UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549



---



FORM
10-K



|(Mark one)                                                 
|-----------------------------------------------------------
|ý                                                          
|                                                           
|For
  the fiscal year ended July 31, 2004                  
|                                                           
|**Or**                                                     
|                                                           
|o                                                          
|                                                           
|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
  incorporation or organization)                                         |  | (I.R.S. Employer
  Identification No.)
|                                                                                                           |  |                                       
|**46939
      Bayside Parkway, Fremont, California, 94538******                                           
|(Address,
    including zip code, of principal executive offices)                                         
|                                                                                                           |  |                                       
|(510)
           687-7000                                                                                 
|(Registrants
         telephone number, including area code)                                             
|                                                                                                           |  |                                       
|Securities
        registered pursuant to Section 12(g) of the Act:
        Common Stock, $0.001 par value
|(Title
      of class)                                                                                    



Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements for the past
90 days.



|ý  Yes |  | o  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 10-K or any amendment
    to this Form 10-K.ý

Indicate by check
mark whether the registrant is an accelerated filer (as defined in Rule 12b-2
of the Exchange act).



|ý  Yes |  | o  No
|------ |  | -----



As
    of September 30, 2004, there
were 61,375,375 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 January 31, 2004 (based on the closing price for the Common Stock on the
NASDAQ National Market for such date) was approximately $221,646,778. 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**

Portions of the Proxy Statement
for the 2004 Annual Meeting of Stockholders (Proxy Statement) to
be held on December 8, 2004, and to be filed pursuant to Regulation 14A within
120
days after the Registrants fiscal year ended July 31, 2004, are incorporated
by reference into Part III of this Form 10-K.




1

Table of Contents

|        | PART I                                                                               
|------- | -------------------------------------------------------------------------------------
|Item 1  | Business                                                                             
|        |                                                                                      
|        |                                                                                      
|        |                                                                                      
|        |                                                                                      
|        |                                                                                      
|        |                                                                                      
|        |                                                                                      
|Item 2  | Properties                                                                           
|Item 3  | Legal Proceedings                                                                    
|Item 4  | Submission of Matters to a Vote of Security Holders                                  
|        | PART II                                                                              
|Item 5  | Market for the Registrant's Common Stock and Related Stockholder Matters             
|Item 6  | Selected Consolidated Financial Data                                                 
|Item 7  | Management's Discussion and Analysis of Financial Condition and Results of Operations
|Item 7A | Quantitative and Qualitative Disclosures About Market Risk                           
|Item 8  | Financial Statements and Supplementary Data                                          
|Item 9  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|Item 9A | Controls and Procedures                                                              
|        | PART III                                                                             
|Item 10 | Directors and Executive Officers of the Registrant                                   
|Item 11 | Executive Compensation                                                               
|Item 12 | Security Ownership of Certain Beneficial Owners and Management                       
|Item 13 | Certain Relationships and Related Transactions                                       
|Item 14 | Principal Accounting Fees and Services                                               
|        | PART IV                                                                              
|Item 15 | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                     
|        | Signatures                                                                           





2

**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 the market for collaborative software
  development applications; the future functionality, business potential, demand
  for, efficiencies created by and adoption of SourceForge; demand for online
  advertising; managements strategy, plans and objectives for future
  operations; the impact of our restructuring and the amount of cash utilized by
  operations; our intent to continue to invest significant resources in
  development; competition, competitors and our ability to compete; liquidity and
  capital resources; the outcome of any litigation to which we are a party; our
  accounting policies; and sufficiency of our cash resources, cash generated from
  operations and investments to meet our operating and working capital
  requirements. Actual results may differ materially from those expressed or
  implied in such forward-looking statements due to various factors, including
  those set forth in this Business section under Competition and 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.

Introduction

We were incorporated in California
  in January 1995 and reincorporated in Delaware in December 1999. From the date
  of our incorporation through October 2001, we sold Linux-based hardware systems
  and services under the name VA Linux Systems, Inc. On June 27, 2001, we
  announced our decision to exit our Linux-based hardware business. Today, we do
  business under the name VA Software Corporation and we develop, market and
  support a software application known as SourceForge Enterprise Edition
  (SourceForge) and also own and operate OSTG, Inc. (OSTG)
  and its wholly-owned subsidiaries, a network of Internet Web sites, offering
advertising, retail and animation services and products.

We are subject to the
  informational requirements of the Securities Exchange Act of 1934 (the
Exchange Act). Therefore, we file periodic reports, proxy statements
  and other information with the Securities and Exchange Commission (the
SEC). Such reports, proxy statements and other information may be
  obtained by visiting the Public Reference Room of the SEC at 450 Fifth Street,
  NW, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. In addition,
  the SEC maintains an Internet site (http://www.sec.gov) that contains
  reports, proxy and information statements and other information regarding
issuers that file electronically.

You can access other information
  at our Investor Relations web site. The address is www.vasoftware.com/company/. The contents of this Web site are not
  intended to be incorporated by reference into this report or any other report we
  file with the SEC. We make available, free of charge, copies of our annual
  report on Form 10-K as soon as reasonably practicable after filing such material
  electronically or otherwise furnishing it to the SEC, and have made the Form
10-K reports available on our web site since November 2002.

Business Overview

We currently view our business
       in four operating segments: SourceForge, Online Media, E-commerce and
       Online
  Images. For segment and geographic financial information, see Note 10 of the
Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.

SourceForge

Our SourceForge segment focuses
on our SourceForge Enterprise Edition software products and services.

SourceForge is a proprietary,
  Web-based software application designed for corporate and public-sector
  information technology (IT) professionals and software engineering
  organizations. SourceForge combines software development and collaboration tools
  with the ability to track, measure, and report on software project activity in
  real-time. SourceForge improves the software development process by capturing
  and archiving software development code, documentation and communication in a
central location. It enables managers to gain insight and



3

improved visibility
  into software development activity, thereby providing better resource and
  requirements management, defect tracking and the ability to resolve critical
  problems earlier in the development cycle. Organizations with distributed,
  offshore and/or outsourced software development teams can achieve improved
  productivity, communication, coordination, collaboration, project clarity and
  insight through SourceForges standard set of development tools and secure,
centralized code, documentation and communication repository.

Our SourceForge segment
  represented 17%, 12% and 5% of net revenues during fiscal 2004, 2003 and 2002,
respectively.

Online Media

Our Online Media segment consists
  of a network of Internet Web sites serving the IT professional and software
  development communities. As of September 15, 2004, OSTG reaches more than 16
  million unique visitors and serves more than 250 million page views per month.
  We believe that OSTG is the most dynamic community-driven media network on the
  Web and a cornerstone of the Open Source software development community. OSTG
  attracts IT decision-makers and buyers, from chief technology officers to
  project managers.  Technologists, developers and system administrators turn
  to OSTG sites to create debate and make IT news.  OSTG is supported by
  sponsors and advertisers who want to reach the unique demographic of IT
  professionals and developers that visit our OSTG Web sites. Our OSTG Web sites
include:

- SourceForge.net, our flagship
  Web site and software development center. As of September 15, 2004,
  SourceForge.net was the development home for more than 87,000 software
development projects and had more than 915,000 registered users.
- Slashdot.org, our leading
  discussion site for technologically-inclined individuals. Slashdot is dedicated
  to providing the IT and software development communities with cutting-edge
technology, science and culture news and interactive commentary.
- 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 to Linux.
- Freshmeat.net, one of the Internets most comprehensive
    indices of downloadable Linux, Unix and cross-platform software.
- NewsForge.com, the online newspaper of record for Linux and Open Source
    software.
- ITManagersJournal.com, a Web site delivering strategic and technical
information to help top-level IT professionals
     implement enterprise-level open source and proprietary architecture, applications, and infrastructure solutions.

Our Online Media segment
  represented 33%, 43% and 44% of net revenues during fiscal 2004, 2003 and 2002,
respectively.

E-commerce

Our E-commerce segment provides
  online sales of a variety of retail products of interest to the software
  development and IT communities through ThinkGeek, Inc. (ThinkGeek),
  a wholly-owned subsidiary of OSTG. We believe we offer a significantly broader
  range of unique products in a centralized location than are available in
  traditional stores. We do not have the shelf display space limitations that
  bricks-and-mortar stores do. Our customers are able to buy electronics, office
  gadgets, apparel, caffeinated products and other specialty items with a single
  check-out. Consumers can either access the information directly through our
  Web site, or get free help from our customer care representatives and experts
  by
  contacting them by e-mail at orders@thinkgeek.com or by telephone at
1-888-GEEKSTUFF.

The E-commerce segment represented
  43%, 35% and 28% of net revenues during fiscal 2004, 2003 and 2002,
respectively.

Online Images

Our Online Images segment provides
  online sales of three-dimensional art, animations and presentations through
  Animation Factory, Inc. (Animation Factory), a wholly-owned
  subsidiary of OSTG. Our online image products are either sold in the form of
  a CD or as a subscription which offers subscribers a dynamic downloadable
  collection of easy to use animations that work in email, Web pages and
  presentations. We believe we offer an array of unique animations on the Web
  giving customers access to over 300,000 animations and 50,000 Web designs.



4

Consumers can either access the information directly through our Web site,
  or get free help from our customer care representatives and experts by contacting
  them by e-mail through www.animationfactory.com or by telephone at
1-800-525-2475.

The Online Images segment
  represented 7%, 7% and 6% of net revenues during fiscal 2004, 2003 and 2002,
respectively.

Sales and Marketing

SourceForge

We primarily market and sell
       our SourceForge software products (software, professional services, maintenance
       and
  support and training) directly to our end users through our SourceForge field
  sales organization, on the Internet at www.vasoftware.com and on our various
  OSTG 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.

Online Media

We primarily market and sell our
  Internet advertisements via OSTGs direct sales organization and its Web
  sites. In addition, we have entered into co-marketing agreements with certain
  third parties with respect to marketing and/or selling advertising space on
OSTG Web sites.

E-commerce

Our E-commerce marketing and
  promotion strategy is designed to increase customer traffic to our store, add
  new customers, build strong customer loyalty, maximize repeat purchases and
  develop incremental revenue opportunities. In addition, we have entered into
  co-marketing agreements with certain third parties with respect to marketing
       our E-commerce Web site. We intend to continue to use the unique capabilities
       of the
  Internet as a means to encourage new and repeat customers to our Web sites.
       Our advertising campaigns are focused on the OSTG Web sites which enables
       OSTG to
  direct customers to our products through a link to our Web site. In addition,
       we currently offer a customer retention program, Geek Points, which is
       designed to
  add new customers and build customer loyalty. Through this program, customers
  are rewarded for shopping with us. When the customer signs up for Geek Points,
  they earn points on all of their purchases. Rewards for Geek Points participants
  include special promotions, discounts and access to products available only
to those customers enrolled in the program.

Online Images

We primarily market and sell
       our Online Images products through the Internet on our www.animationfactory.com Web site. In addition, we have entered into
  co-marketing agreements with certain third parties with respect to marketing our
Animation Factory Web site.

Research and Development

SourceForge

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. Therefore, we have devoted the majority of our research
       and development budget to the goal of improving SourceForge. 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.

In addition to our internal
  SourceForge software engineering efforts, we also utilize an independent
  contractor, Cybernet Software Solutions, Inc. (CSS), for certain
  aspects of our SourceForge product development. CSS utilizes
  software-engineering resources in India 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

Online Media

We believe that the success
       of OSTG will depend partly on our ability to enhance our Web sites and
       underlying
  technology to meet the needs of a rapidly evolving marketplace and increasingly
  sophisticated and demanding customers. We intend to extend and strengthen the
  software underlying our online sites by enhancing existing features and adding
  additional features. These include adding the ability to deliver new ad types
       as they are developed, as well as enhancing our ability to track ads as
they run.

E-commerce

We have implemented a broad
       array of services and systems for customer service, product searching,
       order
processing and order fulfillment functions, including, among other things:

- Accepting and validating customer orders;
- Organizing, placing and managing orders with vendors and fulfillment partners;
- Receiving product and reserving inventory for specific customer orders; and
- Managing shipment of products to customers based on various
ordering criteria.

These services and systems
       use a combination of our own proprietary technologies and commercially
       available, licensed
  technologies. We focus our internal development efforts on creating and
enhancing the specialized, proprietary software that is unique to our business.

Our core online merchandise
  catalog, customer interaction, order collection, fulfillment and back-end
  systems are proprietary to ThinkGeek. The systems are designed to provide
  real-time connectivity to our distribution center systems. These include an
  inventory-tracking system, a real-time order tracking system, an executive
  information system and an inventory replenishment system. Our Internet servers
  use SSL technology to help conduct secure communications and transactions.
       We continue to invest in improving the E-commerce customer service, order
processing, shipping and tracking systems.

Competition

SourceForge

We believe SourceForge gives us an
  opportunity to operate in the collaborative software development 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 as well
  as open source software. There are also many entrenched competitors in closely
  related markets who compete for customer budget allocations. Such competition
  could arise from, among others, Borland Software Corporation, Collabnet, Inc.,
  International Business Machines Corporation, Microsoft Corporation, Serena
  Software, Inc., as well as numerous other public and privately held software
  application development and tools suppliers. Additionally, recent
  and future business combinations among companies in the software industry
  will permit the resulting consolidated companies to offer more
  extensive suites of software products and broader arrays of software solutions,
  some of which may compete directly with SourceForge.  Changes resulting
  from current and future software industry consolidation may negatively impact
our competitive position and operating results.

Many of these potential
  competitors are likely to have substantial competitive advantages including
  greater resources that can be devoted to the development, promotion and sale
       of their products; more established sales forces and channels; greater
       software
development experience; and greater name recognition.

Online Media

The market for Internet services
  provided by OSTG is highly competitive. Advertisers have many alternatives
  available to reach their target audience, including print (e.g., Ziff Davis
  Medias eWeek and International Data Groups Computerworld),
  general portal sites (e.g., aol.com, yahoo.com, google.com and msn.com) and
  other Web sites focused on vertical markets (e.g.,
CNet Networks, Inc.'s cnet.com and techrepublic.com).



6

Similar to our potential
  competitors in our SourceForge business, many of our competitors in our Online
  Media business have substantial competitive advantages including greater
  resources that can be devoted to the development, promotion and sale of their
  online services; more established sales forces and channels; greater software
and Web site development experience; and greater name recognition.

E-commerce

The market for Internet products
  provided by ThinkGeek is highly competitive. We compete with Internet portals
  and online service providers that feature shopping services, such as America
  Online, MSN and Yahoo!, and with other online or mail-order retailers. We
  believe that there are a number of competitive factors in our market, including
  company credibility, product selection and availability, convenience, price,
  privacy, Web site features, functionality and performance, ease of purchasing,
customer service and reliability and speed of order shipment.

Similar to our potential
  competitors in our SourceForge and Online Media businesses, many of our
  competitors in our E-commerce business have substantial competitive advantages
  including greater resources that can be devoted to the development, promotion
  and sale of their online products; more established sales forces and channels;
  greater software and Web site development experience; and 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. Any pricing pressures or loss of potential customers resulting from
our failure to compete effectively would reduce our revenues.

Online Images

The market for online images
  provided by Animation Factory is competitive. Competitive factors in this
  industry include the quality, relevance and diversity of the image library,
  customer service, pricing, accessibility of our images and our speed of
fulfillment. Our primary competitor is Jupiter Media Corporation.

Intellectual Property Rights

We protect our intellectual
  property through a combination of copyright, trademark, trade-secret laws,
  employee and third-party nondisclosure agreements, and other methods of
protection.

SourceForge is licensed to
       our end-user customers as proprietary software code and documentation.
       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.

SourceForge, SourceForge.net,
  Slashdot, ThinkGeek, Freshmeat, OSTG, VA Software, the VA logo and Animation
  Factory are some of our trademarks and/or registered trademarks that we use
in the United States and in other countries.

Because the software industry
       is characterized by rapid technological change, we believe that factors
       such as the
  technological and creative skills of our personnel, new product developments,
  frequent product enhancements, name recognition and reliable product maintenance
  are more important to establishing and maintaining a technology leadership
position than the various legal protections of our technology.

Seasonality

With the exception of our
  E-commerce business, our revenues have not been significantly impacted by
  seasonality. Our E-commerce business, however, is highly seasonal, reflecting
  the general pattern associated with the retail industry of peak sales and
earnings during the holiday shopping season.

In the past several years,
       a substantial portion of our E-commerce revenues occurred in our second
       fiscal
  quarter, which in fiscal year 2005 will begin on November 1, 2004, and end
       on January 31, 2005. As is typical in the retail industry, we generally
       experience
  lower E-commerce revenues during the other quarters. Therefore, our E-commerce
  revenue in a particular quarter is not necessarily indicative of future
E-commerce revenue for a subsequent quarter or our full fiscal year.



7

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 31, 2004, our employee base totaled 122, including 37 in operations, 30
       in sales and marketing, 36 in research and development and 19 in finance
       and
administration.

Item 2. *Properties*

Our principal locations are as follows:

|**Location**              |  | **Purpose**                                                                                                                                          |  | **Approximate 
    Size
    (in square feet)** |  | **Expiration
    of
    Lease**
|------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------- |  | -------------------------------
|United States of America 
|Fremont, California       |  | 100% sublet through lease expiration date                                                                                                            |  | 102,544                                        |  | 2010                           
|Fremont, California       |  | Corporate   headquarters;   SourceForge
    and OSTG sales and marketing, administration,
                                    research & development |  | 36,767                                         |  | 2010                           
|Sunnyvale, California     |  | 100% sublet through lease expiration date                                                                                                            |  | 45,647                                         |  | 2005                           
|San Diego, California     |  | 100% sublet through lease expiration date                                                                                                            |  | 39,010                                         |  | 2005                           
|Fairfax, Virginia         |  | ThinkGeek operations                                                                                                                                 |  | 2,400                                          |  | 2005                           
|Sioux Falls, South Dakota |  | Animation Factory research & development                                                                                                             |  | 1,800                                          |  | 2005                           

Item 3. *Legal Proceedings*

Information with respect to this
  Item may be found in Note 5 of the Notes to Consolidated Financial Statements of
  this Annual Report on Form 10-K, which information is incorporated into this
Item 3 by reference.

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

Not applicable.



8

**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
       11, 2004,
  there were 892 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 31, 2004: |   |          |   |         |  
|Fourth Quarter                   | $ | 2.48     | $ | 1.69    |  
|Third Quarter                    | $ | 4.03     | $ | 1.98    |  
|Second Quarter                   | $ | 5.26     | $ | 2.98    | .
|First Quarter                    | $ | 5.84     | $ | 1.92    |  
|Fiscal Year Ended July 31, 2003: |  
|Fourth Quarter                   | $ | 2.49     | $ | 0.88    |  
|Third Quarter                    | $ | 1.09     | $ | 0.84    |  
|Second Quarter                   | $ | 1.36     | $ | 0.85    |  
|First Quarter                    | $ | 1.54     | $ | 0.63    |  

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

Equity Compensation Plans

The
  following table summarizes our equity compensation plans as of July 31, 2004,
all of which have been approved by our stockholders:

|****                                                       | **A**                                                                                              | **B**                                                                              | **C**                                                                                                                                                                                                                           
|---------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|**Plan Category (1)**                                      | **Number
              of securities to be issued upon exercise
          of outstanding options** | **Weighted average  
          exercise price of  
          outstanding options** | **Number
              of securities remaining available for            future issuance
              under equity compensation plan
                                             (excluding securities reflected in column A)**
|**Equity compensation plans
    approved by stockholders** | 12,034,708 (2)                                                                                     | $3.29                                                                              | 13,544,502 (3) - (6)                                                                                                                                                                                                            

|(1) | The
    table does not include information for equity compensation plans assumed
    by the Company in
  acquisitions. As of July 31, 2004, a total of 97,164 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 OSTG.
  The weighted average exercise price of all outstanding options granted under
  these plans at July 31, 2004 is $38.86. The Company does not grant additional
awards under these assumed plans.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Includes
    11,542,624 options outstanding under the Companys 1998 Stock Plan and 492,084 options
outstanding under the Companys 1999 Directors Plan.                                                                                                                                                                                                                                                                                                                                                                              
|(3) | Includes 2,635,875 shares of common stock reserved for issuance under the Company's 1999 Employee Stock Purchase Plan.                                                                                                                                                                                                                                                                                                                                                                                                                 
|(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 an
         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: 250,000 shares, or 0.5%
  of the outstanding shares on the first day of the new fiscal year or an amount
determined by the Board of Directors.                                                                                                                                                                                                                      
|(6) | Subject
    to the terms of the 1999 Employee Stock Purchase Plan, an annual increase
    is to be added on the
  first day of the Companys fiscal year equal to the lesser of: 500,000
  shares, or 1% of the outstanding shares on the first day of the new fiscal
year or an amount determined by the Board of Directors.                                                                                                                                                                                                          



9

Item 6. Selected Consolidated 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 fiscal years ended July 31, 2004, July 31, 2003 and July 27, 2002 and the
  balance sheet data as of July 31, 2004 and July 31, 2003 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 28,
  2001 and July 28, 2000 and the balance sheet data as of July 27, 2002, July
  28, 2001
  and July 28, 2000 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)**

|                                                                      |  | **For
     the years ended** |  
|--------------------------------------------------------------------- |  | ---------------------------- | -
|                                                                      |  | **July
     31,**            |  
|                                                                      |  | **2004**                     |  
|**Selected
     Consolidated Statements of  Operations Data:**        |  |                              |  
|Net
     revenues                                                     |  | $ 29,261                     |  
|Cost
     of revenues                                                 |  | 15,537                       |  
|Gross
     margin                                                     |  | 13,724                       |  
|Loss
     from operations                                             |  | (11,007                      | )
|Net
     loss                                                         |  | (7,640                       | )
|Dividend
     related to convertible    preferred stock               |  | --                           |  
|Net
     loss attributable to common    stockholders                  |  | $(7,640                      | )
|Basic
     and diluted net loss per share                             |  | $  (0.13                     | )
|Shares
     used in computing basic and    diluted net loss per share |  | 59,684                       |  
|**Selected
     Balance Sheet data at year-end:**                     |  |                              |  
|Cash,
     cash equivalents and investments                           |  | $ 44,042                     |  
|Working
     capital                                                  |  | $ 25,866                     |  
|Total
     assets                                                     |  | $ 53,679                     |  
|Liabilities,
     net of current portion                              |  | $   9,192                    |  
|Total
     stockholders' equity (deficit)                             |  | $ 35,770                     |  

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. From the date
  of our incorporation through October 2001, we sold Linux-based hardware systems
  and services under the name VA Linux Systems, Inc. On June 27, 2001, we
  announced our decision to exit our Linux-based hardware business. Today, we do
  business under the name VA Software Corporation and we develop, market and
  support a software application known as SourceForge Enterprise Edition
  (SourceForge) and also own and operate OSTG, Inc. (OSTG)
  and its wholly-owned subsidiaries, a network of Internet Web sites, offering
advertising, retail and animation services and products.



