Geeknet (GKNT) 10-Q 2008 Q3 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 October 31, 2008

Or

o	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

SourceForge, Inc.

(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.)

650 Castro Street, Suite 450, Mountain View, California, 94041

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

(650) 694-2100

(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 o 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 November 30, 2008
Common Stock, $0.001 par value	68,636,090

Table of Contents

		Page No.
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets at October 31, 2008 and July 31, 2008	3
	Condensed Consolidated Statements of Operations for the three months ended October 31, 2008 and October 31, 2007	4
	Condensed Consolidated Statements of Cash Flows for the three months ended October 31, 2008 and October 31, 2007	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	31
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 6.	Exhibits	44
Signatures		44
Certifications

2

PART I

SOURCEFORGE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, unaudited)

	October 31,			July 31,
	2008			2008
ASSETS
Current assets:
Cash and cash equivalents	$	36,410		$	41,904
Short-term investments		557			549
Accounts receivable, net of allowance of $0 and $52, respectively		4,754			4,413
Inventories		6,647			2,985
Prepaid expenses and other current assets		2,588			1,353
Total current assets		50,956			51,204
Property and equipment, net		4,880			4,800
Long-term investments		9,238			10,249
Restricted cash, non-current		1,000			1,000
Other assets		8,951			7,280
Total assets	$	75,025		$	74,533
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,012		$	2,783
Accrued restructuring liabilities, current portion		2,836			2,788
Deferred revenue		420			585
Accrued liabilities and other		2,266			2,115
Total current liabilities		9,534			8,271
Accrued restructuring liabilities, net of current portion		1,740			2,444
Other long-term liabilities		168			166
Total liabilities		11,442			10,881
Commitments and contingencies (Notes 11 and 13)
Stockholders’ equity:
Common stock		69			69
Treasury stock		(331	)		(193	)
Additional paid-in capital		801,580			801,066
Accumulated other comprehensive loss		3			(597	)
Accumulated deficit		(737,738	)		(736,693	)
Total stockholders’ equity		63,583			63,652
Total liabilities and stockholders’ equity	$	75,025		$	74,533

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

3

SOURCEFORGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts, unaudited)

	Three Months Ended October 31,
	2008			2007
Revenue:
Online Media revenue, including $181and $293 of related party revenue, respectively	$	5,417		$	4,409
E-commerce revenue		6,668			5,893
Revenue		12,085			10,302
Cost of revenue:
Online Media cost of revenue		2,190			1,424
E-commerce cost of revenue		5,212			4,329
Cost of revenue		7,402			5,753
Gross margin		4,683			4,549
Operating expenses:
Sales and marketing		2,152			1,791
Research and development		1,480			853
General and administrative		2,314			2,256
Restructuring costs		-			1,414
Total operating expenses		5,946			6,314
Loss from operations		(1,263	)		(1,765	)
Interest and other income, net		782			697
Loss from operations before income taxes		(481	)		(1,068	)
Provision (benefit) for income taxes		(36	)		2
Net loss	$	(445	)	$	(1,070	)
Net loss per share:
Basic and diluted	$	(0.01	)	$	(0.02	)
Shares used in per share calculations:
Basic and diluted		67,730			67,401

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

4

SOURCEFORGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

	Three Months Ended October 31,
	2008			2007
Cash flows from operating activities:
Net loss	$	(445	)	$	(1,070	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of intangible assets		565			149
Stock-based compensation expense		514			529
Provision for bad debts		(52	)		12
Provision for excess and obsolete inventory		(23	)		10
Gain on sale of assets		-			(1	)
Non-cash restructuring expense		-			1,414
Change in fair value of financial assets		(601	)		-
Changes in assets and liabilities:
Accounts receivable		(289	)		710
Inventories		(3,639	)		(3,870	)
Prepaid expenses and other assets		(1,294	)		(754	)
Accounts payable		1,229			1,573
Accrued restructuring liabilities		(656	)		159
Deferred revenue		(165	)		100
Accrued liabilities and other		151			(392	)
Other long-term liabilities		2			(707	)
Net cash used in operating activities		(4,703	)		(2,138	)
Cash flows from investing activities:
Purchase of property and equipment		(645	)		(936	)
Purchase of marketable securities		(8	)		(11,862	)
Sale of marketable securities		-			15,309
Net cash provided by (used in) investing activities		(653	)		2,511
Cash flows from financing activities:
Proceeds from issuance of common stock		-			32
Repurchase of common stock		(138	)		(85	)
Net cash used in financing activities		(138	)		(53	)
Cash flows from discontinued operations:
Net cash provided by operating activities		-			24
Net cash provided by discontinued operations		-			24
Net increase (decrease) in cash and cash equivalents		(5,494	)		344
Cash and cash equivalents, beginning of period		41,904			8,357
Cash and cash equivalents, end of period	$	36,410		$	8,701

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

5

SOURCEFORGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.  Basis of Presentation

Overview

SourceForge, Inc. (“SourceForge” or the “Company”) owns and operates a network of media web sites, serving the IT professional, software development and open source communities.  Through its ThinkGeek, Inc. subsidiary, SourceForge also provides online sales of a variety of retail products of interest to these communities.  The Company’s network of web sites includes: SourceForge.net, Slashdot.org, ThinkGeek.com, Linux.com and freshmeat.net. Combining user-developed content, online marketplaces and e-commerce, SourceForge is the global technology community's nexus for information exchange, goods for geeks, and open source software distribution and services.

SourceForge 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.  In December 2001, the Company changed its name to VA Software Corporation to reflect its decision to pursue its Online Media, E-commerce, Software and Online Images businesses.  In December 2005, the Company sold its Online Images business to Jupitermedia Corporation (“Jupitermedia”) and in April 2007, the Company sold its Software business to CollabNet, Inc. (“CollabNet”).  On May 24, 2007, reflecting the Company’s strategic decision to focus on its network of media and e-commerce web sites, the Company changed its name to SourceForge, Inc. and merged with and into its wholly-owned subsidiary, OSTG, Inc.

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 accompanying condensed consolidated balance sheet as of July 31, 2008 has been derived from audited financial statements, and the interim 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 October 31, 2008, its results of operations for the three months ended October 31, 2008 and October 31, 2007 and its cash flows for the three months ended October 31, 2008 and October 31, 2007 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, 2008, 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 months ended October 31, 2008 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, 2008.

6

Principles of Consolidation

The interim financial information presented in this Quarterly Report on Form 10-Q includes the accounts of SourceForge and its wholly-owned subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.  At October 31, 2008, the Company owned approximately 9% of CollabNet, Inc. (“CollabNet”) consisting of CollabNet’s Series C-1 preferred stock and approximately 14% of VA Linux Systems Japan, K.K.’s (“VA Linux Japan”) common stock.  As the Company holds less than 20% of the voting stock of these companies and does not otherwise exercise significant influence over them, these investments are accounted for under the cost method.  CollabNet is a developer of software used in collaborative software development.  VA Linux Japan distributes software and related consulting services and resyndicated certain of the Company’s Online Media business web sites for the Japanese market.  In September 2007, VA Linux Japan sold its syndication rights to an unrelated third party which is now known as OSDN K.K.  Subsequent to the sale, the Company no longer has any transactions with VA Linux Japan.

There are $0.2 million and $0.3 million of related-party revenue from continuing operations associated with CollabNet and VA Linux Japan for the three months ended October 31, 2008 and October 31, 2007, respectively.

In December 2008, the Company sold its investment in VA Linux Japan for cash proceeds of $0.9 million.

Foreign Currency Translation

The Company has a wholly-owned foreign subsidiary, SourceForge Europe, which is located in Belgium.  The functional currency of SourceForge Europe is the Euro, which is Belgium’s local currency.  For the periods presented, no revenue or expenses resulted from this entity.  At October 31, 2008 the Company has a foreign cash balance of $0.02 million.  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 October 31, 2008 the Company did not hold any foreign currency derivative instruments.

Segment and Geographic Information

FAS 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.  FAS 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 FAS 131, is the Chief Executive Officer and the executive team.  The Company currently operates as two reportable business segments:  Online Media and E-commerce.

The Company markets its products in the United States through its direct sales force or online web properties and with respect to international Online Media sales, through representatives in in the United Kingdom, Europe and Australia.  Revenue for the three months ended October 31, 2008 and October 31, 2007, respectively, was generated primarily from sales to customers in the United States.

Fair Value Measurements

In September 2006, the Financial Accounting Standards Board (“the FASB”) issued Statement of Financial Accounting Standards (FAS) No. 157, “Fair Value Measurements.”  FAS 157 defines fair value, establishes a framework for measuring fair value, and enhances fair value measurement disclosure.  In October 2008, the FASB issued FSP 157-3 “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”).  FSP 157-3 clarifies the application of FAS 157 in a market that is not active, and provides guidance on the key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. Effective August 1, 2008, the Company adopted the measurement and disclosure requirements related to financial assets and financial liabilities.  The adoption of FAS 157 for financial assets and financial liabilities did not have a material impact on the Company’s results of operations or the fair values of its financial assets and liabilities.

7

FASB Staff Position 157-2, “Effective Date of FASB Statement No. 157,” (“FSP 157-2”) delayed the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of fiscal 2010. The Company is currently assessing the impact that the application of FAS 157 to nonfinancial assets and liabilities will have on its results of operations and financial position.

In February 2007, the FASB issued FAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115.”  Under FAS 159, a company may choose, at specified election dates, to measure eligible items at fair value and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date.  The Company adopted FAS 159 effective August 1, 2008 and has elected the fair value option for Auction Rate Securities, also classified as Municipal Bonds, as of August 1, 2008.  In conjunction with the adoption of FAS 159, the Company accounted for its unrealized loss on its Auction Rate Securities of $0.6 million as the cumulative effect of a change in accounting principle and recorded an increase in its Accumulated Deficit of $0.6 million.

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 as well as treasury bills.

The Company accounts for its investments under the provisions of FAS 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.

