grant			Restricted Stock Purchase Rights Outstanding			Number Outstanding			Weighted- Average Exercise Price per Share		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value ($ 000's)

Balance at July 31, 2005		11,508,412			-			11,226,046		$	3.11
Granted		(1,902,000	)		-			1,902,000		$	3.68
Exercised		-			-			(2,847,520	)	$	3.00
Cancelled		1,317,974			-			(1,327,111	)	$	3.28

Balance at July 31, 2006		10,924,386			-			8,953,415		$	3.56
Granted		(1,509,750	)		747,500			762,250		$	4.26
Exercised		-			-			(2,378,165	)	$	1.35
Repurchased		52,500			(52,500	)		-		$	-
Cancelled		70,024			-			(70,024	)	$	10.27

Balance at January 31, 2007		9,537,160			695,000			7,267,476		$	4.29		7.29	$	12,480
Exercisable at January 31, 2007								4,867,031		$	4.45		6.27	$	9,664

The aggregate intrinsic value in the above table is calculated as the difference between the January 31, 2007 closing price of our stock of $5.13 per share as reported by the Nasdaq Global Market and the exercise price of the shares. The total number of in-the-money options exercisable as of January 31, 2007 was 4.2 million.

As of January 31, 2007, total compensation cost related to nonvested stock options not yet recognized was $4.3 million which is expected to be recognized over the next 40 months on a weighted-average basis. The total intrinsic value of options exercised during the three and six months ended January 31, 2007 was $5.6 million and $7.8 million, respectively. The intrinsic value of options exercised during the three and six months ended January 31, 2006 was $0.04 million and $0.1 million, respectively. No significant tax benefit was realized from exercised options.

As of January 31, 2007, we have repurchased 52,500 shares of restricted stock and retain purchase rights to 695,000 shares issued pursuant to restricted stock purchase agreements at a weighted-average price of approximately $0.01. As of January 31, 2007, total compensation cost related to stock purchase rights not yet recognized was $1.0 million which is expected to be recognized over the next 31 months on a weighted-average basis.

The options outstanding and currently exercisable by exercise price at January 31, 2007 were as follows (in thousands, except years and per-share amounts):

			OPTIONS OUTSTANDING				OPTIONS EXERCISABLE
Range of Exercise Prices			Number Outstanding	Weighted Average Remaining Life (in years)	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price

$ 0.23	-	$ 1.77	791	7.21	$	1.45	526	$	.134
$ 1.79	-	$ 2.33	432	7.74	1.98		410	1.99
$ 2.45	-	$ 2.45	962	7.41	2.45		962	2.45
$ 2.52	-	$ 2.98	908	6.91	2.89		881	2.89
$ 3.00	-	$ 3.78	1,076	6.52	3.33		667	3.09
$ 3.94	-	$ 4.12	869	9.13	4.06		116	4.03
$ 4.13	-	$ 4.62	754	7.52	4.46		550	4.53
$ 4.74	-	$ 5.08	712	9.41	4.81		39	4.88
$ 5.08	-	$ 64.12	763	4.18	13.45		716	13.99

$ 0.23	-	$ 64.12	7,267	7.29	$	4.29	4,867	$	4.45

7. Segment and Geographic Information

The Company’s operating segments are significant strategic business units that offer different products and services. The Company has three operating segments: Online Media, E-commerce and Software. In December 2005, the Company completed the sale of its Online Images business to Jupitermedia Corporation (“Jupitermedia”) and no longer has operations in this segment.

The Company’s Online Media segment consists of a network of Internet web sites serving the IT professional, software development and open source communities. The Company’s E-commerce segment provides online sales of a variety of retail products of interest to the software development and IT communities. The Company’s Software segment focuses on its SFEE software products. Other includes all corporate expenses, such as restructuring charges, legal judgments and settlements, amortization of intangible assets and amortization of deferred stock, that are not allocated to the individual operating segments and are not considered by the Company’s chief decision-making group in evaluating the performance of the operating segments.

(in thousands)	Online Media			E-commerce		Software			Other		Eliminations			Total Company

Three Months Ended January 31, 2007
Revenue from external customers	$	3,827		$	13,277	$	1,720		$	-	$	-		$	18,824
Revenue from intersegments	$	115		$	-	$	-		$	-	$	(115	)	$	-
Cost of revenue	$	1,186		$	9,608	$	374		$	-	$	-		$	11,168
Gross margin (1)	$	2,641		$	3,669	$	1,346		$	-	$	-		$	7,656
Operating income (loss)	$	(247	)	$	2,499	$	(1,067	)	$	-	$	-		$	1,185
Depreciation expense	$	88		$	5	$	47		$	-	$	-		$	140
Three Months Ended January 31, 2006
Revenue from external customers	$	2,694		$	9,062	$	2,970		$	-	$	-		$	14,726
Revenue from intersegments	$	13		$	-	$	-		$	-	$	(13	)	$	-
Cost of revenue	$	937		$	6,529	$	311		$	-	$	-		$	7,777
Gross margin (1)	$	1,757		$	2,533	$	2,659		$	-	$	-		$	6,949
Operating income (loss)	$	(371	)	$	1,568	$	(380	)	$	6	$	-		$	823
Depreciation expense	$	40		$	4	$	71		$	-	$	-		$	115
Six Months Ended January 31, 2007
Revenue from external customers	$	7,530		$	17,738	$	3,856		$	-	$	-		$	29,124
Revenue from intersegments	$	153		$	-	$	-		$	-	$	(153	)	$	-
Cost of revenue	$	2,290		$	13,151	$	744		$	-	$	-		$	16,185
Gross margin	$	5,393		$	4,587	$	3,112		$	-	$	(153	)	$	12,939
Operating income (loss)	$	(517	)	$	2,758	$	(1,899	)	$	-	$	-		$	342
Depreciation expense	$	172		$	7	$	96		$	-	$	-		$	275
Six Months Ended January 31, 2006
Revenue from external customers	$	5,275		$	12,648	$	4,391		$	-	$	-		$	22,314
Revenue from intersegments	$	26		$	-	$	-		$	-	$	(26	)	$	-
Cost of revenue	$	1,800		$	9,371	$	587		$	-	$	-		$	11,758
Gross margin	$	3,626		$	2,492	$	4,606		$	-	$	(26	)	$	10,556
Operating income (loss)	$	(633	)	$	1,704	$	(2,005	)	$	6	$	-		$	(928	)
Depreciation expense	$	92		$	198	$	13		$	-	$	-		$	303

(1) - Gross margin excludes intersegment revenues.

During the time periods covered by the table above, the Company marketed its products in the United States through its direct sales force and its online web sites.

8. Discontinued Operations

In December 2005, the Company sold the net assets of its Online Images business to Jupitermedia for $9.4 million. As specified in the agreement, the assets sold to Jupitermedia consisted primarily of intellectual property, inventories and property and equipment.

Income from discontinued operations consists of direct revenue and direct expenses of the Online Images business, including cost of revenue, as well as other fixed and allocated costs. A summary of the operating results of the Online Images business included in discontinued operations in the accompanying condensed consolidated statements of income is as follows:

	Three Months Ended			Six Months Ended
	January 31, 2006			January 31, 2006
($ in thousands)
Net revenue	$	334		$	914

Income from operations before income taxes	$	100		$	339
Income taxes		(9	)		(9	)
Income from operations, net of income taxes	$	91		$	330

Gain from sale of assets before income taxes	$	9,596		$	9,596
Income taxes		(256	)		(256	)
Gain from sale, net of income taxes	$	9,340		$	9,340

9. Litigation

The Company, two of its former officers (the "Former Officers"), and the lead underwriter in its initial public offering ("IPO") were named as defendants in a consolidated shareholder lawsuit in the United States District Court for the Southern District of New York, captioned In re VA Software Corp. Initial Public Offering Securities Litigation, 01-CV-0242. This is one of a number of actions coordinated for pretrial purposes as In re Initial Public Offering Securities Litigation, 21 MC 92 with the first action filed on January 12, 2001. Plaintiffs in the coordinated proceeding are bringing claims under the federal securities laws against numerous underwriters, companies, and individuals, alleging generally that defendant underwriters engaged in improper and undisclosed activities concerning the allocation of shares in the IPOs of more than 300 companies during late 1998 through 2000. Among other things, the plaintiffs allege that the underwriters' customers had to pay excessive brokerage commissions and purchase additional shares of stock in the aftermarket in order to receive favorable allocations of shares in an IPO. The consolidated amended complaint in the Company's case seeks unspecified damages on behalf of a purported class of purchasers of its common stock between December 9, 1999 and December 6, 2000. Pursuant to a tolling agreement, the individual defendants were dismissed without prejudice. On February 19, 2003, the court denied the Company’s motion to dismiss the claims against it. The litigation is now in discovery. In June 2004, a stipulation of settlement and release of claims against the issuer defendants, including the Company, was submitted to the court for approval. The terms of the settlement if approved, would dismiss and release all claims against the participating defendants (including the Company). In exchange for this dismissal, D&O insurance carriers would agree to guarantee a recovery by the plaintiffs from the underwriter defendants of at least $1 billion, and the issuer defendants would agree to an assignment or surrender to the plaintiffs of certain claims the issuer defendants may have against the underwriters. On August 31, 2005, the court confirmed preliminary approval of the settlement. The proposed settlement remains subject to a number of conditions, including receipt of final approval of the court. On December 5, 2006, the Court of Appeals for the Second Circuit reversed the Court’s order certifying a class in several “test cases” that had been selected by the underwriter defendants and plaintiffs in the coordinated proceeding In re Initial Public Offering Securities Litigation. The Company is not one of the test cases, and it is unclear what impact this will have on the litigation. If the settlement does not occur, and litigation against the Company continues, the Company believes it has meritorious defenses and intends to defend the case vigorously.

On Nov 9, 2001, a former employee of the Company, who had worked as a sales person in the Company's former hardware business, filed a complaint captioned Okerman v. VA Linux Systems, Inc. & Larry Augustin, Civil No. 01-01825 (Norfolk Superior Court), in the Commonwealth of Massachusetts. As amended, the complaint alleges that changes made to certain commission and bonus plans during the plaintiff's tenure at the Company entitled him to recover damages for Breach of Contract, Breach of the Implied Covenant of Good Faith and Fair Dealing, violation of the Massachusetts Wage Act Statute, Promissory Estoppel, and Quantum Meruit. On June 25, 2002, the Court dismissed the Massachusetts Wage Act claim brought against the Company's former chief executive officer. On July 26, 2002, dismissal of the Wage Act claim in favor of the Company’s former chief executive officer was upheld on interlocutory appeal. On July 9, 2003, the Court granted summary judgment in the Company's favor regarding claims for Breach of Contract, Promissory Estoppel, and Quantum Meruit, and granted judgment on the pleadings in favor of the Company regarding the Massachusetts Wage Act claim. On September 24, 2004, following a jury trial on the sole remaining claim for Breach of the Covenant of Good Faith and Fair Dealing, a jury awarded damages of $136,876 to the plaintiff, which have been included in accrued liabilities and other in the Company's condensed consolidated balance sheets as of January 31, 2007. The plaintiff filed a notice of appeal of his previously-dismissed claims and the judgment for Breach of Contract and Breach of the Covenant of Good Faith and Fair Dealing, and the Company has filed a notice of appeal of the judgment for Breach of the Covenant of Good Faith and Fair Dealing. The plaintiff and the Company have since filed their appellate briefs. Plaintiff’s reply to the Company’s response to plaintiff’s appellate brief, and plaintiff’s response to the Company’s appellate brief, are due to be filed in March 2007. The Company’s reply to plaintiff’s response to the Company’s appellate brief is due to be filed in April 2007.

