================================================================================

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    Form 10-K

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

                     For the fiscal year ended July 27, 2002

                                       Or

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

         For the transition period from ______________ to ______________.

                        Commission File Number: 000-28369

                             VA Software Corporation
             (Exact name of Registrant as specified in its charter)

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

                47071 Bayside Parkway, Fremont, California, 94538
          (Address, including zip code, of principal executive offices)

                                 (510) 687-7000
              (Registrant's telephone number, including area code)

           Securities registered pursuant to Section 12(g) of the Act:
                         Common Stock, $0.001 par value
                                (Title of Class)

         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  Registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in  Part  III of this  Form  10K or any
amendment to this Form 10-K. [ ]

         As  of  September  30,  2002,  there  were  54,360,006  shares  of  the
Registrant's Common Stock outstanding.  The aggregate market value of the Common
Stock held by  non-affiliates  of the Registrant as of September 30, 2002 (based
on the closing price for the Common Stock on the NASDAQ National Market for such
date) was approximately $36,963,792.  Shares of common stock held by each of our
officers  and  directors  and by each person or group who owns 5% or more of our
outstanding  common stock have been  excluded in that such persons or groups may
be deemed to be our affiliate.  This  determination  of affiliate  status is not
necessarily a conclusive determination for other purposes.


                       DOCUMENTS INCORPORATED BY REFERENCE

         Specified portions of the Registrant's definitive Proxy Statement to be
issued in  conjunction  with  Registrant's  Annual Meeting of  Stockholders  are
incorporated by reference into Part III of this Form 10-K.

================================================================================


<PAGE>

                                                      Table of Contents


<TABLE>
                                                            PART I

<S>      <C>                                                                                                                  <C>
Item 1   Business ...........................................................................................................  3
              Overview ......................................................................................................  3
              Company Background ............................................................................................  3
              The SourceForge  "Development Intelligence" Solution ..........................................................  4
              Sales, Marketing, and Customers ...............................................................................  5
              Research and Development
              Competition ...................................................................................................  5
              Significant Customers .........................................................................................  6
              Seasonality ...................................................................................................  6
              Backlog .......................................................................................................  6
              Intellectual Property Rights ..................................................................................  6
              Employees .....................................................................................................  6
              Segments ......................................................................................................  7
Item 2   Properties .........................................................................................................  7
Item 3   Legal Proceedings ..................................................................................................  7
Item 4   Submission of Matters to a Vote of Security Holders ................................................................  7


                                                           PART II

Item 5   Market for the Registrant's Common Stock and Related Stockholder Matters ...........................................  8
Item 6   Selected Financial Data ............................................................................................ 10
Item 7   Management's Discussion and Analysis of Financial Condition and Results of Operations .............................. 11
Item 7A  Quantitative and Qualitative Disclosures About Market Risk ......................................................... 31
Item 8   Financial Statements and Supplementary Data ........................................................................ 32
Item 9   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............................... 60


                                                           PART III

Item 10  Directors and Executive Officers of the Registrant ................................................................. 60
Item 11  Executive Compensation ............................................................................................. 60
Item 12  Security Ownership of Certain Beneficial Owners and Management ..................................................... 60
Item 13  Certain Relationships and Related Transactions ..................................................................... 60


                                                           PART IV

Item 14  Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................................................... 60
Signatures .................................................................................................................. 61
</TABLE>

                                                              2


<PAGE>

                                     PART I

Item 1. Business

Special Note Regarding Forward-Looking Statements

         This Form 10-K contains  forward-looking  statements that involve risks
and uncertainties.  Words such as "intend," "expect,"  "believe," "in our view,"
and variations of such words and similar  expressions,  are intended to identify
such  forward-looking  statements,  which  include,  but  are  not  limited  to,
statements  regarding our  expectations  and beliefs  regarding  future  revenue
growth;  gross  margins;   financial  performance  and  results  of  operations;
technological trends in, and emergence of Development Intelligence software; the
future  functionality,  business potential,  demand for, efficiencies created by
and adoption of  SourceForge;  management's  strategy,  plans and objectives for
future   operations;   the  growth  of  license  revenue;   the  impact  of  our
restructuring,  reductions  in force  and new  business  model on our  operating
expenses  and the amount of cash  utilized by  operations;  our  intentions  and
strategies  regarding  customers  and  customer  relationships;  our  intent  to
continue to invest significant resources in software  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;
sufficiency  of  our  cash   resources,   cash  generated  from  operations  and
investments  to meet our operating  and working  capital  requirements;  and our
ability to attract and retain highly  qualified  personnel.  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 Form 10-K 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 Form 10-K.

Overview

         We  develop,   market  and  support   SourceForge   Enterprise  Edition
("SourceForge"),  which is  proprietary  software  designed  for  corporate  and
public-sector   information   technology   ("IT")   and   software   engineering
organizations.   SourceForge  provides  Development  Intelligence  (DI)  to  our
customers by  combining  software  development  tools with the ability to track,
measure  and report on  software  project  activity  in  real-time.  Development
Intelligence  allows  organizations to access,  analyze and share information on
software   development   activity  as  it  takes  place.  By  aligning  software
development  activity  with  business  goals,   Development  Intelligence  helps
organizations improve operational  efficiency and build better quality software.
SourceForge  is  a  relatively  new  product  and  additional   development  and
enhancements are expected in the future.

         A  component  of our  SourceForge  sales  strategy  is the Open  Source
Development Network, Inc. ("OSDN").  OSDN is our network of web sites that serve
the  IT  and  software   development   communities.   OSDN  web  sites   include
SourceForge.net,  which is the largest reference site for potential  SourceForge
customers. As of September 30, 2002, SourceForge.net is the development home for
more than 48,000 software  projects and more than 490,000  registered  users. In
addition to the credibility SourceForge derives from the substantial and growing
usage  of  OSDN's   SourceForge.net,   we  market  SourceForge  through  product
advertising on and sales leads from all of the OSDN web sites.

Company Background

         We incorporated  in January 1995 in California as VA Research,  Inc. In
June 1999, we changed our name to VA Linux  Systems,  Inc., and in December 1999
we  reincorporated  in Delaware.  In December  1999,  we sold  5,060,000  shares
(including  660,000 shares associated with the  underwriters'  exercise of their
option to cover the  over-allotment  of shares) of common stock to the public in
our initial public offering ("IPO"). In December 2001, we changed our name to VA
Software  Corporation  ("VA  Software,"  "VA" or the  "Company").  Our principal
executive  offices are located at 47071 Bayside  Parkway,  Fremont,  California,
94538,  and our telephone  number is (510)  687-7000.  Our corporate web site is
located at www.vasoftware.com.

         From incorporation until the end of fiscal 1998, we grew very modestly.
From July 31, 1998 though  October 27, 2000 (the end of the first quarter of our
fiscal year 2001), we experienced  significant  growth as a leading  provider of
Linux-based solutions,  integrating systems, software and services. Commensurate
with  strong  growth,  we  invested in hiring  personnel  with Linux  expertise,
growing our direct sales force, acquiring companies and expanding our facilities
and  operations,   customer  support  and  administration   infrastructure.   We
outsourced our systems  manufacturing  but provided  systems support through our
internal organization.

--------------------------------------------------------------------------------

SOURCEFORGE,  OSDN,  VA  SOFTWARE  and  the VA  logo,  SLASHDOT,  THINKGEEK  and
ANIMATION  FACTORY are  trademarks,  trade  names or service  marks that we use.
Several of these marks are  registered  trademarks  in the United  States and in
other  countries.  This Form 10-K contains  other  trademarks and trade names of
other individuals and companies.

                                        3

<PAGE>

         Increasing  demand from  customers in the Internet  infrastructure  and
"dot-com"  markets  fueled our growth  through the first  quarter of fiscal year
2001. Thereafter,  the market for our systems products and professional services
declined significantly due in large part to the general economic downturn, which
resulted in reduced availability of capital for our Internet  infrastructure and
"dot-com"  customers.  This decline had a  significant,  negative  effect on our
sales and margins,  which resulted in increased  operating losses. We endeavored
to market our  hardware  products  to larger  "enterprise"  customers,  but were
unable to make sufficient progress to build a sustainable  business in the midst
of a slowing economy and fierce competition from incumbent hardware vendors that
were moving into the Linux-based hardware market.

         Rather than continue with a business model that was not going to enable
us to achieve profitability and would significantly decrease our cash levels, on
June 27, 2001 we announced our strategic  decision to exit the systems  business
and pursue our application software business. During the first quarter of fiscal
year 2002, we exited the  professional  services and Linux software  engineering
services fields in order to focus on  SourceForge.  As a result of exiting these
businesses,  we have  experienced  significant cost reductions and preserved our
cash.  Software license revenue levels have been modest during our first year in
this new  business  but we expect our license  revenues  to grow as  SourceForge
gains acceptance in the marketplace.

         In  the  near  term,  we  expect  OSDN  advertising,   sponsorship  and
e-commerce  revenue to  represent a  substantial  majority  of our  consolidated
revenue,  however,  we expect OSDN revenue to decline as a  percentage  of total
revenue over time as our revenue from SourceForge increases. We also expect that
our  proprietary  software  business  model will enable us to maintain the lower
level of  operating  expenses and cash usage that we have  experienced  since we
stopped selling hardware.  We believe our decision to exit our hardware business
will allow us to build a successful  software company around  SourceForge  using
existing resources.

The SourceForge "Development Intelligence" Solution

         Software  now plays a  critical  role in  corporate  and  public-sector
organizations, including those operating in non-technology sectors. As a result,
such organizations  often devote significant  resources to software  application
development.  Software  application  development  organizations are increasingly
under pressure to manage software  development  more efficiently and effectively
-- controlling costs and risks while improving software quality and process.

         We  believe  that our  target  market  -- IT and  software  engineering
organizations  in sectors such as  financial  services,  defense and  aerospace,
manufacturing  and  government -- is currently  driving major changes to address
the challenges  associated  with the management of software  development.  These
changes include initiatives for software process improvement;  quality standards
certification; and software development outsourcing. We believe SourceForge will
help our  customers  implement  these changes  faster,  improve their ability to
manage software development,  and increase their overall efficiency by providing
Development Intelligence.

SourceForge

         SourceForge  provides  Development  Intelligence  to our  customers  by
combining  software  development  tools with the  ability to track,  measure and
report on software  development  activity  in  real-time.  By aligning  software
development  with  business  goals,   SourceForge  helps  organizations  improve
operational efficiency and build better quality software.

         We believe SourceForge provides a comprehensive solution to many of the
software  development  challenges  facing our  targeted  customers.  SourceForge
supports software  development process improvement  initiatives by capturing and
archiving  software  development  code,  documentation  and  communication  in a
central  location.  SourceForge helps companies build better quality software by
providing  managers  and  developers  with  improved  visibility  into  software
development activity,  enabling better resource and requirements management,  as
well as better defect tracking.  SourceForge helps companies  outsource software
development  more  effectively by providing a standard set of development  tools
for in-house and  third-party  development  teams, a central  repository,  and a
secure environment for managing and safeguarding intellectual property.

         SourceForge is designed to integrate  with, and enhance,  best-of-breed
development  tools  from  other  vendors,   and  extend  them  with  Development
Intelligence functionality.

         Finally,  SourceForge  helps  companies  manage  the  costs  and  risks
associated with software  development by enabling  managers to gain insight into
project  status  and to resolve  critical  problems  earlier in the  development
cycle.

                                       4

<PAGE>

Sales, Marketing, and Customers

SourceForge

         We  primarily  market  and sell our  products  (software,  professional
services,  maintenance  and  support  and  training)  directly  to our end users
through  our  SourceForge   field  sales   organization,   on  the  Internet  at
vasoftware.com  and on our various OSDN web sites. Our direct sales organization
includes a telesales operation to augment our direct sales presence.

         We maintain a complete  customer  service and support  organization for
SourceForge,  which provides support for installation,  software usage,  updates
and system  administration.  Customer service and support are typically provided
as part of the SourceForge maintenance contract to ensure end user productivity.
We also release periodic bug or security fix updates and version upgrades.

         We believe that the success of  SourceForge  will depend  partly on our
ability  to  enhance  our  product  to meet  the  needs  of a  rapidly  evolving
marketplace and increasingly sophisticated and demanding customers. We intend to
extend and  strengthen  our  software by  enhancing  existing  features,  adding
additional  features  and offering  higher  levels of  integration  with popular
software development tools. Although we primarily develop SourceForge technology
internally,   we  may,  based  on  timing  and  cost   considerations,   acquire
technologies or products from third parties.

OSDN

         We own and manage a network of web sites,  collectively  known as OSDN,
which are widely  used by the IT and  software  development  communities.  As of
September 30, 2002, OSDN received more than 134 million page views and more than
6.8 million  unique  visitors  per month.  SourceForge  benefits  from OSDN in a
variety of ways. First,  because IT professionals,  including senior management,
middle  management  and a variety of technical  staff  including  developers and
systems and  network  administrators  comprise  the OSDN  audience,  SourceForge
advertising on OSDN is a targeted sales tool for SourceForge.  Second,  the OSDN
web site  SourceForge.net  is the  largest  reference  web  site  for  potential
SourceForge customers, providing further sales leads.

         Our OSDN sites include:

         o        sourceforge.net,   our   flagship   web  site   and   software
                  development center. As of September 30, 2002,  SourceForge was
                  the development home for more than 48,000 software development
                  projects and had more than 490,000 registered users.

         o        slashdot.org,  our most frequently  visited site.  Slashdot is
                  dedicated  to  providing  the  IT  and  software   development
                  communities with cutting-edge news and interactive commentary.

         o        freshmeat.net,   one  of  the  Internet's  most  comprehensive
                  indices of Linux, Unix and cross-platform software.

         o        thinkgeek.com,  our e-commerce  site,  which  provides  online
                  sales of a  variety  of retail  products  of  interest  to the
                  software development and IT communities.

         o        linux.com,  our  comprehensive  web  site for  Linux  and open
                  source news and information.  Linux.com caters to business and
                  IT managers looking for migration strategies on Linux.

         o        animationfactory.com,  a  source  for  three-dimensional  art,
                  animations  and  presentations.  Animation  Factory  offers  a
                  dynamic  collection  of easy to use  animations  that  work in
                  email, web pages and presentations.

Research and Development

         We have devoted the majority of our research and development  budget to
the goal of improving SourceForge to better serve our customers.  In addition to
our  internal  software  engineering  efforts,  we also  utilize an  independent
contractor,  Cybernet Software Solutions,  Inc. ("CSS"),  for certain aspects of
our SourceForge product development process.  CSS utilizes  software-engineering
resources  in India  and the  United  States  to  perform  software  development
projects  and  consulting  services  for us on a  contractual  time and material
basis. We coordinate our internal software  engineering with ongoing development
at CSS using SourceForge.

                                       5
<PAGE>

Competition

         We  believe  SourceForge  gives us an  opportunity  to  operate  in the
Development  Intelligence market without an entrenched  competitor.  However, we
face  competition  from  software  development  tools  and  processes  developed
internally by customers,  including ad hoc  integrations of commercial  software
development tools and applications.  There are also many entrenched  competitors
in closely  related markets who compete for customer  budget  allocations.  Such
competition could arise from, among others, Collab.Net,  Inc., Rational Software
Corporation,  IBM  Corporation,  Starbase  Corporation,  Merant  plc,  Microsoft
Corporation,  Oracle  Corporation,  Borland  Software  Corporation,  as  well as
numerous other public and privately held software  application  development  and
tools suppliers.

         The market for  Internet  products  and  services  provided  by OSDN is
highly competitive.  Advertisers have many alternatives available to reach their
target   audience,   including  print  (e.g.,   Ziff  Davis  Media's  eWeek  and
Computerworld,  Inc.'s  Computerworld),  general  portal sites  (e.g.,  aol.com,
yahoo.com  and msn.com) and other Web sites focused on vertical  markets  (e.g.,
CNet Networks,  Inc.'s cnet.com and  techrepublic.com).  Many of these potential
competitors are likely to have substantial competitive advantages including:

         o        greater  resources  that can be  devoted  to the  development,
                  promotion and sale of their products;

         o        more established sales forces and channels;

         o        greater software development experience; and

         o        greater name recognition.

         To be  competitive,  we must respond  promptly and  effectively  to the
challenges of  technological  change,  evolving  standards and our  competitors'
innovations  by  continuing  to  enhance  our  products  and grow our  sales and
professional services organizations.  Any pricing pressures or loss of potential
customers  resulting  from our failure to compete  effectively  would reduce our
revenues.

Significant Customers

         For  the  fiscal  year  ended  July  27,  2002,  one  customer,   Intel
Corporation,  accounted for  approximately  20% of net revenues.  For the fiscal
year ended July 28, 2001, one customer, Akamai Technologies, Inc., accounted for
approximately 25% of net revenues

Seasonality

         During the past two years,  our  revenues  have not been  significantly
impacted by  seasonality.  It is not yet clear  whether our new  business  model
focusing on SourceForge will be subject to seasonal fluctuations.

Backlog

         We  have  operated  historically  with  little  or  no  backlog.  As an
application  software  provider,  however,  we have backlog relating to deferred
revenue on SourceForge contracts.

Intellectual Property Rights

         SourceForge  is  licensed  to our  end-user  customers  as  proprietary
software code and  documentation.  We protect our property through a combination
of copyright,  trademark,  patent,  trade-secret laws,  employee and third-party
nondisclosure agreements, and other methods of protection.

         We require our customers to enter into license  agreements  that impose
restrictions on their ability to reproduce, distribute and utilize our software.
In addition,  we seek to avoid  disclosure of our trade secrets through a number
of means,  including  restricting  access to our source code and object code and
requiring  those  entities and persons  with access to agree to  confidentiality
terms which restrict their use and disclosure.

                                       6
<PAGE>

Employees

         We believe our success will depend in part on our continued  ability to
attract  and retain  highly  qualified  personnel  in a  competitive  market for
experienced and talented software  engineers and sales and marketing  personnel.
Our employees are not represented by any collective bargaining organization,  we
have never  experienced a work stoppage,  and we believe that our relations with
our  employees  are good.  As of July 27, 2002,  our employee  base totaled 144,
including  44 in  operations,  29 in sales and  marketing,  44 in  research  and
development and 27 in finance and administration.

Segments

         Information regarding our previous two operating segments over the last
three  fiscal  years is set  forth in Note 12 of the  Notes to the  Consolidated
Financial  Statements.  Since the start of the 2002 fiscal year,  which began on
July 29, 2001, we have operated as one business segment,  providing  application
software products and related OSDN products.

Item 2.  Properties

         In September 2000, we relocated our corporate  headquarters to Fremont,
California  from  Sunnyvale,   California.  Our  Fremont  facility  consists  of
approximately  140,000 square feet,  which is occupied  pursuant to a lease that
expires  in May 2010.  We  subleased  approximately  52,000  square  feet of our
Fremont  facility  pursuant to an agreement with an original  expiration date in
2002. In December 2001, we terminated the sublease of this space by agreement.

         We also maintain a lease related to the Sunnyvale building that expires
in 2005. We had previously  subleased the entire Sunnyvale  facility pursuant to
an  agreement  that would extend for the  remainder of our lease term.  In March
2002, we terminated the sublease of our Sunnyvale facility by agreement.

Item 3.  Legal Proceedings

         The Company,  two of our former officers (the "Former  Officers"),  and
the lead  underwriter  in our IPO were  named as  defendants  in a  consolidated
shareholder  lawsuit  in the  United  States  District  Court  for the  Southern
District of New York,  captioned In re VA Software Corp. Initial Public Offering
Securities  Litigation,   01-CV-0242.  This  is  one  of  a  number  of  actions
coordinated for pretrial  purposes as In re Initial Public  Offering  Securities
Litigation,  21 MC 92.  Plaintiffs in the  coordinated  proceeding  have brought
claims  under  the  federal  securities  laws  against  numerous   underwriters,
companies,  and  individuals,  alleging  generally that  defendant  underwriters
engaged in improper and  undisclosed  activities  concerning  the  allocation of
shares in the initial  public  offerings of more than 300 companies  during late
1998 through 2000. Among other things,  plaintiffs allege that the underwriters'
customers had to pay excessive  brokerage  commissions  and purchase  additional
shares of stock in the aftermarket in order to receive favorable  allocations of
shares in an initial public offering.  The consolidated amended complaint in our
case seeks  unspecified  damages on behalf of a purported class of purchasers of
our common stock between December 9, 1999 and December 6, 2000.  Defendants have
filed motions to dismiss.

         In September 2002,  plaintiffs agreed to voluntarily dismiss all claims
(the "Dismissed  Claims")  against our Former Officers.  In the event,  however,
that facts  emerge  prior to September  30,  2003,  that  support the  Dismissed
Claims, the Court may permit plaintiffs to reassert some or all of the Dismissed
Claims.

         We believe we have  meritorious  defenses to the claims  against us and
will defend ourselves vigorously.

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

         Not applicable.

                                       7
<PAGE>

                                     PART II

Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters

         Our common stock is traded in the NASDAQ  National  Market System under
the symbol LNUX.  As of October 7, 2002,  there were 1,008  holders of record of
our common stock.  We have not declared any cash  dividends  since our inception
and do not expect to pay any dividends in the foreseeable  future.  The high and
low closing  sales  prices,  as reported by NASDAQ,  of our common  stock are as
follows:

                                                            High         Low
                                                            ----         ---
Fiscal Year Ended July 27, 2002:
Fourth Quarter.......................................   $    1.37   $    0.61
Third Quarter........................................        2.42        1.20
Second Quarter.......................................        3.23        1.22
First Quarter........................................        2.26        0.78

Fiscal Year Ended July 28, 2001:
Fourth Quarter.......................................        5.48        1.80
Third Quarter........................................       10.44        1.59
Second Quarter.......................................       31.75        7.00
First Quarter........................................       61.25       26.88


         The  foregoing  reflects  interdealer  prices  without  retail  markup,
markdown, or commissions and may not necessarily reflect actual transactions.

         During the fiscal year ended July 27, 2002, we issued 511,674 shares of
our common  stock upon the  exercise of stock  grants under our 1998 Stock Plan.
The  proceeds  from the sale of these shares were used for working  capital.  We
issued the shares  pursuant to an exemption  either by reason of Section 4(2) or
Rule 701 under the Securities  Act of 1933. We made these sales without  general
solicitation  or  advertising.  For purposes of qualifying for such  exemptions,
each  purchaser  either was an accredited  investor,  a  sophisticated  investor
(either alone or through its  representative) or a natural person satisfying the
requirements of Rule 701, with access to all relevant  information  necessary to
make an investment decision.

Equity Compensation Plans

         The following table summarizes our equity compensation plans as of July
27, 2002, all of which have been approved by our stockholders:


<TABLE>
<CAPTION>
                                           A                           B                                     C

    Plan Category (1)           Number of securities to        Weighted average        Number of securities remaining available for
                                be issued upon exercise        exercise price of      future issuance under equity compensation plan
                                 of outstanding options       outstanding options     (excluding securities reflected in column (a))
<S>                                  <C>                             <C>                           <C>
Equity compensation plan
approved by stockholders             12,108,599 (2)                  $4.50                         10,432,114 (3) - (6)
</TABLE>


(1)      The table does not include  information for equity  compensation  plans
         assumed by the Company in acquisitions. As of July 27, 2002, a total of
         199,302  shares of the  Company's  common  stock  remain  issuable  and
         outstanding upon exercise of options granted under plans assumed by the
         Company in its acquisition of OSDN. The weighted average exercise price
         of all  outstanding  options granted under these plans at July 27, 2002
         is $31.46.  The Company  does not grant  additional  awards under these
         assumed plans.

(2)      Includes  11,728,599 options  outstanding from the Company's 1998 Stock
         Plan and 380,000 options outstanding from the Company's 1999 Director's
         Plan.

(3)      Includes  1,803,677  shares of common stock reserved for issuance under
         the Company's 1999 Employee Stock Purchase Plan

                                       8
<PAGE>



(4)      Subject to the terms of the 1998 Stock Plan,  an annual  increase is to
         be added on the first day of the  Company's  fiscal  year  equal to the
         lesser  of:4,000,000  shares, or 4.9% of the outstanding  shares on the
         first day of the new fiscal year or a lesser  amount  determined by the
         Board of Directors.

(5)      Subject to the terms of the 1999 Directors  Plan, an annual increase is
         to be added on the first day of the Company's  fiscal year equal to the
         lesser of the:250,000  shares,  0.5% of the  outstanding  shares on the
         first day of the new fiscal year or a lesser  amount  determined by the
         Board of Directors.

(6)      Subject  to the terms of the 1999  Employee  Stock  Purchase  Plan,  an
         annual  increases  is to be added  on the  first  day of the  Company's
         fiscal  year  equal  to  the  lesser  of:  500,000  shares,  1% of  the
         outstanding  shares on the first day of the new fiscal year or a lesser
         amount determined by the Board of Directors.

                                       9
<PAGE>

Item 6.  Selected Financial Data

         You should  read the  selected  consolidated  financial  data set forth
below in  conjunction  with  "Management's  Discussion and Analysis of Financial
Condition  and  Results of  Operations"  and our  financial  statements  and the
related notes included  elsewhere in this Form 10-K. The statement of operations
data for the years ended July 27, 2002,  July 28, 2001 and July 28, 2000 and the
balance  sheet data as of July 27, 2002 and July 28,  2001 are derived  from the
audited financial  statements and related notes appearing elsewhere in this Form
10-K. The statement of operations  data for the fiscal years ended July 31, 1999
and 1998 and the balance sheet data as of July 28, 2000,  July 31, 1999 and July
31, 1998 are derived from audited  financial  statements  not  appearing in this
Form 10-K. Historical results are not necessarily indicative of results that may
be expected for any future period.

                          Summary Financial Information
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                             For the years ended
                                                                      -------------------------------------------------------------
                                                                       July 27,     July 28,     July 28,     July 31,     July 31,
                                                                         2002         2001         2000        1999         1998
                                                                      ---------    ---------    ---------    ---------    ---------
<S>                                                                   <C>          <C>          <C>          <C>          <C>
Selected Consolidated Statements of Operations Data:
  Net revenues ....................................................   $  20,385    $ 134,890    $ 120,296    $  17,710    $   5,556
  Cost of revenues ................................................       9,661      154,103       98,181       17,766        4,494
                                                                      ---------    ---------    ---------    ---------    ---------
  Gross margin ....................................................      10,724      (19,213)      22,115          (56)       1,062
  Income (loss) from operations ...................................     (93,248)    (531,798)     (95,387)     (14,531)          73
  Net income (loss) ...............................................     (91,038)    (525,268)     (89,758)     (14,512)          84
                                                                      =========    =========    =========    =========    =========
  Dividend related to convertible preferred stock .................        --           --         (4,900)        --           --
                                                                      ---------    ---------    ---------    ---------    ---------
  Net income (loss) attributable to common stockholders ...........   $ (91,038)   $(525,268)   $ (94,658)   $ (14,512)   $      84
                                                                      =========    =========    =========    =========    =========

  Basic net income (loss) per share ...............................   $   (1.72)   $  (10.78)   $   (3.52)   $   (2.62)   $    0.02
                                                                      =========    =========    =========    =========    =========
  Diluted net income (loss) per share .............................   $   (1.72)   $  (10.78)   $   (3.52)   $   (2.62)   $    0.01
                                                                      =========    =========    =========    =========    =========
  Shares used in computing basic net income (loss) per share ......      53,064       48,741       26,863        5,530        5,100
                                                                      =========    =========    =========    =========    =========
  Shares used in computing diluted net income (loss)
     per share ....................................................      53,064       48,741       26,863        5,530       12,249
                                                                      =========    =========    =========    =========    =========

Selected Balance Sheet data at year-end:
  Cash, cash equivalents and investments ..........................   $  53,046    $  80,083    $ 174,032    $  18,653    $      62
  Working capital .................................................      30,992       62,444      169,930       16,230         (214)
  Total assets ....................................................      66,968      173,033      585,099       27,595        1,195
  Liabilities, net of current portion .............................      15,575       13,178        1,656          424          275
  Total stockholders' equity (deficit) ............................      39,388      126,362      543,875       18,363         (420)
</TABLE>


Quarterly Financial Data
<TABLE>
<CAPTION>
                                                                                               Fiscal Year 2002
                                                                                           For the three months ended
                                                                             -----------------------------------------------------
                                                                             October 28     January 27      April 27       July 27
                                                                             ----------     ----------      --------       -------
<S>                                                                           <C>            <C>            <C>            <C>
Net revenues ...........................................................      $  5,578       $  5,052       $  5,140       $  4,615
Loss from operations ...................................................       (55,963)       (10,701)        (7,906)       (18,678)
Net loss attributable to common stockholders ...........................      $(54,881)      $ (9,656)      $ (7,729)      $(18,772)
Per share amounts:
  Basic and diluted net loss per share .................................      $  (1.04)      $  (0.18)      $  (0.15)      $  (0.35)
  Shares used in computing basic and diluted net loss per share ........        52,678         53,005         53,210         53,487
</TABLE>

                                       10
<PAGE>

<TABLE>
<CAPTION>
                                                                                                Fiscal Year 2001
                                                                                          For the three months ended
                                                                             -----------------------------------------------------
                                                                             October 27    January 27       April 28       July 28
                                                                             ----------    ----------       --------       -------
<S>                                                                          <C>            <C>            <C>            <C>
Net revenues ...........................................................     $  56,062      $  42,513      $  20,334      $  15,981
Loss from operations ...................................................       (53,526)       (75,662)      (111,356)      (291,254)
Net loss attributable to common stockholders ...........................     $ (51,347)     $ (74,148)     $(109,655)     $(290,118)
Per share amounts:
  Basic and diluted net loss per share .................................     $   (1.12)     $   (1.57)     $   (2.21)     $   (5.58)
  Shares used in computing basic and diluted net loss per share ........        45,978         47,362         49,629         52,006
</TABLE>


Item 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operations

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

Overview

         We were  incorporated in California in January 1995 and  reincorporated
in Delaware  in  December  1999.  We  develop,  market and  support  SourceForge
Enterprise Edition  ("SourceForge"),  which is proprietary software designed for
corporate  and   public-sector   information   technology  ("IT")  and  software
engineering organizations. SourceForge provides Development Intelligence (DI) to
our customers by combining software development tools with the ability to track,
measure  and report on  software  project  activity  in  real-time.  Development
Intelligence  allows  organizations to access,  analyze and share information on
software   development   activity  as  it  takes  place.  By  aligning  software
development  activity  with  business  goals,   Development  Intelligence  helps
organizations improve operational  efficiency and build better quality software.
SourceForge  is  a  relatively  new  product  and  additional   development  and
enhancements are expected in the future.