Revenue Recognition

The Company applies the provisions of SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” for revenue recognition 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-related arrangements and contextually-relevant advertising associated with advertising on these web sites.  The Company recognizes Online Media revenue as advertising is delivered 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 delivered in the specified time frame, the Company does not recognize the corresponding revenue until the guaranteed impressions are delivered.

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 2009, begins on November 1, 2008, and ends on January 31, 2009.  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.

8

Software Development Costs

In accordance with the American Institute of Certified Public Accountants Statement of Position (“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.

No internal use software costs were capitalized for the three months ended October 31, 2008.  We capitalized $0.5 million of internal use software costs for the three months ended October 31, 2007.

Income Taxes

The Company accounts for income taxes using the liability method in accordance with FAS 109, “Accounting for Income Taxes.”  Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are provided if, based upon the weight of available evidence, it is considered more likely than not that some or all of the deferred tax assets will not be realized.

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

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

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

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.

Intangibles

Goodwill and trademarks are amortized on a straight-line basis over three to five years.  As October 31, 2008 these intangible assets were fully amortized.

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 and 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 October 31, 2008, no customer accounted for more than 10% of the Company’s gross accounts receivable.

9

For the three months ended October 31, 2008, Google Inc. accounted for 13% of the Company’s revenue and for the three months ended October 31, 2007, no customer represented more than 10% of revenue. Google may also continue to represent more than 10% of revenue in the future.

3. Composition of Certain Balance Sheet Components

Property and equipment, net consists of the following (in thousands):

	October 31,			July 31,
	2008			2008
Computer and office equipment (useful lives of 2 to 3 years)	$	5,640		$	5,068
Furniture and fixtures (useful lives of 2 to 4 years)		91			87
Leasehold improvements (useful lives of lesser of estimated life or lease term)		56			53
Software (useful lives of  2 to 5 years)		2,725			2,662
Total property and equipment		8,512			7,870
Less: Accumulated depreciation and amortization		(3,632	)		(3,070	)
Property and equipment, net	$	4,880		$	4,800

Other assets consists of the following (in thousands):

	October 31,		July 31,
	2008		2008
Equity investments	$	6,951	$	6,951
Intangible asset at fair value - Right		1,612		-
Other		388		329
Other assets	$	8,951	$	7,280

4. Investments

The Company classifies its investments as available-for-sale or trading at the time they are acquired and reports them at fair value with net unrealized gains (losses) reported, net of tax, using the specific identification method as other income in the statement of operations or other comprehensive gain (loss) in stockholders’ equity.  See Note 5 – Fair Value Measurements.

10

The Company’s cash, cash equivalents and investments consist of the following (in thousands):

	October 31, 2008							July 31, 2008
	Adjusted		Gross Unrealized			Estimated		Adjusted		Gross Unrealized			Estimated
	Cost		Gains (Losses)			Fair Value		Cost		Gains (Losses)			Fair Value
Cash and cash equivalents:
Cash	$	1,338	$	-		$	1,338	$	3,022	$	-		$	3,022
Money market funds		21,026		-			21,026		21,936		-			21,936
Government securities		14,046		-			14,046		16,945		1			16,946
Total cash and cash equivalents	$	36,410	$	-		$	36,410	$	41,903	$	1		$	41,904
Short-term investments:
Corporate securities		567		(10	)		557		560		(11	)		549
Total short-term investments	$	567	$	(10	)	$	557	$	560	$	(11	)	$	549
Long-term investments:
Government securities		10,850		(1,612	)		9,238		10,850		(601	)		10,249
Total long-term investments	$	10,850	$	(1,612	)	$	9,238	$	10,850	$	(601	)	$	10,249
Restricted cash, non-current	$	1,000	$	-		$	1,000	$	1,000	$	-		$	1,000

The maturities of the Company’s securities at October 31, 2008 are as follows (in thousands):

	October 31,
	2008
Due between  90 days and one year	$	557
Due more than one year		9,238
Total investments	$	9,795

5. Fair Value Measurements

FAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under FAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under FAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

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

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

11

In accordance with FAS 157, the following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of October 31, 2008 (in thousands):

	Fair Value Measurements at Reporting Date Using
	Level 1		Level 2		Level 3		Total
Money market fund deposits	$	22,026	$	-	$	-	$	22,026
US Treasuries		-		14,046		-		14,046
Corporate debt		-		549		8		557
Municipal bonds		-		-		9,238		9,238
Intangible assets - Rights		-		-		1,612		1,612
Total	$	22,026	$	14,595	$	10,858	$	47,479
Amounts included in:
Cash and cash equivalents	$	22,026	$	14,046	$	-	$	36,072
Short-term investments		-		549		8		557
Long-term investments		-		-		9,238		9,238
Other long term assets		-		-		1,612		1,612
Total	$	22,026	$	14,595	$	10,858	$	47,479

Level 3 assets include municipal bonds with an auction reset feature (“auction-rate securities” or “ARS”) whose underlying assets are student loans which are substantially backed by the federal government. Auction-rate securities are long-term floating rate bonds tied to short-term interest rates. After the initial issuance of the securities, the interest rate on the securities is reset periodically, at intervals established at the time of issuance (primarily every twenty-eight days), based on market demand for a reset period. Auction-rate securities are bought and sold in the marketplace through a competitive bidding process often referred to as a “Dutch auction.” If there is insufficient interest in the securities at the time of an auction, the auction may not be completed and the rates may be reset to predetermined “penalty” or “maximum” rates based on mathematical formulas in accordance with each security’s prospectus.

In February 2008, auctions began to fail for these securities and each auction since then has failed. Consequently, the investments are not currently liquid. All of the Company’s ARS are currently rated AAA, the highest credit rating, by a rating agency. In October 2008, the Company accepted an offer (the “Right”) from UBS AG (“UBS”), its investment provider, to sell at par value auction-rate securities originally purchased from UBS (approximately $10.8 million) at any time during a two-year period beginning June 30, 2010. Based on this, along with the underlying maturities of the securities, a portion of which is greater than 30 years, we have classified auction-rate securities as long-term assets.  The Right represents an instrument by which the Company may require UBS to repurchase its ARS at par value.  The Company has valued the Right as the difference between the par value and the fair value of its ARS, as adjusted for any bearer risk associated with UBS’s financial ability to repurchase the ARS beginning June 30, 2010.

Typically, the fair value of ARS investments approximates par value due to the frequent resets through the auction process. While the Company continues to earn interest on its ARS investments at the contractual rate, these investments are not currently trading and therefore do not have a readily determinable market value. Accordingly, the estimated fair value of the ARS no longer approximates par value. At October 31, 2008, the Company’s investment advisors provided a valuation based on Level 3 inputs for the ARS investments. The investment advisors utilized a discounted cash flow approach to arrive at this valuation, which was corroborated by a separate and comparable discounted cash flow analysis prepared by the Company. The assumptions used in preparing the discounted cash flow model include estimates of, based on data available as of October 31, 2008, interest rates, timing and amount of cash flows, credit spread related yield and illiquidity premiums, and expected holding periods of the ARS. These assumptions are volatile and subject to change as the underlying sources of these assumptions and market conditions change. Based on this Level 3 valuation, the Company valued the ARS investments at $9.2 million, which represents a decline in value of $1.6 million from par.

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Effective August 1, 2008, the Company adopted FAS 159.  In conjunction with the adoption of FAS 159, the Company elected the fair value option for its ARS and the Right.  Since the Right is directly related to the ARS investments, the Company elected the fair value option for these financial assets.  In conjunction with the adoption of FAS 159, the Company reduced its Accumulated Other Comprehensive Loss by $0.6 million and accounted for this as a cumulative effect of a change in accounting principle which was recorded as an increase in its Accumulated Deficit.  The following table provides a reconciliation of the beginning and ending balances for the assets measured at fair value using significant unobservable inputs (Level 3) (in thousands):

	Fair Value Measurements at Reporting Date Using significant Unobservable Inputs (Level 3) Financial Assets
Balance at August  1, 2008	$	10,249
Gain on other assets		1,612
Loss on long-term investments		(1,011	)
Purchases		8
Balance at October 31, 2008	$	10,858

6.  Restructuring Costs

In conjunction with the relocation of its corporate headquarters to Mountain View, California in October 2007, the Company recorded a restructuring charge of $1.4 million for the remaining facility space and leasehold improvements at its former corporate headquarters located in Fremont, California.  In conjunction with the sale of its Software business in April 2007, the Company accrued a restructuring charge of $0.6 million for the excess facility space formerly used by its Software business, which was included in the gain on disposal of discontinued operations.  In fiscal 2001 and 2002, the Company adopted plans to exit its hardware systems and hardware-related software engineering and professional services businesses, as well as to exit a sublease agreement and to reduce its general and administrative overhead costs.  The Company exited these businesses to pursue its current Online Media and E-commerce businesses and reduce its operating losses to improve cash flow.  The restructuring liability of $4.6 million as of October 31, 2008 represents the remaining accrual from non-cancelable lease payments, which continue through 2010, less estimated sublease rent.  This accrual is subject to change should actual circumstances change.  The Company will continue to evaluate and update, if applicable, these accruals on an annual basis.

All charges as a result of restructuring activities have been recorded in accordance with FAS 146 “Accounting for Costs Associated with Exit or Disposal Activities” and Emerging Issues Task Force (“EITF”) 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs incurred in a Restructuring).”

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

	Balance at Beginning of Period		Restructuring Charges		Cash Payments			Other		Balance at End of Period
For the three months ended October 31, 2008	$	5,232	$	-	$	(685	)	$	29	$	4,576

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

	Short- Term		Long-Term		Total Liability
As of October 31, 2008	$	2,836	$	1,740	$	4,576

7.  Computation of Per Share Amounts

Basic net loss per common share is computed using the weighted-average number of common shares outstanding (adjusted for treasury stock and common stock subject to repurchase activity) during the period. Diluted net loss per common share is computed using the weighted-average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares are anti-dilutive when their conversion would increase earnings per share. Dilutive common equivalent shares consist primarily of stock options and restricted stock awards.