The Company is subject to various claims and legal actions arising in the ordinary course of business. The Company has accrued for estimated losses in the accompanying consolidated financial statements for those matters where it believes that the likelihood that a loss will occur is probable and the amount of loss is reasonably estimable.

10. Recent Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140.” SFAS No. 155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155 resolves issues addressed in Statement 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of the Company’s first fiscal year that begins after September 15, 2006, with earlier adoption permitted. The Company is currently evaluating the impact of SFAS No. 155 on its consolidated financial position, results of operations and cash flows.

In March 2006, the FASB issued SFAS No. 156 (“SFAS 156”), “Accounting for Servicing of Financial Assets—An Amendment of FASB Statement No. 140.” Among other requirements, SFAS 156 requires a company to recognize a servicing asset or servicing liability when it undertakes an obligation to service a financial asset by entering into a servicing contract under certain situations. Under SFAS 156 an election can also be made for subsequent fair value measurement of servicing assets and servicing liabilities by class, thus simplifying the accounting and provide for income statement recognition of potential offsetting changes in the fair value of servicing assets, servicing liabilities and related derivative instruments. SFAS No. 156 is effective for fiscal years beginning after September 15, 2006. The Company does not expect the adoption of SFAS No. 156 will have a material impact on its financial position or results of operations.

In July 2006, the FASB issued Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”), which is a change in accounting for income taxes. FIN 48 specifies how tax benefits for uncertain tax positions are to be recognized, measured, and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the balance sheet; and provides transition and interim period guidance, among other provisions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company does not expect the adoption of FIN 48 will have a material impact on its financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157 (“SFAS 157”), “Fair Value Measurements.” Among other requirements, SFAS No. 157 defines fair value and establishes a framework for measuring fair value and also expands disclosure about the use of fair value to measure assets and liabilities. SFAS No. 157 is effective beginning the first fiscal year that begins after November 15, 2007. The Company does not believe that the adoption of SFAS No. 157 will have a material impact on its financial position or results of operations.

In September 2006, the SEC issued SAB No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The guidance is applicable for fiscal years ending after November 15, 2006. The Company does not believe SAB 108 will have a material impact on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities,” SFAS No. 159 amends SFAS 115 and permits fair value measurement of financial instruments and certain other items. SFAS No. 159 is effective beginning the first fiscal year that begins after November 15, 2007. The Company is currently evaluating the impact of SFAS No. 159 on its financial position and results of operations.

11. Guarantees and Indemnifications

The following is a summary of our agreements that we have determined are within the scope of FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” some of which are specifically grandfathered because the guarantees were in effect prior to December 31, 2002. Accordingly, we have no liabilities recorded for these agreements as of January 31, 2007.

In conjunction with the sale of its Online Images business to Jupitermedia, the Company has agreed to indemnify Jupitermedia for losses arising from any misrepresentation of representations and warranties, the breach of a covenant or agreement or the failure by the Company to assume certain liabilities excluded from the sale of the business. The maximum amount of the indemnification is $1.4 million and no claim for indemnification may be made until aggregate losses exceed $0.08 million. The term of the indemnification is generally through June 23, 2007; however, certain items have different indemnification periods. The Company believes that it has complied with all of those items for which it has agreed to indemnify Jupitermedia, and the Company has not been subject to any claims or suffered any losses, and Jupitermedia has not made any claims pursuant to the Company’s indemnification obligations. Accordingly, the Company has no liabilities recorded for this indemnification as of January 31, 2007.

As permitted under Delaware law, the Company has agreements whereby the Company’s officers and directors are indemnified for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has obtained director and officer liability insurance designed to limit the Company’s exposure and to enable the Company to recover a portion of any future amounts paid. As a result of the Company’s insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of January 31, 2007.

The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally, the Company’s business partners, subsidiaries and/or customers, in connection with any patent, copyright or other intellectual property infringement claim by any third party with respect to the Company’s products. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has not incurred significant costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is insignificant. Accordingly, the Company has no liabilities recorded for these agreements as of January 31, 2007.

The Company warrants that its software products will perform in all material respects in accordance with the Company’s standard published specifications in effect at the time of delivery of the licensed products to the customer for a specified period, which generally does not exceed 90 days. Additionally, the Company warrants that its maintenance services will be performed consistent with generally accepted industry standards through the completion of the agreed upon services. If necessary, the Company would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history, however, the Company has not incurred significant expense under its product or services warranties. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of January 31, 2007.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 “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; gross margins; financial performance and results of operations; technological trends in, and emergence of the market for collaborative software development applications; the future functionality, business potential, demand for, efficiencies created by and adoption of SFEE; demand for online advertising; management's strategy, plans and objectives for future operations; the impact of our restructuring and the amount of cash utilized by operations; our intent to continue to invest significant resources in development; 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, cash generated from operations and investments to meet our operating and working capital requirements. 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

There have been no significant changes in our critical accounting estimates during the three and six months ended January 31, 2007 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, 2006.

Overview

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. On June 27, 2001, we announced our decision to exit our Linux-based hardware business. Today, we do business under the name VA Software Corporation. Our wholly-owned subsidiary, OSTG, Inc. ("OSTG"), an operator of a network of Internet web sites, including SourceForge.net and Slashdot.org, serving the IT professional, software development and open source communities, comprises our Online Media segment. OSTG’s wholly-owned subsidiary, ThinkGeek, Inc., (“ThinkGeek”) an online sales retailer comprises our E-commerce segment. Our Software segment develops, markets and supports a software application known as SourceForge Enterprise Edition ("SFEE").

We currently view our business in three operating segments: Online Media; E-commerce; and Software. Our Online Media segment, which operates through OSTG, represents a network of Internet web sites, including SourceForge.net and Slashdot.org, serving primarily the IT professional, software development and open communities. Our E-commerce segment provides online sales of a variety of retail products of interest to the software development and IT communities through ThinkGeek. Our Software segment focuses on our SFEE software products and services.

In December 2005, we completed the sale of our Online Images business to Jupitermedia and we no longer have operations in that segment.

Our network of web sites served over 32 million unique visitors during January 2007 or 33 million unique visitors on a twelve month rolling average. During the second quarter of fiscal 2007 we served 201 million downloads from our SourceForge.net web site. Within the E-commerce segment, we continued to increase our customer base, increasing the number of orders by 43% for the second quarter of fiscal 2007 from the same period in the prior year. Within our Software segment, we increased the number of customers to whom we have sold our SFEE products to 188 at January 31, 2007.

Our 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 from continuing operations for the periods indicated as a percentage of net revenue, represented by selected items from the unaudited condensed consolidated statements of operations. The results of our discontinued Online Images business are excluded from the operating results from continuing 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 January 31,						Six Months Ended January 31,
	2007			2006			2007			2006

Consolidated Statements of Operations Data:
Online Media revenue		20.3	%		18.3	%		25.9	%		23.6	%
E-commerce revenue		70.6			61.5			60.9			56.7
Software revenue		9.1			20.2			13.2			19.7
Net revenue		100.0	%		100.0	%		100.0	%		100.0	%
Online Media cost of revenue		6.3			6.4			7.9			8.1
E-commerce cost of revenue		51.0			44.3			45.2			42.0
Software cost of revenue		2.0			2.1			2.6			2.6
Cost of revenue		59.3			52.8			55.7			52.7
Gross margin		40.7			47.2			44.3			47.3
Operating expenses:
Sales and marketing		15.5			18.8			19.0			22.4
Research and development		7.4			11.0			10.2			14.0
General and administrative		11.5			11.8			14.1			15.0
Total operating expenses		34.4			41.6			43.3			51.4
Income (loss) from operations		6.3			5.6			1.0			(4.1	)
Interest and other income, net		3.9			1.4			4.9			2.2
Income (loss) from continuing operations before income taxes		10.2			7.0			5.9			(1.9	)
Provision for income taxes		0.7			(0.3	)		0.5			(0.1	)
Income (loss) from continuing operations		9.5	%		7.3	%		5.4	%		(1.8	%)

Net Revenue

The following table summarizes our net revenue by business segment:

	Three Months Ended January 31,				Six Months Ended January 31,				% Change			% Change
	2007		2006		2007		2006		Three Months			Six Months
($ in thousands)
Online Media revenue	$	3,827	$	2,694	$	7,530	$	5,275		42	%		43	%
E-commerce revenue		13,277	$	9,062		17,738		12,648		47	%		40	%
Software revenue		1,720		2,970		3,856		4,391		(42	%)		(12	%)
Net revenue	$	18,824	$	14,726	$	29,124	$	22,314		28	%		31	%

Sales for the three months ended January 31, 2007 and January 31, 2006 were primarily to customers located in the United States of America.

For the three and six months ended January 31, 2007 and January 31, 2006, respectively, no one customer represented 10% or greater of net revenue. We do not anticipate that any one customer will represent more than 10% of net revenue in the near future.

Net Revenue by Segment

Online Media Revenue

	Three Months Ended January 31,						Six Months Ended January 31,						% Change			% Change
	2007			2006			2007			2006			Three Months			Six Months
($ in thousands)
Online Media revenue	$	3,827		$	2,694		$	7,530		$	5,275			42	%		43	%
Percentage of total net revenue		20	%		18	%		26	%		24	%

During the three and six months ended January 31, 2007, Online Media revenue was derived primarily from cash 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.

	Three Months Ended January 31,				Six Months Ended January 31,				% Change			% Change
	2007		2006		2007		2006		Three Months			Six Months
($ in thousands)
Cash advertising	$	2,711	$	1,965	$	5,560	$	3,763		38	%		48	%
Sponsorships		162		98		326		216		65	%		51	%
Other revenue		954		631		1,644		1,296		51	%		27	%
Online Media revenue	$	3,827	$	2,694	$	7,530	$	5,275		42	%		43	%

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, generally a lead. The increase in cash advertising for both the three and six months is due to new customers and existing customers participating in the new programs we offer, such as our download program and custom landing 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 during the three and six month months ended January 31, 2007, as compared to the three and six months ended January 31, 2006 is due to new customers participating in our sponsorship offerings.