         A  component  of our  SourceForge  sales  strategy  is the Open  Source
Development Network, Inc. ("OSDN").  OSDN is our network of web sites that serve
the  IT  and  software   development   communities.   OSDN  web  sites   include
SourceForge.net,  which is the largest reference site for potential  SourceForge
customers. As of September 30, 2002, SourceForge.net is the development home for
more than 48,000 software  projects and more than 490,000  registered  users. In
addition to the credibility SourceForge derives from the substantial and growing
usage  of  OSDN's   SourceForge.net,   we  market  SourceForge  through  product
advertising on and sales leads from all of the OSDN web sites.

Results of Operations

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

         The comparison of fiscal year 2002 current period operating  results to
fiscal year 2001 prior  period  results  principally  reflects  the  significant
effects  from  the  change  of  our  business  from  hardware  and  services  to
application software.  Accordingly,  there is little trend data to be taken from
the comparison. We have completed four quarters of operations as an applications
software  company,  and accordingly  have a very short operating  history in our
current  business.  While we believe that we are making good progress in our new
business,  a substantial  majority of our revenues  continues to be derived from
OSDN and we face numerous risks and uncertainties that commonly confront new and
emerging  businesses in emerging markets,  which we have identified in the "Risk
Factors" section below.

                                       11
<PAGE>

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


<TABLE>
                                                             For the years ended
                                                         ----------------------------
                                                         July 27,   July 28,  July 28
                                                           2002      2001      2000
                                                          -----     -----     -----
<S>                                                       <C>       <C>       <C>
Consolidated Statements of Operations Data:
  Software revenues .................................       5.3%      0.0%      0.0%
  Online revenues ...................................      78.4      10.9       1.7
  Other revenues ....................................      16.3      89.1      98.3
                                                          -----     -----     -----
     Net revenues ...................................     100.0%    100.0%    100.0%
  Software cost of revenues .........................      11.7       0.0       0.0
  Online cost of revenues ...........................      51.0       7.8       1.0
  Other cost of revenues ............................     (15.3)    106.4      80.6
                                                          -----     -----     -----
     Cost of revenues ...............................      47.4     114.2      81.6
                                                          -----     -----     -----
  Gross margin ......................................      52.6     (14.2)     18.4
                                                          -----     -----     -----
  Operating expenses:
     Sales and marketing ............................      61.4      29.6      24.5
     Research and development .......................      39.8      13.3      10.3
     General and administrative .....................      53.2      16.3       7.5
     Restructuring costs and other special charges ..     230.2      84.1       0.0
     Amortization of deferred stock compensation ....       8.2      45.4      32.8
     Amortization of goodwill and intangible assets .      57.5      72.6      15.1
     Impairment of long-lived assets ................      59.6     118.6       0.0
     Write-off of in-process research and development       0.0       0.0       7.5
                                                          -----     -----     -----
       Total operating expenses .....................     509.9     379.9      97.7
                                                          -----     -----     -----
  Loss from operations ..............................    (457.3)   (394.1)    (79.3)
  Interest and other income, net ....................      10.8       4.8       4.7
                                                          -----     -----     -----
  Net loss ..........................................    (446.5)%  (389.3)%   (74.6)%
                                                          =====     =====     =====
  Dividend related to convertible preferred stock ...       0.0       0.0      (4.1)
                                                          =====     =====     =====
  Net loss applicable to common stockholders ........    (446.5)%  (389.3)%   (78.7)%
                                                          =====     =====     =====
</TABLE>


Net Revenues

         We had two reportable  business segments for revenue during fiscal year
2001:  systems and services and OSDN.  We allocated  our resources and evaluated
performance  of our  separate  segments  based on  revenue.  As a result  of our
decision to exit the  systems  business  in the fourth  quarter of fiscal  2001,
effective as of July 29, 2001, we operate as one business segment.

Software Revenues

         Software revenues are derived from our SourceForge application software
business and include  software  licenses,  professional  services,  maintenance,
support and training.  Software  revenues  represent  $1.1 million,  or 5.3%, of
total revenues for fiscal year 2002.

         Revenues  from  software   license   agreements  are  recognized   when
objective,  persuasive evidence of an agreement exists,  delivery of the product
has   occurred,   provided  the   arrangement   does  not  require   significant
customization  of  the  software,   the  fee  is  fixed  or  determinable,   and
collectibility is reasonably assured.

         For  perpetual  licenses,  we use  the  residual  method  to  recognize
revenues.  Under the residual method, the fair value of the undelivered elements
is deferred and the remaining  portion of the  arrangement  fee is recognized as
revenue.  If  objective  evidence  of the fair value of one or more  undelivered
elements does not exist,  all revenues are deferred and recognized when delivery
of those  elements  occurs or when  fair  value  can be  established.  A typical
perpetual license agreement may include professional  services,  maintenance and
training.  Revenue from non-essential professional services is recognized as the
work is performed based on fair value, which is based on published  professional
services  rates.  When an  agreement  includes  professional  services  that are
significant  or  essential  to the  functionality  of the  software,  we use the
percentage of completion  contract accounting method for the entire

                                       12
<PAGE>

arrangement,  including license fees. We recognize  maintenance revenues ratably
over  the  term  of  the  maintenance  period  (generally  one  year).  Software
maintenance  agreements  provide  technical support and the right to unspecified
updates/upgrades on an  if-and-when-available  basis. Fair value for the ongoing
maintenance  obligations  are based upon separate sales or  maintenance  sold to
customers or upon renewal  rates quoted in the  contract,  when these exist.  We
record the  unrecognized  portion of amounts  paid in advance for  licenses  and
services as deferred revenue.

         For term arrangements, which include licenses and bundled post-contract
support  ("PCS"),  we use ratable  revenue  recognition.  Under ratable  revenue
recognition,  the only undelivered element is PCS and objective evidence of fair
value of PCS does not exist.  If the term license  agreement  includes  multiple
elements (such as training and  non-essential  professional  services),  then we
defer  revenue  until all elements  except PCS are  delivered,  at which time we
recognize revenue ratably over the remaining contract term.

         If the fee due from the  customer  is not  fixed  or  determinable,  we
recognize  revenues at the earlier of the due date or when cash is received from
the customer,  assuming all other revenue recognition criteria have been met. We
consider all arrangements  with payment terms longer than normal not to be fixed
or determinable.

         Online Revenues

         Online  revenues  include  advertising  as well as e-commerce  revenue.
Online  advertising  revenues  represent  $9.0, or 44.2%,  of total revenues for
fiscal  year  2002 and  includes  $2.0  million  of barter  revenue.  E-commerce
revenues  represent  $7.0 million,  or 34.3%,  of total revenues for fiscal year
2002.

         Advertising  revenues are derived from the sale of advertising space on
our various websites. We recognize advertising revenues over the period in which
the  advertisements  are  displayed,  provided that no  significant  obligations
remain and collection of the receivable is probable.  Our obligations  typically
include  guarantees  of  a  minimum  number  of  "impressions"  (times  that  an
advertisement  is viewed by users of our online  services).  To the extent  that
minimum  guaranteed  impressions  are not met in the specified time frame, we do
not recognize the  corresponding  revenues until the guaranteed  impressions are
achieved.  We record barter revenue  transactions  at their estimated fair value
based on our historical  experience of selling  similar  advertising for cash in
accordance with Emerging Issues Task Force ("EITF") Issue 99-17, "Accounting for
Advertising  Barter  Transactions." We broadcast banner  advertising in exchange
for similar banner  advertising  on third party  websites.  Online  revenues for
fiscal year 2002 included  approximately $2.0 million in barter revenue.  Online
revenues  for fiscal year 2001  included  approximately  $2.4  million of barter
revenue. There was no barter revenue for fiscal year 2000.

         E-commerce  revenues are derived from the online sale of consumer goods
and digital animations.  We recognize e-commerce revenues in accordance with SEC
Staff  Accounting  Bulletin ("SAB") No. 101,  "Revenue  Recognition in Financial
Statements."  Under SAB 101,  product  revenues are recognized  when  persuasive
evidence of an  arrangement  exists,  delivery has  occurred,  the sale price is
fixed and determinable, and collectibility is reasonably assured. In general, we
recognize e-commerce revenue upon the shipment of goods. We do grant customers a
right to return  products and have recorded an allowance for such returns.  This
allowance is a management estimate based on historical return rates.

         Other Revenues

         Other revenues are derived from our former hardware,  customer support,
and professional services businesses.  Other revenues represent $3.3 million, or
16.3%, of total revenues for the fiscal year 2002.

         Our revenue  recognition  policy related to our former hardware systems
business follows SEC SAB No. 101, "Revenue Recognition in Financial Statements."
Under SAB No. 101, we recognized  product  revenues from the sale of Linux-based
servers,  components,  and  desktop  computers  when  persuasive  evidence of an
arrangement  existed,   delivery  occurred,   the  sales  price  was  fixed  and
determinable  and  collectibility  was  reasonably   assured.   In  general,  we
recognized  product  revenue  upon  shipment of the goods.  We did not grant our
customers any rights to return products.

         We  recognized  revenues  from  customer  support  services,  including
on-site  maintenance and technical  support on a pro-rata basis over the term of
the related service agreement.  We recognized revenues from professional service
contracts upon completion of the project,  or using the percentage of completion
method of the project  where project  costs could be  reasonably  estimated.  We
recorded any payments received prior to revenue recognition as deferred revenue.

                                       13
<PAGE>

         Our net revenues  decreased to $20.4 million in fiscal year 2002,  from
$134.9 million in fiscal year 2001. The $114.5 million  decrease in net revenues
was due primarily to the exiting of the systems and services  business  segment.
In fiscal year 2002,  systems and services  revenue  decreased $116.9 million to
$3.3  million  from  $120.2  million in fiscal  year 2001.  In fiscal year 2002,
online revenue  increased by $1.3 million to $16.0 million from $14.7 million in
fiscal  year  2001.  Online  revenue  for fiscal  years  2002 and 2001  included
approximately  $2.0 million and $2.4 million,  respectively,  of barter  revenue
arising  from web  advertising.  SourceForge  revenues  totaled $1.1 million for
fiscal year 2002.

         Our overall net  revenues  increased  to $134.9  million in fiscal year
2001 from $120.3  million in fiscal 2000.  During fiscal year 2001,  our systems
and  services  business  segment  accounted  for $120.2  million or 89.1% of net
revenues and our OSDN business  segment  accounted for $14.7 million or 10.9% of
net  revenues.  Net  revenues  for the systems  and  services  business  segment
increased  to $120.2  million in fiscal year 2001 from $118.2  million in fiscal
year 2000.  This  marginal  increase in our systems and  services  business  was
primarily  due to a small  increase in net revenues  from  services  offset by a
decline in demand  for our  server  products  from the  Internet  infrastructure
market. Net revenues for our OSDN business segment increased to $14.7 million in
fiscal  year 2001 from $2.1  million in fiscal year 2000.  This  increase in net
revenues for our OSDN  business  segment was  primarily  due to incurring a full
year's worth of net revenues for our OSDN  business  segment in fiscal year 2001
as compared to the period from June 7, 2000 (OSDN  acquisition date) to July 28,
2000 in  fiscal  year  2000.  The  increase  in our OSDN net  revenues  was also
partially  offset by a decrease in demand in the second half of fiscal year 2001
for our web advertising offerings.

         Sales for the fiscal years ended 2002, 2001, and 2000 were primarily to
customers located in the United States of America.

         For  the  fiscal  year  ended  July  27,  2002,  one  customer,   Intel
Corporation,  accounted for  approximately  20% of net revenues.  For the fiscal
year ended July 28, 2001, one customer, Akamai Technologies, Inc., accounted for
approximately 25% of net revenues.

Cost of Revenues

         Cost of  revenues  decreased  to $9.7  million in fiscal year 2002 from
$154.1  million in fiscal year 2001.  Gross margin  increased as a percentage of
revenue to 52.6% in fiscal year 2002 from a negative  14.2% in fiscal year 2001.
The increase in gross margin as a percentage of net revenue was due primarily to
the exiting of the systems  business  and an  inventory  provision  allowance of
$28.0  million in fiscal year 2001 to  establish a reserve for excess  material.
Cost of revenues for fiscal year 2002  included  restructuring  charges of a net
credit of $5.8 million which  included a $6.9 million  credit  adjustment to the
fiscal year 2001 fourth quarter systems restructuring composed of a $2.0 million
reversal  of reserves  for  inventory  (due to a better sell  through of old and
excess  material  during fiscal year 2002 than  anticipated  at fiscal  year-end
2001) and a $4.9 million  reversal of an over estimate of warranty  expense.  We
recorded a $1.1 million  restructuring charge for a workforce  reduction,  which
consisted  mostly  of  severance  and other  related  costs  attributable  to 50
employees.  We expect  cost of  revenues  to remain  relatively  constant  or to
slightly increase in absolute dollars in the future.

         Cost of revenues  increased to $154.1  million in fiscal year 2001 from
$98.2  million in fiscal year 2000.  Gross margin  decreased as a percent of net
revenues to a negative  14.2% in fiscal year 2001 from 18.4% in fiscal 2000. The
decline in gross margin was mostly due to charges  from the  write-off of excess
inventory  caused by lower  demand for our server  products  and our decision to
exit the systems business,  charges from lower of cost or market  adjustments to
inventory,  selling price  reductions on our server  products due to competitive
pricing pressure, lower sales volume in the second half of fiscal year 2001, and
increased investments in professional  service,  partially offset by an increase
in gross profit from the OSDN business segment.

Sales and Marketing Expenses

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

         Sales and marketing  expenses decreased to $12.5 million in fiscal year
2002 from $40.0  million in fiscal year 2001.  The decrease in absolute  dollars
was  primarily  due to the exiting of our systems and services  business,  which
accounted for a $30.6 million reduction and a decline in our sales and marketing
efforts related to our online business of $3.0 million, offset by a $6.3 million
increase in spending due to the shift in  resources  to our  software  business.
Headcount in sales and marketing  decreased to 29 in fiscal year 2002 from 59 in
fiscal year 2001.  Sales and marketing  expenses as a percentage of net revenues
increased  to 61.4% for fiscal  year 2002 from 29.6% in fiscal  year 2001.  This
increase was primarily due to our significantly  decreased revenues.  We believe
our

                                       14
<PAGE>

sales and marketing  expenses to support our SourceForge  business will continue
to  increase  in  absolute  dollars as we intend to  continue  to grow our sales
force.  However,  in the  future,  we expect  sales and  marketing  expenses  to
decrease slightly as a percentage of revenue.

         Sales and marketing  expenses increased to $40.0 million in fiscal year
2001 from $29.5 million in fiscal year 2000.  Sales and marketing  expenses as a
percent of net  revenues  increased  to 29.6% in fiscal  year 2001 from 24.5% in
fiscal year 2000.  The increase was  primarily due to the expansion of our sales
and  marketing  organizations  in Europe and Japan  which  accounted  for a $5.7
million  increase and  incurring a full year's worth of expenses  from our sales
and marketing  organizations from our online business which accounted for a $4.0
million of the increase.

Research and Development Expenses

         Research and  development  expenses  consist  primarily of salaries and
related  expenses  for  software  engineers.  We expense all of our research and
development costs as they are incurred.

         Research and development  expenses  decreased to $8.1 million in fiscal
year 2002 from $18.0  million in fiscal  year 2001.  The  decrease  in  absolute
dollars  was  primarily  due  to the  exiting  of the  systems  business,  which
accounted  for a $15.0 million  reduction  offset by an increase in our research
and  development  efforts  related to our online  business of $0.8 million and a
$4.2  million  increase in spending as a result of our  decision to focus on our
software  business.  Headcount  in research and  development  decreased to 44 in
fiscal year 2002 from 66 in fiscal year 2001. Research and development  expenses
as a  percentage  of net  revenues  increased to 39.8% for fiscal year 2002 from
13.3% for fiscal year 2001. This increase was primarily due to our significantly
decreased  revenues.  We expect  research and  development  expenses to increase
slightly  in  absolute  dollars  as  we  continue  to  staff  the  research  and
development  department for our application software business and to decrease as
a percentage of revenue.

         Research and development  expenses increased to $18.0 million in fiscal
year 2001 from $12.4 million in fiscal year 2000.  Research and development as a
percent of net  revenues  increased  to 13.3% in fiscal  year 2001 from 10.3% in
fiscal year 2000.  The  increase  was  primarily  due to incurring a full year's
worth of expenses from our research and development  organization for our online
business which accounted for a $2.6 million increase and an increased investment
in cost relating to research and development  personnel,  partially  offset by a
decrease in material spending for new product development.

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

General and Administrative Expenses

         General and  administrative  expenses  consist of salaries  and related
expenses for finance and  administrative  personnel  and  professional  fees for
accounting and legal services.

         General  and  administrative  expenses  decreased  to $10.9  million in
fiscal  year  2002  from  $22.0  million  for  fiscal  year  2001.  General  and
administrative expenses for fiscal year 2002 included the reversal of excess bad
debt  provisions  of $1.0  million and included  $0.9  million of accrued  legal
expenses  associated with the IPO Securities  Litigation.  See Part I - Item 3 -
Legal  Proceedings.  General and  administrative  expenses  for fiscal year 2001
included  a  one-time  provision  for bad debts of $2.5  million  related to the
reorganization  of the  business.  Excluding  these  charges,  the  decrease  in
absolute dollars resulted primarily from a decrease in administrative  personnel
due to our exit from the systems and services  businesses.  Headcount in general
and  administrative  services  decreased  to 27 in  fiscal  year 2002 from 70 in
fiscal year 2001.  General and  administrative  expenses as a percentage  of net
revenues  increased  to 53.2% for fiscal  year 2002 from  16.3% for fiscal  year
2001.  The increase as a percentage  of net  revenues was  primarily  due to our
significantly  decreased revenue. We do not intend to increase our current level
of spending to support our  infrastructure  and, as a result,  we expect general
and  administrative  expenses to decrease year over year in absolute dollars and
as a percentage of revenue, excluding one-time provisions.

                                       15
<PAGE>

         General  and  administrative  expenses  increased  to $22.0  million in
fiscal  year  2001  from  $9.0   million  in  fiscal  year  2000.   General  and
administrative  expenses as a percentage of net revenues  increased to 16.3% for
fiscal  year 2001 from 7.5% for fiscal  year 2000.  General  and  administrative
expenses  for fiscal year 2001  included a one-time  provision  for bad debts of
$2.5 million related to restructuring  charges.  Excluding one-time charges, the
increase  in  absolute   dollars  was  due  to  an  increase  in  expenses   for
administrative personnel and support costs relating to a full year of operations
from our OSDN business segment and increased international operations. Headcount
in general and administrative  services increased to 70 in fiscal year 2001 from
59 in fiscal year 2000.

Restructuring Costs and Other Special Charges

         During  February  2001,  in  response  to the  general  slowdown in the
economy,  we adopted a formal plan to reduce operating costs. In connection with
these actions, we recorded a pre-tax restructuring charge of approximately $43.4
million.  The principle actions of the plan to reduce costs involved the closure
of our San Diego facility and the exit from our managed  services  business.  Of
the  $43.4  million   restructuring   charge,   $33.8  million  related  to  the
acceleration of deferred stock  compensation  that was originally  contingent on
future employment by three employees of TruSolutions,  Inc. ("TruSolutions") and
one employee of Life BVBA ("Life") from  companies we acquired in March 2000 and
September 2000, respectively. These employees' positions were terminated as part
of the  restructuring  and all stock held in escrow was released to them as part
of their severance agreements. In addition, as part of the plan to exit from our
managed services  business,  we accrued for the disposition of Brave New Worlds,
Inc. ("BNW"), a company we acquired in September 2000. Severance charges related
to six  employees of BNW who were  informed  before April 28, 2001 of our formal
plan to divest BNW were  included in the  accrual.  Further,  we  recorded  $1.7
million for a workforce  reduction,  consisting  of severance,  acceleration  of
stock  options and other  related  costs  attributable  to 43 former  employees,
primarily  from our domestic  systems  business.  Of the remaining $7.9 million,
$1.7  million was for excess  facilities  related  primarily  to  non-cancelable
leases  (with  payments  continuing  until  fiscal  year 2010,  unless we sublet
completely)  the  abandonment  or disposal of property and  equipment  and other
costs  and  $6.2  million  was for the  impairment  of  goodwill  and  purchased
intangibles  as there  were no  future  cash  flows  expected  from the  managed
services  business.  The  accrual for  non-cancelable  lease  payments  included
management's  estimates  of the time  expected  to  sublet  the  facilities  and
estimates of sublease  income.  These  estimates  are subject to change based on
actual events. We evaluate and update, if applicable, these estimates quarterly.

         In  addition  to the  above,  the  Company  recorded  $3.4  million  in
connection  with these  restructuring  charges,  which are classified as cost of
revenues in the statement of operations.  Of the $3.4 million,  $0.2 million was
recorded for  workforce  reduction,  consisting  of severance  and other related
costs  attributable to 19 employees from our domestic  systems business and nine
employees  from the managed  services  business.  Of the remaining $3.2 million,
$2.9 million  related to a write down of  inventory  from the closing of the San
Diego facility, and $0.3 million related to other restructuring costs.

         In June 2001, we adopted a plan to exit the systems business,  which we
accounted for in the fourth  quarter ended July 28, 2001. We decided to exit our
systems  business  and pursue our  applications  software  business  in order to
reduce  operating  losses and improve  cash flow.  We  recorded a  restructuring
charge of $70.1  million in the fourth  quarter of fiscal  year 2001  related to
exiting our systems business. Of the $70.1 million, $53.5 million related to the
impairment of goodwill and purchased  intangibles resulting from our expectation
that we would  receive  no  significant  future  cash  flows  from  the  systems
business.  $6.6 million of the $70.1 million charge related to excess facilities
primarily from  non-cancelable  leases,  net of $3.1 million in assumed sublease
income  (with  payments   continuing  until  fiscal  year  2010,  unless  sublet
completely),  $3.2  million  related  to a  workforce  reduction  consisting  of
severance,  acceleration of stock options,  and other related costs attributable
to 84 employees primarily from our systems business, and $6.8 million related to
other restructuring  charges related to the exit from the systems business.  The
accrual for non-cancelable lease payments included management's estimates of the
time expected to sublet the facilities and estimates of sublease  income.  These
estimates are subject to change based on actual events.  We evaluate and update,
if applicable, these estimates quarterly.

         In addition to the above, the Company recorded $10.5 million of charges
in connection  with the exit of the systems  business,  which was  classified as
cost of revenues in the  statements of operations.  Of the $10.5  million,  $7.6
million was related to excess  inventory  charges arising from the exit from the
systems business, $0.4 million was recorded for a workforce reduction consisting
of severance,  and other related costs  attributable to 64 former employees from
the Company's systems business,  and the remaining $2.5 million related to other
restructuring costs.

         In September 2001, we adopted a plan to exit the professional  services
and Linux  software  engineering  services  businesses  in order to focus on our
SourceForge application software business. We recorded a restructuring charge of
$45.0  million in the first  quarter of fiscal 2002 related to this exit. Of the
$45.0 million, $30.6 million related to the impairment of goodwill and purchased
intangibles from our prior year  acquisitions of NetAttach,  Inc.  ("NetAttach")
and Precision Insight, Inc. ("Precision Insight") resulting from our

                                       16
<PAGE>

expectation  that we would  receive no  significant  future  cash flows from the
professional services and Linux software engineering services businesses.  $12.9
million of the $45.0 million charge related to excess facilities  primarily from
non-cancelable  leases,  net of $2.4  million in assumed  sublease  income (with
payments  continuing until fiscal year 2010, unless sublet  completely) or other
costs  for the  abandonment  or  disposal  of  property  and  equipment.  Of the
remaining  $1.5  million  restructuring  charge,  $1.3  million was related to a
workforce  reduction  consisting  of  severance  and other labor  related  costs
attributable  to  50  former   employees   primarily  from  our  Linux  software
engineering  service  business and $0.2 million  related to other  restructuring
charges  related  to  the  exit  of  the  services  business.  The  accrual  for
non-cancelable  lease  payments  included  management's  estimates  of the  time
expected  to sublet the  facilities  and  estimates  of sublease  income.  These
estimates are subject to change based on actual events.  We evaluate and update,
if applicable, these estimates quarterly.

         In  addition  to the  above,  we  recorded  a $3.1  million  net credit
included in cost of revenues in the consolidated statement of operations for the
quarter  ended  October 27, 2001.  The $3.1  million net credit  included a $3.9
million credit  adjustment  relating to the fiscal 2001 fourth  quarter  systems
restructuring  composed of a $2.0 million reversal of reserves for inventory (we
had a better than expected sell through of old and excess  material in the three
months  ended  October 27, 2001 than was  anticipated  at July 28,  2001),  $1.2
million adjustment for system shipments (we were able to sell product at a price
in excess  of that  originally  estimated  at July 28,  2001)  and $0.7  million
reversal for an over estimate of warranty expense. A $0.8 million  restructuring
charge  was  recorded  for a  workforce  reduction  which  mostly  consisted  of
severance and other related costs attributable to 36 former employees  primarily
associated with our professional services business.

         During  the  third  quarter  of fiscal  2002,  we  recorded  additional
restructuring charges associated with the termination of a sublease agreement of
$0.7 million  offset by reversals of excess  restructuring  accruals  related to
prior periods of $0.6 million.

         In  addition,  we recorded a $0.3  million  credit  included in cost of
revenues in the consolidated statement of operations for the quarter ended April
27, 2002.  This credit was due to the  reversal of a prior period  restructuring
accrual. The accrual was originally  established as a result of a non-cancelable
contract for warranty services. The contract was renegotiated and settled during
the third quarter of fiscal 2002 and as a result the reserve was reversed.

         In  July  2002,   we  adopted  a  plan  to  reduce  our   general   and
administrative  overhead  costs.  As a  result  of  this  plan,  we  recorded  a
restructuring  charge of $1.9 million in the fourth  quarter of fiscal 2002.  Of
the $1.9 million,  $1.2 million related to excess facilities from non-cancelable
leases  (with  payments  continuing  until  fiscal  year 2004,  unless we sublet
completely)  and the  abandonment  of property,  and $0.7  million  related to a
workforce reduction consisting of severance and other related costs attributable
to  35  employees.  The  accrual  for  non-cancelable  lease  payments  included
management's  estimates  of the time  expected  to  sublet  the  facilities  and
estimates of sublease  income.  These  estimates  are subject to change based on
actual events. We evaluate and update, if applicable, these estimates quarterly.

         In  addition  to the  above,  we  recorded  a $2.4  million  net credit
included in cost of revenues in the consolidated statement of operations for the
quarter ended July 27, 2002. The $2.4 million net credit included a $2.7 million
credit adjustment relating to the overestimate of the fiscal 2001 fourth quarter
systems warranty  restructuring accrual. A $0.3 million restructuring charge was
recorded  for a workforce  reduction,  which mostly  consisted of severance  and
other related costs  attributable to 14 former employees  primarily in an effort
to align our infrastructure with our operations.