FAS 128, “Earnings per Share,” requires that employee equity share options, nonvested shares, and similar equity instruments granted by us are treated as potential common shares outstanding in computing diluted earnings per share. Diluted shares outstanding would include the dilutive effect of in-the-money options, calculated based on the average share price for each fiscal period using the treasury stock method, had there been any during the period. Under the treasury stock method, the amount the employee (or purchaser of the written call options) must pay for exercising stock options, the amount of compensation cost for future service that we have not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares. Additionally, under the treasury stock method the amount the purchaser of the written call options must pay for exercising stock options is assumed to be used to repurchase shares.

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

	Three Months Ended October 30,
	2008			2007
Net loss	$	(445	)	$	(1,070	)
Weighted average shares - basic		67,730			67,401
Effect of dilutive potential common shares		-			-
Weighted average shares - diluted		67,730			67,401
Net loss per share:
Basic and diluted	$	(0.01	)	$	(0.02	)

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 October 30,
	2008		2007
Anti-dilutive securities:
Options to purchase common stock		5,953		6,581
Unvested restricted stock purchase rights		741		961
Total		6,694		7,542

8.  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. The following table presents the components of comprehensive loss (in thousands):

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	Three Months Ended October 31,
	2008			2007
Net loss	$	(445	)	$	(1,070	)
Unrealized loss on marketable securities and investments		-			(41	)
Comprehensive loss	$	(445	)	$	(1,111	)

9.  Stockholders’ Equity and Stock-Based Compensation

Stock Repurchase Program

In October 2008 the Company’s Board of Directors authorized a stock repurchase program, authorizing the Company to repurchase up to $10 million of its common stock over a 12-month period.  Repurchased shares will be cancelled and retired.

Stock option plans

In December 2007, the Company’s stockholders approved the 2007 Equity Incentive Plan (“2007 Plan”).  The 2007 Plan replaced the Company’s 1998 Stock Plan (the “1998 Plan”) and the 1999 Director Option Plan (the “Directors’ Plan”), which are collectively referred to as the “Equity Plans.”  In conjunction with the adoption of the 2007 Plan, no further awards can be made under the Equity Plans and 9,072,130 and 466,668 shares which were previously authorized under the 1998 Plan and the Directors’ Plan, respectively, were cancelled.  The Equity Plans will continue to govern awards previously granted under each respective plan.  There were initially 5,250,000 shares of common stock reserved for issuance under the 2007 Plan, subject to increase for stock options or awards previously issued under the Equity Plans which expire or are cancelled.  At October 31, 2008, a total of 4,280,949 shares of common stock were available for issuance under the 2007 Plan.  The 2007 Plan provides that each share award granted with an exercise price less than the fair market value on the date of grant will be counted as two shares towards the shares reserved and each such share award forfeited or repurchased by the Company will increase the shares reserved by two shares.

Under the 2007 Plan, the Board of Directors may grant to employees, consultants and directors an option to purchase shares of the Company’s Common Stock and/or awards of the Company’s common stock at terms and prices determined by the Board of Directors. The Compensation Committee of the Board of Directors also approved that each non-employee director who has been a member of the Board of Directors for at least nine months prior to the date of the annual stockholders’ meeting will be granted a right to purchase 10,000 restricted shares at $0.001 per share at such annual stockholders’ meeting.  The restricted shares will vest 50 percent immediately and the remaining 50 percent on the one year anniversary of the grant.

The 2007 Plan will terminate in 2017.  Options granted under the 2007 Plan must be issued at a price equal to at least the fair market value of the Company’s common stock at the date of grant. All vested options granted under the 2007 Plan may be exercised at any time within 10 years of the date of grant or within 90 days of termination of employment, or such other 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 2007 Plan.

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Restricted Stock Purchase Rights

The following table summarizes restricted stock activities from July 31, 2007 through October 31, 2008:

	Number Outstanding			Weighted-Average Grant Date Fair Value (per Share)
Balance at July 31, 2007		1,317,500		$	3.92
Granted		580,000		$	1.58
Vested		(350,420	)	$	3.82
Forefeited		(262,500	)	$	3.86
Balance at July 31, 2008		1,284,580		$	2.91
Granted		30,000		$	1.35
Vested		(274,583	)	$	3.86
Forefeited		(203,333	)	$	3.36
Balance at October 31, 2008		836,664		$	2.43

The following table summarizes option and restricted stock purchase rights activities from July 31, 2007 through October 31, 2008:

							Stock Options Outstanding
	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, 2007		9,131,900			1,317,500			6,570,246		$	4.26		6.07	$	4,131
Authorized		5,250,000
Granted		(2,465,480	)		580,000			1,305,480		$	2.03
Exercised		-			-			(31,280	)	$	1.65
Restricted stock  released		-			(350,420	)		-		$	-
Restricted stock repurchased		525,000			(262,500	)		-		$	-
Cancelled		(8,164,048	)		-			(1,637,250	)	$	4.12
Balance at July 31, 2008		4,277,372			1,284,580			6,207,196		$	3.85
Granted		(369,500	)		30,000			309,500		$	1.34
Exercised		-			-			-		$	-
Restricted stock  released					(274,583	)		-		$	-
Restricted stock repurchased		253,333			(203,333	)		-		$	-
Cancelled		119,744			-			(121,099	)	$	2.67
Balance at October 31, 2008		4,280,949			836,664			6,395,597		$	3.75		5.40	$	5
Exercisable at October 31, 2008								4,376,932		$	4.29		3.79	$	5

The aggregate intrinsic value in the above table is calculated as the excess of the October 31, 2008 official closing price of our stock of $1.06. per share as reported by the NASDAQ Global Market over the exercise price of the shares. The total number of in-the-money options exercisable as of October 31, 2008 was 0.1 million.

As of October 31, 2008, total compensation cost related to nonvested stock options not yet recognized was $4.0 million, which is expected to be recognized over the next 34 months on a weighted-average basis.  No optionswere exercised during the three months ended October 31, 2008 and the total intrinsic value of options exercised during the three months ended October 31, 2007 was $0.01 million. The Company issues new shares upon the exercise of options.

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As of October 31, 2008, we have 836,664 shares issued pursuant to restricted stock purchase agreements at a weighted-average price of approximately $0.001.  As of October 31, 2008, total compensation cost related to stock purchase rights not yet recognized was $2.2 million which is expected to be recognized over the next 25 months on a weighted-average basis.

The options outstanding and currently exercisable by exercise price at October 31, 2008 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   -   $ 1.06		97		5.44	$	1.01		61	$	0.99
$1.06   -   $ 1.42		829		6.64		1.35		373		1.29
$1.42   -   $ 2.44		817		8.07		1.76		379		1.84
$2.45   -   $ 2.45		723		2.54		2.45		689		2.45
$2.52   -   $ 2.68		685		8.09		2.57		278		2.58
$2.85   -   $ 3.00		1,053		2.03		2.98		1,053		2.98
$3.22   -   $ 4.03		776		6.89		3.81		477		3.74
$4.07   -   $ 4.86		703		7.85		4.26		410		4.28
$4.90   -   $ 8.13		503		2.39		7.46		447		7.76
$8.13   -   $ 64.12		210		1.70		23.67		210		23.67
$0.23   -   $ 64.12		6,396		5.40	$	3.75		4,377	$	4.29

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 October 31,
	2008		2007
Included in cost of revenue:
Online Media cost of revenue	$	48	$	38
E-commerce cost of revenue		13		11
Total included in cost of revenue		61		49
Included in operating expenses:
Sales and marketing		68		54
Research and development		60		23
General and administrative		325		403
Total included in operating expenses		453		480
Total stock-based compensation expense	$	514	$	529

The fair value of the option grants has been calculated on the date of grant using the Black-Scholes option pricing model.  The expected life for the three months ended October 31, 2008 was based on historical settlement patterns.  For the three months ended October 31, 2007, the simplified method for determining the expected term of options granted as allowed by the Securities and Exchange Commission Staff Accounting Bulletin No. 107 was used.  Expected volatility was based on historical implied volatility in the Company’s 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.  The following table summarizes the weighted-average assumptions for stock options granted:

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	Three Months Ended October 31,
	2008			2007
Expected life (years)		5.23			4.22
Risk-free interest rate		2.95	%		3.98	%
Volatility		59.8	%		60.2	%
Dividend yield	None			None
Weighted-average fair value at grant date	$	0.73		$	1.30

As stock-based compensation expense recognized in the Consolidated Statement of Operations for the three months ended October 31, 2008 and October 31, 2007 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. FAS 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 were estimated based on historical experience.

10.  Segment and Geographic Information

The Company’s operating segments are significant strategic business units that offer different products and services.  The Company has two operating segments:  Online Media and E-commerce.

The Company’s Online Media segment consists of Internet websites serving the IT professional, software development and open source communities and 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 websites that comprise the Online Media segment include: SourceForge.net, Slashdot, Linux.com and freshmeat.net.  Those corporate expenses 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 are included in “Other.”

(in thousands)	Online Media			E- commerce		Other			Total Company
Three Months Ended October 31, 2008
Revenue from external customers	$	5,417		$	6,668	$	-		$	12,085
Cost of revenue	$	2,190		$	5,212	$	-		$	7,402
Gross margin	$	3,227		$	1,456	$	-		$	4,683
Operating income/(loss)	$	(1,430	)	$	167	$	-		$	(1,263	)
Depreciation expense	$	541		$	24	$	-		$	565
Three Months Ended October 31, 2007
Revenue from external customers	$	4,409		$	5,893	$	-		$	10,302
Cost of revenue	$	1,424		$	4,329	$	-		$	5,753
Gross margin	$	2,985		$	1,564	$	-		$	4,549
Operating income/(loss)	$	(874	)	$	523	$	(1,414	)	$	(1,765	)
Depreciation expense	$	134		$	15	$	-		$	149

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.

11.  Litigation

In January 2001, the Company, two of its former officers, and Credit Suisse First Boston, the lead underwriter in the Company’s initial public offering (“IPO”) were named as defendants in a shareholder lawsuit in the United States District Court for the Southern District of New York, later consolidated and captioned In re VA Software Corp. Initial Public Offering Securities Litigation, 01-CV-0242. Plaintiffs seek unspecified damages on behalf of a purported class action on behalf of purchasers of the Company’s common stock from the time of the Company’s initial public offering in December 1999 through December 2000.