Other revenue consists primarily of paid search, contextually-relevant advertising, remnant advertising and referral fees. The increase in other revenue for the three and six months ended January 31, 2007 as compared to the three and six months ended January 31, 2006 was primarily due to increased revenue from contextually-relevant advertising and remnant advertising.

E-commerce Revenue

	Three Months Ended January 31,						Six Months Ended January 31,						% Change			% Change
	2007			2006			2007			2006			Three Months			Six Months

E-commerce revenue (in thousands)	$	13,277		$	9,062		$	17,738		$	12,648			47	%		40	%
Percentage of total net revenue		71	%		62	%		61	%		57	%
Number of Orders (per quarter)		200,560			140,532			269,722			195,489			43	%		38	%
Avg. order size (in whole dollars)	$	66.20		$	64.48		$	65.76		$	64.70			3	%		2	%

E-commerce revenue is derived from the online sale of consumer goods, including shipping, net of any returns and allowances. The growth during the three and six months ended January 31, 2007, as compared to the three and six months ended January 31, 2006, was primarily due to a 43% and 38% increases in the number of orders year-over-year resulting from an increase in the number of unique visitors to our site. We expect E-commerce revenue to continue to grow as number of visitors to our site grows.

Software Revenue

	Three Months Ended January 31,						Six Months Ended January 31,						% Change			% Change
	2007			2006			2007			2006			Three Months			Six Months
($ in thousands)
Software revenue	$	1,720		$	2,970		$	3,856		$	4,391			(42	%)		(12	%)
Percentage of total net revenue		9	%		20	%		13	%		20	%
Aggregate # of customers sold to		188			147			188			147			28	%		28	%
Avg. contract value	$	64		$	127		$	64		$	103			(50	%)		(38	%)

Software revenue consists principally of fees for licenses of our SFEE software products, maintenance, hosting, consulting and training.

The decrease in Software revenue during the three months ended January 31, 2007, as compared with the three months ended January 31, 2006, was primarily related to a decrease in license revenue of $1.5 million, due to a contract greater than $1.0 million recorded during the three months ended January 31, 2006, offset in part by increases in maintenance revenue of $0.2 million and professional services revenue of $0.1 million. We increased the number of customers to whom we have licensed SFEE to 188 at January 31, 2007 as compared with 147 at January 31, 2006. The average value of contracts sold during the three months ended January 31, 2007 decreased by 50% as compared with the three months ended January 31, 2006. The average contract value was impacted by the absence of the contract greater than $1.0 million and the lower value of contracts from customers who acquired additional licenses, as well as related maintenance and professional services, following their download of the initial 15 free users offered by our SFEE Free Download program.

The decrease in Software revenue during the six months ended January 31, 2007, as compared with the six months ended January 31, 2006, was primarily related to a decrease in license revenue of $1.1 million, offset in part by increases in maintenance revenue of $0.4 million, professional services revenue of $0.1 million and hosting and system administration revenue of $0.1 million. The decrease in license revenue is due to one contract greater than $1.0 million recorded during the six months ended January 31, 2006 as compared to no contracts greater than $1.0 million during the six months ended January 31, 2007. The average value of contracts sold during the six months ended January 31, 2007 decreased by 38% as compared

with the six months ended January 31, 2006. The average contract value was impacted by the absence of the contract greater than $1.0 million and the lower value of contracts from customers who acquired additional licenses, as well as related maintenance and professional services, following their download of the initial 15 free users offered by our SFEE Free Download program.

We expect Software revenue to continue to increase as we add new customers and grow our returning customer base.

Cost of Revenue/Gross Margin

	Three Months Ended January 31,						Six Months Ended January 31,						% Change			% Change
($ in thousands)	2007			2006			2007			2006			Three Months			Six Months

Cost of revenue	$	11,168		$	7,777		$	16,185		$	11,758			44	%		38	%
Gross margin		7,656			6,949			12,939			10,556			10	%		23	%
Gross margin %		41	%		47	%		44	%		47	%

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

Gross margins decreased for the three and six months ended January 31, 2007 as compared with the three and six months ended January 31, 2006, due primarily to increases in the Online Media gross margin as we leveraged our infrastructure costs to deliver increased revenue and the E-commerce gross margin due to increased revenue, offset in part by a decrease in the Software gross margin due to decreased revenue, primarily license revenue.

Cost of Revenue/Gross Margin by Segment

Online Media Cost of Revenue/Gross Margin

	Three Months Ended January 31,						Six Months Ended January 31,						% Change			% Change
($ in thousands)	2007			2006			2007			2006			Three Months			Six Months

Online Media cost of revenue	$	1,186		$	937		$	2,290		$	1,800			27	%		27	%
Online Media gross margin		2,641			1,757			5,240			3,475			50	%		51	%
Online Media gross margin %		69	%		65	%		70	%		66	%

Online Media cost of revenue consists of personnel costs and related overhead associated with developing the editorial content of the sites and the costs of providing and running advertising campaigns. The increase in Online Media gross margin percentages for the three and six months ended January 31, 2007, as compared to the three and six months ended January 31, 2006, was primarily driven by the increase in Online Media revenue partially offset by higher cost of revenue. The increase in cost of revenue was due to increased ad serving costs, increased operations costs including an increase in network operations headcount and co-location costs.

E-commerce Cost of Revenue/Gross Margin

	Three Months Ended January 31,						Six Months Ended January 31,						% Change			% Change
	2007			2006			2007			2006			Three Months			Six Months
($ in thousands)
E-commerce cost of revenue	$	9,608		$	6,529		$	13,151		$	9,371			47	%		40	%
E-commerce gross margin		3,669			2,533			4,587			3,277			45	%		40	%
E-commerce gross margin %		28	%		28	%		26	%		26	%

E-commerce cost of revenue consists of product costs, shipping and fulfillment costs and personnel costs associated with the operations and merchandising functions. The increase in E-commerce cost of revenue in absolute dollars was primarily due to increased product costs, shipping costs and fulfillment costs. The increase in product, shipping and fulfillment costs were the result of increased E-commerce number of orders. E-commerce gross margin percentages remained constant for the three and six months ended January 31, 2007, as compared to the three and six months ended January 31, 2006. We expect E-commerce cost of revenue in absolute dollars to grow proportionately with E-commerce revenue in the future. In addition, we expect E-commerce overall gross margins to improve slightly as volume grows.

Software Cost of Revenue/Gross Margin

	Three Months Ended January 31,						Six Months Ended January 31,						% Change			% Change
($ in thousands)	2007			2006			2007			2006			Three Months			Six Months

Software cost of revenue	$	374		$	311		$	744		$	587			20	%		27	%
Software gross margin		1,346			2,659			3,112			3,804			(49	%)		(18	%)
Software gross margin %		78	%		90	%		81	%		87	%

Software cost of revenue consists of personnel and related overhead costs and outside service provider costs associated with delivering software, customer hosting, maintenance and professional services.

The decrease in Software gross margin percentage for the three and six months ended January 31, 2007, as compared to the three and six months ended January 31, 2006, was primarily the result of decreased revenue, offset by increased cost of revenue. The increase in cost of revenue is primarily related to an increase in our costs of providing professional services to customers and to costs associated with hosting customer installations.

Operating Expenses

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of personnel and related overhead expenses, including sales commission, for personnel engaged in sales, marketing and sales support functions, as well as costs associated with trade shows, advertising and promotional activities.

	Three Months Ended January 31,						Six Months Ended January 31,						% Change			% Change
($ in thousands)	2007			2006			2007			2006			Three Months			Six Months

Sales and Marketing	$	2,927		$	2,771		$	5,530		$	5,002			6	%		11	%
Percentage of total net revenue		16	%		19	%		19	%		22	%
Headcount		34			33			34			33

The increase in sales and marketing expenses in the three months ended January 31, 2007, as compared to the three months ended January 31, 2006, was primarily due to increases in credit card fees of $0.2 million, consulting fees of $0.1 million and stock compensation expense of $0.1 million offset in part by lower commission expense of $0.2 million. The increase in credit card fees is a direct result of our increased E-commerce revenue; the increase in consulting fees is related to market research to support our SourceForge marketplace platform and the increase in stock compensation expense is related to stock options and restricted stock awards granted. The decrease in commission expense was primarily related to the decreased revenue from our Software segment. The decrease as a percentage of net revenue was due to increased revenue levels.

The increase in sales and marketing expenses in the six months ended January 31, 2007, as compared to the six months ended January 31, 2006, was primarily due to increases in credit card fees of $0.2 million, personnel related costs of $0.2 million and stock compensation expense of $0.2 million offset in part by lower commission expense of $0.2 million. The increase in credit card fees is a direct result of our increased E-commerce revenue; the increase in personnel related costs is a result of increased headcount in our Online Media business, and the increase in stock compensation expense is related to stock options and restricted stock awards granted. The decrease in commission expense was primarily related to the decreased revenue from our Software segment. The decrease as a percentage of net revenue was due to increased revenue levels.

We believe that our sales and marketing expenses in absolute dollars will increase in the future as we grow our sales force. However, in the future, we expect sales and marketing expenses to decrease slightly as a percentage of revenue.

Research and Development Expenses

Research and development (“R&D”) expenses consist primarily of personnel and related overhead expenses for software engineers involved in our Online Media and Software segments. We expense all of our R&D costs as they are incurred.

	Three Months Ended January 31,						Six Months Ended January 31,						% Change			% Change
($ in thousands)	2007			2006			2007			2006			Three Months			Six Months

Online Media	$	786		$	676		$	1,707		$	1,284			16	%		33	%
E-commerce		61			69			119			141			(12	%)		(16	%)
Software		537			876			1,131			1,710			(39	%)		(34	%)
Research and Development	$	1,384		$	1,621		$	2,957		$	3,135			(15	%)		(6	%)
Percentage of total net revenue		7	%		11	%		10	%		14	%
Headcount		37			32			37			32

R&D expense decreased by $0.2 million in absolute dollars in the three months ended January 31, 2007, as compared to the three months ended January 31, 2006. Online Media R&D expenses increased by $0.1 million due to additional personnel expense and outside contractor costs for our SourceForge.net web site. Software R&D expenses decreased by $0.3 million primarily due to a decrease in personnel expenses for our SFEE product. The decrease as a percentage of net revenue was primarily due to increased revenue levels. We expect R&D expenses to increase slightly in absolute dollars and decrease as a percentage of revenue in the future.