10

We currently view our business in
  four operating segments: SourceForge, Online Media, E-commerce and Online
  Images. Our SourceForge segment focuses on our SourceForge software products and
  services. Our Online Media segment represents a network of Internet Web sites
  serving the IT professional and software development communities. Our E-commerce
  segment provides online sales of a variety of retail products of interest to the
  software development and IT communities through ThinkGeek, Inc.
  (ThinkGeek) a wholly-owned subsidiary of OSTG. Our Online Images
  segment provides online sales of digital animation sold in the form of CDs
  or as a subscription offered through Animation Factory, Inc., a wholly-owned
subsidiary of OSTG.

Our goals for fiscal 2004
       were to continue to add new SourceForge customers, grow our returning
       SourceForge
  customer base, and broaden our advertising base for OSTG while increasing
traffic, all with a focus towards driving the Company towards profitability.

Within the SourceForge segment,
       we released new versions of our award winning SourceForge collaborative
       software
  development platform featuring broader integration with enterprise environments
  and tools, more powerful access controls to protect intellectual property,
       and improved management visibility into the status of critical project
       tasks. In
  addition, during fiscal 2004 the number of customers to which we have sold
our SourceForge products increased to 97.

Within the Online Media segment,
we reached record levels of page views, unique visitors and advertisers.

Net revenues during fiscal
       2004 increased as compared to fiscal 2003 primarily due to increased sales
       in our
  SourceForge, E-commerce and Online Images businesses, offset by a decrease
       in our Online Media business and other revenue derived from our previous
       hardware
  business. SourceForge sales increased due to an increase in the number of
  customers to whom we have licensed SourceForge. E-commerce and Online Images
  sales increased due to an increase in our customer base related to these
segments.

Net revenues during fiscal
       2003 increased as compared to fiscal 2002 primarily due to an increase
       in our
  SourceForge, Online Media, E-commerce and Online Images businesses, offset
       by a decrease in other revenue derived from our previous hardware business.
  SourceForge sales increased due to an increase in the number of customers to
  whom we have licensed SourceForge. Online Media increased due to the increase
       in
  the number of impressions delivered in 2003 as compared to 2002. E-commerce
       and Online Images sales increased due to an increase in our customer base
       related to
these segments.

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

Headcount during fiscal 2004
  increased slightly as compared to fiscal 2003 and this increase was primarily
  related to the OSTG media business as we position ourselves to capitalize on
online advertisers growing interest in open source software.

For total operations, the
       net loss was $7.6 million, $13.8 million and $91.0 million during fiscal
       year 2004, 2003
  and 2002, respectively, or $0.13, $0.25 and $1.72, respectively, in basic and
diluted net loss per share.

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 impairment of long-lived assets,
  restructuring reserves for excess facilities for non-cancelable leases, income
taxes, and contingencies and litigation.

Revenue Recognition

SourceForge Revenues

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



11

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

Persuasive evidence of an
  arrangement exists.    We determine that persuasive
  evidence of an arrangement exists with respect to a customer when we have a
  written contract, which is signed by both us and the customer, or a purchase
  order from the customer when the customer has previously executed a standard
license arrangement with us. We do not offer product return rights.

Delivery has
  occurred.    Our software may be either physically
  or electronically delivered to the customer. We determine that delivery has
  occurred upon shipment of the software pursuant to the billing terms of the
  agreement or when the software is made available to the customer through
electronic delivery.

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

Collectibility is
  probable.    We determine whether collectibility is
  probable on a case-by-case basis. When assessing probability of collection, we
  consider the number of years in business, history of collection, and product
  acceptance for each customer. We typically sell to customers, for whom there is
  a history of successful collection. New customers are subject to a credit review
  process, which evaluates the customers financial position and ultimately
  such customers ability to pay. If we determine from the outset that
  collectibility is not probable based upon our review process, revenue is
recognized as payments are received.

We allocate revenue on
  software arrangements involving multiple elements to each element based on the
  relative fair value of each element. Our determination of fair value of each
  element in multiple-element arrangements is based on vendor-specific objective
  evidence (VSOE). We align our assessment of VSOE for each element to
  the price charged when the same element is sold separately. We have analyzed all
  of the elements included in our multiple-element arrangements and determined
  that we have sufficient VSOE to allocate revenue to the maintenance, support and
  professional services components of our perpetual license arrangements. We sell
  our professional services separately, and have established VSOE for professional
  services on that basis. VSOE for maintenance and support is determined based
  upon the customers annual renewal rates for these elements. Accordingly,
  assuming all other revenue recognition criteria are met, we recognize revenue
  from perpetual licenses upon delivery using the residual method in accordance
with SOP 98-9.

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

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

We expense all manufacturing,
  packaging and distribution costs associated with software license sales as
cost of license revenues.



12

Online Media Revenues

Online Media revenues are derived
  from the sale of advertising space on our various Web sites. We recognize Online
  Media revenues over the period in which the advertisements are displayed,
  provided that persuasive evidence of an arrangement exists, no significant
  obligations remain, the fee is fixed or determinable, and collection of the
  receivable is reasonably assured. 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 Web sites. Our barter
  arrangements are documented with our standard customer insertion
  order (and accompanying terms and conditions) or, in certain limited instances,
  via an alternative written contract negotiated between the
  parties. The standard terms and conditions include, but are not
  limited to, the Web sites for each company that will display the impressions,
  the time frame that the impressions will be displayed, and the
number, type and size of impressions to be delivered.

E-commerce Revenues

E-commerce revenues are derived
  from the online sale of consumer goods. We recognize E-commerce revenues from
  the sale of consumer goods in accordance with SEC Staff Accounting Bulletin
  (SAB) No. 104, Revenue Recognition. Under SAB 104,
  product revenues are recognized when persuasive evidence of an arrangement
  exists, delivery has occurred, the sale price is fixed or determinable, and
  collectibility is reasonably assured. In general, we recognize E-commerce
  revenue upon the shipment of goods. We do grant customers a right to return
  E-commerce products. Such returns are recorded as incurred and have been
immaterial for the periods presented.

Online Images Revenues

Software revenues related to
  digital animations consist of fees for licenses and memberships for our
  animation software products. We recognize all software revenue using the
  residual method in accordance with Statement of Position (SOP) 97-2,
Software Revenue Recognition, as amended by SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition with Respect to
  Certain Transactions as described in detail above. We offer
  two Animation Factory membership agreement options:  Gold and
  Platinum. Both Gold and Platinum memberships are available for
  either a three-month or one-year term.  Revenues related to animation
memberships are recognized over the life of the membership term.

Impairment of Long-Lived Assets

We continually evaluate whether
  events and circumstances have occurred that indicate the remaining estimated
  useful life of long-lived assets may warrant revision or that the remaining
  balance of long-lived assets may not be recoverable in accordance with Statement
  of Financial Accounting Standards SFAS No. 144, 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, we use an estimate of the related undiscounted future cash
  flows over the remaining life of the long-lived assets in measuring whether they
  are recoverable. If the estimated undiscounted future cash flows exceed the
  carrying value of the asset, a loss is recorded as the excess of the
  assets carrying value over fair value. Long-lived assets and certain
  identifiable intangible assets to be disposed of are reported at the lower
of carrying amount or fair value less costs to sell.

Restructuring Costs and Other Special Charges

As discussed in Note 3 of the
  notes to the consolidated financial statements, we have recorded significant
  restructuring charges in connection with exiting our hardware systems, managed
  services, and professional services and Linux software engineering services
  businesses during the fiscal years ended 2002 and 2001. A significant portion of
  these charges related to excess facilities primarily from non-cancelable leases
  or other costs for the abandonment or disposal of property and equipment. During
  the third quarter of fiscal 2004, in connection with our original 2002
  restructuring plan which included an assumption to sublet all idle facilities,
  the Company relocated its Fremont, California headquarters to a smaller building
  in the same complex. In addition, during the third quarter of fiscal 2004, the
  Company reached an agreement in principal to sublet unoccupied portions of
  properties that it leases in Fremont, California and Sunnyvale, California (also
  included as part of the original 2002 restructuring plan). As a result of the
  change in circumstances, original accruals were reevaluated and adjusted
  accordingly. All charges as a result of restructuring activities have been
  recorded in accordance with Emerging Issues Task Force EITF 94-3
Liability Recognition for Certain Employee Termination Benefits and Other
  Costs to Exit an Activity (including Certain Costs incurred in a
  Restructuring)". Restructuring charges recorded in fiscal 2004 were
  considered adjustments to the original restructuring plans, therefore,
  Statements of Financial Accounting Standards SFAS No. 146
Accounting for Costs Associated with Exit or Disposal Activities was
  not applicable. The remaining accrual from non-cancelable lease payments is
  based on current circumstances. These accruals are subject to change should
  actual circumstances change. We will continue to evaluate and update, if
applicable, these accruals quarterly.



13

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.

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 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.

We have completed twelve quarters
  of operations focused on building our application software business, and
  accordingly have a limited operating history in this business. While we believe
  that we are making good progress in our application software business, a
  substantial majority of our revenues continue to be derived from our other
  businesses and we face numerous risks and uncertainties that commonly confront
  businesses in emerging markets, some of which we have identified in the
Risk Factors section below.

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 included in this
Form 10-K.



|                                                    |  | **For the years
     ended** |   
|--------------------------------------------------- |  | ---------------------------- | --
|                                                    |  | **July 31,**                 |   
|                                                    |  | **2004**                     |   
|**Consolidated Statements of Operations Data:**     |  |                              |   
|Net
     revenues                                   |  | 100.0                        |   
|Cost
     of revenues                               |  | 53.1                         |   
|Gross
     margin                                   |  | 46.9                         |   
|Operating
     expenses:                            |  |                              |   
|Sales
     and marketing                            |  | 34.5                         |   
|Research
     and development                       |  | 23.0                         |   
|General
     and administrative                     |  | 15.9                         |   
|Restructuring
     costs and other special charges  |  | 11.0                         |   
|Amortization
     of deferred stock compensation    |  | 0.1                          |   
|Amortization
     of goodwill and intangible assets |  | 0.0                          |   
|Impairment
     of long-lived assets                |  | 0.0                          |   
|Total
     operating expenses                       |  | 84.5                         |   
|Loss
     from operations                           |  | (37.6                        | ) 
|Remeasurement
     of warrant liability             |  | 5.4                          |   
|Interest
     and other income, net                 |  | 6.2                          |   
|Net
     loss                                       |  | (26.0                        | )%

Net Revenues

|                       | **** | **Year Ended**                      |  | **%ChangeFiscal**                   |  | **%ChangeFiscal**                   | 
|---------------------- | ---- | ----------------------------------- |  | ----------------------------------- |  | ----------------------------------- | 
|($ in thousands)       |      | **July
         31,
         2004** |  | **July
         31,
         2003** |  | **July
         27,
         2002** | 
|SourceForge revenues   |      | $  4,995                            |  | $  2,918                            |  | $  1,086                            | 
|Online Media revenues  |      | $  9,728                            |  | $10,405                             |  | $  9,007                            | 
|E-commerce revenues    |      | $12,567                             |  | $  8,565                            |  | $  5,722                            | 
|Online Images revenues |      | $  1,922                            |  | $  1,580                            |  | $  1,238                            | 
|Other revenues         |      | $       49                          |  | $     760                           |  | $  3,332                            | 
|Net revenues           |      | $29,261                             |  | $24,228                             |  | $20,385                             | 

Net revenues increased during
  fiscal 2004 as compared to fiscal 2003 due primarily to an increase in our
  SourceForge, E-commerce and Online Images businesses, offset by a decrease
       in our Online Media revenue and other revenue derived from our previous
       hardware
business.

Net revenues increased during
  fiscal 2003 as compared to fiscal 2002 due primarily to an increase in our
  SourceForge, Online Media, E-commerce and Online Images businesses, offset
by a decrease in other revenue derived from our previous hardware business.

Sales for the fiscal years
       ended 2004, 2003, and 2002 were primarily to customers located in the
       United States of
America.

For the fiscal year ended
       July 31, 2004, no one customer represented 10% or greater of net revenues.
       For the fiscal
  year ended July 31, 2003, one customer, Intel Corporation, accounted for
  approximately 17% of net revenues. Going forward, we do not anticipate that
any one customer will represent more than 10% of net revenues.

*Net Revenues by Segment*

SourceForge Revenues

|                                                | **** | **Year Ended**                      |   | **%ChangeFiscal**                   |   | **%ChangeFiscal**                   |  
|----------------------------------------------- | ---- | ----------------------------------- | - | ----------------------------------- | - | ----------------------------------- | -
|($ in thousands)                                |      | **July
         31,
         2004** |   | **July
         31,
         2003** |   | **July
         27,
         2002** |  
|SourceForge revenues                            |      | $4,995                              |   | $2,918                              |   | $1,086                              |  
|Percentage
         of total  net
     revenues |      | 17                                  | % | 12                                  | % | 5                                   | %
|Aggregate
         # of customers  sold
     to |      | 97                                  |   | 55                                  |   | 24                                  |  
|Avg contract value                              |      | $     75                            |   | $     60                            |   | $     53                            |  

SourceForge revenues consist
  principally of fees for licenses of our SourceForge software products,
maintenance, consulting and training.

The growth during fiscal 2004
       was primarily related to the SourceForge licensing component of SourceForge
       revenue.
  During the year, we released the next generation of our SourceForge
  collaborative software development platform, increased the number of customers
  to whom we have licensed SourceForge from 55 to 97 and increased our average
contract value.

The growth during fiscal 2003
       was primarily related to the SourceForge licensing component of SourceForge
       revenue.
  During the year, we increased the number of customers to whom we have licensed
SourceForge from 24 to 55 and increased our average contract value.



15

We expect SourceForge revenues
       to continue to increase as our new and returning customer base grows,
       our average
contract value increases and the length of the sales cycle decreases.

|                                 | **** | **Year Ended**                      |   | **%ChangeFiscal**                   |   | **%ChangeFiscal**                   |  
|-------------------------------- | ---- | ----------------------------------- | - | ----------------------------------- | - | ----------------------------------- | -
|($ in thousands)                 |      | **July
         31,
         2004** |   | **July
         31,
         2003** |   | **July
         27,
         2002** |  
|Online Media revenues            |      | $9,728                              |   | $10,405                             |   | $9,007                              |  
|Percentage of total net revenues |      | 33                                  | % | 43                                  | % | 44                                  | %

Online Media revenues are
  primarily derived from cash and barter sales of advertising space on our various
  Web sites, as well as sponsorship and royalty related arrangements associated
with advertising on these Web sites.

|                      | **** | **Year Ended**                      |  | **%ChangeFiscal**                   |  | **%ChangeFiscal**                   | 
|--------------------- | ---- | ----------------------------------- |  | ----------------------------------- |  | ----------------------------------- | 
|($ in thousands)      |      | **July
         31,
         2004** |  | **July
         31,
         2003** |  | **July
         27,
         2002** | 
|Cash advertising      |      | $6,744                              |  | $  3,944                            |  | $2,793                              | 
|Barter advertising    |      | 1,427                               |  | 1,957                               |  | 2,014                               | 
|Sponsorships          |      | 715                                 |  | 4,350                               |  | 4,000                               | 
|Donations             |      | 412                                 |  | --                                  |  | --                                  | 
|Other                 |      | 430                                 |  | 154                                 |  | 200                                 | 
|Online Media revenues |      | $9,728                              |  | $10,405                             |  | $9,007                              | 

Cash advertising revenue is
  derived from the number of impressions delivered and the average CPM rate (i.e.,
  the average rate at which we receive revenue per 1,000 banner advertisements
  (impressions) we display to users of our online services) charged for the
impressions delivered.

Barter advertising is derived
       from banner advertising delivered in exchange for similar banner advertising
       on
  third-party Web sites. We record barter revenue transactions at their estimated
  fair value based on our historical experience of selling similar advertising
for cash.

Sponsorship revenue is derived
  from non-CPM rate Web marketing programs that are used to increase brand
  awareness. Revenue related to sponsorships is recognized ratably over the term
  of the marketing program. Sponsorship revenue in fiscal 2002 and 2003 was
  primarily derived from one customer, Intel. The decrease in sponsorship revenue
  in fiscal 2004 was the result of Intel not renewing its contract for fiscal
2004.

|                      | **** | **Year Ended**                      |  | **%ChangeFiscal**                   |  | **%ChangeFiscal**                   | 
|--------------------- | ---- | ----------------------------------- |  | ----------------------------------- |  | ----------------------------------- | 
|($ in thousands)      |      | **July
         31,
         2004** |  | **July
         31,
         2003** |  | **July
         27,
         2002** | 
|Cash advertising      |      | $       6,744                       |  | $    3,944                          |  | $    2,793                          | 
|Impressions delivered |      | 1,162,028                           |  | 563,795                             |  | 168,585                             | 
|Average CPM rate      |      | $         5.80                      |  | $      7.00                         |  | $    16.57                          | 

The growth during fiscal 2004
       and 2003 in cash advertising revenue is primarily due to the increase
       in the number
  of impressions delivered. The increase in the number of impressions was
  primarily due to general improvement in demand for our online advertising.
       We expect the growth of our cash advertising revenue to outpace that of
       the general
  online advertising market. We believe that our prominent position in serving
       the growing Open Source software and Linux markets, along with our favorable
       online
  visitor demographics, make us an attractive advertising vehicle for advertising
customers.



15

E-commerce Revenues

|                                  | **** | **Year Ended**                      |   | **%ChangeFiscal**                   |   | **%ChangeFiscal**                   |  
|--------------------------------- | ---- | ----------------------------------- | - | ----------------------------------- | - | ----------------------------------- | -
|($ in thousands)                  |      | **July
         31,
         2004** |   | **July
         31,
         2003** |   | **July
         27,
         2002** |  
|E-commerce revenues               |      | $  12,567                           |   | $    8,565                          |   | $  5,722                            |  
|Percentage of total net revenues  |      | 43                                  | % | 35                                  | % | 28                                  | %
|# of Orders (per year)            |      | 201,542                             |   | 138,495                             |   | 88,334                              |  
|Avg order size (in whole dollars) |      | $    62.35                          |   | $    61.84                          |   | $  64.78                            |  

E-commerce revenues are derived
  from the online sale of consumer goods, including shipping, net of any returns
  and allowances. The growth in fiscal 2004 and 2003 is primarily due to increased
  consumer awareness of our site as a result of expanded advertising, a broader
  product offering which attracted a larger customer base, as well as Web site
  enhancements and affiliate programs that drove more traffic to our site. As
       a result of our efforts we experienced a 46% and 57% increase in the number
       of
  orders placed during fiscal 2004 and 2003, respectively. We expect E-commerce
revenues to continue to grow as our E-commerce customer base grows.

Online Images Revenues

|                                  | **** | **Year Ended**                      |   | **%ChangeFiscal**                   |   | **%ChangeFiscal**                   |  
|--------------------------------- | ---- | ----------------------------------- | - | ----------------------------------- | - | ----------------------------------- | -
|($ in thousands)                  |      | **July
         31,
         2004** |   | **July
         31,
         2003** |   | **July
         27,
         2002** |  
|Online Images revenues            |      | $1,922                              |   | $1,580                              |   | $1,238                              |  
|Percentage of total net  revenues |      | 7                                   | % | 7                                   | % | 6                                   | %

Online Images revenues are
       derived from the online sale of three-dimensional art, animations and
presentations.

The growth in fiscal 2004
       and 2003 is primarily due to increased consumer awareness of our site
       as a result of a
  broader product offering which attracted a larger customer base, as well as
       Web site enhancements and affiliate programs that drove more traffic to
       our site. We
expect Online Images revenues to continue to grow as our customer base grows.

Other Revenues

|                                 | **** | **Year Ended**                      |   | **%ChangeFiscal**                   |   | **%ChangeFiscal**                   |  
|-------------------------------- | ---- | ----------------------------------- | - | ----------------------------------- | - | ----------------------------------- | -
|($ in thousands)                 |      | **July
         31,
         2004** |   | **July
         31,
         2003** |   | **July
         27,
         2002** |  
|Other revenues                   |      | $    49                             |   | $    760                            |   | $   3,332                           |  
|Percentage of total net revenues |      | 0.2                                 | % | 3.1                                 | % | 16.3                                | %

Other revenues are derived
       from our former hardware, and related customer support, and professional
       services
  businesses. The decrease in other revenues in fiscal 2004 and 2003 is the direct
  result of exiting these former businesses. We expect other revenues to be
eliminated in fiscal 2005 and thereafter.

Our revenue recognition policy
  related to our former hardware systems business followed SAB 101, Revenue
  Recognition in Financial Statements. Under SAB 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 or 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 these products.

We recognized revenues from
  hardware related 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 hardware related 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.