Specifically, among other things, this complaint alleged that the prospectus pursuant to which shares of common stock were sold in the Company’s initial public offering contained certain false and misleading statements or omissions regarding the practices of the Underwriters with respect to their allocation of shares of common stock in these offerings and their receipt of commissions from customers related to such allocations. Various plaintiffs have filed actions asserting similar allegations concerning the initial public offerings of approximately 300 other issuers. These various cases pending in the Southern District of New York have been coordinated for pretrial proceedings as In re Initial Public Offering Securities Litigation, 21 MC 92.

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In April 2002, plaintiffs filed a consolidated amended complaint in the action against the Company, alleging violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. Defendants in the coordinated proceeding filed motions to dismiss. In October 2002, the Company’s officers were dismissed from the case without prejudice pursuant to a stipulation. On February 19, 2003, the Court granted in part and denied in part the motion to dismiss, but declined to dismiss the claims against the Company.

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. On August 31, 2005, the Court preliminarily approved the settlement. In December 2006, the appellate court overturned the certification of classes in the six test cases, which included the Company's case, that were selected by the underwriter defendants and plaintiffs in the coordinated proceedings. Because class certification was a condition of the settlement, it was unlikely that the settlement would receive final Court approval. On June 25, 2007, the Court entered an order terminating the proposed settlement based upon a stipulation among the parties to the settlement.  If the litigation proceeds, the Company believes that it has meritorious defenses to plaintiffs' claims and intends to defend the action vigorously.

On October 4, 2007, a purported SourceForge shareholder filed a complaint for violation of Section 16(b) of the Securities Exchange Act of 1934, which prohibits short-swing trading, against the Company's IPO underwriters.  The complaint, Vanessa Simmonds v. Credit Suisse Group, et al., Case No. C07-1583, in District Court for the Western District of Washington, seeks the recovery of short-swing profits.  The Company is named as a nominal defendant.  No recovery is sought from the Company.

In September 2007, the Company received notification that it had been named as a defendant in a civil action filed by the Societe des Producteurs de Phonogrammes Francais (“SPPF”) in Paris, France.  The action asserted statutory claims under the French Intellectual Property Code seeking monetary damages and injunctive relief.  On May 14, 2008, the Company filed a motion to dismiss for lack of jurisdiction. Plaintiff filed its reply brief on June 18, 2008, and the Court heard oral argument from the parties on September 23, 2008. The Company believes that it has meritorious defenses to the action and intends to defend itself vigorously.

The Company is subject to various claims and legal actions arising in the ordinary course of business.  The Company reviews all claims and accrues a liability for those matters where it believes that the likelihood that a loss will occur is probable and the amount of loss is reasonably estimable.

12.  Recent Accounting Pronouncements

In December 2007, the FASB issued FAS No. 141 (revised 2007), “Business Combinations” (“FAS 141(R)”). FAS 141(R) requires the use of "full fair value" to record all the identifiable assets, liabilities, noncontrolling interests and goodwill acquired in a business combination. FAS 141(R) is effective for fiscal years beginning on or after December 15, 2008. We do not believe that the adoption of FAS 141(R) will have a material impact on our financial position or results of operations.

In December 2007, the FASB issued FAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“FAS 160”).  FAS 160 requires the noncontrolling interests (minority interests) to be recorded at fair value and reported as a component of equity.  FAS 160 is effective for fiscal years beginning on or after December 15, 2008. We do not believe that the adoption of FAS 160 will have a material impact on our financial position or results of operations.

13.  Guarantees and Indemnifications

The following is a summary of the Company’s agreements which were determined to be 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 October 31, 2008.

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 October 31, 2008.

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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 October 31, 2008.

14. Subsequent Events

Investments

In December 2008 the Company sold its investment in VA Linux Japan for $0.9 million which generated a gain of $0.5 million.

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 “may,” “could,” “anticipate,” “potential,” “intend,” “expect,” “believe,” “in our view,” and variations of such words and similar expressions, are intended to identify such forward-looking statements, which include, but are not limited to, statements regarding our expectations and beliefs regarding future revenue growth; key metrics; gross margins; financial performance and results of operations; technological trends in, and demand for online advertising; management's strategy, plans and objectives for future operations; employee relations and our ability to attract highly qualified personnel; our intent to continue to invest significant resources in web site 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 and any share repurchases.  Actual results may differ materially from those expressed or implied in such forward-looking statements due to various factors, including those set forth in the Risk Factors contained in the section of this Quarterly Report on Form 10-Q entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations."  We undertake no obligation to update the forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

Critical Accounting Estimates

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

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

Overview

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

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

Our business consists of two operating segments:  Online Media and E-commerce.  Our Online Media segment provides web properties that serve as platforms for the creation, review, hosting and distribution of online peer produced content.  Our audience of technology professionals and enthusiasts relies on our web properties SourceForge.net, Slashdot.org, Linux.com and freshmeat.net to create, improve, compare and distribute Open Source software and to debate and discuss current issues facing, and innovation in, the technology marketplace.  Our E-commerce segment sells technology themed retail products to technology professionals and enthusiasts through our ThinkGeek.com web site.

Our strategy for our Online Media business is to attract more users and increase engagement.  We currently use the following key metrics which are derived from data provided by Google Analytics:

	Three Months Ended
	October 31, 2008		October 31, 2007
Pages per Unique (per Month)		4.3		4.7
Pages per Visit		2.4		2.5
Revenue per User (RPU) (1)	$	0.59	$	0.52
Revenue per Page (RPM)	$	11.57	$	9.26
Page Views (thousands)		468,375		476,215
Unique Visitors (thousands) (2)		36,471		33,744

(1) – Revenue per User (“RPU”) is an annualized amount based on revenue and unique users during the period presented.

(2) – Unique Visitor is the aggregate average unique visitors for all Online Media sites during the period presented. This does not consider possible duplicate visitors who may visit more than one of our web sites during the month.

Media companies have historically reported page views as a metric seeking to measure users’ level of engagement.  Since the introduction of a new web technology, known as asynchronous JavaScript and XML (“AJAX”) which allows users to browse web sites without loading a new page, page views have generally declined for the same, or even higher, level of activity.  We have begun to implement this technology and as we increase our adoption we may experience associated fluctuations in page views.  As media companies measures of engagement evolve to include elements such as time or number of visits in addition to or in lieu or page views, we expect that our reported metrics may also evolve.

Since July 31, 2008, SourceForge.net released a framework for hosted application services and provided projects with access to a wiki, a forum and a survey application.  We have also released new ad products to engage our users with interactive content and rich media and a new sponsorship product.

Our E-commerce business strategy is to increase revenue and gross margins by expanding the range of new and innovative products we sell, including product developed by us, and by attracting increased traffic to our site.

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.

21

The following table sets forth our operating results from continuing operations for the periods indicated as a percentage of revenue, represented by selected items from the unaudited condensed consolidated statements of operations.  The results of our discontinued Software 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 October 31,
	2008			2007
Consolidated Statements of Operations Data from Continuing Operations:
Online Media revenue		44.8	%		42.8	%
E-commerce revenue		55.2			57.2
Revenue		100.0	%		100.0	%
Online Media cost of revenue		18.1			13.8
E-commerce cost of revenue		43.1			42.0
Cost of revenue		61.2			55.8
Gross margin		38.8			44.2
Operating expenses:
Sales and marketing		17.8			17.4
Research and development		12.2			8.3
General and administrative		19.1			21.9
Restructuring costs		-			13.7
Total operating expenses		49.1			61.3
Loss from operations		(10.3	)		(17.1	)
Interest and other income, net		6.5			6.8
Loss from continuing operations before income taxes		(3.8	)		(10.3	)
Benefit for income taxes		(0.3	)		-
Loss from continuing operations		(3.5	)%		(10.3	)%

Revenue

The following table summarizes our revenue by business segment:

	Three Months Ended
	October 31, 2008		October 31, 2007		% Change Three Months
($ in thousands)
Online Media revenue	$	5,417	$	4,409		23	%
E-commerce revenue		6,668		5,893		13	%
Revenue	$	12,085	$	10,302		17	%

Sales for the three months ended October 31, 2008 were primarily to customers located in the United States of America.

For the three months ended October 31, 2008, revenue from Google Inc. (“Google”) was 13% of total revenue.  Google may also continue to represent more than 10% of revenue in the future.

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Revenue by Segment

Online Media Revenue

	Three Months Ended
	October 31, 2008			October 31, 2007			% Change Three Months
($ in thousands)
Direct sales	$	3,497		$	3,491			0	%
Ad Networks		1,575			731			115	%
Other		345			187			84	%
Online Media revenue	$	5,417		$	4,409			23	%
Percentage of total revenue		45	%		43	%

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

Direct sales revenue for the three months ended October 31, 2008 increased slightly as compared with the three months ended October 31, 2007.  The increase in Ad Networks revenue for the three months ended October 31, 2008 as compared to the three months ended October 31, 2007 is due to increased revenue from Google as we continue to optimize our web sites to increase yields from Google and other Ad Networks.  The increase in Other for the three months ended October 31, 2008 as compared to the three months ended October 31, 2007 is primarily due to an increase in our United Kingdom’s reseller revenue and to a lesser extent to revenue from other resellers.

E-commerce Revenue

	Three Months Ended
	October 31, 2008			October 31, 2007			% Change Three Months
E-commerce revenue (in thousands)	$	6,668		$	5,893			13	%
Percentage of total revenue		55	%		57	%
Number of Orders (per quarter)		96,506			81,396			19	%
Avg. order size (in whole dollars)	$	69.09		$	72.40			(5	)%

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 months ended October 31, 2008, as compared to the three months ended October 31, 2007, was primarily due to a 19% increase in the number of orders year-over-year.  The increase in the number of orders was primarily due to the introduction of innovative products.