R&D expense decreased by $0.2 million in absolute dollars in the six months ended January 31, 2007, as compared to the six months ended January 31, 2006. Online Media R&D expenses increased by $0.4 million due to additional personnel expense and outside contractor costs for our SourceForge.net web site. Software R&D expenses decreased by $0.6 million primarily due to a decrease in personnel expenses for our SFEE product. The decrease as a percentage of net revenue was primarily due to increased revenue levels. We expect R&D expenses to increase slightly in absolute dollars and decrease as a percentage of revenue in the future.

In accordance with SFAS No. 86, “Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed,” development costs incurred in the R&D of new software products are expensed as incurred until technological feasibility in the form of a working model has been established, at which time such costs are capitalized, subject to a net realizable value evaluation. Technological feasibility is established upon the completion of an integrated working model. To date, our software development has been completed concurrent with the establishment of technological feasibility and, accordingly, all software development costs have been charged to R&D expense in the accompanying consolidated statements of operations. Going forward, should technological feasibility occur prior to the completion of our software development, all costs incurred between technological feasibility and software development completion will be capitalized.

In accordance with SOP 98-1, “Accounting for the Cost of Computer Software Developed or Obtained for Internal Use,” costs related to the planning and post implementation phases of internal use software products are recorded as an operating expense. Direct costs incurred in the development phase are capitalized and amortized over the product’s estimated useful life as charges to cost of revenue. During the three and six months ended January 31, 2007, we capitalized $0.4 million and $0.4 million, respectively of software development costs relating to the development of our SourceForge.net Marketplace platform.

General and Administrative Expenses

General and administrative expenses consist of salaries and related expenses for finance and accounting, human resources and legal personnel, bad debts and professional fees for accounting and legal services.

	Three Months Ended January 31,						Six Months Ended January 31,						% Change			% Change
($ in thousands)	2007			2006			2007			2006			Three Months			Six Months

General and Administrative	$	2,159		$	1,733		$	4,108		$	3,345			25	%		23	%
Percentage of total net revenue		11	%		12	%		14	%		15	%
Headcount		19			18			19			18

General and administrative expenses increased by $0.4 million in absolute dollars in the three months ended January 31, 2007, as compared to the three months ended January 31, 2006, primarily due to stock-based compensation expense of $0.1 million, increased personnel related expenses of $0.1 million and increased consulting fees of $0.1 million. The increase in stock-based compensation was primarily related to stock options granted to new executive personnel, the increase in personnel related expenses was primarily due to increased headcount and the increase in consulting fees was due to recruiting fees and temporary services. General and administrative expense decreased slightly as a percentage of net revenue due to the increase in expenses being slightly lower than the increase in revenue. We expect general and administrative expenses to increase slightly in absolute dollars and decrease as a percentage of revenue in the future.

General and administrative expenses increased by $0.8 million in absolute dollars in the six months ended January 31, 2007, as compared to the six months ended January 31, 2006, primarily due to increased personnel related expenses of $0.3 million, increased stock-based compensation expense of $0.2 million and increased consulting fees of $0.1 million. The increase in stock-based compensation was primarily related to stock options granted to new executive personnel and the increase in personnel related expenses was primarily due to increased headcount. General and administrative expense decreased slightly as a percentage of net revenue due to the increase in expenses being slightly lower than the increase in revenue.

Restructuring Costs and Other Special Charges

In fiscal 2001 and 2002, we adopted plans to exit our hardware systems and hardware-related software engineering and professional services businesses, as well as exit a sublease agreement and to reduce our general and administrative overhead costs. The remaining restructuring liability of $5.3 million as of January 31, 2007 represents the accrual from non-cancelable lease payments, which continue through 2010. This accrual is subject to change should actual circumstances change. We will continue to evaluate and update, if applicable, these accruals quarterly.

All charges as a result of restructuring activities have been recorded in accordance with 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)”. Restructuring charges recorded in fiscal 2004 were considered adjustments to the original restructuring plans, therefore, SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” was not applicable.

Below is a summary of the changes to the restructuring liability (in thousands):

	Balance at Beginning of Period		Cash payments			Balance at End of Period

For the six months ended January 31, 2006	$	7,855	$	(952	)	$	6,903
For the six months ended January 31, 2007	$	6,107	$	(796	)	$	5,311

Interest and Other Income, Net

Below is a summary of Interest and Other Income, Net (in thousands):

	Three Months Ended January 31,						Six Months Ended January 31,						% Change			% Change
	2007			2006			2007			2006			Three Months			Six Months

Interest Income	$	727		$	350		$	1,427		$	637			108	%		124	%
Interest Expense		(1	)	$	(2	)		(3	)		(5	)		(50	%)		(40	%)
Other Income (Expense)		1			(140	)		7			(137	)		(101	%)		(105	%)
Interest and other income, net	$	727		$	208		$	1,431		$	495			250	%		189	%

The increase in interest income in the three and six months ended January 31, 2007, as compared to the three and months ended January 31, 2006, was due to increased returns on our cash as a result of increased cash balances from the same period for the prior year and increased interest rates. The decrease in other expense during the three and six months ended January 31, 2007 as compared to the three and six months ended January 31, 2006 was primarily due to a loss on the liquidation of three of our European subsidiaries during the three months ended January 31, 2006.

Income Taxes

	Three Months Ended January 31,					Six Months Ended January 31,					% Change			% Change
	2007		2006			2007		2006			Three Months			Six Months
($ in thousands)
Provision (benefit) for income taxes	$	136	$	(41	)	$	137	$	(32	)		(432	%)		(130	%)

As of January 31, 2007, we had federal and state net operating loss carry-forwards for tax reporting purposes available to offset future taxable income. A valuation allowance has been recorded for the total deferred tax assets as a result of uncertainties regarding realization of the assets based on the lack of consistent profitability to date and the uncertainty of future profitability. The federal and state net operating loss carry-forwards expire at various dates through fiscal year 2024 and fiscal year 2014, respectively, to the extent that they are not utilized. We have not recognized any benefit from these net operating loss carry-forwards because of uncertainty surrounding their realization. The amount of net operating losses that we can utilize is limited under tax regulations because we have experienced a cumulative stock ownership change of more than 50% over the last three years.

Liquidity and Capital Resources

	Six Months Ended January 31,
($ in thousands)	2007			2006
Net cash provided by (used in):
Continuing operations
Operating activities	$	695		$	102
Investing activities		(11,549	)		(961	)
Financing activities		3,218			97
Effect of exchange rate changes on cash and cash equivalents		-			(16	)
Discontinued operations		-			8,305
Net increase (decrease) in cash and cash equivalents	$	(7,636	)	$	7,527

Our principal sources of cash as of January 31, 2007 are our existing cash, cash equivalents and investments of $56.1 million, which excludes restricted cash of $1.0 million. Cash and cash equivalents decreased by $7.6 million, and investments increased by $10.6 million at January 31, 2007 when compared to July 31, 2006. This increase is primarily due to cash provided by operations of $0.7 million and cash proceeds from the exercise of stock options of $3.2 million, offset in part by cash used for capital expenditures of $0.9 million

The cash flow discussion below describes the cash used or provided in one period as compared to the cash used or provided in the same period for the previous year. As such, the year-to-year fluctuations discussed can be calculated from the consolidated statements of cash flows.

Operating Activities

The increase in cash provided by operating activities during the first six months of fiscal 2007, as compared to the first six months of fiscal 2006, was primarily the result of an increase of $2.4 million in net income from continuing operations (excluding all non-cash items), an increase in accounts payable of $0.5 million and a decrease in accrued restructuring liability of $0.2 million, offset partly by an increase in accounts receivable of $0.7 million, an increase in inventory of $0.6 million and an increase in prepaids and other assets of $0.4 million, and a decrease in deferred revenue of $0.6 million and a decrease in accrued liabilities and other of $0.1 million. The increase related to accounts payable was the result of increased purchasing activity, primarily related to our inventory purchases. The decrease in accrued restructuring liability was the result of a reduction in periodic payments due to the expiration of lease obligation during the first six months of fiscal 2006. The increase related to accounts receivable is due to lower accounts receivable balances in our Software segment primarily due to the timing of invoices during the first six months of fiscal 2006. The increase related to inventories was primarily the result of increased inventory levels in the first six months of fiscal 2007 to support the increased revenue from our E-commerce business. The increase related to prepaid expenses and other assets was primarily the result of increases in interest receivable and proceeds from the exercise of stock options during the first six month of fiscal 2007. The decrease in deferred revenue was primarily due to the timing of maintenance renewals of our Software segment.

Investing Activities

Our investing activities primarily include purchases and sales of marketable securities, and purchases of property and equipment.

The decrease in cash used in investing activities in the first six months of fiscal 2007, as compared to the first six months of fiscal 2006, was primarily the result of an increase in net purchases of marketable securities of $9.9 million, as we extend the maturity dates of our investments to enhance our investment yields. In the first six months of fiscal 2007, we purchased $0.5 million of property and equipment, primarily to continue to invest in the infrastructure of our Online Media business operations, as compared to purchases of $0.2 million in the first six months of fiscal 2006. We also capitalized $0.4 million of software development costs relating to the development of our SourceForge.net Marketplace platform.

Financing Activities

The increase in cash provided by financing activities in the first six months of fiscal 2007, as compared to the first six months of fiscal 2006, was the result of an increase in the proceeds from the issuance of common stock primarily from increased exercises of stock options by our employees. We are uncertain of the level of cash that will be generated in the future from the issuance of common stock to our employees as the exercising of options is dependant upon several factors such as the price of our common stock and the number of employees participating in our stock option plans.

As of January 31, 2007 and July 31, 2006, we had an outstanding letter of credit issued under a line of credit of $1.0 million, related to the corporate facility lease. The amount related to this letter of credit is recorded in the “Restricted cash” section of the condensed consolidated balance sheet. The $1.0 million letter of credit will decline as the Company meets certain financial covenants.

Our liquidity and capital requirements depend on numerous factors, including market acceptance of our products, the resources we devote to developing, marketing, selling and supporting our products, the timing and expense associated with expanding our distribution channels, potential acquisitions and other factors.

We expect to devote capital resources to continue our research and development efforts, to invest in our sales, support, marketing and product development organizations, to enhance and introduce marketing programs, to invest in capital projects, to continue to support our operations and build out of our SourceForge.net Marketplace platform and related support systems and infrastructure, and for other general corporate activities. We believe that our existing cash balances will be sufficient to fund our operations during the next 12 months under our current business strategy, however, if we fail to adequately monitor and minimize our use of existing cash, we may need additional capital to fund continued operations beyond the next 12 months. Unless we monitor and minimize the level of use of our existing cash, cash equivalents and marketable securities, we may require additional capital to fund continued operations beyond the next 12 months. See “Risks Related to our Financial Results” in the Risk Factors section of this Quarterly Report on Form 10-Q.