                                       17
<PAGE>

         Below is a summary of the restructuring  charges in operating  expenses
(in thousands):


<TABLE>
<CAPTION>
                                                                                                       Total
                                                               Total Charged    Total Charged           Cash          Restructuring
                                                               To Operations    To Operations         Receipts\       Liabilities at
                                                                Fiscal 2001       Fiscal 2002        (Payments)        July 27, 2002
                                                                -----------       -----------        ----------        -------------
<S>                                                              <C>               <C>                <C>                <C>
Cash Provisions:
  Other special charges relating to
    restructuring activities .............................       $  2,159          $   (888)          $ (1,219)          $     52
  Facilities charges .....................................          6,584             9,401              1,545             17,530
  Employee severance and other related
   charges ...............................................          3,498             1,997             (5,083)               412
                                                                 --------          --------           --------           --------
      Total cash provisions ..............................         12,241            10,510           $ (4,757)          $ 17,994
                                                                 --------          --------           ========           ========
Non-cash:
  Write-off of goodwill and intangibles ..................         59,723            30,632
   Write-off of other special charges
   relating to restructuring activities ..................          4,434             5,442
  Write-off of accelerated options from
    terminated employees .................................          1,352              --
   Acceleration of deferred stock
   compensation ..........................................         35,728               352
                                                                 --------          --------
      Total non-cash provisions ..........................        101,237            36,426
                                                                 --------          --------
      Total provisions ...................................       $113,478          $ 46,936
                                                                 ========          ========
</TABLE>


Amortization of Deferred Stock Compensation

         In  connection  with the grant of certain  stock  options to  employees
during  fiscal 2000 and 1999, we recorded  deferred  stock  compensation  within
stockholders' equity of approximately $37.8 million, representing the difference
between the estimated fair value of the common stock for accounting purposes and
the option exercise price of these options at the date of grant. We amortize the
deferred stock  compensation  expense on an  accelerated  basis over the vesting
period of the  individual  award which is  generally  equal to four years.  This
method of deferred stock expense  amortization  is in accordance  with Financial
Accounting  Standards  Board  Interpretation  No. 28. The  amortization  expense
relates to options awarded to employees in all operating expense categories. The
amortization of deferred stock compensation has not been separately allocated to
these  categories.  The amount of deferred stock  compensation from year to year
has  decreased as options for which accrued but unvested  compensation  has been
recorded  have  been  forfeited.   In  connection   with  the   acquisitions  of
TruSolutions,  Precision  Insight and NetAttach,  we recorded  $113.1 million of
deferred  stock  compensation   during  fiscal  2000.  In  connection  with  the
acquisitions  of BNW and Life,  we  recorded  $6.8  million  of  deferred  stock
compensation  during fiscal 2001.  We recorded  amortization  of deferred  stock
compensation  of $1.7  million,  $61.3  million and $39.5 million for the fiscal
years ended July 27,  2002,  July 28, 2001 and July 28, 2000,  respectively.  In
addition,  in connection with the restructuring  discussed above, we recorded an
expense of  approximately  $35.7 million related to the acceleration of deferred
stock compensation for the fiscal year ended July 28, 2001.  Further,  we made a
$0.3  million  adjustment  during  fiscal year 2002  related to  deferred  stock
compensation  for stock options of terminated  employees.  All adjustments  have
been included in restructuring costs and other special charges in the statements
of  operations.  We expect  amortization  of  deferred  stock  compensation,  in
absolute  dollars,  to  decrease  through  fiscal  year  2004 as a result of the
accelerated basis of amortization.

Amortization of Goodwill and Intangibles

         In  connection   with  the   acquisitions  of  BNW,  Life  and  certain
intangibles  of  Alabanza  Corporation  ("Alabanza")  and  Lavaca  Systems  Inc.
("Lavaca"),  we recorded $10.6 million of goodwill and intangibles during fiscal
2001. In connection with the  acquisitions of TruSolutions,  Precision  Insight,
NetAttach, and OSDN (formerly known as "Andover.Net,  Inc."), we recorded $381.3
million of goodwill  and  intangibles  during  fiscal 2000.  We amortized  $97.9
million and $18.2 million of goodwill and  intangibles  in fiscal 2001 and 2000,
respectively.  In  connection  with our  restructuring  plans in fiscal 2001, we
wrote off goodwill  and  intangibles  associated  with BNW,  Life,  Alabanza and
TruSolutions in the amount of $59.7 million as we had exited from these lines of
business and  expected no future cash flows from them.  In  connection  with our
restructuring plans in fiscal 2002, we have written off goodwill and intangibles
associated  with NetAttach and Precision  Insight in the amount of $30.6 million
due to the exit of the  professional  services  and Linux  software  engineering
businesses.

                                       18
<PAGE>

         We periodically  evaluate the carrying amount of our long-lived  assets
and apply the  provisions  of SFAS No. 121,  "Accounting  for the  Impairment of
Long-Lived  Assets and for  Long-Lived  Assets to be Disposed  of." SFAS No. 121
requires that long-lived assets and certain identifiable  intangibles to be held
and used or disposed of by an entity be reviewed for impairment  whenever events
or changes in  circumstances  indicate that the carrying  amount of an asset may
not be recoverable.

         We performed an  assessment  of the  carrying  value of our  long-lived
assets to be held and used including  significant  amounts of goodwill and other
intangible assets recorded in connection with our OSDN acquisition. We performed
the assessment  pursuant to SFAS No. 121 due to the significant  slowdown in the
economy  affecting our current  operations and our expected future sales as well
as the  general  decline  of  technology  valuations.  The  conclusion  of these
assessments  was that the decline in market  conditions  within our industry was
significant and other than temporary. As a result, we recorded during the fourth
quarter of fiscal 2001 a charge of $160.0  million to reduce  goodwill and other
intangible  assets  associated with the acquisition of OSDN, based on the amount
by which the  carrying  value of these  assets  exceeded  their fair value.  The
charge is included  in the  caption  "Impairment  of  long-lived  assets" in the
statements of operations.  Fair value was determined based on discounted  future
cash flows.

         In July 2001, the Financial  Accounting Standards Board ("FASB") issued
SFAS No.  142,  "Goodwill  and Other  Intangible  Assets."  Under SFAS No.  142,
goodwill and intangible  assets with indefinite  lives are not amortized but are
subject to at least an annual  assessment for  impairment  applying a fair-value
based  test.  Upon  adoption  of SFAS No.  142 on July 29,  2001,  we no  longer
amortize goodwill.  In connection with the acquisitions of NetAttach,  Precision
Insight, and OSDN, we amortized $11.7 million of intangibles during fiscal 2002.
As noted above, in connection with the restructuring  plan approved in September
2001,  we wrote-off  $30.6 million of goodwill and  intangibles  relating to our
NetAttach and Precision Insight acquisitions due to the exit of the professional
services and Linux software engineering  businesses.  In addition, an assessment
for impairment was performed during the quarter ended July 27, 2002. As a result
of that  assessment,  we  determined  that the carrying  value of the  remaining
goodwill  and  intangible  assets  associated  with  OSDN were  impaired  and an
impairment  loss of $12.2  million was  recorded  and is included in the caption
"Impairment of long-lived assets" in the statements of operations.

Write-off of In-Process Research and Development

         The value assigned to purchased  in-process research and development in
fiscal 2000 related to the  acquisitions of TruSolutions  and OSDN and was based
on the income method  prepared by an independent  third party and was determined
by identifying  research projects in areas for which  technological  feasibility
had not been established and no future alternative uses existed.

         TruSolutions'  in-process  research  projects included the research and
development  associated with the 1/2U, 1U, 2U, and 4U server products. The value
of in-process research and development was determined by estimating the costs to
develop the purchased  in-process  technology into commercially viable products,
estimating the resulting net cash flows from such projects and  discounting  the
net cash  flows  back to their  present  value.  The  discount  rate  included a
risk-adjusted discount rate to take into account the uncertainty surrounding the
successful development of the purchased in-process technology. The risk-adjusted
discount  rate applied to the  projects'  cash flows was 45% for the  in-process
technology.  We  believed  that  the  estimated  in-process  technology  amounts
represented fair value and did not exceed the amount a third party would pay for
the projects.  The valuation  included cash inflows from  in-process  technology
through  fiscal 2003 with revenues  commencing in fiscal 2000 for the 1U, 2U and
4U  servers,  and in fiscal  2001 for the 1/2U  server.  Where  appropriate,  we
allocated  anticipated  cash flows from an in-process  research and  development
project to reflect contributions of the core technology.

         OSDN's in-process  research projects included  next-generation web site
management  tools,  online web  applications  and other  technologies  that will
support  our  network  of web  sites.  The  value  of  in-process  research  and
development  was  determined  by  estimating  the costs to develop the purchased
in-process   technology  into  commercially  viable  products,   estimating  the
resulting net cash flows from such projects and  discounting  the net cash flows
back to their present value. The discount rate included a risk-adjusted discount
rate to take into account the uncertainty surrounding the successful development
of the purchased in-process technology.  The risk-adjusted discount rate applied
to the projects' cash flows was 30% for the in-process  technology.  We believed
that the estimated in-process  technology amounts represented fair value and did
not exceed the amount a third party would pay for the  projects.  The  valuation
included  cash  inflows  from  in-process  technology  through  fiscal 2005 with
revenues commencing in fiscal 2001. Where appropriate,  we allocated anticipated
cash  flows  from an  in-process  research  and  development  project to reflect
contributions of the core technology.

                                       19
<PAGE>

Interest and Other Income, Net

         Interest  and  other  income,   net,  includes  income  from  our  cash
investments,  net of other expenses.  Net interest and other income decreased to
$2.2  million for fiscal year 2002 from $6.5  million for fiscal year 2001.  The
decrease was primarily due to a lower cash balance and decreased  returns on our
cash as a result of declining interest rates from prior year. We expect interest
and other  income,  net to decline as our cash balance  decreases to support our
operations.

         Net interest and other income increased to $6.5 million for fiscal year
2001 from $5.6 million in fiscal year 2000.  The increase was  primarily  due to
offsetting the appropriate  amount of operating loss for our Japan joint venture
operations to the minority shareholders and the incremental increase in interest
income earned from our short-term  investments,  partially offset by the payment
of various state taxes.

Income Taxes

         As of July 27,  2002,  we had $226.2  million of 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  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 2021 and fiscal year 2012,  respectively,  to
the extent that they are not utilized.  We have not  recognized any benefit from
these net operating loss carry-forwards because of uncertainty surrounding their
realization.  The amount of net operating  losses that we can utilize is limited
under tax regulations  because we have  experienced a cumulative stock ownership
change of more than 50% over the last three years.

Preferred Stock Dividend

         During  fiscal  2000,  we recorded a preferred  stock  dividend of $4.9
million  representing  the value of the  beneficial  conversion  feature  on the
issuance of  convertible  preferred  stock in  September  1999.  The  beneficial
conversion feature was calculated at the commitment date based on the difference
between the conversion  price of $3.86 per share and the estimated fair value of
the common stock at that date. The amount of the beneficial  conversion  feature
was limited to the amount of the gross  proceeds  received  from the issuance of
convertible preferred stock. No dividends were recorded in fiscal 2002 or 2001.

Liquidity and Capital Resources

         As of July 27, 2002, our principal  sources of liquidity  included cash
and cash  equivalents  of $35.1  million,  and  marketable  securities  of $17.9
million.  Cash and cash equivalents  decreased to $35.1 million at July 27, 2002
from $57.5 million at July 28, 2001.

         For fiscal  year  2002,  we used  $35.1  million in cash for  operating
activities,  compared to $81.6  million for fiscal  year 2001.  Working  capital
decreased to $31.0 million at July 27, 2002 from $62.4 million at July 28, 2001,
primarily  due to using  our cash  and  investments  to  support  our  operating
activities.  The fiscal year 2002 decrease in cash used for operating activities
of $46.5 is  primarily  due to a decrease  in our net loss to $91.0  million for
fiscal  year 2002  compared  to our net loss of $525.3  million  for fiscal year
2001.  This  decrease in net loss was primarily due to our reduction in expenses
through our  restructuring  and exiting the systems and  services  business  and
changing our focus to application software.  Non-cash items consisting primarily
of  depreciation  and  amortization  of goodwill,  non-cash  restructuring,  our
proportionate  loss of our VA Linux  Systems  Japan,  K.K.  ("VA  Linux  Japan")
investment,  gain on the sale of our Japan investment,  impairment of long-lived
assets and amortization of deferred  compensation  were $52.4 million and $453.7
million for fiscal years 2002 and 2001, respectively. Other operating activities
during fiscal year 2002 consisted of decreases in accounts receivable,  accounts
payable, inventories, prepaid expenses and other assets, accrued liabilities and
other long-term  liabilities,  and an increase in  restructuring  accruals.  The
decrease in all  accounts,  with the  exception of  restructuring,  reflects our
lower revenue and the exit from the systems business.

         Cash and cash  equivalents  decreased to $57.5 million at July 28, 2001
from  $121.6  million  at July 28,  2000.  For fiscal  year 2001,  we used $81.6
million in cash for operating  activities,  compared to $24.6 million for fiscal
year 2000.  Working  capital  decreased  to $62.4  million at July 28, 2001 from
$169.9 million at July 28, 2000, primarily due to using our cash and investments
to support our operating activities.  The increase in net cash used in operating
activities  was  primarily  due to the  increase in  operating  losses to $525.3
million  in fiscal  year 2001,  compared  to our net loss of $89.8  million  for
fiscal year 2000.  Non-cash  items  consisting  primarily  of  depreciation  and
amortization of goodwill, bad debt and inventory provisions, loss on disposal of
assets,  amortization  of  deferred  compensation,  non-cash  restructuring  and
impairment of long-lived assets were $453.7 million and $72.9 million for fiscal
years 2001 and 2000, respectively. Other operating activities during fiscal year
2001  consisted  of  an  increase  in  inventories,  prepaid  expenses,

                                       20
<PAGE>

accrued restructuring liabilities, other accrued liabilities and other long-term
liabilities offset by decreases in accounts receivable and accounts payable.

         For fiscal year 2002,  we  received  $11.3  million in cash  related to
investing  activities  primarily from the cash proceeds  received on the partial
sale of our VA  Linux  Japan  investment  and the  sale/purchase  of  marketable
securities. In fiscal year 2001, we received $17.9 million in cash for investing
activities  primarily  from the sales of  marketable  securities  and  partially
offset by the  purchase  of  computer  and  facilities-related  assets and other
long-lived assets and for acquisition-related  activities.  In fiscal year 2000,
we used $13.2  million in cash for  investing  activities  due to  purchases  of
short-term  investments  of $52.4  million,  capital  equipment of $7.6 million,
offset by the net amount of cash acquired as a result of  acquisitions  of $46.9
million.

         For fiscal years 2002,  2001 and 2000, we generated $0.1 million,  $1.6
million and $143.0 million in cash from financing activities,  respectively.  In
fiscal years 2002 and 2001,  cash  provided by financing  activities  was due to
proceeds from the issuance of common stock to our employees, partially offset by
payments  on notes  payable.  Fiscal year 2000  increase in cash from  financing
activities  reflects the  proceeds  from our initial  public  offering of $141.5
million.

         For the fiscal year 2002,  exchange rate changes had a positive  effect
on cash and cash equivalents of $1.4 million. For the fiscal year 2001, exchange
rate changes had a negative effect on cash and cash equivalents of $1.5 million.
There was no effect on cash from exchange rate changes in fiscal year 2000.

         As of July 27, 2002, we had outstanding  letters of credit issued under
the Line of Credit of  approximately  $1.4  million,  primarily  related  to the
corporate  facility  lease.  The  amount  related  to this  letter  of credit is
recorded in the "Restricted cash" section of the consolidated balance sheet.

         Future  payments  due under debt and lease  obligations  as of July 27,
2002 are as follows (in thousands):

                                                                   Obligations
                                                                      Under
                                                  Obligations    Non-cancelable
                                                 Under Capital      Operating
   Year Ending July 27, 2002                         Leases           Leases
   -------------------------                         ------           ------
   2003...........................................  $    42         $  4,208
   2004...........................................       --            4,428
   2005...........................................       --            4,556
   2006...........................................       --            3,632
   2007...........................................       --            3,511
   Thereafter.....................................       --           10,521
                                                    -------        ---------
                                                    $    42        $  30,856
                                                    =======        =========

         Our  liquidity  and capital  requirements  depend on numerous  factors,
including market acceptance of our application software products,  the resources
we devote to  developing,  marketing,  selling and  supporting  our  application
software  products,  the  timing  and  expense  associated  with  expanding  our
distribution  channels,  potential  acquisitions and other factors. We expect to
devote capital  resources to continue our research and development  efforts,  to
invest in our sales, support,  marketing and product development  organizations,
to enhance and introduce  marketing  programs,  and for other general  corporate
activities.  We believe that our existing  cash  balances  will be sufficient to
fund our operations through fiscal 2003 under our current business strategy.

                                       21
<PAGE>

Financial Risk Management

         As a primarily  US-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.

Critical Accounting Policies

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

Revenue Recognition

         During  the  fourth  quarter  of fiscal  2001 and the first  quarter of
fiscal 2002,  we announced  and executed our plan to exit from our systems,  and
professional  services and Linux software  engineering  services  businesses and
pursue the application software business.

         As  discussed  in Note 2 of the  notes  to the  consolidated  financial
statements,  our revenue  recognition  policy  related to the software  business
follows American Institute of Certified Public Accountants  ("AICPA")  Statement
of Position ("SOP") 97-2,  "Software Revenue  Recognition," as amended,  and was
implemented in the fourth quarter of fiscal 2001. Revenues from software license
agreements are recognized  when objective,  persuasive  evidence of an agreement
exists, delivery of the product has occurred,  provided the arrangement does not
require  significant  customization  to  the  software,  the  fee  is  fixed  or
determinable and collectibility is reasonably assured.

         We use  the  residual  method  to  recognize  revenues  from  perpetual
licenses.  Under the residual method, the fair value of the undelivered elements
is deferred and the remaining  portion of the  arrangement  fee is recognized as
revenue.  If  objective  evidence  of the fair value of one or more  undelivered
elements does not exist,  revenues are deferred and recognized  when delivery of
those elements occur or when fair value can be established.  A typical perpetual
license agreement may include professional  services,  maintenance and training.
Revenue from  non-essential  professional  services is recognized as the work is
performed based on fair value, based on published  professional  services rates.
When an  agreement  includes  professional  services  that  are  significant  or
essential to the  functionality  of the  software,  we use  contract  accounting
percentage  completion for the entire  arrangement,  including  license fees. We
recognize software maintenance revenues ratably over the term of the maintenance
period (generally one year).  Software maintenance  agreements provide technical
support    and   the    right   to    unspecified    updates/upgrades    on   an
if-and-when-available  basis. Fair value for the ongoing maintenance obligations
are based upon separate sales or  maintenance  sold to customers or upon renewal
rates  quoted in the  contract,  when these  exist.  We record the  unrecognized
portion of  amounts  paid in advance  for  licenses  and  services  as  deferred
revenue.

         For term  arrangements,  which include licenses and bundled PCS, we use
ratable  revenue  recognition.  Under  ratable  revenue  recognition,  the  only
undelivered  element is PCS and objective evidence of fair value of PCS does not
exist.  If the  term  license  agreement  includes  multiple  elements  (such as
training and non-essential  professional services),  then we defer revenue until
all  elements  except  PCS are  delivered,  at which time we  recognize  revenue
ratably over the remaining contract term.

         If the fee due from the  customer  is not  fixed  or  determinable,  we
recognize  revenues at the earlier of the due date or when cash is received from
the customer,  assuming all other revenue recognition criteria have been met. We
consider all arrangements  with payment terms longer than normal not to be fixed
or determinable.

                                       22
<PAGE>

         Advertising  revenues are derived from the sale of advertising space on
our various websites. We recognize advertising revenues over the period in which
the  advertisements  are  displayed,  provided that no  significant  obligations
remain and collection of the receivable is probable.  Our obligations  typically
include  guarantees  of  a  minimum  number  of  "impressions"  (times  that  an
advertisement  is viewed by users of our online services over a specified period
of time). To the extent that minimum  guaranteed  impressions are not met, we do
not recognize the  corresponding  revenues until the guaranteed  impressions are
achieved.  We record barter revenue  transactions  at their estimated fair value
based on our historical  experience of selling  similar  advertising for cash in
accordance  with  EITF  Issue  99-17,   "Accounting   for   Advertising   Barter
Transactions."  We broadcast  banner  advertising in exchange for similar banner
advertising on third party websites.

         E-commerce  revenues are derived from the online sale of consumer goods
and digital animations.  We recognize E-commerce revenues in accordance with SEC
Staff  Accounting  Bulletin ("SAB") No. 101,  "Revenue  Recognition in Financial
Statements."  Under SAB 101,  product  revenues are recognized  when  persuasive
evidence of an  arrangement  exists,  delivery has  occurred,  the sale price is
fixed and determinable, and collectibility is reasonably assured. In general, we
recognize e-commerce revenue upon the shipment of goods. We do grant customers a
right to return  products and have recorded an allowance for such returns.  This
allowance is a management estimate based on historical return rates.

         From inception through June 27, 2001, we were a provider of Linux-based
computer systems and services,  Internet infrastructure and Open Source software
services and OSDN.

         Our revenue  recognition  policy related to our former hardware systems
business follows SEC SAB No. 101, "Revenue Recognition in Financial Statements."
Under SAB No. 101, we recognized  product  revenues from the sale of Linux-based
servers,  components,  and  desktop  computers  when  persuasive  evidence of an
arrangement  existed,  delivery  had  occurred,  the  sales  price was fixed and
determinable  and  collectibility  was  reasonably   assured.   In  general,  we
recognized  product  revenue  upon  shipment  of the goods and did not grant our
customers any rights to return  products.  We recognized  revenues from customer
support  services,  including  on-site  maintenance  and technical  support on a
pro-rata  basis over the term of the related  service  agreement.  We recognized
revenues from professional  service contracts upon completion of the project, or
using the  percentage  of  completion  method of the project where project costs
could be  reasonably  estimated.  We recorded  any  payments  received  prior to
revenue recognition as deferred revenue.

Amortization of Goodwill and Intangibles

         As  discussed  in Note 2 of the  notes  to the  condensed  consolidated
financial  statements,  effective  July 29,  2001,  we  adopted  SFAS  No.  142,
"Goodwill  and Other  Intangible  assets."  Upon adoption of SFAS No. 142, we no
longer  amortize  goodwill,  and thereby  eliminated  goodwill  amortization  of
approximately $1.3 million based on anticipated goodwill amortization for fiscal
2002.  Pursuant to SFAS No. 142, we test goodwill for  impairment.  SFAS No. 142
requires that goodwill be tested for  impairment at the  "reporting  unit level"
("Reporting  Unit") at least annually and more frequently upon the occurrence of
certain events, as defined by SFAS 142. We have determined that we have only one
Reporting  Unit,  specifically  the license,  implementation  and support of our
software  applications.  We tested  goodwill for  impairment  during the quarter
ended July 27, 2002.  First, we tested to determine if the carrying value of our
net assets  exceeded their "fair value",  which would indicate that goodwill may
be impaired.  Based on this test, we determined that goodwill could be impaired.
Therefore we compared the "implied  fair value" of the  goodwill,  as defined by
SFAS 142, to our carrying  amount to determine if there was an impairment  loss.
As a result of the  impairment  test, we determined  that the carrying value was
impaired and we recorded an impairment loss of $3.6 million.

         Other  intangible  assets are amortized on a  straight-line  basis over
three  to  five  years.  We  continually   evaluate  whether  later  events  and
circumstances have occurred that indicate the remaining estimated useful life of
these intangible  assets may not be recoverable.  When factors indicate that the
intangible  assets  should  be  evaluated  for  possible  impairment,  we use an
estimate  of the related  business  segment's  undiscounted  net income over the
remaining  useful life of the  intangible  assets in measuring  whether they are
recoverable.  We performed an  evaluation  on the  intangible  assets during the
quarter ended July 27, 2002. As a result of this evaluation,  we determined that
the  carrying  value was  impaired  and we recorded an  impairment  loss of $8.6
million.  The write  off of  intangible  assets  will  result  in a  savings  in
amortization expense of $8.6 million in fiscal 2003.

Restructuring Costs and Other Special Charges

         As  discussed  in  Note  4  of  notes  to  the  consolidated  financial
statements,  we have recorded  significant  restructuring  charges in connection
with exiting our managed services,  systems, and professional services and Linux
software  engineering  services  businesses

                                       23
<PAGE>

initiated in the third and fourth  quarters of fiscal 2001 and the first quarter
of fiscal 2002, respectively.  A significant portion of these charges related to
excess facilities  primarily from non-cancelable  leases (payments which, unless
we sublet  completely,  will continue  until fiscal 2010) or other costs for the
abandonment or disposal of property and equipment. In addition, during the third
quarter of fiscal 2002, we recorded additional  restructuring charges associated
with the exiting of a sublease  agreement.  Estimates  related to sublease costs
and income are based on assumptions  regarding the period required to locate and
contract  with  suitable  sub-lessees  and sublease  rates which can be achieved
using market trend  information  analyses  provided by a commercial  real estate
brokerage firm retained by us. We review these  estimates each reporting  period
and to the extent  that these  assumptions  change due to changes in the market,
the ultimate  restructuring  expenses for these excess  facilities could vary by
material amounts.  Savings related to fiscal year 2003 as a result of idle space
charges  taken in fiscal year 2002 totaled $2.7  million.  Should the Company be
unable to sublet the idle facilities under the current  assumptions,  additional
idle space charges may be recorded in future periods for a maximum of up to $6.5
million.  Further,  during  the  fourth  quarter  of fiscal  2002,  we  recorded
restructuring charges totaling a net credit amount of approximately $0.5 million
in  connection  with a plan to reduce our  general and  administrative  overhead
costs.

         Income Taxes

         We  are   required  to  estimate  our  income  taxes  in  each  of  the
jurisdictions  in which we  operate  as part of the  process  in  preparing  our
consolidated  financial  statements.  This process  involves us  estimating  our
actual  current tax  exposure  together  with  assessing  temporary  differences
resulting from differing  treatment of items, such as deferred revenue,  for tax
and  accounting  purposes.  These  differences  result in deferred tax assets or
liabilities. We must then assess the likelihood that our net deferred tax assets
will be recovered  from future  taxable income and to the extent that we believe
recovery is not likely, we must establish a valuation  allowance.  While we have
considered  future  taxable  income  in  assessing  the need  for the  valuation
allowance,  in the  event  that we were to  determine  that we  would be able to
realize  our  deferred  tax assets in the  future in excess of its net  recorded
amount, an adjustment to the deferred tax asset would be made, increasing income
in the period in which such determination was made.

         Contingencies and Litigation

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

         Recent Accounting Pronouncements

         Effective  July 29, 2001, the Company  adopted SFAS No. 142,  "Goodwill
and Other  Intangible  assets."  Upon  adoption of SFAS No. 142,  the Company no
longer  amortizes  goodwill  and thereby  eliminated  goodwill  amortization  of
approximately $1.3 million anticipated goodwill amortization for fiscal 2002. We
tested  goodwill and intangible  assets for impairment  during the quarter ended
July 27, 2002.  First,  we determined if our carrying  amount exceeded our "fair
value",  which would indicate that goodwill may be impaired.  We determined that
goodwill and intangible assets were impaired, therefore we compared the "implied
fair value" of the assets,  as defined by SFAS 142,  to our  carrying  amount to
determine if there was an impairment  loss. As a result of the impairment  test,
we determined that the carrying value was impaired and we recorded an impairment
loss of $12.2 million.

         In August  2001,  the FASB issued SFAS No. 143,  "Accounting  for Asset
Retirement  Obligations."  SFAS No. 143  establishes  accounting  standards  for
recognition and measurement of an asset retirement  obligation and an associated
asset retirement cost and is effective for fiscal years beginning after June 15,
2002.  The Company is currently  evaluating  the potential  impact,  if any, the
adoption of SFAS No. 143 will have on its future financial  position and results
of operations.

         In August  2001,  the FASB  issued SFAS No.  144,  "Accounting  for the
Impairment  or  Disposal  of  Long-Lived   Assets,"  which  addresses  financial
accounting  and reporting for the  impairment or disposal of long-lived  assets.
While SFAS No. 144 supersedes  SFAS No. 121,  "Accounting  for the Impairment of
Long-Lived  Assets and for Long-Lived Assets to Be Disposed Of," it retains many
of the fundamental  provisions of SFAS No. 121. SFAS No. 144 also supersedes the
accounting  and reporting  provisions of APB No. 30,  "Reporting  the Results of
Operations--Reporting  the Effects of  Disposal of a Segment of a Business,  and
Extraordinary,  Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business.  However, it retains the requirement in
APB No.  30 to  separately  report  discontinued  operations  and  extends  that
reporting to a component of an entity that either has been disposed of (by sale,
abandonment,  or in a distribution to owners) or is classified as held for sale.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and
interim  periods within those fiscal years.  The adoption of SFAS No. 144 is not
expected to have a material effect on our consolidated financial statements.