Cost of Revenue/Gross Margin

	Three Months Ended
	October 31, 2008			October 31, 2007			% Change Three Months
($ in thousands)
Cost of revenue	$	7,402		$	5,753			29	%
Gross margin		4,683			4,549			3	%
Gross margin %		39	%		44	%

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

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Gross margins increased for the three months ended October 31, 2008 as compared with the three months ended October 31, 2007, due primarily to increases in our Online Media revenue and our E-commerce revenue.

Gross margin percentage for the three months ended October 31, 2008 decreased as compared with the three months ended October 31, 2007, due primarily to increases in our Online Media cost of revenue and our E-commerce cost of revenue.

Cost of Revenue/Gross Margin by Segment

Online Media Cost of Revenue/Gross Margin

	Three Months Ended
	October 31, 2008			October 31, 2007			% Change Three Months
($ in thousands)
Online Media cost of revenue	$	2,190		$	1,424			54	%
Online Media gross margin		3,227			2,985			8	%
Online Media gross margin %		60	%		68	%
Headcount		21			20

Online Media cost of revenue consists of personnel costs and related overhead associated with developing the editorial content of the sites, co-location and depreciation costs for delivering site content, and the costs of serving and running advertising campaigns.  The decrease in Online Media gross margin percentages for the three months ended October 31, 2008, as compared to the three months ended October 31, 2007, was primarily driven by increases in data center co-location costs of $0.4 million, amortization of internally developed software costs of $0.2 million, and ad serving costs.  Our data center costs increased due to increased infrastructure requirements and depreciation as we purchased equipment for our new data center. Our ad serving costs increased as we added headcount to develop and serve our premium products, which require more effort to produce and are also more expensive to serve.

We expect Online Media cost of revenue to increase in absolute dollars resulting from increased headcount in our ad operations group, depreciation expense and ongoing operating costs.  To the extent that Online Media revenue does not increase proportionately or even declines, our Online Media gross margins may decline.

E-commerce Cost of Revenue/Gross Margin

	Three Months Ended
	October 31, 2008			October 31, 2007			% Change Three Months
($ in thousands)
E-commerce cost of revenue	$	5,212		$	4,329			20	%
E-commerce gross margin		1,456			1,564			(7	)%
E-commerce gross margin %		22	%		27	%
Headcount		21			14

E-commerce cost of revenue consists of product costs, shipping and fulfillment costs and operating costs, and includes personnel costs associated with the E-commerce operations and merchandising functions.  The increase in E-commerce cost of revenue during the three months ended October 31, 2008, as compared to the three months ended October 31, 2007 was primarily due to increased shipping and product costs as well as increased operating costs.  The increase in shipping costs was primarily the result of increased E-commerce number of orders and increased carrier costs, while the increase in product costs was primarily due to the increased number of orders.  The increase in operating costs was primarily due to increased headcount and related expenses to support the increased revenue as well as increased fulfillment costs resulting from the increased number of orders.  The changes in gross margin percentage were primarily due to increases in shipping costs as they increased at a higher rate than product costs, fulfillment costs and operating expenses, primarily due to additional headcount and related costs as we expand to source and identify new products.  We expect E-commerce cost of revenue in absolute dollars to grow as E-commerce revenue increases in the future, while E-commerce gross margin percentages may fluctuate depending on the mix of products sold and our ability to adjust for shipping cost surcharges on a timely basis.

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Operating Expenses

Sales and Marketing Expenses

Sales and marketing (“S&M”) expenses consist primarily of personnel and related overhead expenses, including sales commission, for personnel engaged in sales, marketing and sales support functions, and includes costs associated with market research, promotional activities and trade shows.

	Three Months Ended
	October 31, 2008			October 31, 2007			% Change Three Months
($ in thousands)
Sales and Marketing	$	2,152		$	1,791			20	%
Percentage of total revenue		18	%		17	%
Headcount		30	��		22

The increase in S&M expenses in the three months ended October 31, 2008, as compared to the three months ended October 31, 2007, was primarily due to increases in headcount and related expenses of $0.2 million and marketing expenses of $0.2 million.  The increase in headcount is due to additional sales personnel as we ramp our sales organization and our Online Media personnel to support our media platform.  The increase in marketing expenses was due to printing and mailing of our E-commerce catalog.

We expect S&M expenses to increase in absolute dollars as we grow our sales force and may also increase 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 segment.  We expense all of our R&D costs as they are incurred; however, certain costs, including personnel related expenses incurred in the development of internal-use software, were capitalized.

	Three Months Ended
	October 31, 2008			October 31, 2007			% Change Three Months
($ in thousands)
Online Media	$	1,341		$	760			76	%
E-commerce		139			93			49	%
Research and Development	$	1,480		$	853			74	%
Percentage of total revenue		12	%		8	%
Headcount		35			25

R&D expense increased by $0.6 million in absolute dollars in the three months ended October 31, 2008, as compared to the three months ended October 31, 2007.  Online Media R&D expenses increased by $0.6 million, primarily due to $0.5 million capitalized as internally-developed software during the three months ended October 31, 2007 and headcount related costs of $0.1 million. We expect R&D expenses to increase in absolute dollars and may also increase as a percentage of revenue in the future.

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. We did not capitalize any internal use software costs for the three months ended October 31, 2008.  We capitalized $0.5 million of internal use software costs for the three months ended October 31, 2007.

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General and Administrative Expenses

General and administrative expenses consist of salaries and related expenses for finance and accounting, human resources and legal personnel, professional fees for accounting and legal services as well as insurance and other public company related costs.

	Three Months Ended
	October 31, 2008			October 31, 2007			% Change Three Months
($ in thousands)
General and Administrative	$	2,314		$	2,256			3	%
Percentage of total revenue		19	%		22	%
Headcount		23			19

General and administrative expenses increased by $0.1 million in absolute dollars in the three months ended October 31, 2008, as compared to the three months ended October 31, 2007, primarily due to recruiting fees for our CEO search. General and administrative expense decreased as a percentage of revenue due to the increase in revenue. We expect general and administrative expenses to remain steady in the future.

Restructuring Costs

In October 2007, we relocated our corporate headquarters to Mountain View, California.  During fiscal 2008, we recorded a restructuring charge of $2.2 million for the remaining facility space and leasehold improvements at our former corporate headquarters located in Fremont, California.  In conjunction with the sale of our Software business in April 2007, we accrued a restructuring charge of $0.6 million for the excess facility space used in the operation of our Software business, which was included in the gain on disposal of discontinued operations. 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 restructuring liability of $4.6 million as of October 31, 2008 represents the remaining accrual from non-cancelable lease payments, which continue through 2010, less estimated sublease rent.  This accrual is subject to change should actual circumstances change.  We will continue to evaluate and update, if applicable, these accruals on an annual basis.

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

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

	Balance at Beginning of Period		Restructuring Charges		Cash Payments			Other		Balance at End of Period
For the three months ended October 31, 2008	$	5,232	$	-	$	(685	)	$	29	$	4,576

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Interest and other income, net

Below is a summary of Interest and other income, net (in thousands):

	Three Months Ended
	October 31, 2008			October 31, 2007			% Change Three Months
Interest Income	$	183		$	750			(76	)%
Interest Expense		(29	)		(56	)		(48	)%
Other Income (Expense), net		628			3			*
Interest and other income, net	$	782		$	697			12	%

* - - not meaningful

The decrease in interest income for the three months ended October 31, 2008, as compared to the three months ended October 31, 2007, was due to as a result of reduced yields on our investments resulting from lower interest rates and our decision to invest in short-term treasuries, which generally have lower yields.

Interest expense for the three months ended October 31, 2008 results from accretion of our accrued restructuring charge, while interest expense for the three months ended October 31, 2007 is primarily due to interest expense on a legal settlement which was paid in fiscal 2008.

The increase in other income was primarily the result of the Company’s fair value accounting for certain of its assets.

Income Taxes

	Three Months Ended
	October 31, 2008			October 31, 2007		% Change Three Months
($ in thousands)
Provision (benefit) for income taxes	$	(36	)	$	2		*

* - - not meaningful

The decrease in the provision for income taxes for the three months ended October 31, 2008, as compared to the three months ended October 31, 2007, was due to the decrease in income from continuing operations.  As of October 31, 2008, 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 2026 and fiscal year 2016, respectively, to the extent that they are not utilized.

27

Liquidity and Capital Resources

	Three Months Ended October 31,
($ in thousands)	2008			2007
Net cash provided by (used in):
Continuing operations:
Operating activities	$	(4,703	)	$	(2,138	)
Investing activities		(653	)		2,511
Financing activities		(138	)		(53	)
Discontinued operations		-			24
Net increase (decrease) in cash and cash equivalents	$	(5,494	)	$	344

Our principal sources of cash as of October 31, 2008 are our existing cash, cash equivalents and investments of $46.2 million, which excludes restricted cash of $1.0 million. Cash and cash equivalents decreased by $5.5 million, and investments decreased by $1.0 million at October 31, 2008 when compared to July 31, 2008. This total decrease is primarily due to cash used in continuing operations of $4.7 million, capital expenditures of $0.7 million and cash used to repurchase common stock for taxes upon the vesting of restricted stock awards of $0.1 million.

Operating Activities

Net cash used in operating activities of $4.7 million for the three months ended October 31, 2008 was primarily due to a loss from continuing operations of $0.4 million, increases in inventory of $3.6 million and prepaid expenses and other assets of $1.3 million, decreases in accrued restructuring liabilities of $0.7 million, an increase in accounts receivable of $0.3 million and non-cash change in fair value of assets of $0.6 million, offset in part by stock-based compensation of $0.5 million and depreciation expenses of $0.6 million, resulting from network equipment purchased for our new data center, and an increase in accounts payable of $1.2 million.  The increase in inventory is due to purchases of inventory by our E-commerce business in anticipation of their seasonal second quarter, and the increase in prepaid and other assets are primarily related to inventory prepayments to vendors. The increase in accounts payable is primarily due to the increased inventory levels.