17

Cost of Revenues/Gross Margin

|                 | **** | **Year Ended**                      |   | **%ChangeFiscal**                   |   | **%ChangeFiscal**                   |  
|---------------- | ---- | ----------------------------------- | - | ----------------------------------- | - | ----------------------------------- | -
|($ in thousands) |      | **July
         31,
         2004** |   | **July
         31,
         2003** |   | **July
         27,
         2002** |  
|Cost of revenues |      | $15,537                             |   | $12,780                             |   | $  9,661                            |  
|Gross margin     |      | $13,724                             |   | $11,448                             |   | $10,724                             |  
|Gross margin %   |      | 47                                  | % | 47                                  | % | 53                                  | %

Cost of revenues consist of
  personnel costs and related overhead associated with providing software
  professional services, personnel costs and related overhead associated with
  providing and running advertising campaigns and product costs associated with
  our E-commerce business. The above analysis is inclusive of any restructuring
  charges that were originally classified as cost of revenues or adjustments
       to those original restructuring charges. The below analysis represents
       cost of
revenues, excluding all restructuring charges and adjustments:

|                                      | **** | **Year Ended**                      |   | **%ChangeFiscal**                   |   | **%ChangeFiscal**                   |  
|------------------------------------- | ---- | ----------------------------------- | - | ----------------------------------- | - | ----------------------------------- | -
|($ in thousands)                      |      | **July
         31,
         2004** |   | **July
         31,
         2003** |   | **July
         27,
         2002** |  
|Cost of revenues                      |      | $ 15,537                            |   | $ 12,780                            |   | $  9,661                            |  
|Add back restructuring recoveries     |      | 12                                  |   | 432                                 |   | 5,807                               |  
|Cost of revenues (excl restructuring) |      | $ 15,549                            |   | $ 13,212                            |   | $15,468                             |  
|Gross margin (excl restructuring)     |      | $ 13,712                            |   | $ 11,016                            |   | $  4,917                            |  
|Gross margin % (excl restructuring)   |      | 47                                  | % | 45                                  | % | 24                                  | %

The restructuring credits
       in fiscal 2004, 2003, and 2002 were related to adjustments of prior period
  restructuring charges associated with inventory and warranty reserves in
  connection with our former hardware business. The $5.8 million credit in fiscal
  2002 related to the reversal of inventory reserves and was the result of a
  better than expected sell through of old and excess material as well as the
ability to sell product at a price in excess of that originally estimated.

The increase in gross margins
  excluding the prior period restructuring reserves adjustments was primarily
the result of improvements in the SourceForge and Online Media businesses.

Cost of Revenues/Gross Margin by Segment (Excluding
Restructuring)

SourceForge Cost of Revenues/Gross Margin

|                             | **** | **Year Ended**                      |   | **%ChangeFiscal**                   |   | **%ChangeFiscal**                   |   
|---------------------------- | ---- | ----------------------------------- | - | ----------------------------------- | - | ----------------------------------- | --
|($ in thousands)             |      | **July
         31,
         2004** |   | **July
         31,
         2003** |   | **July
         27,
         2002** |   
|SourceForge cost of revenues |      | $1,860                              |   | $1,997                              |   | $ 2,387                             |   
|SourceForge gross margin     |      | $3,135                              |   | $   921                             |   | $(1,301                             | ) 
|SourceForge gross margin %   |      | 63                                  | % | 32                                  | % | (120                                | %)

SourceForge cost of revenues
  consist of personnel costs associated with providing software customer and
  professional services. The increase in our SourceForge gross margin percentages
  for fiscal 2004 and 2003 was primarily the result of leveraging our fixed
personnel costs while increasing revenue levels.



18

Online Media Cost of Revenues/Gross Margin

|                              | **** | **Year Ended**                      |   | **%ChangeFiscal**                   |   | **%ChangeFiscal**                   |  
|----------------------------- | ---- | ----------------------------------- | - | ----------------------------------- | - | ----------------------------------- | -
|($ in thousands)              |      | **July
         31,
         2004** |   | **July
         31,
         2003** |   | **July
         27,
         2002** |  
|Online Media cost of revenues |      | $2,969                              |   | $3,852                              |   | $5,088                              |  
|Online Media gross margin     |      | $6,759                              |   | $6,553                              |   | $3,919                              |  
|Online Media gross margin %   |      | 69                                  | % | 63                                  | % | 44                                  | %

Online Media cost of revenues
  consist of personnel costs and related overhead associated with developing
       the editorial content of the sites and providing and running advertising
       campaigns.
  The increase in Online Media gross margin percentages for fiscal 2004 was driven
  by the decrease in costs associated with editorial content and advertising
  delivery. The increase in Online Media gross margin percentages for fiscal
       2003 was primarily driven by the increase in revenues while continuing
       to reduce the
costs associated with editorial content and advertising delivery.

E-commerce Cost of Revenues/Gross Margin

|                            | **** | **Year Ended**                      |   | **%ChangeFiscal**                   |   | **%ChangeFiscal**                   |  
|--------------------------- | ---- | ----------------------------------- | - | ----------------------------------- | - | ----------------------------------- | -
|($ in thousands)            |      | **July
         31,
         2004** |   | **July
         31,
         2003** |   | **July
         27,
         2002** |  
|E-commerce cost of revenues |      | $10,225                             |   | $7,025                              |   | $4,708                              |  
|E-commerce gross margin     |      | $  2,342                            |   | $1,540                              |   | $1,014                              |  
|E-commerce gross margin %   |      | 19                                  | % | 18                                  | % | 18                                  | %

E-commerce cost of revenues
  consist of product costs, shipping and fulfillment costs and personnel costs
  associated with the operations and merchandising functions. E-commerce cost
       of revenues in absolute dollars has increased consistent with increased
       E-commerce
  revenue levels. E-commerce gross margin percentages have remained relatively
  flat for fiscal years 2004, 2003 and 2002. We expect E-commerce cost of revenues
  in absolute dollars to increase proportionately with E-commerce revenues. In
  addition, we expect E-commerce overall gross margins to improve slightly as
volume grows.

Online Images Cost of Revenues/Gross Margin

|                               | **** | **Year Ended**                      |   | **%ChangeFiscal**                   |   | **%ChangeFiscal**                   |  
|------------------------------ | ---- | ----------------------------------- | - | ----------------------------------- | - | ----------------------------------- | -
|($ in thousands)               |      | **July
         31,
         2004** |   | **July
         31,
         2003** |   | **July
         27,
         2002** |  
|Online Images cost of revenues |      | $   495                             |   | $   339                             |   | $   222                             |  
|Online Images gross margin     |      | $1,427                              |   | $1,241                              |   | $1,016                              |  
|Online Images gross margin %   |      | 74                                  | % | 79                                  | % | 82                                  | %

Online Images cost of revenues
  consist of direct material and production costs for animation CDs. The decrease
  in our Online Images gross margin percentages for fiscal 2004 and 2003 was
  primarily due to increased server capacity and bandwidth usage as the business
has grown from year to year.

Operating Expenses

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.

|                                 | **** | **Year Ended**                      |   | **%ChangeFiscal**                   |   | **%ChangeFiscal**                   |  
|-------------------------------- | ---- | ----------------------------------- | - | ----------------------------------- | - | ----------------------------------- | -
|($ in thousands)                 |      | **July
         31,
         2004** |   | **July
         31,
         2003** |   | **July
         27,
         2002** |  
|Sales & Marketing                |      | $10,093                             |   | $9,791                              |   | $12,513                             |  
|Percentage of total net revenues |      | 34                                  | % | 40                                  | % | 61                                  | %
|Headcount                        |      | 30                                  |   | 27                                  |   | 29                                  |  



19

The increase in absolute dollars
  in fiscal 2004 compared to 2003 was primarily related to an increase in employee
  expenses, including commission, of $0.5 million and an increase in credit card
  fees associated with our e-commerce business of $0.3 million. Of the $0.5
  million in employee expenses, $0.4 million was related to commission expense
       and was a direct result of increased revenue across all businesses. The
       increase in
  credit card fees was directly related to our increase in E-commerce business
  year over year. These increases were offset by a decrease in our Online Media
  marketing expense related to barter of $0.6 million. We intend to continue
       to decrease our barter expense in the future consistent with our barter
       revenue as
  we begin to decrease barter related programs. The decrease as a percentage
       of net revenues was due to increased revenue levels. We believe our sales
       and
  marketing expenses in absolute dollars will increase in the future as we intend
  to grow our sales force. However, in the future, we expect sales and marketing
expenses to decrease slightly as a percentage of revenue.

The decrease in absolute dollars
  in fiscal 2003 compared to fiscal 2002 was primarily due to headcount reductions
  which accounted for $1.0 million of the decrease, a reduction in marketing
  programs which represented $0.9 million of the decrease, the reduction in our
  investment in VA Linux Systems Japan K.K. (VA Linux Japan) which
  represented $0.7 million of the decrease and the exiting of our Linux software
  engineering and professional services businesses which represented $0.1 million
  of the decrease. The decrease as a percentage of net revenues was primarily
  due to decreased spending levels as described above as well as increased revenue
levels.

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.

|                                 | **** | **Year Ended**                      |   | **%ChangeFiscal**                   |   | **%ChangeFiscal**                   |  
|-------------------------------- | ---- | ----------------------------------- | - | ----------------------------------- | - | ----------------------------------- | -
|($ in thousands)                 |      | **July
         31,
         2004** |   | **July
         31,
         2003** |   | **July
         27,
         2002** |  
|Research & Development           |      | $6,732                              |   | $7,815                              |   | $8,122                              |  
|Percentage of total net revenues |      | 23                                  | % | 32                                  | % | 40                                  | %
|Headcount                        |      | 36                                  |   | 34                                  |   | 44                                  |  

The decrease in absolute dollars
  in fiscal 2004 compared to fiscal 2003 was primarily due to a decrease in the
  use of SourceForge outside contractors of $0.4 million and decreased employee
  related expenses of $0.7 million. The decrease in SourceForge contractors was
  specifically related to Cybernet Software Solutions, Inc. and was the direct
  result of completing the development phase of SourceForge 3.4. The decrease in
  employee-related expenses was primarily due to a reduction in salary expense
  during fiscal 2004 as the average R&D headcount declined to 38 in fiscal
  2004 from 42 in fiscal 2003. The decrease as a percentage of net revenues was
  primarily due to our decreased spending levels as described above as well as
  increased revenue levels. We expect research and development expenses to
  increase slightly in absolute dollars and decrease as a percentage of revenue
in the future.

The decrease in absolute dollars
  in fiscal 2003 compared to fiscal 2002 was primarily due to the exiting of
       our Linux software engineering and professional services businesses, which
       accounted
  for a $1.3 million reduction, the reduction in our investment in VA Linux Japan,
  which accounted for a $0.5 million reduction, offset by an increase in the
       use of outside contractors of $0.6 million and higher employee related
       expenses of
  $0.6 million. The fiscal year 2003 $0.6 million increase in employee related
  expenses was primarily due to a $0.7 million increase in allocated operating
costs partially offset by a $0.1 million reduction in salary expense. The decrease as a percentage
       of net revenues was primarily due to our slightly decreased spending levels
       as
described above as well as increased revenues levels.

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
  consolidated statements of operations. Going forward, should technological
  feasibility occur prior to the completion of our software development, all
  costs incurred between technological feasibility and software development completion
will be capitalized.



21

General and Administrative Expenses

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

|                                 | **** | **Year Ended**                      |   | **%ChangeFiscal**                   |   | **%ChangeFiscal**                   |  
|-------------------------------- | ---- | ----------------------------------- | - | ----------------------------------- | - | ----------------------------------- | -
|($ in thousands)                 |      | **July
         31,
         2004** |   | **July
         31,
         2003** |   | **July
         27,
         2002** |  
|General & Administrative         |      | $4,665                              |   | $6,455                              |   | $10,850                             |  
|Percentage of total net revenues |      | 16                                  | % | 27                                  | % | 53                                  | %
|Headcount                        |      | 19                                  |   | 17                                  |   | 27                                  |  

The decrease in absolute dollars
  in fiscal 2004 as compared to fiscal 2003 was primarily related to the reversal
  of legal expenses in 2004 of $1.4 million, $0.9 million of which was associated
  with the IPO Securities Litigation that was ultimately paid by one of our
  insurers, $0.3 million of which related to a lawsuit that was favorably
  resolved, and $0.2 million of which related to a lawsuit that was considered
  probable at the time of accrual but was considered highly unlikely at July
       31, 2004. In addition, fiscal 2003 expenses included a charge of $0.3
       million
  resulting from a California Sales Tax audit associated with our former hardware
  business. In 2004, no expense was incurred related to sales tax audits. The
  decrease as a percentage of net revenues was primarily due to our decreased
  expense levels related to prior period accrual reversals as described above
       as well as increased revenue levels. We expect general and administrative
       expenses
  to return to fiscal 2003 levels in absolute dollars and decrease as a percentage
of revenue in the future.

General and administrative
  expenses for fiscal year 2002 included the reversal of excess bad debt
  provisions of $1.0 million and $0.9 million of accrued legal expenses associated
  with the IPO Securities Litigation. Excluding these charges, the decrease in
  absolute dollars in fiscal 2003 as compared to fiscal 2002 resulted primarily
  from a decrease in administrative personnel. Our decision in the fourth quarter
  of fiscal 2002 to reduce our administrative and overhead costs to align with
       our business model represented $4.1 million of the decrease and the reduction
       in our
  investment in VA Linux Japan represented $0.4 million of the decrease. The
  decrease as a percentage of net revenues was primarily due to our decreased
spending levels as described above as well as increased revenue levels.

Restructuring Costs and Other Special
   Charges

In fiscal 2001 and 2002, we
  adopted plans to exit our hardware systems and hardware-related software
  engineering and professional services businesses, as well as exit a sublease
  agreement and reduce our general and administrative overhead costs. We exited
  these activities to pursue our current SourceForge, Online Media, E-commerce
       and Online Images businesses and reduce our operating losses to improve
       cash flow.
  We recorded restructuring charges of $168.5 million related to exiting these
  activities, $160.4 million of which was included in restructuring charges and
  other special charges in operating expenses and $8.1 million of which was
  included in cost of sales. Included in the restructuring were charges related
       to excess facilities from non-cancelable leases. During the third quarter
       of fiscal
  2004, in connection with our original 2002 restructuring plan which included
       an assumption to sublet all idle facilities, we relocated our Fremont,
       California
  headquarters to a smaller building in the same complex. As a result of the
  change in circumstances, original accruals were reevaluated and we accordingly
  recorded a restructuring adjustment of $2.9 million. Included in the $2.9
  million dollar restructuring adjustment was $2.5 million of expense related
       to writing off leasehold improvements and fixed assets and an additional
       $0.4
  million expense related to excess facilities from non-cancelable leases. In
  addition, during the third quarter of fiscal 2004, we reached an agreement
       in principal to sublet unoccupied portions of properties that we lease
       in
  Sunnyvale, California and Fremont, California, which was finalized in the fourth
  quarter of fiscal 2004. As a result of the change in circumstances due to the
  agreement in principal, original accruals were reevaluated and we accordingly
  recorded a restructuring adjustment of $0.3 million in the third quarter of
  fiscal 2004. The $3.2 million total adjustment to restructuring expenses in
  fiscal 2004 has been recorded in the consolidated statement of operations for
  that period. The remaining accrual from non-cancelable lease payments is based
  on current circumstances. These accruals are subject to change should actual
  circumstances change. We will continue to evaluate and update, if applicable,
  these accruals quarterly. As of July 31, 2004, we had an accrual of
  approximately $11.3 million outstanding related to these non-cancelable leases,
all of which was originally included in operating expenses.



21

We recorded a net restructuring
  credit of $0.3 million for the fiscal year ended July 31, 2003. This included
  $0.4 million of additional charges related to existing excess facilities as
       a result of the termination of a subtenant lease and $0.3 million of charges
  associated with our fiscal 2002 plan to reduce our general and administrative
  overhead costs, net of $1.0 million in credit adjustments to previously recorded
  restructuring reserves. As of July 31, 2004, no outstanding accruals remained
related to these net restructuring activities related to fiscal year 2003.

All charges as a result of
  restructuring activities have been recorded in accordance with Emerging Issues
  Task Force EITF 94-3 Liability Recognition for Certain
  Employee Termination Benefits and Other Costs to Exit an Activity (including
  Certain Costs incurred in a Restructuring)". Restructuring charges recorded
  in fiscal 2004 were considered adjustments to the original restructuring plans,
  therefore, Statements of Financial Accounting Standards SFAS No. 146
Accounting for Costs Associated with Exit or Disposal Activities was
not applicable.

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

|                                                                                                  |  | **Total
    Charged To Operations Fiscal 2001** | **** | **Total
    Charged To Operations Fiscal 2002** | **** | **Total
    Charged To Operations Fiscal 2003** | **** | **Total
    Charged To Operations Fiscal 2004** |  | **Total
        Cash Receipts\
      (Payments)** | **** | **Restructuring
      Liabilities at
      July 31, 2004** | 
|------------------------------------------------------------------------------------------------- |  | ----------------------------------------------- | ---- | ----------------------------------------------- | ---- | ----------------------------------------------- | ---- | ----------------------------------------------- |  | ------------------------------------------------- | ---- | ---------------------------------------------------------- | 
|Cash Provisions:                                                                                  |  |                                                 |      |                                                 |      |                                                 |      |                                                 |  |                                                   |      |                                                            | 
|Other
     special charges relating                                                               | 
|to restructuring
         activities                                                              |  | $    2,159                                      |      | $    (888                                       | )    | $   78                                          |      | $     --                                        |  | $(1,349                                           | )    | $       --                                                 | 
|Facilities
     charges                                                                           |  | 6,584                                           |      | 9,401                                           |      | 191                                             |      | 713                                             |  | (5,606                                            | )    | 11,283                                                     | 
|Employee
     severance and other 
       related charges                                         |  | 3,498                                           |      | 1,997                                           |      | 37                                              |      | --                                              |  | (5,532                                            | )    | --                                                         | 
|Total
     cash provisions                                                                        |  | 12,241                                          |      | 10,510                                          |      | 306                                             |      | 713                                             |  | $(12,487                                          | )    | $11,283                                                    | 
|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                                           |      | (553                                            | )    | 2,496                                           | 
|Write-off
         of accelerated options   


         from terminated
     employees            |  | 1,352                                           |      | --                                              |      | --                                              |      | --                                              |  |                                                   |      |                                                            | 
|Acceleration
     of deferred stock compensation                                                  |  | 35,728                                          |      | 352                                             |      | (16                                             | )    | --                                              | 
|Total
     non-cash provisions                                                                    |  | 101,237                                         |      | 36,426                                          |      | (569                                            | )    | 2,496                                           |  |                                                   |      |                                                            | 
|Total
     provisions                                                                             |  | $113,478                                        |      | $ 46,936                                        |      | $(263                                           | )    | $3,209                                          | 

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

|Changes
          in the total accrued restructuring liability |      | **Balance
          at
      Beginning of Period** |      | **Charged
          to Costs and Expenses** |      | **Deductions**          |      | **Balance
          at End of Period** | 
|-------------------------------------------------------------- | ---- | -------------------------------------------------- | ---- | ------------------------------------------- | ---- | ----------------------- | ---- | -------------------------------------- | 
|For
        the year ended July 28, 2001                       |      | $       --                                         |      | $12,241                                     |      | $(2,728                 | )    | $  9,513                               | 
|For
        the year ended July 27, 2002                       |      | $  9,513                                           |      | $10,510                                     |      | $(2,029                 | )    | $17,994                                | 
|For
        the year ended July 31, 2003                       |      | $17,994                                            |      | $     306                                   |      | $(3,411                 | )    | $14,889                                | 
|For
        the year ended July 31, 2004                       |      | $14,889                                            |      | $     713                                   |      | $(4,319                 | )    | $11,283                                | 
|                                                              
|                                                               |     
|Components
    of the total accrued restructuring liability    | **** | **Short
    Term**                                 | **** | **Long
    Term**                           | **** | **Total
    Liability** | ****
|For
        the year ended July 27, 2002                       |      | $  3,397                                           |      | $14,597                                     |      | $ 17,994                |     
|For
        the year ended July 31, 2003                       |      | $  4,117                                           |      | $10,772                                     |      | $ 14,889                |      |                                        | 
|For
        the year ended July 31, 2004                       |      | $  3,440                                           |      | $  7,843                                    |      | $ 11,283                |     

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



22

years. This method of deferred stock expense
  amortization is in accordance with Financial Accounting Standards Board
  (FASB) Interpretation No. (FIN) 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. We recorded
  amortization of deferred stock compensation related to these options of $20,000,
  $0.1 million and $1.2 million for fiscal years 2004, 2003 and 2002,
  respectively. These stock options are fully amortized as of July 31, 2004.
  In addition, in connection with acquisitions, we recorded $0.5 million of deferred
  stock compensation during fiscal year 2002. No amortization of deferred stock
  compensation related to acquisitions was recorded during fiscal years 2004
  and
  2003. Further, we made adjustments during fiscal years 2003 and 2002 related
  to deferred stock compensation for stock options of terminated employees of
  a
  credit of $16,000 and $0.3 million, respectively. These adjustments have been
  included in restructuring costs and other special charges in the consolidated
statements of operations.

Goodwill and Intangibles and Impairment
   of Long-Lived Assets

In connection with the
  acquisitions of Precision Insight, Inc. (Precision Insight) and
  NetAttach, Inc. (NetAttach), we recorded $42.0 million of goodwill
  and intangibles during fiscal 2000. In connection with our restructuring plans
  in fiscal year 2002, we wrote off the remaining 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. This was included in restructuring costs and other special charges
in the consolidated statements of operations for fiscal 2002.

We continually evaluate whether
  events and circumstances have occurred that indicate the remaining estimated
  useful life of long-lived assets may warrant revision or that the remaining
  balance of long-lived assets may not be recoverable in accordance with SFAS No.
  144, 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, we use an estimate of the related
  undiscounted future cash flows over the remaining life of the long-lived assets
  in measuring whether they are recoverable. If the estimated undiscounted future
  cash flows exceed the carrying value of the asset, a loss is recorded as the
  excess of the assets carrying value over fair value. Long-lived assets
  and certain identifiable intangible assets to be disposed of are reported at
  the
lower of carrying amount or fair value less costs to sell.