Contractual Obligations

The contractual obligations presented in the table below represent our estimates of future payments under fixed contractual obligations and commitments. Changes in our business needs, cancellation provisions and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. The following table summarizes our fixed contractual obligations and commitments as of January 31, 2007 (in thousands):

				Fiscal years ending July 31,
	Total			2007			2008 and 2009			2010 and 2011			Beyond Fiscal 2011

Gross Operating Lease Obligations	$	12,554		$	1,826		$	7,539		$	3,189		$	-
Sublease Income		(3,611	)		(513	)		(2,160	)		(938	)		-
Net Operating Lease Obligations		8,943			1,313			5,379			2,251			-

Purchase Obligations		1,769			1,769			-			-			-
Total Obligations	$	10,712		$	3,082		$	5,379		$	2,251		$	-

Financial Risk Management

As a primarily U.S.-centric company, we face limited exposure to adverse movements in foreign currency exchange rates and we do not engage in hedging activity. We do not anticipate significant currency gains or losses in the near term. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial results.

We maintain investment portfolio holdings of various issuers, types and maturities. These securities are classified as available-for-sale, and consequently are recorded on the consolidated balance sheet at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income (loss). These securities are not leveraged and are held for purposes other than trading.

Recent Accounting Pronouncements

In February 2006, the FASB issued SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140.” SFAS No. 155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155 resolves issues addressed in Statement 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of our first fiscal year that begins after September 15, 2006, with earlier adoption permitted. We are currently evaluating the impact of SFAS No. 155 on our consolidated financial position, results of operations and cash flows.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets—An Amendment of FASB Statement No. 140.” Among other requirements, SFAS No. 156 requires a company to recognize a servicing asset or servicing liability when it undertakes an obligation to service a financial asset by entering into a servicing contract under certain situations. Under SFAS No. 156 an election can also be made for subsequent fair value measurement of servicing assets and servicing liabilities by class, thus simplifying the accounting and provide for income statement recognition of potential offsetting changes in the fair value of servicing assets, servicing liabilities and related derivative instruments. The Statement will be effective beginning the first fiscal year that begins after September 15, 2006. We do not expect the adoption of SFAS No. 156 will have a material impact on our financial position or results of operations.

In July 2006, the FASB issued Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”), which is a change in accounting for income taxes. FIN 48 specifies how tax benefits for uncertain tax positions are to be recognized, measured, and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the balance sheet; and provides transition and interim period guidance, among other provisions. FIN 48 is effective for fiscal years beginning after December 15, 2006. We do not expect the adoption of FIN 48 will have a material impact on our financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” Among other requirements, SFAS No. 157 defines fair value and establishes a framework for measuring fair value and also expands disclosure about the use of fair value to measure assets and liabilities. SFAS No. 157 is effective beginning the first fiscal year that begins after November 15, 2007. We do not expect the adoption of SFAS No. 157 will have a material impact on our financial position or results of operations.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The guidance is applicable for fiscal years ending after November 15, 2006. We do not believe SAB 108 will have a material impact on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities,” SFAS No. 159 amends SFAS 115 and permits fair value measurement of financial instruments and certain other items. SFAS No. 159 is effective beginning the first fiscal year that begins after November 15, 2007. We are currently evaluating the impact of SFAS No. 159 on our financial position and results of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we have invested in may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline. To minimize this risk, we maintain a portfolio of cash equivalents, short-term investments and long-term investments in a variety of securities, including commercial paper, money market funds and government and non-government debt securities. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate.

The following table presents the amounts of our cash equivalents and investments (in thousands) that are subject to market risk and weighted-average interest rates, categorized by expected maturity dates, as of January 31, 2007. This table does not include money market funds because those funds are not subject to market risk.

(in thousands)	Maturing within three months			Maturing within three months to one year			Maturing greater than one year

As of January 31, 2007:
Cash equivalents	$	1,085
Weighted-average interest rate		5.35	%
Short-term investments				$	43,998
Weighted-average interest rate					5.29	%
Long-term investments							$	4,972
Weighted-average interest rate								5.23	%

We have operated primarily in the United States, and virtually all sales have been made in U.S. dollars. Accordingly, we have not had any material exposure to foreign currency rate fluctuations.

The estimated fair value of our cash, cash equivalents and investments approximate carrying value. We do not currently hold any derivative instruments and do not engage in hedging activities.

Item 4. Controls and Procedures

a)	Evaluation of disclosure controls and procedures.

The Company’s management evaluated, with the participation of its Chief Executive Officer (CEO) and its Chief Financial Officer (CFO), the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934 (the “’34 Act”)) as of the end of the period covered by this report.

Disclosure controls and procedures are designed with the objective of ensuring that (i) information required to be disclosed in the Company’s reports filed under the ’34 Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) information is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Internal control procedures, which are designed with the objective of providing reasonable assurance that the Company’s transactions are properly authorized, its assets are safeguarded against unauthorized or improper use and its transactions are properly recorded and reported, all to permit the preparation of the Company’s financial statements in conformity with generally accepted accounting principles. To the extent that elements of our internal control over financial reporting are included within our disclosure controls and procedures, they are included in the scope of our quarterly controls evaluation.

Based on that evaluation, the CEO and CFO concluded that as of the end of the period covered by this report, the disclosure controls and procedures were effective.

b)	Changes in internal controls over financial reporting.

There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) of the ’34 Act) as of the date of this report that has materially affected, or is reasonably likely to materially affect, its internal controls over financial reporting.

PART II

Item 1. Legal Proceedings

The Company, two of its former officers (the "Former Officers"), and the lead underwriter in its initial public offering ("IPO") were named as defendants in a consolidated shareholder lawsuit in the United States District Court for the Southern District of New York, captioned In re VA Software Corp. Initial Public Offering Securities Litigation, 01-CV-0242. This is one of a number of actions coordinated for pretrial purposes as In re Initial Public Offering Securities Litigation, 21 MC 92, with the first action filed on January 12, 2001. Plaintiffs in the coordinated proceeding are bringing claims under the federal securities laws against numerous underwriters, companies, and individuals, alleging generally that defendant underwriters engaged in improper and undisclosed activities concerning the allocation of shares in the IPOs of more than 300 companies during late 1998 through 2000. Among other things, the plaintiffs allege that the underwriters' customers had to pay excessive brokerage commissions and purchase additional shares of stock in the aftermarket in order to receive favorable allocations of shares in an IPO. The consolidated amended complaint in the Company's case seeks unspecified damages on behalf of a purported class of purchasers of its common stock between December 9, 1999 and December 6, 2000. Pursuant to a tolling agreement, the individual defendants were dismissed without prejudice. On February 19, 2003, the court denied the Company’s motion to dismiss the claims against it. The litigation is now in discovery. In June 2004, a stipulation of settlement and release of claims against the issuer defendants, including the Company, was submitted to the court for approval. The terms of the settlement if approved, would dismiss and release all claims against the participating defendants (including the Company). In exchange for this dismissal, D&O insurance carriers would agree to guarantee a recovery by the plaintiffs from the underwriter defendants of at least $1 billion, and the issuer defendants would agree to an assignment or surrender to the plaintiffs of certain claims the issuer defendants may have against the underwriters. On August 31, 2005, the court confirmed preliminary approval of the settlement. The proposed settlement remains subject to a number of conditions, including receipt of final approval of the court. On December 5, 2006, the Court of Appeals for the Second Circuit reversed the Court’s order certifying a class in several “test cases” that had been selected by the underwriter defendants and plaintiffs in the coordinated proceeding In re Initial Public Offering Securities Litigation. The Company is not one of the test cases, and it is unclear what impact this will have on the litigation. If the settlement does not occur, and litigation against the Company continues, the Company believes it has meritorious defenses and intends to defend the case vigorously.

On Nov 9, 2001, a former employee of the Company, who had worked as a sales person in the Company's former hardware business, filed a complaint captioned Okerman v. VA Linux Systems, Inc. & Larry Augustin, Civil No. 01-01825 (Norfolk Superior Court), in the Commonwealth of Massachusetts. As amended, the complaint alleges that changes made to certain commission and bonus plans during the plaintiff's tenure at the Company entitled him to recover damages for Breach of Contract, Breach of the Implied Covenant of Good Faith and Fair Dealing, violation of the Massachusetts Wage Act Statute, Promissory Estoppel, and Quantum Meruit. On June 25, 2002, the Court dismissed the Massachusetts Wage Act claim brought against the Company's former chief executive officer. On July 26, 2002, dismissal of the Wage Act claim in favor of the Company’s former chief executive officer was upheld on interlocutory appeal. On July 9, 2003, the Court granted summary judgment in the Company's favor regarding claims for Breach of Contract, Promissory Estoppel, and Quantum Meruit, and granted judgment on the pleadings in favor of the Company regarding the Massachusetts Wage Act claim. On September 24, 2004, following a jury trial on the sole remaining claim for Breach of the Covenant of Good Faith and Fair Dealing, a jury awarded damages of $136,876 to the plaintiff, which have been included in accrued liabilities and other in the Company's Condensed Consolidated Balance Sheets as of January 31, 2007. The plaintiff filed a notice of appeal of his previously-dismissed claims and the judgment for Breach of Contract and Breach of the Covenant of Good Faith and Fair Dealing, and the Company has filed a notice of appeal of the judgment for Breach of the Covenant of Good Faith and Fair Dealing. The plaintiff and the Company have since filed their appellate briefs. Plaintiff’s reply to the Company’s response to plaintiff’s appellate brief, and plaintiff’s response to the Company’s appellate brief, are due to be filed in March 2007. The Company’s reply to plaintiff’s response to the Company’s appellate brief is due to be filed in April 2007.

Item 1A. Risk Factors

CURRENT AND PROSPECTIVE INVESTORS IN VA SOFTWARE SECURITIES SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN INVESTMENT DECISION. IN ADDITION, THESE RISKS ARE NOT THE ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS OF WHICH WE ARE NOT PRESENTLY AWARE OR THAT WE CURRENTLY BELIEVE ARE IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. OUR BUSINESS COULD BE HARMED BY ANY OF THESE RISKS. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO ANY OF THESE RISKS, AND INVESTORS MAY LOSE ALL OR PART OF THEIR INVESTMENT.

Risks Related To Our Online Media Business

If our Online Media business fails to attract and retain users, particularly users who create and post original content on our sites, our financial results will be adversely affected.

Our reliance upon user-generated content requires that we develop and maintain tools and services designed to facilitate:

·	creation of user-generated content,

·	participation in discussion surrounding such user-generated content, and

·	evaluation of user-generated content.

We cannot assure that any new tools or services that we offer to facilitate creation of user-generated content will be developed and/or improved in a timely or cost-effective manner. If we are unable to develop and/or improve tools and services facilitating creation of user-generated content, or if our infrastructure is not sufficiently robust to ensure that such tools and services are highly available, we will be unable to attract, retain and expand a loyal user base that is desirable to advertisers, resulting in an inability to generate sufficient revenue to grow our online business.