Net cash used in operating activities of $2.1 million for the three months ended October 31, 2007 was primarily due to a loss from continuing operations of $1.1 million, increases in inventory of $3.9 million and prepaid expenses and other assets of $0.8 million and decreases in accrued liabilities and other long-term liabilities of $1.1 million, offset in part by non-cash restructuring charges of $1.4 million, stock-based compensation of $0.5 million, a decrease in accounts receivable of $0.7 million and an increase in accounts payable of $1.6 million.  The increase in inventory is due to purchases of inventory by our E-commerce business in anticipation of their seasonal second quarter, and the increase in prepaid and other assets are primarily related to inventory prepayments to vendors.  The decreases in accrued liabilities and other long-term liabilities are primarily related to the reclassification of $1.0 million of accrued rent related to our Fremont, California facility to restructuring reserve.  The decrease in accounts receivable is primarily the result of improved collection efforts.  The increase in accounts payable is primarily due to the increased inventory levels.

Investing Activities

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

Cash usage related to purchases of property and equipment for the three months ended October 31, 2008 was primarily due to purchase of property and equipment of $0.6 million.  The purchase of equipment was related to our data center.

Cash usage related to purchases of property and equipment for the three months ended October 31, 2007 was primarily due to internally developed software of $0.5 million and to a lesser extent additional equipment and leasehold improvement purchases.  The purchase of equipment was related to the initial equipment purchases for our data center and the leasehold improvements related to the relocation of our corporate headquarters from Fremont to Mountain View.

Financing Activities

Our financing activities are primarily comprised of cash proceeds from the sale of our common stock through equity incentive plans and repurchases of common stock for taxes upon the vesting of restricted stock awards.

28

Discontinued Operations

The cash provided by discontinued operations during fiscal 2008 was due to collection of residual accounts receivable from our discontinued Software business in fiscal 2007.  Since fiscal 2007, we no longer have operations in this segment and the cash flows for fiscal 2008 are solely the result of the collection of outstanding accounts receivable related to the discontinued Software business.

Restricted Cash

As of October 31, 2008 and July 31, 2008, we had an outstanding letter of credit issued under a line of credit of $1.0 million, related to our former Fremont 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.

Auction Rate Securities and UBS Right

At October 31, 2008, all our investments were recorded at fair value in accordance with FAS 157. As defined by FAS 157, a significant portion of our investments were classified as either Level 1 or Level 2; however, we classified $9.2 million of municipal bond investments with an auction reset feature (“auction-rate securities” or “ARS”) as Level 3. The underlying assets of these auction-rate securities are student loans which are substantially backed by the Federal government.

Since February 2008, auctions for ARS have failed and, consequently, the investments are not currently liquid.  At October 31, 2008, all of our ARS are currently rated AAA by a credit rating agency. We do not expect to need to access these funds in the short-term; however, in the event we are needed to access these funds, they are not expected to be accessible until one of the following occurs: a successful auction occurs, the issuer redeems the issue, a buyer is found outside of the auction process or the underlying securities mature. In October 2008, we accepted an Offer from UBS, our investment advisor, granting us the right to require UBS to purchase our ARS at their par value of $10.8 million anytime during the two-year period beginning June 30, 2010 (“Right”).  UBS has also established a program which allows us to establish a no net cost line of credit and borrow up to 75 percent of the market value of the ARS at interest rates equal to the return we receive on the underlying ARS securities.

Typically, the fair value of ARS investments approximates par value due to the frequent resets through the auction process. While we continue to earn interest on our ARS investments at the contractual rate, these investments are not currently trading and therefore do not have a readily determinable market value.  At October 31, 2008, our investment advisors provided a Level 3 valuation for these ARS investments. The investment advisors utilized a discounted cash flow approach to arrive at this valuation.  The assumptions used in preparing the discounted cash flow model include estimates of interest rates, timing and amount of cash flows, credit spread related yield and illiquidity premiums, and expected holding periods of the ARS.  These assumptions are volatile and subject to change as the underlying sources of these assumptions and market conditions change.  Based on this Level 3 valuation, we have recorded a loss on these investments of $1.6 million as of October 31, 2008.

In conjunction with the adoption of FAS 159, we elected the fair value option for our ARS and the Right.  Since the Right is directly related to our ARS investments, we elected the fair value option for these financial assets.  We will recognize any change in the fair value of the ARS and the Right as a gain or loss in operations.  Upon adoption of FAS 159, we reduced our Accumulated Other Comprehensive Loss by $0.6 million and accounted for this as a cumulative effect of a change in accounting principle which was recorded as an increase in our Accumulated Deficit.  We valued the Right using Level 3 inputs as the difference between the par value and the fair value of its ARS, as adjusted for any bearer risk associated with UBS’s financial ability to repurchase the ARS beginning June 30, 2010.  We currently believe that the bearer risk associated with UBS is insignificant and have not made any adjustment to the fair value of the Right for bearer risk.

Liquidity

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, capital projects to expand our support systems and infrastructure, 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 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.  See “Risks Related to our Financial Results” in the Risk Factors section of this Quarterly Report on Form 10-Q.

29

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 October 31, 2008 (in thousands):

				Fiscal years ending July 31,
	Total			2009			2010 and 2011			2012 and 2013
Gross Operating Lease Obligations	$	8,572		$	3,376		$	4,464		$	732
Sublease Income		(1,487	)		(549	)		(938	)		-
Net Operating Lease Obligations		7,085			2,827			3,526			732
Purchase Obligations		3,053			3,053			-			-
Total Obligations	$	10,138		$	5,880		$	3,526		$	732

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 December 2007, the FASB issued FAS No. 141 (revised 2007), “Business Combinations.”  FAS 141(R) requires the use of "full fair value" to record all the identifiable assets, liabilities, noncontrolling interests and goodwill acquired in a business combination. FAS 141(R) is effective for fiscal years beginning on or after December 15, 2008. We do not believe that the adoption of FAS 141(R) will have a material impact on our financial position or results of operations.

In December 2007, the FASB issued FAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51.”. FAS 160 requires the noncontrolling interests (minority interests) to be recorded at fair value and reported as a component of equity.  FAS 160 is effective for fiscal years beginning on or after December 15, 2008. We do not believe that the adoption of FAS 160 will have a material impact on our financial position or 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 limited category of securities, primarily money market funds and 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.

30

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 October 31, 2008.  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 October 31, 2008:
Cash equivalents	$	14,046
Weighted-average interest rate		0.14	%
Short-term investments				$	557
Weighted-average interest rate					3.37	%
Long-term investments							$	9,238
Weighted-average interest rate								1.35	%

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.

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

In January 2001, the Company, two of its former officers, and Credit Suisse First Boston, the lead underwriter in the Company’s initial public offering (“IPO”) were named as defendants in a shareholder lawsuit in the United States District Court for the Southern District of New York, later consolidated and captioned In re VA Software Corp. Initial Public Offering Securities Litigation, 01-CV-0242. Plaintiffs seek unspecified damages on behalf of a purported class action on behalf of purchasers of the Company’s common stock from the time of the Company’s initial public offering in December 1999 through December 2000.

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Specifically, among other things, this complaint alleged that the prospectus pursuant to which shares of common stock were sold in the Company’s initial public offering contained certain false and misleading statements or omissions regarding the practices of the Underwriters with respect to their allocation of shares of common stock in these offerings and their receipt of commissions from customers related to such allocations. Various plaintiffs have filed actions asserting similar allegations concerning the initial public offerings of approximately 300 other issuers. These various cases pending in the Southern District of New York have been coordinated for pretrial proceedings as In re Initial Public Offering Securities Litigation, 21 MC 92.

In April 2002, plaintiffs filed a consolidated amended complaint in the action against the Company, alleging violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. Defendants in the coordinated proceeding filed motions to dismiss. In October 2002, the Company’s officers were dismissed from the case without prejudice pursuant to a stipulation. On February 19, 2003, the Court granted in part and denied in part the motion to dismiss, but declined to dismiss the claims against the Company.

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. On August 31, 2005, the Court preliminarily approved the settlement. In December 2006, the appellate court overturned the certification of classes in the six test cases, which included the Company's case, that were selected by the underwriter defendants and plaintiffs in the coordinated proceedings. Because class certification was a condition of the settlement, it was unlikely that the settlement would receive final Court approval. On June 25, 2007, the Court entered an order terminating the proposed settlement based upon a stipulation among the parties to the settlement.  If the litigation proceeds, the Company believes that it has meritorious defenses to plaintiffs' claims and intends to defend the action vigorously.

On October 4, 2007, a purported SourceForge shareholder filed a complaint for violation of Section 16(b) of the Securities Exchange Act of 1934, which prohibits short-swing trading, against the Company's IPO underwriters.  The complaint, Vanessa Simmonds v. Credit Suisse Group, et al., Case No. C07-1583, in District Court for the Western District of Washington, seeks the recovery of short-swing profits.  The Company is named as a nominal defendant.  No recovery is sought from the Company.

In September 2007, we received notification that we had been named as a defendant in a civil action filed by the Societe des Producteurs de Phonogrammes Francais (“SPPF”) in Paris, France.  The action asserted statutory claims under the French Intellectual Property Code seeking monetary damages and injunctive relief.  On May 14, 2008, we filed a motion to dismiss for lack of jurisdiction. Plaintiff filed its reply brief on June 18, 2008, and the Court heard oral argument from the parties on September 23, 2008. We believe that we have meritorious defenses to the action and intend to defend ourself vigorously.

The Company is subject to various claims and legal actions arising in the ordinary course of business.  The Company reviews all claims and accrues a liability for those matters where it believes that the likelihood that a loss will occur is probable and the amount of loss is reasonably estimable.

Item 1A.  Risk Factors

CURRENT AND PROSPECTIVE INVESTORS IN SOURCEFORGE 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.

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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,

· evaluation of user-generated content, and

· distribution of user-generated content.

If our development efforts fail to facilitate such activities on our sites, the level of user engagement and interaction will not increase and may decline.  Even if we succeed in facilitating such activities on our sites, we cannot assure that such improvements will be deployed in a timely or cost-effective manner.

If we fail to increase user engagement and interaction on our sites, we will not attract and retain a loyal user base that is desirable to advertisers, which will adversely affect our Online Media business and our ability to maintain or grow our revenue.

We are expanding our offerings in international markets in which we may have limited experience or rely on business partners.