                                       24
<PAGE>

         In November 2001, the EITF reached a consensus on EITF Issue No. 01-09,
"Accounting for  Consideration  Given by a Vendor to a Customer or a Reseller of
the Vendor's  Products," which is a codification of EITF Issue No. 00-14,  00-22
and 00-25. This issue presumes that consideration from a vendor to a customer or
reseller of the vendor's products to be a reduction of the selling prices of the
vendor's  products and,  therefore,  should be  characterized  as a reduction of
revenues  when  recognized  in the vendor's  income  statement and could lead to
negative  revenues under certain  circumstances.  Revenue  reduction is required
unless  consideration  relates  to  a  separate  identifiable  benefit  and  the
benefit's fair value can be established.  EITF No. 01-09 is effective for fiscal
years  beginning after December 15, 2001 and interim periods within those fiscal
years.  The adoption of EITF No. 01-9 is not expected to have a material  effect
on our consolidated financial statements.

         In November 2001, the FASB discussed  Topic D-103,  recharacterized  as
EITF Issue No.  01-14,  "Income  Statement  Characterization  of  Reimbursements
Received  for   "Out-of-Pocket"   Expenses  Incurred."  This  issue  deals  with
classification in the income statement of incidental expenses, which in practice
are commonly referred to as "out-of-pocket" expenses,  incurred by entities that
provide  services as part of their central  ongoing  operations.  The Task Force
reached a consensus  that  reimbursements  received for  out-of-pocket  expenses
incurred should be characterized as revenue in the income statement.  This issue
is  effective  for fiscal years  beginning  after  December  15,  2001.  We have
recorded all "out-of-pocket" expenses for fiscal 2002 as revenue.  Out-of-pocket
expenses for all periods presented were immaterial.

         In June 2002,  the FASB  issued  SFAS No.  146,  "Accounting  for Costs
Associated with Exit or Disposal  Activities,"  which  addresses  accounting for
restructuring  and similar costs.  SFAS No. 146 supercedes  previous  accounting
guidance, principally EITF issue No. 94-3. We are required to adopt SFAS No. 146
for  restructuring  activities  initiated  after December 31, 2002. SFAS No. 146
requires  that the  liability  for  costs  associated  with an exit or  disposal
activity be  recognized  when the  liability  is  incurred.  Under EITF 94-3,  a
liability  for an  exit  cost  was  recognized  at  the  date  of the  company's
commitment  to an exit plan.  SFAS No. 146 also  established  that the liability
should initially be measured and recorded at fair value.  Accordingly,  SFAS 146
may affect the timing of recognizing future  restructuring plans. If we continue
to record significant  restructuring charges in the future, the adoption of SFAS
No. 146 could have a significant impact on our results of operations.

Risk Factors

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

Risks Related To Our Software Business

BECAUSE THE MARKET FOR DEVELOPMENT  INTELLIGENCE  (DI)  APPLICATION  SOFTWARE IS
NEW, WE DO NOT KNOW  WHETHER  EXISTING  AND  POTENTIAL  CUSTOMERS  WILL  LICENSE
SOURCEFORGE IN SUFFICIENT QUANTITY FOR US TO ACHIEVE  PROFITABILITY.  The market
for  Development  Intelligence  (DI) software is new and rapidly  evolving.  Our
future growth and financial  performance will depend on broad market  acceptance
of  SourceForge,   our  Development  Intelligence  application.  The  number  of
customers using  SourceForge is still  relatively  small. We expect that we will
continue to need  intensive  marketing and sales efforts to educate  prospective
clients  about the uses and  benefits  of  SourceForge.  Various  factors  could
inhibit  the  growth of the  market and market  acceptance  of  SourceForge.  In
particular, potential customers may be unwilling to make the significant capital
investment needed to license  SourceForge and retrain their software  developers
to develop software using our product.  Many of our customers have licensed only
small  quantities of  SourceForge,  and these or new customers may decide not to
broadly  implement  or license  additional  copies.  We cannot be certain that a
viable market for SourceForge will emerge, or if it does emerge, that it will be
sustainable. If a sustainable viable market of SourceForge fails to emerge, this
would  have a  significant,  adverse  effect  upon our  business  and  operating
results.

WE ARE CONCENTRATING OUR SALES EFFORTS ON SOURCEFORGE,  SO IF THIS SOFTWARE DOES
NOT ACHIEVE  MARKET  ACCEPTANCE  WE ARE LIKELY TO  EXPERIENCE  LARGER  OPERATING
LOSSES.  We are directing the majority of our product  research and  development
efforts to SourceForge.  The failure to achieve  widespread market acceptance of
SourceForge  would  adversely  affect our business and  operating  results.  The
success of SourceForge is difficult to predict because SourceForge  represents a
relatively  new area of business for us. There can be no assurance  that we will
be successful in marketing,

                                       25
<PAGE>

upgrading  and  supporting  SourceForge.  Our  failure to do so could  adversely
affect our business and operating results.

IF WE DO NOT DEVELOP AND ENHANCE  SOURCEFORGE  TO KEEP PACE WITH  TECHNOLOGICAL,
MARKET,  AND INDUSTRY  CHANGES,  OUR REVENUES MAY NOT GROW. Rapid  technological
advances,   changes  in  customer   requirements,   and   frequent  new  product
introductions and enhancements  characterize the software industry generally. We
must respond rapidly to developments  related to hardware  platforms,  operating
systems,  and software  development tools. These developments will require us to
make substantial  product-development  investments.  If we fail to anticipate or
respond adequately to technology developments,  industry standards, or practices
and customer requirements, or if we experience any significant delays in product
development,  introduction,  or integration,  SourceForge may become obsolete or
unmarketable,  our ability to compete may be impaired,  and our revenues may not
grow or may decline.  We believe our continued success will become  increasingly
dependent on our ability to:

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

o        use  the  latest   technologies   to  continue  to  support   Web-based
         Development Intelligence; and

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

IF  WE  FAIL  TO  ATTRACT  AND  RETAIN  LARGER  CORPORATE  AND  ENTERPRISE-LEVEL
CUSTOMERS,  OUR REVENUES WILL  DECLINE.  We have focused our sales and marketing
efforts upon larger corporate and enterprise-level  customers. This strategy may
fail to generate  sufficient revenue to offset the substantial demands that this
strategy  will place on our  business,  in  particular  the longer sales cycles,
higher  levels of service and  support and volume  pricing and terms that larger
corporate  and  enterprise  accounts  often  demand.  In addition,  these larger
customers generally have significant internal financial and personnel resources.
As a result,  rather than license SourceForge,  our target customers may develop
Development Intelligence  applications internally,  including ad hoc development
of Development Intelligence applications based on open source code. A failure to
successfully obtain revenues from larger corporate or enterprise-level customers
will materially and adversely affect our operations.

OUR PRODUCT HAS A LONG AND UNPREDICTABLE  SALES CYCLE,  WHICH MAKES IT DIFFICULT
TO  FORECAST  OUR FUTURE  RESULTS  AND MAY CAUSE OUR  OPERATING  RESULTS TO VARY
SIGNIFICANTLY.  The period between initial  contact with a prospective  customer
and the  licensing of our software  varies and can range from three to more than
twelve  months.  Additionally,  our sales cycle is long and complex as customers
consider a number of factors before committing to purchase SourceForge.  Factors
considered by customers when evaluating  SourceForge  include product  benefits,
cost and time of  implementation,  and the ability to operate with  existing and
future computer systems. Customer evaluation, purchasing and budgeting processes
vary  significantly  from company to company.  As a result, we spend significant
time and resources informing  prospective customers about our software products,
which may not result in a completed  transaction  and may negatively  impact our
operating  margins.  Even  if  SourceForge  has  been  chosen  by the  customer,
completion of the  transaction  is subject to a number of  contingencies,  which
make our quarterly revenues difficult to forecast.  These contingencies  include
but are not limited to:

o        Because  the   licensing   of  our   software   products  is  often  an
         enterprise-wide  decision by our customers  that involves many factors,
         our  ability to license  our  product may be impacted by changes in the
         strategic  importance of software projects to our customers,  budgetary
         constraints or changes in customer personnel.

o        A customer's  internal approval and expenditure  authorization  process
         can be difficult and time  consuming.  Delays in approvals,  even after
         selection  of a vendor,  could impact the timing and amount of revenues
         recognized in a quarterly period.

o        Changes in our sales incentive plans may have an  unpredictable  impact
         on our sales cycle and contracting activities.

o        The number,  timing and  significance  of  enhancements to our software
         products and the introduction of new software by our competitors and us
         may affect customer-purchasing decisions.

CONTRACTUAL  ISSUES MAY ARISE DURING THE NEGOTIATION  PROCESS THAT MAY DELAY THE
ANTICIPATED  CLOSURE OF THE TRANSACTION AND OUR ABILITY TO RECOGNIZE  REVENUE AS
ANTICIPATED.   Because  we  sell  enterprise-wide   solutions,  the  process  of
contractual negotiation is becoming more protracted and critical. The additional
time  needed  to  negotiate  mutually  acceptable  terms  that  culminate  in an
agreement to license our products could extend the sale cycle.  Several  factors
may also require us to defer  recognition  of license  revenue for a significant
period of time after  entering  into a license  agreement,  including  instances
where we are  required  to deliver  either  unspecified  additional  products or
specified upgrades for which we do not have  vendor-specific  objective evidence
of fair value. While we have a standard software license agreement that provides
for revenue recognition  provided that delivery has taken place,  collectibility
from the  customer is  reasonably  assured and  assuming no  significant  future
obligations  or customer  acceptance  rights exist,  customer  negotiations  and
revisions to these terms could  impact our ability to recognize  revenues at the
time of delivery.

                                       26
<PAGE>

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

IF WE DO NOT CONTINUE TO RECEIVE REPEAT  BUSINESS FROM EXISTING  CUSTOMERS,  OUR
REVENUE WILL SUFFER.  We generate a significant  amount of our software  license
revenues  from  existing  customers.  Most of our  current  customers  initially
purchase  a  limited  number  of  licenses  as  they  implement  and  adopt  our
Development  Intelligence  application.  Even if the customer  successfully uses
SourceForge, customers may not purchase additional licenses to expand the use of
our product.  Purchases of expanded  licenses by these  customers will depend on
their success in deploying SourceForge,  their satisfaction with our product and
support  services  and  their  use of  competitive  alternatives.  A  customer's
decision to widely deploy SourceForge and purchase  additional licenses may also
be affected by factors  that are outside of our control or which are not related
to  our  product  or  services.  In  addition,  as we  deploy  new  versions  of
SourceForge,  or introduce new products,  our current  customers may not require
the  functionality of our new versions or products and may decide not to license
these products.

IF WE  FAIL  TO  MAINTAIN  OUR  STRATEGIC  RELATIONSHIP  WITH  IBM,  THE  MARKET
ACCEPTANCE OF OUR PRODUCTS AND OUR FINANCIAL  PERFORMANCE  MAY SUFFER.  To date,
the majority of our SourceForge  revenue has come from our direct sales efforts.
To offer products and services to a larger customer base, our direct sales force
depends on strategic  relationships  and marketing  alliances to obtain customer
leads,  referrals  and  distribution.  If we are unable to maintain our existing
strategic  relationship  with IBM,  our  ability to  increase  our sales will be
harmed. We would also lose anticipated  customer  introductions and co-marketing
benefits.  In addition,  IBM could  terminate its  relationship  with us, pursue
other relationships,  or attempt to develop or acquire products or services that
compete with our products and  services.  Even if we succeed in  maintaining  or
expanding  our  relationship  with  IBM,  the  relationship  may not  result  in
additional customers or revenues.

IF WE ARE UNABLE TO PROVIDE HIGH-QUALITY  CUSTOMER SUPPORT AND SERVICES, WE WILL
NOT MEET THE NEEDS OF OUR CUSTOMERS AND REVENUE MAY DECLINE. For our business to
succeed,   we  must   effectively   market  and  provide  customer  support  for
SourceForge.  If we do not develop our customer support organization to meet the
needs or  expectations  of customers,  we face an increased  risk that customers
will purchase  software from other providers or forgo  deployment of Development
Intelligence  applications entirely, which would materially and adversely affect
our operations.

INCREASED  UTILIZATION AND COSTS OF OUR TECHNICAL SUPPORT SERVICES MAY ADVERSELY
AFFECT OUR  FINANCIAL  RESULTS.  Like many  companies in the software  industry,
technical  support  costs  will  likely  comprise a  significant  portion of our
operating  costs and expenses.  Over the short term, we may be unable to respond
to fluctuations in customer demand for support  services.  We also may be unable
to modify the format of our support  services to compete with changes in support
services  provided by competitors.  Further,  customer demand for these services
could cause  increases in the costs of  providing  such  services and  adversely
affect our operating results.

Risks Related To Competition

IF WE DO NOT EFFECTIVELY COMPETE WITH NEW AND EXISTING COMPETITORS, OUR REVENUES
AND  OPERATING  MARGINS  WILL  DECLINE.  We  believe  that  the  newly  emerging
Development Intelligence software market is fragmented,  subject to rapid change
and highly  sensitive  to new product  introductions  and  marketing  efforts by
industry  participants.  Competition  in  related  markets  is  intense.  If our
products gain market acceptance,  we expect the competition to rapidly intensify
as new competitors enter the Development Intelligence software marketplace.  Our
potential  competitors  include entrenched  companies in closely related markets
who may  choose  to enter  and focus on the  Development  Intelligence  software
marketplace.  Although we do not believe  that we presently  have an  entrenched
competitor,  we expect  competition to intensify in the future if the market for
Development  Intelligence  applications  continues  to  expand.  Many  of  these
potential  competitors  are much larger  than we are and may have  significantly
more resources and more experience.  Our potential competitors include providers
of software  and related  services as well as  providers  of hosted  application
services.  Our potential competitors vary in size, scope of services offered and
platforms supported. Many of our competitors have longer operating histories and
greater  financial,  technical,  sales and  marketing  resources  than we do. We
cannot  guarantee that we will be able to compete  successfully  against current
and future  competitors or that  competitive  pressures will not result in price
reductions, reduced operating margins and loss of market share, any one of which
could seriously harm our business.

Because individual product sales often lead to a broader customer  relationship,
our products must be able to successfully  compete with and complement  numerous
competitors'  current and  potential  offerings.  Moreover,  we may be forced to
compete with our strategic

                                       27
<PAGE>

partners,  and potential strategic  partners,  and this may adversely impact our
relationship with an individual partner or a number of partners.

ONLINE  COMPETITION  IS  INTENSE.  OUR  FAILURE  TO COMPETE  SUCCESSFULLY  COULD
ADVERSELY  AFFECT OUR REVENUE AND  FINANCIAL  RESULTS.  The market for  Internet
content and services is intensely  competitive and rapidly  evolving.  It is not
difficult  to enter this market and current and new  competitors  can launch new
Internet sites at relatively low cost. We derive revenue from  advertising,  for
which we compete with various media including newspapers,  radio,  magazines and
various  Internet sites. We cannot assure you that we will 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 effected.

Risks Related To Our Financial Results

IT IS  DIFFICULT  TO EVALUATE  OUR  BUSINESS  BECAUSE WE HAVE A LIMITED  HISTORY
OPERATING AS A PROVIDER OF SOURCEFORGE.  We have a brief operating  history as a
provider of our SourceForge commercial Development Intelligence application.  As
a result, our historical financial information is of limited value in projecting
future operating results. On June 27, 2001, we exited our hardware business.  In
the first  quarter of our fiscal year 2002,  we made the  strategic  decision to
exit,  and exited,  the  professional  services and Linux  software  engineering
services  fields to focus solely on  SourceForge.  These changes  required us to
adjust  our  business  processes  and make a  number  of  significant  personnel
changes,  including  changes and  additions to our  engineering  and  management
teams.  Therefore,  in  evaluating  our business you must consider the risks and
difficulties  frequently encountered by early stage companies in new and rapidly
evolving  markets,  including those discussed within these "Risk Factors" and in
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."

IF WE FAIL TO ADEQUATELY  MONITOR AND MINIMIZE OUR USE OF EXISTING  CASH, WE MAY
NEED ADDITIONAL  CAPITAL TO FUND CONTINUED  OPERATIONS  BEYOND FISCAL YEAR 2003.
Since becoming a public  company,  we have  experienced  negative cash flow from
operations  and expect to experience  negative cash flow from  operations for at
least the foreseeable future. Unless we monitor and minimize the level of use of
our  existing  cash,  cash   equivalents,   marketable   securities  and  credit
facilities,  we may  require  additional  capital to fund  continued  operations
beyond our fiscal year 2003. 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  continued  slowdown in  technology  spending as
compared to the general economy,  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.

BECAUSE WE HAVE A LIMITED  OPERATING  HISTORY  SELLING  SOURCEFORGE,  WE MAY NOT
ACCURATELY  FORECAST  OUR  SALES  AND  REVENUES,   WHICH  WILL  CAUSE  QUARTERLY
FLUCTUATIONS  IN OUR NET  REVENUES  AND  RESULTS OF  OPERATIONS.  Our ability to
accurately  forecast our  quarterly  sales and revenue is made  difficult by our
limited  operating  history with our new business  direction  and the  continued
slowdown in technology  spending.  In addition,  most of our operating costs are
fixed and based on our revenue expectations.  Therefore,  if we have a shortfall
in  revenues,  we may be unable to reduce our expenses  quickly  enough to avoid
lower quarterly operating results.

DESPITE  REDUCTIONS IN THE SIZE OF OUR WORKFORCE,  OUR BUSINESS MAY FAIL TO GROW
RAPIDLY ENOUGH TO OFFSET OUR ONGOING OPERATING EXPENSES.  In February,  June and
August 2001, we  substantially  reduced our  workforce  such that as of July 28,
2001 we had 286  employees,  down from 551  employees  in January  2001.  During
fiscal 2002, we further  reduced our workforce  such that as of July 27, 2002 we
had 144 employees.  Nevertheless, despite these reductions in our workforce, our
business  may fail to grow  rapidly  enough  to  offset  our  ongoing  operating
expenses. As a result, our quarterly operating results could fluctuate, and such
fluctuation could adversely affect the market price of our common stock.

                                       28
<PAGE>

OUR QUARTERLY NET REVENUES AND RESULTS OF OPERATIONS MAY VARY  SIGNIFICANTLY  IN
THE FUTURE DUE TO A NUMBER OF ADDITIONAL  FACTORS,  MANY OF WHICH ARE OUTSIDE OF
OUR CONTROL.  The primary  factors that may cause our quarterly net revenues and
results of operations to fluctuate include the following:

         o        the acceptance of our products by the marketplace;

         o        the continued slowdown in technology  spending and unfavorable
                  economic conditions in the technology industry;

         o        demand for and market acceptance of our software and services;

         o        reductions  in the sales  price of our  software  or  software
                  offered by our competitors;

         o        our ability to develop,  introduce  and market new versions of
                  our  software  and  product  enhancements  that meet  customer
                  requirements in a timely manner.

         o        the discretionary nature of our customers' purchase and budget
                  cycles;

         o        difficulty predicting the size and timing of customer orders;

         o        long sales cycles;

         o        introduction   or   enhancement   of  our   products   or  our
                  competitors' products;

         o        changes in our pricing policies or the pricing policies of our
                  competitors;

         o        an increase in our operating costs;

         o        whether we are able to expand our sales and marketing programs
                  for our software products;

         o        the level of sales incentives for our direct sales force;

         o        changes in accounting pronouncements applicable to us;

         o        the timing of  announcements  and  releases of new or enhanced
                  versions of our products and product upgrades;

         o        the  market's  transition  between new releases of third party
                  operating systems on which our software products run; and

         o        possibility that software  development delays will result from
                  our   outsourcing   of  certain   SourceForge   research   and
                  development efforts to CSS, an independent  contractor located
                  primarily in India,  given that unstable  relations  currently
                  exist between India and Pakistan.

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

Factors that may decrease our online revenues include:

         o        decreased demand for advertising;

         o        the addition or loss of  advertisers,  and the size and timing
                  of the advertising purchases of individual advertisers;

         o        trends in Internet use and advertising;

         o        technical difficulties or system downtime; and

         o        economic conditions specific to advertising,  the Internet and
                  Internet media.

Accordingly,  you  should  not rely on the  results  of any past  periods  as an
indication of our future performance.

WE HAVE A HISTORY OF LOSSES AND EXPECT TO  CONTINUE  TO INCUR NET LOSSES FOR THE
FORESEEABLE  FUTURE.  We incurred a loss of $18.8  million for our fiscal fourth
quarter  ended  July  27,  2002,  primarily  due to the  continued  slowdown  in
technology spending as compared to the general economy,  restructuring  charges,
long-lived asset  impairments and our ramp up of our software  business,  and we
had an  accumulated  deficit of $725.9 million as of July 27, 2002. We expect to
continue to incur  significant  product  development,  sales and  marketing  and
administrative  expenses. We expect to continue to incur net losses for at least
the foreseeable  future. If we do achieve  profitability,  we may not be able to
sustain it. Failure to become and remain profitable may materially and adversely
affect the market price of our common stock and our ability to raise capital and
continue operations.

                                       29
<PAGE>

FUTURE GUIDELINES AND  INTERPRETATIONS  REGARDING  SOFTWARE REVENUE  RECOGNITION
COULD HAVE A MATERIAL IMPACT ON OUR BUSINESS.  In October 1997, the AICPA issued
SOP No. 97-2,  "Software Revenue Recognition" which superceded SOP No. 91-1. SOP
No.  97-2,  as amended by SOP No. 98-4 and SOP No.  98-9,  provides  guidance on
applying   generally  accepted   accounting   principles  for  software  revenue
recognition transactions. In December 1999, the SEC issued SAB No. 101, "Revenue
Recognition in Financial Statements," which provides further revenue recognition
guidance.  We adopted SAB No. 101, as amended,  and SOP No. 97-2,  as amended by
SOP No. 98-4 and SOP No. 98-9 in the fourth  quarter of fiscal 2001 as required.
The adoption of SAB No. 101 did not have a material  effect on our  consolidated
financial  position,  results  of  operations  or  cash  flows.  The  accounting
profession  continues to review  certain  provisions of SOP No. 97-2 and SAB No.
101 with the  objective of providing  additional  guidance on  implementing  its
provisions.  Depending  upon the outcome of these  reviews  and the  issuance of
implementation guidelines and interpretations,  we may be required to change our
revenue recognition  policies and business practices and such changes could have
a material  adverse  effect on our business,  results of operations or financial
position.

ECONOMIC  CONDITIONS  HAVE AFFECTED AND COULD CONTINUE TO NEGATIVELY  IMPACT OUR
REVENUES AND PROFITS.  Our revenue  growth  depends on the overall demand for IT
software  spending.  The  recession in the United States has and may continue to
result in cutbacks by our customers in the purchase of our software products and
services,  postponed or canceled  orders,  longer sales cycles and lower average
selling prices.  To the extent that the current downturn  continues or increases
in severity,  we believe  demand for our products and  services,  and  therefore
future revenues, could be further impacted.

Risks Related To Intellectual Property

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

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

IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL  PROPERTY RIGHTS,  COMPETITORS
MAY USE OUR  TECHNOLOGY  AND  TRADEMARKS,  WHICH  COULD  WEAKEN OUR  COMPETITIVE
POSITION,  REDUCE OUR REVENUES, AND INCREASE OUR COSTS. We rely on a combination
of copyright, trademark, patent, and trade-secret laws, employee and third-party
nondisclosure  agreements,  and other  arrangements  to protect our  proprietary
rights.  Despite these  precautions,  it may be possible for unauthorized  third
parties to copy our  products  or obtain and use  information  that we regard as
proprietary  to  create   products  that  compete  against  ours.  Some  license
provisions   protecting  against  unauthorized  use,  copying,   transfer,   and
disclosure  of our  licensed  programs  may be  unenforceable  under the laws of
certain jurisdictions and foreign countries.

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

Our collection of trademarks is important to our business.  The protective steps
we take  or have  taken  may be  inadequate  to  deter  misappropriation  of our
trademark  rights.  We have filed  applications  for registration of some of our
trademarks  in  the  United  States

                                       30
<PAGE>

and  internationally.  Effective  trademark  protection  may not be available in
every  country in which we offer or intend to offer our products  and  services.
Failure  to protect  our  trademark  rights  adequately  could  damage our brand
identity and impair our ability to compete effectively.  Furthermore,  defending
or enforcing our trademark rights could result in the expenditure of significant
financial and managerial resources.

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

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

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

Other Risks Related To Our Business

IF WE ARE UNABLE TO IMPLEMENT  APPROPRIATE SYSTEMS,  PROCEDURES AND CONTROLS, WE
MAY NOT BE ABLE TO  SUCCESSFULLY  OFFER  OUR  SERVICES  AND  GROW  OUR  SOFTWARE
BUSINESS.  Our ability to successfully  offer our services and grow our software
business requires an effective  planning and management  process.  Over the past
two  and a half  years,  we have  implemented  or  updated  our  operations  and
financial systems,  procedures and controls,  including the implementation of an
enterprise  resource  planning  system.  Our  systems  will  continue to require
additional  modifications  and  improvements  to respond  to current  and future
changes in our business. Our key personnel have limited experience managing this
type of fluctuation in operations.  If we cannot grow our software business, and
manage that growth  effectively,  or if we fail to timely implement  appropriate
internal  systems,   procedures,   controls  and  necessary   modifications  and
improvements to these systems, our business will suffer.

PROMOTIONAL  PRODUCT VERSIONS MAY ADVERSELY IMPACT OUR ACTUAL PRODUCT SALES. Our
marketing strategy relies in part on making elements of our technology available
for no charge or at a very low price.  This  strategy  is designed to expose our
products to a broader customer base than to our historical  customer base and to
encourage  potential  customers  to  purchase  an upgrade  or other full  priced
products from us.

We may not be able to  introduce  enhancements  to our  full-price  products  or
versions of our products with intermediate  functionality at a rate necessary to
adequately  differentiate them from the promotional versions, which could reduce
sales of our products.

Item 7A.  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

                                       31
<PAGE>

and  short-term  investments in a variety of  securities,  including  commercial
paper, money market funds and government and non-government debt securities.  In
general,  money market funds are not subject to market risk because the interest
paid on such funds fluctuates with the prevailing interest rate.

         The following  table presents the amounts of our cash  equivalents  and
short-term  investments  (in  thousands)  that are  subject  to market  risk and
weighted-average  interest rates,  categorized by expected maturity dates, as of
July 27, 2002.  This table does not include  money market  funds  because  those
funds are not subject to market risk.


<TABLE>
<CAPTION>
                                                 Maturing        Maturing within three         Maturing
(in thousands)                             within three months     months to one year    Greater than one year
                                           -------------------    --------------------   ---------------------

<S>                                              <C>                     <C>                    <C>
As of July 27, 2002
Cash equivalents                                 $11,450
    Weighted-average interest rate                  1.95%
Short-term investments                                                   $5,458
    Weighted-average interest rate                                         2.25%
Long-term investments                                                                           $12,440
    Weighted-average interest rate                                                                 3.11%
</TABLE>

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

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

                                       32
<PAGE>

Item 8. Financial Statements and Supplementary Data

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----
Reports of Independent Public Accountants.................................... 33
Consolidated Balance Sheets.................................................. 34
Consolidated Statements of Operations and Other Comprehensive Income/(Loss).. 35
Consolidated Statements of Stockholders' Equity.............................. 36
Consolidated Statements of Cash Flows........................................ 37
Notes to Consolidated Financial Statements................................... 39

         All other schedules are omitted  because they are not  applicable,  not
required,  or because the required  information is included in the  consolidated
financial statements or notes thereto.

                                       33
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
VA Software Corporation:

         In our opinion,  the  accompanying  consolidated  financial  statements
listed in the index appearing under Item 14(a)(1) on page 60 present fairly,  in
all material respects, the financial position of VA Software Corporation and its
subsidiaries  at July 27, 2002,  and the results of their  operations  and their
cash  flows for the year  ended  July 27,  2002 in  conformity  with  accounting
principles  generally accepted in the United States of America. In addition,  in
our opinion,  the financial  statement  schedule  listed in the index  appearing
under Item 14(a)(2) on page 60 presents fairly,  in all material  respects,  the
information  set  forth  therein  when  read in  conjunction  with  the  related
consolidated  financial  statements.  These  financial  statements and financial
statement  schedule are the  responsibility  of the  Company's  Management;  our
responsibility  is to  express  an opinion  on these  financial  statements  and
financial statement schedule based on our audit. We conducted our audit of these
statements  in  accordance  with auditing  standards  generally  accepted in the
United  States of America,  which  require that we plan and perform the audit to
obtain reasonable  assurance about whether the financial  statements are free of
material  misstatement.  An audit includes examining,  on a test basis, evidence
supporting the amounts and  disclosures in the financial  statements,  assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall  financial  statement  presentation.  We believe that our
audit provides a reasonable basis for our opinion.

         The  financial  statements  of VA Software  Corporation  as of July 28,
2001,  and for each of the two years in the  period  ended July 28,  2001,  were
audited by other  independent  accountants  who have  ceased  operations.  These
independent  accountants  expressed an  unqualified  opinion on those  financial
statements in their report dated August 22, 2001.