In connection with the acquisition
  of OSTG (known at the time of acquisition as Andover.net, Inc.), the
  Company recorded $83.6 million of goodwill and intangibles during fiscal 2000.
  During the quarter ended July 27, 2002 the goodwill was tested for impairment in
  accordance with SFAS No. 142, Goodwill and Other Intangible Assets.
  First, the Company determined whether its carrying amount exceeded its
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 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, we determined that the remaining carrying
  value was impaired and recorded an impairment loss of $3.6 million. The charge
  is included in the caption Impairment of goodwill, intangible assets and
  other long-lived assets in the consolidated statements of operations.
No carrying value related to OSTG goodwill remained at July 31, 2003.

Intangible assets are amortized on
  a straight-line basis over three to five years. We continually evaluate 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,
  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. An evaluation was performed on the intangible
  assets related to OSTG during the quarter ended July 27, 2002. As a result of
  this evaluation, we determined that the carrying value was impaired and an
  impairment loss was recorded for $8.6 million. The impairment charge is included
  in the caption Impairment of goodwill, intangible assets and other
  long-lived assets in the consolidated statements of operations. Intangible
  asset amortization of $12,000, $2.1 million and $11.7 million was recorded
  in fiscal 2004, 2003 and 2002, respectively. The intangible asset carrying
  value at
  July 31, 2004 is $14,000 and relates to domain and trade names associated with
  our current SourceForge and OSTG businesses. No events or circumstances occurred
  during fiscal year 2004 that would indicate a possible impairment in the
carrying value of intangible assets at July 31, 2004.

Remeasurement of Warrant Liability,
   Interest and Other Income, Net

On November 6, 2003, we entered
  into a securities purchase agreement in which we completed a private placement
  of 3,529,412 shares of our common stock with The Riverview Group LLC
  (Riverview) at an issue price of $4.25 per share for aggregate
  proceeds of approximately $15 million (the Private Placement).
  In connection with the Private Placement,



23

the Company retained Wharton Capital
  Partners Ltd. (Wharton) to act as a financial consultant and
  placement agent. Also in connection with the Private Placement, Riverview and
  Wharton received three-year warrants to purchase a total of 705,883 and 25,000
  shares of our common stock, respectively, at an exercise price of $6.00 and
  $6.14 per share, respectively (collectively, the Warrants). We
  entered into a registration rights agreement with Riverview on November 6, 2003
  (the Registration Rights Agreement) in which we agreed to provide
  certain registration rights under the Securities Act of 1933, as amended and
  the rules and regulations promulgated thereunder, and applicable state securities
laws with respect to the common stock and the warrants issued to Riverview.

Pursuant to the terms of the
  Registration Rights Agreement, we filed a registration statement (the
Registration Statement) on Form S-3 in order to register the common
  stock and warrants issued in the Private Placement. The SEC declared the
  Registration Statement effective on April 30, 2004. Before the effective date of
  the Registration Statement, the shares of our common stock sold in the Private
  Placement and the shares of our common stock underlying the Warrants did not
  have the same rights as the other shares which were included in the Equity
  section of the Consolidated Balance sheet. Therefore, the shares of our common
  stock sold in the Private Placement and the shares of our common stock
  underlying the Warrants were classified as liabilities on the Consolidated
  Balance sheet. Liabilities must be reported at fair value as of the balance
  sheet date. Initially the Warrants were valued as of November 6, 2003, and
  revalued on January 31, 2004 using the Black-Scholes valuation model and then,
  on April 30, 2004, the effective date of the Registration Statement, revalued
  again using the same Black-Scholes valuation model. As a result of these
  remeasurements, a non-cash credit adjustment of $1.9 million was recorded to
  properly value the liability. In addition, a $0.3 million non-cash expense was
  recorded as a result of not having the common stock shares associated with the
  Private Placement registered. Both adjustments have been recorded in
Remeasurement of warrant liability in the Consolidated Statement
of Operations. Further, as a result of the S-3 becoming effective on April 30,
  2004, our remaining liability for the warrants of $0.6 million was reclassified
to equity as of that date.

Interest and Other Income, Net

|                       | **** | **Year Ended**                      |   | **%ChangeFiscal**                   |   | **%ChangeFiscal**                   |  
|---------------------- | ---- | ----------------------------------- | - | ----------------------------------- | - | ----------------------------------- | -
|($ in thousands)       |      | **July
         31,
         2004** |   | **July
         31,
         2003** |   | **July
         27,
         2002** |  
|Interest Income        |      | $ 911                               |   | $ 1,132                             |   | $ 1,714                             |  
|Interest Expense       |      | ($    5                             | ) | ($    8                             | ) | ($   32                             | )
|Other Income (Expense) |      | $ 895                               |   | ($   40                             | ) | $    528                            |  

Although we received an additional
  $14.5 million in proceeds associated with a Private Placement offering, net of
  issuance costs, in the second quarter of fiscal 2004, we experienced a decline
  in interest income in fiscal 2004 as compared to fiscal 2003 as a result of the
  continuing decline in interest rates. We expect our cash balance to continue to
  decrease to support our operations, however, interest income may fluctuate as
  interest rates fluctuate. Refer to Item 7A Quantitative and Qualitative
Disclosures About Market Risk.

The decrease in interest income
       in fiscal 2003 as compared to fiscal 2002 was due to decreased cash balances
       as
  well as decreased returns on our cash as a result of declining interest rates
from the prior year.

Other income and expenses
  increased in fiscal 2004 as compared to fiscal 2003 primarily due to proceeds
received from a legal settlement in fiscal 2004 of $1.0 million.

Other income and expenses
  decreased in fiscal 2003 as compared to fiscal 2002 primarily due to our
  decreased investment in VA Linux Japan that resulted in a loss of $0.9 million
in fiscal 2002.

Income Taxes

As of July 31, 2004, we had
       $310.6 million of federal and state net operating loss carry-forwards
       for tax reporting
  purposes available to offset future taxable income. We have not recognized
       any benefit from these net operating loss carry-forwards because 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 2024 and fiscal year 2014, respectively, to the extent that they
       are
  not utilized. 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.



24

Liquidity and Capital Resources

|                                          |  |                            |  
|----------------------------------------- |  | -------------------------- | -
|****                                      |  | **Year
     Ended**        |  
|(in
     thousands)                       |  | **July
         31, 2004** |  
|Net cash provided by (used in):           |  |                            |  
|Operating
     activities                 |  | $(10,912                   | )
|Investing
     activities                 |  | (2,322                     | )
|Financing
     activities                 |  | 17,840                     |  
|Effect of  exchange  rate changes on cash |  |                            |  
|and
     cash equivalents                 |  | 55                         |  
|Net change in cash and cash equivalents   |  | $   4,661                  |  

Our principal sources of cash as
  of July 31, 2004 are our existing cash, cash equivalents, short-term and
  long-term investments of $44.0 million, which excludes restricted cash of
  $1.5 million. During fiscal 2004, cash and cash equivalents increased by
  $4.7 million, and short-term and long-term investments increased by
  $0.5 million. This increase is primarily due to cash provided by proceeds
  from the private placement offering and sale of common stock through our
  employee benefit plans, offset by cash used in operations and payments for
capital expenditures.

The cash flow discussion below
  describes the cash used or provided by in one period as compared to the cash
  used or provided by in the previous period. As such, the year to year
  fluctuations discussed can be calculated from the Consolidated Statements of
Cash Flows.

*Operating Activities*

The decrease in cash usage
       related to operating activities in fiscal 2004, as compared to fiscal
       2003, was
  primarily the result of a decrease in net loss (excluding all non-cash items)
       of $3.4 million, an increase in accrued liabilities and other of $1.3
       million and
  an increase in accounts payable of $2.0 million. The increased cash flow from
  accrued liabilities and other was primarily related to the growth in SourceForge
  bookings and therefore deferred revenue in 2004 as compared to 2003. The
  increased cash flow from accounts payable was primarily the result of our
  continued efforts to decrease expenses as well as the timing of payments. The
  increase in cash flow was offset by an increase in accounts receivable of $0.9
  million, an increase in inventories of $0.6 million and a decrease in accrued
  restructuring of $0.5 million. The increased cash usage related to accounts
  receivable was primarily the result of increased SourceForge sales in July
       2004 compared to July 2003. The increased cash usage related to inventories
       was
  primarily the result of higher volume purchases in the fourth quarter of fiscal
  2004 compared to the fourth quarter of fiscal 2003. These higher volume
  purchases were made as a result of long lead times and to secure exclusive
  inventory that would not be available later in the year. Finally, the increased
  cash usage related to accrued restructuring was the result of increased payments
  on excess facilities in 2004 compared to 2003 of $1.4 million, offset by a
  decrease in cash payments related to severance agreements of $0.5 million.
       Cash payments made on excess facilities in 2004 was $4.3 million, compared
       to $2.9
  million in 2003. The variance in the restructuring accrual compared to the
  payments made in 2004 was the $0.7 million adjustment recorded based on the
  change in events related to excess facilities that occurred in the third and
  fourth quarters of fiscal 2004. Payments made to former employees for severance
  agreements in 2003 were $0.5 million. A decrease in cash outflow of $0.5 million
  in 2004 compared to 2003 resulted as no restructuring related severance payments
  were made in 2004. We expect that the above cash utilization trends will
  continue as we grow our business and pay off our remaining lease obligations
related to excess facilities.

The decrease in cash usage
       related to operating activities in fiscal 2003, as compared to fiscal
       2002, was
  primarily the result of a decrease in net loss (excluding all non-cash items)
       of $30.0 million, an increase in accrued liabilities and other of $6.1
       million, an
  increase in other long-term liabilities of $0.6 million and an increase in
  accounts payable of $11.0 million. The decreased cash usage related to accrued
  liabilities, other long-term liabilities and accounts payable was due to the
  exiting of our former hardware and related businesses at the end of fiscal
       2001. A significant amount of liabilities relating to this former hardware
       business
  remained at the end of 2001 creating large cash outflows in 2002. The increase
  in cash flow in fiscal 2003, as compared to fiscal 2002 was offset by an
  increase in accounts receivable of $11.6 million, an increase in inventories
       of $2.1 million, an increase in prepaids and other assets of $3.1 million
       and a
  decrease in accrued restructuring of $11.6 million. The increased cash usage
  related to accounts receivable, prepaids and inventory in 2003 compared to
       2002 was primarily the result of exiting the former hardware business
       at the end of
  fiscal 2001. Accounts receivable decreased dramatically in fiscal 2002 as a
  result of all the previous hardware sales collected during that year. The 2002
  revenue base to be collected in fiscal 2003 was much smaller than the 2001
revenue base to be collected in fiscal 2002.



25

As a result, we had less cash
    inflow related to receivables in fiscal 2003 compared to fiscal 2002. Inventory
    also decreased dramatically in fiscal 2002 as we sold off remaining excess
    hardware inventory for cash. In fiscal 2003, no remaining hardware inventory
    existed and all inventory purchases were associated with our current E-commerce
    business. Prepaids and other assets also decreased dramatically in fiscal
       2002, creating significant cash inflow in that year, as we transitioned
       to our new
    infrastructure. The increased cash usage related to accrued restructuring
       was primarily the result of increased payments on excess facilities in
       2003, as
    compared to 2002 of $1.8 million, cash received in fiscal 2002 of $2.5 million
    as the result of a sublease termination on one of the Companys idle
    facilities, offset by a decrease in payments related to severance agreements
    of $2.6 million. Cash payments made on excess facilities in fiscal 2003 were
    $2.9
    million, compared to $1.1 million in fiscal 2002. Payments made to former
    employees for severance agreements in fiscal 2003 were $0.5 million, compared
    to $3.1 million in fiscal 2002. The variance in the restructuring accrual
    compared to the payments made in 2003 was the $10.5 million additional restructuring
charges booked during fiscal 2002 that primarily related to idle facilities.

Investing Activities

During the past three fiscal
       years our investing activities have primarily included changes in our
       restricted cash,
  purchases of property and equipment, purchases and sales of marketable
securities and proceeds on the sale of our Japan investment.

Net cash used in investing
  activities decreased in fiscal 2004, as compared to fiscal 2003, due primarily
  to a decrease in net purchases of marketable securities of $14.1 million. The
  decrease in net purchases of marketable securities was the result of our
  strategic decision in fiscal 2003 to increase our short- and long-term
  investments and decrease our cash equivalent investments in an effort to
  maximize our rate of return. As a result, 2003 experienced much higher cash
  outflows related to marketable security purchases than 2004. This decrease
       was offset by higher capital expenditures of $0.7 million and an increase
       in our
  restricted cash of $1.0 million in fiscal 2004, as compared to 2003, primarily
as a result of moving into a new facility during fiscal 2004.

Net cash used in investing
  activities increased in fiscal 2003, as compared to fiscal 2002, due primarily
  to an increase in net purchases of marketable securities of $19.6 million and
  proceeds received from the sale of our VA Linux Japan investment of $5.1
  million. The increase in net purchases of marketable securities was the result
  of our strategic decision in fiscal 2003 to increase our short- and long-term
  investments and decrease our cash equivalent investments in an effort to
  maximize our rate of return. As a result, 2003 experienced much higher cash
  outflows related to marketable security purchases than 2002. This increase
       was offset by a decrease in our restricted cash of $1.0 million in fiscal
       2003, as
  compared to fiscal 2002. In fiscal 2002, we generated $1.5 million in cash
       due to the release of restricted cash, compared to $0.5 million generated
       in fiscal
2003.

Financing Activities

During the past three fiscal
       years our investing activities have primarily included cash proceeds from
       the sale of
  our common stock through employee benefit plans and private placement offerings,
and payments on notes payable.

Net cash provided by financing
  activities increased in fiscal 2004, as compared to fiscal 2003, primarily
       due to the $14.5 million of proceeds received upon the private placement
       of
  3,529,412 shares of our common stock. In addition, net cash provided by
  financing activities increased in fiscal 2004, as compared to fiscal 2003,
       due to an increase of $2.0 million in net proceeds from the sale of common
       stock
through our employee benefit plans.

Net cash provided by financing
  activities increased in fiscal 2003, as compared to fiscal 2002, primarily
       due to an increase of $1.0 million in net proceeds from the sale of common
       stock
  through our employee benefit plans. In addition, net cash provided by financing
  activities increased in fiscal 2003, as compared to fiscal 2002, due to a
decrease in notes payable of $0.2 million.

For the fiscal years ended
       July 31, 2004 and July 31, 2003, exchange rate changes had an immaterial
       effect on
  cash and cash equivalents. For the fiscal year ended July 27, 2002, exchange
  rate changes had a positive effect on cash and cash equivalents of $1.4 million.
  We expect that exchange rate changes will have an immaterial effect on cash
and cash equivalents in the near future due to our focus on US-based business.

As of July 31, 2004 and July 31,
  2003, we had outstanding letters of credit issued under a line of credit of
  approximately $1.5 million and $0.9 million, respectively, related to the
  corporate facility lease. The amount related to this letter of credit is
  recorded in the Restricted cash section of the condensed
  consolidated balance sheet. We anticipate that this balance will decline by
  $0.5 million in the fourth quarter of fiscal year 2005 under the terms of our
  existing lease agreement. The remaining $1.0 million will decline as the Company
meets certain financial covenants.



26

Our liquidity and capital
  requirements depend on numerous factors, including market acceptance of our
  software and online products, the resources we devote to developing, marketing,
  selling and supporting our software and online 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 2005 under our current
business strategy.

Contractual Obligations

The contractual obligations presented in the table below
      represent our estimates of future payments under fixed contractual obligations
      and commitments. Changes in our business needs, cancellation provisions
       and other factors may result in actual payments differing from the estimates.
         We cannot provide certainty regarding the timing and amounts of payments.
         The
      following table summarizes our fixed contractual obligations and commitments
as of July 31, 2004 (in thousands):

|                             |  |                                |  |                     | 
|---------------------------- |  | ------------------------------ |  | ------------------- | 
|                             |  | **Gross
    Operating Leases** |  | **Sublease income** | 
|2005                         |  | $  5,042                       |  | $   970             | 
|2006                         |  | 3,741                          |  | 1,123               | 
|2007                         |  | 3,511                          |  | 1,033               | 
|2008                         |  | 3,616                          |  | 1,064               | 
|2009                         |  | 3,725                          |  | 1,096               | 
|Thereafter                   |  | 3,180                          |  | 938                 | 
|Total minimum lease payments |  | $22,815                        |  | $6,224              | 

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.

Recent Accounting Pronouncements

In November 2002, the Financial
  Accounting Standards Board (FASB) issued FIN 45,
Guarantors Accounting and Disclosure Requirements for Guarantees,
  Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires
  that a liability be recorded in the guarantors balance sheet upon issuance
  of a guarantee or indemnification. In addition, FIN 45 requires disclosures
  about the guarantees that an entity has issued, including a reconciliation of
  changes in the entitys product warranty liabilities. The initial
  recognition and initial measurement provisions of FIN 45 are applicable on a
  prospective basis to guarantees issued or modified after December 31, 2002,
  irrespective of the guarantors fiscal year-end. The disclosure
  requirements of FIN 45 are effective for financial statements of interim or
  annual periods ending after December 15, 2002. The adoption of FIN 45 has not
had a material effect on these consolidated financial statements.

As permitted under Delaware law,
  we have agreements whereby our officers and directors are indemnified for
  certain events or occurrences while the officer or director is, or was serving,
  at our request in such capacity. The term of the indemnification period is for
  the officers or directors term in such capacity. The maximum
  potential amount of future payments we could be required to make under these
  indemnification agreements is unlimited; however, we have director and officer
  liability insurance designed to limit our exposure and to enable us to recover a
  portion of any future amounts paid. As a result of our insurance policy
  coverage, we believe the estimated fair value of these indemnification
  agreements is minimal. Accordingly, we have no liabilities recorded for these
agreements as of July 31, 2004.



27

We
  enter into standard indemnification agreements in the ordinary course of
  business. Pursuant to these agreements, we indemnify, hold harmless, and agree
  to reimburse the indemnified party for losses suffered or incurred by the
  indemnified party, generally, our business partners, subsidiaries and/or
  customers, in connection with any U.S. patent or any copyright or other
  intellectual property infringement claim by any third party with respect to our
  products. The term of these indemnification agreements is generally perpetual
  any time after execution of the agreement. The maximum potential amount of
  future payments we could be required to make under these indemnification
  agreements is unlimited. We have not incurred significant costs to defend
  lawsuits or settle claims related to these indemnification agreements. As a
  result, we believe the estimated fair value of these agreements is
  insignificant. Accordingly, we have no liabilities recorded for these agreements
as of July 31, 2004.

We
  warrant that our software products will perform in all material respects in
  accordance with our standard published specifications in effect at the time of
  delivery of the licensed products to the customer for a specified period, which
  generally does not exceed ninety days. Additionally, we warrant that our
  maintenance services will be performed consistent with generally accepted
  industry standards through completion of the agreed upon services. If necessary,
  we would provide for the estimated cost of product and service warranties based
  on specific warranty claims and claim history, however, we have not incurred
  significant expense under our product or services warranties. As a result, we
  believe the estimated fair value of these agreements is minimal. Accordingly, we
have no liabilities recorded for these agreements as of July 31, 2004.

In May 2003, the FASB issued SFAS
  No. 150, Accounting for Certain Financial Instruments with Characteristics
  of both Liabilities and Equity. SFAS No. 150 addresses certain financial
  instruments that, under previous guidance, could be accounted for as equity, but
  now must be classified as liabilities in statements of financial position. These
  financial instruments include: 1) mandatory redeemable financial instruments, 2)
  obligations to repurchase the issuers equity shares by transferring
  assets, and 3) obligations to issue a variable number of shares. SFAS No. 150
  is effective for all financial instruments entered into or modified after May
  31,
  2003, and otherwise effective at the beginning of the first interim period
  beginning after June 15, 2003. The implementation of SFAS No. 150 did not have
a material impact on our financial position or results of operations.

In December 2003, the FASB
  issued FIN 46R (revising FIN 46, which was issued in
  January 2003), entitled Consolidation of Variable Interest Entities,
  an Interpretation of ARB No. 51 FIN 46R addresses how a
  business enterprise should evaluate whether it has a controlling interest in an
  entity through means other than voting rights and accordingly should consolidate
  the entity. Before concluding that it is appropriate to apply the voting
  interest consolidation model to an entity, an enterprise must first determine
  that the entity is not a variable interest entity or a special purpose entity.
  FIN 46R became effective for VA Software during fiscal 2004 and the adoption of
  this statement did not have a material impact on our financial position or
results of operations.

In December 2003, the SEC issued
  SAB 104, Revenue Recognition, which supersedes SAB 101,
Revenue Recognition in Financial Statements. SAB 104s primary
  purpose is to rescind accounting guidance contained in SAB 101 related to
  multiple element revenue arrangements, which was superseded as a result of the
  issuance of EITF 00-21, Accounting for Revenue Arrangements with Multiple
  Deliverables.  While the wording of SAB 104 has changed to reflect
  the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain
  largely unchanged by the issuance of SAB 104.  The adoption of SAB 104
  has not had a material impact on our financial position or results of operations.

Risk Factors

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

*Risks Related To Our SourceForge Business*



28

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

Our future growth and financial performance will depend on
  market acceptance of SourceForge and our ability to license our software in
  sufficient quantities and under acceptable terms. 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 for and market acceptance of SourceForge. In particular, potential
  customers may be unwilling to make the significant capital investment needed to
  license SourceForge. Many of our customers have licensed only limited quantities
  of SourceForge, and these or new customers may decide not to deploy our software
  more broadly. 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 for SourceForge fails to emerge, this would have a significant,
adverse effect upon our software business and operating results.

We are devoting the majority of our research and development
      spending on our SourceForge application, so if this software does not achieve
market acceptance we are likely to experience continued operating losses.

Although in fiscal year 2004, which ended on July 31, 2004,
      approximately 17% of our revenue was derived from our SourceForge business,
           we devoted 69%, or $4.6 million, of our research and development spending
           to
      research and development associated with our SourceForge software application.
      We expect to continue to allocate the majority of our research and development
      resources to SourceForge for the foreseeable future. There can be no assurance,
      however, that we will be sufficiently successful in marketing, licensing,
      upgrading and supporting SourceForge to offset our substantial software
  research and development expenditures. A failure to grow SourceForge revenue
  sufficiently
      to offset SourceForges significant research and development costs
will materially and adversely affect our business and operating results.