We have signed agreements with representatives to sell our international inventory in Europe and Australia and may enter into agreements with additional firms to sell our international advertising impressions.  As we expand into these new international markets, we have limited experience in marketing our products and services in such markets.  We rely on the efforts and abilities of our international representatives in such markets.  Certain international markets may be slower than domestic markets in the development and adoption of online advertising programs and as a result our offerings in international markets may not develop at a rate that supports our level of investment.

If our Online Media business fails to deliver innovative marketing programs, we may not be able 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 and to generate revenue from such audiences;

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

• attract and retain qualified marketing and technical personnel.

We cannot assure that our 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 may not be able to generate sufficient revenue to grow our Online Media business.

New technologies could block our advertisements, which would harm our operating results.

Technologies have been developed and are likely to continue to be developed that can block the display of our advertisements.  Our Online Media revenues are derived from fees paid to us by advertisers in connection with the display of advertisements on web pages.  As a result, advertisement blocking technology could reduce the number of advertisements that we are able to deliver and, in turn, our advertising revenues and operating results may also be reduced.

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

Our advertisers can generally terminate their contracts with us at any time.  Our advertisers’ spending patterns tend to be cyclical, reflecting overall macroeconomic conditions, seasonality and company-specific budgeting and buying patterns.  Our advertisers are also concentrated in the technology sector and the economic conditions in this sector also impact their spending decisions.  Because we derive a large part of our Online Media revenue from these advertisers, 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 Media business could be harmed.

Our SourceForge.net site hosts Open Source software projects, and we derive revenue from the site through advertising campaigns.  Because the cost to develop and host websites has declined over time, an increasing number of companies, organizations and individuals have begun hosting Open Source code and offering Open Source software development-related services. In addition, Google Inc. (“Google”) offers Open Source code hosting 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.  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 face competition from traditional media companies, and we may not be included in the advertising budgets of large advertisers, which could harm our operating results.

We face competition from companies that offer traditional media advertising.  Large advertisers with fixed budgets may allocate a portion of their budgets to Internet advertising.  If we fail to convince these companies to spend their advertising budgets with us, or if our existing advertisers reduce the amount they spend on our programs, our operating results would be harmed.

We have made and continue to make significant investments in our web sites and services offered thereon, which may fail to become profitable endeavors.

We have made and will continue to make significant investments in research, development and marketing for our web sites and services offered thereon. Investments in new technology are inherently speculative. We continue to focus on initiatives to accelerate the pace of improvements to our web sites, particularly SourceForge.net and Slashdot.org.  These efforts require substantial investments of our time and resources and may be hindered by unforeseen delays and expenses.  Our efforts may not be successful in achieving our desired objective, and even if we achieve the desired objective, our audience or our advertisers may not respond positively to these improvements.  Failure to grow revenue sufficiently to offset the significant investments 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 substantially all of our computer and communications systems are located in a single data center near Chicago, Illinois.  Our systems and operations remain vulnerable to damage or interruption from fire, power loss, telecommunications failure and similar events.

We experience unplanned service interruptions with all our online sites.  Service interruptions may be 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.

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Risks Related To Our E-commerce 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.

In order to be successful, we must accurately predict our customers’ tastes and avoid over-stocking 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, especially inventory of custom manufactured products, 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.  Failure to properly assess our inventory needs will adversely affect our financial results.

We cannot predict our E-commerce customers’ preferences with certainty and such preferences may change rapidly.

Our E-commerce offerings on our ThinkGeek.com web site are designed to appeal to technology professionals and enthusiasts and other consumers. 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 gross margins and our results of operations.  Failure to accurately assess and predict our E-commerce customers’ preferences will adversely impact our financial results.  Our E-commerce business also relies heavily on consumer purchases.  The recent economic downturn may impact consumer spending, and have a significant reduction on E-commerce revenue and adversely impact our results of operations.

We are subject to risks as a result of our reliance on foreign sources of production for certain products.

In order to offer cost effective and innovative products, we are increasingly relying on manufacturers located outside of the United States, most of which are located in Asia (primarily China), to supply us with these products in sufficient quantities — based on our forecasted customer demand — and to deliver these products in a timely manner.

Our arrangements with these manufacturers are generally limited to purchase orders tied to specific lots of goods.  We are subject to the risks of relying on products manufactured outside the United States, including political unrest, trade restrictions, customs and tariffs, local business practice and political issues.  Additionally, significant reliance on foreign sources of productions increases the risk of issues relating to compliance with domestic or international labor standards, compliance with domestic or international manufacturing and product safety standards, currency fluctuations, restrictions on the transfer of funds, work stoppages or slowdowns and other labor issues, economic uncertainties including inflation and government regulations, availability and costs of raw materials, potentially adverse tax consequences and other uncertainties. China, in particular, has in recent years experienced rapid social, political and economic change, and further changes may adversely affect our ability to procure our products from Chinese suppliers.

Our ability to obtain goods on a cost effective basis is also subject to our ability to maintain relationships with our suppliers and our ability to negotiate and maintain supply arrangements on favorable terms. There is increasing political pressure on China to permit the exchange rate of its currency, the Chinese Yuan (“CNY”), to float against the U.S. Dollar (“USD”). Although substantially all of our purchase orders are denominated in USD, our suppliers could attempt to renegotiate these contracts and increase costs to us if the CNY/USD exchange rate were to change in a manner adverse to the USD. In addition, because our purchases are usually on a case by case basis, we are subject to the risk of unexpected changes in pricing or supply from these suppliers. We may also be unable to develop beneficial relationships with new vendors in the future.

Increased focus on sales and use tax could subject us to liability for past sales and cause our future sales to decrease.

We do not collect sales or other taxes on shipments of most of our goods into most states in the United States or internationally.  The relocation of our fulfillment center or customer service centers or any future expansion of them, along with other aspects of our business, may result in additional sales and other tax obligations.  We do not collect consumption tax (including value added tax, goods and services tax, and provincial sales tax) as applicable on goods and services sold that are delivered outside of the United States.  One or more states or foreign countries may seek to impose sales or other tax collection obligations on out-of-jurisdiction E-commerce companies. A successful assertion by one or more states or foreign countries that we should collect sales or other taxes on the sale of merchandise or services could result in substantial tax liabilities for past sales, decrease our ability to compete with traditional retailers, and otherwise harm our business.

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Currently, U.S. Supreme Court decisions restrict the imposition of obligations to collect state and local sales and use taxes with respect to sales made over the Internet. However, a number of states, as well as the U.S. Congress, have been considering initiatives that could limit or supersede the Supreme Court’s position regarding sales and use taxes on Internet sales. If any of these initiatives are successful, we could be required to collect sales and use taxes in additional states. The imposition by state and local governments of various taxes upon Internet commerce could create administrative burdens for us, put us at a competitive disadvantage if they do not impose similar obligations on all of our online competitors and decrease our future sales.

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, food items 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, and even if some agreements provide for indemnification, it may be prohibitively costly to avail ourselves of the benefits of the protection.

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.

Unplanned system interruptions and capacity constraints could harm our revenue and reputation.

Our E-commerce business is dependent on the uninterrupted and highly available operation of our web site.  During fiscal 2008, we experienced service interruptions with our E-commerce web site.  Service interruptions may be caused by a variety of factors, including capacity constraints, software design flaws and bugs, and third party denial of service attacks.  If we fail to provide customers with such access to our web site at the speed and performance which they require, our E-commerce sales would be adversely affected and our business reputation may be seriously harmed.

We do not currently have a formal disaster recovery plan and our E-commerce related computer and communications systems are located in a single data center near Chicago, Illinois.   Our systems and operations remain vulnerable to damage or interruption from fire, power loss, telecommunications failure and similar events.  If our ThinkGeek.com web site experience frequent or lengthy service interruptions, our business and reputation will be seriously harmed.

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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:

• specific economic conditions relating to online advertising and/or E-commerce spending;

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

• the size and timing of online media customer orders;

• long online media sales cycles;

• our ability to retain skilled engineering, marketing and sales personnel;

• 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.

Disruptions and liquidity issues in the credit market may unfavorably impact our financial condition and results of operations.

We invest excess funds in specific instruments and issuers approved for inclusion in our cash and short-term investments accounts pursuant to a written investment policy established by our Board of Directors and overseen by the Audit Committee of our Board of Directors.  Our investment criteria are to invest only in top tier quality investments or federally sponsored investments.  Top tier quality investments are determined by our investment advisors in conjunction with ratings of those investments provided by outside ratings agencies as well as our investment advisors’ internal credit specialists.  Our cash is invested in overnight instruments and instruments that will mature within ninety days after the end of our fiscal reporting period.  Our investment portfolio consists of instruments that mature between ninety-one days and 37 years after the end of our fiscal reporting period.

Based upon recent events in the credit market, we may be impacted by the following risks:

• our investment portfolio contains auction rate securities, which have recently experienced liquidity issues due to the failure of auctions;

• our investment portfolio contains a security issued by an entity in the mortgage lending business which has recently experienced declines in value resulting from the uncertainties in the United States mortgage and home equity market;

• we have experienced and may continue to experience temporary or permanent declines in the value of certain instruments which would be reflected in our financial statements;

• we may not be able to reasonably value or assess our investments if there is not a liquid resale market for those instruments.

We report changes in the market value of investments as gains or losses.  During the year ended July 31, 2008 we experienced a realized loss on one investment of $0.5 million. In the event any investments do not mature as scheduled, we may be required to recognize additional losses on the investment and our results of operations would be adversely affected.

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We face possible delisting from the Nasdaq Global Market, which could result in a limited public market for our common stock and make obtaining future equity financing more difficult for us.