PricewaterhouseCoopers LLP

San Jose, California
August 22, 2002

                                       34
<PAGE>

This is a copy of the audit report  previously  issued by Arthur Andersen LLP in
connection  with VA Software  Corporation's  (Formerly VA Linux  Systems,  Inc.)
filing on Form 10-K for the year ended July 28, 2001.  This audit report has not
been  reissued by Arthur  Andersen  LLP in  connection  with this filing on Form
10-K. See Exhibit 23.2 for further discussion. The consolidated balance sheet as
of July 28, 2000,  the  consolidated  statements  of  operations,  stockholders'
equity and cash flows for the years ended July 31, 1999 and the  information  in
the schedule for 1999  referred to in this report have not been  included in the
accompanying financial statements or schedule.


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To The Board of Directors and Stockholders of
VA Linux Systems, Inc.:

         We have  audited the  accompanying  consolidated  balance  sheets of VA
Software  Corporation,  formerly  known as VA Linux  Systems,  Inc.  (a Delaware
corporation)  as of  July  28,  2001  and  2000,  and the  related  consolidated
statements of  operations,  stockholders'  equity and cash flows for each of the
three years in the period ended July 28, 2001.  These  financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

         We conducted our audits in accordance with auditing standards generally
accepted in the United States.  Those standards require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.  An
audit also includes  assessing the accounting  principles  used and  significant
estimates  made by  management,  as well as  evaluating  the  overall  financial
statement  presentation.  We believe that our audits provide a reasonable  basis
for our opinion.

         In our opinion,  the  financial  statements  referred to above  present
fairly, in all material respects, the financial position of VA Software Corp. as
of July 28, 2001 and 2000,  and the results of its operations and its cash flows
for each of the three years in the period  ended July 28,  2001,  in  conformity
with accounting principles generally accepted in the United States.

         Our audit was made for the  purpose  of forming an opinion on the basic
financial  statements  taken as a whole.  The schedule  listed in Item 14(a)2 is
presented  for  purposes  of  complying   with  the   Securities   and  Exchange
Commission's  rules  and is not part of the  basic  financial  statements.  This
schedule has been subjected to the auditing  procedures  applied in the audit of
the  basic  financial  statements  and,  in our  opinion,  fairly  states in all
material  respects  the  financial  data  required  to be set forth  therein  in
relation to the basic financial statements taken as a whole.


                                            ARTHUR ANDERSEN LLP

San Jose, California
August 22, 2001

                                       35
<PAGE>

                             VA SOFTWARE CORPORATION

                           CONSOLIDATED BALANCE SHEETS
                    (In thousands, except share information)

<TABLE>
<CAPTION>
                                                                                                       July 27,          July 28,
                                                                                                         2002               2001
                                                                                                       ---------          ---------
                                            ASSETS
<S>                                                                                                    <C>                <C>
  Current assets:
    Cash and cash equivalents ................................................................         $  35,148          $  57,488
    Short-term investments ...................................................................             5,458             22,595
    Restricted cash, current .................................................................               450              1,509
    Accounts receivable, net of allowances of $1,166 and $4,247, respectively ................               764             10,107
    Inventories ..............................................................................               300                343
    Prepaid expenses and other assets ........................................................               877              3,895
                                                                                                       ---------          ---------
            Total current assets .............................................................            42,997             95,937
  Property and equipment, net ................................................................             7,223             17,703
  Goodwill and intangibles, net ..............................................................             2,169             56,730
  Long-term investments ......................................................................            12,440               --
  Restricted cash, non current ...............................................................               900              1,350
  Other assets ...............................................................................             1,239              1,313
                                                                                                       ---------          ---------
            Total assets .....................................................................         $  66,968          $ 173,033
                                                                                                       =========          =========
                             LIABILITIES AND STOCKHOLDERS' EQUITY
  Current liabilities:
    Current portion of notes payable .........................................................         $      42          $     756
    Accounts payable .........................................................................             2,075             14,319
    Accrued restructuring liabilities, current portion .......................................             3,397              3,135
    Accrued compensation .....................................................................             1,517              3,906
    Deferred revenue .........................................................................               774              2,120
    Accrued liabilities and other ............................................................             4,200              9,257
                                                                                                       ---------          ---------
            Total current liabilities ........................................................            12,005             33,493
  Notes payable, net of current portion ......................................................              --                   42
  Accrued restructuring liabilities, net of current portion ..................................            14,597              6,378
  Other long-term liabilities ................................................................               978              1,366
                                                                                                       ---------          ---------
            Total liabilities ................................................................            27,580             41,279
  Commitments and contingencies (Note 7) Minority interest ...................................              --                5,392
  Stockholders' equity:
    Common stock, $0.001 par value; Authorized -- 250,000,000; Issued and
       outstanding -- 54,165,411 shares in 2002 and 54,118,703 shares in 2001 ................                54                 54
    Treasury stock ...........................................................................                (4)                (4)
    Additional paid-in capital ...............................................................           765,422            768,797
    Deferred stock compensation ..............................................................              (245)            (6,108)
    Accumulated other comprehensive gain (loss) ..............................................                86             (1,490)
    Accumulated deficit ......................................................................          (725,925)          (634,887)
                                                                                                       ---------          ---------
            Total stockholders' equity .......................................................            39,388            126,362
                                                                                                       ---------          ---------
            Total liabilities and stockholders' equity .......................................         $  66,968          $ 173,033
                                                                                                       =========          =========
</TABLE>

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

                                       36
<PAGE>

                             VA SOFTWARE CORPORATION

   CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME/(LOSS)
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                                        Year Ended
                                                                                          July 27,        July 28,        July 28,
     Net revenues:                                                                          2002            2001            2000
                                                                                          ---------       ---------       ---------
<S>                                                                                       <C>             <C>             <C>
  Software revenues ................................................................      $   1,086       $    --         $    --
  Online revenues ..................................................................         15,967          14,678           2,081
  Other revenues ...................................................................          3,332         120,212         118,215
                                                                                          ---------       ---------       ---------
     Net revenues ..................................................................         20,385         134,890         120,296
Cost of revenues:
  Software cost of revenues ........................................................          2,387            --              --
  Online cost of revenues ..........................................................         10,393          10,497           1,147
  Other cost of revenues ...........................................................         (3,119)        143,606          97,034
                                                                                          ---------       ---------       ---------
     Cost of revenues ..............................................................          9,661         154,103          98,181
                                                                                          ---------       ---------       ---------
     Gross margin ..................................................................         10,724         (19,213)         22,115
                                                                                          ---------       ---------       ---------
Operating expenses:
  Sales and marketing ..............................................................         12,513          39,981          29,479
  Research and development .........................................................          8,122          17,959          12,363
  General and administrative .......................................................         10,850          22,012           8,985
  Restructuring costs and other special charges ....................................         46,936         113,478            --
  Amortization of deferred stock compensation ......................................          1,671          61,268          39,500
  Amortization of goodwill and intangible assets ...................................         11,730          97,887          18,175
  Impairment of goodwill, intangible assets and other long-lived assets ............         12,150         160,000            --
  Write-off of in-process research and development .................................           --              --             9,000
                                                                                          ---------       ---------       ---------
              Total operating expenses .............................................        103,972         512,585         117,502
                                                                                          ---------       ---------       ---------
    Loss from operations ...........................................................        (93,248)       (531,798)        (95,387)
    Interest income ................................................................          1,714           6,803           5,805
    Interest expense ...............................................................            (32)           (165)           (142)
    Other income (expense), net ....................................................            528            (108)            (34)
                                                                                          ---------       ---------       ---------
    Net loss .......................................................................      $ (91,038)      $(525,268)      $ (89,758)
    Other comprehensive loss:
          Unrealized gain (loss) on marketable securities and investments ..........            209              13             (47)
                   Foreign currency translation gain (loss) ........................          1,367          (1,456)           --
                                                                                          ---------       ---------       ---------
    Comprehensive loss .............................................................      $ (89,462)      $(526,711)      $ (89,805)
                                                                                          =========       =========       =========
    Dividend related to convertible preferred stock ................................           --              --            (4,900)
                                                                                          ---------       ---------       ---------
    Net loss attributable to common stockholders ...................................      $ (91,038)      $(525,268)      $ (94,658)
                                                                                          =========       =========       =========
    Basic and diluted net loss per share ...........................................      $   (1.72)      $  (10.78)      $   (3.52)
                                                                                          =========       =========       =========
    Shares used in computing basic and diluted net loss per share ..................         53,064          48,741          26,863
                                                                                          =========       =========       =========
</TABLE>

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

                                       37
<PAGE>

                             VA SOFTWARE CORPORATION

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (In thousands)


<TABLE>
<CAPTION>
                                                              Convertible
                                                            Preferred Stock            Common Stock                      Additional
                                                         ----------------------    ----------------------     Treasury     Paid-in
                                                           Shares      Amount        Shares      Amount        Stock       Capital
                                                         ---------    ---------    ---------    ---------    ---------    ---------
<S>                                                         <C>       <C>             <C>       <C>          <C>          <C>
BALANCE AT JULY 31, 1999 .............................      18,652    $      19       15,445    $      15    $    --      $  45,461
Issuance of Series B convertible preferred
   stock for assets acquired .........................          13         --           --           --           --             50
Issuance of Series B convertible preferred
   stock for cash, net ...............................       1,256            1         --           --           --          4,833
Exercise of stock options and stock
   purchase rights for cash and services
   rendered ..........................................        --           --          2,140            2         --          3,333
Dividend related to convertible preferred
   stock .............................................        --           --           --           --           --          4,900
Issuance of common stock for cash and
   services rendered .................................        --           --            203         --           --            530
Issuance of common stock from initial
   public offering, net ..............................        --           --          5,060            5         --        138,771
Repurchase of common stock for cash
   related to options ................................        --           --           (593)        --           --            (55)
Proceeds received from stockholders ..................        --           --           --           --           --           --
Conversion of preferred stock to common
   stock .............................................     (19,921)         (20)      19,921           20         --           --
Issuance of common stock to acquire
   businesses ........................................        --           --          9,728           10         --        541,983
Deferred stock compensation ..........................        --           --           --           --           --         23,369
Amortization of deferred stock
   compensation ......................................        --           --           --           --           --           --
Unrealized gain or loss on marketable
   securities ........................................        --           --           --           --           --           --
Net loss .............................................        --           --           --           --           --           --
                                                         ---------    ---------    ---------    ---------    ---------    ---------
BALANCE AT JULY 28, 2000 .............................        --           --         51,904           52         --        763,175
Issuance of common stock for cash
   related to options ................................        --           --          2,522            3         --          4,437
Repurchase of common stock for cash
   related to options ................................        --           --         (1,028)          (1)          (4)        (268)
Issuance of common stock to acquire
   businesses or assets ..............................        --           --            721         --           --         14,397
Amortization of deferred stock
   compensation ......................................        --           --           --           --           --           --
Acceleration and forfeiture of deferred
   stock compensation related to
   terminations ......................................        --           --           --           --           --        (12,944)
Foreign currency translation adjustment
   and unrealized gain or loss on
   marketable securities .............................        --           --           --           --           --           --
Net loss .............................................        --           --           --           --           --           --
                                                         ---------    ---------    ---------    ---------    ---------    ---------
BALANCE AT JULY 28, 2001 .............................        --           --         54,119           54           (4)     768,797
Issuance of common stock for cash related
   to options ........................................        --           --            581            1         --            402
Repurchase of common stock for cash
   related to options ................................        --           --           (535)          (1)        --            (16)
Issuance of common stock to acquire
   businesses or assets ..............................        --           --           --           --           --          1,313
Acceleration of stock options ........................        --           --           --           --           --             74
Amortization of deferred stock
   compensation ......................................        --           --           --           --           --         (1,926)
Acceleration and forfeiture of stock
   options and deferred stock
   compensation related to terminations,
   restructuring .....................................        --           --           --           --           --         (3,222)
Foreign currency translation adjustment
   and unrealized gain or loss on
   marketable securities .............................        --           --           --           --           --           --
Net loss .............................................        --           --           --           --           --           --
                                                         ---------    ---------    ---------    ---------    ---------    ---------
BALANCE AT JULY 27, 2002 .............................        --      $    --         54,165    $      54    $      (4)   $ 765,422
                                                         =========    =========    =========    =========    =========    =========

                                                                        Accumulated
                                                        Stockholder       Deferred         Other                           Total
                                                            Note           Stock       Comprehensive     Accumulated   Stockholders'
                                                         Receivable     Compensation        Loss            Deficit        Equity
                                                          ---------       ---------       ---------       ---------       ---------
BALANCE AT JULY 31, 1999 ...........................      $     (50)      $ (12,121)      $    --         $ (14,961)      $  18,363
Issuance of Series B convertible preferred
   stock for assets acquired .......................           --              --              --              --                50
Issuance of Series B convertible preferred
   stock for cash, net .............................           --              --              --              --             4,834
Exercise of stock options and stock
   purchase rights for cash and services
   rendered ........................................           --              --              --              --             3,335
Dividend related to convertible preferred
   stock ...........................................           --              --              --            (4,900)           --
Issuance of common stock for cash and
   services rendered ...............................           --              --              --              --               530
Issuance of common stock from initial
   public offering, net ............................           --              --              --              --           138,776
Repurchase of common stock for cash
   related to options ..............................           --              --              --              --               (55)
Proceeds received from stockholders ................             50            --              --              --                50
Conversion of preferred stock to common
   stock ...........................................           --              --              --              --              --
Issuance of common stock to acquire
   businesses ......................................           --          (113,106)           --              --           428,887
Deferred stock compensation ........................           --           (23,369)           --              --              --
Amortization of deferred stock
   compensation ....................................           --            38,910            --              --            38,910
Unrealized gain or loss on marketable
   securities ......................................           --              --               (47)           --               (47)
Net loss ...........................................           --              --              --           (89,758)        (89,758)
                                                          ---------       ---------       ---------       ---------       ---------
BALANCE AT JULY 28, 2000 ...........................           --          (109,686)            (47)       (109,619)        543,875
Issuance of common stock for cash
   related to options ..............................           --              --              --              --             4,440
Repurchase of common stock for cash
   related to options ..............................           --              --              --              --              (273)
Issuance of common stock to acquire
   businesses or assets ............................           --            (6,757)           --              --             7,640
Amortization of deferred stock
   compensation ....................................           --            61,268            --              --            61,268
Acceleration and forfeiture of deferred
   stock compensation related to
   terminations ....................................           --            49,067            --              --            36,123
Foreign currency translation adjustment
   and unrealized gain or loss on
   marketable securities ...........................           --              --            (1,443)           --            (1,443)
Net loss ...........................................           --              --              --          (525,268)       (525,268)
                                                          ---------       ---------       ---------       ---------       ---------
BALANCE AT JULY 28, 2001 ...........................           --            (6,108)         (1,490)       (634,887)        126,362
Issuance of common stock for cash related
   to options ......................................           --              --              --              --               403
Repurchase of common stock for cash
   related to options ..............................           --              --              --              --               (17)
Issuance of common stock to acquire
   businesses or assets ............................           --            (1,308)           --              --                 5
Acceleration of stock options                                  --              --              --              --                74
Amortization of deferred stock
   compensation ....................................           --             3,597            --              --             1,671
Acceleration and forfeiture of stock
   options and deferred stock
   compensation related to terminations,
   restructuring ...................................           --             3,574            --              --               352
Foreign currency translation adjustment
   and unrealized gain or loss on
   marketable securities ...........................           --              --             1,576            --             1,576
Net loss ...........................................           --              --              --           (91,038)        (91,038)
                                                          ---------       ---------       ---------       ---------       ---------
BALANCE AT JULY 27, 2002 ...........................      $    --         $    (245)      $      86       $(725,925)      $  39,388
                                                          =========       =========       =========       =========       =========
</TABLE>

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

                                       38
<PAGE>

                             VA SOFTWARE CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                                        Year Ended
                                                                                          July 27,        July 28,        July 28,
                                                                                            2002            2001            2000
                                                                                          ---------       ---------       ---------
<S>                                                                                       <C>             <C>             <C>
Cash flows from operating activities:
  Net loss .........................................................................      $ (91,038)      $(525,268)      $ (89,758)
  Adjustments to reconcile net loss to net cash used in operating activities:
    Depreciation and amortization ..................................................         16,153         102,786          19,588
    Provision for bad debts ........................................................         (1,096)          3,968           1,328
    Provision for excess and obsolete inventory ....................................         (4,378)         24,441           1,878
    Loss on disposal of assets .....................................................          1,422               9             177
    Proportionate share of net losses in Japan investment ..........................          2,012            --              --
    Minority interest in Japan loss ................................................           (496)           --              --
    Gain on sale of Japan investment ...............................................        (12,872)           --              --
    Release of contingent shares in relation to OSDN acquisition ...................          1,313            --              --
    Amortization of deferred stock compensation ....................................          1,671          61,268          39,500
    Non-cash compensation expense ..................................................             75            --             1,429
    Non-cash restructuring expense .................................................         36,426         101,237            --
    Impairment of long-lived assets ................................................         12,150         160,000            --
    Write-off of in-process research and development ...............................           --              --             9,000
    Changes in assets and liabilities:
      Accounts receivable ..........................................................         10,439          17,635         (23,468)
      Inventories ..................................................................          2,046         (23,783)          1,191
      Prepaid expenses and other assets ............................................          3,391          (3,195)         (2,098)
      Accounts payable .............................................................        (12,244)        (12,446)         11,902
      Accrued restructuring liabilities ............................................          8,481           9,513            --
      Accrued liabilities and other ................................................         (8,159)          1,388           3,723
      Other long-term liabilities ..................................................           (388)            814           1,045
                                                                                          ---------       ---------       ---------
         Net cash used in operating activities .....................................        (35,092)        (81,633)        (24,563)
                                                                                          ---------       ---------       ---------
Cash flows from investing activities:
  Change in restricted cash ........................................................          1,509            (609)         (2,250)
  Purchase of property and equipment ...............................................           (417)        (14,750)         (7,601)
  Purchase of marketable securities ................................................        (32,917)        (80,329)        (52,433)
  Sale of marketable securities ....................................................         37,829         110,167            --
  Businesses acquired, net of cash acquired ........................................           --             4,627          46,870
  Cash proceeds on sale of Japan investment ........................................          5,059            --              --
  Purchase of other long-lived assets ..............................................           --            (1,929)           --
  Other, net .......................................................................            209             161             (47)
                                                                                          ---------       ---------       ---------
         Net cash provided (used) in investing activities ..........................         11,272          17,338         (15,461)
                                                                                          ---------       ---------       ---------
Cash flows from financing activities:
  Payments on notes payable ........................................................           (273)         (2,527)         (3,363)
  Proceeds from stockholder note receivable ........................................           --              --                50
  Proceeds from issuance of convertible preferred stock, net .......................           --              --             4,834
  Proceeds from issuance of common stock ...........................................            403           4,440         141,504
  Repurchase of common stock .......................................................            (17)           (273)            (55)
                                                                                          ---------       ---------       ---------
         Net cash provided by financing activities .................................            113           1,640         142,970
                                                                                          ---------       ---------       ---------
 Effect of exchange rate changes on cash and cash equivalents ......................          1,367          (1,456)           --
                                                                                          ---------       ---------       ---------
 Net increase (decrease) in cash and cash equivalents ..............................        (22,340)        (64,111)        102,946
                                                                                          ---------       ---------       ---------
 Cash and cash equivalents, beginning of year ......................................         57,488         121,599          18,653
                                                                                          ---------       ---------       ---------
 Cash and cash equivalents, end of year ............................................      $  35,148       $  57,488       $ 121,599
                                                                                          =========       =========       =========
Supplemental cash flow information:
Cash paid for state taxes ..........................................................      $      18       $     335       $      35
Cash paid for interest .............................................................      $      32       $     165       $     142
Issuance of convertible preferred stock for assets .................................      $    --         $    --         $      50
Dividends on convertible preferred stock ...........................................      $    --         $    --         $   4,900
Conversion of preferred stock to common stock at par ...............................      $    --         $    --         $      20
Issuance of common stock to acquire businesses .....................................      $    --         $  14,397       $ 541,993
</TABLE>

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

                                       39
<PAGE>

                             VA SOFTWARE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Operations of the Company:

         VA Software  Corporation was incorporated in January 1995 in California
as VA  Research,  Inc. In June 1999,  the  Company  changed its name to VA Linux
Systems,  Inc., and in December 1999 the Company  reincorporated in Delaware. In
December  1999,  the Company sold  5,060,000  shares  (including  660,000 shares
associated  with the  underwriter's  exercise  of  their  option  to  cover  the
over-allotment  of shares) of common  stock to the public in our initial  public
offering ("IPO").  In December 2001, the Company changed its name to VA Software
Corporation ("VA Software," "VA" or the "Company").

         Through  June 27,  2001,  the  Company  was a provider  of  Linux-based
computer systems and services,  Internet infrastructure and Open Source software
services and the Open Source  Development  Network ("OSDN").  From incorporation
until the end of fiscal 1998, the Company grew very modestly. From July 31, 1998
though  October 27, 2000 (the end of the first quarter of our fiscal year 2001),
the Company experienced  significant growth as a leading provider of Linux-based
solutions,  integrating systems, software and services. Commensurate with strong
growth,  the Company invested in hiring personnel with Linux expertise,  growing
its direct  sales force,  acquiring  companies  and  expanding  its  operations,
customer support and administration  infrastructure.  The Company outsourced its
systems   manufacturing  but  provided  systems  support  through  its  internal
organization.

         Increasing  demand from  customers in the Internet  infrastructure  and
"dot-com"  markets  fueled the  Company's  growth  through the first  quarter of
fiscal year 2001. Thereafter,  the market for the Company's systems products and
professional  services  declined  significantly due in large part to the general
economic  downturn,  which  resulted  in reduced  availability  of  capital  for
Internet infrastructure and "dot-com" customers. This decline had a significant,
negative effect on the Company's sales and margins,  which resulted in increased
operating  losses.  The Company  endeavored  to market its hardware  products to
larger  "enterprise"  customers,  but were unable to make sufficient progress to
build a  sustainable  business  in the midst of a  slowing  economy  and  fierce
competition   from  incumbent   hardware  vendors  that  were  moving  into  the
Linux-based hardware market.

         Rather than continue with a business model that was not going to enable
the Company to achieve  profitability and would significantly  decrease its cash
levels,  on June 27, 2001 the Company  announced its strategic  decision to exit
the systems business and pursue an application software business.  During fiscal
year 2002,  the  Company  decided to exit the  professional  services  and Linux
software engineering services fields in order to focus solely on its SourceForge
Enterprise Edition ("SourceForge") application software product.

         The Company  operates on a 52-53 week year ending the  Saturday  before
July 31.  Prior to the  quarter  ended  January 27,  2001,  the last day of each
fiscal  quarter  and year end was  Friday.  This  change did not have a material
impact on the results of operations for the year ended July 28, 2001 or on prior
periods.

         The Company is subject to certain risks,  including without limitation,
risks relating to fluctuating operating results,  customer and market acceptance
of  new  products,  dependence  on new  products,  rapid  technological  change,
litigation,  dependence on growth in the software market, product concentration,
changing  product  mix,  competition,   dependence  on  proprietary  technology,
intellectual  property  rights,  dependence on key  personnel and  volatility of
stock price.

2. Summary of Significant Accounting Policies:

         Use of Estimates in Preparation of Consolidated Financial Statements

         The preparation of consolidated financial statements in conformity with
accounting  principles  generally  accepted  by the  United  States  of  America
requires  management to make estimates and assumptions  that affect the reported
amounts of assets and  liabilities  and the disclosure of contingent  assets and
liabilities  at the date of such financial  statements,  as well as the reported
amounts of revenue and expenses  during the periods  indicated.  Actual  results
could differ from those estimates.

         Principles of Consolidation

         These consolidated  financial statements include the accounts of VA and
its wholly-owned and majority-owned  subsidiaries.  All significant intercompany
accounts and transactions  have been eliminated in  consolidation.  In September
2000, the Company  acquired

                                       40
<PAGE>

68% of the  outstanding  shares of common stock of VA Linux Systems Japan,  K.K.
("VA Linux  Japan") for a cash  purchase  price of  approximately  $6.9 million.
Effective  January 11, 2002,  VA sold 13,500 shares of VA Linux Japan stock to a
third party for  approximately  $5.1 million,  the effect of which decreased the
Company's investment in VA Linux Japan to approximately 11%. As a result of this
sale,  the  Company  recorded a $0.4  million  gain,  which is included in other
income in the  Company's  consolidated  statements of  operations.  On March 29,
2002, VA Linux Japan  repurchased  10,000 shares of its outstanding stock from a
third  party other than the  Company,  thereby  decreasing  the number of shares
outstanding and increasing the Company's investment to approximately 19%. As the
Company  holds less than 20% of the voting  stock of VA Linux Japan and does not
otherwise exercise significant influence,  VA Linux Japan has been accounted for
under the cost method as of January 11, 2002. The minority  interest included in
the  results of  operations  for VA Linux  Japan has not been  material  for any
period  presented  and has been  recorded  in other  income in the  accompanying
statements of operations.  The minority  interest in VA Linux Japan is reflected
separately in the balance sheet outside of  stockholders'  equity for the period
ended July 28, 2001. The operations of VA Linux Japan  primarily  related to our
former systems and services business.

Foreign Currency Translation

         The functional  currency of a foreign  operation is the country's local
currency. Consequently,  balance sheet accounts are translated into U.S. dollars
at exchange  rates  prevailing at balance sheet dates.  Revenue and expenses are
translated into U.S.  dollars at average rates for the period.  Gains and losses
resulting from translation are charged or credited in comprehensive  income as a
component of stockholders'  equity. As of July 27, 2002 the Company did not hold
any foreign currency derivative instruments.

Segment and Geographic Information

         Statement  of  Financial   Accounting   Standards   ("SFAS")  No.  131,
"Disclosures   about  Segments  of  an  Enterprise  and  Related   Information",
establishes  standards for reporting information regarding operating segments in
annual financial statements and requires selected information for those segments
to be presented in interim  financial  reports issued to stockholders.  SFAS No.
131 also  establishes  standards  for related  disclosures  about  products  and
services and geographic areas.  Operating  segments are identified as components
of  an  enterprise  about  which  separate  discrete  financial  information  is
available   for   evaluation   by  the  chief   operating   decision-maker,   or
decision-making  group, in making decisions how to allocate resources and assess
performance.  The Company's chief  decision-making  group, as defined under SFAS
No. 131, are the Chief Executive  Officer and the executive team. For the period
up to the  acquisition  of OSDN on June 7, 2000,  the  Company  operated  as one
operating segment, the provision of Linux-based systems and services referred to
as systems and  services.  From June 7, 2000 through June 27, 2001,  the Company
viewed the  operations  of OSDN,  as a second  segment.  On June 27,  2001,  the
Company announced its decision to exit the hardware systems business. Subsequent
to the  Company's  fiscal year end of July 28, 2001, a decision was made to exit
the professional  services and Linux software  engineering  services businesses,
which had been part of the Company's systems and services  business segment,  in
order to  solely  focus  on  SourceForge.  Significant  cost  reduction  actions
accompanied  the exiting of these  businesses  which will help to  preserve  the
Company's  cash (see Note 4).  Consequently,  for the fiscal year beginning July
29,  2001,  the  Company  has  operated  as  one  business  segment,   providing
application software products and related OSDN services.

Cash, Cash Equivalents, Short-Term Investments and Long-Term Investments

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

         The Company  accounts for its investments  under the provisions of SFAS
No. 115,  "Accounting  for Certain  Investments in Debt and Equity  Securities."
Investments  in highly liquid  financial  instruments  with original  maturities
greater than three  months and  remaining  maturities  of less than one year are
classified as short-term investments.  All short-term investments are classified
as  available-for-sale  and are reported at fair value with net unrealized gains
(losses) reported, net of tax, using the specific identification method as other
comprehensive  gain/(loss)  in  stockholders'  equity.  The  fair  value  of the
Company's available-for-sale securities are based on quoted market prices at the
balance sheet dates.

         Cash equivalents and short-term investments are all due within one year
and consist of the following (in thousands) at market value:

                                       41
<PAGE>

                                                           July 27,     July 28,
                                                             2002         2001
                                                           -------       -------
Government obligations .............................       $22,319       $25,956
Corporate obligations ..............................         7,029        18,005
                                                           -------       -------
          Total ....................................       $29,348       $43,961
                                                           =======       =======
Included in cash and cash equivalents ..............       $11,450       $21,366
Included in short-term investments .................         5,458        22,595
Included in long-term investments ..................        12,440          --
                                                           -------       -------
          Total ....................................       $29,348       $43,961
                                                           =======       =======

Restricted Cash

         During fiscal year 2000, the Company  established  letters of credit of
approximately  $2.3 million that are used to  collateralize  payments related to
the Fremont  building  lease. As of July 27, 2002 and July 28, 2001, the Company
had  approximately  $1.4 million and $2.3 million,  respectively,  of restricted
cash related to this building lease.

         During fiscal year 2001, the Company  established  letters of credit of
approximately  $4.0  million  that were used to  collateralize  the  delivery of
customer  parts from a single  supplier.  As of July 28,  2001,  the Company had
approximately  $0.6 million of  restricted  cash  outstanding  on the letters of
credit. As of July 27, 2002, there was no outstanding  balance on this letter of
credit.