If our Online Media business fails to deliver innovative marketing programs, we will be unable to attract and retain advertisers, which will adversely affect our financial results.

The successful development and production of marketing programs is subject to numerous uncertainties, including our ability to:

• enable advertisers to showcase products, services and/or brands to their intended audience;

• anticipate and successfully respond to emerging trends in online advertising; and

• attract and retain qualified marketing and technical personnel.

We cannot assure that our online marketing programs will enable us to attract and retain advertisers and generate revenue consistent with our estimates or sufficient to sustain operations. In addition, we cannot assure that any new marketing programs will be developed in a timely or cost-effective manner. If we are unable to deliver innovative marketing programs that allow us to expand our advertiser base, we will be unable to generate sufficient revenue to grow our online business.

Decreases or delays in advertising spending due to general economic conditions could harm our ability to generate advertising revenue, which would adversely affect our financial results.

Expenditures by advertisers tend to be cyclical, reflecting overall economic conditions as well as budgeting and buying patterns. Because we derive a large part of our revenue from advertising fees, decreases in or delays of advertising spending could reduce our revenue or negatively impact our ability to grow our revenue.

The market in which SourceForge.net participates is becoming more competitive, and if we do not compete effectively, our online business could be harmed.

SouceForge.net hosts more than 141,000 open source software projects, and we derive revenue from SourceForge.net primarily through advertisements and sponsorship campaigns run on the site. Google, Inc. (“Google”) offers open source code hosting and search capabilities that may be viewed as competitive to SourceForge.net’s offering. Because Google enjoys substantial competitive advantages in the online space generally, including powerful brand identity, established marketing relationships, larger visitor base, and greater financial, technical, and other resources, we may be unable to compete effectively with Google’s offering. Further, other companies and organizations offer open source code hosting, open source code search, and open source software development-related services. Our competitors may be able to respond more quickly and effectively than we can to new or changing open source software opportunities, technologies, standards, or user requirements. Because of competitors’ advantages, even if our services are more effective than those of our competitors, users might accept the services of our competitors in lieu of ours. If we fail to compete effectively, our Online Media business could be negatively impacted.

We are devoting significant research and development resources and spending to development of the SourceForge.net Marketplace, so if it does not achieve market acceptance once launched we may experience operating losses.

In the first six months of fiscal 2007, which ended January 31, 2007, we spent $2.1 million on research and development within our Online Media business, including expenses related to the development of our SourceForge.net Marketplace offering. We expect to allocate an increased portion of our research and development resources to the SourceForge.net Marketplace for the foreseeable future, a portion of which may be capitalized as internally-developed software. There can be no assurance, however, that we will be sufficiently successful in marketing, upgrading and supporting the SourceForge.net Marketplace to offset our substantial research and development expenditures. Once we begin offering the SourceForge.net Marketplace, failure to grow revenue derived from the SourceForge.net Marketplace sufficiently to offset the significant research and development costs will materially and adversely affect our business and operating results.

Unplanned system interruptions and capacity constraints and failure to effect efficient transmission of user communications and data over the Internet could harm our business and reputation.

The success of our Online Media business largely depends on the efficient and uninterrupted operation of the computer and communications hardware and network systems that power our web sites. We do not currently have a formal disaster recovery plan and our computer and communications systems are located in a single data center in Santa Clara County, California. Although we are considering moving our data center in connection with formulation of a formal disaster recovery plan, given the current location of our single data center and our lack of a formal disaster recovery plan, our systems and operations are vulnerable to damage or interruption from earthquake, fire, power loss, telecommunications failure and similar events.

During and prior to the second quarter of fiscal year 2007, we experienced service interruptions with our online sites, including service outages associated with our SourceForge.net and Slashdot.org sites. Service interruptions during the first six months of fiscal year 2007 were caused by a variety of factors, including capacity constraints, single points of hardware failure, software design flaws and bugs, and third party denial of service attacks. Although we continue to work to improve the performance and uptime of our web sites, and have taken steps to mitigate these risks, we expect that service interruptions will continue to occur from time to time. If our web sites experience frequent or lengthy service interruptions, our business and reputation will be seriously harmed.

Risks Related To Our E-Commerce Business

We cannot predict our E-commerce customers’ preferences with certainty and such preferences may change rapidly. If we fail to accurately assess and predict our E-commerce customers’ preferences, it will adversely impact our financial results.

Our E-commerce offerings on our ThinkGeek.com web site are designed to appeal to IT professionals, software developers and others in technical fields. Misjudging either the market for our products or our customers’ purchasing habits will cause our sales to decline, our inventories to increase and/or require us to sell our products at lower prices, all of which would have a negative effect on our business.

We are exposed to significant inventory risks as a result of seasonality, new product launches, rapid changes in product cycles and changes in consumer tastes with respect to our products offered at our ThinkGeek E-commerce web site. Failure to properly assess our inventory needs will adversely affect our financial results.

In order to be successful, we must accurately predict our customers’ tastes and avoid overstocking or under-stocking products. Demand for products can change significantly between the time inventory is ordered and the date of sale. In addition, when we begin selling a new product, it is particularly difficult to forecast product demand accurately. The acquisition of certain types of inventory, or inventory from certain sources, may require significant lead-time and prepayment, and such inventory may not be returnable. We carry a broad selection and significant inventory levels of certain products and we may be unable to sell products in sufficient quantities or during the relevant selling seasons.

If we do not maintain sufficient E-commerce inventory levels, or if we are unable to deliver our E-commerce products to our customers in sufficient quantities, our E-commerce business operating results will be adversely affected.

We must be able to deliver our merchandise in sufficient quantities to meet the demands of our customers and deliver this merchandise to customers in a timely manner. We must be able to maintain sufficient inventory levels, particularly during the peak holiday selling seasons. If we fail to achieve these goals, we may be unable to meet customer demand, and our financial results will be adversely affected.

Our ThinkGeek E-commerce web site is dependent upon a single third party fulfillment and warehouse provider. The satisfaction of our E-commerce customers is highly dependent upon fulfillment of orders in a professional and timely manner, so any decrease in the quality of service offered by our fulfillment and warehouse provider will adversely affect our reputation and the growth of our E-commerce business.

Our ThinkGeek E-commerce web site’s ability to receive inbound inventory and ship completed orders efficiently to our customers is substantially dependent on a third-party contract fulfillment and warehouse provider. We currently utilize the services of Dotcom Distribution, Inc. (“Dotcom Distribution”), located in Edison, New Jersey. If Dotcom Distribution fails to meet our future distribution and fulfillment needs, our relationship with and reputation among our E-commerce customers will suffer and this will adversely affect our E-commerce growth. Additionally, if Dotcom Distribution cannot meet our distribution and fulfillment needs, particularly during the peak holiday selling seasons, or our contract with Dotcom Distribution terminates, we may fail to secure a suitable replacement or second-source distribution and fulfillment provider on comparable terms, which would adversely affect our E-commerce financial results.

Risks Related To Our Software Business

The announcement of our intention to explore strategic alternatives for the Software business may have an adverse impact on customers’ buying decisions.

In February 2007, we announced that we have retained an outside financial advisor to explore various strategic alternatives for our Software segment. Our existing and prospective customers may delay purchasing decisions while waiting for further information as to the future of the Software business. Any such delays in purchasing decisions or loss of customers may have an adverse impact on our Software business and operating results. In addition, many of the courses of action that we may decide to pursue involve significant risks, including the potential loss of key employees, diversion of management’s attention from our core business, and adverse effects on existing business relationships with business partners and suppliers.

Because the market for our SFEE application software is still emerging, we do not know whether existing and potential customers will license SFEE in sufficient quantities for us to sustain profitability.

Our future growth and financial performance will depend on market acceptance of SFEE and our ability to license our software in sufficient quantities and under acceptable terms. The number of customers using SFEE is still relatively small. We expect that we will continue to need intensive marketing and sales efforts to educate prospective clients about the uses and benefits of SFEE. Various factors could inhibit the growth of the market for and market acceptance of SFEE. In particular, potential customers may be unwilling to make the significant capital investment needed to license SFEE. Many of our customers have licensed only limited quantities of SFEE, and these or new customers may decide not to deploy our software more broadly. We cannot be certain that a viable market for SFEE will be sustainable. If a viable market for SFEE fails to be sustainable, this would have a significant, adverse effect upon our Software business and operating results.

We are devoting a significant research and development resources and spending to our SFEE application, so if this software does not achieve market acceptance we may experience operating losses.

In the second quarter of fiscal 2007, which ended January 31, 2007, we spent $0.5 million and in fiscal year 2006 we spent $3.2 million on research and development associated with our SFEE software application. We expect to continue to allocate a substantial portion of our research and development resources to SFEE for the foreseeable future. There can be no assurance, however, that we will be sufficiently successful in marketing, licensing, upgrading and supporting SFEE to offset our substantial research and development expenditures. A failure to grow Software revenue sufficiently to offset the significant research and development costs will materially and adversely affect our business and operating results.

If we fail to attract and retain larger corporate and enterprise-level customers, our revenue will not grow and may decline.

We have focused our sales and marketing efforts upon larger corporate and enterprise-level customers. This strategy may fail to generate sufficient revenue to offset the substantial demands that this strategy will place on our business, in particular the longer sales cycles, higher levels of service and support and volume pricing and terms that larger corporate and enterprise accounts often demand. In addition, these larger customers generally have significant financial and personnel resources. As a result, rather than license software, our target customers may develop collaborative software development applications internally, including ad hoc development of applications based on open source code. A failure to successfully obtain revenue from larger corporate or enterprise-level customers will materially and adversely affect our operating results.

If we fail to anticipate or respond adequately to technology developments, industry standards or practices, and customer requirements, or if we experience any significant delays in product development, introduction, or integration, SFEE software may become obsolete or unmarketable, our ability to compete may be impaired, and our Software revenue may not grow or may decline.

Rapid technological advances, changes in customer requirements, and frequent new product introductions and enhancements characterize the software industry generally. We must respond rapidly to developments related to hardware platforms, operating systems, and software development tools. These developments will require us to make substantial product development investments. We believe the success of our Software business will become increasingly dependent on our ability to:

• support multiple platforms, including Linux, commercial UNIX and Microsoft Windows;

• use the latest technologies to continue to support web-based collaborative software development; and

• continually support the rapidly changing standards, tools and technologies used in software development.

Our SFEE application software has a long and unpredictable sales cycle, which makes it difficult to forecast our future results and may cause our operating results to vary significantly.