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

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

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

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

- support multiple platforms, including Linux, commercial UNIX
  and Microsoft Windows;
- use the latest technologies to continue to support
  Web-based collaborative software development; and
- continually support the
rapidly changing standards, tools and technologies used in software development.

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

The period between initial contact with a prospective customer
  and the licensing of SourceForge varies and has often exceeded three and
  occasionally exceeded twelve months. Additionally, our sales cycle is complex
  because customers consider a number of factors before committing to license
  SourceForge. Factors that our customers and potential customers have informed us
  that they considered when evaluating SourceForge include product benefits, cost
  and time of implementation, and the ability to operate with existing and future
  computer systems and applications. We have found that customer evaluation,
  purchasing and budgeting processes vary significantly from company to company.



29

We spend significant time and resources informing prospective
  customers about our SourceForge products, which may not result in completed
  transactions and
    associated revenue. Even if SourceForge has been chosen by a 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 the following:

- Our ability to sell SourceForge
  licenses may be impacted by changes in the strategic importance of software
  projects due to our customers budgetary constraints or changes in customer
personnel;
- A customers internal
  approval and expenditure authorization process can be difficult and time
  consuming. Delays in approvals, even after we are selected as a vendor, could
  impact the timing and amount of revenues recognized in a quarterly period;
and
- The number, timing and
  significance of enhancements to our SourceForge products and future
  introductions of new software by our competitors and us may affect
customer-purchasing decisions.

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

We generate a significant amount of our SourceForge license
      revenues from existing customers. Generally, our customers initially purchase
           a limited number of licenses as they evaluate, implement and adopt
  SourceForge. Even if customers successfully use SourceForge, such customers
  may not purchase
      additional licenses to expand the use of our product. Purchases of additional
      licenses by these customers will depend on their success in deploying
      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,
  we entered into a commercial relationship with IBM. If we are unable to maintain
  our existing strategic relationship with IBM, our ability to increase our sales
  may 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. We have begun exploring other
  possible relationships and marketing alliances to obtain customer leads,
  referrals and distribution opportunities. Even if we succeed in securing such
  additional strategic relationships, the relationships may not result in
additional customers or revenues.

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

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

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

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



30

Many enterprise customers negotiate software licenses near the
  end of each quarter. In part, this is because enterprise customers are able, or
  believe that they are able, to negotiate lower prices and more favorable terms
  at that time. Our reliance on a large portion of SourceForge 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. In addition, slowdowns
  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.

Risks Related To Our Online Media Business

If our online business fails to continue to deliver original
        and compelling content and services, we will be unable to attract and retain
users, which will adversely affect our financial results.

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

- anticipate and successfully respond to rapidly changing consumer tastes and
  preferences;
- fund new program development; and
- attract and retain qualified
editors, writers and technical personnel.

We cannot assure you that our online content and services will
  be attractive to a sufficient number of users to generate revenues consistent
  with our estimates or sufficient to sustain operations. In addition, we cannot
  assure you that any new content or services will be developed in a timely or
  cost-effective manner. If we are unable to develop content and services that
  allow us to attract, retain and expand a loyal user base that is attractive to
  advertisers, we will be unable to generate sufficient revenue to grow our online
business.

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

Expenditures by advertisers tend to be cyclical, reflecting
  overall economic conditions as well as budgeting and buying patterns. The
  overall market for advertising, including Internet advertising, has been
  generally characterized in recent quarters by modest growth of marketing and
  advertising budgets. Because we derive a large part of our revenues from
  advertising fees, the decreases in or delays of advertising spending could
  reduce our revenues or negatively impact our ability to grow our revenues. Even
  if economic conditions continue to improve, marketing budgets and advertising
spending may not increase from current levels.

If we fail to maintain our strategic relationship with IDG,
          our advertising revenue will not grow as anticipated and may decline, and our
financial performance will suffer.

During
    the first quarter of fiscal year 2005, we entered into a marketing and sales
    agreement with International Data Group (IDG).
  Under the agreement with IDG, IDGs Global Solutions sales force will
sell international advertising on OSTGs network of Web sites. If we are unable to maintain
       this strategic relationship with IDG, our ability to increase our online
       advertising
  sales may be harmed. In addition, IDG can terminate this relationship with
       us, pursue other relationships, or attempt to develop or acquire Web sites
       that
  compete with our Web sites for online advertising revenue. Even if we succeed
       in maintaining or expanding our relationship with IDG, the relationship
       may not
result in additional online advertising customers or revenues.

*Risks Related To Our E-Commerce Business*



31

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

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

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

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

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

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

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

Our ThinkGeek E-commerce Web sites ability to receive
  inbound inventory and ship completed orders efficiently to our customers is
  substantially dependent on a third-party contract fulfillment and warehouse
  provider. We previously utilized the services of efillit Inc., a third-party
  contract fulfillment and warehouse provider located in Baltimore, Maryland.
  However, effective June 4, 2004, we transitioned from efillit to a new provider,
  Dotcom Distribution, Inc. (Dotcom Distribution), located in Edison,
  New Jersey, whom we believe will be able to satisfactorily accommodate
  ThinkGeeks future growth. If Dotcom Distribution fails to meet our future
  distribution and fulfillment needs, our relationship with and reputation among
  our E-commerce customers will suffer and this will adversely affect our
  E-commerce growth. Additionally, if Dotcom Distribution cannot meet our
  distribution and fulfillment needs, particularly during the peak holiday selling
  seasons, or our contract with Dotcom Distribution terminates, we may fail to
  secure a suitable replacement or second-source distribution and fulfillment
  provider on comparable terms, which would adversely affect our E-commerce
financial results.

Risks Related To Our Financial Results

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 2005.

Since becoming a public company, we have experienced negative
  cash flow from operations and expect to experience negative cash flow from
  operations for all or part of fiscal year 2005. Our average net monthly cash
  flow shortfall during the quarter ended July 31, 2004 was approximately $0.7
  million. Although this average net monthly cash flow shortfall approximation
  should not be relied upon as an indicator of our average net monthly cash flow
  shortfall in the future, it further illustrates that unless we monitor and
  minimize the level of use of our existing cash, cash equivalents and marketable
  securities, we may require additional capital to fund continued operations
  beyond our fiscal year 2005. While we believe we will not require additional
  capital to fund continued operations through fiscal year 2005, we may require
  additional funding within this time frame, and this additional funding, if
  needed, may not be available on terms acceptable to us, or at all. A slowdown in
  technology or advertising spending, as well as other factors that may arise,
  could affect our future capital requirements and the adequacy of our available
  funds. As a result, we may be required to raise additional funds through private
  or public financing facilities, strategic relationships or other arrangements.
  Any additional equity financing would likely be dilutive to our stockholders.
  Debt financing, if available, may involve restrictive covenants on our
  operations and financial condition. Our inability to raise capital when needed
could seriously harm our business.





32

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

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

- specific economic conditions relating to IT spending;
- the discretionary nature of our
    software customers purchase
         and budget cycles;
- the size and timing of software customer orders;
- long software sales cycles;
- our ability to retain skilled software
         engineers
    and sales personnel;
- the timing of announcements and releases of new or
    enhanced versions of our products and product upgrades;
- economic conditions
    relating to online advertising and sponsorship, and E-commerce;
- our ability
         to demonstrate and maintain attractive online user demographics;
- our
         ability to
    retain a skilled online advertising and sponsorship sales force;
- the addition
    or loss of specific online advertisers or sponsors, and the size and timing
of advertising or sponsorship
     purchases by individual customers; and
- our ability to keep our Web sites operational at a reasonable cost.

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

Future guidelines and interpretations regarding software
      revenue recognition could cause delays in our ability to recognize revenue,
which will adversely impact our quarterly financial results.

From time to time, the American Institute of Certified Public
      Accountants (AICPA), the Public Company Accounting Oversight Board (PCAOB)
           and the SEC will issue guidelines and interpretations regarding the
         recognition of
      revenue from software and other activities. These new guidelines and
      interpretations could result in a delay in our ability to recognize revenue.
           If the company has to delay the recognition of a significant amount
         of revenue in
      the future, this will have a material impact on the companys reported
financial results.

We have a history of losses and expect to continue to incur
      net losses for the foreseeable future. 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.

We incurred a loss of $7.6 million for our fiscal year ended
  July 31, 2004, and we had an accumulated deficit of $747.4 million as of July
  31, 2004. 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 beyond our fiscal year 2005.

33

---

Despite reductions in the size of our workforce, our business
may fail to grow rapidly enough to offset our ongoing operating expenses.

During fiscal years 2001, 2002 and 2003, we substantially
  reduced the size of our workforce. As of July 31, 2004, we had 122 employees.
  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.

Risks Related To Competition

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

We believe that the newly emerging collaborative software
      development 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 marketplace. Our potential competitors include companies entrenched
           in closely related markets who may choose to enter and focus on collaborative
      software development. Although we do not believe that we presently have
  an entrenched competitor, we expect competition to intensify in the future
  if
           the
      market for collaborative software development applications continues to
  expand. Our potential competitors include providers of software and related
  services
           as well as providers of hosted application services. Many of our potential
      competitors have significantly more resources, more experience, longer
  operating histories and greater financial, technical, sales and marketing resources
         than we do. We cannot guarantee that we will be able to compete successfully
         against
      current and future competitors or that competitive pressure will not result
           in
      price reductions, reduced operating margins and loss of market share, any
         one of which could seriously harm our business. Because individual product
           sales often
      lead to a broader customer relationship, our products must be able to
      successfully compete with and complement numerous competitors current
      and potential offerings. Moreover, we may be forced to compete with our
      strategic partners, and potential strategic partners, and this may adversely
      impact
      our relationship with an individual partner or a number of partners. Consolidation
      is underway among companies in the software industry as firms seek to offer
      more
      extensive suites of software products and broader arrays of software solutions.
      Changes resulting from this consolidation may negatively impact our competitive
position and operating results.

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

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

Risks Related To Intellectual Property

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

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

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



34

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

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

Our software business success depends significantly upon our
  proprietary technology. Despite our efforts to protect our proprietary
  technology, it may be possible for unauthorized third parties to copy certain
  portions of our products or to reverse engineer or otherwise obtain and use our
  proprietary information. We do not have any software patents, and existing
  copyright laws afford only limited protection. In addition, we cannot be certain
  that others will not develop substantially equivalent or superseding proprietary
  technology, or that equivalent products will not be marketed in competition with
  our products, thereby substantially reducing the value of our proprietary
  rights. We cannot assure 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.

Other Risks Related To Our Overall Business

If we fail to complete our internal control
      evaluations or if our independent registered public accounting
      firm does not attest to our evaluation in a timely manner, we
      could be subject to regulatory scrutiny and a loss of public confidence
      in our
internal controls.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
  (Section 404), we will be required, beginning in our fiscal
  year 2005, to perform an evaluation of our internal controls over financial
  reporting and have our independent registered public accounting
  firm test and evaluate the design and operating effectiveness of such
  internal controls and publicly attest to such evaluation. We have prepared
  an internal plan of action for compliance with the requirements of Section
  404, which includes a timeline and scheduled activities, although as of the
  date of
  this filing we have not yet completed the evaluation. Compliance with the
  requirements of Section 404 is expected to be expensive and time-consuming.
  If we fail to complete this evaluation in a timely manner, or if our independent
  registered public accounting firm cannot timely attest to our evaluation, we
  could be subject to regulatory scrutiny and a loss of public confidence in
  our
  internal controls. In addition, any failure to implement required new or
  improved controls, or difficulties encountered in their implementation, could
  harm our operating results or cause us to fail to meet our reporting
obligations.



35

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

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

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

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

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

Our ability to successfully offer our services and grow our
  business requires an effective planning and management process. We updated our
  operations and financial systems, procedures and controls following our
  strategic decision to exit the hardware business. Our systems will continue to
  require additional modifications and improvements to respond to current and
  future changes in our business. If we cannot grow our businesses, and manage
  that growth effectively, or if we fail to timely implement appropriate internal
  systems, procedures, controls and necessary modifications and improvements to
these systems, our businesses will suffer.

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

The trading price of our common stock has been and may continue
  to be subject to wide fluctuations. During the fourth quarter of fiscal year
  2004, the closing sale prices of our common stock on the Nasdaq ranged from
  $1.69 to $2.48 per share and the closing sale price on July 30, 2004 was $1.94
  per share. Our stock price may fluctuate in response to a number of events and
  factors, such as quarterly variations in operating results, announcements of
  technological innovations or new products and media properties by us or our
  competitors, changes in financial estimates and recommendations by securities
  analysts, the operating and stock price performance of other companies that
  investors may deem comparable to us, and news reports relating to trends in our
markets or general economic conditions.

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

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

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

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

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



36

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

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

Business disruptions could affect our future operating
results.

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

System disruptions could adversely affect our future
operating results.

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

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

The following table presents
       the amounts of our cash equivalents, short-term investments and long-term
  investments (in thousands) that are subject to market risk and weighted-average
  interest rates, categorized by expected maturity dates, as of July 31, 2004.
  This table does not include money market funds because those funds are not
subject to market risk.

|                                    |  |                                      |  
|----------------------------------- |  | ------------------------------------ | -
|**(in thousands)**                  |  | **Maturing
    Within three months** |  
|As of July 31, 2004                 |  |                                      |  
|Cash equivalents                    |  | $7,163                               |  
|Weighted-average
     interest rate |  | 1.49                                 | %
|Short-term investments              |  |                                      |  
|Weighted-average
     interest rate |  |                                      |  
|Long-term investments               |  |                                      |  
|Weighted-average
     interest rate |  |                                      |  



37

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.



38

Item 8. Consolidated Financial Statements and Supplementary
Data

**TABLE OF CONTENTS**

|                                                                            |  | **Page** | 
|--------------------------------------------------------------------------- |  | -------- | 
|Reports of Independent Registered Public Accounting Firm                    |  | 40       | 
|Consolidated Balance Sheets                                                 |  | 42       | 
|Consolidated Statements of Operations and Other Comprehensive Income (Loss) |  | 43       | 
|Consolidated Statements of Stockholders' Equity                             |  | 44       | 
|Consolidated Statements of Cash Flows                                       |  | 45       | 
|Notes to Consolidated Financial Statements                                  |  | 46       | 
|Schedule II - Valuation and Qualifying Accounts                             |  | 66       | 

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.



39

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors and Stockholders
VA  Software Corporation

We have audited the accompanying
  consolidated balance sheet of VA Software Corporation as of July 31, 2004, and
  the related consolidated statements of operations and other comprehensive
  income/(loss), stockholders equity, and cash flows for the year then
  ended. We have also audited the financial statement schedule listed in the Index
  at Item 15(a) as of and for the year ended July 31, 2004. These financial
  statements and schedule are the responsibility of the Companys management.
  Our responsibility is to express an opinion on these financial statements and
schedule based on our audit.

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

In our opinion, the consolidated
  financial statements referred to above present fairly, in all material respects,
  the financial position of VA Software Corporation at July 31, 2004, and the
  results of its operations and its cash flows for the year then ended, in
  conformity with accounting principles generally accepted in the United States
of America.

Also, in our opinion, the
  financial statement schedule as of and for the year ended July 31, 2004, when
  considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein. 
     /s/ BDO Seidman, LLP

San Jose, California

August 20, 2004, except for
  the second paragraph of Note 5,
                as to which the date is September 24, 2004

40

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

In our opinion, the accompanying
  consolidated financial statements listed in the index  present fairly, in all material respects, the financial
  position of VA Software Corporation and its subsidiaries at July 31, 2003, and
  the results of their operations and their cash flows for each of the years ended
  July 31, 2003 and 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 for each of the years ending July 31, 2003 and
  July 27, 2002, listed in the index   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.

PricewaterhouseCoopers LLP

San Jose, California
     August
    20, 2003



41

**VA SOFTWARE CORPORATION**

**CONSOLIDATED BALANCE SHEETS
(In thousands, except per share information)**

|                                                                           |  |                      
|-------------------------------------------------------------------------- |  | ---------------------
|                                                                           |  | **July
    31, 2004**
|**ASSETS**                                                                 |  |                      
|Current
     assets:                                                       |  |                      
|Cash
     and cash equivalents                                             |  | $   10,964           
|Short-term
     investments                                                |  | 17,145               
|Restricted
     cash, current                                              |  | 450                  
|Accounts
     receivable, net of allowances of $127 and $144, respectively |  | 3,909                
|Inventories                                                                |  | 1,069                
|Prepaid
     expenses and other assets                                     |  | 1,046                
|Total
     current assets                                                  |  | 34,583               
|Property
     and equipment, net                                           |  | 1,208                
|Long-term
     investments                                                 |  | 15,933               
|Restricted
     cash, non current                                          |  | 1,000                
|Other
     assets                                                          |  | 955                  
|Total
     assets                                                          |  | $   53,679           
|                                                                          
|**LIABILITIES AND STOCKHOLDERS' EQUITY**                                   |  |                      
|Current
     liabilities:                                                  | 
|Accounts
     payable                                                      |  | 1,674                
|Accrued
     restructuring liabilities, current portion                    |  | 3,440                
|Accrued
     compensation                                                  |  | 981                  
|Deferred
     revenue                                                      |  | 1,750                
|Accrued
     liabilities and other                                         |  | 872                  
|Total
     current liabilities                                             |  | 8,717                
|Accrued
     restructuring liabilities, net of current portion             |  | 7,843                
|Other
     long-term liabilities                                           |  | 1,349                
|Total
     liabilities                                                     |  | 17,909               
|Commitments
     and contingencies (Notes 4,5,6 and 7)                     | 
|Stockholders'
     equity:                                                 |  |                      
|Common
     stock, $0.001 par value; authorized-- 250,000,000; issued and  | 
|outstanding--
     61,184,857 shares in 2004 and 55,470,064 shares in 2003 |  | 62                   
|Treasury
     stock                                                        |  | (4                   
|Additional
     paid-in capital                                            |  | 783,246              
|Deferred
     stock compensation                                           |  | --                   
|Accumulated
     other comprehensive gain (loss)                           |  | (171                 
|Accumulated
     deficit                                                   |  | (747,363             
|Total
     stockholders' equity                                            |  | 35,770               
|Total
     liabilities and stockholders' equity                            |  | $   53,679           

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



42

VA SOFTWARE CORPORATION

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

|                                                                           |  |                         |     
|-------------------------------------------------------------------------- |  | ----------------------- | ----
|                                                                           |  | **Year
         Ended** |     
|                                                                           |  | **July
     31,**       |     
|                                                                           |  | **2004**                | ****
|Net revenues                                                               |  |                         |     
|SourceForge
     revenues                                                  |  | $   4,995               |     
|Online
     Media revenues                                                 |  | 9,728                   |     
|E-commerce
     revenues                                                   |  | 12,567                  |     
|Online
     Images revenues                                                |  | 1,922                   |     
|Other
     revenues                                                        |  | 49                      |     
|Net
     revenues                                                          |  | 29,261                  |     
|Cost of revenues                                                           | 
|SourceForge
     cost of revenues                                          |  | 1,860                   |     
|Online
     Media cost of revenues                                         |  | 2,969                   |     
|E-commerce
     cost of revenues                                           |  | 10,225                  |     
|Online
     Images cost of revenues                                        |  | 495                     |     
|Other
     cost of revenues                                                |  | (12                     | )   
|Cost
     of revenues                                                      |  | 15,537                  |     
|Gross
     margin                                                          |  | 13,724                  |     
|Operating expenses:                                                        | 
|Sales
     and marketing                                                   |  | 10,093                  |     
|Research
     and development                                              |  | 6,732                   |     
|General
     and administrative                                            |  | 4,665                   |     
|Restructuring
     costs and other special charges                         |  | 3,209                   |     
|Amortization
     of deferred stock compensation                           |  | 20                      |     
|Amortization
     of goodwill and intangible assets                        |  | 12                      |     
|Impairment
     of goodwill, intangible assets and other long-lived assets |  | --                      |     
|Total
     operating expenses                                              |  | 24,731                  |     
|Loss from operations                                                       |  | (11,007                 | )   
|Remeasurement of warrant liability                                         |  | 1,566                   |     
|Interest income                                                            |  | 911                     |     
|Interest expense                                                           |  | (5                      | )   
|Other income (expense), net                                                |  | 895                     |     
|Net loss                                                                   |  | $(7,640                 | )   
|Other comprehensive income (loss):                                         |  |                         |     
|Unrealized
     (loss) gain on marketable securities and investments       |  | (354                    | )   
|Foreign
     currency translation gain                                     |  | 55                      |     
|Comprehensive loss                                                         |  | $(7,939                 | )   
|Net loss                                                                   |  | $(7,640                 | )   
|Basic and diluted net loss per share                                       |  | $  (0.13                | )   
|Shares used in computing basic and diluted net loss per share              |  | 59,684                  |     