Inventories

         Inventories  consist of finished  goods are stated at the lower of cost
or market with cost being  determined by the first-in,  first-out method at July
27, 2002 and July 28, 2001. Provisions, when required, are made to reduce excess
and obsolete  inventories  to their  estimated  net  realizable  values.  Due to
competitive  pressures,  it is possible that estimates of net  realizable  value
could change.

Property and Equipment

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

<TABLE>
<CAPTION>
                                                                            July 27,       July 28,
                                                                              2002           2001
                                                                            --------       --------
<S>                                                                         <C>            <C>
Computer and office equipment (useful lives of 2 to 3 years) .........      $  6,295       $  8,983
Furniture and fixtures (useful lives of 2 to 4 years) ................         2,464          4,093
Leasehold improvements (useful lives of lesser of estimated
  life or lease term) ................................................         3,748          7,186
Software (useful lives of  2 to 5 years) .............................         2,016          2,856
                                                                            --------       --------
          Total property and equipment ...............................        14,523         23,118
Less: Accumulated depreciation and amortization ......................        (7,300)        (5,415)
                                                                            --------       --------
          Property and equipment, net ................................      $  7,223       $ 17,703
                                                                            ========       ========
</TABLE>


         Depreciation  expense for the years ended July 27, 2002, July 28, 2001,
and  July  28,  2000  was  $4.4  million,   $4.9  million,   and  $1.4  million,
respectively.

Goodwill and Intangibles and Impairment of Long-Lived Assets

         In   connection   with   the   acquisitions   of   TruSolutions,   Inc.
("TruSolutions"), Precision Insight, Inc. ("Precision Insight"), NetAttach, Inc.
("NetAttach"),  and OSDN (formerly known as  "Andover.Net,  Inc."),  the Company
recorded  $381.3  million of goodwill and  intangibles  during fiscal 2000.  The
Company amortized $97.9 million and $18.2 million of goodwill and intangibles in
fiscal 2001 and 2000,  respectively.  In connection with the restructuring plans
in fiscal year 2001, the Company wrote off goodwill and  intangibles  associated
with BNW, Life,  Alabanza and TruSolutions in the amount of $59.7 million as the
Company had exited these lines of business and expected no future cash flows. In
connection  with the  Company's  restructuring  plans in fiscal  year 2002,  the
Company  wrote off goodwill  and  intangibles  associated  with  NetAttach,  and
Precision  Insight  in the  amount  of  $30.6  million  due to the  exit  of the
professional services and Linux software engineering businesses.

         The Company continually evaluates whether events and circumstances have
occurred that indicate the remaining  estimated useful life of long-lived assets
may warrant revision or that the remaining  balance of long-lived assets may not
be recoverable in accordance

                                       42
<PAGE>

with SFAS No. 121,  "Accounting  for  Impairment  of  Long-Lived  Assets and for
Long-Lived  Assets to be Disposed  of." When factors  indicate  that  long-lived
assets should be evaluated for possible impairment, the Company uses an estimate
of the related  undiscounted  future cash flows over the  remaining  life of the
long-lived  assets in measuring  whether they are recoverable.  If the estimated
undiscounted future cash flows exceed the carrying value of the asset, a loss is
recorded as the excess of the assets carrying value over fair value.  Long-lived
assets and certain identifiable intangible assets to be disposed of are reported
at the lower of carrying amount or fair value less costs to sell. See Note 4 for
details on impairment charges recognized during fiscal years 2002 and 2001.

         The  Company  performed  an  assessment  of the  carrying  value of its
long-lived assets to be held and used including  significant amounts of goodwill
and other  intangible  assets  recorded in connection  with the  Company's  OSDN
acquisition.  The Company performed the assessment  pursuant to SFAS No. 121 due
to the  significant  slowdown in the economy  affecting  current  operations and
expected future sales, as well as the general decline of technology  valuations.
The  conclusion  of that  assessment  was that the decline in market  conditions
within the industry was significant and other than temporary.  As a result,  the
Company  recorded  during  the fourth  quarter  of fiscal  year 2001 a charge of
$160.0 million to reduce goodwill and other  intangible  assets  associated with
the  acquisition  of OSDN,  based on the amount by which the  carrying  value of
these assets  exceeded  their fair value.  The charge is included in the caption
"Impairment of long-lived assets" in the consolidated  statements of operations.
Fair value was determined based on discounted future cash flows.

         Effective  July 29, 2001, the Company  adopted SFAS No. 142,  "Goodwill
and Other  Intangible  assets."  Upon  adoption of SFAS No. 142,  the Company no
longer  amortized  goodwill,  and thereby  eliminated  goodwill  amortization of
approximately  $1.3 million  anticipated  goodwill  amortization for fiscal year
2002. Pursuant to SFAS No. 142, the Company tests goodwill for impairment.  SFAS
142 requires  that  goodwill be tested for  impairment  at the  "reporting  unit
level"  ("Reporting  Unit")  at  least  annually  and more  frequently  upon the
occurrence  of certain  events,  as defined by SFAS No.  142.  The  Company  has
determined  that it has only one Reporting  Unit,  specifically  the  licensing,
implementation and support of its software applications. Goodwill was tested for
impairment during the quarter ended July 27, 2002. First, the Company determined
whether its carrying amount exceeded its "fair value", which would indicate that
goodwill  may be  impaired.  Based on this test,  the  Company  determined  that
goodwill could be impaired.  Therefore,  the Company  compared the "implied fair
value" of  goodwill,  as  defined by SFAS No.  142,  to its  carrying  amount to
determine  whether there was an impairment  loss. As a result of the  impairment
test,  the  Company  determined  that the  carrying  value was  impaired  and it
recorded  an  impairment  loss of $3.6  million.  The charge is  included in the
caption "Impairment of long-lived assets" in the statements of operations.

         Intangible assets are amortized on a straight-line  basis over three to
five years. The Company  continually  evaluates  whether events or circumstances
have  occurred  that  indicate  the  remaining  estimated  useful lives of these
intangible  assets  may not be  recoverable.  When  factors  indicate  that  the
intangible assets should be evaluated for possible impairment,  the Company uses
an estimate of the related business  segment's  undiscounted net income over the
remaining  useful life of the  intangible  assets in measuring  whether they are
recoverable.  An evaluation  was performed on the  intangible  assets during the
quarter  ended  July 27,  2002.  As a result  of this  evaluation,  the  Company
determined  that the  carrying  value was impaired  and an  impairment  loss was
recorded for $8.6 million.  The charge is included in the caption "Impairment of
long-lived assets" in the statements of operations.

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

<TABLE>
<CAPTION>
                                                                As of July 27, 2002                       As of July 28, 2001
                                                           ------------------------------            ------------------------------
                                                        Gross Carrying        Accumulated        Gross Carrying          Accumulated
                                                             Amount           Amortization            Amount            Amortization
                                                             ------           ------------            ------            ------------
<S>                                                        <C>                  <C>                  <C>                  <C>
Domain and trade names                                     $   5,922            $  (4,457)           $   6,610            $  (2,395)
Purchased technology                                           2,534               (1,830)              18,400              (14,999)
                                                           ---------            ---------            ---------            ---------
      Total intangible assets                                  8,456               (6,287)              25,010              (17,394)
Goodwill                                                      60,362              (60,362)             127,049              (77,935)
                                                           ---------            ---------            ---------            ---------
                                                           $  68,818            $ (66,649)           $ 152,059            $ (95,329)
                                                           =========            =========            =========            =========
</TABLE>

         The  aggregate  amortization  expense  of  intangible  assets,  net  of
restructuring  charges was $11.7  million and $15.6 million for the fiscal years
ending  July 27,  2002 and July 28,  2001,  respectively.  The  estimated  total
amortization  expense of acquired  intangible assets is $2.2 million and $12,700
for the fiscal years ending 2003 and 2004, respectively.

         The changes in the carrying amount of goodwill for the years ended July
27, 2002, and July 28, 2001 are as follows (in thousands):

                                       43
<PAGE>


                                                    July 27,           July 28,
                                                      2002               2001
                                                   ---------          ---------
Balance as of July                                 $  49,114          $ 313,640
Amortization in the period                              --              (82,249)
Goodwill additions                                        45              6,253
Write-off of goodwill                                (49,159)          (188,530)
                                                   ---------          ---------
Balance as of July                                 $    --            $  49,114
                                                   =========          =========

         The  following  table  presents  the  effects on net loss and basic and
diluted  net loss  per  share  if the  Company  had  followed  the  amortization
provisions of SFAS No. 142 for all periods  presented (in thousands,  except per
share data):


                                                           Twelve Months Ended
                                                         ----------------------
                                                          July 27,     July 28,
                                                            2002        2001
                                                         ---------    ---------
     Net loss (as reported)                              $ (91,038)   $(525,268)
                                                         =========    =========
     Add:  goodwill amortization                              --         82,249
                                                         ---------    ---------
          Adjusted net loss                              $ (91,038)   $(443,019)
                                                         =========    =========
Basic and diluted net loss per share                     $   (1.72)   $   (9.09)
                                                         =========    =========
Weighted-average shares of common stock outstanding         53,290       51,410
Less: Weighted-average shares subject to repurchase           (226)      (2,669)
                                                         ---------    ---------
Shares used in computing basic and diluted net loss
 per share                                                  53,064       48,741
                                                         =========    =========


Revenue Recognition

Software Revenues

         Software   revenues   are  derived  from  the   Company's   SourceForge
application  software  business  and  include  software  licenses,  professional
services,  maintenance,  support and training.  Software revenues represent $1.1
million, or 5.3%, of total revenues for the fiscal year 2002.

         Revenues from software license agreements follows American Institute of
Certified Public Accountants  ("AICPA")  Statement of Position ("SOP") 97-2, are
recognized when objective,  persuasive evidence of an agreement exists, delivery
of  the  product  has  occurred,  provided  the  arrangement  does  not  require
significant  customization of the software, the fee is fixed or determinable and
collectibility is probable.

         For  perpetual  licenses,  the  Company  uses the  residual  method  to
recognize revenues. Under the residual method, the fair value of the undelivered
elements  is  deferred  and the  remaining  portion  of the  arrangement  fee is
recognized as revenue.  If evidence of the fair value of one or more undelivered
elements does not exist,  revenues are deferred and recognized  when delivery of
those elements occurs or when fair value can be established. A typical perpetual
license agreement may include professional  services,  maintenance and training.
Revenue from  non-essential  professional  services is recognized as the work is
performed based on fair value. When an agreement includes  professional services
that are  significant  or essential to the  functionality  of the software,  the
Company uses the  percentage of completion  contract  accounting  method for the
entire arrangement,  including license fees. Maintenance revenues are recognized
ratably over the term of the maintenance  period (generally one year).  Software
maintenance  agreements  provide  technical support and the right to unspecified
updates/upgrades on an  if-and-when-available  basis. Fair value for the ongoing
maintenance  obligations  are based upon separate sales or  maintenance  sold to
customers or upon renewal  rates quoted in the contract,  when these exist.  The
unrecognized  portion of amounts  paid in advance for  licenses and services are
recorded as deferred revenue.

         For term arrangements, which include licenses and bundled post-contract
support  ("PCS"),  the Company uses ratable revenue  recognition.  Under ratable
revenue recognition,  the only undelivered element is PCS and objective evidence
of fair  value of PCS does not exist.  If the term  license  agreement  includes
multiple  elements (such as training and non-essential  professional  services),
then the Company defers revenue until all elements except PCS are delivered,  at
which time revenue is recognized ratably over the remaining contract term.

         If the fee due from the customer is not fixed or determinable, revenues
are recognized as cash is received from the customer,

                                       44
<PAGE>

assuming  all other  revenue  recognition  criteria  have been met.  The Company
considers all arrangements with payment terms longer than normal not to be fixed
or determinable.

Online Revenues

         Online  revenues  include  advertising  as well as e-commerce  revenue.
Online advertising  revenues represent $9.0 million, or 44.2%, of total revenues
for the  fiscal  year  2002,  and  includes  $2.0  million  of  barter  revenue.
E-commerce  revenues represent $7.0 million, or 34.3%, of total revenues for the
fiscal year ending July 27, 2002.

         Advertising  revenues are derived from the sale of advertising space on
our various  websites.  Advertising  revenues are recognized  over the period in
which the advertisements are displayed, provided that no significant obligations
remain and collection of the receivable is reasonable  assured.  Our obligations
typically include guarantees of a minimum number of "impressions" (times that an
advertisement  is viewed by users of our online services over a specified period
of time).  To the extent that minimum  guaranteed  impressions  are not met, the
Company does not  recognize  the  corresponding  revenues  until the  guaranteed
impressions  are achieved.  Barter  revenue  transactions  are recorded at their
estimated  fair value based on the  Company's  historical  experience of selling
similar  advertising  for cash in  accordance  with  Emerging  Issues Task Force
("EITF") Issue 99-17,  "Accounting for  Advertising  Barter  Transactions."  The
Company broadcasts banner advertising in exchange for similar banner advertising
on third party  websites.  Revenues for the year ended July 27,  2002,  included
approximately  $2.0 million of barter revenue.  Revenues for the year ended July
28, 2001,  included  approximately $2.4 million of barter revenue.  There was no
barter revenue for the fiscal year ended July 28, 2000.

         E-commerce  revenues are derived from the online sale of consumer goods
and digital  animations.  E-commerce  revenues are recognized in accordance with
SEC Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements."  Under SAB 101,  product  revenues are recognized  when  persuasive
evidence of an  arrangement  exists,  delivery has  occurred,  the sale price is
fixed and 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 and has recorded an
allowance for such returns.  This  allowance is a management  estimate  based on
historical return rates.

         Other Revenues

         Other  revenues are derived from the Company's  old hardware,  customer
support,  and professional  services  businesses.  Other revenues represent $3.3
million, or 16.3%, of total revenues for the fiscal year ending July 27, 2002.

         The Company's revenue recognition policy related to its former hardware
systems  business  follows SEC SAB No. 101,  "Revenue  Recognition  in Financial
Statements." Under SAB No. 101, the Company recognized product revenues from the
sale of Linux-based servers,  components,  and desktop computers when persuasive
evidence of an arrangement existed,  delivery occurred, the sales price is fixed
and determinable  and  collectibility  is reasonably  assured.  In general,  the
Company  recognizes product revenue upon shipment of the goods. The Company does
not grant customers any rights to return these products.

         The  Company  recognizes   revenues  from  customer  support  services,
including on-site maintenance and technical support on a pro-rata basis over the
term of the related  service  agreement.  The Company  recognizes  revenues from
professional  service  contracts  upon  completion of the project,  or using the
percentage  of  completion  method of the project  where  project costs could be
reasonably estimated. The Company records any payments received prior to revenue
recognition as deferred revenue.

         Advertising Expenses

         The Company expenses  advertising costs as incurred.  Total advertising
expenses  were $2.7  million,  $8.3  million and $5.7  million for fiscal  years
ending July 27, 2002, July 28, 2001 and July 28, 2000, respectively.

         Stock-Based Compensation

         SFAS No. 123, "Accounting for Stock-Based Compensation" permits the use
of either a fair value based method or the  intrinsic  value  method  defined in
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees" to account for stock-based  compensation  arrangements.  Companies
that elect to employ the valuation method provided in APB No. 25 are required to
disclose the pro forma net income  (loss) that would have  resulted from the use
of the fair value based method. The Company has elected to continue to determine
the value of stock-based  compensation  arrangements under the provisions of APB
No. 25 and the related Interpretations from Financial Accounting Standards Board
Interpretation No. 44 ("FIN 44") "Accounting for

                                       45
<PAGE>

Certain Transactions Involving Stock Compensation - an interpretation of APB No.
25" and,  accordingly,  it has included the pro forma disclosures required under
SFAS No. 123 in the notes to the financial statements (see Note 10).

         The value of options,  stock  purchase  rights and stock  exchanged for
services  rendered or assets  acquired are accounted for in accordance with SFAS
No. 123 and EITF No. 96-18 "Accounting for Equity Instruments That Are Issued To
Other Than  Employees  for  Acquiring or in  Conjunction  With Selling  Goods or
Services", which require that such equity instruments are recorded at their fair
value  on  the  measurement  date  which  is  typically  the  grant  date.  Such
instruments are valued using the Black-Scholes option pricing model.

Software Development Costs

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

Computation of Per Share Amounts

         In  accordance  with SFAS No. 128,  basic net loss per common share has
been  calculated  using the  weighted-average  number of shares of common  stock
outstanding during the period, less shares subject to repurchase.  For the years
ended July 27, 2002,  July 28, 2001 and July 28, 2000,  the Company has excluded
all  convertible   preferred  stock  and  outstanding  stock  options  from  the
calculation of diluted net loss per common share because all such securities are
antidilutive for those periods.

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

<TABLE>
<CAPTION>
                                                                             Year Ended
                                                                  -----------------------------------
                                                                   July 27,     July 28,   July 28,
                                                                     2002         2001        2000
                                                                  ---------    ---------    ---------
<S>                                                               <C>          <C>          <C>
Net loss (as reported) ........................................   $ (91,038)   $(525,268)   $ (89,758)
  Dividends related to convertible preferred stock ............        --           --         (4,900)
                                                                  ---------    ---------    ---------
Net loss attributable to common stockholders ..................   $ (91,038)   $(525,268)   $ (94,658)
                                                                  =========    =========    =========
Basic and diluted:
  Weighted average shares of common stock outstanding .........      53,290       51,410       33,398
  Less: Weighted average shares subject to repurchase .........        (226)      (2,669)      (6,535)
                                                                  ---------    ---------    ---------
  Shares used in computing basic and diluted net loss per share      53,064       48,741       26,863
                                                                  =========    =========    =========
  Basic and diluted net loss per share ........................   $   (1.72)   $  (10.78)   $   (3.52)
                                                                  =========    =========    =========
</TABLE>


         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):


                                                           Year Ended
                                                   ----------------------------
                                                  July 27,    July 28,  July 28,
                                                    2002       2001       2000
                                                   ------     ------     ------
Anti-dilutive securities:
      Options to purchase common stock ........    12,308     10,834      9,534
     Common stock subject to repurchase .......       226      2,669      6,535
                                                   ------     ------     ------
                                                   12,534     13,503     16,069
                                                   ======     ======     ======


         Comprehensive Income (Loss)

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

                                       46
<PAGE>

Income Taxes

         The Company  accounts  for income taxes using the  liability  method in
accordance  with  SFAS  No.  109,  "Accounting  for  Income  Taxes".  Due to the
Company's  loss  position  in fiscal  years  2002,  2001 and 2000,  there was no
provision for income taxes for the years ended July 27, 2002,  July 28, 2001 and
July 28, 2000.  Deferred tax assets are  recognized for  anticipated  future tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and their respective tax bases. 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
profitability to date and the uncertainty of future profitability.

Recent Accounting Pronouncements

         Effective  July 29, 2001, the Company  adopted SFAS No. 142,  "Goodwill
and Other  Intangible  assets."  Upon  adoption of SFAS No. 142,  the Company no
longer  amortizes  goodwill,  and thereby  eliminated  goodwill  amortization of
approximately $1.3 million per year based on anticipated  goodwill  amortization
for fiscal  2002.  Goodwill  and  intangible  assets were tested for  impairment
during the quarter ended July 27, 2002.  First, the Company  determined  whether
the carrying amount of its goodwill and its intangible assets exceeded its "fair
value",  which  would  indicate  that  goodwill  may be  impaired.  The  Company
determined  that goodwill and  intangible  assets were  impaired,  therefore the
Company compared the "implied fair value" of the assets, as defined by SFAS 142,
to its carrying amount to determine  whether there was an impairment  loss. As a
result of the impairment  test, the Company  determined  that the carrying value
was impaired and it recorded an impairment loss of $12.2 million.

         In August 2001,  the  Financial  Accounting  Standards  Board  ("FASB")
issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143
establishes  accounting  standards for  recognition  and measurement of an asset
retirement  obligation and an associated  asset retirement cost and is effective
for  fiscal  years  beginning  after June 15,  2002.  The  Company is  currently
evaluating the potential  impact, if any, the adoption of SFAS No. 143 will have
on its future financial position and results of operations.

         In August  2001,  the FASB  issued SFAS No.  144,  "Accounting  for the
Impairment  or  Disposal  of  Long-Lived  Assets",   which  addresses  financial
accounting  and reporting for the  impairment or disposal of long-lived  assets.
While SFAS No. 144 supersedes  SFAS No. 121,  "Accounting  for the Impairment of
Long-Lived  Assets and for Long-Lived  Assets to Be Disposed Of" it retains many
of the fundamental  provisions of SFAS No. 121. SFAS No. 144 also supersedes the
accounting  and reporting  provisions of APB No. 30,  "Reporting  the Results of
Operations--Reporting  the Effects of  Disposal of a Segment of a Business,  and
Extraordinary,  Unusual and Infrequently Occurring Events and Transactions", for
the disposal of a segment of a business.  However, it retains the requirement in
APB No.  30 to  report  separately  discontinued  operations  and  extends  that
reporting to a component of an entity that either has been disposed of (by sale,
abandonment,  or in a distribution to owners) or is classified as held for sale.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and
interim  periods within those fiscal years.  The adoption of SFAS No. 144 is not
expected  to have a  material  effect on the  Company's  consolidated  financial
statements.

         In November 2001, the EITF reached a consensus on EITF Issue No. 01-09,
"Accounting for  Consideration  Given by a Vendor to a Customer or a Reseller of
the Vendor's  Products," which is a codification of EITF Issue No. 00-14,  00-22
and 00-25. This issue presumes that consideration from a vendor to a customer or
reseller of the vendor's products to be a reduction of the selling prices of the
vendor's  products and,  therefore,  should be  characterized  as a reduction of
revenues  when  recognized  in the vendor's  income  statement and could lead to
negative  revenues under certain  circumstances.  Revenue  reduction is required
unless  consideration  relates  to  a  separate  identifiable  benefit  and  the
benefit's fair value can be established.  EITF No. 01-09 is effective for fiscal
years  beginning after December 15, 2001 and interim periods within those fiscal
years.  The adoption of EITF No. 01-9 is not expected to have a material  effect
on our consolidated financial statements.

         In November 2001, the FASB discussed  Topic D-103,  recharacterized  as
EITF Issue No.  01-14,  "Income  Statement  Characterization  of  Reimbursements
Received  for   "Out-of-Pocket"   Expenses  Incurred."  This  issue  deals  with
classification in the income statement of incidental expenses, which in practice
are commonly referred to as "out-of-pocket" expenses,  incurred by entities that
provide  services as part of their central  ongoing  operations.  The Task Force
reached a consensus  that  reimbursements  received for  out-of-pocket  expenses
incurred should be characterized as revenue in the income statement.  This issue
is effective for fiscal years beginning after December 15, 2001. The Company has
recorded all "out-of-pocket" expenses for fiscal 2002 as revenue.  Out-of-pocket
expenses for all periods presented were immaterial.

         In June 2002,  the FASB  issued  SFAS No.  146,  "Accounting  for Costs
Associated with Exit or Disposal  Activities",  which  addresses  accounting for
restructuring  and similar costs.  SFAS No. 146 supercedes  previous  accounting
guidance, principally EITF

                                       47
<PAGE>

issue No. 94-3. The Company is required to adopt SFAS No. 146 for  restructuring
activities  initiated  after  December 31, 2002.  SFAS No. 146 requires that the
liability for costs  associated with an exit or disposal  activity be recognized
when the  liability is incurred.  Under EITF 94-3, a liability  for an exit cost
was recognized at the date of the company's commitment to an exit plan. SFAS No.
146 also  established  that the  liability  should  initially  be  measured  and
recorded  at  fair  value.  Accordingly,  SFAS  146 may  affect  the  timing  of
recognizing  future  restructuring  plans.  If the Company  continues  to record
significant  restructuring  charges,  the  adoption of SFAS No. 146 could have a
significant impact on the Company's results of operations.

Supplier Concentration

         Prior to exiting the hardware systems business in fiscal year 2001, the
Company was dependent on a single contract manufacturer for substantially all of
its manufacturing and supply chain management,  including component  procurement
and inventory  management for its systems and services  segment.  Beginning July
29, 2001, under the software  application  business,  no supplier  concentration
exists.

Concentrations of Credit Risk and Significant Customers

         Financial   instruments  that   potentially   subject  the  Company  to
concentrations of credit risk consist primarily of cash trade  receivables.  The
Company  provides  credit,  in the  normal  course of  business,  to a number of
companies and performs ongoing credit  evaluations of its customers.  As of July
27, 2002, approximately 40% of gross accounts receivables were concentrated with
one customer,  Lavaca  Systems,  Inc. A reserve  representing  100% of the gross
accounts  receivable  related to this customer has been established.  As of July
28, 2001, approximately 24% of gross accounts receivables were concentrated with
one customer, AT&T.

         For  the  fiscal  year  ended  July  27,  2002,  one  customer,   Intel
Corporation,  accounted for  approximately  20% of net revenues.  For the fiscal
year ended July 28, 2001, one customer, Akamai Technologies, Inc., accounted for
approximately 25% of net revenues.  For the fiscal year ended July 28, 2000, one
customer,  Akamai  Technologies,  Inc.  accounted for  approximately  18% of net
revenues.

Reclassifications

         Certain  reclassifications have been made to the prior year's financial
statements to conform to the current year's presentation.  These classifications
had no effect on the prior year's stockholders' equity or results of operations.

3. Acquisitions and Divestitures

         There were no acquisitions or divestitures during the fiscal year ended
2002.  During  the  fiscal  years  ended  July 28,  2001 and 2000,  the  Company
completed a number of  acquisitions  accounted for using the purchase method and
as such,  the  purchase  price was  allocated  to the  assets  acquired  and the
liabilities  assumed based on estimated fair values on the date of  acquisition.
The  consolidated  financial  statements  include the operating  results of each
business  from  the  date  of  acquisition.  The  value  assigned  to  purchased
in-process  research and development,  based on the income method prepared by an
independent  third party,  was  determined by identifying  research  projects in
areas for which technological feasibility had not been established and no future
alternative uses existed. Amounts allocated to goodwill and purchased intangible
assets have been  amortized  on a  straight-line  basis over three to five years
through July 28, 2001.  As of July 29, 2001,  in  accordance  with SFAS No. 142,
"Goodwill  and  Other  Intangible  assets,"  the  Company  no  longer  amortizes
goodwill.  Other  intangible  assets continue to be amortized on a straight-line
basis over three to five years.

Acquisitions and Divestitures - Fiscal Year 2000

         TruSolutions, Inc.

         On March 28, 2000, in an  acquisition  accounted for under the purchase
method of  accounting,  the Company  acquired all of the  outstanding  shares of
TruSolutions for  approximately  $72.9 million  (including  acquisition costs of
approximately  $400,000).  The  consideration  included  767,000  shares  of the
Company's  common stock with a fair market value of $56.7  million  based on the
average closing price for ten days prior to the  acquisition  closing date, cash
of  approximately  $10  million and the  assumption  of  outstanding  options to
purchase  TruSolutions  common  stock  valued  at  $5.8  million  based  on  the
Black-Scholes  model using the following  assumptions:  risk free rate of 6.34%;
average expected life of 4 years;  dividend yield of 0.0%;  volatility of common
stock of 60.0%. The purchase agreement contained  additional payments to be made
in common stock that were solely contingent upon the continued

                                       48
<PAGE>

employment of certain key employees for a period of three years.  Maximum future
payments,  contingent  on  employment  of the key  employees,  was $96.3 million
payable in stock  (approximately  1,303,000  shares) and was originally  payable
after 12 months, 24 months and 36 months (approximately  501,000 shares, 501,000
shares and 301,000  shares,  respectively).  The contingent  payments were to be
accounted for as compensation  expense over the term of the employment condition
and not as part of the purchase  price.  The purchase price of $72.9 million was
allocated  as  follows:  $62.2  million  to  goodwill,  $7.7  million  to  other
intangible assets,  $4.0 million to in-process  research and development and the
remainder of $1.0 million to other assets and liabilities.

         TruSolutions'  in-process  research  projects included the research and
development  associated with the 1/2U, 1U, 2U, and 4U server products. The value
of in-process research and development was determined by estimating the costs to
develop the purchased  in-process  technology into commercially viable products,
estimating the resulting net cash flows from such projects and  discounting  the
net cash  flows  back to their  present  value.  The  discount  rate  included a
risk-adjusted discount rate to take into account the uncertainty surrounding the
successful development of the purchased in-process technology. The risk-adjusted
discount  rate applied to the  projects'  cash flows was 45% for the  in-process
technology.  The  Company  believes  that the  estimated  in-process  technology
amounts  represent  fair value and do not exceed the amount a third  party would
pay for the  projects.  The  valuation  included  cash inflows  from  in-process
technology through fiscal year 2003 with revenues commencing in fiscal year 2000
for the 1U,  2U and 4U  servers,  and in fiscal  year 2001 for the 1/2U  server.
Where  appropriate,  the  Company  allocated  anticipated  cash  flows  from  an
in-process research and development project to reflect contributions of the core
technology.