The period between initial contact with a prospective customer and the licensing of SFEE varies and has often exceeded three and occasionally exceeded twelve months. Additionally, our sales cycle is complex because customers consider a number of factors before committing to license our software. Factors that our customers and potential customers have informed us that they consider when evaluating our software include product benefits, cost and time of implementation, and the ability to operate with existing and future computer systems and applications. We have found that customer evaluation, purchasing and budgeting processes vary significantly from company to company. We spend significant time and resources informing prospective customers about our software products, which may not result in completed transactions and associated revenue. Even if SFEE has been chosen by a customer, completion of the transaction is subject to a number of contingencies, which make our quarterly revenue difficult to forecast. These contingencies include but are not limited to the following:

• Our ability to sell SFEE software licenses may be impacted by changes in the strategic importance of software projects due to our customers’ budgetary constraints or changes in customer personnel;

• A customer’s internal approval and expenditure authorization process can be difficult and time consuming. Delays in approvals, even after we are selected as a vendor, could impact the timing and amount of revenue recognized in a quarterly period; and

• The number, timing and significance of enhancements to our software products and future introductions of new software by our competitors and us may affect customer-purchasing decisions.

If we do not continue to receive repeat business from existing software customers, our revenue will not grow and may decline.

We generate a significant amount of our SFEE license revenue from existing customers. Generally, our customers initially purchase a limited number of licenses, or download 15 free users offered by our SFEE Free Download program, as they evaluate, implement and adopt SFEE software. Even if customers successfully use SFEE, such customers may not purchase additional licenses to expand the use of our product. Purchases of additional licenses by these customers will depend on their success in deploying our software, their satisfaction with our product and support services and their use of competitive alternatives. A customer’s decision to widely deploy SFEE and purchase additional licenses may also be affected by factors that are outside of our control or which are not related to our product or services. In addition, as we deploy new versions of our software, or introduce new products, our current customers may not require the functionality of our new versions or products and may decide not to license these products.

Increased utilization and costs of our technical support services may adversely affect our financial results.

Over the short term, we may be unable to respond to fluctuations in customer demand for support services. We may also be unable to modify the format of our support services to compete with changes in support services provided by competitors. Further, customer demand for these services could cause increases in the costs of providing such services and adversely affect our operating results.

Contractual issues may arise during the negotiation process that may delay the anticipated closure of a transaction and our ability to recognize revenue as anticipated. The occurrence of such issues might cause our Software revenue and operating results to fall below our publicly-stated expectations, the expectations of securities analysts or the expectations of investors. Failure to meet public expectations is likely to materially and adversely affect the trading price of our common stock.

Because we focus on selling enterprise solutions, the process of contractual negotiation is critical and may be lengthy. Additionally, several factors may require us to defer recognition of license revenue for a significant period of time after entering into a license agreement, including instances where we are required to deliver either unspecified additional products or specified upgrades for which we do not have vendor-specific objective evidence of fair value. While we have a standard software license agreement that provides for revenue recognition provided that delivery has taken place, collectibility from the customer is reasonably assured and assuming no significant future obligations or customer acceptance rights exist, customer negotiations and revisions to these terms could impact our ability to recognize revenue at the time of delivery.

Many enterprise customers negotiate software licenses near the end of each quarter. In part, this is because enterprise customers are able, or believe that they are able, to negotiate lower prices and more favorable terms at that time. Our reliance on a large portion of Software revenue occurring at the end of the quarter and the increase in the dollar value of transactions that occur at the end of a quarter can result in increased uncertainty relating to quarterly revenue. Due to end-of-period variances, forecasts may not be achieved, either because expected sales do not occur or because they occur at lower prices or on terms that are less favorable to us.

In addition, slowdowns in our quarterly license contracting activities may impact our service offerings and may result in lower revenue from our customer training, professional services and customer support organizations. Our ability to maintain or increase service revenue is highly dependent on our ability to increase the number of license agreements we enter into with customers.

Risks Related To Our Financial Results

Certain factors specific to our businesses over which we have limited or no control may nonetheless adversely impact our total revenue and financial results.

The primary factors over which we have limited or no control that may adversely impact our total revenue and financial results include the following:

• the impact of our customers’ and partners’ reactions that we have retained an outside financial advisor to explore various strategic alternatives for our Software segment;

• specific economic conditions relating to IT spending;

• the discretionary nature of our online media and software customers’ purchase and budget cycles;

• the size and timing of online media and software customer orders;

• long software and online media sales cycles;

• our ability to retain skilled engineering and sales personnel;

• economic conditions relating to online advertising and sponsorship, and E-commerce;

• our ability to demonstrate and maintain attractive online user demographics;

• the addition or loss of specific online advertisers or sponsors, and the size and timing of advertising or sponsorship purchases by individual customers; and

• our ability to keep our web sites operational at a reasonable cost.

If our revenue and operating results fall below our expectations, the expectations of securities analysts or the expectations of investors, the trading price of our common stock will likely be materially and adversely affected. You should not rely on the results of our business in any past periods as an indication of our future financial performance.

Future changes in financial accounting standards, including pronouncements and interpretations of accounting pronouncements on software revenue recognition, share-based payments and financial instruments, may cause adverse unexpected revenue fluctuations and affect our reported results of operations.

From time to time, the American Institute of Certified Public Accountants (“AICPA”) and the SEC may issue accounting pronouncements, guidelines and interpretations regarding accounting pronouncements. A change in an accounting policy can have a significant effect on our reported results and may even affect our reporting of transactions completed before a change is announced. Accounting policies affecting our business, including rules relating to revenue recognition, share-based payments and financial instruments have recently been revised or are under review. In particular, new accounting pronouncements and varying interpretations of existing pronouncements on software revenue recognition, share-based payments and financial instruments have occurred with frequency, may occur in the future and could impact our revenue and results of operations. There have also been recent accounting pronouncements on the reporting of changes in accounting policies and the consideration of the effects on prior year misstatements. Required changes in our application of accounting pronouncements could cause changes in our reported results of operation and our financial condition.

If we fail to adequately monitor and minimize our use of existing cash, we may need additional capital to fund continued operations beyond the next 12 months.

Although we generated cash from operations during the first six months of fiscal 2007, which ended January 31, 2007, and during fiscal 2006, which ended July 31, 2006, we have historically experienced cash shortfalls. Unless we monitor and minimize the level of use of our existing cash, cash equivalents and marketable securities, we may require additional capital to fund continued operations beyond the next 12 months. While we believe we will not require additional capital to fund continued operations for the next 12 months, we may require additional funding within this time frame, and this additional funding, if needed, may not be available on terms acceptable to us, or at all. A slowdown in technology or advertising spending, as well as other factors that may arise, could affect our future capital requirements and the adequacy of our available funds. As a result, we may be required to raise additional funds through private or public financing facilities, strategic relationships or other arrangements. Any additional equity financing would likely be dilutive to our stockholders. Debt financing, if available, may involve restrictive covenants on our operations and financial condition. Our inability to raise capital when needed could seriously harm our business.

We have a history of losses and may incur net losses in the foreseeable future. Failure to remain profitable may materially and adversely affect the market price of our common stock and our ability to raise capital and continue operations.

Although we generated income from continuing operations of $1.8 million for our second fiscal quarter ended January 31, 2007 and for the six months ended January 31, 2007 we generated income from continuing operations of $1.6 million, we do not have a long history of profitability and have an accumulated deficit of $739.5 million as of January 31, 2007. We may incur net losses in the future. Failure to remain profitable may materially and adversely affect the market price of our common stock and our ability to raise capital and continue operations beyond the next 12 months.

Risks Related To Competition

Online competition is intense. Our failure to compete successfully could adversely affect our revenue and financial results.

The market for Internet content and services is intensely competitive and rapidly evolving. It is not difficult to enter this market and current and new competitors can launch new Internet sites at relatively low cost. We derive revenue from online advertising and sponsorships, for which we compete with various media including newspapers, radio, magazines and various Internet sites. We also derive revenue from E-commerce, for which we compete with other E-commerce companies as well as traditional, “brick and mortar” retailers. We may fail to compete successfully with current or future competitors. Moreover, increased competition could result in price reductions, reduced margins or loss of market share, any of which could have a material adverse effect on our future revenue and financial results. If we do not compete successfully for new users and advertisers, our financial results may be materially and adversely affected.

If we do not effectively compete with new and existing SFEE competitors, our Software revenue will not grow and may decline, which will adversely impact our financial results.

We believe that the emerging collaborative software development market continues to be fragmented, subject to rapid change and highly sensitive to new product introductions and marketing efforts by industry participants. Competition in related markets is intense. If our products gain market acceptance, we expect the competition to rapidly intensify as new competitors enter the marketplace. Our potential competitors include companies entrenched in closely related markets who may choose to enter and focus on collaborative software development. We expect competition to intensify in the future if the market for collaborative software development applications continues to expand. Our potential competitors include providers of software and related services as well as providers of hosted application services. Many of our potential competitors have significantly more resources, more experience, longer operating histories and greater financial, technical, sales and marketing resources than we do. In addition, open source and free-of-charge closed source code can be obtained through commercial vendors or downloaded and used on an ad hoc basis to address some collaborative software development challenges. We cannot guarantee that we will be able to compete successfully against current and future competitors or that competitive pressure and/or the availability of open source and free-of-charge closed source code will not result in price reductions, reduced operating margins and loss of market share, any one of which could seriously harm our business. Because individual product sales often lead to a broader customer relationship, our products must be able to successfully compete with and complement numerous competitors’ current and potential offerings. Moreover, we may be forced to compete with our strategic partners, and potential strategic partners, and this may adversely impact our relationship with an individual partner or a number of partners. Consolidation is underway among companies in the software industry as firms seek to offer more extensive suites of software products and broader arrays of software solutions. Changes resulting from this consolidation may negatively impact our competitive position and operating results.

Risks Related To Intellectual Property

We are vulnerable to claims that our products infringe third-party intellectual property rights. Any resulting claims against us could be costly to defend or subject us to significant damages.

We expect that our software products will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. In addition, we may receive patent infringement claims as companies increasingly seek to patent their software. Our developers may fail to perform patent searches and may therefore unwittingly infringe on third-party patent rights. We cannot prevent current or future patent holders or other owners of intellectual property from suing us and others seeking monetary damages or an injunction against shipment of our software offerings. A patent holder may deny us a license or force us to pay royalties. In either event, our operating results could be seriously harmed. In addition, employees hired from competitors might utilize proprietary and trade secret information from their former employers without our knowledge, even though our employment agreements and policies clearly prohibit such practices.

Any litigation regarding our intellectual property, with or without merit, could be costly and time consuming to defend, divert the attention of our management and key personnel from our business operations and cause product shipment delays. Claims of intellectual property infringement may require us to enter into royalty and licensing agreements that may not be available on terms acceptable to us, or at all. In addition, parties making claims against us may be able to obtain injunctive or other equitable relief that could effectively block our ability to sell our products in the United States and abroad and could result in an award of substantial damages against us. Defense of any lawsuit or failure to obtain any required license could delay shipment of our products and increase our costs. If a successful claim is made against us and we fail to develop or license a substitute technology, our business, results of operations, financial condition or cash flows could be immediately and materially adversely affected.