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



VA SOFTWARE CORPORATION

CONSOLIDATED
    STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands)

|                                                                                                                              |  | **Common Stock** | **** | **Treasury** |      | **Additional Paid-in** | **** | **Deferred
        Stock** |      | **Accumulated
        Other Comprehensive** |   | **Accumulated**   |   | **Total
        Stockholders'** | **** |            |     
|----------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ---- | ------------ | ---- | ---------------------- | ---- | -------------------------- | ---- | ------------------------------------------- | - | ----------------- | - | ------------------------------- | ---- | ---------- | ----
|                                                                                                                              |  | **Shares**       | **** | **Amount**   | **** | **Stock**              |      | **Capital**                | **** | **Compensation**                            |   | **Income (Loss)** |   | **Deficit**                     |      | **Equity** | ****
|BALANCE
      AT JULY 28, 2001                                                                                                |  | 54,119           |      | $ 54         |      | $(4                    | )    | $ 768,797                  |      | $(6,108                                     | ) | $(1,490           | ) | $(634,887                       | )    | $ 126,362  |     
|Issuance of common stock for cash related to options                                                                          |  | 581              |      | 1            |      | --                     |      | 402                        |      | --                                          |   | --                |   | --                              |      | 403        |     
|Repurchase
         of common stock for cash related to options                                                               |  | (535             | )    | (1           | )    | --                     |      | (16                        | )    | --                                          |   | --                |   | --                              |      | (17        | )   
|Issuance of common stock to acquire businesses                                                                                | 
|Or
     assets                                                                                                                |  | --               |      | --           |      | --                     |      | 1,313                      |      | (1,308                                      | ) | --                |   | --                              |      | 5          |     
|Acceleration of stock options                                                                                                 |  | --               |      | --           |      | --                     |      | 74                         |      | --                                          |   | --                |   | --                              |      | 74         |     
|Amortization of deferred stock compensation                                                                                   |  | --               |      | --           |      | --                     |      | (1,926                     | )    | 3,597                                       |   | --                |   | --                              |      | 1,671      |     
|Acceleration
     and forfeiture of stock options and deferred stock compensation related
     to terminations, restructuring |  | --               |      | --           |      | --                     |      | (3,222                     | )    | 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                                                                                                      |  | 54,165           |      | 54           |      | (4                     | )    | 765,422                    |      | (245                                        | ) | 86                |   | (725,925                        | )    | 39,388     |     
|Issuance of common stock for
     cash related to options                                                                     |  | 1,578            |      | 2            |      | --                     |      | 1,442                      |      | --                                          |   | --                |   | --                              |      | 1,444      |     
|Repurchase of common stock for cash related to options                                                                        |  | (273             | )    | --           |      | --                     |      | (2                         | )    | --                                          |   | --                |   | --                              |      | (2         | )   
|Amortization of deferred stock compensation                                                                                   |  | --               |      | --           |      | --                     |      | (76                        | )    | 220                                         |   | --                |   | --                              |      | 144        |     
|Acceleration
     and forfeiture of stock options and deferred stock compensation related
     to terminations, restructuring |  | --               |      | --           |      | --                     |      | (21                        | )    | 5                                           |   | --                |   | --                              |      | (16        | )   
|Foreign currency translation adjustment and unrealized
     gain or loss on marketable securities                             |  | --               |      | --           |      | --                     |      | --                         |      | --                                          |   | 42                |   | --                              |      | 42         |     
|Net loss                                                                                                                      |  | --               |      | --           |      | --                     |      | --                         |      | --                                          |   | --                |   | (13,798                         | )    | (13,798    | )   
|BALANCE AT JULY 31, 2003                                                                                                      |  | 55,470           |      | 56           |      | (4                     | )    | 766,765                    |      | (20                                         | ) | 128               |   | (739,723                        | )    | 27,202     |     
|Issuance of common stock for cash related to options                                                                          |  | 2,186            |      | 2            |      | --                     |      | 3,402                      |      | --                                          |   | --                |   | --                              |      | 3,404      |     
|Issuance of common stock related to Private Placement, net of issuance costs                                                  |  | 3,529            |      | 4            |      | --                     |      | 12,866                     |      | --                                          |   | --                |   | --                              |      | 12,870     |     
|Amortization of deferred stock compensation                                                                                   |  | --               |      | --           |      | --                     |      | --                         |      | 20                                          |   | --                |   | --                              |      | 20         |     
|Acceleration of stock options related to terminations                                                                         |  | --               |      | --           |      | --                     |      | 213                        |      | --                                          |   | --                |   | --                              |      | 213        |     
|Foreign currency translation adjustment and unrealized
     gain or loss on marketable securities                             |  | --               |      | --           |      | --                     |      | --                         |      | --                                          |   | (299              | ) | --                              |      | (299       | )   
|Net loss                                                                                                                      |  | --               |      | --           |      | --                     |      | --                         |      | --                                          |   | --                |   | (7,640                          | )    | (7,640     | )   
|BALANCE AT JULY 31, 2004                                                                                                      |  | 61,185           |      | $ 62         |      | $(4                    | )    | $ 783,246                  |      | $      --                                   |   | $  (171           | ) | $(747,363                       | )    | $   35,770 |     

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



44

VA SOFTWARE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

|                                                                                        |  | **Year
     Ended**   |     
|--------------------------------------------------------------------------------------- |  | --------------------- | ----
|                                                                                        |  | **July
         31,** |     
|                                                                                        |  | **2004**              | ****
|Cash flows from operating activities:                                                   |  |                       |     
|Net
     loss                                                                           |  | $(7,640               | )   
|Adjustments
     to reconcile net loss to net cash used in operating        activities: |  |                       |     
|Depreciation
     and amortization                                                      |  | 1,468                 |     
|Remeasurement
     of warrant liability                                                 |  | (1,566                | )   
|Provision
     for bad debts                                                            |  | 56                    |     
|Provision
     for excess and obsolete inventory                                        |  | 9                     |     
|Loss
     on disposal of assets                                                         |  | --                    |     
|Proportionate
     share of net losses in Japan investment                              |  | --                    |     
|Minority
     interest in Japan loss                                                    |  | --                    |     
|Gain
     on sale of Japan investment                                                   |  | --                    |     
|Release
     of contingent shares in relation to OSTG acquisition                       |  | --                    |     
|Amortization
     of deferred stock compensation                                        |  | 20                    |     
|Non-cash
     compensation expense                                                      |  | 213                   |     
|Non-cash
     restructuring expense                                                     |  | 2,496                 |     
|Impairment
     of long-lived assets                                                    |  | --                    |     
|Changes
     in assets and liabilities:                                                 |  |                       |     
|Accounts
     receivable                                                                |  | (2,036                | )   
|Inventories                                                                             |  | (690                  | )   
|Prepaid
     expenses and other assets                                                  |  | 157                   |     
|Accounts
     payable                                                                   |  | 812                   |     
|Accrued
     restructuring liabilities                                                  |  | (3,606                | )   
|Accrued
     liabilities and other                                                      |  | (773                  | )   
|Other
     long-term liabilities                                                        |  | 168                   |     
|Net
     cash used in operating activities                                              |  | (10,912               | )   
|Cash flows from investing activities:                                                   | 
|Change
     in restricted cash                                                          |  | (550                  | )   
|Purchase
     of property and equipment                                                 |  | (880                  | )   
|Sale
     of property and equipment                                                     |  | --                    |     
|Purchase
     of marketable securities                                                  |  | (44,976               | )   
|Sale
     of marketable securities                                                      |  | 44,443                |     
|Cash
     proceeds on sale of Japan investment                                          |  | --                    |     
|Other,
     net                                                                         |  | (359                  | )   
|Net
     cash provided by (used in) investing activities                                |  | (2,322                | )   
|Cash flows from financing activities:                                                   |  |                       |     
|Payments
     on notes payable                                                          |  | --                    |     
|Proceeds
     from issuance of common stock                                             |  | 17,840                |     
|Repurchase
     of common stock                                                         |  | --                    |     
|Net
     cash provided by financing activities                                          |  | 17,840                |     
|Effect
     of exchange rate changes on cash and cash equivalents                       |  | 55                    |     
|Net
     increase (decrease) in cash and cash equivalents                               |  | 4,661                 |     
|Cash
     and cash equivalents, beginning of year                                       |  | 6,303                 |     
|Cash
     and cash equivalents, end of year                                             |  | $ 10,964              |     
|Supplemental
     cash flow information:                                                | 
|Cash
     paid for state taxes                                                          |  | $        26           |     
|Cash
     paid for interest                                                             |  | $          5          |     

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



45

VA SOFTWARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Operations of the Company:

Overview

VA Software Corporation (VA
  Software or the Company) was incorporated in California in
  January 1995 and reincorporated in Delaware in December 1999. From the date of
  its incorporation through October 2001, the Company sold Linux-based hardware
  systems and services under the name VA Linux Systems, Inc. On June 27, 2001, the
  Company announced its decision to exit its Linux-based hardware business. Today,
  the Company does business under the name VA Software Corporation and it
  develops, markets and supports a software application known as SourceForge
  Enterprise Edition (SourceForge) and owns and operates OSTG, Inc.
  (OSTG) and its wholly-owned subsidiaries, a network of Internet
Web sites offering advertising, retail and animation services and products.

Prior to the quarter
            ended July 31, 2003, the Company operated on a 52-53 week year ending
            the Saturday
       before
  July 31. Beginning in the quarter ended July 31, 2003, the Company operates
       on regular calendar months with its year ending on July 31. This change
       did not
have a material impact on the consolidated results of operations.

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.

Reclassifications

Certain reclassifications
       have been made to the prior year consolidated financial statements to
       conform to the
  current year presentation. These reclassifications have no impact on previously
reported net loss or cash flows.

Principles of Consolidation

These consolidated financial
  statements include the accounts of VA and its wholly-owned subsidiaries. All
  significant intercompany accounts and transactions have been eliminated in
  consolidation. In September 2000, the Company acquired 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 for fiscal 2002. As of July
  31, 2004, VA Softwares investment in VA Linux Japan was approximately 14%.
  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 and thereafter. The
  minority interest included in the results of operations prior to January 11,
  2002 for VA Linux Japan was not material in fiscal 2002 and has been recorded in
  other income in the accompanying consolidated statements of operations. The
  operations of VA Linux Japan primarily relate to the Companys former
systems and services business.

Foreign Currency Translation

The functional currency of all the
  Companys foreign subsidiaries is the countrys local currency.
  Operations related to all of the Companys foreign subsidiaries were
  discontinued in 2001 and were included in the fiscal 2001 restructuring plan.
  Although the legal entities still exist as of July 31, 2004, no revenues were
  generated from these entities for any of the periods presented and the expenses
  were administrative in nature and were immaterial to the consolidated results of
  operations for all periods presented. Minimal cash balances have been maintained
  in these entities for legal purposes. Remaining balance sheet accounts are
  translated into U.S. dollars at exchange rates prevailing at balance sheet
  dates. Expenses are translated into U.S. dollars at average rates for the
  period. Gains and losses resulting from translation are charged or credited in
  other comprehensive income as a component of stockholders equity. As
  of July 31, 2004 the Company did not hold any foreign currency derivative
  instruments. The Company is in the process of formally liquidating all of its
foreign subsidiaries.



46

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. The Company currently operates as four
  reportable business segments: SourceForge, Online Media, E-commerce and Online
Images.

The Company markets its
            products in the United States through its direct sales force and
            online Web sites.
  Revenues for each of the years ended July 31, 2004, July 31, 2003 and July
       27, 2002 were primarily generated from sales to end users in the United
States.

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 remaining maturities greater than three months and
  maturities of less than one year are classified as short-term investments.
  Financial instruments with remaining maturities greater than one year are
  classified as long-term investments. All investments are classified as
  available-for-sale and are reported at fair value with net unrealized gains
  (losses) reported, net of tax, using the specific identification method as other
  comprehensive gain/(loss) in stockholders equity. The cost of the
  investments was not significantly different than the fair value for the fiscal
  years presented. The fair value of the Companys available-for-sale
securities are based on quoted market prices at the balance sheet dates.

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

|                                                                                  |  | **July 31,** |  | **July 31,** | 
|--------------------------------------------------------------------------------- |  | ------------ |  | ------------ | 
|                                                                                  |  | **2004**     |  | **2003**     | 
|Government securities                                                             |  | $22,465      |  | $10,001      | 
|Corporate securities                                                              |  | 14,134       |  | 21,148       | 
|Asset backed securities                                                           |  | 2,731        |  | --           | 
|Money market funds                                                                |  | 1,056        |  | 2,250        | 
|Commercial paper                                                                  |  | 911          |  | 4,796        | 
|Total
     Investments                                                            |  | $41,297      |  | $38,195      | 
|Operating cash                                                                    |  | 2,745        |  | 652          | 
|Restricted cash                                                                   |  | 1,450        |  | 900          | 
|Total cash,
     cash equivalents, short-term investments & long-term investments |  | $45,492      |  | $39,747      | 
|Included in cash and cash equivalents                                             |  | $  8,219     |  | $  5,651     | 
|Included in short-term investments                                                |  | 17,145       |  | 27,864       | 
|Included in Long-term investments                                                 |  | 15,933       |  | 4,680        | 
|Total
     Investments                                                            |  | $41,297      |  | $38,195      | 



48

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, which
                        had been reduced to $0.9 million at July 31, 2003. During
                        fiscal year 2004, the
  Company revised the remaining letter of credit used to collateralize the Fremont
  building lease as a result of subletting the unoccupied space and moving into
  the smaller facility in the same complex. The revised letter of credit
associated with this lease was $1.5 million at July 31, 2004.

Inventories

Inventories related to the
  Companys E-commerce and Online Images segments consist solely of finished
  goods are that are valued using the average cost method. Provisions, when
  required, are made to reduce excess and obsolete inventories to their estimated
net realizable values.

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):

|                                                                                |  | **July 31,** | **** | **July 31,** | ****
|------------------------------------------------------------------------------- |  | ------------ | ---- | ------------ | ----
|                                                                                |  | **2004**     | **** | **2003**     | ****
|Computer and office equipment (useful lives of 2 to 3 years)                    |  | $   6,820    |      | $   6,238    |     
|Furniture and fixtures (useful lives of 2 to 4 years)                           |  | 1,199        |      | 2,209        |     
|Leasehold improvements (useful lives of lesser of estimated life or lease term) |  | 271          |      | 3,762        |     
|Software (useful lives of  2 to 5 years)                                        |  | 2,092        |      | 2,090        |     
|Total
     property and equipment                                               |  | 10,382       |      | 14,299       |     
|Less: Accumulated depreciation and amortization                                 |  | (9,174       | )    | (10,032      | )   
|Property
     and equipment, net                                                |  | $   1,208    |      | $   4,267    |     

Depreciation
                        expense for the years ended July 31, 2004, July 31, 2003,
                        and July 27, 2002 was $1.4 million, $3.2
million, and $4.4 million, respectively.

Goodwill and Intangibles and Impairment
   of Long-Lived Assets

In connection with the
  acquisitions of Precision Insight, Inc. (Precision Insight) and
  NetAttach, Inc. (NetAttach), the Company recorded $42.0 million of
  goodwill and intangibles during fiscal 2000. In connection with the
  Companys restructuring plans in fiscal year 2002, the Company wrote off
  the remaining 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. This is included in
  restructuring costs and other special charges in the consolidated statements
of operations for fiscal 2002.

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 with
  SFAS No. 144, 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 assets carrying value over fair value.
  Long-lived assets and certain identifiable intangible assets to be disposed
  of are reported at the lower of carrying amount or fair value less costs to
sell.

In connection with the acquisition
  of OSTG (known at the time of acquisition as Andover.Net, Inc.), the
  Company recorded $83.6 million of goodwill and intangibles during fiscal 2000.
  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. However, pursuant to SFAS No. 142, the Company tests
  goodwill for impairment at least annually and more frequently upon the
  occurrence of certain events, as defined by SFAS No. 142. During the quarter
  ended July 27, 2002, the goodwill associated with OSTG was tested for impairment
  in accordance with SFAS No. 142, Goodwill and Other Intangible
  assets. 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 remaining carrying value was impaired and recorded an
  impairment loss of $3.6 million. The charge is included in the caption
Impairment of goodwill, intangible assets and other long-lived
  assets in the consolidated statements of operations. No carrying value
remained related to OSTG goodwill at July 31, 2003.



49

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 related to OSTG 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, leaving a remaining carrying value of $2.1 million at
  July 31, 2002. The impairment charge is included in the caption Impairment
  of goodwill, intangible assets and other long-lived assets in the
  consolidated statements of operations. Intangible asset amortization of $12,000,
  $2.1 million and $11.7 million was recorded in fiscal 2004, 2003 and 2002,
  respectively. The intangible asset carrying value at July 31, 2004 of $14,000
  relates to domain and trade names associated with our current SourceForge and
  OSTG businesses. No events or circumstances occurred during fiscal year 2004
  that would indicate a possible impairment in the carrying value of intangible
assets at July 31, 2004.

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

|                        |  | **As of July 31, 2004**         |  | **As of July 31, 2003**      | ****
|----------------------- |  | ------------------------------- |  | ---------------------------- | ----
|                        |  | **Gross Carrying 
     Amount** |  | **Accumulated Amortization** |     
|Domain and trade names  |  | $5,927                          |  | $(5,913                      | )   
|Purchased technology    |  | 2,534                           |  | (2,534                       | )   
|Total intangible assets |  | $8,461                          |  | $(8,447                      | )   

The aggregate
                        amortization expense of intangible assets, net of restructuring
                        charges was $12,000 and $2.1 million for
  the fiscal years ending July 31, 2004 and July 31, 2003, respectively. The
  estimated total amortization expense of acquired intangible assets is $10,200
and $1,700 for the fiscal years ending 2005 and 2006.

Revenue Recognition

SourceForge Revenues

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

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



49

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

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

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

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

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

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

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

Online Media Revenues

Online media revenues are
  primarily derived from cash and barter sales of advertising space on the
  Companys various Web sites, as well as sponsorship and royalty related
  arrangements associated with advertising on these Web sites. The Company
  recognizes Online Media revenues over the period in which the advertisements are
  displayed, provided that persuasive evidence of an arrangement exists, no
  significant obligations remain, the fee is fixed or determinable, and collection
  of the receivable is reasonably assured. The Companys obligations
  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, the Company does not recognize the corresponding revenues until the
  guaranteed impressions are achieved.



50

The Company records 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. The Company broadcasts banner advertising in exchange for
  similar banner advertising on third-party Web sites. The Companys barter
  arrangements are documented with its standard customer insertion
  order (and accompanying terms and conditions) or, in certain limited instances,
  via an alternative written contract negotiated between the
  parties. The standard terms and conditions include, but are not
  limited to, the Web sites for each company that will display the impressions,
  the time frame that the impressions will be displayed, and the
  number, type and size of impressions to be delivered. Barter revenue
  transactions totaled $1.4 million, $2.0 million and $2.0 million for the fiscal
years ended July 31, 2004, July 31, 2003 and July 27, 2002, respectively.

E-commerce Revenues

E-commerce revenues are derived
  from the online sale of consumer goods. The Company recognizes E-commerce
  revenues from the sale of consumer goods in accordance with SEC Staff Accounting
  Bulletin (SAB) No. 104, Revenue Recognition. Under
  SAB 104, product revenues are recognized when persuasive evidence of an arrangement
  exists, delivery has occurred, the sale price is fixed or determinable, and
  collectibility is reasonably assured. In general, the Company recognizes
  E-commerce revenue upon the shipment of goods. The Company does grant customers
  a right to return E-commerce products. Such returns are recorded as incurred
  and
have been immaterial for the periods presented.

Online Images Revenues

Online Images revenues are derived
  from the online sale of three-dimensional art, animations and presentations that
  consist of fees for software licenses and memberships for these animation
  software products. Software revenues related to digital animations are
  recognized using the residual method in accordance with Statement of Position
  (SOP) 97-2, Software Revenue Recognition, as amended by
  SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with
  Respect to Certain Transactions as described in detail above. Revenues
  recognized related to animation memberships are recognized over the life of
the membership, typically 3 months or 12 months.

Other Revenues

The Companys revenue
  recognition policy related to its former hardware systems business followed 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 was fixed or
  determinable and collectibility was reasonably assured. In general, the Company
  recognized product revenue upon shipment of the goods. The Company did not
  grant
customers any rights to return these products.

The Company
                        recognized revenues from hardware related 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 recognized revenues from hardware related 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 recorded any payments received prior to revenue
recognition as deferred revenue.

Advertising Expenses

The Company
                        expenses advertising costs as incurred. Total advertising
                        expenses were $2.1 million, $2.5 million
  and $2.7 million for fiscal years ending July 31, 2004, July 31, 2003 and July
27, 2002, respectively.

Stock-Based Compensation

The Company has elected to account
  for its employee stock-based compensation plans in accordance with Accounting
  Principles Board (APB) Opinion No. 25, Accounting for Stock
  Issued to Employees, and Financial Accounting Standards Board
  (FASB) Interpretation No. (FIN) 44,
Accounting for Certain Transactions Involving Stock Compensationan
  Interpretation of APB Opinion No. 25, and complies with the disclosure
  provisions of SFAS No. 123, Accounting for Stock-Based Compensation.
  Accordingly, no compensation cost is recognized for any of the Companys
  fixed stock options granted to employees when the exercise price of the option
  equals or exceeds the fair value of the underlying common stock as of the grant
  date for each stock option. The Company accounts for equity instruments issued
  to non-employees in accordance with the provisions of 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. Deferred stock-based compensation is included as a component of
  stockholders equity and is being amortized by charges to operations over
  the vesting period of the options and restricted stock consistent with the
  method described in FIN No. 28, Accounting for Stock Appreciation Rights
and Other Variable Stock Option or Award Plans.



51

Had compensation cost been
  recognized based on the fair value at the date of grant for options granted and
  Employee Stock Purchase Plan issuances during the three fiscal years ended July
  31, 2004, July 31, 2003 and July 27, 2002 the Companys pro forma net
  loss and net loss per share would have been as follows (in thousands, except
  per
share amounts):

|                                                                                                                                                         |  | **Fiscal Year Ended**
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------
|                                                                                                                                                         |  | **July 31, 2004**    
|Net loss as reported                                                                                                                                     |  | $(7,640              
|Add back employee stock-based compensation expense related to stock options included in reported net loss                                                |  | 20                   
|Less employee stock-based compensation expense determined under fair value based method for all employee stock option awards, net of related tax effects |  | (6,410               
|Pro forma net loss                                                                                                                                       |  | $(14,030             
|Basic and diluted net loss per share                                                                                                                     |  | $(  0.13             
|Pro forma basic and diluted net loss per share                                                                                                           |  | $(  0.24             

The  Company  calculated  the fair  value of each  option  grant on the
                      date of the grant and stock purchase right using the Black-Scholes
                      option-pricing
      model as prescribed by SFAS. No. 123 using
                      the following assumptions:

|                        |  | Stock        option Plans
        For the fiscal year ended |   | ESPP
      Plans
    For the fiscal year ended |  
|----------------------- |  | ----------------------------------------------------------- | - | ---------------------------------------------- | -
|                        |  | **July 31,**                                                |   | **July 31,**                                   |  
|                        |  | **2004**                                                    |   | **2003**                                       |  
|Expected life (years)   |  | 4.9                                                         |   | 4.8                                            |  
|Risk-free interest rate |  | 3.5                                                         | % | 3.0                                            | %
|Volatility              |  | 106                                                         | % | 108                                            | %
|Dividend yield          |  | None                                                        |   | None                                           |  

The weighted
                        average fair value of options granted during fiscal years
                        2004, 2003 and 2002 was $2.24, $0.97 and
$0.81, respectively.