         In February  2001, in response to the general  slowdown in the economy,
the Company adopted a plan to reduce  operating costs. The plan included charges
related to the closure of  TruSolution's  sole facility located in San Diego. In
addition,   compensation   expense  of  $33.3   million  was  recorded  for  the
acceleration of the contingent  consideration related to severance  arrangements
with  terminated  TruSolutions'  employees.   These  charges  were  recorded  as
restructuring  costs and other special  charges in the  statements of operations
(see Note 4).  In June  2001,  the  Company  adopted a plan to exit the  systems
business.  As a result,  the net book value of goodwill and intangible assets of
$50.6 million related to the  TruSolutions  acquisition was written down to zero
as there were no future cash flows  expected from this business  pursuant to the
completion of the restructuring plan (see Note 4).

         NetAttach, Inc.

         On April 5, 2000,  in an  acquisition  accounted for under the purchase
method of  accounting,  the Company  acquired all of the  outstanding  shares of
NetAttach  for  approximately  $37.4  million  (including  acquisition  costs of
approximately  $300,000).  The purchase  price  included  396,000  shares of the
Company's  common stock with a fair market value of $24.6  million  based on the
average closing price for five days prior to the acquisition  closing date, cash
of $10.0  million  and the  assumption  of  outstanding  options  valued at $2.5
million based on the Black-Scholes model using the following  assumptions:  risk
free rate of 6.34%;  average  expected life of 4 years;  dividend yield of 0.0%;
volatility  of common stock of 60.0%.  The  purchase  agreement  also  contained
additional  payments  to be made in common  stock.  These  payments  were solely
contingent  upon the continued  employment of certain key employees for a period
of two years.  Maximum  future  payments,  contingent  on  employment of the key
employees,  were $5.4 million payable in stock  (approximately  86,000 shares of
the Company's common stock) and were payable on the two-year anniversary date of
the merger. The contingent  payments were accounted for as compensation  expense
over the term of the employment condition and not as part of the purchase price.
The total  purchase  price of $37.4  million was  allocated  as  follows:  $33.1
million to goodwill,  $4.8 million to other intangible  assets and the remainder
of $0.5  million  to other  assets  and  liabilities.  As part of the  NetAttach
acquisition,  the Company assumed certain warrant agreements in association with
the  purchase.  The fair market  value of the  warrants  was not  material.  All
warrants have been converted into common stock.

         In September 2001, the Company adopted a plan to exit the  professional
services and Linux software  engineering  services  businesses in order to focus
solely on the Company's SourceForge software application  business.  The Company
recorded a restructuring  charge of $45.0 million in the first quarter of fiscal
2002  related to exiting  these  fields.  Of the $45.0  million,  $27.6  million
related  to the  impairment  of  goodwill  and  purchased  intangibles  from the
Company's  prior year  acquisition of NetAttach,  resulting from the expectation
that the Company would receive no  significant  future cash flows from the Linux
software  engineering  services businesses as a result of the exit decision made
in September 2001.

         Precision Insight, Inc.

         On April 14, 2000, in an  acquisition  accounted for under the purchase
method of  accounting,  the Company  acquired all of the  outstanding  shares of
Precision Insight for  approximately  $4.1 million.  The consideration  included
approximately  32,000  shares of the  Company's  common stock with a fair market
value of $2.3 million based on the average  closing price for five days prior to
the  acquisition  closing  date  and cash of  approximately  $1.8  million.  The
purchase agreement contained additional payments to be made

                                       49
<PAGE>

in common stock that were solely  contingent  upon the  continued  employment of
certain key  employees  for a period of four  years.  Maximum  future  payments,
contingent  on  employment  of the key  employees,  was $11.5  million  in stock
(approximately 157,000 shares of the Company's common stock) and were originally
payable after 24 months,  36 months and 48 months  (approximately  52,300 shares
each year).  The  contingent  payments were to be accounted for as  compensation
expense  over  the  term of the  employment  condition  and not as a part of the
purchase  price.  The  disclosures  of the  allocation of purchase price and pro
forma data have not been disclosed as the amounts are not material.

         In September 2001, the Company adopted a plan to exit the  professional
services and Linux software  engineering  services  businesses in order to focus
solely on the Company's SourceForge software application  business.  The Company
recorded a restructuring  charge of $45.0 million in the first quarter of fiscal
2002 related to exiting these fields. Of the $45.0 million, $3.0 million related
to the impairment of goodwill and purchased intangibles from the Company's prior
year acquisition of Precision  Insight,  resulting from the expectation that the
Company would  receive no  significant  future cash flows from the  professional
services business as a result of the exit decision made in September 2001.

OSDN

         On June 7, 2000,  in an  acquisition  accounted  for under the purchase
method of accounting, the Company acquired all of the outstanding shares of OSDN
for approximately  $342.0 million (including  acquisition costs of approximately
$5.0 million).  The purchase price  included  6,986,000  shares of the Company's
common  stock with a fair market  value of $315.0  million  based on the average
closing  price  for five  days  prior to the  acquisition  closing  date and the
assumption of outstanding  options to purchase the Company's common stock valued
at  approximately  $22.0  million  based on the  Black-Scholes  model  using the
following  assumptions:  risk  free rate of 6.64%;  average  expected  life of 7
years; dividend yield of 0.0%; volatility of common stock of 70.0%. The purchase
price was  allocated as follows:  $229.7  million to goodwill,  $38.4 million to
other intangible assets, $5.0 million to in-process research and development and
the remainder to other assets and liabilities.

         OSDN's in-process  research projects included  next-generation web site
management tools,  online web applications,  and other technologies that support
the  Company's  network  of web  sites.  The value of  in-process  research  and
development  was  determined  by  estimating  the costs to develop the purchased
in-process   technology  into  commercially  viable  products,   estimating  the
resulting net cash flows from such projects and  discounting  the net cash flows
back to their present value. The discount rate included a risk-adjusted discount
rate to take into account the uncertainty surrounding the successful development
of the purchased in-process technology.  The risk-adjusted discount rate applied
to the projects' cash flows was 30% for the in-process  technology.  The Company
believed that the estimated in-process technology amounts represented fair value
and did not exceed the amount a third party would pay for the projects.

         The valuation included cash inflows from in-process  technology through
fiscal  year  2005  with  revenues   commencing  in  fiscal  year  2001.   Where
appropriate,  the Company  allocated  anticipated  cash flows from an in-process
research  and  development   project  to  reflect   contributions  of  the  core
technology.  At the  time  of the  merger,  OSDN's  remaining  tasks  that  were
substantially   incomplete   included  certain  planning,   designing,   coding,
prototyping,  and testing  activities  that were necessary to establish that the
developmental technologies could be produced to meet their design specifications
including  functional,  technical,  and economic performance  requirements.  The
Company  estimated that it would cost  approximately  $1,000,000 to complete the
projects with significant  remaining  development  efforts.  The Company did not
incur any additional  charges  related to these projects in fiscal year 2002 and
does not expect to incur additional charges going forward.

         In the  fourth  quarter  of  fiscal  2001,  the  Company  performed  an
assessment of the carrying value of the Company's  long-lived  assets to be held
and used including  significant  amounts of goodwill and other intangible assets
recorded  in  connection  with its  acquisition  of  OSDN.  The  assessment  was
performed  pursuant  to SFAS  No.  121 due to the  significant  slowdown  in the
economy  affecting both the Company's  current  operations  and expected  future
sales, as well as the general decline of technology  valuations.  The conclusion
of that  assessment  was  that the  decline  in  market  conditions  within  the
Company's  industry was significant and other than temporary.  As a result,  the
Company  recorded  during the fourth  quarter of fiscal 2001, a charge of $160.0
million to reduce goodwill associated with the acquisition of OSDN, based on the
amount by which the carrying  value of these assets  exceeded  their fair value.
The charge is included in the caption  "Impairment of long-lived  assets" in the
statements of operations.  Fair value was determined based on discounted  future
cash flows.

         Effective  July 29, 2001, the Company  adopted SFAS No. 142,  "Goodwill
and Other  Intangible  assets."  SFAS 142 requires  that  goodwill be tested for
impairment at the "reporting  unit level" at least annually and more  frequently
upon the  occurrence  of certain  events,  as defined by SFAS 142. In accordance
with SFAS No. 142, the Company tested the remaining OSDN goodwill and

                                       50
<PAGE>

intangibles for impairment  during the quarter ended July 27, 2002.  First,  the
Company  determined if its carrying amount exceeded its "fair value" which would
indicate that goodwill may be impaired. The Company determined that goodwill and
intangible  assets were impaired.  Therefore,  the Company compared the "implied
fair value" of the assets,  as defined by SFAS 142,  to its  carrying  amount to
determine if there was an impairment  loss. As a result of the impairment  test,
the Company  determined  that the  carrying  value was  impaired and recorded an
impairment loss of $12.2 million.

Acquisitions and Divestitures - Fiscal Year 2001

         Brave New Worlds, Inc.

         On  September  26,  2000,  in an  acquisition  accounted  for under the
purchase  method of  accounting,  the Company  acquired  all of the  outstanding
shares of Brave New Worlds,  Inc. ("BNW") for  approximately  $2.5 million.  The
consideration included approximately 35,000 shares of the Company's common stock
with a fair market value of $1.7 million based on the average  closing price for
three  days  prior to the  acquisition  closing  date and cash of  approximately
$750,000.  The purchase agreement  contained  additional  payments to be made in
common  stock that were  solely  contingent  upon the  continued  employment  of
certain  key  employees  for a period of four  years.  Maximum  future  payments
contingent  on  employment  of the key employees was to be $4.8 million in stock
(approximately  97,000  shares) and was payable after 12 months,  24 months,  36
months and 48 months. The contingent payments were accounted for as compensation
expense on a pro rata basis over the term of the employment condition and not as
purchase price. Upon consummation of the acquisition, the Company established an
escrow for these  contingent  payments.  The  disclosures  of the  allocation of
purchase  price and pro forma  data have been  omitted  as the  amounts  are not
material.  In February 2001, in response to the general slowdown in the economy,
the Company  adopted a plan to reduce  operating  costs.  The plan  involved the
divestiture of the managed services  business,  including the recently  acquired
BNW.  Charges  were  recorded  to write  down the net book  value of the BNW net
assets acquired to the Company's estimate of proceeds to be received on the sale
of the business,  which was estimated to be nominal.  In addition,  compensation
expense of $1.4 million was recorded  for the  acceleration  of a portion of the
contingent  consideration related to severance arrangements made with terminated
BNW  employees.  The  sale of BNW was  completed  on June 10,  2001 for  minimal
proceeds.  The charges  associated with this  divestiture  have been recorded as
restructuring  costs and other  special  charges in the  statement of operations
(see Note 4).

         Life BVBA

On September 29, 2000, in an acquisition accounted for under the purchase method
of accounting,  the Company acquired all of the outstanding  shares of Life BVBA
("Life") for approximately  $860,000.  The consideration  included approximately
14,000 shares of the Company's common stock with a fair market value of $660,000
based on the  average  closing  price for three  days  prior to the  acquisition
closing  date  and  cash  of  approximately  $200,000.  The  purchase  agreement
contained  additional  payments  to be made in common  stock  that  were  solely
contingent  upon the continued  employment of certain key employees for a period
of four years.  Maximum  future  payments  contingent  on  employment of the key
employees were capped at $2.0 million in stock (approximately 43,000 shares) and
was originally payable after 12 months, 24 months, 36 months and 48 months. Upon
consummation  of the  acquisition,  the Company  established an escrow for these
contingent payments. The disclosures of the allocation of purchase price and pro
forma data have been omitted as the amounts are not material.  In February 2001,
in response to the general  slowdown in the economy,  the Company adopted a plan
to reduce  operating  costs.  The plan involved the  divestiture  of the managed
services  business,  including the recently  acquired Life. The sale of Life was
completed  on April 25, 2001 for minimal  proceeds.  In  addition,  compensation
expense of $1.3  million was  recorded for the  acceleration  of the  contingent
consideration  related  to  severance  arrangements  made with  terminated  Life
employees.  The charges  associated with this  divestiture have been recorded as
restructuring  costs and other  special  charges in the  statement of operations
(see Note 4).

         Help Desk Facility

         On November 27, 2000, the Company  acquired  certain assets of Alabanza
Corporation  ("Alabanza")  for  approximately  $3.6 million.  The  consideration
included 224,090 shares of the Company's common stock valued at $2.6 million and
cash of approximately $950,000. The agreement contained no additional contingent
payments,  options or commitments.  In February 2001, in response to the general
slowdown in the economy,  the Company adopted a plan to reduce  operating costs.
In  connection  with these  actions,  the plan involved the  divestiture  of its
managed services  business,  including the help desk facility  recently acquired
from  Alabanza.  Charges  were  recorded  to write  down  the net book  value of
intangible  assets to the  Company's  estimate of proceeds to be received on the
sale of the assets,  which was  estimated  to be  nominal.  The  divestiture  of
Alabanza was completed on July 10, 2001 for  approximately  $0.5 million,  which
has been fully reserved for during  restructuring.  The charges  associated with
this divestiture were recorded as restructuring  costs and other special charges
in the statements of operations (see Note 4).

                                       51
<PAGE>

         Software Technology

         On December  7, 2000,  the Company  acquired  certain  assets of Lavaca
Systems,  Inc.  ("Lavaca") for  approximately  $3.6 million.  The  consideration
included 306,122 shares of the Company's common stock valued at $2.6 million and
cash of  approximately  $1.0  million.  The  agreement  contained no  additional
contingent  payments,  options  or  commitments.   Purchased  intangible  assets
included  intellectual  property  and  technology  related to specific  software
applications of approximately $3.6 million.  During the fourth quarter of fiscal
2001,  charges  were  recorded  to write down the net book  value of  intangible
assets to the  Company's  estimate of proceeds to be received on the sale of the
assets.  The  divestiture of Lavaca was completed in the first quarter of fiscal
2002 for minimal proceeds. The charges associated with this write-down have been
recorded as  restructuring  costs and other special charges in the statements of
operations (see Note 4).

4. Restructuring Costs and Other Special Charges

         During  February  2001,  in  response  to the  general  slowdown in the
economy,  the  Company  adopted a formal  plan to  reduce  operating  costs.  In
connection with these actions, a pre-tax  restructuring  charge of approximately
$43.4  million was recorded in the third  quarter of fiscal 2001.  The principle
actions of the plan involved the closure of the Company's San Diego facility and
the exit from its managed services business. Of the $43.4 million, $33.8 million
related to the acceleration of deferred stock  compensation  that was originally
contingent  on future  employment  by three  employees of  TruSolutions  and one
employee  of Life,  companies  VA  acquired  in March 2000 and  September  2000,
respectively.  These  employees'  positions  were  terminated  as  part  of  the
restructuring and all stock held in escrow was released to them as part of their
severance  agreements.  In  addition,  as part of the  plan  to  exit  from  the
Company's  managed services  business,  VA accrued for the disposition of BNW, a
company VA acquired in September  2000.  Included in the accrual were  severance
charges  related to six employees of BNW who were informed before April 28, 2001
of the formal plan of the Company to divest of BNW.  Further,  $1.7  million was
recorded for workforce reduction, consisting of severance, acceleration of stock
options, and other related costs attributable to 43 former employees,  primarily
from the Company's  domestic  systems  business.  Of the remaining $7.9 million,
$1.7  million was for excess  facilities  related  primarily  to  non-cancelable
leases  (payments  which will continue  until fiscal year 2010 unless VA sublets
completely)  or other costs and the  abandonment  or  disposal  of property  and
equipment,  and $6.2 million was for the  impairment  of goodwill and  purchased
intangibles  as there  were no  future  cash  flows  expected  from the  managed
services  business  that was exited  pursuant  to the  restructuring  plan.  The
accrual for non-cancelable lease payments includes management's estimates of the
time expected to sublet the facilities and estimates of sublease  income.  These
estimates  are  subject  to change  based on actual  events.  VA  evaluates  and
updates, if applicable, these estimates quarterly.

         In  addition  to the  above,  the  Company  recorded  $3.4  million  in
connection  with these  restructuring  charges,  which was classified as cost of
revenues in the statement of operations.  Of the $3.4 million,  $0.2 million was
recorded for  workforce  reduction,  consisting  of severance  and other related
costs  attributable to 19 employees from the domestic  systems business and nine
employees  from the managed  services  business.  Of the remaining $3.2 million,
$2.9 million  related to a write down of  inventory  from the closing of the San
Diego facility, and $0.3 million related to other restructuring costs.

         In June 2001, the Company  adopted a plan to exit the systems  business
which was accounted for in the fourth  quarter ended July 28, 2001.  The Company
decided to exit its systems  business in reaction to the negative  impact of the
slowdown in the economy on VA's customer base and VA's  inability to effectively
penetrate the larger enterprise market. VA exited the systems business to pursue
its  SourceForge  application  software  business  in order to reduce  operating
losses and improve cash flow.  The Company  recorded a  restructuring  charge of
$70.1  million  in the  fourth  quarter of fiscal  2001  related to exiting  its
systems business. Of the $70.1 million,  $53.5 million related to the impairment
of goodwill and purchased  intangibles,  resulting from its expectation  that VA
would receive no significant  future cash flows from the systems business.  $6.6
million of the $70.1 million charge related to excess facilities  primarily from
non-cancelable  leases  (payments  which,  unless VA  sublets  completely,  will
continue until fiscal year 2010), $3.2 million related to a workforce  reduction
consisting of severance,  acceleration of stock options, and other related costs
attributable to 84 employees primarily from the Company's systems business,  and
$6.8 million related to other restructuring charges related to the exit from the
systems  business.  The  accrual  for  non-cancelable  lease  payments  includes
management's  estimates  of the time  expected  to  sublet  the  facilities  and
estimates of sublease  income.  These  estimates  are subject to change based on
actual  events.  VA  evaluates  and  updates,  if  applicable,  these  estimates
quarterly.

                                       52
<PAGE>

         In addition to the above, the Company recorded $10.5 million of charges
in connection  with the exit of the systems  business,  which were classified as
cost of revenues in the  statements of operations.  Of the $10.5  million,  $7.6
million was related to excess  inventory  charges  arising  from the exit of the
systems business, $0.4 million was recorded for a workforce reduction consisting
of severance,  and other related costs  attributable to 64 former employees from
the Company's systems business,  and the remaining $2.5 million related to other
restructuring costs.

         In September 2001, the Company adopted a plan to exit the  professional
services and Linux software  engineering  services  businesses in order to focus
solely on its SourceForge software application business.  The Company recorded a
restructuring  charge of $45.0  million in the first quarter of fiscal year 2002
related  to this  exit.  Of the $45.0  million,  $30.6  million  related  to the
impairment   of  goodwill  and  purchased   intangibles   from  its  prior  year
acquisitions of NetAttach and Precision  Insight  resulting from its expectation
that the  Company  would  receive  no  significant  future  cash  flows from the
professional services and Linux software engineering services businesses.  $12.9
million of the $45.0 million charge related to excess facilities  primarily from
non-cancelable  leases  (payments  which will  continue  until  fiscal year 2010
unless VA sublets completely) and other costs for the abandonment or disposal of
property and equipment. Of the remaining $1.5 million restructuring charge, $1.3
million was related to a workforce  reduction  consisting of severance and other
labor related costs attributable to 50 former employees primarily from its Linux
software  engineering  service  business,  and  $0.2  million  related  to other
restructuring charges related to the exit of the services business.  The accrual
for non-cancelable  lease payments includes  management's  estimates of the time
expected  to sublet the  facilities  and  estimates  of sublease  income.  These
estimates  are  subject  to change  based on actual  events.  VA  evaluates  and
updates, if applicable, these estimates quarterly.

         In  addition  to the above,  the  Company  recorded a $3.1  million net
credit included in cost of revenues in the consolidated  statement of operations
for the quarter ended October 27, 2001.  The $3.1 million net credit  included a
$3.9  million  credit  adjustment  relating to the fiscal  2001  fourth  quarter
systems  restructuring  composed of a $2.0  million  reversal  of  reserves  for
inventory (the Company had a better than expected sell through of old and excess
material in the three months ended October 27, 2001 than was anticipated in July
2001),  $1.2 million  adjustment  for system  shipments (the Company was able to
sell product at a price in excess of that originally estimated at July 28, 2001)
and $0.7  million  reversal  for an over  estimate of warranty  expense.  A $0.8
million restructuring charge was recorded for a workforce reduction which mostly
consisted  of  severance  and  other  related  costs  attributable  to 36 former
employees primarily from exiting the professional services business.

         During  the  third  quarter  of  fiscal  2002,  the  Company   recorded
additional  restructuring  charges  associated  with the  exiting  of a sublease
agreement of $0.7 million,  offset by reversals of excess restructuring accruals
related to prior periods of $0.6 million.

         In addition,  the Company  recorded a $0.3 million  credit  included in
cost of revenues in the  consolidated  statement of  operations  for the quarter
ended  April 27,  2002.  This credit was due to the  reversal of a prior  period
restructuring  accrual. The accrual was originally  established as a result of a
non-cancelable contract for warranty services. The contract was renegotiated and
settled  during the third quarter of fiscal 2002 and as a result the reserve was
reversed.

         In July 2002,  the  Company  adopted a plan to reduce its  general  and
administrative  overhead  costs.  As a  result  of  this  plan,  a $1.9  million
restructuring  charge was recorded in the fourth quarter of fiscal year 2002. Of
the $1.9 million,  $1.2 million related to excess facilities from non-cancelable
leases  (payments which will continue until fiscal year 2004,  unless VA sublets
completely)  and the  abandonment  of property,  and $0.7  million  related to a
workforce reduction consisting of severance and other related costs attributable
to 35 employees.

         In  addition  to the above,  the  Company  recorded a $2.4  million net
credit included in cost of revenues in the consolidated  statement of operations
for the quarter ended July 27, 2002. The $2.4 million net credit included a $2.7
million credit adjustment relating to the overestimate of the fiscal 2001 fourth
quarter systems warranty  restructuring  accrual.  A $0.3 million  restructuring
charge was  recorded  for a  workforce  reduction,  which  mostly  consisted  of
severance and other related costs attributable to 14 former employees  primarily
in an effort to align the Company's infrastructure with its operations.

                                       53
<PAGE>

         Below is a summary of the restructuring  charges in operating  expenses
(in thousands):


<TABLE>
<CAPTION>
                                                                                        Total             Total
                                                                    Total Charged     Charged To           Cash       Restructuring
                                                                    To Operations     Operations         Receipts/    Liabilities at
                                                                     Fiscal 2001      Fiscal 2002       (Payments)    July 27, 2002
                                                                     -----------      -----------       ----------    -------------
<S>                                                                    <C>              <C>               <C>             <C>
Cash Provisions:
  Other special charges relating to
    restructuring activities .................................         $  2,159         $   (888)         $ (1,219)       $     52
  Facilities charges .........................................            6,584            9,401             1,545          17,530
   Employee severance and other related
     charges .................................................            3,498            1,997            (5,083)            412
                                                                       --------         --------          --------        --------
      Total cash provisions ..................................           12,241           10,510          $ (4,757)       $ 17,994
                                                                       --------         --------          ========        ========
Non-cash Provisions:
  Write-off of goodwill and intangibles ......................           59,723           30,632
  Write-off of other special charges relating
   to restructuring activities ...............................            4,434            5,442
  Write-off of accelerated options from
    terminated employees .....................................            1,352             --
   Acceleration of deferred stock
   compensation ..............................................           35,728              352
                                                                       --------         --------
      Total non-cash provisions ..............................          101,237           36,426
                                                                       --------         --------
      Total operating expense restructuring
        provisions ...........................................         $113,478         $ 46,936
                                                                       ========          ========
</TABLE>


5.  Other Obligations

OSDN Notes Payable

         As part of the OSDN acquisition, the Company assumed three note payable
agreements (the "Notes") with an employee of OSDN. The Notes bore interest rates
of 9.0% to 9.75%  totaling  $2,043,000  and were to mature  through  fiscal year
2003. As of July 28, 2001,  the remaining  principal  maturities  under the note
payables  of  $922,000   were   currently  due  and  were  recorded  as  accrued
compensation  in the  accompanying  balance sheet.  During fiscal year 2002, the
Company settled the remaining loan balance as part of the employee's  separation
agreement for face value. As of July 27, 2002, there were no remaining  balances
under the Notes.

6. Line of Credit and Equipment Loan

         In September 2001, the Company amended its loan and security  agreement
with a bank. In accordance with the amended agreement,  the committed  revolving
line of credit was reduced from $10,000,000 to $7,500,000.  The amount available
for  borrowing  was  not to  exceed  the  committed  revolving  line,  less  any
outstanding letters of credit issued under the line of credit,  which was not to
exceed  $3,000,000.  If the sum of outstanding  advances plus the face amount of
all outstanding letters of credit exceeded $4,000,000, then advances were not to
exceed the lesser of (i) the  committed  revolving  line or (ii) 70% of eligible
accounts  receivables  minus,  in each case, the face amount of all  outstanding
letters of credit.

         In May  2002,  the  Company  further  amended  its  loan  and  security
agreement.  In accordance with the amended  agreement,  the committed  revolving
line of credit was reduced from $7,500,000 to $5,000,000.  The amount  available
for  borrowing  was  not to  exceed  the  committed  revolving  line,  less  any
outstanding letters of credit issued under the line of credit,  which was not to
exceed  $3,000,000.  If the sum of outstanding  advances plus the face amount of
all outstanding letters of credit exceeded $4,000,000, then advances were not to
exceed the lesser of (i) the  committed  revolving  line or (ii) 70% of eligible
accounts  receivables  minus,  in each case, the face amount of all  outstanding
letters of credit.  Borrowings under the amended  agreement  matured on June 30,
2002.  The loan and  security  agreement  were not  renewed  or  amended  on its
maturity date of June 30, 2002.

                                       54
<PAGE>

7. Commitments and Contingencies

         The Company leases its facilities under operating leases that expire at
various dates through  fiscal year 2010.  Future  minimum lease  payments  under
non-cancelable operating leases, net of sublease income, as of July 27, 2002 are
as follows (in thousands):

                                                                     Operating
                                                                       Leases
                                                                      -------
2003 .........................................................        $ 4,208
2004 .........................................................          4,428
2006 .........................................................          4,556
2006 .........................................................          3,632
2007 .........................................................          3,511
Thereafter ...................................................         10,521
                                                                      -------
          Total minimum lease payments .......................        $30,856
                                                                      =======

         Effective  June 1, 2000,  the  Company  entered  into a ten-year  lease
agreement for a new corporate facility.

         Gross rent expense for the years ended July 27, 2002, July 28, 2001 and
July  28,  2000  was  approximately  $18,866,000,  $13,601,000  and  $2,163,000,
respectively. $11,029,000 and $8,300,000 of the rent expense for the years ended
July 27, 2002 and July 28, 2001, respectively,  were attributable to an estimate
of the loss related to idle facilities, which has been recorded as restructuring
costs and other special charges in the statements of operations.

8.  Litigation

         The Company,  two of its former officers (the "Former  Officers"),  and
the lead  underwriter  in its IPO were  named as  defendants  in a  consolidated
shareholder  lawsuit  in the  United  States  District  Court  for the  Southern
District of New York,  captioned In re VA Software Corp. Initial Public Offering
Securities  Litigation,   01-CV-0242.  This  is  one  of  a  number  of  actions
coordinated for pretrial  purposes as In re Initial Public  Offering  Securities
Litigation,  21 MC 92.  Plaintiffs in the  coordinated  proceeding  bring claims
under the federal securities laws against numerous underwriters,  companies, and
individuals,  alleging generally that defendant underwriters engaged in improper
and  undisclosed  activities  concerning the allocation of shares in the IPOs of
more than 300  companies  during late 1998  through  2000.  Among other  things,
plaintiffs  allege  that  the  underwriters'  customers  had  to  pay  excessive
brokerage commissions and purchase additional shares of stock in the aftermarket
in order to receive favorable  allocations of shares in an IPO. The consolidated
amended complaint in the Company's case seeks unspecified damages on behalf of a
purported  class of purchasers of its common stock between  December 9, 1999 and
December 6, 2000. Defendants have filed motions to dismiss.

         In September 2002,  plaintiffs agreed to voluntarily dismiss all claims
(the "Dismissed  Claims") against the Company's  Former Officers.  In the event,
however,  that facts  emerge  prior to September  30,  2003,  which  support the
Dismissed Claims, the Court may permit plaintiffs to reassert some or all of the
Dismissed Claims.

         The Company  believes it has meritorious  defenses to all of the claims
against the Company and will defend them vigorously.

         The Company is subject to various  claims and legal actions  arising in
the  ordinary  course  of  business.   In  the  opinion  of  management,   after
consultation  with legal counsel,  the ultimate  disposition of these matters is
not  expected to have a material  effect on the  Company's  business,  financial
condition or results of operations. The Company has accrued for estimated losses
in the accompanying consolidated financial statements for those matters where it
believes that the  likelihood  that a loss will occur is probable and the amount
of loss is reasonably estimable. Although management currently believes that the
outcome of other outstanding legal proceedings,  claims and litigation involving
the Company will not have a material adverse effect on its business,  results of
operations or financial condition, litigation is inherently uncertain, and there
can be no assurance that existing or future  litigation will not have a material
adverse  effect on the  Company's  business,  results of operations or financial
condition.