If we fail to adequately protect our intellectual property rights, competitors may use our technology and trademarks, which could weaken our competitive position, reduce our revenue, and increase our costs.

We rely on a combination of copyright, trademark and trade-secret laws, employee and third-party nondisclosure agreements, and other arrangements to protect our proprietary rights. Despite these precautions, it may be possible for unauthorized third parties to copy our products or obtain and use information that we regard as proprietary to create products that compete against ours. Some license provisions protecting against unauthorized use, copying, transfer, and disclosure of our licensed programs may be unenforceable under the laws of certain jurisdictions and foreign countries.

In addition, the laws of some countries do not protect proprietary rights to the same extent as do the laws of the United States. To the extent that we increase our international activities, our exposure to unauthorized copying and use of our products and proprietary information will increase.

Our collection of trademarks is important to our business. The protective steps we take or have taken may be inadequate to deter misappropriation of our trademark rights. We have filed applications for registration of and registered some of our trademarks in the United States and internationally. Effective trademark protection may not be available in every country in which we offer or intend to offer our products and services. Failure to protect our trademark rights adequately could damage our brand identity and impair our ability to compete effectively. Furthermore, defending or enforcing our trademark rights could result in the expenditure of significant financial and managerial resources.

The scope of United States patent protection in the software industry is not well defined and will evolve as the United States Patent and Trademark Office grants additional patents. Because patent applications in the United States are not publicly disclosed until the patent is issued, applications may have been filed that would relate to our products.

Our Software business success depends significantly upon our proprietary technology. Despite our efforts to protect our proprietary technology, it may be possible for unauthorized third parties to copy certain portions of our products or to reverse engineer or otherwise obtain and use our proprietary information. We do not have any software patents, and existing copyright laws afford only limited protection. In addition, we cannot be certain that others will not develop substantially equivalent or superseding proprietary technology, or that equivalent products will not be marketed in competition with our products, thereby substantially reducing the value of our proprietary rights. We cannot assure that we will develop proprietary products or technologies that are patentable, that any patent, if issued, would provide us with any competitive advantages or would not be challenged by third parties, or that the patents of others will not adversely affect our ability to do business. Litigation may be necessary to protect our proprietary technology. This litigation may be time-consuming and expensive.

Other Risks Related To Our Overall Business

We may be subject to claims as a result of information published on, posted on or accessible from our Internet sites, which could be costly to defend and subject us to significant damage claims.

We may be subject to claims of defamation, negligence, copyright or trademark infringement (including contributory infringement) or other claims relating to the information contained on our Internet sites, whether written by third parties or us. These types of claims have been brought against online services in the past and can be costly to defend regardless of the merit of the lawsuit. Although federal legislation protects online services from some claims when third parties write the material, this protection is limited. Furthermore, the law in this area remains in flux and varies from state to state. We receive notification from time to time of potential claims, but have not been named as a party to litigation involving such claims. While no formal complaints have been filed against us to date, our business could be seriously harmed if one were asserted.

We may be subject to product liability claims if people or property are harmed by the products we sell on our E-commerce web sites, which could be costly to defend and subject us to significant damage claims.

Some of the products we offer for sale on our E-commerce web sites, such as consumer electronics, toys, computers and peripherals, toiletries, beverages and clothing, may expose us to product liability claims relating to personal injury, death or property damage caused by such products, and may require us to take actions such as product recalls. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. In addition, some of our vendor agreements with our suppliers do not indemnify us from product liability.

We make significant investments in new products and services that may fail to become profitable endeavors.

We have made and will continue to make significant investments in research, development and marketing for new products and services. For example, we are building a SourceForge.net Marketplace platform, including related support systems and infrastructure. Investments in new technology are inherently speculative.

Commercial success for new products and services depends on many factors including innovativeness, developer support, and effective marketing. Significant revenue from new product and service investments may not be achieved for a number of years, if at all. Moreover, new products and services may not be profitable, and even if they are profitable, operating margins for new products and services may not meet our internal expectations or the expectations of investors and securities analysts. If our new products and services fail to achieve financial results that meet public expectations, our business could be seriously harmed and our stock price will likely decline.

If we are unable to implement appropriate systems, procedures and controls, we may not be able to successfully offer our services and grow our business.

Our ability to successfully offer our services and grow our business requires an effective planning and management process. We updated our operations and financial systems, procedures and controls following our strategic decision to exit the hardware business, however, we still rely on manual processes and procedures that may not scale commensurately with growth. Our systems will continue to require automation, modifications and improvements to respond to current and future changes in our business. If we cannot grow our businesses, and manage that growth effectively, or if we fail to implement in a timely manner appropriate internal systems, procedures, controls and necessary automation and improvements to these systems, our businesses will suffer.

If we lose key personnel or fail to integrate replacement personnel successfully, our ability to manage our business could be impaired.

Our future success depends upon the continued service of our key management, technical, sales, and other critical personnel. Our officers and other key personnel are employees-at-will, and we cannot assure that we will be able to retain them. Key personnel have left our company in the past and there likely will be additional departures of key personnel from time to time in the future. The loss of any key employee could result in significant disruptions to our operations, including adversely affecting the timeliness of product releases, the successful implementation and completion of company initiatives, and the results of our operations. Competition for these individuals is intense, and we may not be able to attract, assimilate or retain highly qualified personnel. Competition for qualified personnel in our industry and the San Francisco Bay Area, as well as other geographic markets in which we recruit, is intense and characterized by increasing salaries, which may increase our operating expenses or hinder our ability to recruit qualified candidates. In addition, the integration of replacement personnel could be time consuming, may cause additional disruptions to our operations, and may be unsuccessful.

Our stock price has been volatile historically and may continue to be volatile.

The trading price of our common stock has been and may continue to be subject to wide fluctuations. During the second quarter of fiscal year 2007, the closing sale prices of our common stock on the NASDAQ Global Market ranged from $4.01 to $5.44 per share and the closing sale price on January 31, 2007, the last trading day of the second quarter of our fiscal year 2007, was $5.13 per share. Our stock price may fluctuate in response to a number of events and factors, such as quarterly variations in operating results, announcements of technological innovations or new products and media properties by us or our competitors, changes in financial estimates and recommendations by securities analysts, the operating and stock price performance of other companies that investors may deem comparable to us, and news reports relating to trends in our markets or general economic conditions.

In addition, the stock market in general, and the market prices for Internet-related companies in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance. Additionally, volatility or a lack of positive performance in our stock price may adversely affect our ability to retain key employees, all of whom have been granted stock options.

Sales of our common stock by significant stockholders may cause the price of our common stock to decrease.

Several of our stockholders own significant portions of our common stock. If these stockholders were to sell significant amounts of their holdings of our common stock, then the market price of our common stock could be negatively impacted. The effect of such sales, or of significant portions of our stock being offered or made available for sale, could result in strong downward pressure on our stock price. Investors should be aware that they could experience significant short-term volatility in our stock if such stockholders decide to sell a substantial amount of their holdings of our common stock at once or within a short period of time.

Our networks may be vulnerable to unauthorized persons accessing our systems, which could disrupt our operations and result in the theft of our proprietary information.

A party who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions or malfunctions in our Internet operations. We may be required to expend significant capital and resources to protect against the threat of security breaches or to alleviate problems caused by breaches in security.

Increasing regulation of the Internet or imposition of sales and other taxes on products sold or distributed over the Internet could harm our business.

The electronic commerce market on the Internet is relatively new and rapidly evolving. While this is an evolving area of the law in the United States and overseas, currently there are relatively few laws or regulations that directly apply to commerce on the Internet. Changes in laws or regulations governing the Internet and electronic commerce, including, without limitation, those governing an individual’s privacy rights, pricing, content, encryption, security, acceptable payment methods and quality of products or services could have a material adverse effect on our business, operating results and financial condition. Taxation of Internet commerce, or other charges imposed by government agencies or by private organizations, may also be imposed. Any of these regulations could have an adverse effect on our future sales and revenue growth.

Business disruptions could affect our future operating results.

Our operating results and financial condition could be materially and adversely affected in the event of a major earthquake, fire or other catastrophic event. Our corporate headquarters, the majority of our research and development activities, our third-party data center and certain other critical business operations are located in California, near major earthquake faults. A catastrophic event that results in the destruction of any of our critical business or information technology systems could severely affect our ability to conduct normal business operations and as a result our future operating results could be adversely affected.

System disruptions could adversely affect our future operating results.

Our ability to attract and maintain relationships with users, advertisers, merchants and strategic partners will depend on the satisfactory performance, reliability and availability of our Internet channels and network infrastructure. Our Internet advertising revenue relates directly to the number of advertisements delivered to our users. System interruptions or delays that result in the unavailability of Internet channels or slower response times for users would reduce the number of advertisements and sales leads delivered to such users and reduce the attractiveness of our Internet channels to users, strategic partners and advertisers or reduce the number of impressions delivered and thereby reduce revenue. In the past twelve months, some of our sites have experienced a small number of brief service interruptions. We will continue to suffer future interruptions from time to time whether due to capacity constraints, natural disasters, telecommunications failures, other system failures, rolling blackouts, viruses, hacking or other events. System interruptions or slower response times could have a material adverse effect on our revenue and financial condition.

Item 4. Submission of Matters to a Vote of Security Holders

We held our Annual Meeting of Stockholders on December 6, 2006 at our principal executive offices located at 46939 Bayside Parkway, Fremont, California, 94538. Of the 65,724,337 shares of common stock outstanding as of October 9, 2006 (the record date), 52,551,636 shares (79.95%) were present or represented by proxy at the meeting.

1. The table below presents the results of the election of three (3) Class III directors to our board of directors:

Name	For		Against
Ram Gupta		52,110,731		440,905
Ali Jenab		52,046,110		505,526

2. The table below presents the results of voting regarding ratification of the appointment of Stonefield Josephson, Inc. as our registered independent public accounting firm for our fiscal year ending July 31, 2007.

For		Against			Abstain
52,283,540			216,347			52,048

Item 6. Exhibits

Exhibit No.	Description

31.1	Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002.

SIGNATURES

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


	VA SOFTWARE CORPORATION

	By:	/s/ ALI JENAB
		Ali Jenab
		President and Chief Executive Officer



	By:	/s/ PATRICIA S. MORRIS
		Patricia S. Morris
		Senior Vice President and Chief Financial Officer

Date: March 9, 2007

EXHIBIT INDEX

Exhibit No.		Description

31.1	—	Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	—	Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	—	Certification Of Chief Executive Officer and Chief Financial Officer Pursuant To 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 Of The Sarbanes-Oxley Act Of 2002.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

Geeknet (GKNT) Inactive 10-Q2007 Q0 Quarterly report

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