On October 16, 2008, Nasdaq implemented a temporary suspension of enforcement of its rules requiring companies to maintain a minimum bid price of $1.00 and a specified minimum market value of publicly held shares.  This moratorium is scheduled to remain in effect until January 16, 2009.  Currently, our common stock is trading below $1.00.  Beginning on January 19, 2009, if we are unable to satisfy Nasdaq's requirements for continued listing on the Nasdaq Global Market, our securities may be delisted from the Nasdaq Global Market. There can be no assurances that we will satisfy the standards to regain compliance. The delisting of our common stock from the Nasdaq Global Market may have a material adverse effect on us by, among other things, reducing:

• the liquidity of our common stock; the market price of our common stock; the number of institutional and other investors that will consider investing in our common stock;

• the number of market makers in our common stock;

• the availability of information concerning the trading prices and volume of our common stock;

• the availability of information concerning the trading prices and volume of our common stock;

• the number of broker-dealers willing to execute trades in shares of our common stock; and

• our ability to obtain equity financing for the continuation of our operations.

Future changes in financial accounting standards, including pronouncements and interpretations of accounting pronouncements on revenue recognition, share-based payments, fair value measurements and financial instruments, may cause adverse unexpected revenue fluctuations and/or 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 fair value accounting, 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 fair value accounting, 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.  The SEC has recently announced that they will issue a proposed a roadmap regarding the potential use of financial statements prepared in accordance with International Financial Reporting Standards (IFRS). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (IASB). Under the proposed roadmap, we could be required in fiscal 2014 to prepare financial statements in accordance with IFRS, and the SEC will make a determination in 2011 regarding the mandatory adoption of IFRS.  Required changes in our application of accounting pronouncements could cause changes in our reported results of operations 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.

We have historically experienced cash shortfalls from operating activities and during the three months ended October 31, 2008 we used $4.7 million of cash in operating activities.  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.  In addition, our existing marketable securities may not provide us with adequate liquidity when needed.  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 online advertising and/or E-commerce 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.

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

We incurred a net loss of $0.4 million during the three months ended October 31, 2008 and we have an accumulated deficit of $737.7 million as of October 31, 2008.  We may incur net losses in the future.  Failure to attain profitability on a sustained basis 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

Our 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 compete with various media businesses for advertising revenue, including newspaper, radio, magazine and Internet media companies.

We also derive revenue from E-commerce, for which we compete with other E-commerce companies as well as traditional, “brick and mortar” retailers. Recent increases in shipping costs and taxation of Internet commerce may make our products uncompetitive when compared with 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.

Risks Related To Intellectual Property

We are vulnerable to claims that our web sites 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 web sites will increasingly be subject to infringement claims as the number of competitors in our industry segment grows and the functionality of web sites in different Internet industry segments overlap. The scope of United States patent protection for software 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.  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 our web site 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 interruption in our web site offerings. 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 offer one or more of our web sites, or services thereon 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 release 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 web sites, or products and services offered thereon or obtain and use information that we regard as proprietary to create sites 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.

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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 web sites 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.

Our success depends significantly upon our proprietary technology and information. Despite our efforts to protect our proprietary technology and information, it may be possible for unauthorized third parties to copy certain portions of our offerings or to reverse engineer or otherwise obtain and use our proprietary technology or information. In our E-commerce business, we periodically discover products that are counterfeit reproductions of our products or designs, or that otherwise infringe our intellectual property rights.  The actions we take to establish and protect our intellectual property rights may not be adequate to prevent imitation of our offerings by others or prevent others from seeking to block sales of our offerings as violations of proprietary rights. Existing copyright laws afford only limited protection, and the laws of certain foreign countries may not protect intellectual property rights to the same extent as do United States laws. Litigation may be necessary to protect our proprietary technology and information. Such litigation may be costly and time-consuming and if we are unsuccessful in challenging a party on the basis of intellectual property infringement, our sales and intellectual property rights could adversely be affected and result in a shift of customer preference away from our offerings.

In addition, we cannot be certain that others will not develop substantially equivalent or superseding proprietary technology, or that equivalent offerings will not be marketed in competition with our offerings, thereby substantially reducing the value of our proprietary rights. Currently, we do not have any software, utility, or design patents and we cannot assure that we will develop proprietary offerings 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.

Other Risks Related To Our Overall Business

We are exposed to risks associated with worldwide economic slowdowns and related uncertainties.

We are subject to macro-economic fluctuations in the U.S. economy and elsewhere.  Concerns about consumer and investor confidence, volatile corporate profits and reduced capital spending, international conflicts, terrorist and military activity, civil unrest and pandemic illness could cause a slowdown in sales revenue. In addition, political and social turmoil related to international conflicts and terrorist acts may put further pressure on economic conditions in the United States and abroad.

Recent macro-economic issues involving the broader financial markets, including the housing and credit system and general liquidity issues in the securities markets, have negatively impacted the economy and may negatively affect our business.  In addition, weak economic conditions and declines in consumer spending and consumption may harm our operating results.  Purchases of our online advertising and E-commerce products are discretionary.  If the economic climate deteriorates, customers or potential customers could delay, reduce or forgo their purchases of our products and services, which could impact our business in a number of ways, including lower prices for our products and services and reduced or delayed sales.  There could be a number of follow-on effects from the current financial crisis on our business, including insolvency of key suppliers resulting in product delays; delays in customer payments of outstanding accounts receivable and/or customer insolvencies; counterparty failures negatively impacting our operations; and increased expense or inability to obtain future financing.

If the negative macro-economic conditions persist, or if the economy enters a prolonged period of decelerating growth, our results of operations may be harmed.

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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.

Claims of defamation 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 defamation complaints have been filed against us to date, our business could be seriously harmed if one were asserted.

Claims of infringement or other violations of intellectual property rights are common among Internet, media and technology companies because such companies often own large numbers of patents, copyrights, trademarks and trade secrets.  Such claims often result in litigation, which is time consuming and can be costly to litigate, regardless of the merits of the claim or the eventual outcome of the claim.  In addition, any time one of our online services links to or hosts material in which others allegedly own copyrights, we face the risk of being sued for copyright infringement or related claims.  Because hosting of third party content comprises the majority of the online services that we offer, the risk of harm from such lawsuits could be substantial.  Intellectual property claims are often time-consuming and may also be expensive to litigate or settle.

In addition to substantial defense costs, to the extent claims against us are successful, we may have to pay substantial monetary damages or discontinue one or more of our services or practices that are found to be in violation of another party’s rights.  We may also acquire licenses or pay royalties in order to continue such practices, which may increase our operating expenses and have an adverse impact on our results of operations.

In September 2007, the Societe des Producteurs de Phonogrammes Francais filed copyright claims under French law against us alleging that the hosting on our SourceForge.net web site of a certain third party Open Source software project, which may be used for so-called "peer-to-peer" file sharing, purportedly violates French law.  An adverse result in this lawsuit may include an award of substantial monetary damages, costly royalty or licensing agreements or orders preventing us from offering downloads of certain third party Open Source software in France, which could result in a loss of revenue or an increase in operating expenses.  In addition, this claim may require us to change our business practices, which could result in a loss of revenue or otherwise harm our business.

We may not detect weaknesses in our internal control over financial reporting in a timely manner, or at all.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 ("Section 404"), we are required to evaluate the effectiveness of our internal control over financial reporting as well as our disclosure controls and procedures each fiscal year. As of October 31, 2008 management has concluded that our internal control over financial reporting and our disclosure controls and procedures were effective. We will need to continue to evaluate, upgrade and enhance our internal controls. Because of inherent limitations, our internal control over financial reporting may not prevent or detect misstatements, errors or omissions, and any projections of any evaluation of effectiveness of internal controls to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with our policies or procedures may deteriorate. We cannot be certain in future periods that other control deficiencies that may constitute one or more “significant deficiencies” (as defined by the relevant auditing standards) or material weaknesses in our internal control over financial reporting will not be identified. If we fail to maintain the adequacy of our internal controls, including any failure to implement or difficulty in implementing required or new or improved controls, our business and results of operations could be harmed, the results of operations we report could be subject to adjustments, we may not be able to provide reasonable assurance as to our financial results or the effectiveness of our internal controls and/or we may not be able to meet our reporting obligations.

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 periodically update our operations and financial systems, procedures and controls, however; we still rely on manual processes and procedures that may not scale commensurately with our business 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.

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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.  In the Internet and high technology industries, qualified candidates often consider equity awards in compensation arrangements and fluctuations in our stock price may make it difficult to recruit, retain, and motivate employees.  In addition, the integration of replacement personnel could be time consuming, may cause additional disruptions to our operations, and may be unsuccessful.  For example, in December 2008, we announced our new President and Chief Executive Officer who has joined the Company.

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 first quarter of fiscal year 2009, which ended October 31, 2008, the closing sale prices of our common stock on the NASDAQ Global Market ranged from $1.00 to $1.50 per share and the closing sale price on October 31, 2008, the last trading day of the first quarter of our fiscal year 2009, was $1.06 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 substantial 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 or services sold or distributed over the Internet could harm our business.

The E-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 E-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. Recently New York State has adopted legislation which attempts to impose sales tax collection and reporting obligation on Internet companies. Any of these regulations could have an adverse effect on our future sales and revenue growth.

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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 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 pages or slower response times for users would reduce the number of advertisements delivered to such users and reduce the attractiveness of our web properties to users, strategic partners and advertisers or reduce the number of impressions delivered and thereby reduce revenue. In the past year, all of our web properties have experienced unplanned 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 2. Unregistered Sales of Equity Securities and Use of Proceeds

Items 2(a) and 2(b) are not applicable.

(c) Issuer Purchases of Equity Securities

The following table sets forth information regarding the Company’s purchases of its common stock during the three months ended October 31, 2008.

	Total Number of Shares Purchased		Average Price Paid Per Share
Period		(1)		(1)
August 1, 2008 to August 31, 2008		32,474	$	1.36
September 1, 2008 to September 30, 2008		64,602	$	1.45
October 1, 2008 to October 31, 2008		-
Total		97,076	$	1.42

(1)  - Represents shares repurchased to satisfy tax withholding obligations that arise on the vesting of shares of restricted stock.

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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 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.

SOURCEFORGE, INC.
By:	/s/	ROBERT M. NEUMEISTER, JR.
		Robert M. Neumeister, Jr.
		Interim President and Chief Executive Officer
By:	/s/	PATRICIA S. MORRIS
		Patricia S. Morris
		Senior Vice President and Chief Financial Officer

Date: December 9, 2008

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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.