9.  Retirement Savings Plan

         The Company  maintains an employee savings and retirement plan which is
intended to be qualified  under Section 401(k) of the Internal  Revenue Code and
is available to substantially all full-time  employees of the Company.  The plan
provides  for  tax   deferred   salary   deductions   and   after-tax   employee
contributions.  Contributions include employee salary deferral contributions and
discretionary  employer  contributions.  To date,  there  have been no  employer
discretionary contributions.

                                       55
<PAGE>

10.  Common Stock

         In  October  1999,  the  Company's  board  of  directors  approved  the
reincorporation  into Delaware by way of a merger with a  newly-formed  Delaware
subsidiary in connection  with the Company's IPO. In  conjunction  with the IPO,
the  Company  issued  4,400,000  shares of common  stock with an initial  public
offering price of $30.00 per share. Upon closing of the initial public offering,
all of the outstanding shares of convertible  preferred stock were automatically
converted into 19,921,322 shares of common stock. In addition,  the underwriters
exercised  their  option  to  purchase  660,000  additional  shares to cover the
over-allotments of shares at the $30.00 per share offering price. The IPO raised
approximately  $141,000,000  after  underwriting fees and $139,000,000 after all
other direct costs. In fiscal year 2002, the Company  cancelled 10,934 shares of
its common stock, which has been recorded as treasury stock in the balance sheet
and  statement  of  stockholders'  equity.  In fiscal  year  2001,  the  Company
repurchased 41,114 shares of common stock for approximately $4,000 and cancelled
63,386 shares of its common stock,  which has been recorded as treasury stock in
the balance sheet and statement of stockholders' equity.

         As of July 27, 2002 there were 54,165,411 shares of common stock issued
and outstanding. VA Software is authorized to issue 250,000,000 shares of common
stock,  $0.001 par value.  Each share of common stock has the right to one vote.
The  holders of common  stock are also  entitled to receive  dividends  whenever
funds  are  available  and when  declared  by the  Board of  Directors.  No cash
dividends have been declared or paid through July 27, 2002.

         As of July 27,  2002,  the  Company had  reserved  shares of its common
stock for future issuance as follows:

1998 Stock Option Plan and Assumed Plans ....................         19,936,338
1999 Director Option Plan ...................................          1,000,000
1999 Employee Stock Purchase Plan ...........................          1,803,677
                                                                      ----------
                                                                      22,740,015
                                                                      ==========

Stock Repurchase Agreements

         In  connection  with the exercise of options  pursuant to the Company's
Stock Option Plan,  employees entered into restricted stock purchase  agreements
with the Company.  Under the terms of these agreements,  the Company has a right
to repurchase any unvested  shares at the original  exercise price of the shares
upon  termination of the employee.  The repurchase right lapses ratably over the
vesting term of the original option grant. As of July 27, 2002, 29,106 shares of
the Company's common stock were subject to repurchase by the Company.

Stock Option Plan

         In fiscal  year 1997,  the Company  adopted and the board of  directors
approved  the 1996 Stock  Option  Plan  ("1996  Plan"),  under  which a total of
4,650,000 shares of the Company's  common stock were reserved for issuance.  The
1996  Plan  permitted  options  to be  granted  to  employees,  consultants  and
directors to purchase shares of the Company's common stock at a price determined
by the board of directors.  The Company granted 4,650,000 options under the 1996
Plan during fiscal 1997 and 1998. In fiscal 1998, the Company granted options to
purchase  4,026,000  shares  of  common  stock  outside  of the 1996  Plan at an
exercise price of $0.02 per share.  In October 1998,  the Company  cancelled all
stock options outstanding under the 1996 Plan and the 4,026,000 options that had
been issued in fiscal year 1998 outside of the 1996 Plan. The cancelled  options
were  replaced  with  options  under the 1998 Stock Plan ("1998  Plan") that had
vesting and exercise prices consistent with the terms of the cancelled  options.
The 1996 Plan was terminated in October 1998.

         In fiscal  year 1999,  the Company  adopted and the board of  directors
approved the 1998 Plan. A total of  32,452,248  shares of common stock have been
reserved for issuance under the 1998 Plan,  subject to an annual increase of the
lesser of 4,000,000  shares or 4.9% of the then  outstanding  common stock or an
amount to be  determined  by the Board of  Directors.  Through  July,  27, 2002,
36,939,966  options have been granted under the 1998 Plan.  Under the 1998 Plan,
the board of directors may grant to employees  and  consultants  options  and/or
stock purchase rights to purchase the Company's common stock at terms and prices
determined  by the  board  of  directors.  The  Plan  will  terminate  in  2008.
Nonqualified options granted under the 1998 Plan must be issued at a price equal
to at least 85% of the fair market  value of the  Company's  common stock at the
date of grant.  All options may be  exercised at any time within 10 years of the
date of grant or within  three  months of  termination  of  employment,  or such
shorter time as may be provided in the stock option  agreement,  and vest over a
vesting schedule determined by the board of directors.

                                       56
<PAGE>

         The Company's 1999 Directors  Option Plan (the  "Directors'  Plan") was
adopted  by the  Company's  board  of  directors  in  October  1999.  A total of
1,000,000  shares of common  stock have been  reserved  for  issuance  under the
Directors' Plan,  subject to an annual increase of the lesser of 250,000 shares,
0.5% of the then outstanding  common stock or an amount  determined by the board
of directors. Through July 27, 2002, 430,000 options have been granted under the
Directors'  Plan.  Under  the  Directors'  Plan,  options  are  granted  when  a
non-employee director joins the board of directors following the IPO and at each
annual meeting where the director  continues to serve on the board of directors.
The Directors'  Plan  establishes an automatic  grant of 80,000 shares of common
stock to each  non-employee  director who is elected after the completion of the
IPO.  The  Directors'  Plan  also  provides  that  upon the date of each  annual
stockholders'  meeting,  each non-employee director who has been a member of the
board  of  directors  for  at  least  six  months  prior  to  the  date  of  the
stockholders' meeting will receive automatic annual grants of options to acquire
20,000 shares of common stock.  Each automatic grant will have an exercise price
per share  equal to the fair  market  value of the  common  stock at the date of
grant, will vest 25% immediately upon the grant date and monthly  thereafter and
become fully vested three years after the date of grant.  Each  automatic  grant
will have a term of ten years. In the event of a merger with another corporation
or the sale of substantially  all of its assets,  each  non-employee  director's
outstanding  option will become fully vested and  exercisable.  Options  granted
under the  Directors'  Plan must be exercised  within 3 months of the end of the
non-employee  director's tenure as a member of the board of directors, or within
12 months after a  non-employee  director's  termination by death or disability,
provided  that the  option  does not  terminate  by its  terms  earlier.  Unless
terminated sooner, the Directors' Plan terminates automatically in 2009.

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

         The  following  is a summary  of the option  activity  under all of the
stock option plans for the three years ended July 27, 2002 follows:

<TABLE>
<CAPTION>
                                                                                                    Options Outstanding
                                                                                                 -------------------------
                                                                                 Options                       Weighted
                                                                                Available       Number of       Average
                                                                                for Grant        Shares     Exercise Price
                                                                                ---------        ------     --------------
<S>                                                                              <C>             <C>        <C>
        Balance at July 31, 1999.........................................        6,552,640       6,482,976  $      0.46
          Authorized.....................................................        4,000,000              --           --
          Granted........................................................       (3,911,088)      5,465,563        20.89
          Exercised......................................................               --      (2,139,936)        1.12
          Cancelled......................................................          275,085        (275,085)        9.26
          Repurchases....................................................          593,048              --           --
                                                                             -------------   -------------
        Balance at July 28, 2000.........................................        7,509,685       9,533,518        11.77
          Authorized.....................................................        3,293,288              --           --
          Granted........................................................       (8,683,574)      8,683,574         9.10
          Exercised......................................................               --      (2,395,276)        1.25
          Cancelled......................................................        4,272,107      (4,987,636)       16.62
          Repurchases....................................................          923,844              --           --
                                                                             -------------   -------------
        Balance at July 28, 2001.........................................        7,315,350      10,834,180         9.72
                                                                             =============   =============
          Authorized.....................................................        2,901,816              --           --
          Granted........................................................       (8,082,800)      8,082,800         1.15
          Exercised......................................................               --        (511,674)        0.63
          Cancelled......................................................        5,970,320      (6,097,405)        8.79
          Repurchases....................................................          523,751              --           --
                                                                             -------------   -------------
        Balance at July 27, 2002.........................................        8,628,437      12,307,901         4.94
                                                                             =============   =============
</TABLE>

                                       57
<PAGE>

<TABLE>
<CAPTION>
                                               Outstanding Options                                    Options Exercisable
         ----------------------------------------------------------------------------------------     -------------------
                                                                              Weighted
                                                                               Average    Weighted                Weighted
                                                                              Remaining    Average                 Average
            Range of                                              Number      Life (in    Exercise                Exercise
         Exercise Prices                                        Outstanding    years)       Price      Shares       Price
         ---------------                                        -----------    ------       -----      ------       -----
<S>                                                               <C>           <C>       <C>           <C>       <C>
        $  0.02 - $  0.85                                         1,313,342     7.45      $  0.38       858,622   $  0.15
        $  0.92 - $  0.99                                         4,619,693     9.22      $  0.99       936,760   $  0.99
        $  1.00 - $  3.00                                         2,896,271     9.10      $  2.39       673,050   $  2.73
        $  3.22 - $  8.75                                         2,523,486     8.43      $  7.52     1,085,934   $  7.44
        $  9.63 - $112.06                                           955,109     7.87      $ 31.23       562,532   $ 30.93
                                                               ------------                         -----------
        $  0.02 - $112.06                                        12,307,901     8.74      $  4.94     4,116,898   $  6.89
                                                               ============                         ===========
</TABLE>

         During fiscal 2000,  185,000 options and stock purchase rights,  with a
weighted  average  exercise price of $0.09 were  exercised.  During fiscal years
2002 and 2001, there were no options or stock purchase rights granted outside of
the 1998 Plan outstanding.  The compensation expense recorded in connection with
these fiscal year 2000 grants was not  material.  Total options  exercisable  at
July 27, 2002 and July 28, 2001 were 4,116,898 and 2,804,395, respectively.

         Employee Stock Purchase Plan

         In October 1999,  the Company  adopted an Employee  Stock Purchase Plan
("ESPP"). Under the terms of the ESPP, the maximum aggregate number of shares of
stock that may be issued  under the ESPP is  2,000,000,  cumulatively  increased
annually by an amount  equal to the lesser of (a) one  percent  (1%) of the then
issued and outstanding  shares of common stock, (b) an amount  determined by the
Board of Directors, or (c) 500,000 shares of common stock. During each six-month
offering  period,  employees  can choose to have up to 10% of their  annual base
earnings  withheld to purchase the Company's common stock. The purchase price of
the common  stock is 85% of the lesser of the fair value as of the  beginning or
ending of the offering  period.  A total of 196,323  shares of common stock were
issued under the ESPP through July 27, 2002. At July 27, 2002,  1,803,677 shares
were available for issuance.

Employee Stock Option and Stock Purchase Plan

         The Company  accounts for stock options  issued to employees  under APB
Opinion No. 25 whereby the  difference  between the exercise  price and the fair
value  at  the  date  of  grant  is  recognized  as  compensation  expense.  Had
compensation  expense  been  determined  consistent  with SFAS No. 123, net loss
would have  increased to the following pro forma amounts (in  thousands,  except
per share data):

<TABLE>
<CAPTION>
                                                                Year Ended
                                                 ----------------------------------------
                                                                  July 28,
                                                     2001           2001          2000
                                                 -----------    -----------    ----------
<S>                                              <C>            <C>            <C>
Net loss as reported .........................   $   (91,038)   $  (525,268)   $  (94,658)
Pro forma net loss ...........................   $  (101,628)   $  (545,600)   $  (98,971)
Basic and diluted net loss per share .........   $     (1.72)   $    (10.78)   $    (3.52)
Pro forma basic and diluted net loss per share   $     (1.92)   $    (11.20)   $    (3.68)
</TABLE>


         The weighted  average fair value of options granted during fiscal years
2002, 2001 and 2000 was $0.81, $6.52 and $10.28,  respectively.  Pursuant to the
provisions  of SFAS No. 123,  the  compensation  cost  associated  with  options
granted in fiscal  years 2002,  2001 and 2000 were  estimated  on the grant date
using the Black-Scholes model and the following assumptions:

<TABLE>
<CAPTION>
                                                                       Options
                                                                     Year Ended
                                                          ---------------------------------      ESPP
                                                                                               Year Ended
                                                          ----------------------------------------------
                                                          July 27,    July 28,    July 28,     July 27,
                                                            2002       2001         2000         2002
                                                          -------     -------     ---------    ---------
<S>                                                         <C>         <C>         <C>           <C>
Risk free interest rate..............................       3.7%        5.1%        6.9%          2.4%
Average expected life of option......................     4 years     4 years     5.3 years    0.5 years
Dividend yield.......................................        0%          0%          0%            0%
Volatility of common stock...........................       100%        100%         60%          100%
</TABLE>

                                       58
<PAGE>

Deferred Stock Compensation

         In  connection  with the grant of certain  stock  options to  employees
during  fiscal  years  2000  and  1999,  the  Company  recorded  deferred  stock
compensation   within   stockholders'   equity  of  approximately   $37,800,000,
representing the difference between the estimated fair value of the common stock
for  accounting  purposes and the option  exercise price of these options at the
date of grant. The deferred stock compensation  expense is being amortized on an
accelerated  basis over the vesting  period of the individual  award,  generally
four years.  The method is in accordance  with FASB  Interpretation  No. 28. The
amortization  expense  relates to options  awarded to employees in all operating
expense  categories.  The  amortization  of deferred  compensation  has not been
separately  allocated to these categories.  The amount of deferred  compensation
expense to be recorded  in future  periods  could  decrease if options for which
accrued but unvested compensation has been recorded are forfeited. In connection
with the  acquisitions of  TruSolutions,  Precision  Insight and NetAttach,  the
Company  recorded  $113.1 million of deferred stock  compensation  during fiscal
year 2000.  In  connection  with the  acquisitions  of BNW,  Inc. and Life,  the
Company recorded $6.8 million of deferred stock compensation  during fiscal year
2001. The Company recorded  amortization of deferred stock  compensation of $1.7
million, $61.3 million and $39.5 million for the years ended July 27, 2002, July
28,  2001  and  2000,   respectively.   In  addition,  in  connection  with  the
restructuring  discussed  in Note 4, expense of  approximately  $0.3 million and
$35.7 million  related to the  acceleration of deferred stock  compensation  has
been  recorded  for the  fiscal  years  ended July 27,  2002 and July 28,  2001,
respectively,  and has been  included in  restructuring  costs and other special
charges in the statements of operations.

11. Income Taxes

         The Company  accounts for income taxes in accordance with SFAS No. 109,
"Accounting  for Income  Taxes".  Due to the  Company's  loss position in fiscal
years 2002, 2001 and 2000, there was no provision for income taxes for the years
ended July 27, 2002, July 28, 2001 and July 28, 2000. 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  components  of the net  deferred  tax assets  are as  follows  (in
thousands):

                                           July 27,      July 28,      July 28,
                                             2002          2001          2000
                                           --------      --------      --------
Net operating loss carryforwards .....     $ 80,446      $ 68,965      $ 34,578
Other reserves and accruals ..........       11,494        19,726         2,901
                                           --------      --------      --------
                                             91,940        88,691        37,479
Valuation allowance ..................      (91,940)      (88,691)      (37,479)
                                           --------      --------      --------
Net deferred income tax asset ........     $   --        $   --        $   --
                                           ========      ========      ========

As of July 27,  2002,  the  Company  has net  operating  loss  carryforwards  of
approximately  $226.2 million to offset future  federal  taxable  income,  which
expires  at  various  dates  through  fiscal  year 2021.  This  amount  includes
approximately  $12.5  million  of net  operating  loss  carryforwards  from  the
acquisition of OSDN. The deferred tax assets related to the acquisition of OSDN,
approximately $5.6 million as of June 7, 2000, and if and when realized, will be
used to reduce the remaining  intangibles recorded at the date of acquisition to
zero first and then to reduce the tax provision. The Company also has California
net operating loss carryforwards of approximately $61.0 million to offset future
California  taxable  income,  which expire at various dates through  fiscal year
2012.  The net operating loss  carryforwards  also include  approximately  $21.3
million  resulting  from employee  exercises of  non-qualified  stock options or
disqualifying  dispositions,  the tax benefits of which, when realized,  will be
recorded as an addition to additional paid-in capital rather than a reduction of
the provision for income taxes.  The operating loss  carryforwards to be used in
future years is limited in accordance  with the provisions of the Tax Reform Act
of 1986 as the Company has experienced a cumulative  stock  ownership  change of
more than 50% over the last three years.  The net operating  loss  carryforwards
stated above are reflective of various federal and state tax limitations.

12. Segment and Geographic Information

         Through  June  27,  2001,  the  Company  had  two  reportable  business
segments:   Systems  and  Services  and  OSDN,   which  was  formerly  known  as
Andover.Net, Inc. ("Andover.Net"). The Systems and Services segment consisted of
a broad  line of  Linux  systems  and Open  Source  services,  including  system
architecture  design and  integration,  development of Open Source  software and
managed  services.  The OSDN segment helps  customers  develop,  distribute  and
discuss open source software.  The Company allocated  resources to and evaluated
the performance of its segments based on each segment's revenue.  As a result of
the  Company's  decision to exit the systems  business in the fourth  quarter of
fiscal  2001,  effective  July 29,  2001,  the Company  operates as one business
segment,

                                       59
<PAGE>

providing  application software products and related OSDN products and services.
For fiscal year 2002,  revenue from the Company's  single  business  segment was
$20.4 million.  For fiscal year 2001,  revenue from OSDN was $14.7 million,  and
revenue from the Systems and Services segment was $120.2 million.

         The Company  marketed  its  products in the United  States  through its
direct sales  force.  Revenues for each of the fiscal years ended July 27, 2002,
July 28, 2001 and 2000 were  primarily  generated from sales to end users in the
United States of America.

13. Subsequent Events (Unaudited)

         On August 13, 2002, the Company  entered into a significant  commercial
agreement  with  IBM  focused  on the  joint  marketing  and  sales  of the next
generation of SourceForge, which will offer full support for IBM's DB2 database.
As part of the  agreement,  IBM's direct and indirect sales channels will engage
with VA Software in joint sales  activities.  The terms of the agreement include
VA Software's and IBM's ongoing  integration of SourceForge  with a suite of IBM
infrastructure,  application  development and system management tools, including
DB2  database  software;   WebSphere   Application   Server;   WebSphere  Studio
Application Developer; and Tivoli management software. In addition,  SourceForge
will also be optimized to run on IBM eServer xSeries Linux servers.

                                       60
<PAGE>

Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure

         On April 18, 2002,  the Company  filed a current  report on Form 8-K to
report a change in  independent  public  accountants,  effective as of April 17,
2002.


                                    PART III

Item 10. Directors and Executive Officers of the Registrant

         The information called for by this item is incorporated by reference to
the sections entitled  "Certain  Beneficial  Owners" and "Security  Ownership of
Directors  and  Executive  Officers"  in the  Proxy  Statement  for  the  annual
stockholders' meeting to be held on December 4, 2002.

Item 11. Executive Compensation

         The information called for by this item is incorporated by reference to
the section entitled  "Compensation of Directors and Executive  Officers" in the
Proxy Statement for the annual  stockholders'  meeting to be held on December 4,
2002.

Item 12. Security Ownership of Certain Beneficial Owners and Management

         The information called for by this item is incorporated by reference to
the sections entitled  "Certain  Beneficial  Owners" and "Security  Ownership of
Directors  and  Executive  Officers"  in the  Proxy  Statement  for  the  annual
stockholders' meeting to be held on December 4, 2002.

Item 13. Certain Relationships and Related Transactions

         The information called for by this item is incorporated by reference to
the sections  entitled "Certain  Relationships and Related  Transactions" in the
Proxy Statement for the annual  stockholders'  meeting to be held on December 4,
2002.


                                     PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) The following documents are filed as part of this report:

         1. All Financial Statements:

See the Consolidated Financial Statements and notes thereto in Item 8 above.

         2. Schedule II-- Valuation and Qualifying Accounts are filed as part of
this Form 10-K.

         3. Exhibits:

See the Exhibit Index.

(b) Reports on Form 8-K.

         None.

                                       61
<PAGE>

                                   SIGNATURES

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


                                            VA SOFTWARE CORPORATION

                                            By:       /s/     ALI JENAB
                                               ---------------------------------
                                                          Ali Jenab
                                              Chief Executive Officer, President
                                             and Member of Board of Directors

Date: October 18, 2002


                                POWER OF ATTORNEY

         KNOW ALL PERSONS BY THESE  PRESENTS,  that each person whose  signature
appears below hereby constitutes and appoints Ali Jenab and Kathleen R. McElwee,
and each of them, his true and lawful attorneys-in-fact, each with full power of
substitution,  for him and all capacities, to sign any amendments to this report
on Form 10-K and to file the same, with exhibits  thereto and other documents in
connection  therewith,  with the  Securities  and Exchange  Commission  and does
hereby  ratify  and  confirm  all that each of said  attorneys-in-fact  or their
substitute or substitutes may do or cause to be done by virtue hereof.

         Pursuant to the  requirement  of the  Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                       Signature                                                 Title                                   Date
                       ---------                                                 -----                                   ----
<S>                                                           <C>                                                  <C>
                    /s/  ALI JENAB                                Chief Executive Officer, President               October 18, 2002
-----------------------------------------------------         (principle executive officer) and Director
                       Ali Jenab

               /s/  KATHLEEN R. MCELWEE                                 Chief Financial Officer                    October 18, 2002
-----------------------------------------------------               (principle accounting officer)
                  Kathleen R. McElwee

                /s/  LARRY M. AUGUSTIN                            Chairman of the Board of Directors               October 18, 2002
-----------------------------------------------------
                   Larry M. Augustin

                /S/  ANDRE M. BOISVERT                                         Director                            October 18, 2002
-----------------------------------------------------
                   Andre M. Boisvert

                    /s/  RAM GUPTA                                             Director                            October 18, 2002
-----------------------------------------------------
                       Ram Gupta

                  /s/  DOUGLAS LEONE                                           Director                            October 18, 2002
-----------------------------------------------------
                     Douglas Leone

            /s/  ROBERT M. NEUMEISTER, JR.                                     Director                            October 18, 2002
-----------------------------------------------------
               Robert M. Neumeister, Jr.

                  /s/  CARL REDFIELD                                           Director                            October 18, 2002
-----------------------------------------------------
                     Carl Redfield

                 /s/ DAVID B. WRIGHT                                           Director                            October 18, 2002
-----------------------------------------------------
                    David B. Wright
</TABLE>

                                       62
<PAGE>

              CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
                SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002

I, Ali Jenab, certify that:

1.       I have  reviewed  this  annual  report  on  Form  10-K  of VA  Software
         Corporation;

2.       Based on my  knowledge,  this annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances  under which
         such  statements  were made, not misleading  with respect to the period
         covered by this annual report;

3.       Based on my knowledge,  the financial  statements,  and other financial
         information  included  in this  annual  report,  fairly  present in all
         material  respects the financial  condition,  results of operations and
         cash flows of the  registrant as of, and for, the periods  presented in
         this annual report;


Date:  October 18, 2002                      /s/      ALI JENAB
                                             -----------------------------------
                                             Ali Jenab
                                             Chief Executive Officer


              CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
                SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002



I, Kathleen R. McElwee, certify that:

1.       I have  reviewed  this  annual  report  on  Form  10-K  of VA  Software
         Corporation;

2.       Based on my  knowledge,  this annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances  under which
         such  statements  were made, not misleading  with respect to the period
         covered by this annual report;

3.       Based on my knowledge,  the financial  statements,  and other financial
         information  included  in this  annual  report,  fairly  present in all
         material  respects the financial  condition,  results of operations and
         cash flows of the  registrant as of, and for, the periods  presented in
         this annual report;


Date:   October 18, 2002                     /s/      KATHLEEN R. MCELWEE
                                             -----------------------------------
                                             Kathleen R. McElwee
                                             Chief Financial Officer

                                       63
<PAGE>

                             VA SOFTWARE CORPORATION

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                            Balance at     Charged to      Additions                    Balance at
                                                            Beginning      Costs and         due to                         End
    Description                                             of Period       Expenses     Acquisitions     Deductions     of Period
    -----------                                             ---------       --------     ------------     ----------     ---------
<S>                                                          <C>            <C>             <C>            <C>            <C>
Year Ended July 28, 2000
  Allowance for doubtful accounts ......................     $    207       $  1,328        $    150       $    210       $  1,475
  Allowance for excess and obsolete inventory ..........     $    833       $  1,878        $   --         $  1,540       $  1,171
Year Ended July 28, 2001
  Allowance for doubtful accounts ......................     $  1,475       $  3,968        $   --         $  1,196       $  4,247
  Allowance for excess and obsolete inventory ..........     $  1,171       $ 24,441        $   --         $  7,265       $ 18,347
  Accrued restructuring liabilities ....................     $   --         $ 12,241        $   --         $  2,728       $  9,513
Year Ended July 27, 2002
  Allowance for doubtful accounts ......................     $  4,247       $ (1,096)       $   --         $  1,985       $  1,166
  Allowance for excess and obsolete inventory ..........     $ 18,347       $ (4,378)       $   --         $ 13,939       $     30
  Accrued restructuring liabilities ....................     $  9,513       $ 10,510        $   --         $  2,029       $ 17,994
</TABLE>

                                       64
<PAGE>

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
 Exhibit
  Number
  ------
<S>                       <C>
   2.1*             --    Amended and Restated Agreement and Plan of Reorganization  between the Registrant,  Atlanta  Acquisition
                          Corp. and Andover.Net, Inc.

   3.1**            --    Amended and Restated Certificate of Incorporation of the Registrant

   3.2**            --    Bylaws of the Registrant

   4.1**            --    Specimen Common Stock Certificate

  10.1**            --    Form of Indemnification Agreement between the Registrant and each of its directors and officers

  10.2**            --    1998 Stock Plan and forms of agreement thereunder

  10.3**            --    1999 Employee Stock Purchase Plan

  10.4**            --    1999 Director Option Plan

  10.5#             --    First Amended and Restated  Registration  Rights  Agreement  between  Registrant and certain  holders of
                          preferred stock

  10.6##            --    Loan and Security Agreement between Registrant and Comerica Bank-- California

  10.7+***          --    Master Lease Agreement between Boca Global, Inc. and Bordeaux Partners LLC

  10.8+###          --    Master Lease Agreement between Registrant and Renco Investment Company

  10.9****          --    Consent of Linus Torvalds

  23.1              --    Consent of PricewaterhouseCoopers LLP, Independent Public Accountants (see page 66)

  23.2              --    Notice regarding Consent of Arthur Andersen LLP (see page 67)

  24.1**            --    Power of Attorney (see signature page)

  99.1              --    Certification  Of Chief Executive  Officer  Pursuant To 18 U.S.C.  Section 1350, As Adopted  Pursuant To
                          Section 906 Of The Sarbanes-Oxley Act Of 2002

  99.2              --    Certification  Of Chief Financial  Officer  Pursuant To 18 U.S.C.  Section 1350, As Adopted  Pursuant To
                          Section 906 Of The Sarbanes-Oxley Act Of 2002
</TABLE>

------------
+        Confidential  treatment  has been  requested  by the  Registrant  as to
         certain  portions  of this  exhibit.  The  omitted  portions  have been
         separately filed with the Commission.

*        Incorporated by reference to the corresponding  exhibit of Registrant's
         form  S-4  and  the  amendment  thereto  (Commission  registration  no.
         333-35704).

**       Incorporated by reference to the corresponding  exhibit of Registrant's
         form  S-1  and  the  amendment  thereto  (Commission  registration  no.
         333-88687).

***      Incorporated by reference from Exhibit 10.16 of  Registrant's  form S-1
         and the amendments thereto (Commission registration no. 333-88687).

                                       65
<PAGE>

****     Incorporated by reference from Exhibit 10.18 of Registrant's  Quarterly
         Report on Form 10-Q for the  period  ended  January  28,  2000 filed on
         March 13, 2000 (Commission file number 000-28369).

#        Incorporated  by reference from Exhibit 10.6 of  Registrant's  form S-1
         and the amendments thereto (Commission registration no. 333-88687).

##       Incorporated  by reference from Exhibit 10.9 of  Registrant's  form S-1
         and the amendments thereto (Commission registration no. 333-88687).

###      Incorporated  by reference  from Exhibit 10.14 of  Registrant's  Annual
         Report on Form 10-K for the period ended June 28, 2000 filed on October
         26, 2000 (Commission file number 000-28369).

                                       66