For purposes of pro forma
  disclosure, the estimated fair value of the options was amortized to expense
  over the options vesting period for employee stock options, and the
  six-month purchase period, for stock purchases under the Employee Stock Purchase
Plan and were included in the pro forma information above.

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 consolidated statements
of operations.

In accordance with SOP 98-1
Accounting for the Cost of Computer Software Developed or Obtained for
          Internal Use, costs incurred related to internal use software
are capitalized and amortized over their useful lives.



52

Computation of Per Share Amounts

In accordance with SFAS No. 128
Earnings Per Share, basic net loss per common share has been
          calculated using the weighted-average number of shares of common stock
          outstanding during the period, less shares subject to repurchase. For
  the fiscal years ended July 31, 2004, July 31, 2003 and July 27, 2002, the
Company has
          excluded all 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):

|                                                                   |  | **Year
            Ended** |     
|------------------------------------------------------------------ |  | -------------------------- | ----
|                                                                   |  | **July
         31,**      |     
|                                                                   |  | **2004**                   | ****
|Net loss                                                           |  | $(7,640                    | )   
|Basic and diluted:                                                 | 
|Weighted
     average shares of common stock outstanding           |  | 59,684                     |     
|Less:
     Weighted average shares subject to repurchase           |  | (--)                       |     
|Shares
     used in computing basic and diluted net loss per share |  | 59,684                     |     
|Basic
     and diluted net loss per share                          |  | $  (0.13                   | )   

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
         31,**     
|                                        |  | **2004**                  
|Anti-dilutive securities:               |  |                           
|Options
     to purchase common stock   |  | 12,132                    
|Common
     stock subject to repurchase |  | --                        
|Total Anti-dilutive securities          |  | 12,132                    

Comprehensive 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.

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 2004, 2003 and 2002, there was no provision for income taxes
in those years. 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 management
  believes it is more likely than not that these assets will not be realized
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

In November 2002, the FASB issued
  FIN 45, Guarantors Accounting and Disclosure Requirements for
  Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN
  45 requires that a liability be recorded in the guarantors balance sheet
  upon issuance of a guarantee or indemnification. In addition, FIN 45 requires
  disclosures about the guarantees that an entity has issued, including a
  reconciliation of changes in the entitys product warranty liabilities. The
  initial recognition and initial measurement provisions of FIN 45 are applicable
  on a prospective basis to guarantees issued or modified after December 31, 2002,
  irrespective of the guarantors fiscal year-end. The disclosure
  requirements of FIN 45 are effective for financial statements of interim or
  annual periods ending after December 15, 2002. The adoption of FIN 45 has not
had a material effect on these consolidated financial statements.

In May 2003, the FASB issued SFAS
  No. 150, Accounting for Certain Financial Instruments with Characteristics
  of both Liabilities and Equity. SFAS No. 150 addresses certain financial
  instruments that, under previous guidance, could be accounted for as equity, but
  now must be classified as liabilities in statements of financial position. These
  financial instruments include: 1) mandatory redeemable financial instruments, 2)
  obligations to repurchase the issuers equity shares by transferring
  assets, and 3) obligations to issue a variable number of shares. SFAS No. 150 is
  effective for all financial instruments entered into or modified after May 31,
  2003, and otherwise effective at the beginning of the first interim period
  beginning after June 15, 2003. The implementation of SFAS No. 150 did not have a
  material impact on the Companys financial position or results of
operations.

In December 2003, the FASB
  revised Interpretation No. 46, Consolidation of Variable Interest
  Entities, an Interpretation of ARB No. 51(FIN 46R),which
  addresses how a business enterprise should evaluate whether it has a controlling
  interest in an entity through means other than voting rights and accordingly
  should consolidate the entity. FIN 46R replaces FIN 46, which was issued in
  January 2003. Before concluding that it is appropriate to apply the voting
  interest consolidation model to an entity, an enterprise must first determine
  that the entity is not a variable interest entity or a special purpose entity.
  FIN 46R became effective for VA Software during fiscal 2004 and the adoption of
  this statement did not have a material impact on the Companys financial
position or results of operations.



53

In December 2003, the SEC issued
  SAB 104, Revenue Recognition, which supersedes SAB 101,
Revenue Recognition in Financial Statements. SAB 104s primary
  purpose is to rescind accounting guidance contained in SAB 101 related to
  multiple element revenue arrangements, which was superseded as a result of the
  issuance of EITF 00-21, Accounting for Revenue Arrangements with Multiple
  Deliverables.  While the wording of SAB 104 has changed to reflect
  the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain
  largely unchanged by the issuance of SAB 104.  The adoption of SAB 104 has
  not had a material impact on the Companys consolidated financial
statements.

Supplier Concentration

No supplier concentration exists
  in the Companys SourceForge, Online Media, E-commerce and Online Images
businesses.

Concentrations of Credit Risk and
   Significant Customers

The Companys investments are
  held with two reputable financial institutions; both institutions are
  headquartered in the United States. The Companys investment policy limits
  the amount of risk exposure. Financial instruments that potentially subject the
  Company to concentrations of credit risk consist primarily of cash trade
  receivables. The Company provides credit, in the normal course of business, to a
  number of companies and performs ongoing credit evaluations of its customers.
  The credit risk in the Companys trade receivables is substantially
  mitigated by its credit evaluation process and reasonably short collection
  terms. The Company maintains reserves for potential credit losses and such
  losses have been within managements expectations. As of July 31, 2004
  and July 31, 2003, no gross accounts receivables were concentrated with one
customer.

For the fiscal
                        year ended July 31, 2004 no one customer represented
                        more than 10% of net revenues. For the fiscal
  year ended July 31, 2003, one customer, Intel Corporation, accounted for
  approximately 17% of net revenues. For the fiscal year ended July 27, 2002,
                        one customer, Intel Corporation, accounted for approximately
                        20% of net revenues.
  Going forward, the company does not anticipate that any one customer will
represent more than 10% of net revenues.

3. Restructuring Costs and Other Special Charges

In fiscal
                        2001 and 2002, the Company adopted plans to exit its
                        hardware systems and hardware-related software
  engineering and professional services businesses, as well as exit a sublease
  agreement and reduce its general and administrative overhead costs. The Company
  exited these activities to pursue its SourceForge, Online Media, E-commerce
                        and Online Images businesses and reduce its operating
                        losses to improve cash flow.
  The Company recorded restructuring charges of $168.5 million related to exiting
  these activities, $160.4 million of which was included in restructuring charges
  and other special charges in operating expenses and $8.1 million of which was
  included in cost of sales. Included in the restructuring were charges related
                        to excess facilities from non-cancelable leases. During
                        the third quarter of fiscal
  2004, in connection with its original 2002 restructuring plan which included
                        an assumption to sublet all idle facilities, the Company
                        relocated its Fremont,
  California headquarters to a smaller building in the same complex. As a result
  of the change in circumstances, original accruals were reevaluated and
  accordingly the Company recorded a restructuring adjustment of $2.9 million.
  Included in the $2.9 million dollar restructuring adjustment was $2.5 million
                        of expense related to writing off leasehold improvements
                        and fixed assets and an
  additional $0.4 million expense related to excess facilities from non-cancelable
  leases. In addition, during the third quarter of fiscal 2004, the Company
  reached an agreement in principal to sublet unoccupied portions of properties
  that it leases in Sunnyvale, California and Fremont, California. As a result
                        of the change in circumstances due to the agreement in
                        principal, original accruals
  were reevaluated and, accordingly, the Company recorded a restructuring
  adjustment of $0.3 million in the third quarter of fiscal 2004. The $3.2 million
  total adjustment to restructuring expenses in fiscal 2004 has been recorded
                        in the consolidated statement of operations for that
                        period. The remaining accrual
  from non-cancelable lease payments is based on current circumstances. These
  accruals are subject to change should actual circumstances change. The Company
  will continue to evaluate and update, if applicable, these accruals quarterly.
  As of July 31, 2004, the Company had an accrual of approximately $11.3 million
  outstanding related to these non-cancelable leases, all of which was originally
included in operating expenses.



54

The Company recorded a net
  restructuring credit of $0.3 million for the fiscal year ended July 31, 2003.
  This included $0.4 million of additional charges related to existing excess
  facilities as a result of the termination of a subtenant lease and $0.3 million
  of charges associated with the Companys fiscal 2002 plan to reduce its
  general and administrative overhead costs, net of $1.0 million in credit
  adjustments to previously recorded restructuring reserves. As of July 31, 2004,
no outstanding accruals remained related to these restructuring charges.

All charges as a result of
  restructuring activities have been recorded in accordance with EITF 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
  Costs to Exit an Activity (including Certain Costs incurred in a
  Restructuring). Restructuring charges recorded in fiscal 2004 were
  considered adjustments to the original restructuring plans, therefore, SFAS No.
  146, Accounting for Costs Associated with Exit or Disposal
Activities, was not applicable.

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

|                                                                                                  |  | **Total
    Charged To Operations Fiscal 2001** | **** | **Total
    Charged To Operations Fiscal 2002** | **** | **Total
    Charged To Operations Fiscal 2003** | **** | **Total
    Charged To Operations Fiscal 2004** |  | **Total
        Cash Receipts\
      (Payments)** | **** | **Restructuring
      Liabilities at
      July 31, 2004** | 
|------------------------------------------------------------------------------------------------- |  | ----------------------------------------------- | ---- | ----------------------------------------------- | ---- | ----------------------------------------------- | ---- | ----------------------------------------------- |  | ------------------------------------------------- | ---- | ---------------------------------------------------------- | 
|Cash Provisions:                                                                                  |  |                                                 |      |                                                 |      |                                                 |      |                                                 |  |                                                   |      |                                                            | 
|Other
     special charges relating                                                               | 
|to restructuring
         activities                                                              |  | $    2,159                                      |      | $    (888                                       | )    | $   78                                          |      | $     --                                        |  | $(1,349                                           | )    | $       --                                                 | 
|Facilities
     charges                                                                           |  | 6,584                                           |      | 9,401                                           |      | 191                                             |      | 713                                             |  | (5,606                                            | )    | 11,283                                                     | 
|Employee
     severance and other 
       related charges                                         |  | 3,498                                           |      | 1,997                                           |      | 37                                              |      | --                                              |  | (5,532                                            | )    | --                                                         | 
|Total
     cash provisions                                                                        |  | 12,241                                          |      | 10,510                                          |      | 306                                             |      | 713                                             |  | $(12,487                                          | )    | $11,283                                                    | 
|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                                           |      | (553                                            | )    | 2,496                                           | 
|Write-off
         of accelerated options   


         from terminated
     employees            |  | 1,352                                           |      | --                                              |      | --                                              |      | --                                              |  |                                                   |      |                                                            | 
|Acceleration
     of deferred stock compensation                                                  |  | 35,728                                          |      | 352                                             |      | (16                                             | )    | --                                              | 
|Total
     non-cash provisions                                                                    |  | 101,237                                         |      | 36,426                                          |      | (569                                            | )    | 2,496                                           |  |                                                   |      |                                                            | 
|Total
     provisions                                                                             |  | $113,478                                        |      | $ 46,936                                        |      | $(263                                           | )    | $3,209                                          | 

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

|**Changes
          in the total accrued restructuring liability** |      | **Balance
          at
      Beginning of Period** |      | **Charged
          to Costs and Expenses** |      | **Deductions**          |      | **Balance
          at End of Period** | 
|------------------------------------------------------------------ | ---- | -------------------------------------------------- | ---- | ------------------------------------------- | ---- | ----------------------- | ---- | -------------------------------------- | 
|For
        the year ended July 27, 2002                           |      | $  9,513                                           |      | $10,510                                     |      | $(2,029                 | )    | $17,994                                | 
|For
        the year ended July 31, 2003                           |      | $17,994                                            |      | $     306                                   |      | $(3,411                 | )    | $14,889                                | 
|For
        the year ended July 31, 2004                           |      | $14,889                                            |      | $     713                                   |      | $(4,319                 | )    | $11,283                                | 
|                                                                  
|                                                                   |     
|**Components
    of the total accrued restructuring liability**    | **** | **Short
    Term**                                 | **** | **Long
    Term**                           | **** | **Total
    Liability** | ****
|For
        the year ended July 27, 2002                           |      | $  3,397                                           |      | $14,597                                     |      | $ 17,994                |     
|For
        the year ended July 31, 2003                           |      | $  4,117                                           |      | $10,772                                     |      | $ 14,889                |      |                                        | 
|For
        the year ended July 31, 2004                           |      | $  3,440                                           |      | $  7,843                                    |      | $ 11,283                |     



55

4. 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 31, 2004 are as follows (in thousands):

|                             |  | **Gross 
        Operating 
     Leases** | **** | **Sublease
     Income** | **** | **Net
        Operating
     Leases** | ****
|---------------------------- |  | ----------------------------------------- | ---- | ------------------------ | ---- | ------------------------------------- | ----
|2005                         |  | $  5,042                                  |      | $   970                  |      | $  4,072                              |     
|2006                         |  | 3,741                                     |      | 1,123                    |      | 2,618                                 |     
|2007                         |  | 3,511                                     |      | 1,033                    |      | 2,478                                 |     
|2008                         |  | 3,616                                     |      | 1,064                    |      | 2,552                                 |     
|2009                         |  | 3,725                                     |      | 1,096                    |      | 2,629                                 |     
|Thereafter                   |  | 3,180                                     |      | 938                      |      | 2,242                                 |     
|Total minimum lease payments |  | $22,815                                   |      | $6,224                   |      | $16,591                               |     

Gross rent
                        expense for the years ended July 31, 2004, July 31, 2003
                        and July 27, 2002 was approximately $3.0
  million, $3.9 million and $18.9 million, respectively. This rent expense was
  offset by sublease income of $1.1 million, $2.4 million and $6.0 million for
                        the years ended July 31, 2004, July 31, 2003 and July
                        27, 2002, respectively. In
  addition, rent expense of $0.7 million, $0.1 million and $11.0 million was
  recorded as a result of idle facilities charges for the years ended July 31,
  2004, July 31, 2003 and July 27, 2002, respectively. These idle facilities
  charges have been recorded as restructuring costs and other special charges
in the consolidated statements of operations.

5. Litigation

The Company, two of its former
  officers (the Former Officers), and the lead underwriter in its
  initial public offering (IPO) were named as defendants in a
  consolidated shareholder lawsuit in the United States District Court for the
  Southern District of New York, captioned In re VA Software Corp. Initial
  Public Offering Securities Litigation, 01-CV-0242. This is one of a number
  of actions coordinated for pretrial purposes as In re Initial Public Offering
  Securities Litigation, 21 MC 92 with the first action filed on January
  12, 2001. Plaintiffs in the coordinated proceeding are bringing claims under
  the
  federal securities laws against numerous underwriters, companies, and
  individuals, alleging generally that defendant underwriters engaged in improper
  and undisclosed activities concerning the allocation of shares in the IPOs
  of more than 300 companies during late 1998 through 2000. Among other things,
  the
  plaintiffs allege that the underwriters customers had to pay excessive
  brokerage commissions and purchase additional shares of stock in the aftermarket
  in order to receive favorable allocations of shares in an IPO. The consolidated
  amended complaint in the Companys case seeks unspecified damages on behalf
  of a purported class of purchasers of its common stock between December 9, 1999
  and December 6, 2000. Pursuant to a tolling agreement, the individual defendants
  were dismissed without prejudice. On February 19, 2003, the court denied the
  Companys motion to dismiss the claims against it. The litigation is now in
  discovery. A proposal has been made for the settlement and release of claims
  against the issuer defendants, including the Company. The settlement is
  subject to a number of conditions, including approval of the proposed settling
  parties and the court. If the settlement does not occur, and litigation against
  the Company continues, the Company believes it has meritorious defenses and
intends to defend the case vigorously.

On Nov 9, 2001, a former employee
  of the Company, who had worked as a sales person in the Companys former
  hardware business, filed a complaint captioned Okerman v. VA Linux Systems,
  Inc. & Larry Augustin, Civil No. 01-01825 (Norfolk Superior Court),
  in the Commonwealth of Massachusetts. As amended, the complaint alleges that
  changes made to certain commission and bonus plans during the
  plaintiffs tenure at the Company entitled him to recover damages for
  Breach of Contract, Breach of the Implied Covenant of Good Faith and Fair
  Dealing, violation of the Massachusetts Wage Act Statute, Promissory Estoppel,
  and Quantum Meruit. On June 25, 2002, the Court dismissed the Massachusetts Wage
  Act claim brought against the Companys former chief executive officer. On
  July 26, 2002, dismissal of the Wage Act claim in favor of the Companys
  former chief executive officer was upheld on interlocutory appeal. On July 9,
  2003, the Court granted summary judgment in the Companys favor regarding
  claims for Breach of Contract, Promissory Estoppel, and Quantum Meruit, and
  granted judgment on the pleadings in favor of the Company regarding the
  Massachusetts Wage Act claim. On September 24, 2004, following a jury trial
  on the sole remaining claim for Breach of the Covenant of Good Faith and Fair
  Dealing, a jury awarded damages of $136,876 to the plaintiff. The Company is
currently evaluating whether it will appeal the judgment.



56

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

6. Guarantees and Indemnifications

As permitted under Delaware law,
  the Company has agreements whereby the Companys officers and directors are
  indemnified for certain events or occurrences while the officer or director is,
  or was, serving at the Companys request in such capacity. The maximum
  potential amount of future payments the Company could be required to make under
  these indemnification agreements is unlimited; however, the Company has director
  and officer liability insurance designed to limit the Companys exposure
  and to enable the Company to recover a portion of any future amounts paid. As a
  result of the Companys insurance policy coverage, the Company believes
  the estimated fair value of these indemnification agreements is minimal.
  Accordingly, the Company has no liabilities recorded for these agreements as
of July 31, 2004.

The
  Company enters into standard indemnification agreements in the ordinary course
  of business. Pursuant to these agreements, the Company indemnifies, holds
  harmless, and agrees to reimburse the indemnified party for losses suffered or
  incurred by the indemnified party, generally, the Companys business
  partners, subsidiaries and/or customers, in connection with any patent,
  copyright or other intellectual property infringement claim by any third party
  with respect to the Companys products. The term of these indemnification
  agreements is generally perpetual any time after execution of the agreement.
  The maximum potential amount of future payments the Company could be required
  to
  make under these indemnification agreements is unlimited. The Company has not
  incurred significant costs to defend lawsuits or settle claims related to these
  indemnification agreements. As a result, the Company believes the estimated
  fair value of these agreements is insignificant. Accordingly, the Company has
  no
liabilities recorded for these agreements as of July 31, 2004.

The
  Company warrants that its software products will perform in all material
  respects in accordance with the Companys standard published specifications
  in effect at the time of delivery of the licensed products to the customer
  for a specified period, which generally does not exceed ninety days. Additionally,
  the
  Company warrants that its maintenance services will be performed consistent
  with generally accepted industry standards through the completion of the agreed
  upon
  services. If necessary, the Company would provide for the estimated cost of
  product and service warranties based on specific warranty claims and claim
  history, however, the Company has not incurred significant expense under its
  product or services warranties. As a result, the Company believes the estimated
  fair value of these agreements is minimal. Accordingly, the Company has no
liabilities recorded for these agreements as of July 31, 2004.

7. Retirement Savings Plan

The Company
                        maintains an employee savings and retirement plan which
                        is 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.

8. 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 2004, the Company cancelled 104,127 shares of its common
  stock, which has been recorded as treasury stock in the consolidated balance
  sheets and statement of stockholders equity. In fiscal year 2003, the
  Company cancelled 270,407 shares of its common stock, which had been recorded as
  treasury stock in the consolidated balance sheets and statement of
  stockholders equity. In fiscal 2002, the Company cancelled 10,934 shares
  of its common stock which had been recorded as treasury stock in the
consolidated balance sheets and statement of stockholders equity.



57

As of July
                        31, 2004 there were 61,184,857 shares of common stock
                        issued and outstanding. The Company 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 31, 2004.

As of July
                        31, 2004, the Company had reserved shares of its common
stock for future issuance as follows:

|1998 Stock Option Plan and Assumed Plans |  | 21,688,415 | 
|---------------------------------------- |  | ---------- | 
|1999 Director Option Plan                |  | 1,352,084  | 
|1999 Employee Stock Purchase Plan        |  | 2,635,875  | 
|                                         |  | 25,676,374 | 

Warrants

On November 6, 2003, the Company issued
  two warrants to purchase up to 705,883 and 25,000 shares of common stock to The
  Riverview Group LLC and Wharton Capital Partners Ltd., respectively in
  connection with a private placement of the Companys common stock. These
  warrants are exercisable at exercise prices of $6.00 and $6.14 per share. The
terms of these warrants expire in November 2006. At July 31,
2004 both of these warrants remained outstanding.

Stock Option Plan

In fiscal year 1999, the Company
  adopted and the board of directors approved the 1998 Plan. Since inception, a
  total of 37,824,386 shares of common stock have been reserved for issuance under
  the 1998 Plan, subject to an annual increase of the lesser of 4,000,000 shares
  or 4.9% of the then outstanding common stock or an amount to be determined by
  the board of directors. Through July, 31, 2004, 44,490,787 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.

The Companys 1999
  Directors Option Plan (the Directors Plan) was adopted
  by the Companys board of directors in October 1999. Since inception, a
  total of 1,500,000 shares of common stock have been reserved for issuance under
  the Directors Plan, subject to an annual increase of the lesser of 250,000
  shares, or 0.5% of the then outstanding common stock or an amount determined by
  the board of directors. Through July 31, 2004, 690,000 options have been granted
  under the Directors Plan. Under the Directors Plan, options are
  granted when a non-employee director joins the board of directors and at each
  annual meeting where the director continues to serve on the board of directors.
  The Directors Plan establishes an automatic grant of 80,000 shares of
  common stock to each non-employee director who is elected. The Directors
  Plan also provides that upon the date of each annual stockholders meeting,
  each non-employee director who has been a member of the board of directors for
  at least six months prior to the date of the stockholders meeting will
  receive automatic annual grants of options to acquire 20,000 shares of common
  stock. Each automatic grant has an exercise price per share equal to the fair
  market value of the common stock at the date of grant, vest 25% immediately upon
  the grant date, one thirty-sixth per month thereafter and become fully vested
  three years after the date of grant. Each automatic grant has a term of ten
  years. In the event of a merger with another corporation or the sale of
  substantially all of its assets, each non-employee directors outstanding
  options will become fully vested and exercisable. Options granted under the
  Directors Plan must be exercised within 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.



58

The following
                        is a summary of the option activity under all of the
                        stock option plans for the years ended July 31,
2004, July 31, 2003 and July 27, 2002.

|                         |  | ****                                         | **** | **Options Outstanding**  
|------------------------ |  | -------------------------------------------- | ---- | -------------------------
|                         |  | **Options
        Available
     for Grant** | **** | **Number of
     Shares**
|Balance at July 28, 2001 |  | 7,315,350                                    |      | 10,834,180               
|Authorized               |  | 2,901,816                                    |      | --                       
|Granted                  |  | (8,082,800                                   | )    | 8,082,800                
|Exercised                |  | --                                           |      | (511,674                 
|Cancelled                |  | 5,970,320                                    |      | (6,097,405               
|Repurchases              |  | 523,751                                      |      | --                       
|Balance at July 27, 2002 |  | 8,628,437                                    |      | 12,307,901               
|Authorized               |  | 2,904,105                                    |      | --                       
|Granted                  |  | (1,584,600                                   | )    | 1,584,600                
|Exercised                |  | --                                           |      | (1,499,274               
|Cancelled                |  | 2,906,164                                    |      | (2,960,715               
|Repurchases              |  | 2,500                                        |      | --                       
|Balance at July 31, 2003 |  | 12,856,606                                   |      | 9,432,512                
|Authorized               |  | 2,968,033                                    |      | --                       
|Granted                  |  | (6,226,221                                   | )    | 6,226,221                
|Exercised                |  | --                                           |      | (2,199,992               
|Cancelled                |  | 1,310,209                                    |      | (1,326,869               
|Repurchases              |  | --                                           |      | --                       
|Balance at July 31, 2004 |  | 10,908,627                                   |      | 12,131,872               

Outstanding Options

|                                 |  |                            |  |                                                                 |  |                                                  |  | **Options Exercisable**
|-------------------------------- |  | -------------------------- |  | --------------------------------------------------------------- |  | ------------------------------------------------ |  | -----------------------
|**Range of
    Exercise Prices** |  | **Number
    Outstanding** |  | **Weighted
    Average
    Remaining
    Life 
    (in years)** |  | **Weighted
    Average
    Exercise 
    Price** |  | **Shares**             
|$  0.02 - $  0.96                |  | 692,804                    |  | 4.70                                                            |  | $  0.15                                          |  | 625,072                
|$  0.99 - $  0.99                |  | 1,547,280                  |  | 7.20                                                            |  | $  0.99                                          |  | 689,143                
|$  1.00 - $  2.21                |  | 1,265,321                  |  | 8.22                                                            |  | $  1.42                                          |  | 455,307                
|$  2.26 - $  2.33                |  | 888,326                    |  | 9.22                                                            |  | $  2.28                                          |  | 84,875                 
|$  2.45 - $  2.45                |  | 2,444,345                  |  | 9.92                                                            |  | $  2.45                                          |  | --                     
|$  2.49 - $  2.96                |  | 522,484                    |  | 9.17                                                            |  | $  2.90                                          |  | 91,746                 
|$  2.98 - $  2.98                |  | 1,412,884                  |  | 9.36                                                            |  | $  2.98                                          |  | 230,348                
|$  3.00 - $  4.02                |  | 1,268,765                  |  | 7.41                                                            |  | $  3.21                                          |  | 896,626                
|$  4.10 - $  8.13                |  | 1,236,700                  |  | 7.79                                                            |  | $  5.87                                          |  | 637,075                
|$  8.50 - $64.12                 |  | 852,963                    |  | 6.18                                                            |  | $17.51                                           |  | 826,539                
|$  0.02 - $64.12                 |  | 12,131,872                 |  | 8.21                                                            |  | $  3.58                                          |  | 4,536,731              

During fiscal
                        years 2004, 2003 and 2002, there were no options or stock
                        purchase rights granted outside of the 1998
  Plan outstanding. Total options exercisable at July 31, 2004 and July 31, 2003
were 4,536,731 and 4,408,676, 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 2,500,000, cumulatively increased annually by an amount equal
  to the lesser of (a) 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 364,125 shares of common stock were issued under the ESPP
  through July 31, 2004. At July 31, 2004, 2,635,875 shares were available for
issuance.



59

Deferred Stock Compensation

In connection with the grant of
  certain stock options to employees during fiscal 2000 and 1999, the Company
  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. The Company amortizes 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 FIN 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. The Company
  recorded amortization of deferred stock compensation related to these options
  of
  $20,000, $0.1 million and $1.2 million for fiscal years 2004, 2003 and 2002,
  respectively. These stock options were fully amortized as of July 31, 2004.
  In addition, in connection with acquisitions, the Company recorded $0.5 million
  of
  deferred stock compensation during fiscal year 2002. No amortization of deferred
  stock compensation related to acquisitions was recorded during fiscal years
  2004 and 2003. Further, the Company made adjustments during fiscal years 2003
  and
  2002 related to deferred stock compensation for stock options of terminated
  employees of a credit of $16,000 and $0.3 million, respectively. These
  adjustments have been included in restructuring costs and other special charges
in the consolidated statements of operations.

9. 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 2004, 2003 and 2002,
  there was no provision for income taxes for those years. A valuation allowance
  has been recorded for the total deferred tax assets as management believes
  there are 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 31, 2004** |   | **July 31, 2003** |   | **July 27, 2002** |  
|-------------------------------- |  | ----------------- | - | ----------------- | - | ----------------- | -
|Net operating loss carryforwards |  | $ 86,796          |   | $ 83,577          |   | $ 80,446          |  
|Other reserves and accruals      |  | 12,722            |   | 13,081            |   | 11,494            |  
|                                 |  | 99,518            |   | 96,658            |   | 91,940            |  
|Valuation allowance              |  | (99,518           | ) | (96,658           | ) | (91,940           | )
|Net deferred income tax asset    |  | $        --       |   | $        --       |   | $        --       |  

As of July 31, 2004, the Company
  has net operating loss carryforwards of approximately $243.8 million to offset
  future federal taxable income, which expires at various dates through fiscal
  year 2024. This amount includes approximately $12.5 million of net operating
  loss carryforwards from the acquisition of OSTG.  The deferred tax assets
  related to the acquisition of OSTG of approximately $5.6 million as of June 7,
  2000, will be used to reduce the tax provision if and when realized.  The
  Company also has California net operating loss carryforwards of approximately
  $66.8 million to offset future California taxable income, which expire at
  various dates through fiscal year 2014.  The net operating loss
  carryforwards also include approximately $28.9 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.

10. Segment and Geographic Information

The Companys
                        operating segments are significant strategic business
                        units that offer different products
  and services. The Company has four operating segments: SourceForge, Online
Media, E-commerce and Online Images.

The Companys SourceForge
  segment focuses on its SourceForge software products. The Companys Online
  Media segment represents a network of Internet Web sites serving the IT
  professional and software development communities. The Companys E-commerce
  segment provides online sales of a variety of retail products of interest to the
  software development and IT communities. The Companys Online Images
  segment provides online sales of three-dimensional art, animations and
  presentations. Other includes revenues and costs associated with the
  Companys former hardware business as well as all corporate expenses, such
  as restructuring charges, legal judgments and settlements, amortization of
  goodwill and intangibles, amortization of deferred stock, impairment of
  long-lived assets and interest income, that are not allocated to the individual
  operating segments and are not considered by the Companys chief
decision-making group in evaluating the performance of the operating segments.



60

The accounting policies of the
  segments are consistent with those described in the summary of significant
  accounting policies. All intersegment sales have been stated separately in the
  table below. The Companys chief decision-making group, as defined under
  SFAS No. 131, consists of the Chief Executive Officer and the executive team.
  The Companys chief decision-making group excludes all intersegment sales
  when evaluating the performance of the segments. The Companys assets and
  liabilities are not discretely allocated or reviewed by operating segment. The
  depreciation of the Companys property, equipment and leasehold
  improvements are allocated based on headcount, unless specifically identified
by operating segment.

|(in thousands)                  |  | SourceForge |         | Online Media |   | E-commerce |   | Online Images |        | Other |   | Elimin- ations |  | Total Company |        
|------------------------------- |  | ----------- | ------- | ------------ | - | ---------- | - | ------------- | ------ | ----- | - | -------------- |  | ------------- | -------
|Year Ended July 31, 2004        | 
|Revenue from external customers |  | $           | 4,995   |              | $ | 9,728      |   | $             | 12,567 |       | $ | 1,922          |  | $             | 49     
|Revenue from intersegments      |  | $           | --      |              | $ | 238        |   | $             | --     |       | $ | --             |  | $             | --     
|Cost of revenues                |  | $           | 1,860   |              | $ | 2,969      |   | $             | 10,225 |       | $ | 495            |  | $             | (12    
|Gross margin                    |  | $           | 3,135   |              | $ | 6,759      |   | $             | 2,342  |       | $ | 1,427          |  | $             | 61     
|Operating income (loss)         |  | $           | (8,900  | )            | $ | (431       | ) | $             | 79     |       | $ | 622            |  | $             | (2,377 
|Depreciation expense            |  | $           | 1,123   |              | $ | 260        |   | $             | 30     |       | $ | 43             |  | $             | --     
|Year Ended July 31, 2003        | 
|Revenue from external customers |  | $           | 2,918   |              | $ | 10,405     |   | $             | 8,565  |       | $ | 1,580          |  | $             | 760    
|Revenue from intersegments      |  | $           | --      |              | $ | 163        |   | $             | --     |       | $ | --             |  | $             | --     
|Cost of revenues                |  | $           | 1,997   |              | $ | 3,852      |   | $             | 7,025  |       | $ | 338            |  | $             | (432   
|Gross margin                    |  | $           | 921     |              | $ | 6,553      |   | $             | 1,540  |       | $ | 1,242          |  | $             | 1,192  
|Operating income (loss)         |  | $           | (13,575 | )            | $ | (376       | ) | $             | (162   | )     | $ | 353            |  | $             | (1,122 
|Depreciation expense            |  | $           | 2,129   |              | $ | 1,049      |   | $             | 12     |       | $ | 12             |  | $             | --     
|Year Ended July 27, 2002        | 
|Revenue from external customers |  | $           | 1,086   |              | $ | 9,007      |   | $             | 5,722  |       | $ | 1,238          |  | $             | 3,332  
|Revenue from intersegments      |  | $           | --      |              | $ | --         |   | $             | --     |       | $ | --             |  | $             | --     
|Cost of revenues                |  | $           | 2,387   |              | $ | 5,088      |   | $             | 4,708  |       | $ | 222            |  | $             | (2,744 
|Gross margin                    |  | $           | (1,301  | )            | $ | 3,919      |   | $             | 1,014  |       | $ | 1,016          |  | $             | 6,076  
|Operating income (loss)         |  | $           | (19,391 | )            | $ | (5,560     | ) | $             | (30    | )     | $ | 326            |  | $             | (68,593
|Depreciation expense            |  | $           | 2,742   |              | $ | 1,511      |   | $             | 29     |       | $ | 29             |  | $             | 112    

During
         the time period covered by the table above, the Company marketed
                        its products in the United States through
  its direct sales force and its online Web sites. Revenues for each of the fiscal
  years ended July 31, 2004, July 31, 2003 and July 27, 2002 were primarily
generated from sales to end users in the United States of America.

Quarterly Financial Data

|                                                                   |  | **Fiscal Year 2004
For the three months ended** |     
|------------------------------------------------------------------ |  | ----------------------------------------------- | ----
|                                                                   |  | **October 31**                                  | ****
|Net revenues                                                       |  | $  5,797                                        |     
|Loss from
     operations                                          |  | (2,402                                          | )   
|Net loss
     attributable to common stockholders                  |  | $(1,223                                         | )   
|Per share
     amounts:                                            | 
|Basic
     and diluted net loss per share                          |  | $  (0.02                                        | )   
|Shares
     used in computing basic and diluted net loss per share |  | 56,255                                          |     



|                                                                   |  | **Fiscal Year 2003
For the three months ended** |     
|------------------------------------------------------------------ |  | ----------------------------------------------- | ----
|                                                                   |  | **October 26**                                  | ****
|Net revenues                                                       |  | $  5,075                                        |     
|Loss from
     operations                                          |  | (4,459                                          | )   
|Net loss
     attributable to common stockholders                  |  | $(4,133                                         | )   
|Per share
     amounts:                                            | 
|Basic
     and diluted net loss per share                          |  | $  (0.08                                        | )   
|Shares
     used in computing basic and diluted net loss per share |  | 53,717                                          |     

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

On June 3, 2004, the
  Companys Audit Committee of its Board of Directors dismissed
  PricewaterhouseCoopers LLP (PWC) as the Companys independent
  registered public accounting firm and engaged BDO Seidman, LLP (BDO)
  as the Companys independent registered public accounting firm to audit the
  Companys financial statements for the fiscal year ended July 31,
  2004. The Company filed a current report on Form 8-K on June 10, 2004,
reporting these events.

PWCs reports on VA
  Softwares consolidated financial statements for each of the fiscal years
  ended July 27, 2002 and July 31, 2003 did not contain an adverse opinion or
  disclaimer of opinion, nor were they qualified or modified as to uncertainty,
  audit scope or accounting principle. During the fiscal years ended July 27, 2002
  and July 31, 2003 and through June 3, 2004, there were no disagreements with PWC
  on any matter of accounting principles or practices, financial statement
  disclosure, or auditing scope or procedure which, if not resolved to PWCs
  satisfaction, would have caused PWC to make reference to the subject matter in
  connection with its report on VA Softwares consolidated financial
  statements for such years; and there were no reportable events as defined in
Item 304(a)(1)(v) of Regulation S-K.

The Company
                        has had no disagreements with its independent registered
                        public accountant firm on any
accounting or financial disclosures.

Item 9A. Controls and Procedures

|a) | Evaluation of disclosure
  controls and procedures.The Companys management evaluated, with the
  participation of its Chief Executive Officer and its Chief Financial Officer,
  the effectiveness of its disclosure controls and procedures as of the end of the
  period covered by this report. Based on this evaluation, the Companys
  Chief Executive Officer and its Chief Financial Officer have concluded that the
  Companys disclosure controls and procedures are effective to ensure that
  information the Company is required to disclose in reports that it files or
  submits under the Securities Exchange Act of 1934 is recorded, processed,
  summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|b) | Changes in internal controls
  over financial reporting.There was no change in the Companys internal
  control over financial reporting (as defined in Rule 13a-15(f) of the Securities
  Exchange Act of 1934) that occurred during the quarter ended July 31, 2004
  that has materially affected, or is reasonably likely to materially affect,
  its
internal control over financial reporting.                                                                                                                                                                                                                                                                                                                                                                                  

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 Companys 2004 Proxy Statement, which will be
  delivered to stockholders in connection with the Companys annual
stockholders meeting to be held on December 8, 2004.

Code of Ethics

In addition to the Companys
  Code of Business Conduct and Ethics that is applicable to all employees and
  directors, the Company has adopted a Code of Ethics for Principal Executive
                        and Senior Financial Officers. The Company has posted
                        the text of its Code of Ethics
  for Principal Executive and Senior Financial Officers on its Internet Web site
at: 
     http://www.vasoftware.com/company/docs/Code_of_Ethics_for_Senior_Financial_Officers.pdf.



62

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 Companys 2004 Proxy
  Statement, which will be delivered to stockholders in connection with the
  Companys annual stockholders meeting to be held on December 8,
2004.

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 Companys 2004 Proxy Statement, which will be
  delivered to stockholders in connection with the Companys annual
stockholders meeting to be held on December 8, 2004.

Item 13. Certain Relationships and Related Transactions

The information called for by this
  item is incorporated by reference to the section entitled Certain
  Relationships and Related Transactions in the Companys 2004 Proxy
  Statement, which will be delivered to stockholders in connection with the
  Companys annual stockholders meeting to be held on December 8,
2004.

Item 14. Principal Accountant Fees and Services.

The information called for by this
  item is incorporated by reference to the section entitled Principal
  Accountant Fees and Services in the Companys 2004 Proxy Statement,
  which will be delivered to stockholders in connection with the Companys
annual stockholders meeting to be held on December 8, 2004

PART IV

Item 15. 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.

On June 10, 2004, the Company
  furnished a Current Report on Form 8-K under Items 4 (Changes in Certifying
  Accountants) and 7 (Financial Statements and Exhibits) disclosing the decision
  to dismiss PricewaterhouseCoopers LLP (PWC) as the Companys
  independent registered public accounting firm and engage BDO Seidman, LLP
  (BDO) as the Companys independent registered public accounting
  firm to audit the Companys financial statements for the fiscal year ended
July 31, 2004.

On August 26, 2004, the
  Company furnished a Current Report on Form 8-K under Items 2.02 (Results of
  Operations and Financial Condition) and 9.01 (Financial Statements and Exhibits)
  disclosing the issuance of a press release announcing its financial results for
  the fourth quarter and fiscal year ended July 31, 2004. In addition, the
  Company filed Exhibit 99.2 (Financial Statements) to this August 26, 2004
Current Report on Form 8-K with the Securities and Exchange Commission.

On September 14, 2004, the Company
  furnished a Current Report on Form 8-K under Items 1.01 (Entry into a Material
  Definitive Agreement) and 9.01 (Financial Statements and Exhibits) disclosing
  the approval of the Companys Fiscal 2005 Named Executive Officer Bonus
Policy and Plan by the Companys Compensation Committee.



63

On October 1, 2004, the Company
  filed a Current Report on Form 8-K under Item 5.02 (Departure of Directors or
  Principal Officers; Election of Directors; Appointment of Principal Officers)
  disclosing that, effective September 20, 2004, the Companys Board of
  Directors appointed Andrew Anker as a member of the Companys Board of
Directors.

On October 5, 2004, the Company
  filed a Current Report on Form 8-K under Item 1.01 (Entry into a Material
  Definitive Agreement) disclosing that, following Andrew Ankers appointment
  as a member of the Companys Board of Directors, the Company entered into
an indemnification agreement with Mr. Anker on October 4, 2004.

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 JenabChief Executive Officer and President                              

Date: October 14, 2004



64

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.



|Signature                      | Title                                             | Date            
|------------------------------ | ------------------------------------------------- | ----------------
|                              
|/s/ ALI JENAB                  | Chief Executive Officer, President                | October 14, 2004
|Ali Jenab                      | (principle executive officer) and Director       
|                              
|/s/  KATHLEEN R. MCELWEE       | Senior Vice President and Chief Financial Officer | October 14, 2004
|Kathleen R. McElwee            | (principle accounting officer)                   
|                              
|/s/  ANDREW ANKER              | Director                                          | October 14, 2004
|Andrew Anker                  
|                              
|/s/  LARRY M. AUGUSTIN         | Chairman of the Board of Directors                | October 14, 2004
|Larry M. Augustin             
|                              
|/S/  ANDRE M. BOISVERT         | Director                                          | October 14, 2004
|Andre M. Boisvert             
|                              
|/s/  RAM GUPTA                 | Director                                          | October 14, 2004
|Ram Gupta                     
|                              
|/s/  DOUGLAS LEONE             | Director                                          | October 14, 2004
|Douglas Leone                 
|                              
|/s/  ROBERT M. NEUMEISTER, JR. | Director                                          | October 14, 2004
|Robert M. Neumeister, Jr.     
|                              
|/s/  CARL REDFIELD             | Director                                          | October 14, 2004
|Carl Redfield                 
|                              
|/s/ DAVID B. WRIGHT            | Director                                          | October 14, 2004
|David B. Wright               



65

# SCHEDULE
    II  VALUATION
    AND QUALIFYING
ACCOUNTS

# (In thousands)

|                                                  |  | **Balance at** |  | **Charged to** |  |                |  | **Balance at**
|------------------------------------------------- |  | -------------- |  | -------------- |  | -------------- |  | --------------
|                                                  |  | **Beginning**  |  | **Costs and**  |  |                |  | **End**       
|**Description**                                   |  | **of Period**  |  | **Expenses**   |  | **Deductions** |  | **of Period** 
|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     
|Year Ended July 31, 2003                          |  |                |  |                |  |                |  |               
|Allowance for
      doubtful accounts             |  | $   1,166      |  | $      (19)    |  | $   1,003      |  | $    144      
|Allowance for
      excess and obsolete inventory |  | $        30    |  | $        (6)   |  | $         --   |  | $       24    
|Year Ended July 31, 2004                          |  |                |  |                |  |               
|Allowance for
      doubtful accounts             |  | $      144     |  | $        56    |  | $       73     |  | $     127     
|Allowance for
      excess and obsolete inventory |  | $        24    |  | $          9   |  | $        --    |  | $       33    



66

EXHIBIT INDEX

Exhibit

|Exhibit
Number
|--------------
|3.1(1)        
|3.2(1)        
|4.1(1)        
|4.2(2)        
|10.1(1)      
|10.2(1)      
|10.3(1)      
|10.4(1)      
|10.5(3)       
|10.6(4)      
|10.7(5)      
|10.8(6)       
|10.9          
|10.10         
|10.11(7)      
|10.12         
|23.1          
|23.2          
|24.1          
|31.01         
|31.02         
|32.01         
|32.02         
|              
|             
|(1)           
|(2)           
|(3)           
|(4)           
|(5)           
|(6)           
|(7)           
|             



67